Capital in the Twenty-First Century

by Thomas Piketty

  This comparison of the United States with Canada is interesting, because it is difficult to find purely economic reasons why these two North American trajectories should differ so profoundly. Clearly, political factors played a central role. Although the United States has always been quite open to foreign investment, it is fairly difficult to imagine that nineteenth-century US citizens would have tolerated a situation in which one-quarter of the country was owned by its former colonizer.13 This posed less of a problem in Canada, which remained a British colony: the fact that a large part of the country was owned by Britain was therefore not so different from the fact that Londoners owned much of the land and many of the factories in Scotland or Sussex. Similarly, the fact that Canada’s net foreign assets remained negative for so long is linked to the absence of any violent political rupture (Canada gradually gained independence from Britain, but its head of state remained the British monarch) and hence to the absence of expropriations of the kind that elsewhere in the world generally accompanied access to independence, especially in regard to natural resources.

  New World and Old World: The Importance of Slavery

  I cannot conclude this examination of the metamorphoses of capital in Europe and the United States without examining the issue of slavery and the place of slaves in US fortunes.

  Thomas Jefferson owned more than just land. He also owned more than six hundred slaves, mostly inherited from his father and father-in-law, and his political attitude toward the slavery question was always extremely ambiguous. His ideal republic of small landowners enjoying equal rights did not include people of color, on whose forced labor the economy of his native Virginia largely depended. After becoming president of the United States in 1801 thanks to the votes of the southern states, he nevertheless signed a law ending the import of new slaves to US soil after 1808. This did not prevent a sharp increase in the number of slaves (natural increase was less costly than buying new slaves), which rose from around 400,000 in the 1770s to 1 million in the 1800 census. The number more than quadrupled again between 1800 and the census of 1860, which counted more than 4 million slaves: in other words, the number of slaves had increased tenfold in less than a century. The slave economy was growing rapidly when the Civil War broke out in 1861, leading ultimately to the abolition of slavery in 1865.

  In 1800, slaves represented nearly 20 percent of the population of the United States: roughly 1 million slaves out of a total population of 5 million. In the South, where nearly all of the slaves were held,14 the proportion reached 40 percent: 1 million slaves and 1.5 million whites for a total population of 2.5 million. Not all whites owned slaves, and only a tiny minority owned as many as Jefferson: fortunes based on slavery were among the most concentrated of all.

  By 1860, the proportion of slaves in the overall population of the United States had fallen to around 15 percent (about 4 million slaves in a total population of 30 million), owing to rapid population growth in the North and West. In the South, however, the proportion remained at 40 percent: 4 million slaves and 6 million whites for a total population of 10 million.

  We can draw on any number of historical sources to learn about the price of slaves in the United States between 1770 and 1865. These include probate records assembled by Alice Hanson Jones, tax and census data used by Raymond Goldsmith, and data on slave market transactions collected primarily by Robert Fogel. By comparing these various sources, which are quite consistent with one another, I compiled the estimates shown in Figures 4.10 and 4.11.

  What one finds is that the total market value of slaves represented nearly a year and a half of US national income in the late eighteenth century and the first half of the nineteenth century, which is roughly equal to the total value of farmland. If we include slaves along with other components of wealth, we find that total American wealth has remained relatively stable from the colonial era to the present, at around four and a half years of national income (see Figure 4.10). To add the value of slaves to capital in this way is obviously a dubious thing to do in more ways than one: it is the mark of a civilization in which some people were treated as chattel rather than as individuals endowed with rights, including in particular the right to own property.15 But it does allow us to measure the importance of slave capital for slave owners.

  FIGURE 4.10. Capital and slavery in the United States

  The market value of slaves was about 1.5 years of US national income around 1770 (as much as land).

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

  This emerges even more clearly when we distinguish southern from northern states and compare the capital structure in the two regions (slaves included) in the period 1770–1810 with the capital structure in Britain and France in the same period (Figure 4.11). In the American South, the total value of slaves ranged between two and a half and three years of national income, so that the combined value of farmland and slaves exceeded four years of national income. All told, southern slave owners in the New World controlled more wealth than the landlords of old Europe. Their farmland was not worth very much, but since they had the bright idea of owning not just the land but also the labor force needed to work that land, their total capital was even greater.

  If one adds the market value of slaves to other components of wealth, the value of southern capital exceeds six years of the southern states’ income, or nearly as much as the total value of capital in Britain and France. Conversely, in the North, where there were virtually no slaves, total wealth was indeed quite small: barely three years of the northern states’ income, half as much as in the south or Europe.

  FIGURE 4.11. Capital around 1770–1810: Old and New World

  The combined value of agricultural land and slaves in the Southern United States surpassed four years of national income around 1770–1810.

