Capital in the Twenty-First Century (25 page)

FIGURE 4.1.
   Capital in Germany, 1870–2010

National capital is worth 6.5 years of national income in Germany in 1910 (including
about 0.5 year invested abroad).

Sources and series: see
piketty.pse.ens.fr/capital21c
.

The first thing to notice is that the overall evolution is similar: first, agricultural
land gave way in the long run to residential and commercial real estate and industrial
and financial capital, and second, the capital/income ratio has grown steadily since
World War II and appears to be on its way to regaining the level it had attained prior
to the shocks of 1914–1945 (see
Figure 4.1
).

Note that the importance of farmland in late nineteenth-century Germany made the German
case resemble the French more than the British one (agriculture had not yet disappeared
east of the Rhine), and the value of industrial capital was higher than in either
France or Britain. By contrast, Germany on the eve of World War I had only half as
much in foreign assets as France (roughly 50 percent of national income versus a year’s
worth of income for France) and only a quarter as much as Britain (whose foreign assets
were worth two years of national income). The main reason for this is of course that
Germany had no colonial empire, a fact that was the source of some very powerful political
and military tensions: think, for example, of the Moroccan crises of 1905 and 1911,
when the Kaiser sought to challenge French supremacy in Morocco. The heightened competition
among European powers for colonial assets obviously contributed to the climate that
ultimately led to the declaration of war in the summer of 1914: one need not subscribe
to all of Lenin’s theses in
Imperialism, the Highest Stage of Capitalism
(1916) to share this conclusion.

Note, too, that Germany over the past several decades has amassed substantial foreign
assets thanks to trade surpluses. By 2010, Germany’s net foreign asset position was
close to 50 percent of national income (more than half of which has been accumulated
since 2000). This is almost the same level as in 1913. It is a small amount compared
to the foreign asset positions of Britain and France at the end of the nineteenth
century, but it is substantial compared to the current positions of the two former
colonial powers, which are close to zero. A comparison of
Figure 4.1
with
Figures 3.1
–
2
shows how different the trajectories of Germany, France, and Britain have been since
the nineteenth century: to a certain extent they have inverted their respective positions.
In view of Germany’s very large current trade surpluses, it is not impossible that
this divergence will increase. I will come back to this point.

In regard to public debt and the split between public and private capital, the German
trajectory is fairly similar to the French. With average inflation of nearly 17 percent
between 1930 and 1950, which means that prices were multiplied by a factor of 300
between those dates (compared with barely 100 in France), Germany was the country
that, more than any other, drowned its public debt in inflation in the twentieth century.
Despite running large deficits during both world wars (the public debt briefly exceeded
100 percent of GDP in 1918–1920 and 150 percent of GDP in 1943–1944), inflation made
it possible in both instances to shrink the debt very rapidly to very low levels:
barely 20 percent of GDP in 1930 and again in 1950 (see
Figure 4.2
).
¹
Yet the recourse to inflation was so extreme and so violently destabilized German
society and economy, especially during the hyperinflation of the 1920s, that the German
public came away from these experiences with a strongly antiinflationist attitude.
²
That is why the following paradoxical situation exists today: Germany, the country
that made the most dramatic use of inflation to rid itself of debt in the twentieth
century, refuses to countenance any rise in prices greater than 2 percent a year,
whereas Britain, whose government has always paid its debts, even more than was reasonable,
has a more flexible attitude and sees nothing wrong with allowing its central bank
to buy a substantial portion of its public debt even if it means slightly higher inflation.

FIGURE 4.2.
   Public wealth in Germany, 1870–2010

Public debt is worth almost one year of national income in Germany in 2010 (as much
as assets).

Sources and series: see
piketty.pse.ens.fr/capital21c
.

In regard to the accumulation of public assets, the German case is again similar to
the French: the government took large positions in the banking and industrial sectors
in the period 1950–1980, then partially sold off those positions between 1980 and
2000, but substantial holdings remain. For example, the state of Lower Saxony today
owns more than 15 percent of the shares (and 20 percent of the voting rights, which
are guaranteed by law, despite objections from the European Union) of Volkswagen,
the leading automobile manufacturer in Europe and the world.
³
In the period 1950–1980, when public debt was close to zero, net public capital was
close to one year’s national income in Germany, compared with barely two years for
private capital, which then stood at a very low level (see
Figure 4.3
). Just as in France, the government owned 25–30 percent of Germany’s national capital
during the decades of postwar reconstruction and the German economic miracle. Just
as in France, the slowdown in economic growth after 1970 and the accumulation of public
debt (which began well before reunification and has continued since) led to a complete
turnaround over the course of the past few decades. Net public wealth was almost exactly
zero in 2010, and private wealth, which has grown steadily since 1950, accounts for
nearly all of national wealth.

