Capital in the Twenty-First Century
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From Old Europe to the New World
In the previous chapter, I examined the metamorphoses of capital in Britain and France since the eighteenth century. The lessons to be learned from each country proved consistent and complementary. The nature of capital was totally transformed, but in the end its total amount relative to income scarcely changed at all. To gain a better understanding of the different historical processes and mechanisms involved, the analysis must now extend to other countries. I will begin by looking at Germany, which will round out the European panorama. Then I will turn my attention to capital in North America (the United States and Canada). Capital in the New World took some quite unusual and specific forms, in the first place because land was so abundant that it did not cost very much; second, because of the existence of slavery; and finally, because this region of perpetual demographic growth tended to accumulate structurally smaller amounts of capital (relative to annual income and output) than Europe did. This will lead to the question of what fundamentally determines the capital/income ratio in the long run, which will be the subject of Chapter 5. I will approach that question by extending the analysis first to all the wealthy countries and then to the entire globe, insofar as the sources allow.
Germany: Rhenish Capitalism and Social Ownership
I begin with the case of Germany. It is interesting to compare the British and French trajectories with the German, especially in regard to the issue of mixed economy, which became important, as noted, after World War II. Unfortunately, the historical data for Germany are more diverse, owing to the lateness of German unification and numerous territorial changes, so there is no satisfactory way to trace the history back beyond 1870. Still, the estimates we have for the period after 1870 reveal clear similarities with Britain and France, as well as a number of differences.
FIGURE 4.1. Capital in Germany, 1870–2010
National capital is worth 6.5 years of national income in Germany in 1910 (including about 0.5 year invested abroad).
Sources and series: see piketty.pse.ens.fr/capital21c.
The first thing to notice is that the overall evolution is similar: first, agricultural land gave way in the long run to residential and commercial real estate and industrial and financial capital, and second, the capital/income ratio has grown steadily since World War II and appears to be on its way to regaining the level it had attained prior to the shocks of 1914–1945 (see Figure 4.1).
Note that the importance of farmland in late nineteenth-century Germany made the German case resemble the French more than the British one (agriculture had not yet disappeared east of the Rhine), and the value of industrial capital was higher than in either France or Britain. By contrast, Germany on the eve of World War I had only half as much in foreign assets as France (roughly 50 percent of national income versus a year’s worth of income for France) and only a quarter as much as Britain (whose foreign assets were worth two years of national income). The main reason for this is of course that Germany had no colonial empire, a fact that was the source of some very powerful political and military tensions: think, for example, of the Moroccan crises of 1905 and 1911, when the Kaiser sought to challenge French supremacy in Morocco. The heightened competition among European powers for colonial assets obviously contributed to the climate that ultimately led to the declaration of war in the summer of 1914: one need not subscribe to all of Lenin’s theses in Imperialism, the Highest Stage of Capitalism (1916) to share this conclusion.
Note, too, that Germany over the past several decades has amassed substantial foreign assets thanks to trade surpluses. By 2010, Germany’s net foreign asset position was close to 50 percent of national income (more than half of which has been accumulated since 2000). This is almost the same level as in 1913. It is a small amount compared to the foreign asset positions of Britain and France at the end of the nineteenth century, but it is substantial compared to the current positions of the two former colonial powers, which are close to zero. A comparison of Figure 4.1 with Figures 3.1–2 shows how different the trajectories of Germany, France, and Britain have been since the nineteenth century: to a certain extent they have inverted their respective positions. In view of Germany’s very large current trade surpluses, it is not impossible that this divergence will increase. I will come back to this point.
In regard to public debt and the split between public and private capital, the German trajectory is fairly similar to the French. With average inflation of nearly 17 percent between 1930 and 1950, which means that prices were multiplied by a factor of 300 between those dates (compared with barely 100 in France), Germany was the country that, more than any other, drowned its public debt in inflation in the twentieth century. Despite running large deficits during both world wars (the public debt briefly exceeded 100 percent of GDP in 1918–1920 and 150 percent of GDP in 1943–1944), inflation made it possible in both instances to shrink the debt very rapidly to very low levels: barely 20 percent of GDP in 1930 and again in 1950 (see Figure 4.2).1 Yet the recourse to inflation was so extreme and so violently destabilized German society and economy, especially during the hyperinflation of the 1920s, that the German public came away from these experiences with a strongly antiinflationist attitude.2 That is why the following paradoxical situation exists today: Germany, the country that made the most dramatic use of inflation to rid itself of debt in the twentieth century, refuses to countenance any rise in prices greater than 2 percent a year, whereas Britain, whose government has always paid its debts, even more than was reasonable, has a more flexible attitude and sees nothing wrong with allowing its central bank to buy a substantial portion of its public debt even if it means slightly higher inflation.
