Capital in the Twenty-First Century (7 page)

I belong to a generation that turned eighteen in 1989, which was not only the bicentennial
of the French Revolution but also the year when the Berlin Wall fell. I belong to
a generation that came of age listening to news of the collapse of the Communist dicatorships
and never felt the slightest affection or nostalgia for those regimes or for the Soviet
Union. I was vaccinated for life against the conventional but lazy rhetoric of anticapitalism,
some of which simply ignored the historic failure of Communism and much of which turned
its back on the intellectual means necessary to push beyond it. I have no interest
in denouncing inequality or capitalism per se—especially since social inequalities
are not in themselves a problem as long as they are justified, that is, “founded only
upon common utility,” as article 1 of the 1789 Declaration of the Rights of Man and
the Citizen proclaims. (Although this definition of social justice is imprecise but
seductive, it is rooted in history. Let us accept it for now. I will return to this
point later on.) By contrast, I am interested in contributing, however modestly, to
the debate about the best way to organize society and the most appropriate institutions
and policies to achieve a just social order. Furthermore, I would like to see justice
achieved effectively and efficiently under the rule of law, which should apply equally
to all and derive from universally understood statutes subject to democratic debate.

I should perhaps add that I experienced the American dream at the age of twenty-two,
when I was hired by a university near Boston just after finishing my doctorate. This
experience proved to be decisive in more ways than one. It was the first time I had
set foot in the United States, and it felt good to have my work recognized so quickly.
Here was a country that knew how to attract immigrants when it wanted to! Yet I also
realized quite soon that I wanted to return to France and Europe, which I did when
I was twenty-five. Since then, I have not left Paris, except for a few brief trips.
One important reason for my choice has a direct bearing on this book: I did not find
the work of US economists entirely convincing. To be sure, they were all very intelligent,
and I still have many friends from that period of my life. But something strange happened:
I was only too aware of the fact that I knew nothing at all about the world’s economic
problems. My thesis consisted of several relatively abstract mathematical theorems.
Yet the profession liked my work. I quickly realized that there had been no significant
effort to collect historical data on the dynamics of inequality since Kuznets, yet
the profession continued to churn out purely theoretical results without even knowing
what facts needed to be explained. And it expected me to do the same. When I returned
to France, I set out to collect the missing data.

To put it bluntly, the discipline of economics has yet to get over its childish passion
for mathematics and for purely theoretical and often highly ideological speculation,
at the expense of historical research and collaboration with the other social sciences.
Economists are all too often preoccupied with petty mathematical problems of interest
only to themselves. This obsession with mathematics is an easy way of acquiring the
appearance of scientificity without having to answer the far more complex questions
posed by the world we live in. There is one great advantage to being an academic economist
in France: here, economists are not highly respected in the academic and intellectual
world or by political and financial elites. Hence they must set aside their contempt
for other disciplines and their absurd claim to greater scientific legitimacy, despite
the fact that they know almost nothing about anything. This, in any case, is the charm
of the discipline and of the social sciences in general: one starts from square one,
so that there is some hope of making major progress. In France, I believe, economists
are slightly more interested in persuading historians and sociologists, as well as
people outside the academic world, that what they are doing is interesting (although
they are not always successful). My dream when I was teaching in Boston was to teach
at the École des Hautes Études en Sciences Sociales, whose faculty has included such
leading lights as Lucien Febvre, Fernand Braudel, Claude Lévi-Strauss, Pierre Bourdieu,
Françoise Héritier, and Maurice Godelier, to name a few. Dare I admit this, at the
risk of seeming chauvinistic in my view of the social sciences? I probably admire
these scholars more than Robert Solow or even Simon Kuznets, even though I regret
the fact that the social sciences have largely lost interest in the distribution of
wealth and questions of social class since the 1970s. Before that, statistics about
income, wages, prices, and wealth played an important part in historical and sociological
research. In any case, I hope that both professional social scientists and amateurs
of all fields will find something of interest in this book, starting with those who
claim to “know nothing about economics” but who nevertheless have very strong opinions
about inequality of income and wealth, as is only natural.

The truth is that economics should never have sought to divorce itself from the other
social sciences and can advance only in conjunction with them. The social sciences
collectively know too little to waste time on foolish disciplinary squabbles. If we
are to progress in our understanding of the historical dynamics of the wealth distribution
and the structure of social classes, we must obviously take a pragmatic approach and
avail ourselves of the methods of historians, sociologists, and political scientists
as well as economists. We must start with fundamental questions and try to answer
them. Disciplinary disputes and turf wars are of little or no importance. In my mind,
this book is as much a work of history as of economics.

As I explained earlier, I began this work by collecting sources and establishing historical
time series pertaining to the distribution of income and wealth. As the book proceeds,
I sometimes appeal to theory and to abstract models and concepts, but I try to do
so sparingly, and only to the extent that theory enhances our understanding of the
changes we observe. For example, income, capital, the economic growth rate, and the
rate of return on capital are abstract concepts—theoretical constructs rather than
mathematical certainties. Yet I will show that these concepts allow us to analyze
historical reality in interesting ways, provided that we remain clear-eyed and critical
about the limited precision with which we can measure these things. I will also use
a few equations, such as
α
=
r
×
β
(which says that the share of capital in national income is equal to the product
of the return on capital and the capital/income ratio), or
β
=
s
/
g
(which says that the capital/income ratio is equal in the long run to the savings
rate divided by the growth rate). I ask readers not well versed in mathematics to
be patient and not immediately close the book: these are elementary equations, which
can be explained in a simple, intuitive way and can be understood without any specialized
technical knowledge. Above all, I try to show that this minimal theoretical framework
is sufficient to give a clear account of what everyone will recognize as important
historical developments.

