Capital in the Twenty-First Century (8 page)

The Marikana tragedy calls to mind earlier instances of violence. At Haymarket Square
in Chicago on May 1, 1886, and then at Fourmies, in northern France, on May 1, 1891,
police fired on workers striking for higher wages. Does this kind of violent clash
between labor and capital belong to the past, or will it be an integral part of twenty-first-century
history?

The first two parts of this book focus on the respective shares of global income going
to labor and capital and on how those shares have changed since the eighteenth century.
I will temporarily set aside the issue of income inequality between workers (for example,
between an ordinary worker, an engineer, and a plant manager) and between capitalists
(for example, between small, medium, and large stockholders or landlords) until
Part Three
. Clearly, each of these two dimensions of the distribution of wealth—the “factorial”
distribution in which labor and capital are treated as “factors of production,” viewed
in the abstract as homogeneous entities, and the “individual” distribution, which
takes account of inequalities of income from labor and capital at the individual level—is
in practice fundamentally important. It is impossible to achieve a satisfactory understanding
of the distributional problem without analyzing both.
³

In any case, the Marikana miners were striking not only against what they took to
be Lonmin’s excessive profits but also against the apparently fabulous salary awarded
to the mine’s manager and the difference between his compensation and theirs.
⁴
Indeed, if capital ownership were equally distributed and each worker received an
equal share of profits in addition to his or her wages, virtually no one would be
interested in the division of earnings between profits and wages. If the capital-labor
split gives rise to so many conflicts, it is due first and foremost to the extreme
concentration of the ownership of capital. Inequality of wealth—and of the consequent
income from capital—is in fact always much greater than inequality of income from
labor. I will analyze this phenomenon and its causes in
Part Three
. For now, I will take the inequality of income from labor and capital as given and
focus on the global division of national income between capital and labor.

To be clear, my purpose here is not to plead the case of workers against owners but
rather to gain as clear as possible a view of reality. Symbolically, the inequality
of capital and labor is an issue that arouses strong emotions. It clashes with widely
held ideas of what is and is not just, and it is hardly surprising if this sometimes
leads to physical violence. For those who own nothing but their labor power and who
often live in humble conditions (not to say wretched conditions in the case of eighteenth-century
peasants or the Marikana miners), it is difficult to accept that the owners of capital—some
of whom have inherited at least part of their wealth—are able to appropriate so much
of the wealth produced by their labor. Capital’s share can be quite large: often as
much as one-quarter of total output and sometimes as high as one-half in capital-intensive
sectors such as mining, or even more where local monopolies allow the owners of capital
to demand an even larger share.

Of course, everyone can also understand that if all the company’s earnings from its
output went to paying wages and nothing to profits, it would probably be difficult
to attract the capital needed to finance new investments, at least as our economies
are currently organized (to be sure, one can imagine other forms of organization).
Furthermore, it is not necessarily just to deny any remuneration to those who choose
to save more than others—assuming, of course, that differences in saving are an important
reason for the inequality of wealth. Bear in mind, too, that a portion of what is
called “the income of capital” may be remuneration for “entrepreneurial” labor, and
this should no doubt be treated as we treat other forms of labor. This classic argument
deserves closer scrutiny. Taking all these elements into account, what is the “right”
split between capital and labor? Can we be sure that an economy based on the “free
market” and private property always and everywhere leads to an optimal division, as
if by magic? In an ideal society, how would one arrange the division between capital
and labor? How should one think about the problem?

If this study is to make even modest progress on these questions and at least clarify
the terms of a debate that appears to be endless, it will be useful to begin by establishing
some facts as accurately and carefully as possible. What exactly do we know about
the evolution of the capital-labor split since the eighteenth century? For a long
time, the idea accepted by most economists and uncritically repeated in textbooks
was that the relative shares of labor and capital in national income were quite stable
over the long run, with the generally accepted figure being two-thirds for labor and
one-third for capital.
⁵
Today, with the advantage of greater historical perspective and newly available data,
it is clear that the reality was quite a bit more complex.

For one thing, the capital-labor split varied widely over the course of the twentieth
century. The changes observed in the nineteenth century, which I touched on in the
Introduction (an increase in the capital share in the first half of the century, followed
by a slight decrease and then a period of stability), seem mild by comparison. Briefly,
the shocks that buffeted the economy in the period 1914–1945—World War I, the Bolshevik
Revolution of 1917, the Great Depression, World War II, and the consequent advent
of new regulatory and tax policies along with controls on capital—reduced capital’s
share of income to historically low levels in the 1950s. Very soon, however, capital
began to reconstitute itself. The growth of capital’s share accelerated with the victories
of Margaret Thatcher in England in 1979 and Ronald Reagan in the United States in
1980, marking the beginning of a conservative revolution. Then came the collapse of
the Soviet bloc in 1989, followed by financial globalization and deregulation in the
1990s. All of these events marked a political turn in the opposite direction from
that observed in the first half of the twentieth century. By 2010, and despite the
crisis that began in 2007–2008, capital was prospering as it had not done since 1913.
Not all of the consequences of capital’s renewed prosperity were negative; to some
extent it was a natural and desirable development. But it has changed the way we look
at the capital-labor split since the beginning of the twenty-first century, as well
as our view of changes likely to occur in the decades to come.

