More generally, if one compares the level of private wealth in 2010 predicted by the savings flows observed between 1970 and 2010 (together with the initial wealth observed in 1970) with the actual observed levels of wealth in 2010, one finds that the two numbers are quite similar for most countries.9 The correspondence is not perfect, which shows that other factors also play a significant role. For instance, in the British case, the flow of savings seems quite inadequate to explain the very steep rise in private wealth in this period.
Looking beyond the particular circumstances of this or that country, however, the results are overall quite consistent: it is possible to explain the main features of private capital accumulation in the rich countries between 1970 and 2010 in terms of the quantity of savings between those two dates (along with the initial capital endowment) without assuming a significant structural increase in the relative price of assets. In other words, movements in real estate and stock market prices always dominate in the short and even medium run but tend to balance out over the long run, where volume effects appear generally to be decisive.
Once again, the Japanese case is emblematic. If one tries to understand the enormous increase in the capital/income ratio in the 1980s and the sharp drop in the early 1990s, it is clear that the dominant phenomenon was the formation of a bubble in real estate and stocks, which then collapsed. But if one seeks to understand the evolution observed over the entire period 1970–2010, it is clear that volume effects outweighed price effects: the fact that private wealth in Japan rose from three years of national income in 1970 to six in 2010 is predicted almost perfectly by the flow of savings.10
The Two Components of Private Saving
For the sake of completeness, I should make clear that private saving consists of two components: savings made directly by private individuals (this is the part of disposable household income that is not consumed immediately) and savings by firms on behalf of the private individuals who own them, directly in the case of individual firms or indirectly via their financial investments. This second component consists of profits reinvested by firms (also referred to as “retained earnings”) and in some countries accounts for as much as half the total amount of private savings (see Table 5.2).
If one were to ignore this second component of savings and consider only household savings strictly defined, one would conclude that savings flows in all countries are clearly insufficient to account for the growth of private wealth, which one would then explain largely in terms of a structural increase in the relative price of assets, especially shares of stock. Such a conclusion would be correct in accounting terms but artificial in economic terms: it is true that stock prices tend to rise more quickly than consumption prices over the long run, but the reason for this is essentially that retained earnings allow firms to increase their size and capital (so that we are looking at a volume effect rather than a price effect). If retained earnings are included in private savings, however, the price effect largely disappears.
In practice, from the standpoint of shareholders, profits paid out directly as dividends are often more heavily taxed than retained earnings: hence it may be advantageous for the owners of capital to pay only a limited share of profits as dividends (to meet their immediate consumption needs) and leave the rest to accumulate and be reinvested in the firm and its subsidiaries. Later, some shares can be sold in order to realize the capital gains (which are generally taxed less heavily than dividends).11 The variation between countries with respect to the proportion of retained earnings in total private savings can be explained, moreover, largely by differences in legal and tax systems; these are accounting differences rather than actual economic differences. Under these conditions, it is better to treat retained earnings as savings realized on behalf of the firm’s owners and therefore as a component of private saving.
I should also be clear that the notion of savings relevant to the dynamic law β = s / g is savings net of capital depreciation, that is, truly new savings, or the part of total savings left over after we deduct the amount needed to compensate for wear and tear on buildings and equipment (to repair a hole in the roof or a pipe or to replace a worn-out automobile, computer, machine, or what have you). The difference is important, because annual capital depreciation in the developed economies is on the order of 10–15 percent of national income and absorbs nearly half of total savings, which generally run around 25–30 percent of national income, leaving net savings of 10–15 percent of national income (see Table 5.3). In particular, the bulk of retained earnings often goes to maintaining buildings and equipment, and frequently the amount left over to finance net investment is quite small—at most a few percent of national income—or even negative, if retained earnings are insufficient to cover the depreciation of capital. By definition, only net savings can increase the capital stock: savings used to cover depreciation simply ensure that the existing capital stock will not decrease.12
Durable Goods and Valuables
Finally, I want to make it clear that private saving as defined here, and therefore private wealth, does not include household purchases of durable goods: furniture, appliances, automobiles, and so on. In this respect I am following international standards for national accounting, under which durable household goods are treated as items of immediate consumption (although the same goods, when purchased by firms, are counted as investments with a high rate of annual depreciation). This is of limited importance for my purposes, however, because durable goods have always represented a relatively small proportion of total wealth, which has not varied much over time: in all rich countries, available estimates indicate that the total value of durable household goods is generally between 30 and 50 percent of national income throughout the period 1970–2010, with no apparent trend.
