Capital in the Twenty-First Century

by Thomas Piketty

  In the wake of the cumulative shocks of two world wars, the Great Depression, and decolonization, these vast stocks of foreign assets would eventually evaporate. In the 1950s, both France and Great Britain found themselves with net foreign asset holdings close to zero, which means that their foreign assets were just enough to balance the assets of the two former colonial powers owned by the rest of the world. Broadly speaking, this situation did not change much over the next half century. Between 1950 and 2010, the net foreign asset holdings of France and Britain varied from slightly positive to slightly negative while remaining quite close to zero, at least when compared with the levels observed previously.7

  Finally, when we compare the structure of national capital in the eighteenth century to its structure now, we find that net foreign assets play a negligible role in both periods, and that the real long-run structural change is to be found in the gradual replacement of farmland by real estate and working capital, while the total capital stock has remained more or less unchanged relative to national income.

  Income and Wealth: Some Orders of Magnitude

  To sum up these changes, it is useful to take today’s world as a reference point. The current per capita national income in Britain and France is on the order of 30,000 euros per year, and national capital is about 6 times national income, or roughly 180,000 euros per head. In both countries, farmland is virtually worthless today (a few thousand euros per person at most), and national capital is broadly speaking divided into two nearly equal parts: on average, each citizen has about 90,000 euros in housing (for his or her own use or for rental to others) and about 90,000 euros worth of other domestic capital (primarily in the form of capital invested in firms by way of financial instruments).

  As a thought experiment, let us go back three centuries and apply the national capital structure as it existed around 1700 but with the average amounts we find today: 30,000 euros annual income per capita and 180,000 euros of capital. Our representative French or British citizen would then own around 120,000 euros worth of land, 30,000 euros worth of housing, and 30,000 euros in other domestic assets.8 Clearly, some of these people (for example, Jane Austen’s characters: John Dashwood with his Norland estate and Charles Darcy with Pemberley) owned hundreds of hectares—capital worth tens or hundreds of millions of euros—while many others owned nothing at all. But these averages give us a somewhat more concrete idea of the way the structure of national capital has been utterly transformed since the eighteenth century while preserving roughly the same value in terms of annual income.

  Now imagine this British or French person at the turn of the twentieth century, still with an average income of 30,000 euros and an average capital of 180,000. In Britain, farmland already accounted for only a small fraction of this wealth: 10,000 for each British subject, compared with 50,000 euros worth of housing and 60,000 in other domestic assets, together with nearly 60,000 in foreign investments. France was somewhat similar, except that each citizen still owned on average between 30,000 and 40,000 euros worth of land and roughly the same amount of foreign assets.9 In both countries, foreign assets had taken on considerable importance. Once again, it goes without saying that not everyone owned shares in the Suez Canal or Russian bonds. But by averaging over the entire population, which contained many people with no foreign assets at all and a small minority with substantial portfolios, we are able to measure the vast quantity of accumulated wealth in the rest of the world that French and British foreign asset holdings represented.

  Public Wealth, Private Wealth

  Before studying more precisely the nature of the shocks sustained by capital in the twentieth century and the reasons for the revival of capital since World War II, it will be useful at this point to broach the issue of the public debt, and more generally the division of national capital between public and private assets. Although it is difficult today, in an age where rich countries tend to accumulate substantial public debts, to remember that the public sector balance sheet includes assets as well as liabilities, we should be careful to bear this fact in mind.

  To be sure, the distinction between public and private capital changes neither the total amount nor the composition of national capital, whose evolution I have just traced. Nevertheless, the division of property rights between the government and private individuals is of considerable political, economic, and social importance.

  I will begin, then, by recalling the definitions introduced in Chapter 1. National capital (or wealth) is the sum of public capital and private capital. Public capital is the difference between the assets and liabilities of the state (including all public agencies), and private capital is of course the difference between the assets and liabilities of private individuals. Whether public or private, capital is always defined as net wealth, that is, the difference between the market value of what one owns (assets) and what one owes (liabilities, or debts).

  Concretely, public assets take two forms. They can be nonfinancial (meaning essentially public buildings, used for government offices or for the provision of public services, primarily in health and education: schools, universities, hospitals, etc.) or financial. Governments can own shares in firms, in which they can have a majority or minority stake. These firms may be located within the nation’s borders or abroad. In recent years, for instance, so-called sovereign wealth funds have arisen to manage the substantial portfolios of foreign financial assets that some states have acquired.

  In practice, the boundary between financial and nonfinancial assets need not be fixed. For example, when the French government transformed France Telecom and the French Post Office into shareholder-owned corporations, state-owned buildings used by both firms began to be counted as financial assets of the state, whereas previously they were counted as nonfinancial assets.

