Capital in the Twenty-First Century (4 page)

Kuznets’s 1955 paper is enlightening. After reminding readers of all the reasons for
interpreting the data cautiously and noting the obvious importance of exogenous shocks
in the recent reduction of inequality in the United States, Kuznets suggests, almost
innocently in passing, that the internal logic of economic development might also
yield the same result, quite apart from any policy intervention or external shock.
The idea was that inequalities increase in the early phases of industrialization,
because only a minority is prepared to benefit from the new wealth that industrialization
brings. Later, in more advanced phases of development, inequality automatically decreases
as a larger and larger fraction of the population partakes of the fruits of economic
growth.
¹⁴

The “advanced phase” of industrial development is supposed to have begun toward the
end of the nineteenth or the beginning of the twentieth century in the industrialized
countries, and the reduction of inequality observed in the United States between 1913
and 1948 could therefore be portrayed as one instance of a more general phenomenon,
which should theoretically reproduce itself everywhere, including underdeveloped countries
then mired in postcolonial poverty. The data Kuznets had presented in his 1953 book
suddenly became a powerful political weapon.
¹⁵
He was well aware of the highly speculative nature of his theorizing.
¹⁶
Nevertheless, by presenting such an optimistic theory in the context of a “presidential
address” to the main professional association of US economists, an audience that was
inclined to believe and disseminate the good news delivered by their prestigious leader,
he knew that he would wield considerable influence: thus the “Kuznets curve” was born.
In order to make sure that everyone understood what was at stake, he took care to
remind his listeners that the intent of his optimistic predictions was quite simply
to maintain the underdeveloped countries “within the orbit of the free world.”
¹⁷
In large part, then, the theory of the Kuznets curve was a product of the Cold War.

To avoid any misunderstanding, let me say that Kuznets’s work in establishing the
first US national accounts data and the first historical series of inequality measures
was of the utmost importance, and it is clear from reading his books (as opposed to
his papers) that he shared the true scientific ethic. In addition, the high growth
rates observed in all the developed countries in the post–World War II period were
a phenomenon of great significance, as was the still more significant fact that all
social groups shared in the fruits of growth. It is quite understandable that the
Trente Glorieuses fostered a certain degree of optimism and that the apocalyptic predictions
of the nineteenth century concerning the distribution of wealth forfeited some of
their popularity.

Nevertheless, the magical Kuznets curve theory was formulated in large part for the
wrong reasons, and its empirical underpinnings were extremely fragile. The sharp reduction
in income inequality that we observe in almost all the rich countries between 1914
and 1945 was due above all to the world wars and the violent economic and political
shocks they entailed (especially for people with large fortunes). It had little to
do with the tranquil process of intersectoral mobility described by Kuznets.

The question is important, and not just for historical reasons. Since the 1970s, income
inequality has increased significantly in the rich countries, especially the United
States, where the concentration of income in the first decade of the twenty-first
century regained—indeed, slightly exceeded—the level attained in the second decade
of the previous century. It is therefore crucial to understand clearly why and how
inequality decreased in the interim. To be sure, the very rapid growth of poor and
emerging countries, especially China, may well prove to be a potent force for reducing
inequalities at the global level, just as the growth of the rich countries did during
the period 1945–1975. But this process has generated deep anxiety in the emerging
countries and even deeper anxiety in the rich countries. Furthermore, the impressive
disequilibria observed in recent decades in the financial, oil, and real estate markets
have naturally aroused doubts as to the inevitability of the “balanced growth path”
described by Solow and Kuznets, according to whom all key economic variables are supposed
to move at the same pace. Will the world in 2050 or 2100 be owned by traders, top
managers, and the superrich, or will it belong to the oil-producing countries or the
Bank of China? Or perhaps it will be owned by the tax havens in which many of these
actors will have sought refuge. It would be absurd not to raise the question of who
will own what and simply to assume from the outset that growth is naturally “balanced”
in the long run.

In a way, we are in the same position at the beginning of the twenty-first century
as our forebears were in the early nineteenth century: we are witnessing impressive
changes in economies around the world, and it is very difficult to know how extensive
they will turn out to be or what the global distribution of wealth, both within and
between countries, will look like several decades from now. The economists of the
nineteenth century deserve immense credit for placing the distributional question
at the heart of economic analysis and for seeking to study long-term trends. Their
answers were not always satisfactory, but at least they were asking the right questions.
There is no fundamental reason why we should believe that growth is automatically
balanced. It is long since past the time when we should have put the question of inequality
back at the center of economic analysis and begun asking questions first raised in
the nineteenth century. For far too long, economists have neglected the distribution
of wealth, partly because of Kuznets’s optimistic conclusions and partly because of
the profession’s undue enthusiasm for simplistic mathematical models based on so-called
representative agents.
¹⁸
If the question of inequality is again to become central, we must begin by gathering
as extensive as possible a set of historical data for the purpose of understanding
past and present trends. For it is by patiently establishing facts and patterns and
then comparing different countries that we can hope to identify the mechanisms at
work and gain a clearer idea of the future.

This book is based on sources of two main types, which together make it possible to
study the historical dynamics of wealth distribution: sources dealing with the inequality
and distribution of income, and sources dealing with the distribution of wealth and
the relation of wealth to income.

