Capital in the Twenty-First Century

by Thomas Piketty

  The Nature of Wealth: From Literature to Reality

  When Honoré de Balzac and Jane Austen wrote their novels at the beginning of the nineteenth century, the nature of wealth was relatively clear to all readers. Wealth seemed to exist in order to produce rents, that is, dependable, regular payments to the owners of certain assets, which usually took the form of land or government bonds. Père Goriot owned the latter, while the small estate of the Rastignacs consisted of the former. The vast Norland estate that John Dashwood inherits in Sense and Sensibility is also agricultural land, from which he is quick to expel his half-sisters Elinor and Marianne, who must make do with the interest on the small capital in government bonds left to them by their father. In the classic novels of the nineteenth century, wealth is everywhere, and no matter how large or small the capital, or who owns it, it generally takes one of two forms: land or government bonds.

  From the perspective of the twenty-first century, these types of assets may seem old-fashioned, and it is tempting to consign them to the remote and supposedly vanished past, unconnected with the economic and social realities of the modern era, in which capital is supposedly more “dynamic.” Indeed, the characters in nineteenth-century novels often seem like archetypes of the rentier, a suspect figure in the modern era of democracy and meritocracy. Yet what could be more natural to ask of a capital asset than that it produce a reliable and steady income: that is in fact the goal of a “perfect” capital market as economists define it. It would be quite wrong, in fact, to assume that the study of nineteenth-century capital has nothing to teach us today.

  When we take a closer look, the differences between the nineteenth and twenty-first centuries are less apparent than they might seem at first glance. In the first place, the two types of capital asset—land and government bonds—raise very different issues and probably should not be added together as cavalierly as nineteenth-century novelists did for narrative convenience. Ultimately, a government bond is nothing more than a claim of one portion of the population (those who receive interest) on another (those who pay taxes): it should therefore be excluded from national wealth and included solely in private wealth. The complex question of government debt and the nature of the wealth associated with it is no less important today than it was in 1800, and by studying the past we can learn a lot about an issue of great contemporary concern. Although today’s public debt is nowhere near the astronomical levels attained at the beginning of the nineteenth century, at least in Britain, it is at or near a historical record in France and many other countries and is probably the source of as much confusion today as in the Napoleonic era. The process of financial intermediation (whereby individuals deposit money in a bank, which then invests it elsewhere) has become so complex that people are often unaware of who owns what. To be sure, we are in debt. How can we possibly forget it, when the media remind us every day? But to whom exactly do we owe money? In the nineteenth century, the rentiers who lived off the public debt were clearly identified. Is that still the case today? This mystery needs to be dispelled, and studying the past can help us do so.

  There is also another, even more important complication: many other forms of capital, some of them quite “dynamic,” played an essential role not only in classic novels but in the society of the time. After starting out as a noodle maker, Père Goriot made his fortune as a pasta manufacturer and grain merchant. During the wars of the revolutionary and Napoleonic eras, he had an unrivaled eye for the best flour and a knack for perfecting pasta production technologies and setting up distribution networks and warehouses so that he could deliver the right product to the right place at the right time. Only after making a fortune as an entrepreneur did he sell his share of the business, much in the manner of a twenty-first-century startup founder exercising his stock options and pocketing his capital gains. Goriot then invested the proceeds in safer assets: perpetual government bonds that paid interest indefinitely. With this capital he was able to arrange good marriages for his daughters and secure an eminent place for them in Parisian high society. On his deathbed in 1821, abandoned by his daughters Delphine and Anastasie, old Goriot still dreamt of juicy investments in the pasta business in Odessa.

  César Birotteau, another Balzac character, made his money in perfumes. He was the ingenious inventor of any number of beauty products—Sultan’s Cream, Carminative Water, and so on—that Balzac tells us were all the rage in late imperial and Restoration France. But this was not enough for him: when the time came to retire, he sought to triple his capital by speculating boldly on real estate in the neighborhood of La Madeleine, which was developing rapidly in the 1820s. After rejecting the sage advice of his wife, who urged him to invest in good farmland near Chinon and government bonds, he ended in ruin.

  Jane Austen’s heroes were more rural than Balzac’s. Prosperous landowners all, they were nevertheless wiser than Balzac’s characters in appearance only. In Mansfield Park, Fanny’s uncle, Sir Thomas, has to travel out to the West Indies for a year with his eldest son for the purpose of managing his affairs and investments. After returning to Mansfield, he is obliged to set out once again for the islands for a period of many months. In the early 1800s it was by no means simple to manage plantations several thousand miles away. Tending to one’s wealth was not a tranquil matter of collecting rent on land or interest on government debt.

