Capital in the Twenty-First Century (42 page)

Inequality and Concentration: Preliminary Bearings

In
Part Two
I examined the dynamics of both the capital/income ratio at the country level and
the overall split of national income between capital and labor, but I did not look
directly at income or wealth inequality at the individual level. In particular, I
analyzed the importance of the shocks of 1914–1945 in order to understand changes
in the capital/income ratio and the capital-labor split over the course of the twentieth
century. The fact that Europe—and to some extent the entire world—have only just gotten
over these shocks has given rise to the impression that patrimonial capitalism—which
is flourishing in these early years of the twenty-first century—is something new,
whereas it is in large part a repetition of the past and characteristic of a low-growth
environment like the nineteenth century.

Here begins my examination of inequality and distribution at the individual level.
In the next few chapters, I will show that the two world wars, and the public policies
that followed from them, played a central role in reducing inequalities in the twentieth
century. There was nothing natural or spontaneous about this process, in contrast
to the optimistic predictions of Kuznets’s theory. I will also show that inequality
began to rise sharply again since the 1970s and 1980s, albeit with significant variation
between countries, again suggesting that institutional and political differences played
a key role. I will also analyze, from both a historical and a theoretical point of
view, the evolution of the relative importance of inherited wealth versus income from
labor over the very long run. Many people believe that modern growth naturally favors
labor over inheritance and competence over birth. What is the source of this widespread
belief, and how sure can we be that it is correct? Finally, in
Chapter 12
, I will consider how the global distribution of wealth might evolve in the decades
to come. Will the twenty-first century be even more inegalitarian than the nineteenth,
if it is not already so? In what respects is the structure of inequality in the world
today really different from that which existed during the Industrial Revolution or
in traditional rural societies?
Part Two
has already suggested some interesting leads to follow in this regard, but the only
way to answer this crucial question is by analyzing the structure of inequality at
the individual level.

Before proceeding farther, in this chapter I must first introduce certain ideas and
orders of magnitude. I begin by noting that in all societies, income inequality can
be decomposed into three terms: inequality in income from labor; inequality in the
ownership of capital and the income to which it gives rise; and the interaction between
these two terms. Vautrin’s famous lesson to Rastignac in Balzac’s
Père Goriot
is perhaps the clearest introduction to these issues.

Balzac’s
Père Goriot,
published in 1835, could not be clearer. Père Goriot, a former spaghetti maker, has
made a fortune in pasta and grain during the Revolution and Napoleonic era. A widower,
he sacrifices everything he has to find husbands for his daughters Delphine and Anastasie
in the best Parisian society of the 1810s. He keeps just enough to pay his room and
board in a shabby boardinghouse, where he meets Eugène de Rastignac, a penniless young
noble who has come up from the provinces to study law in Paris. Full of ambition and
humiliated by his poverty, Eugène avails himself of the help of a distant cousin to
worm his way into the luxurious salons where the aristocracy,
grande bourgeoisie,
and high finance of the Restoration mingle. He quickly falls in love with Delphine,
who has been abandoned by her husband, Baron de Nucingen, a banker who has already
used his wife’s dowry in any number of speculative ventures. Rastignac soon sheds
his illusions as he discovers the cynicism of a society entirely corrupted by money.
He is appalled to learn how Père Goriot has been abandoned by his daughters, who,
preoccupied as they are with social success, are ashamed of their father and have
seen little of him since availing themselves of his fortune. The old man dies in sordid
poverty and solitude. Only Rastignac attends his burial. But no sooner has he left
Père Lachaise cemetery than he is overwhelmed by the sight of Parisian wealth on display
along the Seine and decides to set out in conquest of the capital: “It’s just you
and me now!” he apostrophizes the city. His sentimental and social education is over.
From this point on he, too, will be ruthless.

The darkest moment in the novel, when the social and moral dilemmas Rastignac faces
are rawest and clearest, comes at the midpoint, when the shady character Vautrin offers
him a lesson about his future prospects.
¹
Vautrin, who resides in the same shabby boardinghouse as Rastignac and Goriot, is
a glib talker and seducer who is concealing a dark past as a convict, much like Edmond
Dantès in
Le Comte de Monte-Cristo
or Jean Valjean in
Les Misérables.
In contrast to those two characters, who are on the whole worthy fellows, Vautrin
is deeply wicked and cynical. He attempts to lure Rastignac into committing a murder
in order to lay hands on a large legacy. Before that, Vautrin offers Rastignac an
extremely lurid, detailed lesson about the different fates that might befall a young
man in the French society of the day.

In substance, Vautrin explains to Rastignac that it is illusory to think that social
success can be achieved through study, talent, and effort. He paints a detailed portrait
of the various possible careers that await his young friend if he pursues studies
in law or medicine, fields in which professional competence counts more than inherited
wealth. In particular, Vautrin explains very clearly to Rastignac what yearly income
he can aspire to in each of these professions. The verdict is clear: even if he ranks
at the top of his class and quickly achieves a brilliant career in law, which will
require many compromises, he will still have to get by on a mediocre income and give
up all hope of becoming truly wealthy:

By the age of thirty, you will be a judge making 1,200 francs a year, if you haven’t
yet tossed away your robes. When you reach forty, you will marry a miller’s daughter
with an income of around 6,000 livres. Thank you very much. If you’re lucky enough
to find a patron, you will become a royal prosecutor at thirty, with compensation
of a thousand écus [5,000 francs], and you will marry the mayor’s daughter. If you’re
willing to do a little political dirty work, you will be a prosecutor-general by the
time you’re forty.… It is my privilege to point out to you, however, that there are
only twenty prosecutors-general in France, while 20,000 of you aspire to the position,
and among them are a few clowns who would sell their families to move up a rung. If
this profession disgusts you, consider another. Would Baron de Rastignac like to be
a lawyer? Very well then! You will need to suffer ten years of misery, spend a thousand
francs a month, acquire a library and an office, frequent society, kiss the hem of
a clerk to get cases, and lick the courthouse floor with your tongue. If the profession
led anywhere, I wouldn’t advise you against it. But can you name five lawyers in Paris
who earn more than 50,000 francs a year at the age of fifty?
²