FIGURE 4.2. Public wealth in Germany, 1870–2010
Public debt is worth almost one year of national income in Germany in 2010 (as much as assets).
Sources and series: see piketty.pse.ens.fr/capital21c.
In regard to the accumulation of public assets, the German case is again similar to the French: the government took large positions in the banking and industrial sectors in the period 1950–1980, then partially sold off those positions between 1980 and 2000, but substantial holdings remain. For example, the state of Lower Saxony today owns more than 15 percent of the shares (and 20 percent of the voting rights, which are guaranteed by law, despite objections from the European Union) of Volkswagen, the leading automobile manufacturer in Europe and the world.3 In the period 1950–1980, when public debt was close to zero, net public capital was close to one year’s national income in Germany, compared with barely two years for private capital, which then stood at a very low level (see Figure 4.3). Just as in France, the government owned 25–30 percent of Germany’s national capital during the decades of postwar reconstruction and the German economic miracle. Just as in France, the slowdown in economic growth after 1970 and the accumulation of public debt (which began well before reunification and has continued since) led to a complete turnaround over the course of the past few decades. Net public wealth was almost exactly zero in 2010, and private wealth, which has grown steadily since 1950, accounts for nearly all of national wealth.
FIGURE 4.3. Private and public capital in Germany, 1870–2010
In 1970, public capital is worth almost one year of national income, versus slightly more than two for private capital.
Sources and series: see piketty.pse.ens.fr/capital21c.
There is, however, a significant difference between the value of private capital in Germany compared to that in France and Britain. German private wealth has increased enormously since World War II: it was exceptionally low in 1950 (barely a year and a half of national income), but today it stands at more than four years of national income. The reconstitution of private wealth in all three countries emerges clearly from Figure 4.4. Nevertheless, German private wealth in 2010 was noticeably lower than private wealth in Britain and France: barely four years of national income in Germany compared with five or six in France and Britai
n and more than six in Italy and Spain (as we will see in Chapter 5). Given the high level of German saving, this low level of German wealth compared to other European countries is to some extent a paradox, which may be transitory and can be explained as follows.4
The first factor to consider is the low price of real estate in Germany compared to other European countries, which can be explained in part by the fact that the sharp price increases seen everywhere else after 1990 were checked in Germany by the effects of German reunification, which brought a large number of low-cost houses onto the market. To explain the discrepancy over the long term, however, we would need more durable factors, such as stricter rent control.
FIGURE 4.4. Private and public capital in Europe, 1870–2010
The fluctuations of national capital in Europe in the long run are mostly due to the fluctuations of private capital.
Sources and series: see piketty.pse.ens.fr/capital21c.
In any case, most of the gap between Germany on the one hand and France and Britain on the other stems not from the difference in the value of the housing stock but rather from the difference in the value of other domestic capital, and primarily the capital of firms (see Figure 4.1). In other words, the gap arises not from the low valuation of German real estate but rather from the low stock market valuation of German firms. If, in measuring total private wealth, we used not stock market value but book value (obtained by subtracting a firm’s debt from the cumulative value of its investments), the German paradox would disappear: German private wealth would immediately rise to French and British levels (between five and six years of national income rather than four). These complications may appear to be purely matters of accounting but are in fact highly political.
At this stage, suffice it to say that the lower market values of German firms appear to reflect the character of what is sometimes called “Rhenish capitalism” or “the stakeholder model,” that is, an economic model in which firms are owned not only by shareholders but also by certain other interested parties known as “stakeholders,” starting with representatives of the firms’ workers (who sit on the boards of directors of German firms not merely in a consultative capacity but as active participants in deliberations, even though they may not be shareholders), as well as representatives of regional governments, consumers’ associations, environmental groups, and so on. The point here is not to idealize this model of shared social ownership, which has its limits, but simply to note that it can be at least as efficient economically as Anglo-Saxon market capitalism or “the shareholder model” (in which all power lies in theory with shareholders, although in practice things are always more complex), and especially to observe that the stakeholder model inevitably implies a lower market valuation but not necessarily a lower social valuation. The debate about different varieties of capitalism erupted in the early 1990s after the collapse of the Soviet Union.5 Its intensity later waned, in part no doubt because the German economic model seemed to be losing steam in the years after reunification (between 1998 and 2002, Germany was often presented as the sick man of Europe). In view of Germany’s relatively good health in the midst of the global financial crisis (2007–2012), it is not out of the question that this debate will be revived in the years to come.6
Shocks to Capital in the Twentieth Century
Now that I have presented a first look at the general evolution of the capital/income ratio and the public-private split over the long run, I must return to the question of chronology and in particular attempt to understand the reasons first for the collapse of the capital/income ratio over the course of the twentieth century and then for its spectacular recovery.