In other words, everyone owns on average between a third and half a year’s income worth of furniture, refrigerators, cars, and so on, or 10,000–15,000 euros per capita for a national income on the order of 30,000 euros per capita in the early 2010s. This is not a negligible amount and accounts for most of the wealth owned by a large segment of the population. Compared, however, with overall private wealth of five to six years of national income, or 150,000–200,000 euros per person (excluding durable goods), about half of which is in the form of real estate and half in net financial assets (bank deposits, stocks, bonds, and other investments, net of debt) and business capital, this is only a small supplementary amount. Concretely, if we were to include durable goods in private wealth, the only effect would be to add 30–50 percent of national income to the curves shown in Figure 5.3 without significantly modifying the overall evolution.13
Note in passing that apart from real estate and business capital, the only nonfinancial assets included in national accounts under international standards (which I have followed scrupulously in order to ensure consistency in my comparisons of private and national wealth between countries) are “valuables,” including items such as works of art, jewelry, and precious metals such as gold and silver, which households acquire as a pure reservoir of value (or for their aesthetic value) and which in principle do not deteriorate (or deteriorate very little) over time. These valuables are worth much less than durable goods by most estimates, however (between 5 and 10 percent of national income, depending on the country, or between 1,500 and 3,000 per person for a per capita national income of 30,000 euros), hence their share of total private wealth is relatively small, even after the recent rise in the price of gold.14
It is interesting to note that according to available historical estimates, these orders of magnitude do not seem to have changed much over the long run. Estimates of the value of durable goods are generally around 30–50 percent of national income for both the nineteenth and twentieth centuries. Gregory King’s estimates of British national wealth around 1700 show the same thing: the total value of furniture, china, and so on was about 30 percent of national income. The amount of wealth represented by valuables and precious objects seems to have decrease
d over the long run, however, from 10–15 percent of national income in the late nineteenth and early twentieth century to 5–10 percent today. According to King, the total value of such goods (including metal coin) was as high as 25–30 percent of national income around 1700. In all cases, these are relatively limited amounts compared to total accumulated wealth in Britain of around seven years of national income, primarily in the form of farmland, dwellings, and other capital goods (shops, factories, warehouses, livestock, ships, etc.), at which King does not fail to rejoice and marvel.15
Private Capital Expressed in Years of Disposable Income
Note, moreover, that the capital/income ratio would have attained even higher levels—no doubt the highest ever recorded—in the rich countries in the 2000s and 2010s if I had expressed total private wealth in terms of years of disposable income rather than national income, as I have done thus far. This seemingly technical issue warrants further discussion.
As the name implies, disposable household income (or simply “disposable income”) measures the monetary income that households in a given country dispose of directly. To go from national income to disposable income, one must deduct all taxes, fees, and other obligatory payments and add all monetary transfers (pensions, unemployment insurance, aid to families, welfare payments, etc.). Until the turn of the twentieth century, governments played a limited role in social and economic life (total tax payments were on the order of 10 percent of national income, which went essentially to pay for traditional state functions such as police, army, courts, highways, and so on, so that disposable income was generally around 90 percent of national income). The state’s role increased considerably over the course of the twentieth century, so that disposable income today amounts to around 70–80 percent of national income in the rich countries. As a result, total private wealth expressed in years of disposable income (rather than national income) is significantly higher. For example, private capital in the 2000s represented four to seven years of national income in the rich countries, which would correspond to five to nine years of disposable income (see Figure 5.4).
FIGURE 5.4. Private capital measured in years of disposable income
Expressed in years of household disposable income (about 70–80 percent of national income), the capital/income ratio appears to be larger than when it is expressed in years of national income.
Sources and series: see piketty.pse.ens.fr/capital21c.
Both ways of measuring the capital/income ratio can be justified, depending on how one wants to approach the question. When expressed in terms of disposable income, the ratio emphasizes strictly monetary realities and shows us the magnitude of wealth in relation to the income actually available to households (to save, for instance). In a way, this reflects the concrete reality of the family bank account, and it is important to keep these orders of magnitude in mind. It is also important to note, however, that the gap between disposable income and national income measures by definition the value of public services from which households benefit, especially health and education services financed directly by the public treasury. Such “transfers in kind” are just as valuable as the monetary transfers included in disposable income: they allow the individuals concerned to avoid spending comparable (or even greater) sums on private producers of health and education services. Ignoring such transfers in kind might well distort certain evolutions or international comparisons. That is why it seemed to me preferable to express wealth in years of national income: to do so is to adopt an economic (rather than strictly monetary) view of income. In this book, whenever I refer to the capital/income ratio without further qualification, I am always referring to the ratio of the capital stock to the flow of national income.16
The Question of Foundations and Other Holders of Capital
Note also that for the sake of completeness I have included in private wealth not only the assets and liabilities of private individuals (“households” in national accounting terminology) but also assets and liabilities held by foundations and other nonprofit organizations. To be clear, this category includes only foundations and other organizations financed primarily by gifts from private individuals or income from their properties. Organizations that depend primarily on public subsidies are classified as governmental organizations, and those that depend primarily on the sale of goods are classified as corporations.