To begin with income: in large part, my work has simply broadened the spatial and
temporal limits of Kuznets’s innovative and pioneering work on the evolution of income
inequality in the United States between 1913 and 1948. In this way I have been able
to put Kuznets’s findings (which are quite accurate) into a wider perspective and
thus radically challenge his optimistic view of the relation between economic development
and the distribution of wealth. Oddly, no one has ever systematically pursued Kuznets’s
work, no doubt in part because the historical and statistical study of tax records
falls into a sort of academic no-man’s-land, too historical for economists and too
economistic for historians. That is a pity, because the dynamics of income inequality
can only be studied in a long-run perspective, which is possible only if one makes
use of tax records.
¹⁹

I began by extending Kuznets’s methods to France, and I published the results of that
study in a book that appeared in 2001.
²⁰
I then joined forces with several colleagues—Anthony Atkinson and Emmanuel Saez foremost
among them—and with their help was able to expand the coverage to a much wider range
of countries. Anthony Atkinson looked at Great Britain and a number of other countries,
and together we edited two volumes that appeared in 2007 and 2010, in which we reported
the results for some twenty countries throughout the world.
²¹
Together with Emmanuel Saez, I extended Kuznets’s series for the United States by
half a century.
²²
Saez himself looked at a number of other key countries, such as Canada and Japan.
Many other investigators contributed to this joint effort: in particular, Facundo
Alvaredo studied Argentina, Spain, and Portugal; Fabien Dell looked at Germany and
Switzerland; and Abhijit Banerjeee and I investigated the Indian case. With the help
of Nancy Qian I was able to work on China. And so on.
²³

In each case, we tried to use the same types of sources, the same methods, and the
same concepts. Deciles and centiles of high incomes were estimated from tax data based
on stated incomes (corrected in various ways to ensure temporal and geographic homogeneity
of data and concepts). National income and average income were derived from national
accounts, which in some cases had to be fleshed out or extended. Broadly speaking,
our data series begin in each country when an income tax was established (generally
between 1910 and 1920 but in some countries, such as Japan and Germany, as early as
the 1880s and in other countries somewhat later). These series are regularly updated
and at this writing extend to the early 2010s.

Ultimately, the World Top Incomes Database (WTID), which is based on the joint work
of some thirty researchers around the world, is the largest historical database available
concerning the evolution of income inequality; it is the primary source of data for
this book.
²⁴

The book’s second most important source of data, on which I will actually draw first,
concerns wealth, including both the distribution of wealth and its relation to income.
Wealth also generates income and is therefore important on the income study side of
things as well. Indeed, income consists of two components: income from labor (wages,
salaries, bonuses, earnings from nonwage labor, and other remuneration statutorily
classified as labor related) and income from capital (rent, dividends, interest, profits,
capital gains, royalties, and other income derived from the mere fact of owning capital
in the form of land, real estate, financial instruments, industrial equipment, etc.,
again regardless of its precise legal classification). The WTID contains a great deal
of information about the evolution of income from capital over the course of the twentieth
century. It is nevertheless essential to complete this information by looking at sources
directly concerned with wealth. Here I rely on three distinct types of historical
data and methodology, each of which is complementary to the others.
²⁵

In the first place, just as income tax returns allow us to study changes in income
inequality, estate tax returns enable us to study changes in the inequality of wealth.
²⁶
This approach was introduced by Robert Lampman in 1962 to study changes in the inequality
of wealth in the United States from 1922 to 1956. Later, in 1978, Anthony Atkinson
and Alan Harrison studied the British case from 1923 to 1972.
²⁷
These results were recently updated and extended to other countries such as France
and Sweden. Unfortunately, data are available for fewer countries than in the case
of income inequality. In a few cases, however, estate tax data extend back much further
in time, often to the beginning of the nineteenth century, because estate taxes predate
income taxes. In particular, I have compiled data collected by the French government
at various times and, together with Gilles Postel-Vinay and Jean-Laurent Rosenthal,
have put together a huge collection of individual estate tax returns, with which it
has been possible to establish homogeneous series of data on the concentration of
wealth in France since the Revolution.
²⁸
This will allow us to see the shocks due to World War I in a much broader context
than the series dealing with income inequality (which unfortunately date back only
as far as 1910 or so). The work of Jesper Roine and Daniel Waldenström on Swedish
historical sources is also instructive.
²⁹

The data on wealth and inheritance also enable us to study changes in the relative
importance of inherited wealth and savings in the constitution of fortunes and the
dynamics of wealth inequality. This work is fairly complete in the case of France,
where the very rich historical sources offer a unique vantage point from which to
observe changing inheritance patterns over the long run.
³⁰
To one degree or another, my colleagues and I have extended this work to other countries,
especially Great Britain, Germany, Sweden, and the United States. These materials
play a crucial role in this study, because the significance of inequalities of wealth
differs depending on whether those inequalities derive from inherited wealth or savings.
In this book, I focus not only on the level of inequality as such but to an even greater
extent on the structure of inequality, that is, on the origins of disparities in income
and wealth between social groups and on the various systems of economic, social, moral,
and political justification that have been invoked to defend or condemn those disparities.
Inequality is not necessarily bad in itself: the key question is to decide whether
it is justified, whether there are reasons for it.

Last but not least, we can also use data that allow us to measure the total stock
of national wealth (including land, other real estate, and industrial and financial
capital) over a very long period of time. We can measure this wealth for each country
in terms of the number of years of national income required to amass it. This type
of global study of the capital/income ratio has its limits. It is always preferable
to analyze wealth inequality at the individual level as well, and to gauge the relative
importance of inheritance and saving in capital formation. Nevertheless, the capital/income
approach can give us an overview of the importance of capital to the society as a
whole. Moreover, in some cases (especially Britain and France) it is possible to collect
and compare estimates for different periods and thus push the analysis back to the
early eighteenth century, which allows us to view the Industrial Revolution in relation
to the history of capital. For this I will rely on historical data Gabriel Zucman
and I recently collected.
³¹
Broadly speaking, this research is merely an extension and generalization of Raymond
Goldsmith’s work on national balance sheets in the 1970s.
³²