FIGURE 6.8. The capital share in national income in France, 1900–2010
The share of capital income (net profits and rents) rose from 15 percent of national income in 1982 to 27 percent in 2010.
Sources and series: see piketty.pse.ens.fr/capital21c.
Back to Marx and the Falling Rate of Profit
As I come to the end of this examination of the historical dynamics of the capital/income ratio and the capital-labor split, it is worth pointing out the relation between my conclusions and the theses of Karl Marx.
For Marx, the central mechanism by which “the bourgeoisie digs its own grave” corresponded to what I referred to in the Introduction as “the principle of infinite accumulation”: capitalists accumulate ever increasing quantities of capital, which ultimately leads inexorably to a falling rate of profit (i.e., return on capital) and eventually to their own downfall. Marx did not use mathematical models, and his prose was not always limpid, so it is difficult to be sure what he had in mind. But one logically consistent way of interpreting his thought is to consider the dynamic law β = s / g in the special case where the growth rate g is zero or very close to zero.
Recall that g measures the long-term structural growth rate, which is the sum of productivity growth and population growth. In Marx’s mind, as in the minds of all nineteenth- and early twentieth-century economists before Robert Solow did his work on growth in the 1950s, the very idea of structural growth, driven by permanent and durable growth of productivity, was not clearly identified or formulated.31 In those days, the implicit hypothesis was that growth of production, and especially of manufacturing output, was explained mainly by the accumulation of industrial capital. In other words, output increased solely because every worker was backed by more machinery and equipment and not because productivity as such (for a given quantity of labor and capital) increased. Today we know that long-term structural growth is possible only because of productivity growth. But this was not obvious in Marx’s time, owing to lack of historical perspective and good data.
Where there is no structural growth, and the productivity and population growth rate g is zero, we run up against a logical contradiction very close to what Marx described. If the savings rate s is positive, meaning the capitalists insist on accumulating more and more capital every year in order to increase their power and perpetuate their advantages or simply because their standard of living is already so high, then the capital/income ratio will increase indefinitely. More generally, if g is close to zero, the long-term capital/income ratio β = s / g tends toward infinity. And if β is extremely large, then the return on capital r must get smaller and smaller and closer and closer to zero, or else capital’s share of income, α = r × β, will ultimately devour all of national income.32
The dynamic inconsistency that Marx pointed out thus corresponds to a real difficulty, from which the only logical exit is structural growth, which is the only way of balancing the process of capital accumulation (to a certain extent). Only permanent growth of productivity and population can compensate for the permanent addition of new units of capital, as the law β = s / g makes clear. Otherwise, capitalists do indeed dig their own grave: either they tear each other apart in a desperate attempt to combat the falling rate of profit (for instance, by waging war over the best colonial investments, as Germany and France did in the Moroccan crises of 1905 and 1911), or they force labor to accept a smaller and smaller share of national income, which ultimately leads to a proletarian revolution and general expropriation. In any event, capital is undermined by its internal contradictions.
That Marx actually had a model of this kind in mind (i.e., a model based on infinite accumulation of capital) is confirmed by his use on several occasions of the account books of industrial firms with very high capital intensities. In volume 1 of Capital, for instance, he uses the books of a textile factory, which were conveyed to him, he says, “by the owner,” and seem to show an extremely high ratio of the total amount of fixed and variable capital used in the production process to the value of a year’s output—apparently greater than ten. A capital/income ratio of this level is indeed rather frightening. If the rate of return on capital is 5 percent, then more than half the value of the firm’s output goes to profits. It was natural for Marx and many other anxious contemporary observers to ask where all this might lead (especially because wages had been stagnant since the beginning of the nineteenth century) and what type of long-run socioeconomic equilibrium such hyper-capital-intensive industrial development would produce.