  At present, the total value of public assets (both financial and non-financial) is estimated to be almost one year’s national income in Britain and a little less than 1 1/2 times that amount in France. Since the public debt of both countries amounts to about one year’s national income, net public wealth (or capital) is close to zero. According to the most recent official estimates by the statistical services and central banks of both countries, Britain’s net public capital is almost exactly zero and France’s is slightly less than 30 percent of national income (or one-twentieth of total national capital: see Table 3.1).10

  In other words, if the governments of both countries decided to sell off all their assets in order to immediately pay off their debts, nothing would be left in Britain and very little in France.

  Once again, we should not allow ourselves to be misled by the precision of these estimates. Countries do their best to apply the standardized concepts and methods established by the United Nations and other international organizations, but national accounting is not, and never will be, an exact science. Estimating public debts and financial assets poses no major problems. By contrast, it is not easy to set a precise market value on public buildings (such as schools and hospitals) or transportation infrastructure (such as railway lines and highways) since these are not regularly sold. In theory, such items are priced by observing the sales of similar items in the recent past, but such comparisons are not always reliable, especially since market prices frequently fluctuate, sometimes wildly. Hence these figures should be taken as rough estimates, not mathematical certainties.

  In any event, there is absolutely no doubt that net public wealth in both countries is quite small and certainly insignificant compared with total private wealth. Whether net public wealth represents less than 1 percent of national wealth, as in Britain, or about 5 percent, as in France, or even 10 percent if we assume that the value of public assets is seriously underestimated, is ultimately of little or no importance for present purposes. Regardless of the imperfections of measurement, the crucial fact here is that private wealth in 2010 accounts for virtually all of national wealth in both countries: more than 99 percent in Britain and roughly 95 percent in France, according to
the latest available estimates. In any case, the true figure is certainly greater than 90 percent.

  FIGURE 3.3. Public wealth in Britain, 1700–2010

  Public debt surpassed two years of national income in 1950 (versus one year for public assets).

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

  Public Wealth in Historical Perspective

  If we examine the history of public wealth in Britain and France since the eighteenth century, as well as the evolution of the public-private division of national capital, we find that the foregoing description has almost always been accurate (see Figures 3.3–6). To a first approximation, public assets and liabilities, and a fortiori the difference between the two, have generally represented very limited amounts compared with the enormous mass of private wealth. In both countries, net public wealth over the past three centuries has sometimes been positive, sometimes negative. But the oscillations, which have ranged, broadly speaking, between +100 and −100 percent of national income (and more often than not between +50 and −50) have all in all been limited in amplitude compared to the high levels of private wealth (as much as 700–800 percent of national income).

  In other words, the history of the ratio of national capital to national income in France and Britain since the eighteenth century, summarized earlier, has largely been the history of the relation between private capital and national income (see Figures 3.5 and 3.6).

  FIGURE 3.4. Public wealth in France, 1700–2010

  Public debt is about one year of national income in France in 1780 as well as in 1880 and in 2000–2010.

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

  The crucial fact here is of course well known: France and Britain have always been countries based on private property and never experimented with Soviet-style communism, where the state takes control of most capital. Hence it is not surprising that private wealth has always dominated public wealth. Conversely, neither country has ever amassed public debts sufficiently large to radically alter the magnitude of private wealth.

  With this central fact in mind, it behooves us to push the analysis a bit farther. Even though public policy never went to extremes in either country, it did have a nonnegligible impact on the accumulation of private wealth at several points, and in different directions.

  In eighteenth- and nineteenth-century Britain, the government tended at times to increase private wealth by running up large public debts. The French government did the same under the Ancien Régime and in the Belle Époque. At other times, however, the government tried to reduce the magnitude of private wealth. In France after World War II, public debts were canceled, and a large public sector was created; the same was true to a lesser extent in Britain during the same period. At present, both countries (along with most other wealthy countries) are running large public debts. Historical experience shows, however, that this can change fairly rapidly. It will therefore useful to lay some groundwork by studying historical reversals of policy in Britain and France. Both countries offer a rich and varied historical experience in this regard.

  FIGURE 3.5. Private and public capital in Britain, 1700–2010

  In 1810, private capital is worth eight years of national income in Britain (versus seven years for national capital).

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

  FIGURE 3.6. Private and public capital in France, 1700–2010

  In 1950, public capital is worth almost one year of national income versus two years for private capital.

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

  Great Britain: Public Debt and the Reinforcement of Private Capital

  I begin with the British case. On two occasions—first at the end of the Napoleonic wars and again after World War II—Britain’s public debt attained extremely high levels, around 200 percent of GDP or even slightly above that. Although no country has sustained debt levels as high as Britain’s for a longer period of time, Britain never defaulted on its debt. Indeed, the latter fact explains the former: if a country does not default in one way or another, either directly by simply repudiating its debt or indirectly through high inflation, it can take a very long time to pay off such a large public debt.