Note first of all that this was a phenomenon that affected all European countries. All available sources indicate that the changes observed in Britain, France, and Germany (which together in 1910 and again in 2010 account for more than two-thirds of the GDP of Western Europe and more than half of the GDP of all of Europe) are representative of the entire continent: although interesting variations between countries do exist, the overall pattern is the same. In particular, the capital/income ratio in Italy and Spain has risen quite sharply since 1970, even more sharply than in Britain and France, and the available historical data suggest that it was on the order of six or seven years of national income around the turn of the twentieth century. Available estimates for Belgium, the Netherlands, and Austria indicate a similar pattern.7
Next, we must insist on the fact that the fall in the capital/income ratio between 1914 and 1945 is explained to only a limited extent by the physical destruction of capital (buildings, factories, infrastructure, etc.) due to the two world wars. In Britain, France, and Germany, the value of national capital was between six and a half and seven years of national income in 1913 and fell to around two and a half years in 1950: a spectacular drop of more than four years of national income (see Figures 4.4 and 4.5). To be sure, there was substantial physical destruction of capital, especially in France during World War I (during which the northeastern part of the country, on the front lines, was severely battered) and in both France and Germany during World War II owing to massive bombing in 1944–1945 (although the periods of combat were shorter than in World War I, the technology was considerably more destructive). All in all, capital worth nearly a year of national income was destroyed in France (accounting for one-fifth to one-quarter of the total decline in the capital/income ratio), and a year and a half in Germany (or roughly a third of the total decline). Although these losses were quite significant, they clearly explain only a fraction of the total drop, even in the two countries most directly affected by the conflicts. In Britain, physical destruction was less extensive—insignificant in World War I and less than 10 percent of national income owing to German bombing in World War II—yet national capital fell by four years of national income (or more than 40 times the loss due to physical destruction), as much as in France and Germany.
FIGURE 4.5. National capital in Europe, 1870–2010
National capital (sum of public and private capital) is worth between two and three years of national income in Europe in 1950.
Sources and series: see piketty.pse.ens.fr/capital21c.
In fact, the budgetary and political shocks of two wars proved far more destructive to capital than combat itself. In addition to physical destruction, the main factors that explain the dizzying fall in the capital/income ratio between 1913 and 1950 were on the one hand the collapse of foreign portfolios and the very low savings rate characteristic of the time (together, these two factors, plus physical destruction, explain two-thirds to three-quarters of the drop) and on the other the low asset prices that obtained in the new postwar political context of mixed ownership and regulation (which accounted for one-quarter to one-third of the drop).
I have already mentioned the importance of losses on foreign assets, especially in Britain, where net foreign capital dropped from two years of national income on the eve of World War I to a slightly negative level in the 1950s. Britain’s losses on its international portfolio were thus considerably greater than French or German losses through physical destruction of domestic capital, and these more than made up for the relatively low level of physical destruction on British soil.
The decline of foreign capital stemmed in part from expropriations due to revolution and the process of decolonization (think of the Russian loans to which many French savers subscribed in the Belle Époque and that the Bolsheviks repudiated in 1917, or the nationalization of the Suez Canal by Nasser in 1956, to the dismay of the British and French shareholders who owned the canal and had been collecting dividends and royalties on it since 1869) and in even greater part to the very low savings rate observed in various European countries between 1914 and 1945, which led British and French (and to a lesser degree German) savers to gradually sell off their foreign assets. Owing to low growth and repeated recessions, the period 1914–1945 was a dark one for all Europeans but especially for the wealthy, whose income dwindled considerably in compar
ison with the Belle Époque. Private savings rates were therefore relatively low (especially if we deduct the amount of reparations and replacement of war-damaged property), and some people consequently chose to maintain their standard of living by gradually selling off part of their capital. When the Depression came in the 1930s, moreover, many stock- and bondholders were ruined as firm after firm went bankrupt.
Furthermore, the limited amount of private saving was largely absorbed by enormous public deficits, especially during the wars: national saving, the sum of private and public saving, was extremely low in Britain, France, and Germany between 1914 and 1945. Savers lent massively to their governments, in some cases selling their foreign assets, only to be ultimately expropriated by inflation, very quickly in France and Germany and more slowly in Britain, which created the illusion that private wealth in Britain was faring better in 1950 than private wealth on the continent. In fact, national wealth was equally affected in both places (see Figures 4.4 and 4.5). At times governments borrowed directly from abroad: that is how the United States went from a negative position on the eve of World War I to a positive position in the 1950s. But the effect on the national wealth of Britain or France was the same.8