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

  Clearly, the antebellum United States was far from the country without capital discussed earlier. In fact, the New World combined two diametrically opposed realities. In the North we find a relatively egalitarian society in which capital was indeed not worth very much, because land was so abundant that anyone could became a landowner relatively cheaply, and also because recent immigrants had not had time to accumulate much capital. In the South we find a world where inequalities of ownership took the most extreme and violent form possible, since one half of the population owned the other half: here, slave capital largely supplanted and surpassed landed capital.

  This complex and contradictory relation to inequality largely persists in the United States to this day: on the one hand this is a country of egalitarian promise, a land of opportunity for millions of immigrants of modest background; on the other it is a land of extremely brutal inequality, especially in relation to race, whose effects are still quite visible. (Southern blacks were deprived of civil rights until the 1960s and subjected to a regime of legal segregation that shared some features in common with the system of apartheid that was maintained in South Africa until the 1980s.) This no doubt accounts for many aspects of the development—or rather nondevelopment—of the US welfare state.

  Slave Capital and Human Capital

  I have not tried to estimate the value of slave capital in other slave societies. In the British Empire, slavery was abolished in 1833–1838. In the French Empire it was abolished in two stages (first abolished in 1792, restored by Napoleon in 1803, abolished definitively in 1848). In both empires, in the eighteenth and early nineteenth centuries a portion of foreign capital was invested in plantations in the West Indies (think of Sir Thomas in Mansfield Park) or in slave estates on islands in the Indian Ocean (the Ile Bourbon and Ile de France, which became Réunion and Mauritius after the French Revolution). Among the assets of these plantations were slaves, whose value I have not attempted to calculate separately. Since total foreign assets did not exceed 10 percent of national income in these two countries at the beginning of the nineteenth century, the share of slaves in total wealth was
obviously smaller than in the United States.16

  Conversely, in societies where slaves represent a large share of the population, their market value can easily reach very high levels, potentially even higher than it did in the United States in 1770–1810 and greater than the value of all other forms of wealth. Take an extreme case in which virtually an entire population is owned by a tiny minority. Assume for the sake of argument that the income from labor (that is, the yield to slave owners on the labor of their slaves) represents 60 percent of national income, the income on capital (meaning the return on land and other capital in the form of rents, profits, etc.) represents 40 percent of national income, and the return on all forms of nonhuman capital is 5 percent a year.

  By definition, the value of national capital (excluding slaves) is equal to eight years of national income: this is the first fundamental law of capitalism (β = α / r), introduced in Chapter 1.

  In a slave society, we can apply the same law to slave capital: if slaves yield the equivalent of 60 percent of national income, and the return on all forms of capital is 5 percent a year, then the market value of the total stock of slaves is equal to twelve years of national income—or half again more than national nonhuman capital, simply because slaves yield half again as much as nonhuman capital. If we add the value of slaves to the value of capital, we of course obtain twenty years of national income, since the total annual flow of income and output is capitalized at a rate of 5 percent.

  In the case of the United States in the period 1770–1810, the value of slave capital was on the order of one and a half years of national income (and not twelve years), in part because the proportion of slaves in the population was 20 percent (and not 100 percent) and in part because the average productivity of slaves was slightly below the average productivity of free labor and the rate of return on slave capital was generally closer to 7 or 8 percent, or even higher, than it was to 5 percent, leading to a lower capitalization. In practice, in the antebellum United States, the market price of a slave was typically on the order of ten to twelve years of an equivalent free worker’s wages (and not twenty years, as equal productivity and a return of 5 percent would require). In 1860, the average price of a male slave of prime working age was roughly $2,000, whereas the average wage of a free farm laborer was on the order of $200.17 Note, however, that the price of a slave varied widely depending on various characteristics and on the owner’s evaluation; for example, the wealthy planter Quentin Tarantino portrays in Django Unchained is prepared to sell beautiful Broomhilda for only $700 but wants $12,000 for his best fighting slaves.

  In any case, it is clear that this type of calculation makes sense only in a slave society, where human capital can be sold on the market, permanently and irrevocably. Some economists, including the authors of a recent series of World Bank reports on “the wealth of nations,” choose to calculate the total value of “human capital” by capitalizing the value of the income flow from labor on the basis of a more or less arbitrary annual rate of return (typically 4–5 percent). These reports conclude with amazement that human capital is the leading form of capital in the enchanted world of the twenty-first century. In reality, this conclusion is perfectly obvious and would also have been true in the eighteenth century: whenever more than half of national income goes to labor and one chooses to capitalize the flow of labor income at the same or nearly the same rate as the flow of income to capital, then by definition the value of human capital is greater than the value of all other forms of capital. There is no need for amazement and no need to resort to a hypothetical capitalization to reach this conclusion. (It is enough to compare the flows.).18 Attributing a monetary value to the stock of human capital makes sense only in societies where it is actually possible to own other individuals fully and entirely—societies that at first sight have definitively ceased to exist.

