Capital in the Twenty-First Century (48 page)

FIGURE 8.2.
   The fall of rentiers in France, 1910–2010

The fall in the top percentile share (the top 1 percent highest incomes) in France
between 1914 and 1945 is due to the fall of top capital incomes.

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

This fact stands out even more boldly when we climb the rungs of the social ladder.
Look, in particular, at the evolution of the top centile (
Figure 8.2
).
³
Compared with the peak inequality of the Belle Époque, the top centile’s share of
income literally collapsed in France over the course of the twentieth century, dropping
from more than 20 percent of national income in 1900–1910 to 8 or 9 percent in 2000–2010.
This represents a decrease of more than half in one century, indeed nearly two-thirds
if we look at the bottom of the curve in the early 1980s, when the top centile’s share
of national income was barely 7 percent.

Again, this collapse was due solely to the decrease of very high incomes from capital
(or, crudely put, the fall of the rentier). If we look only at wages, we find that
the upper centile’s share remains almost totally stable over the long run at around
6 or 7 percent of total wages. On the eve of World War I, income inequality (as measured
by the share of the upper centile) was nearly three times greater than wage inequality.
Today it is a nearly a third higher and largely identical with wage inequality, to
the point where one might imagine—incorrectly—that top incomes from capital have virtually
disappeared (see
Figure 8.2
).

To sum up: the reduction of inequality in France during the twentieth century is largely
explained by the fall of the rentier and the collapse of very high incomes from capital.
No generalized structural process of inequality compression (and particularly wage
inequality compression) seems to have operated over the long run, contrary to the
optimistic predictions of Kuznets’s theory.

Herein lies a fundamental lesson about the historical dynamics of the distribution
of wealth, no doubt the most important lesson the twentieth century has to teach.
This is all the more true when we recognize that the factual picture is more or less
the same in all developed countries, with minor variations.

The third important fact to emerge from
Figures 8.1
and
8.2
is that the history of inequality has not been a long, tranquil river. There have
been many twists and turns and certainly no irrepressible, regular tendency toward
a “natural” equilibrium. In France and elsewhere, the history of inequality has always
been chaotic and political, influenced by convulsive social changes and driven not
only by economic factors but by countless social, political, military, and cultural
phenomena as well. Socioeconomic inequalities—disparities of income and wealth between
social groups—are always both causes and effects of other developments in other spheres.
All these dimensions of analysis are inextricably intertwined. Hence the history of
the distribution of wealth is one way of interpreting a country’s history more generally.

In the case of France, it is striking to see the extent to which the compression of
income inequality is concentrated in one highly distinctive period: 1914–1945. The
shares of both the upper decile and upper centile in total income reached their nadir
in the aftermath of World War II and seem never to have recovered from the extremely
violent shocks of the war years (see
Figures 8.1
and
8.2
). To a large extent, it was the chaos of war, with its attendant economic and political
shocks, that reduced inequality in the twentieth century. There was no gradual, consensual,
conflict-free evolution toward greater equality. In the twentieth century it was war,
and not harmonious democratic or economic rationality, that erased the past and enabled
society to begin anew with a clean slate.

What were these shocks? I discussed them in
Part Two
: destruction caused by two world wars, bankruptcies caused by the Great Depression,
and above all new public policies enacted in this period (from rent control to nationalizations
and the inflation-induced euthanasia of the rentier class that lived on government
debt). All of these things led to a sharp drop in the capital/income ratio between
1914 and 1945 and a significant decrease in the share of income from capital in national
income. But capital is far more concentrated than labor, so income from capital is
substantially overrepresented in the upper decile of the income hierarchy (even more
so in the upper centile). Hence there is nothing surprising about the fact that the
shocks endured by capital, especially private capital, in the period 1914–1945 diminished
the share of the upper decile (and upper centile), ultimately leading to a significant
compression of income inequality.

France first imposed a tax on income in 1914 (the Senate had blocked this reform since
the 1890s, and it was not finally adopted until July 15, 1914, a few weeks before
war was declared, in an extremely tense climate). For that reason, we unfortunately
have no detailed annual data on the structure of income before that date. In the first
decade of the twentieth century, numerous estimates were made of the distribution
of income in anticipation of the imposition of a general income tax, in order to predict
how much revenue such a tax might bring in. We therefore have a rough idea of how
concentrated income was in the Belle Époque. But these estimates are not sufficient
to give us historical perspective on the shock of World War I (for that, the income
tax would have to have been adopted several decades earlier).
⁴
Fortunately, data on estate taxes, which have been levied since 1791, allow us to
study the evolution of the wealth distribution throughout the nineteenth and twentieth
centuries, and we are therefore able to confirm the central role played by the shocks
of 1914–1945. For these data indicate that on the eve of World War I, nothing presaged
a spontaneous reduction of the concentration of capital ownership—on the contrary.
From the same source we also know that income from capital accounted for the lion’s
share of the upper centile’s income in the period 1900–1910.

