Capital in the Twenty-First Century (21 page)

These are very large swings, commensurate with the violent military, political, and
economic conflicts that marked the twentieth century. Capital, private property, and
the global distribution of wealth were key issues in these conflicts. The eighteenth
and nineteenth centuries look tranquil by comparison.

In the end, by 2010, the capital/income ratio had returned to its pre–World War I
level—or even surpassed it if we divide the capital stock by disposable household
income rather than national income (a dubious methodological choice, as will be shown
later). In any case, regardless of the imperfections and uncertainties of the available
measures, there can be no doubt that Britain and France in the 1990s and 2000s regained
a level of wealth not seen since the early twentieth century, at the conclusion of
a process that originated in the 1950s. By the middle of the twentieth century, capital
had largely disappeared. A little more than half a century later, it seems about to
return to levels equal to those observed in the eighteenth and nineteenth centuries.
Wealth is once again flourishing. Broadly speaking, it was the wars of the twentieth
century that wiped away the past to create the illusion that capitalism had been structurally
transformed.

As important as it is, this evolution of the overall capital/income ratio should not
be allowed to obscure sweeping changes in the composition of capital since 1700. This
is the second conclusion that emerges clearly from
Figures 3.1
and
3.2
. In terms of asset structure, twenty-first-century capital has little in common with
eighteenth-century capital. The evolutions we see are again quite close to what we
find happening in Britain and France. To put it simply, we can see that over the very
long run, agricultural land has gradually been replaced by buildings, business capital,
and financial capital invested in firms and government organizations. Yet the overall
value of capital, measured in years of national income, has not really changed.

More precisely, remember that national capital, which is shown in
Figures 3.1
and
3.2
, is defined as the sum of private capital and public capital. Government debt, which
is an asset for the private sector and a liability for the public sector, therefore
nets out to zero (if each country owns its own government debt). As noted in
Chapter 1
, national capital, so defined, can be decomposed into domestic capital and net foreign
capital. Domestic capital measures the value of the capital stock (buildings, firms,
etc.) located within the territory of the country in question. Net foreign capital
(or net foreign assets) measures the wealth of the country in question with respect
to the rest of the world, that is, the difference between assets owned by residents
of the country in the rest of the world and assets owned by the rest of the world
in the country in question (including assets in the form of government bonds).

Domestic capital can in turn be broken down into three categories: farmland, housing
(including the value of the land on which buildings stand), and other domestic capital,
which covers the capital of firms and government organizations (including buildings
used for business and the associated land, infrastructure, machinery, computers, patents,
etc.). These assets, like any asset, are evaluated in terms of market value: for example,
in the case of a corporation that issues stock, the value depends on the share price.
This leads to the following decomposition of national capital, which I have used to
create
Figures 3.1
and
3.2
:

National capital
=
farmland
+
housing
+
other domestic capital
+
net foreign capital

A glance at these graphs shows that at the beginning of the eighteenth century, the
total value of farmland represented four to five years of national income, or nearly
two-thirds of total national capital. Three centuries later, farmland was worth less
than 10 percent of national income in both France and Britain and accounted for less
than 2 percent of total wealth. This impressive change is hardly surprising: agriculture
in the eighteenth century accounted for nearly three-quarters of all economic activity
and employment, compared with just a few percent today. It is therefore natural that
the share of capital involved in agriculture has evolved in a similar direction.

This collapse in the value of farmland (proportionate to national income and national
capital) was counterbalanced on the one hand by a rise in the value of housing, which
rose from barely one year of national income in the eighteenth century to more than
three years today, and on the other hand by an increase in the value of other domestic
capital, which rose by roughly the same amount (actually slightly less, from 1.5 years
of national income in the eighteenth century to a little less than 3 years today).
¹
This very long-term structural transformation reflects on the one hand the growing
importance of housing, not only in size but also in quality and value, in the process
of economic and industrial development;
²
and on the other the very substantial accumulation since the Industrial Revolution
of buildings used for business purposes, infrastructure, machinery, warehouses, offices,
tools, and other material and immaterial capital, all of which is used by firms and
government organizations to produce all sorts of nonagricultural goods and services.
³
The nature of capital has changed: it once was mainly land but has become primarily
housing plus industrial and financial assets. Yet it has lost none of its importance.

What about foreign capital? In Britain and France, it evolved in a very distinctive
way, shaped by the turbulent history of these two leading colonial powers over the
past three centuries. The net assets these two countries owned in the rest of the
world increased steadily during the eighteenth and nineteenth centuries and attained
an extremely high level on the eve of World War I, before literally collapsing in
the period 1914–1945 and stabilizing at a relatively low level since then, as
Figures 3.1
and
3.2
show.

Foreign possessions first became important in the period 1750–1800, as we know, for
instance, from Sir Thomas’s investments in the West Indies in Jane Austen’s
Mansfield Park.
But the share of foreign assets remained modest: when Austen wrote her novel in 1812,
they represented, as far as we can tell from the available sources, barely 10 percent
of Britain’s national income, or one-thirtieth of the value of agricultural land (which
amounted to more than three years of national income). Hence it comes as no surprise
to discover that most of Austen’s characters lived on the rents from their rural properties.

