Capital in the Twenty-First Century
Page 18
Ultimately, the decline in the capital/income ratio between 1913 and 1950 is the history of Europe’s suicide, and in particular of the euthanasia of European capitalists.
This political, military, and budgetary history would be woefully incomplete, however, if we did not insist on the fact that the low level of the capital/income ratio after World War II was in some ways a positive thing, in that it reflected in part a deliberate policy choice aimed at reducing—more or less consciously and more or less efficaciously—the market value of assets and the economic power of their owners. Concretely, real estate values and stocks fell to historically low levels in the 1950s and 1960s relative to the price of goods and services, and this goes some way toward explaining the low capital/income ratio. Remember that all forms of wealth are evaluated in terms of market prices at a given point in time. This introduces an element of arbitrariness (markets are often capricious), but it is the only method we have for calculating the national capital stock: how else could one possibly add up hectares of farmland, square meters of real estate, and blast furnaces?
In the postwar period, housing prices stood at historic lows, owing primarily to rent control policies that were adopted nearly everywhere in periods of high inflation such as the early 1920s and especially the 1940s. Rents rose less sharply than other prices. Housing became less expensive for tenants, while landlords earned less on their properties, so real estate prices fell. Similarly, the value of firms, that is, the value of the stock of listed firms and shares of partnerships, fell to relatively low levels in the 1950s and 1960s. Not only had confidence in the stock markets been strongly shaken by the Depression and the nationalizations of the postwar period, but new policies of financial regulation and taxation of dividends and profits had been established, helping to reduce the power of stockholders and the value of their shares.
Detailed estimates for Britain, France, and Germany show that low real estate and stock prices after World War II account for a nonnegligible but still minority share of the fall in the capital/income ratio between 1913 and 1950: between one-quarter and one-third of the drop depending on the country, whereas volume effects (low national savings rate, loss of foreign assets, destructions) account for two-thirds to three-quarters of the decline.9 Similarly, as I will show in the next chapter, the very strong rebound of real estate and stock market prices in the 1970s and 1980s and especially the 1990s and 2000s explains a significant part of the rebound in the capital/income ratio, though still less important than volume effects, linked this time to a structural decrease in the rate of growth.
Capital in America: More Stable Than in Europe
Before studying in greater detail the rebound in the capital/income ratio in the second half of the twentieth century and analyzing the prospects for the twenty-first century, I now want to move beyond the European framework to examine the historical forms and levels of capital in America.
Several facts stand out clearly. First, America was the New World, where capital mattered less than in the Old World, meaning old Europe. More precisely, the value of the stock of national capital, based on numerous contemporary estimates I have collected and compared, as for other countries, was scarcely more than three years of national income around the time that the United States gained its independence, in the period 1770–1810. Farmland was valued at between one and one and a half years of national income (see Figure 4.6). Uncertainties notwithstanding, there is no doubt that the capital/income ratio was much lower in the New World colonies than in Britain or France, where national capital was worth roughly seven years of national income, of which farmland accounted for nearly four (see Figures 3.1 and 3.2).
The crucial point is that the number of hectares per person was obviously far greater in North America than in old Europe. In volume, capital per capita was therefore higher in the United States. Indeed, there was so much land that its market value was very low: anyone could own vast quantities, and therefore it was not worth very much. In other words, the price effect more than counterbalanced the volume effect: when the volume of a given type of capital exceeds certain thresholds, its price will inevitably fall to a level so low that the product of the price and volume, which is the value of the capital, is lower than it would be if the volume were smaller.
FIGURE 4.6. Capital in the United States, 1770–2010
National capital is worth three years of national income in the United States in 1770 (including 1.5 years in agricultural land).
Sources and series: see piketty.pse.ens.fr/capital21c.
The considerable difference between the price of land in the New World and in Europe at the end of the eighteenth century and the beginning of the nineteenth is confirmed by all available sources concerning land purchases and inheritances (such as probate records and wills).
Furthermore, the other types of capital—housing and other domestic capital—were also relatively less important in the colonial era and during the early years of the American republic (in comparison to Europe). The reason for this is different, but the fact is not surprising. New arrivals, who accounted for a very large proportion of the US population, did not cross the Atlantic with their capital of homes or tools or machinery, and it took time to accumulate the equivalent of several years of national income in real estate and business capital.
Make no mistake: the low capital/income ratio in America reflected a fundamental difference in the structure of social inequalities compared with Europe. The fact that total wealth amounted to barely three years of national income in the United States compared with more than seven in Europe signified in a very concrete way that the influence of landlords and accumulated wealth was less important in the New World. With a few years of work, the new arrivals were able to close the initial gap between themselves and their wealthier predecessors—or at any rate it was possible to close the wealth gap more rapidly than in Europe.