FIGURE 8.3.
   The composition of top incomes in France in 1932

Labor income becomes less and less important as one goes up within the top decile
of total income. Notes: (i) “P90–95” includes individuals between percentiles 90 to
95, “P95–99” includes the next 4 percent, “P99–99.5” the next 0.5 percent, etc.; (ii)
Labor income: wages, bonuses, pensions. Capital income: dividends, interest, rent.
Mixed income: self-employment income.

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

In 1932, despite the economic crisis, income from capital still represented the main
source of income for the top 0.5 percent of the distribution (see
Figure 8.3
).
⁵
But when we look at the composition of the top income group today, we find that a
profound change has occurred. To be sure, today as in the past, income from labor
gradually disappears as one moves higher in the income hierarchy, and income from
capital becomes more and more predominant in the top centiles and thousandths of the
distribution: this structural feature has not changed. There is one crucial difference,
however: today one has to climb much higher in the social hierarchy before income
from capital outweighs income from labor. Currently, income from capital exceeds income
from labor only in the top 0.1 percent of the income distribution (see
Figure 8.4
). In 1932, this social group was 5 times larger; in the Belle Époque it was 10 times
larger.

FIGURE 8.4.
   The composition of top incomes in France in 2005

Capital income becomes dominant at the level of the top 0.1 percent in France in 2005,
as opposed to the top 0.5 percent in 1932.

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

Make no mistake: this is a significant change. The top centile occupies a very prominent
place in any society. It structures the economic and political landscape. This is
much less true of the top thousandth.
⁶
Although this is a matter of degree, it is nevertheless important: there are moments
when the quantitative becomes qualitative. This change also explains why the share
of income going to the upper centile today is barely higher than the upper centile’s
share of total wages: income from capital assumes decisive importance only in the
top thousandth or top ten-thousandth. Its influence in the top centile as a whole
is relatively insignificant.

To a large extent, we have gone from a society of rentiers to a society of managers,
that is, from a society in which the top centile is dominated by rentiers (people
who own enough capital to live on the annual income from their wealth) to a society
in which the top of the income hierarchy, including to upper centile, consists mainly
of highly paid individuals who live on income from labor. One might also say, more
correctly (if less positively), that we have gone from a society of superrentiers
to a less extreme form of rentier society, with a better balance between success through
work and success through capital. It is important, however, to be clear that this
major upheaval came about, in France at any rate, without any expansion of the wage
hierarchy (which has been globally stable for a long time: the universe of individuals
who are paid for their labor has never been as homogeneous as many people think);
it was due entirely to the decrease in high incomes from capital.

To sum up: what happened in France is that rentiers (or at any rate nine-tenths of
them) fell behind managers; managers did not race ahead of rentiers. We need to understand
the reasons for this long-term change, which are not obvious at first glance, since
I showed in
Part Two
that the capital/income ratio has lately returned to Belle Époque levels. The collapse
of the rentier between 1914 and 1945 is the obvious part of the story. Exactly why
rentiers have not come back is the more complex and in some ways more important and
interesting part. Among the structural factors that may have limited the concentration
of wealth since World War II and to this day have helped prevent the resurrection
of a society of rentiers as extreme as that which existed on the eve of World War
I, we can obviously cite the creation of highly progressive taxes on income and inheritances
(which for the most part did not exist prior to 1920). But other factors may also
have played a significant and potentially equally important role.

But first, let me dwell a moment on the very diverse social groups that make up the
top decile of the income hierarchy. The boundaries between the various subgroups have
changed over time: income from capital used to predominate in the top centile but
today predominates only in the top thousandth. More than that, the coexistence of
several worlds within the top decile can help us to understand the often chaotic short-
and medium-term evolutions we see in the data. Income statements required by the new
tax laws have proved to be a rich historical source, despite their many imperfections.
With their help, it is possible to precisely describe and analyze the diversity at
the top of the income distribution and its evolution over time. It is particularly
striking to note that in all the countries for which we have this type of data, in
all periods, the composition of the top income group can be characterized by intersecting
curves like those shown in
Figures 8.3
and
8.4
for France in 1932 and 2005, respectively: the share of income from labor always
decreases rapidly as one moves progressively higher in the top decile, and the share
of income from capital always rises sharply.