  So which was it: quiet capital or risky investments? Is it safe to conclude that nothing has really changed since 1800? What actual changes have occurred in the structure of capital since the eighteenth century? Père Goriot’s pasta may have become Steve Jobs’s tablet, and investments in the West Indies in 1800 may have become investments in China or South Africa in 2010, but has the deep structure of capital really changed? Capital is never quiet: it is always risk-oriented and entrepreneurial, at least at its inception, yet it always tends to transform itself into rents as it accumulates in large enough amounts—that is its vocation, its logical destination. What, then, gives us the vague sense that social inequality today is very different from social inequality in the age of Balzac and Austen? Is this just empty talk with no purchase on reality, or can we identify objective factors to explain why some people think that modern capital has become more “dynamic” and less “rent-seeking?”

  FIGURE 3.1. Capital in Britain, 1700–2010

  National capital is worth about seven years of national income in Britain in 1700 (including four in agricultural land).

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

  The Metamorphoses of Capital in Britain and France

  I will begin by looking at changes in the capital structure of Britain and France since the eighteenth century. These are the countries for which we possess the richest historical sources and have therefore been able to construct the most complete and homogeneous estimates over the long run. The principal results of this work are shown in Figures 3.1 and 3.2, which attempt to summarize several key aspects of three centuries in the history of capitalism. Two clear conclusions emerge.

  FIGURE 3.2. Capital in France, 1700–2010

  National capital is worth almost seven years of national income in France in 1910 (including one invested abroad).

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

  We find, to begin with, that the capital/income ratio followed quite similar trajectories in both countries, remaining relatively stable in the eighteenth and nineteenth centuries, followed by an enormous shock in the twentieth century, before returning to levels similar to those observed on the eve of World War I. In both Britain and France, the total value of national capital fluctuated between six and seven years of national income throughout the eighteenth and nineteenth centuries, up to 1914. Then, after World War I, the capital/income ratio suddenly plummeted, and it continued to fall during the Depression and World War II, to the point where national capital amounted to only two or three years of national income in the 1950s. The capital/income ratio then began to climb and has continued
to do so ever since. In both countries, the total value of national capital in 2010 is roughly five to six years’ worth of national income, indeed a bit more than six in France, compared with less than four in the 1980s and barely more than two in the 1950s. The measurements are of course not perfectly precise, but the general shape of the curve is clear.

  In short, what we see over the course of the century just past is an impressive “U-shaped curve.” The capital/income ratio fell by nearly two-thirds between 1914 and 1945 and then more than doubled in the period 1945–2012.

  These are very large swings, commensurate with the violent military, political, and economic conflicts that marked the twentieth century. Capital, private property, and the global distribution of wealth were key issues in these conflicts. The eighteenth and nineteenth centuries look tranquil by comparison.

  In the end, by 2010, the capital/income ratio had returned to its pre–World War I level—or even surpassed it if we divide the capital stock by disposable household income rather than national income (a dubious methodological choice, as will be shown later). In any case, regardless of the imperfections and uncertainties of the available measures, there can be no doubt that Britain and France in the 1990s and 2000s regained a level of wealth not seen since the early twentieth century, at the conclusion of a process that originated in the 1950s. By the middle of the twentieth century, capital had largely disappeared. A little more than half a century later, it seems about to return to levels equal to those observed in the eighteenth and nineteenth centuries. Wealth is once again flourishing. Broadly speaking, it was the wars of the twentieth century that wiped away the past to create the illusion that capitalism had been structurally transformed.

  As important as it is, this evolution of the overall capital/income ratio should not be allowed to obscure sweeping changes in the composition of capital since 1700. This is the second conclusion that emerges clearly from Figures 3.1 and 3.2. In terms of asset structure, twenty-first-century capital has little in common with eighteenth-century capital. The evolutions we see are again quite close to what we find happening in Britain and France. To put it simply, we can see that over the very long run, agricultural land has gradually been replaced by buildings, business capital, and financial capital invested in firms and government organizations. Yet the overall value of capital, measured in years of national income, has not really changed.

  More precisely, remember that national capital, which is shown in Figures 3.1 and 3.2, is defined as the sum of private capital and public capital. Government debt, which is an asset for the private sector and a liability for the public sector, therefore nets out to zero (if each country owns its own government debt). As noted in Chapter 1, national capital, so defined, can be decomposed into domestic capital and net foreign capital. Domestic capital measures the value of the capital stock (buildings, firms, etc.) located within the territory of the country in question. Net foreign capital (or net foreign assets) measures the wealth of the country in question with respect to the rest of the world, that is, the difference between assets owned by residents of the country in the rest of the world and assets owned by the rest of the world in the country in question (including assets in the form of government bonds).