In 1840, Tocqueville noted quite accurately that “the number of large fortunes [in the United States] is quite small, and capital is still scarce,” and he saw this as one obvious reason for the democratic spirit that in his view dominated there. He added that, as his observations showed, all of this was a consequence of the low price of agricultural land: “In America, land costs little, and anyone can easily become a landowner.”10 Here we can see at work the Jeffersonian ideal of a society of small landowners, free and equal.
Things would change over the course of the nineteenth century. The share of agriculture in output decreased steadily, and the value of farmland also declined, as in Europe. But the United States accumulated a considerable stock of real estate and industrial capital, so that national capital was close to five years of national income in 1910, versus three in 1810. The gap with old Europe remained, but it had shrunk by half in one century (see Figure 4.6). The United States had become capitalist, but wealth continued to have less influence than in Belle Époque Europe, at least if we consider the vast US territory as a whole. If we limit our gaze to the East Coast, the gap is smaller still. In the film Titanic, the director, James Cameron, depicted the social structure of 1912. He chose to make wealthy Americans appear just as prosperous—and arrogant—as their European counterparts: for instance, the detestable Hockley, who wants to bring young Rose to Philadelphia in order to marry her. (Heroically, she refuses to be treated as property and becomes Rose Dawson.) The novels of Henry James that are set in Boston and New York between 1880 and 1910 also show social groups in which real estate and industrial and financial capital matter almost as much as in European novels: times had indeed changed since the Revolutionary War, when the United States was still a land without capital.
The shocks of the twentieth century struck America with far less violence than Europe, so that the capital/income ratio remained far more stable: it oscillated between four and five years of national income from 1910 to 2010 (see Figure 4.6), whereas in Europe it dropped from more than seven years to less than three before rebounding to five or six (see Figures 3.1–2).
FIGURE 4.7. Public wealth in the United States, 1770–2010
Public debt is worth one year of national income in the United States in 1950 (almost as much as assets).
Sources and series: see piketty.pse.ens.fr/capital21c.
To be sure, US fortunes were also buffeted by the crises of 1914–1945. Public debt rose sharply in the United States due to the cost of waging war, especially during World War II, and this affected national saving in a period of economic instability: the euphoria of the 1920s gave way to the Depression of the 1930s. (Cameron tells us that the odious Hockley commits suicide in October 1929.). Under Franklin D. Roosevelt, moreover, the United States adopted policies designed to reduce the influence of private capital, such as rent control, just as in Europe. After World War II, real estate and stock prices stood at historic lows. When it came to progressive taxation, the United States went much farther than Europe, possibly demonstrating that the goal there was more to reduce inequality than to eradicate private property. No sweeping policy of nationalization was attempted, although major public investments were initiated in the 1930s and 1940s, especially in infrastructures. Inflation and growth eventually returned public debt to a modest level in the 1950s and 1960s, so that public wealth was distinctly positive in 1970 (see Figure 4.7). In the end, American private wealth decreased from nearly five years of national income in 1930 to less than three and a half in 1970, a not insignificant decline (see Figure 4.8).
FIGURE 4.8. Private and public capital in the United States, 1770–2010
In 2010, public capital is worth 20 percent of national income, versus over 400 percent for private capital.
Sources and series: see piketty.pse.ens.fr/capital21c.
Nevertheless, the “U-shaped curve” of the capital/income ratio in the twentieth century is smaller in amplitude in the United States than in Europe. Expressed in years of income or output, capital in the United States seems to have achieved virtual stability from the turn of the twentieth century on—so much so that a stable capital/income or capital/output ratio is sometimes treated as a universal law in US textbooks (like Paul Samuelson’s). In comparison, Europe’s relation to capital, and especially private capital, was notably chaotic in the century just past. In the Belle Époque capital was king. In the years after World War II many people thought capitalism had been almost eradicated. Yet at the beginning of the twenty-first century Europe seems to be in the avant-garde of the new patrimonial capitalism, with private fortunes once again surpassing US levels. This is fairly well explained by the lower rate of economic and especially demographic growth in Europe compared with the United States, leading automatically to increased influence of wealth accumulated in the past, as we will see in Chapter 5. In any case, the key fact is that the United States enjoyed a much more stable capital/income ratio than Europe in the twentieth century, perhaps explaining why Americans seem to take a more benign view of capitalism than Europeans.
The New World and Foreign Capital
Another key difference between the history of capital in America and Europe is that foreign capital never had more than a relatively limited importance in the United States. This is because the United States, the first colonized territory to have achieved independence, never became a colonial power itself.
Throughout the nineteenth century, the United States’ net foreign capital position was slightly negative: what US citizens owned in the rest of the world was less than what foreigners, mainly British, owned in the United States. The difference was quite small, however, at most 10–20 percent of the US national income, and generally less than 10 percent between 1770 and 1920.