FIGURE 4.3.
   Private and public capital in Germany, 1870–2010

In 1970, public capital is worth almost one year of national income, versus slightly
more than two for private capital.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

There is, however, a significant difference between the value of private capital in
Germany compared to that in France and Britain. German private wealth has increased
enormously since World War II: it was exceptionally low in 1950 (barely a year and
a half of national income), but today it stands at more than four years of national
income. The reconstitution of private wealth in all three countries emerges clearly
from
Figure 4.4
. Nevertheless, German private wealth in 2010 was noticeably lower than private wealth
in Britain and France: barely four years of national income in Germany compared with
five or six in France and Britain and more than six in Italy and Spain (as we will
see in
Chapter 5
). Given the high level of German saving, this low level of German wealth compared
to other European countries is to some extent a paradox, which may be transitory and
can be explained as follows.
⁴

The first factor to consider is the low price of real estate in Germany compared to
other European countries, which can be explained in part by the fact that the sharp
price increases seen everywhere else after 1990 were checked in Germany by the effects
of German reunification, which brought a large number of low-cost houses onto the
market. To explain the discrepancy over the long term, however, we would need more
durable factors, such as stricter rent control.

FIGURE 4.4.
   Private and public capital in Europe, 1870–2010

The fluctuations of national capital in Europe in the long run are mostly due to the
fluctuations of private capital.

Sources and series: see
piketty.pse.ens.fr/capital21c
.

In any case, most of the gap between Germany on the one hand and France and Britain
on the other stems not from the difference in the value of the housing stock but rather
from the difference in the value of other domestic capital, and primarily the capital
of firms (see
Figure 4.1
). In other words, the gap arises not from the low valuation of German real estate
but rather from the low stock market valuation of German firms. If, in measuring total
private wealth, we used not stock market value but book value (obtained by subtracting
a firm’s debt from the cumulative value of its investments), the German paradox would
disappear: German private wealth would immediately rise to French and British levels
(between five and six years of national income rather than four). These complications
may appear to be purely matters of accounting but are in fact highly political.

At this stage, suffice it to say that the lower market values of German firms appear
to reflect the character of what is sometimes called “Rhenish capitalism” or “the
stakeholder model,” that is, an economic model in which firms are owned not only by
shareholders but also by certain other interested parties known as “stakeholders,”
starting with representatives of the firms’ workers (who sit on the boards of directors
of German firms not merely in a consultative capacity but as active participants in
deliberations, even though they may not be shareholders), as well as representatives
of regional governments, consumers’ associations, environmental groups, and so on.
The point here is not to idealize this model of shared social ownership, which has
its limits, but simply to note that it can be at least as efficient economically as
Anglo-Saxon market capitalism or “the shareholder model” (in which all power lies
in theory with shareholders, although in practice things are always more complex),
and especially to observe that the stakeholder model inevitably implies a lower market
valuation but not necessarily a lower social valuation. The debate about different
varieties of capitalism erupted in the early 1990s after the collapse of the Soviet
Union.
⁵
Its intensity later waned, in part no doubt because the German economic model seemed
to be losing steam in the years after reunification (between 1998 and 2002, Germany
was often presented as the sick man of Europe). In view of Germany’s relatively good
health in the midst of the global financial crisis (2007–2012), it is not out of the
question that this debate will be revived in the years to come.
⁶

Now that I have presented a first look at the general evolution of the capital/income
ratio and the public-private split over the long run, I must return to the question
of chronology and in particular attempt to understand the reasons first for the collapse
of the capital/income ratio over the course of the twentieth century and then for
its spectacular recovery.

Note first of all that this was a phenomenon that affected all European countries.
All available sources indicate that the changes observed in Britain, France, and Germany
(which together in 1910 and again in 2010 account for more than two-thirds of the
GDP of Western Europe and more than half of the GDP of all of Europe) are representative
of the entire continent: although interesting variations between countries do exist,
the overall pattern is the same. In particular, the capital/income ratio in Italy
and Spain has risen quite sharply since 1970, even more sharply than in Britain and
France, and the available historical data suggest that it was on the order of six
or seven years of national income around the turn of the twentieth century. Available
estimates for Belgium, the Netherlands, and Austria indicate a similar pattern.
⁷