Furthermore, if we look beyond the twentieth century and adopt a very long-term view,
the idea of a stable capital-labor split must somehow deal with the fact that the
nature of capital itself has changed radically (from land and other real estate in
the eighteenth century to industrial and financial capital in the twenty-first century).
There is also the idea, widespread among economists, that modern economic growth depends
largely on the rise of “human capital.” At first glance, this would seem to imply
that labor should claim a growing share of national income. And one does indeed find
that there may be a tendency for labor’s share to increase over the very long run,
but the gains are relatively modest: capital’s share (excluding human capital) in
the early decades of the twenty-first century is only slightly smaller than it was
at the beginning of the nineteenth century. The importance of capital in the wealthy
countries today is primarily due to a slowing of both demographic growth and productivity
growth, coupled with political regimes that objectively favor private capital.

The most fruitful way to understand these changes is to analyze the evolution of the
capital/income ratio (that is, the ratio of the total stock of capital to the annual
flow of income) rather than focus exclusively on the capital-labor split (that is,
the share of income going to capital and labor, respectively). In the past, scholars
have mainly studied the latter, largely owing to the lack of adequate data to do anything
else.

Before presenting my results in detail, it is best to proceed by stages. The purpose
of
Part One
of this book is to introduce certain basic notions. In the remainder of this chapter,
I will begin by presenting the concepts of domestic product and national income, capital
and labor, and the capital/income ratio. Then I will look at how the global distribution
of income has changed since the Industrial Revolution. In
Chapter 2
, I will analyze the general evolution of growth rates over time. This will play a
central role in the subsequent analysis.

With these preliminaries out of the way,
Part Two
takes up the dynamics of the capital/income ratio and the capital-labor split, once
again proceeding by stages.
Chapter 3
will look at changes in the composition of capital and the capital/income ratio since
the eighteenth century, beginning with Britain and France, about which we have the
best long-run data.
Chapter 4
introduces the German case and above all looks at the United States, which serves
as a useful complement to the European prism. Finally,
Chapters 5
and
6
attempt to extend the analysis to all the rich countries of the world and, insofar
as possible, to the entire planet. I also attempt to draw conclusions relevant to
the global dynamics of the capital/income ratio and capital-labor split in the twenty-first
century.

It will be useful to begin with the concept of “national income,” to which I will
frequently refer in what follows. National income is defined as the sum of all income
available to the residents of a given country in a given year, regardless of the legal
classification of that income.

National income is closely related to the idea of GDP, which comes up often in public
debate. There are, however, two important differences between GDP and national income.
GDP measures the total of goods and services produced in a given year within the borders
of a given country. In order to calculate national income, one must first subtract
from GDP the depreciation of the capital that made this production possible: in other
words, one must deduct wear and tear on buildings, infrastructure, machinery, vehicles,
computers, and other items during the year in question. This depreciation is substantial,
today on the order of 10 percent of GDP in most countries, and it does not correspond
to anyone’s income: before wages are distributed to workers or dividends to stockholders,
and before genuinely new investments are made, worn-out capital must be replaced or
repaired. If this is not done, wealth is lost, resulting in negative income for the
owners. When depreciation is subtracted from GDP, one obtains the “net domestic product,”
which I will refer to more simply as “domestic output” or “domestic production,” which
is typically 90 percent of GDP.

Then one must add net income received from abroad (or subtract net income paid to
foreigners, depending on each country’s situation). For example, a country whose firms
and other capital assets are owned by foreigners may well have a high domestic product
but a much lower national income, once profits and rents flowing abroad are deducted
from the total. Conversely, a country that owns a large portion of the capital of
other countries may enjoy a national income much higher than its domestic product.

Later I will give examples of both of these situations, drawn from the history of
capitalism as well as from today’s world. I should say at once that this type of international
inequality can give rise to great political tension. It is not an insignificant thing
when one country works for another and pays out a substantial share of its output
as dividends and rent to foreigners over a long period of time. In many cases, such
a system can survive (to a point) only if sustained by relations of political domination,
as was the case in the colonial era, when Europe effectively owned much of the rest
of the world. A key question of this research is the following: Under what conditions
is this type of situation likely to recur in the twenty-first century, possibly in
some novel geographic configuration? For example, Europe, rather than being the owner,
may find itself owned. Such fears are currently widespread in the Old World—perhaps
too widespread. We shall see.

At this stage, suffice it to say that most countries, whether wealthy or emergent,
are currently in much more balanced situations than one sometimes imagines. In France
as in the United States, Germany as well as Great Britain, China as well as Brazil,
and Japan as well as Italy, national income is within 1 or 2 percent of domestic product.
In all these countries, in other words, the inflow of profits, interest, dividends,
rent, and so on is more or less balanced by a comparable outflow. In wealthy countries,
net income from abroad is generally slightly positive. To a first approximation, the
residents of these countries own as much in foreign real estate and financial instruments
as foreigners own of theirs. Contrary to a tenacious myth, France is not owned by
California pension funds or the Bank of China, any more than the United States belongs
to Japanese and German investors. The fear of getting into such a predicament is so
strong today that fantasy often outstrips reality. The reality is that inequality
with respect to capital is a far greater domestic issue than it is an international
one. Inequality in the ownership of capital brings the rich and poor within each country
into conflict with one another far more than it pits one country against another.
This has not always been the case, however, and it is perfectly legitimate to ask
whether our future may not look more like our past, particularly since certain countries—Japan,
Germany, the oil-exporting countries, and to a lesser degree China—have in recent
years accumulated substantial claims on the rest of the world (though by no means
as large as the record claims of the colonial era). Furthermore, the very substantial
increase in cross-ownership, in which various countries own substantial shares of
one another, can give rise to a legitimate sense of dispossession, even when net asset
positions are close to zero.