Marx was also an assiduous reader of British parliamentary reports from the period 1820–1860. He used these reports to document the misery of wage workers, workplace accidents, deplorable health conditions, and more generally the rapacity of the owners of industrial capital. He also used statistics derived from taxes imposed on profits from different sources, which showed a very rapid increase of industrial profits in Britain during the 1840s. Marx even tried—in a very impressionistic fashion, to be sure—to make use of probate statistics in order to show that the largest British fortunes had increased dramatically since the Napoleonic wars.33
The problem is that despite these important intuitions, Marx usually adopted a fairly anecdotal and unsystematic approach to the available statistics. In particular, he did not try to find out whether the very high capital intensity that he observed in the account books of certain factories was representative of the British economy as a whole or even of some particular sector of the economy, as he might have done by collecting just a few dozen similar accounts. The most surprising thing, given that his book was devoted largely to the question of capital accumulation, is that he makes no reference to the numerous attempts to estimate the British capital stock that had been carried out since the beginning of the eighteenth century and extended in the nineteenth century by work beginning with Patrick Colqhoun between 1800 and 1810 and continuing through Giffen in the 1870s.34 Marx seems to have missed entirely the work on national accounting that was developing around him, and this is all the more unfortunate in that it would have enabled him to some extent to confirm his intuitions concerning the vast accumulation of private capital in this period and above all to clarify his explanatory model.
Beyond the “Two Cambridges”
It is important to recognize, however, that the national accounts and other statistical data available in the late nineteenth and early twentieth centuries were wholly inadequate for a correct understanding of the dynamics of the capital/income ratio. In particular, there were many more estimates of the stock of national capital than of national income or domestic product. By the mid-twentieth century, following the shocks of 1914–1945, the reverse was true. This no doubt explains why the question of capital accumulation and a possible dynamic equilibrium continued to stir controversy and arouse a good deal of confusion for so long. A good example of this is the famous “Cambridge capital controversy” of the 1950s and 1960s (also called the “Two Cambridges Debate” because it pitted Cambridge, England, against Cambridge, Massachusetts).
To briefly recall the main points of this debate: when the formula β = s / g was explicitly introduced for the first time by the economists Roy Harrod and Evsey Domar in the late 1930s, it was common to invert it as g = s / β. Harrod, in particular, argued in 1939 that β was fixed by the available technology (as in the case of a production function with fixed coefficients and no possible substitution between labor and capital), so that the growth rate was entirely determined by the savings rate. If the savings rate is 10 percent and technology imposes a capital/income ratio of 5 (so that it takes exactly five units of capital, neither more nor less, to produce one unit of output), then the growth rate of the economy’s productive capacity is 2 percent per year. But since the growth rate must also be equal to the growth rate of the population (and of productivity, which at the time was still ill defined), it follows that growth is an intrinsically unstable process, balanced “on a razor’s edge.” There is always either too mu
ch or too little capital, which therefore gives rise either to excess capacity and speculative bubbles or else to unemployment, or perhaps both at once, depending on the sector and the year.
Harrod’s intuition was not entirely wrong, and he was writing in the midst of the Great Depression, an obvious sign of great macroeconomic instability. Indeed, the mechanism he described surely helps to explain why the growth process is always highly volatile: to bring savings into line with investment at the national level, when savings and investment decisions are generally made by different individuals for different reasons, is a structurally complex and chaotic phenomenon, especially since it is often difficult in the short run to alter the capital intensity and organization of production.35 Nevertheless, the capital/income ratio is relatively flexible in the long run, as is unambiguously demonstrated by the very large historical variations that are observed in the data, together with the fact that the elasticity of substitution of capital for labor has apparently been greater than one over a long period of time.