It was during the nineteenth century that British subjects began to accumulate considerable
assets in the rest of the world, in amounts previously unknown and never surpassed
to this day. By the eve of World War I, Britain had assembled the world’s preeminent
colonial empire and owned foreign assets equivalent to nearly two years of national
income, or 6 times the total value of British farmland (which at that point was worth
only 30 percent of national income).
⁴
Clearly, the structure of wealth had been utterly transformed since the time of
Mansfield Park,
and one has to hope that Austen’s heroes and their descendants were able to adjust
in time and follow Sir Thomas’s lead by investing a portion of their land rents abroad.
By the turn of the twentieth century, capital invested abroad was yielding around
5 percent a year in dividends, interest, and rent, so that British national income
was about 10 percent higher than its domestic product. A fairly significant social
group were able to live off this boon.

France, which commanded the second most important colonial empire, was in a scarcely
less enviable situation: it had accumulated foreign assets worth more than a year’s
national income, so that in the first decade of the twentieth century its national
income was 5–6 percent higher than its domestic product. This was equal to the total
industrial output of the northern and eastern
départements,
and it came to France in the form of dividends, interest, royalties, rents, and other
revenue on assets that French citizens owned in the country’s foreign possessions.
⁵

It is important to understand that these very large net positions in foreign assets
allowed Britain and France to run structural trade deficits in the late nineteenth
and early twentieth century. Between 1880 and 1914, both countries received significantly
more in goods and services from the rest of the world than they exported themselves
(their trade deficits averaged 1–2 percent of national income throughout this period).
This posed no problem, because their income from foreign assets totaled more than
5 percent of national income. Their balance of payments was thus strongly positive,
which enabled them to increase their holdings of foreign assets year after year.
⁶
In other words, the rest of the world worked to increase consumption by the colonial
powers and at the same time became more and more indebted to those same powers. This
may seem shocking. But it is essential to realize that the goal of accumulating assets
abroad by way of commercial surpluses and colonial appropriations was precisely to
be in a position later to run trade deficits. There would be no interest in running
trade surpluses forever. The advantage of owning things is that one can continue to
consume and accumulate without having to work, or at any rate continue to consume
and accumulate more than one could produce on one’s own. The same was true on an international
scale in the age of colonialism.

In the wake of the cumulative shocks of two world wars, the Great Depression, and
decolonization, these vast stocks of foreign assets would eventually evaporate. In
the 1950s, both France and Great Britain found themselves with net foreign asset holdings
close to zero, which means that their foreign assets were just enough to balance the
assets of the two former colonial powers owned by the rest of the world. Broadly speaking,
this situation did not change much over the next half century. Between 1950 and 2010,
the net foreign asset holdings of France and Britain varied from slightly positive
to slightly negative while remaining quite close to zero, at least when compared with
the levels observed previously.
⁷

Finally, when we compare the structure of national capital in the eighteenth century
to its structure now, we find that net foreign assets play a negligible role in both
periods, and that the real long-run structural change is to be found in the gradual
replacement of farmland by real estate and working capital, while the total capital
stock has remained more or less unchanged relative to national income.

To sum up these changes, it is useful to take today’s world as a reference point.
The current per capita national income in Britain and France is on the order of 30,000
euros per year, and national capital is about 6 times national income, or roughly
180,000 euros per head. In both countries, farmland is virtually worthless today (a
few thousand euros per person at most), and national capital is broadly speaking divided
into two nearly equal parts: on average, each citizen has about 90,000 euros in housing
(for his or her own use or for rental to others) and about 90,000 euros worth of other
domestic capital (primarily in the form of capital invested in firms by way of financial
instruments).

As a thought experiment, let us go back three centuries and apply the national capital
structure as it existed around 1700 but with the average amounts we find today: 30,000
euros annual income per capita and 180,000 euros of capital. Our representative French
or British citizen would then own around 120,000 euros worth of land, 30,000 euros
worth of housing, and 30,000 euros in other domestic assets.
⁸
Clearly, some of these people (for example, Jane Austen’s characters: John Dashwood
with his Norland estate and Charles Darcy with Pemberley) owned hundreds of hectares—capital
worth tens or hundreds of millions of euros—while many others owned nothing at all.
But these averages give us a somewhat more concrete idea of the way the structure
of national capital has been utterly transformed since the eighteenth century while
preserving roughly the same value in terms of annual income.

Now imagine this British or French person at the turn of the twentieth century, still
with an average income of 30,000 euros and an average capital of 180,000. In Britain,
farmland already accounted for only a small fraction of this wealth: 10,000 for each
British subject, compared with 50,000 euros worth of housing and 60,000 in other domestic
assets, together with nearly 60,000 in foreign investments. France was somewhat similar,
except that each citizen still owned on average between 30,000 and 40,000 euros worth
of land and roughly the same amount of foreign assets.
⁹
In both countries, foreign assets had taken on considerable importance. Once again,
it goes without saying that not everyone owned shares in the Suez Canal or Russian
bonds. But by averaging over the entire population, which contained many people with
no foreign assets at all and a small minority with substantial portfolios, we are
able to measure the vast quantity of accumulated wealth in the rest of the world that
French and British foreign asset holdings represented.

Before studying more precisely the nature of the shocks sustained by capital in the
twentieth century and the reasons for the revival of capital since World War II, it
will be useful at this point to broach the issue of the public debt, and more generally
the division of national capital between public and private assets. Although it is
difficult today, in an age where rich countries tend to accumulate substantial public
debts, to remember that the public sector balance sheet includes assets as well as
liabilities, we should be careful to bear this fact in mind.