In practice, all of these distinctions are malleable and porous. It is rather arbitrary to count the wealth of foundations as part of private wealth rather than public wealth or to place it in a category of its own, since it is in fact a novel form of ownership, intermediate between purely private and strictly public ownership. In practice, when we think of the property owned by churches over the centuries, or the property owned today by organizations such as Doctors without Borders or the Bill and Melinda Gates Foundation, it is clear that we are dealing with a wide variety of moral persons pursuing a range of specific objectives.
Note, however, that the stakes are relatively limited, since the amount of wealth owned by moral persons is generally rather small compared with what physical persons retain for themselves. Available estimates for the various rich countries in the period 1970–2010 show that foundations and other nonprofit organizations always own less than 10 percent and generally less than 5 percent of total private wealth, though with interesting variations between countries: barely 1 percent in France, around 3–4 percent in Japan, and as much as 6–7 percent in the United States (with no apparent trend). Available historical sources indicate that the total value of church-owned property in eighteenth-century France amounted to about 7–8 percent of total private wealth, or approximately 50–60 percent of national income (some of this property was confiscated and sold during the French Revolution to pay off debts incurred by the government of the Ancien Régime).17 In other words, the Catholic Church owned more property in Ancien Régime France (relative to the total private wealth of the era) than prosperous US foundations own today. It is interesting to observe that the two levels are nevertheless fairly close.
These are quite substantial holdings of wealth, especially if we compare them with the meager (and sometimes negative) net wealth owned by the government at various points in time. Compared with total private wealth, however, the wealth of foundations remains fairly modest. In particular, it matters little whether or not we include foundations when considering the general evolution of the ratio of private capital to national income over the long run. Inclusion is justified, moreover, by the fact that it is never easy to define the boundary line between on the one hand various legal structures such as foundations, trust funds, and the like used by wealthy individuals to manage their assets and further their private interests (which are in principle counted in national accounts as individual holdings, assuming they are identified as such) and on the other hand foundations and nonprofits said to be in the public interest. I will come back to this delicate issue in Part Three, where I will discuss the dynamics of global inequality of wealth, and especially great wealth, in the twenty-first century.
The Privatization of Wealth in the Rich Countries
The very sharp increase in private wealth observed in the rich countries, and especially in Europe and Japan, between 1970 and 2010 thus can be explained largely by slower growth coupled with continued high savings, using the law β = s / g. I will now return to the two other complementary phenomena that amplified this mechanism, which I mentioned earlier: the privatization or gradual transfer of public wealth into private hands and the “catch-up” of asset prices over the long run.
FIGURE 5.5. Private and public capital in rich countries, 1970–2010
In Italy, private capital rose from 240 percent to 680 percent of national income between 1970 and 2010, while public capital dropped from 20 percent to −70 percent.
Sources and series: see piketty.pse.ens.fr/capital21c.
I begin with privatization. As noted, the proportion of public capital in national capital has dropped sharply in r
ecent decades, especially in France and Germany, where net public wealth represented as much as a quarter or even a third of total national wealth in the period 1950–1970, whereas today it represents just a few percent (public assets are just enough to balance public debt). This evolution reflects a quite general phenomenon that has affected all eight leading developed economies: a gradual decrease in the ratio of public capital to national income in the period 1970–2010, accompanied by an increase in the ratio of private capital to national income (see Figure 5.5). In other words, the revival of private wealth is partly due to the privatization of national wealth. To be sure, the increase in private capital in all countries was greater than the decrease in public capital, so national capital (measured in years of national income) did indeed increase. But it increased less rapidly than private capital owing to privatization.
The case of Italy is particularly clear. Net public wealth was slightly positive in the 1970s, then turned slightly negative in the 1980s as large government deficits mounted. All told, public wealth decreased by an amount equal to nearly a year of national income over the period 1970–2010. At the same time, private wealth rose from barely two and a half years of national income in 1970 to nearly seven in 2010, an increase of roughly four and a half years. In other words, the decrease in public wealth represented between one-fifth and one-quarter of the increase in private wealth—a nonnegligible share. Italian national wealth did indeed rise significantly, from around two and a half years of national income in 1970 to about six in 2010, but this was a smaller increase than in private wealth, whose exceptional growth was to some extent misleading, since nearly a quarter of it reflected a growing debt that one portion of the Italian population owed to another. Instead of paying taxes to balance the government’s budget, the Italians—or at any rate those who had the means—lent money to the government by buying government bonds or public assets, which increased their private wealth without increasing the national wealth.
Capital in the Twenty-First Century Page 21