  Domestic capital can in turn be broken down into three categories: farmland, housing (including the value of the land on which buildings stand), and other domestic capital, which covers the capital of firms and government organizations (including buildings used for business and the associated land, infrastructure, machinery, computers, patents, etc.). These assets, like any asset, are evaluated in terms of market value: for example, in the case of a corporation that issues stock, the value depends on the share price. This leads to the following decomposition of national capital, which I have used to create Figures 3.1 and 3.2:

  National capital = farmland + housing + other domestic capital + net foreign capital

  A glance at these graphs shows that at the beginning of the eighteenth century, the total value of farmland represented four to five years of national income, or nearly two-thirds of total national capital. Three centuries later, farmland was worth less than 10 percent of national income in both France and Britain and accounted for less than 2 percent of total wealth. This impressive change is hardly surprising: agriculture in the eighteenth century accounted for nearly three-quarters of all economic activity and employment, compared with just a few percent today. It is therefore natural that the share of capital involved in agriculture has evolved in a similar direction.

  This collapse in the value of farmland (proportionate to national income and national capital) was counterbalanced on the one hand by a rise in the value of housing, which rose from barely one year of national income in the eighteenth century to more than three years today, and on the other hand by an increase in the value of other domestic capital, which rose by roughly the same amount (actually slightly less, from 1.5 years of national income in the eighteenth century to a little less than 3 years today).1 This very long-term structural transformation reflects on the one hand the growing importance of housing, not only in size but also in quality and value, in the process of economic and industrial development;2 and on the other the very substantial accumulation since the Industrial Revolution of buildings used for business purposes, infrastructure, machinery, warehouses, offices, tools, and other material and immaterial capital, all of which is used by firms and government organizations to produce all sorts of nonagricultural goods and services.3 The nature of capital has changed: it once was mainly land but has become primarily housing plus industrial and financial assets. Yet it has lost none of its importance.

  The Rise and Fall of Foreign Capital

  What about foreign capital? In Britain and France, it evolved in a very distinctive way, shaped by the turbulent history of these two leading colonial powers over the past three centuries. The net assets these two countries owned in the rest of the world increased steadily during the eighteenth and nineteenth centuries and attained an extremely high level on the eve of World War I, before literally collapsing in the period 1914–1945 and stabilizing at a relatively low level since then, as Figures 3.1 and 3.2 show.

  Foreign possessions first became important in the period 1750–1800, as we know, for instance, from Sir Thomas’s investments in the West Indies in Jane Austen’s Mansfield Park. But the share of foreign assets remained modest: when Austen wrote her novel in 1812, they represented, as far as we can tell from the available sources, barely 10 percent of Britain’s national income, or one-thirtieth of the value of agricultural land (which amounted to more than three years of national income). Hence it comes as no surprise to discover that most of Austen’s characters lived on the rents from their rural properties.

  It was during the nineteenth century that British subjects began to accumulate considerable assets in the rest of the world, in amounts previously unknown and never surpassed to this day. By the eve of World War I, Britain had assembled the world’s preeminent colonial empire and owned foreign assets equivalent to nearly two years of national income, or 6 times the total value of British farmland (which at that point was worth only 30 percent of national income).4 Clearly, the structure of wealth had been utterly transformed since the time of Mansfield Park, and one has to hope that Austen’s heroes and their descendants were able to adjust in time and follow Sir Thomas’s lead by investing a portion of their land rents abroad. By the turn of the twentieth century, capital invested abroad was yielding around 5 percent a year in dividends, interest, and rent, so that British national income was about 10 percent higher than its domestic product. A fairly significant social group were able to live off this boon.

  France, which commanded the second most important colonial empire, was in a scarcely less enviable situation: it had accumulated foreign assets worth more than a year’s national income, so that in the first decade of the twentieth century its national income was 5–6 percent higher than its domestic product. This was equal to the total industria
l output of the northern and eastern départements, and it came to France in the form of dividends, interest, royalties, rents, and other revenue on assets that French citizens owned in the country’s foreign possessions.5

  It is important to understand that these very large net positions in foreign assets allowed Britain and France to run structural trade deficits in the late nineteenth and early twentieth century. Between 1880 and 1914, both countries received significantly more in goods and services from the rest of the world than they exported themselves (their trade deficits averaged 1–2 percent of national income throughout this period). This posed no problem, because their income from foreign assets totaled more than 5 percent of national income. Their balance of payments was thus strongly positive, which enabled them to increase their holdings of foreign assets year after year.6 In other words, the rest of the world worked to increase consumption by the colonial powers and at the same time became more and more indebted to those same powers. This may seem shocking. But it is essential to realize that the goal of accumulating assets abroad by way of commercial surpluses and colonial appropriations was precisely to be in a position later to run trade deficits. There would be no interest in running trade surpluses forever. The advantage of owning things is that one can continue to consume and accumulate without having to work, or at any rate continue to consume and accumulate more than one could produce on one’s own. The same was true on an international scale in the age of colonialism.