Capital in the Twenty-First Century (47 page)

Distribution tables are also valuable because they force everyone to take note of
the income and wealth levels of the various social groups that make up the existing
hierarchy. These levels are expressed in cash terms (or as a percentage of average
income and wealth levels in the country concerned) rather than by way of artificial
statistical measures that can be difficult to interpret. Distribution tables allow
us to have a more concrete and visceral understanding of social inequality, as well
as an appreciation of the data available to study these issues and the limits of those
data. By contrast, statistical indices such as the Gini coefficient give an abstract
and sterile view of inequality, which makes it difficult for people to grasp their
position in the contemporary hierarchy (always a useful exercise, particularly when
one belongs to the upper centiles of the distribution and tends to forget it, as is
often the case with economists). Indices often obscure the fact that there are anomalies
or inconsistencies in the underlying data, or that data from other countries or other
periods are not directly comparable (because, for example, the tops of the distribution
have been truncated or because income from capital is omitted for some countries but
not others). Working with distribution tables forces us to be more consistent and
transparent.

For similar reasons, caution is in order when using indices such as the interdecile
ratios often cited in official reports on inequality from the OECD or national statistical
agencies. The most frequently used interdecile ratio is the P90/P10, that is, the
ratio between the ninetieth percentile of the income distribution and the tenth percentile.
²³
For example, if one needs to earn more than 5,000 euros a month to belong to the
top 10 percent of the income distribution and less than 1,000 euros a month to belong
to the bottom 10 percent, then the P90/P10 ratio is 5.

Such indices can be useful. It is always valuable to have more information about the
complete shape of the distribution in question. One should bear in mind, however,
that by construction these ratios totally ignore the evolution of the distribution
beyond the ninetieth percentile. Concretely, no matter what the P90/P10 ratio may
be, the top decile of the income or wealth distribution may have 20 percent of the
total (as in the case of Scandinavian incomes in the 1970s and 1980s) or 50 percent
(as in the case of US incomes in the 2010s) or 90 percent (as in the case of European
wealth in the Belle Époque). We will not learn any of this by consulting the publications
of the international organizations or national statistical agencies who compile these
statistics, however, because they usually focus on indices that deliberately ignore
the top end of the distribution and give no indication of income or wealth beyond
the ninetieth percentile.

This practice is generally justified on the grounds that the available data are “imperfect.”
This is true, but the difficulties can be overcome by using adequate sources, as the
historical data collected (with limited means) in the World Top Incomes Database (WTID)
show. This work has begun, slowly, to change the way things are done. Indeed, the
methodological decision to ignore the top end is hardly neutral: the official reports
of national and international agencies are supposed to inform public debate about
the distribution of income and wealth, but in practice they often give an artificially
rosy picture of inequality. It is as if an official government report on inequalities
in France in 1789 deliberately ignored everything above the ninetieth percentile—a
group 5 to 10 times larger than the entire aristocracy of the day—on the grounds that
it was too complex to say anything about. Such a chaste approach is all the more regrettable
in that it inevitably feeds the wildest fantasies and tends to discredit official
statistics and statisticians rather than calm social tensions.

Conversely, interdecile ratios are sometimes quite high for largely artificial reasons.
Take the distribution of capital ownership, for example: the bottom 50 percent of
the distribution generally own next to nothing. Depending on how small fortunes are
measured—for example, whether or not durable goods and debts are counted—one can come
up with apparently quite different evaluations of exactly where the tenth percentile
of the wealth hierarchy lies: for the same underlying social reality, one might put
it at 100 euros, 1,000 euros, or even 10,000 euros, which in the end isn’t all that
different but can lead to very different interdecile ratios, depending on the country
and the period, even though the bottom half of the wealth distribution owns less than
5 percent of total wealth. The same is only slightly less true of the labor income
distribution: depending on how one chooses to treat replacement incomes and pay for
short periods of work (for example, depending on whether one uses the average weekly,
monthly, annual, or decadal income) one can come up with highly variable P10 thresholds
(and therefore interdecile ratios), even though the bottom 50 percent of the labor
income distribution actually draws a fairly stable share of the total income from
labor.
²⁴

This is perhaps one of the main reasons why it is preferable to study distributions
as I have presented them in
Tables 7.1
–
3
, that is, by emphasizing the shares of income and wealth claimed by different groups,
particularly the bottom half and the top decile in each society, rather than the threshold
levels defining given percentiles. The shares give a much more stable picture of reality
than the interdecile ratios.

These, then, are my reasons for believing that the distribution tables I have been
examining in this chapter are the best tool for studying the distribution of wealth,
far better than synthetic indices and interdecile ratios.

In addition, I believe that my approach is more consistent with national accounting
methods. Now that national accounts for most countries enable us to measure national
income and wealth every year (and therefore average income and wealth, since demographic
sources provide easy access to population figures), the next step is naturally to
break down these total income and wealth figures by decile and centile. Many reports
have recommended that national accounts be improved and “humanized” in this way, but
little progress has been made to date.
²⁵
A useful step in this direction would be a breakdown indicating the poorest 50 percent,
the middle 40 percent, and the richest 10 percent. In particular, such an approach
would allow any observer to see just how much the growth of domestic output and national
income is or is not reflected in the income actually received by these different social
groups. For instance, only by knowing the share going to the top decile can we determine
the extent to which a disproportionate share of growth has been captured by the top
end of the distribution. Neither a Gini coefficient nor an interdecile ratio permits
such a clear and precise response to this question.

