Capital in the Twenty-First Century (41 page)

Marx was also an assiduous reader of British parliamentary reports from the period
1820–1860. He used these reports to document the misery of wage workers, workplace
accidents, deplorable health conditions, and more generally the rapacity of the owners
of industrial capital. He also used statistics derived from taxes imposed on profits
from different sources, which showed a very rapid increase of industrial profits in
Britain during the 1840s. Marx even tried—in a very impressionistic fashion, to be
sure—to make use of probate statistics in order to show that the largest British fortunes
had increased dramatically since the Napoleonic wars.
³³

The problem is that despite these important intuitions, Marx usually adopted a fairly
anecdotal and unsystematic approach to the available statistics. In particular, he
did not try to find out whether the very high capital intensity that he observed in
the account books of certain factories was representative of the British economy as
a whole or even of some particular sector of the economy, as he might have done by
collecting just a few dozen similar accounts. The most surprising thing, given that
his book was devoted largely to the question of capital accumulation, is that he makes
no reference to the numerous attempts to estimate the British capital stock that had
been carried out since the beginning of the eighteenth century and extended in the
nineteenth century by work beginning with Patrick Colqhoun between 1800 and 1810 and
continuing through Giffen in the 1870s.
³⁴
Marx seems to have missed entirely the work on national accounting that was developing
around him, and this is all the more unfortunate in that it would have enabled him
to some extent to confirm his intuitions concerning the vast accumulation of private
capital in this period and above all to clarify his explanatory model.

It is important to recognize, however, that the national accounts and other statistical
data available in the late nineteenth and early twentieth centuries were wholly inadequate
for a correct understanding of the dynamics of the capital/income ratio. In particular,
there were many more estimates of the stock of national capital than of national income
or domestic product. By the mid-twentieth century, following the shocks of 1914–1945,
the reverse was true. This no doubt explains why the question of capital accumulation
and a possible dynamic equilibrium continued to stir controversy and arouse a good
deal of confusion for so long. A good example of this is the famous “Cambridge capital
controversy” of the 1950s and 1960s (also called the “Two Cambridges Debate” because
it pitted Cambridge, England, against Cambridge, Massachusetts).

To briefly recall the main points of this debate: when the formula
β
=
s
/
g
was explicitly introduced for the first time by the economists Roy Harrod and Evsey
Domar in the late 1930s, it was common to invert it as
g
=
s
/
β
. Harrod, in particular, argued in 1939 that
β
was fixed by the available technology (as in the case of a production function with
fixed coefficients and no possible substitution between labor and capital), so that
the growth rate was entirely determined by the savings rate. If the savings rate is
10 percent and technology imposes a capital/income ratio of 5 (so that it takes exactly
five units of capital, neither more nor less, to produce one unit of output), then
the growth rate of the economy’s productive capacity is 2 percent per year. But since
the growth rate must also be equal to the growth rate of the population (and of productivity,
which at the time was still ill defined), it follows that growth is an intrinsically
unstable process, balanced “on a razor’s edge.” There is always either too much or
too little capital, which therefore gives rise either to excess capacity and speculative
bubbles or else to unemployment, or perhaps both at once, depending on the sector
and the year.

Harrod’s intuition was not entirely wrong, and he was writing in the midst of the
Great Depression, an obvious sign of great macroeconomic instability. Indeed, the
mechanism he described surely helps to explain why the growth process is always highly
volatile: to bring savings into line with investment at the national level, when savings
and investment decisions are generally made by different individuals for different
reasons, is a structurally complex and chaotic phenomenon, especially since it is
often difficult in the short run to alter the capital intensity and organization of
production.
³⁵
Nevertheless, the capital/income ratio is relatively flexible in the long run, as
is unambiguously demonstrated by the very large historical variations that are observed
in the data, together with the fact that the elasticity of substitution of capital
for labor has apparently been greater than one over a long period of time.

In 1948, Domar developed a more optimistic and flexible version of the law
g
=
s
/
β
than Harrod’s. Domar stressed the fact that the savings rate and capital/income ratio
can to a certain extent adjust to each other. Even more important was Solow’s introduction
in 1956 of a production function with substitutable factors, which made it possible
to invert the formula and write
β
=
s
/
g
. In the long run, the capital/income ratio adjusts to the savings rate and structural
growth rate of the economy rather than the other way around. Controversy continued,
however, in the 1950s and 1960s between economists based primarily in Cambridge, Massachusetts
(including Solow and Samuelson, who defended the production function with substitutable
factors) and economists working in Cambridge, England (including Joan Robinson, Nicholas
Kaldor, and Luigi Pasinetti), who (not without a certain confusion at times) saw in
Solow’s model a claim that growth is always perfectly balanced, thus negating the
importance Keynes had attributed to short-term fluctuations. It was not until the
1970s that Solow’s so-called neoclassical growth model definitively carried the day.