The remainder of the book consists of sixteen chapters divided into four parts.
Part One
, titled “Income and Capital,” contains two chapters and introduces basic ideas that
are used repeatedly in the remainder of the book. Specifically,
Chapter 1
presents the concepts of national income, capital, and the capital/income ratio and
then describes in broad brushstrokes how the global distribution of income and output
has evolved.
Chapter 2
gives a more detailed analysis of how the growth rates of population and output have
evolved since the Industrial Revolution. This first part of the book contains nothing
really new, and the reader familiar with these ideas and with the history of global
growth since the eighteenth century may wish to skip directly to
Part Two
.

The purpose of
Part Two
, titled “The Dynamics of the Capital/Income Ratio,” which consists of four chapters,
is to examine the prospects for the long-run evolution of the capital/income ratio
and the global division of national income between labor and capital in the twenty-first
century.
Chapter 3
looks at the metamorphoses of capital since the eighteenth century, starting with
the British and French cases, about which we possess the most data over the long run.
Chapter 4
introduces the German and US cases.
Chapters 5
and
6
extend the geographical range of the analysis to the entire planet, insofar as the
sources allow, and seek to draw the lessons from all of these historical experiences
that can enable us to anticipate the possible evolution of the capital/income ratio
and the relative shares of capital and labor in the decades to come.

Part Three
, titled “The Structure of Inequality,” consists of six chapters.
Chapter 7
familiarizes the reader with the orders of magnitude of inequality attained in practice
by the distribution of income from labor on the one hand and of capital ownership
and income from capital on the other.
Chapter 8
then analyzes the historical dynamics of these inequalities, starting with a comparison
of France and the United States.
Chapters 9
and
10
extend the analysis to all the countries for which we have historical data (in the
WTID), looking separately at inequalities related to labor and capital, respectively.
Chapter 11
studies the changing importance of inherited wealth over the long run. Finally,
Chapter 12
looks at the prospects for the global distribution of wealth over the first few decades
of the twenty-first century.

The purpose of
Part Four
, titled “Regulating Capital in the Twenty-First Century” and consisting of four chapters,
is to draw normative and policy lessons from the previous three parts, whose purpose
is primarily to establish the facts and understand the reasons for the observed changes.
Chapter 13
examines what a “social state” suited to present conditions might look like.
Chapter 14
proposes a rethinking of the progressive income tax based on past experience and
recent trends.
Chapter 15
describes what a progressive tax on capital adapted to twenty-first century conditions
might look like and compares this idealized tool to other types of regulation that
might emerge from the political process, ranging from a wealth tax in Europe to capital
controls in China, immigration reform in the United States, and revival of protectionism
in many countries.
Chapter 16
deals with the pressing question of public debt and the related issue of the optimal
accumulation of public capital at a time when natural capital may be deteriorating.

One final word. It would have been quite presumptuous in 1913 to publish a book called
“Capital in the Twentieth Century.” I beg the reader’s indulgence for giving the title
Capital in the Twenty-First Century
to this book, which appeared in French in 2013 and in English in 2014. I am only
too well aware of my total inability to predict what form capital will take in 2063
or 2113. As I already noted, and as I will frequently show in what follows, the history
of income and wealth is always deeply political, chaotic, and unpredictable. How this
history plays out depends on how societies view inequalities and what kinds of policies
and institutions they adopt to measure and transform them. No one can foresee how
these things will change in the decades to come. The lessons of history are nevertheless
useful, because they help us to see a little more clearly what kinds of choices we
will face in the coming century and what sorts of dynamics will be at work. The sole
purpose of the book, which logically speaking should have been entitled “Capital at
the Dawn of the Twenty-First Century,” is to draw from the past a few modest keys
to the future. Since history always invents its own pathways, the actual usefulness
of these lessons from the past remains to be seen. I offer them to readers without
presuming to know their full import.

PART ONE

INCOME AND CAPITAL

{ONE}

Income and Output

On August 16, 2012, the South African police intervened in a labor conflict between
workers at the Marikana platinum mine near Johannesburg and the mine’s owners: the
stockholders of Lonmin, Inc., based in London. Police fired on the strikers with live
ammunition. Thirty-four miners were killed.
¹
As often in such strikes, the conflict primarily concerned wages: the miners had
asked for a doubling of their wage from 500 to 1,000 euros a month. After the tragic
loss of life, the company finally proposed a monthly raise of 75 euros.
²

This episode reminds us, if we needed reminding, that the question of what share of
output should go to wages and what share to profits—in other words, how should the
income from production be divided between labor and capital?—has always been at the
heart of distributional conflict. In traditional societies, the basis of social inequality
and most common cause of rebellion was the conflict of interest between landlord and
peasant, between those who owned land and those who cultivated it with their labor,
those who received land rents and those who paid them. The Industrial Revolution exacerbated
the conflict between capital and labor, perhaps because production became more capital
intensive than in the past (making use of machinery and exploiting natural resources
more than ever before) and perhaps, too, because hopes for a more equitable distribution
of income and a more democratic social order were dashed. I will come back to this
point.