  In this respect, Britain’s public debt in the nineteenth century is a textbook case. To look back a little farther in time: even before the Revolutionary War in America, Britain had accumulated large public debts in the eighteenth century, as had France. Both monarchies were frequently at war, both with each other and with other European countries, and they did not manage to collect enough in taxes to pay for their expenditures, so that public debt rose steeply. Both countries thus managed to amass debts on the order of 50 percent of national income in the period 1700–1720 and 100 percent of national income in the period 1760–1770.

  The French monarchy’s inability to modernize its tax system and eliminate the fiscal privileges of the nobility is well known, as is the ultimate revolutionary resolution, initiated by the convocation of the Estates General in 1789, that led eventually to the introduction of a new tax system in 1790–1791. A land tax was imposed on all landowners and an estate tax on all inherited wealth. In 1797 came what was called the “banqueroute des deux tiers,” or “two-thirds bankruptcy,” which was in fact a massive default on two-thirds of the outstanding public debt, compounded by high inflation triggered by the issuance of assignats (paper money backed by nationalized land). This was how the debts of the Ancien Régime were ultimately dealt with.11 The French public debt was thus quickly reduced to a very low level in the first decades of the nineteenth century (less than 20 percent of national income in 1815).

  Britain followed a totally different trajectory. In order to finance its war with the American revolutionaries as well as its many wars with France in the revolutionary and Napoleonic eras, the British monarchy chose to borrow without limit. The public debt consequently rose to 100 percent of national income in the early 1770s and to nearly 200 percent in the 1810s—10 times France’s debt in the same period. It would take a century of budget surpluses to gradually reduce Britain’s debt to under 30 percent of national income in the 1910s (see Figure 3.3).

  What lessons can we draw from this historical experience? First, there is no doubt that Britain’s high level of public debt enhanced the influence of private wealth in British society. Britons who had the necessary means lent what the state demanded without appreciably reducing private investment: the very substantial increase in public debt in the period 1770–1810 was financed largely by a corresponding increase in private saving (proving that the propertied class in Britain was indeed prosperous and that yields on government bonds were attractive), so that national capital remained stable overall at around seven years of national income throughout the period, whereas private wealth rose to more than eight years of national income in the 1810s, as net public capital fell into increasingly negative territory (see Figure 3.5).

  Hence it is no surprise that wealth is ubiquitous in Jane Austen’s novels: traditional landlords were joined by unprecedented numbers of government bondholders. (These were largely the same people, if literary sources count as reliable historical sources.) The result was an exceptionally high level of overall private wealth. Interest on British government bonds supplemented land rents as private capital grew to dimensions never before seen.

  Second, it is also quite clear that, all things considered, this very high level of public debt served the interests of the lenders and their descendants quite well, at least when compared with what would have happened if the British monarchy had financed its expenditures by making them pay taxes. From the standpoint of people with the means to lend to the government, it is obviously far more advantageous to lend to the state and receive interest on the loan for decades than to pay taxes without compensation. Furthermore, the fact that the government’s deficits increased the overall demand for private wealth inevitably increased the return on that wealth, thereby serving
the interests of those whose prosperity depended on the return on their investment in government bonds.

  The central fact—and the essential difference from the twentieth century—is that the compensation to those who lent to the government was quite high in the nineteenth century: inflation was virtually zero from 1815 to 1914, and the interest rate on government bonds was generally around 4–5 percent; in particular, it was significantly higher than the growth rate. Under such conditions, investing in public debt can be very good business for wealthy people and their heirs.

  Concretely, imagine a government that runs deficits on the order of 5 percent of GDP every year for twenty years (to pay, say, the wages of a large number of soldiers from 1795 to 1815) without having to increase taxes by an equivalent amount. After twenty years, an additional public debt of 100 percent of GDP will have been accumulated. Suppose that the government does not seek to repay the principal and simply pays the annual interest due on the debt. If the interest rate is 5 percent, it will have to pay 5 percent of GDP every year to the owners of this additional public debt, and must continue to do so until the end of time.

  In broad outline, this is what Britain did in the nineteenth century. For an entire century, from 1815 to 1914, the British budget was always in substantial primary surplus: in other words, tax revenues always exceeded expenditures by several percent of GDP—an amount greater, for example, than the total expenditure on education throughout this period. It was only the growth of Britain’s domestic product and national income (nearly 2.5 percent a year from 1815 to 1914) that ultimately, after a century of penance, allowed the British to significantly reduce their public debt as a percentage of national income.12