In 1948, Domar developed a more optimistic and flexible version of the law g = s / β than Harrod’s. Domar stressed the fact that the savings rate and capital/income ratio can to a certain extent adjust to each other. Even more important was Solow’s introduction in 1956 of a production function with substitutable factors, which made it possible to invert the formula and write β = s / g. In the long run, the capital/income ratio adjusts to the savings rate and structural growth rate of the economy rather than the other way around. Controversy continued, however, in the 1950s and 1960s between economists based primarily in Cambridge, Massachusetts (including Solow and Samuelson, who defended the production function with substitutable factors) and economists working in Cambridge, England (including Joan Robinson, Nicholas Kaldor, and Luigi Pasinetti), who (not without a certain confusion at times) saw in Solow’s model a claim that growth is always perfectly balanced, thus negating the importance Keynes had attributed to short-term fluctuations. It was not until the 1970s that Solow’s so-called neoclassical growth model definitively carried the day.
If one rereads the exchanges in this controversy with the benefit of hindsight, it is clear that the debate, which at times had a marked postcolonial dimension (as American economists sought to emancipate themselves from the historic tutelage of their British counterparts, who had reigned over the profession since the time of Adam Smith, while the British sought to defend the memory of Lord Keynes, which they thought the American economists had betrayed), did more to cloud economic thinking than to enlighten it. There was no real justification for the suspicions of the British. Solow and Samuelson were fully convinced that the growth process is unstable in the short term and that macroeconomic stabilization requires Keynesian policies, and they viewed β = s / g solely as a long-term law. Nevertheless, the American economists, some of whom (for example Franco Modigliani) were born in Europe, tended at times to exaggerate the implications of the “balanced growth path” they had discovered.36 To be sure, the law β = s / g describes a growth path in which all macroeconomic quantities—capital stock, income and output flows—progress at the same pace over the long run. Still, apart from the question of short-term volatility, such balanced growth does not guarantee a harmonious distribution of wealth and in no way implies the disappearance or even reduction of inequality in the ownership of capital. Furthermore, contrary to an idea that until recently was widespread, the law β = s / g in no way precludes very large variations in the capital/income ratio over time and between countries. Quite the contrary. In my view, the virulence—and at times sterility—of the Cambridge capital controversy was due in part to the fact that participants on both sides lacked the historical data needed to clarify the terms of the debate. It is striking to see how little use either side made of national capital estimates done prior to World War I; they probably believed them to be incompatible with the realities of the 1950s and 1960s. The two world wars created such a deep discontinuity in both conceptual and statistical analysis that for a while it seemed impossible to study the issue in a long-run perspective, especially from a European point of view.
Capital’s Comeback in a Low-Growth Regime
The truth is that only since the end of the twentieth century have we had the statistical data and above all the indispensable historical distance to correctly analyze the long-run dynamics of the capital/income ratio and the capital-labor split. Specifically, the data I have assembled and the historical distance we are fortunate enough to enjoy (still insufficient, to be sure, but by definition greater than that which previous authors had) lead to the following conclusions.
First, the return to a historic regime of low growth, and in particular zero or even negative demographic growth, leads logically to the return of capital. This tendency for low-growth societies to reconstitute very large stocks of capital is expressed by the law β = s / g and can be summarized as follows: in stagnant societies, wealth accumulated in the past naturally takes on considerable importance.
In Europe today, the capital/income ratio has already risen to around five to six years of national income, scarcely less than the level observed in the eighteenth and nineteenth centuries and up to the eve of World War I.
At the global level, it is entirely possible that the capital/income ratio will attain or even surpass this level during the twenty-first century. If the savings rate is now around 10 percent and the growth rate stabilizes at around 1.5 percent in the very long run, then the global stock of capital will logically rise to six or seven years of income. And if growth falls to 1 percent, the capital stock could rise as high as ten years of income.
As for capital’s share in national and global income, which is given by the law α = r × β, experience suggests that the predictable rise in the capital/income ratio will not necessarily lead to a significant drop in the return on capital. There are many uses for capital over the very long run, and this fact can be captured by noting that the long-run elasticity of substitution of capital for labor is probably greater than one. The most likely outcome is thus that the decrease in the rate of return will be smaller than the increase in the capital/income ratio, so that capital’s share will increase. With a capital/income ratio of seven to eight years and a rate of return on capital of 4–5 percent, capital’s share of global income could amount to 30 or 40 percent, a level close to that observed in the eighteenth and nineteenth centuries, and it might rise even higher.