By contrast, the strategy for social success that Vautrin proposes to Rastignac is
quite a bit more efficient. By marrying Mademoiselle Victorine, a shy young woman
who lives in the boardinghouse and has eyes only for the handsome Eugène, he will
immediately lay hands on a fortune of a million francs. This will enable him to draw
at age twenty an annual income of 50,000 francs (5 percent of the capital) and thus
immediately achieve ten times the level of comfort to which he could hope to aspire
only years later on a royal prosecutor’s salary (and as much as the most prosperous
Parisian lawyers of the day earned at age fifty after years of effort and intrigue).

The conclusion is clear: he must lose no time in marrying young Victorine, ignoring
the fact that she is neither very pretty nor very appealing. Eugène eagerly heeds
Vautrin’s lesson right up to the ultimate coup de grâce: if the illegitimate child
Victorine is to be recognized by her wealthy father and become the heiress of the
million francs Vautrin has mentioned, her brother must first be killed. The ex-convict
is ready to take on this task in exchange for a commission. This is too much for Rastignac:
although he is quite amenable to Vautrin’s arguments concerning the merits of inheritance
over study, he is not prepared to commit murder.

What is most frightening about Vautrin’s lecture is that his brisk portrait of Restoration
society contains such precise figures. As I will soon show, the structure of the income
and wealth hierarchies in nineteenth-century France was such that the standard of
living the wealthiest French people could attain greatly exceeded that to which one
could aspire on the basis of income from labor alone. Under such conditions, why work?
And why behave morally at all? Since social inequality was in itself immoral and unjustified,
why not be thoroughly immoral and appropriate capital by whatever means are available?

The detailed income figures Vautrin gives are unimportant (although quite realistic):
the key fact is that in nineteenth-century France and, for that matter, into the early
twentieth century, work and study alone were not enough to achieve the same level
of comfort afforded by inherited wealth and the income derived from it. This was so
obvious to everyone that Balzac needed no statistics to prove it, no detailed figures
concerning the deciles and centiles of the income hierarchy. Conditions were similar,
moreover, in eighteenth- and nineteenth-century Britain. For Jane Austen’s heroes,
the question of work did not arise: all that mattered was the size of one’s fortune,
whether acquired through inheritance or marriage. Indeed, the same was true almost
everywhere before World War I, which marked the suicide of the patrimonial societies
of the past. One of the few exceptions to this rule was the United States, or at any
rate the various “pioneer” microsocieties in the northern and western states, where
inherited capital had little influence in the eighteenth and nineteenth centuries—a
situation that did not last long, however. In the southern states, where capital in
the form of slaves and land predominated, inherited wealth mattered as much as it
did in old Europe. In
Gone with the Wind,
Scarlett O’Hara’s suitors cannot count on their studies or talents to assure their
future comfort any more than Rastignac can: the size of one’s father’s (or father-in-law’s)
plantation matters far more. Vautrin, to show how little he thinks of morality, merit,
or social justice, points out to young Eugène that he would be glad to end his days
as a slave owner in the US South, living in opulence on what his Negroes produced.
³
Clearly, the America that appeals to the French ex-convict is not the America that
appealed to Tocqueville.

To be sure, income from labor is not always equitably distributed, and it would be
unfair to reduce the question of social justice to the importance of income from labor
versus income from inherited wealth. Nevertheless, democratic modernity is founded
on the belief that inequalities based on individual talent and effort are more justified
than other inequalities—or at any rate we hope to be moving in that direction. Indeed,
Vautrin’s lesson to some extent ceased to be valid in twentieth-century Europe, at
least for a time. During the decades that followed World War II, inherited wealth
lost much of its importance, and for the first time in history, perhaps, work and
study became the surest routes to the top. Today, even though all sorts of inequalities
have reemerged, and many beliefs in social and democratic progress have been shaken,
most people still believe that the world has changed radically since Vautrin lectured
Rastignac. Who today would advise a young law student to abandon his or her studies
and adopt the ex-convict’s strategy for social advancement? To be sure, there may
exist rare cases where a person would be well advised to set his or her sights on
inheriting a large fortune.
⁴
In the vast majority of cases, however, it is not only more moral but also more profitable
to rely on study, work, and professional success.

Vautrin’s lecture focuses our attention on two questions, which I will try to answer
in the next few chapters with the imperfect data at my disposal. First, can we be
sure that the relative importance of income from labor versus income from inherited
wealth has been transformed since the time of Vautrin, and if so, to what extent?
Second, and even more important, if we assume that such a transformation has to some
degree occurred, why exactly did it happen, and can it be reversed?

To answer these questions, I must first introduce certain basic ideas and the fundamental
patterns of income and wealth inequality in different societies at different times.
I showed in
Part One
that income can always be expressed as the sum of income from labor and income from
capital. Wages are one form of income from labor, and to simplify the exposition I
will sometimes speak of wage inequality when I mean inequality of income from labor
more generally. To be sure, income from labor also includes income from nonwage labor,
which for a long time played a crucial role and still plays a nonnegligible role today.
Income from capital can also take different forms: it includes all income derived
from the ownership of capital independent of any labor and regardless of its legal
classification (rents, dividends, interest, royalties, profits, capital gains, etc.).