For example, on the eve of World War I, US domestic capital—farmland, housing, other domestic capital—stood at 500 percent of national income. Of this total, the assets owned by foreign investors (minus foreign assets held by US investors) represented the equivalent of 10 percent of national income. The national capital, or net national wealth, of the United States was thus about 490 percent of national income. In other words, the United States was 98 percent US-owned and 2 percent foreign-owned. The net foreign asset position was close to balanced, especially when compared to the enormous foreign assets held by Europeans: between one and two years of national income in France and Britain and half a year in Germany. Since the GDP of the United States was barely more than half of the GDP of Western Europe in 1913, this also means that the Europeans of 1913 held only a small proportion of their foreign asset portfolios (less than 5 percent) in the United States. To sum up, the world of 1913 was one in which Europe owned a large part of Africa, Asia, and Latin America, while the United States owned itself.
With the two world wars, the net foreign asset position of the United States reversed itself: it was negative in 1913 but turned slightly positive in the 1920s and remained so into the 1970s and 1980s. The United States financed the belligerents and thus ceased to be a debtor of Europe and became a creditor. It bears emphasizing, however, that the United States’ net foreign assets holdings remained relatively modest: barely 10 percent of national income (see Figure 4.6).
In the 1950s and 1960s in particular, the net foreign capital held by the United States was still fairly limited (barely 5 percent of national income, whereas domestic capital was close to 400 percent, or 80 times greater). The investments of US multinational corporations in Europe and the rest of the world attained levels that seemed considerable at the time, especially to Europeans, who were accustomed to owning the world and who chafed at the idea of owing their reconstruction in part to Uncle Sam and the Marshall Plan. In fact, despite these national traumas, US investments in Europe would always be fairly limited compared to the investments the former colonial powers had held around the globe a few decades earlier. Furthermore, US investments in Europe and elsewhere were balanced by continued strong foreign investment in the United States, particularly by Britain. In the series Mad Men, which is set in the early 1960s, the New York advertising agency Sterling Cooper is bought out by distinguished British stockholders, which does not fail to cause a culture shock in the small world of Madison Avenue advertising: it is never easy to be owned by foreigners.
The net foreign capital position of the United States turned slightly negative in the 1980s and then increasingly negative in the 1990s and 2000s as a result of accumulating trade deficits. Nevertheless, US investments abroad continued to yield a far better return than the nation paid on its foreign-held debt—such is the privilege due to confidence in the dollar. This made it possible to limit the degradation of the negative US position, which amounted to roughly 10 percent of national income in the 1990s and slightly more than 20 percent in the early 2010s. All in all, the current situation is therefore fairly close to what obtained on the eve of World War I. The domestic capital of the United States is worth about 450 percent of national income. Of this total, assets held by foreign investors (minus foreign assets held by US investors) represent the equivalent of 20 percent of national income. The net national wealth of the United States is therefore about 430 percent of national income. In other words, the United States is more than 95 percent American owned and less than 5 percent foreign owned.
To sum up, the net foreign asset position of the United States has at times been slightly negative, at other times slightly positive, but these positions were always of relatively limited importance compared with the total stock of capital owned by US citizens (always less than 5 percent and generally less than 2 percent).
FIGURE 4.9. Capital in Canada, 1860–2010
In Canada, a substantial part of domestic capital has always been held by the rest of the world, so that national capital has always been less than domestic capital.
Sources and series: see piketty.pse.ens.fr/capital21c.
Canada: Long Owned by the Crown
It is interesting to observe that things took a very different course in Canada, where a very significant share of domestic capital—as much as a quarter in the late nineteenth and early twentiet
h century—was owned by foreign investors, mainly British, especially in the natural resources sector (copper, zinc, and aluminum mines as well as hydrocarbons). In 1910, Canada’s domestic capital was valued at 530 percent of national income. Of this total, assets owned by foreign investors (less foreign assets owned by Canadian investors) represented the equivalent of 120 percent of national income, somewhere between one-fifth and one-quarter of the total. Canada’s net national wealth was thus equal to about 410 percent of national income (see Figure 4.9).11
Two world wars changed this situation considerably, as Europeans were forced to sell many foreign assets. This took time, however: from 1950 to 1990, Canada’s net foreign debt represented roughly 10 percent of its domestic capital. Public debt rose toward the end of the period before being consolidated after 1990.12 Today, Canada’s situation is fairly close to that of the United States. Its domestic capital is worth roughly 410 percent of its national income. Of this total, assets owned by foreign investors (less foreign assets own by Canadian investors) represent less than 10 percent of national income. Canada is thus more than 98 percent Canadian owned and less than 2 percent foreign owned. (Note, however, that this view of net foreign capital masks the magnitude of cross-ownership between countries, about which I will say more in the next chapter.)