As noted, it is also possible that technological changes over the very long run will slightly favor human labor over capital, thus lowering the return on capital and the capital share. But the size of this long-term effect seems limited, and it is possible that it will be more than compensated by other forces tending in the opposite direction, such as the creation of increasingly sophisticated systems of financial intermediation and international competition for capital.
The Caprices of Technology
The principal lesson of this second part of the book is surely that there is no natural force that inevitably reduces the importance of capital and of income flowing from ownership of capital over the course of history. In the decades after World War II, people began to think that the triumph of human capital over capital in the traditional sense (land, buildings, and financial capital) was a natural and irreversible process, due perhaps to technology and to purely economic forces. In fact, however, some people were already saying that political forces were central. My results fully confirm this view. Progress toward economic and technological rationality need not imply progress toward democratic and meritocratic rationality. The primary reason for this is simple: technology, like the market, has neither limits nor morality. The evolution of technology has certainly increased the need for human skills and competence. But it has also increased the need for buildings, homes, offices, equipment of all kinds, patents, and so on, so that in the end the total value of all these forms of nonhuman capital (real estate, business capital, industrial capital, financial capital) has increased al
most as rapidly as total income from labor. If one truly wishes to found a more just and rational social order based on common utility, it is not enough to count on the caprices of technology.
To sum up: modern growth, which is based on the growth of productivity and the diffusion of knowledge, has made it possible to avoid the apocalypse predicted by Marx and to balance the process of capital accumulation. But it has not altered the deep structures of capital—or at any rate has not truly reduced the macroeconomic importance of capital relative to labor. I must now examine whether the same is true for inequality in the distribution of income and wealth. How much has the structure of inequality with respect to both labor and capital actually changed since the nineteenth century?
PART THREE
THE STRUCTURE OF INEQUALITY
{SEVEN}
Inequality and Concentration: Preliminary Bearings
In Part Two I examined the dynamics of both the capital/income ratio at the country level and the overall split of national income between capital and labor, but I did not look directly at income or wealth inequality at the individual level. In particular, I analyzed the importance of the shocks of 1914–1945 in order to understand changes in the capital/income ratio and the capital-labor split over the course of the twentieth century. The fact that Europe—and to some extent the entire world—have only just gotten over these shocks has given rise to the impression that patrimonial capitalism—which is flourishing in these early years of the twenty-first century—is something new, whereas it is in large part a repetition of the past and characteristic of a low-growth environment like the nineteenth century.
Here begins my examination of inequality and distribution at the individual level. In the next few chapters, I will show that the two world wars, and the public policies that followed from them, played a central role in reducing inequalities in the twentieth century. There was nothing natural or spontaneous about this process, in contrast to the optimistic predictions of Kuznets’s theory. I will also show that inequality began to rise sharply again since the 1970s and 1980s, albeit with significant variation between countries, again suggesting that institutional and political differences played a key role. I will also analyze, from both a historical and a theoretical point of view, the evolution of the relative importance of inherited wealth versus income from labor over the very long run. Many people believe that modern growth naturally favors labor over inheritance and competence over birth. What is the source of this widespread belief, and how sure can we be that it is correct? Finally, in Chapter 12, I will consider how the global distribution of wealth might evolve in the decades to come. Will the twenty-first century be even more inegalitarian than the nineteenth, if it is not already so? In what respects is the structure of inequality in the world today really different from that which existed during the Industrial Revolution or in traditional rural societies? Part Two has already suggested some interesting leads to follow in this regard, but the only way to answer this crucial question is by analyzing the structure of inequality at the individual level.
Capital in the Twenty-First Century Page 27