I will add, finally, that the distribution tables whose use I am recommending are
in some ways fairly similar to the “social tables” that were in vogue in the eighteenth
and early nineteenth centuries. First developed in Britain and France in the late
seventeenth century, these social tables were widely used, improved, and commented
on in France during the Enlightenment: for example, in the celebrated article on “political
arithmetic” in Diderot’s
Encyclopedia.
From the earliest versions established by Gregory King in 1688 to the more elaborate
examples compiled by Expilly and Isnard on the eve of the French Revolution or by
Peuchet, Colqhoun, and Blodget during the Napoleonic era, social tables always aimed
to provide a comprehensive vision of the social structure: they indicated the number
of nobles, bourgeois, gentlemen, artisans, farmers, and so on along with their estimated
income (and sometimes wealth); the same authors also compiled the earliest estimates
of national income and wealth. There is, however, one essential difference between
these tables and mine: the old social tables used the social categories of their time
and did not seek to ascertain the distribution of wealth or income by deciles and
centiles.
²⁶

Nevertheless, social tables sought to portray the flesh-and-blood aspects of inequality
by emphasizing the shares of national wealth held by different social groups (and,
in particular, the various strata of the elite), and in this respect there are clear
affinities with the approach I have taken here. At the same time, social tables are
remote in spirit from the sterile, atemporal statistical measures of inequality such
as those employed by Gini and Pareto, which were all too commonly used in the twentieth
century and tend to naturalize the distribution of wealth. The way one tries to measure
inequality is never neutral.

{EIGHT}

Two Worlds

I have now precisely defined the notions needed for what follows, and I have introduced
the orders of magnitude attained in practice by inequality with respect to labor and
capital in various societies. The time has now come to look at the historical evolution
of inequality around the world. How and why has the structure of inequality changed
since the nineteenth century? The shocks of the period 1914–1945 played an essential
role in the compression of inequality, and this compression was in no way a harmonious
or spontaneous occurrence. The increase in inequality since 1970 has not been the
same everywhere, which again suggests that institutional and political factors played
a key role.

I will begin by examining at some length the case of France, which is particularly
well documented (thanks to a rich lode of readily available historical sources). It
is also relatively simple and straightforward (as far as it is possible for a history
of inequality to be straightforward) and, above all, broadly representative of changes
observed in several other European countries. By “European” I mean “continental European,”
because in some respects the British case is intermediate between the European and
the US cases. To a large extent the continental European pattern is also representative
of what happened in Japan. After France I will turn to the United States, and finally
I will extend the analysis to the entire set of developed and emerging economies for
which adequate historical data exist.

Figure 8.1
depicts the upper decile’s share of both national income and wages over time. Three
facts stand out.

First, income inequality has greatly diminished in France since the Belle Époque:
the upper decile’s share of national income decreased from 45–50 percent on the eve
of World War I to 30–35 percent today.

FIGURE 8.1.
   Income inequality in France, 1910–2010

Inequality of total income (labor and capital) has dropped in France during the twentieth
century, while wage inequality has remained the same.

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

This drop of 15 percentage points of national income is considerable. It represents
a decrease of about one-third in the share of each year’s output going to the wealthiest
10 percent of the population and an increase of about a third in the share going to
the other 90 percent. Note, too, that this is roughly equivalent to three-quarters
of what the bottom half of the population received in the Belle Époque and more than
half of what it receives today.
¹
Recall, moreover, that in this part of the book, I am examining inequality of primary
incomes (that is, before taxes and transfers). In
Part Four
, I will show how taxes and transfers reduced inequality even more. To be clear, the
fact that inequality decreased does not mean that we are living today in an egalitarian
society. It mainly reflects the fact that the society of the Belle Époque was extremely
inegalitarian—indeed, one of the most inegalitarian societies of all time. The form
that this inequality took and the way it came about would not, I think, be readily
accepted today.

Second, the significant compression of income inequality over the course of the twentieth
century was due entirely to diminished top incomes from capital. If we ignore income
from capital and concentrate on wage inequality, we find that the distribution remained
quite stable over the long run. In the first decade of the twentieth century as in
the second decade of the twenty-first, the upper decile of the wage hierarchy received
about 25 percent of total wages. The sources also indicate long-term stability of
wage inequality at the bottom end of the distribution. For example, the least well
paid 50 percent always received 25–30 percent of total wages (so that the average
pay of a member of this group was 50–60 percent of the average wage overall), with
no clear long-term trend.
²
The wage level has obviously changed a great deal over the past century, and the
composition and skills of the workforce have been totally transformed, but the wage
hierarchy has remained more or less the same. If top incomes from capital had not
decreased, income inequality would not have diminished in the twentieth century.