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  The Capital/Income Ratio over the Long Run

  In the previous chapter I examined the metamorphoses of capital in Europe and North America since the eighteenth century. Over the long run, the nature of wealth was totally transformed: capital in the form of agricultural land was gradually replaced by industrial and financial capital and urban real estate. Yet the most striking fact was surely that in spite of these transformations, the total value of the capital stock, measured in years of national income—the ratio that measures the overall importance of capital in the economy and society—appears not to have changed very much over a very long period of time. In Britain and France, the countries for which we possess the most complete historical data, national capital today represents about five or six years of national income, which is just slightly less than the level of wealth observed in the eighteenth and nineteenth centuries and right up to the eve of World War I (about six or seven years of national income). Given the strong, steady increase of the capital/income ratio since the 1950s, moreover, it is natural to ask whether this increase will continue in the decades to come and whether the capital/income ratio will regain or even surpass past levels before the end of the twenty-first century.

  The second salient fact concerns the comparison between Europe and the United States. Unsurprisingly, the shocks of the 1914–1945 period affected Europe much more strongly, so that the capital/income ratio was lower there from the 1920s into the 1980s. If we except this lengthy period of war and its aftermath, however, we find that the capital/income ratio has always tended to be higher in Europe. This was true in the nineteenth and early twentieth centuries (when the capital/income ratio was 6 to 7 in Europe compared with 4 to 5 in the United States) and again in the late twentieth and early twenty-first centuries: private wealth in Europe again surpassed US levels in the early 1990s, and the capital/income ratio there is close to 6 today, compared with slightly more than 4 in the United States (see Figures 5.1 and 5.2).1

  FIGURE 5.1. Private and public capital: Europe and America, 1870–2010

  The fluctuations of national capital in the long run correspond mostly to the fluctuations of private capital (both in Europe and in the United States).

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

  FIGURE 5.2. National capital in Europe and America, 1870–2010

  National capital (public and private) is worth 6.5 years of national income in Europe in 1910, versus 4.5 years in America.

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

  These facts remain to be explained. Why did the capital/income ratio return to historical highs in Europe, and why should it be structurally higher in Europe than in the United States? What magical forces imply that capital in one society should be worth six or seven years of national income rather than three or four? Is there an equilibrium level for the capital/income ratio, and if so how is it determined, what are the consequences for the rate of return on capital, and what is the relation between it and the capital-labor split of national income? To answer these questions, I will begin by presenting the dynamic law that allows us to relate the capital/income ratio in an economy to its savings and growth rates.

  The Second Fundamental Law of Capitalism: β = s / g

  In the long run, the capital/income ratio β is related in a simple and transparent way to the savings rate s and the growth rate g according to the following formula:

  β = s / g

  For example, if s = 12% and g = 2%, then β = s / g = 600%.2

  In other words, if a country saves 12 percent of its national income every year, and the rate of growth of its national income is 2 percent per year, then in the long run the capital/income ratio will be equal to 600 percent: the country will have accumulated capital worth six years of national income.

  This formula, which can be regarded as the second fundamental law of capitalism, reflects an obvious but important point: a country that saves a lot and grows slowly will over the long run accumulate an enormous stock of capital (relative to its income), which can in turn have a significant effect on the social structure and distribution of
wealth.

  Let me put it another way: in a quasi-stagnant society, wealth accumulated in the past will inevitably acquire disproportionate importance.

  The return to a structurally high capital/income ratio in the twenty-first century, close to the levels observed in the eighteenth and nineteenth centuries, can therefore be explained by the return to a slow-growth regime. Decreased growth—especially demographic growth—is thus responsible for capital’s comeback.

  The basic point is that small variations in the rate of growth can have very large effects on the capital/income ratio over the long run.

  For example, given a savings rate of 12 percent, if the rate of growth falls to 1.5 percent a year (instead of 2 percent), then the long-term capital/income ratio β = s / g will rise to eight years of national income (instead of six). If the growth rate falls to 1 percent, then β = s / g will rise to twelve years, indicative of a society twice as capital intensive as when the growth rate was 2 percent. In one respect, this is good news: capital is potentially useful to everyone, and provided that things are properly organized, everyone can benefit from it. In another respect, however, what this means is that the owners of capital—for a given distribution of wealth—potentially control a larger share of total economic resources. In any event, the economic, social, and political repercussions of such a change are considerable.

  On the other hand if the growth rate increases to 3 percent, then β = s / g will fall to just four years of national income. If the savings rate simultaneously decreases slightly to s = 9 percent, then the long-run capital/income ratio will decline to 3.