If one rereads the exchanges in this controversy with the benefit of hindsight, it
is clear that the debate, which at times had a marked postcolonial dimension (as American
economists sought to emancipate themselves from the historic tutelage of their British
counterparts, who had reigned over the profession since the time of Adam Smith, while
the British sought to defend the memory of Lord Keynes, which they thought the American
economists had betrayed), did more to cloud economic thinking than to enlighten it.
There was no real justification for the suspicions of the British. Solow and Samuelson
were fully convinced that the growth process is unstable in the short term and that
macroeconomic stabilization requires Keynesian policies, and they viewed
β
=
s
/
g
solely as a long-term law. Nevertheless, the American economists, some of whom (for
example Franco Modigliani) were born in Europe, tended at times to exaggerate the
implications of the “balanced growth path” they had discovered.
³⁶
To be sure, the law
β
=
s
/
g
describes a growth path in which all macroeconomic quantities—capital stock, income
and output flows—progress at the same pace over the long run. Still, apart from the
question of short-term volatility, such balanced growth does not guarantee a harmonious
distribution of wealth and in no way implies the disappearance or even reduction of
inequality in the ownership of capital. Furthermore, contrary to an idea that until
recently was widespread, the law
β
=
s
/
g
in no way precludes very large variations in the capital/income ratio over time and
between countries. Quite the contrary. In my view, the virulence—and at times sterility—of
the Cambridge capital controversy was due in part to the fact that participants on
both sides lacked the historical data needed to clarify the terms of the debate. It
is striking to see how little use either side made of national capital estimates done
prior to World War I; they probably believed them to be incompatible with the realities
of the 1950s and 1960s. The two world wars created such a deep discontinuity in both
conceptual and statistical analysis that for a while it seemed impossible to study
the issue in a long-run perspective, especially from a European point of view.

The truth is that only since the end of the twentieth century have we had the statistical
data and above all the indispensable historical distance to correctly analyze the
long-run dynamics of the capital/income ratio and the capital-labor split. Specifically,
the data I have assembled and the historical distance we are fortunate enough to enjoy
(still insufficient, to be sure, but by definition greater than that which previous
authors had) lead to the following conclusions.

First, the return to a historic regime of low growth, and in particular zero or even
negative demographic growth, leads logically to the return of capital. This tendency
for low-growth societies to reconstitute very large stocks of capital is expressed
by the law
β
=
s
/
g
and can be summarized as follows: in stagnant societies, wealth accumulated in the
past naturally takes on considerable importance.

In Europe today, the capital/income ratio has already risen to around five to six
years of national income, scarcely less than the level observed in the eighteenth
and nineteenth centuries and up to the eve of World War I.

At the global level, it is entirely possible that the capital/income ratio will attain
or even surpass this level during the twenty-first century. If the savings rate is
now around 10 percent and the growth rate stabilizes at around 1.5 percent in the
very long run, then the global stock of capital will logically rise to six or seven
years of income. And if growth falls to 1 percent, the capital stock could rise as
high as ten years of income.

As for capital’s share in national and global income, which is given by the law
α
=
r
×
β
, experience suggests that the predictable rise in the capital/income ratio will not
necessarily lead to a significant drop in the return on capital. There are many uses
for capital over the very long run, and this fact can be captured by noting that the
long-run elasticity of substitution of capital for labor is probably greater than
one. The most likely outcome is thus that the decrease in the rate of return will
be smaller than the increase in the capital/income ratio, so that capital’s share
will increase. With a capital/income ratio of seven to eight years and a rate of return
on capital of 4–5 percent, capital’s share of global income could amount to 30 or
40 percent, a level close to that observed in the eighteenth and nineteenth centuries,
and it might rise even higher.

As noted, it is also possible that technological changes over the very long run will
slightly favor human labor over capital, thus lowering the return on capital and the
capital share. But the size of this long-term effect seems limited, and it is possible
that it will be more than compensated by other forces tending in the opposite direction,
such as the creation of increasingly sophisticated systems of financial intermediation
and international competition for capital.

The principal lesson of this second part of the book is surely that there is no natural
force that inevitably reduces the importance of capital and of income flowing from
ownership of capital over the course of history. In the decades after World War II,
people began to think that the triumph of human capital over capital in the traditional
sense (land, buildings, and financial capital) was a natural and irreversible process,
due perhaps to technology and to purely economic forces. In fact, however, some people
were already saying that political forces were central. My results fully confirm this
view. Progress toward economic and technological rationality need not imply progress
toward democratic and meritocratic rationality. The primary reason for this is simple:
technology, like the market, has neither limits nor morality. The evolution of technology
has certainly increased the need for human skills and competence. But it has also
increased the need for buildings, homes, offices, equipment of all kinds, patents,
and so on, so that in the end the total value of all these forms of nonhuman capital
(real estate, business capital, industrial capital, financial capital) has increased
almost as rapidly as total income from labor. If one truly wishes to found a more
just and rational social order based on common utility, it is not enough to count
on the caprices of technology.

To sum up: modern growth, which is based on the growth of productivity and the diffusion
of knowledge, has made it possible to avoid the apocalypse predicted by Marx and to
balance the process of capital accumulation. But it has not altered the deep structures
of capital—or at any rate has not truly reduced the macroeconomic importance of capital
relative to labor. I must now examine whether the same is true for inequality in the
distribution of income and wealth. How much has the structure of inequality with respect
to both labor and capital actually changed since the nineteenth century?

PART THREE

THE STRUCTURE OF INEQUALITY

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