Capital in the Twenty-First Century

by Thomas Piketty

  A Simple Case: The Reduction of Inequality in France in the Twentieth Century

  I will begin by examining at some length the case of France, which is particularly well documented (thanks to a rich lode of readily available historical sources). It is also relatively simple and straightforward (as far as it is possible for a history of inequality to be straightforward) and, above all, broadly representative of changes observed in several other European countries. By “European” I mean “continental European,” because in some respects the British case is intermediate between the European and the US cases. To a large extent the continental European pattern is also representative of what happened in Japan. After France I will turn to the United States, and finally I will extend the analysis to the entire set of developed and emerging economies for which adequate historical data exist.

  Figure 8.1 depicts the upper decile’s share of both national income and wages over time. Three facts stand out.

  First, income inequality has greatly diminished in France since the Belle Époque: the upper decile’s share of national income decreased from 45–50 percent on the eve of World War I to 30–35 percent today.

  FIGURE 8.1. Income inequality in France, 1910–2010

  Inequality of total income (labor and capital) has dropped in France during the twentieth century, while wage inequality has remained the same.

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

  This drop of 15 percentage points of national income is considerable. It represents a decrease of about one-third in the share of each year’s output going to the wealthiest 10 percent of the population and an increase of about a third in the share going to the other 90 percent. Note, too, that this is roughly equivalent to three-quarters of what the bottom half of the population received in the Belle Époque and more than half of what it receives today.1 Recall, moreover, that in this part of the book, I am examining inequality of primary incomes (that is, before taxes and transfers). In Part Four, I will show how taxes and transfers reduced inequality even more. To be clear, the fact that inequality decreased does not mean that we are living today in an egalitarian society. It mainly reflects the fact that the society of the Belle Époque was extremely inegalitarian—indeed, one of the most inegalitarian societies of all time. The form that this inequality took and the way it came about would not, I think, be readily accepted today.

  Second, the significant compression of income inequality over the course of the twentieth century was due entirely to diminished top incomes from capital. If we ignore income from capital and concentrate on wage inequality, we find that the distribution remained quite stable over the long run. In the first decade of the twentieth century as in the second decade of the twenty-first, the upper decile of the wage hierarchy received about 25 percent of total wages. The sources also indicate long-term stability of wage inequality at the bottom end of the distribution. For example, the least well paid 50 percent always received 25–30 percent of total wages (so that the average pay of a member of this group was 50–60 percent of the average wage overall), with no clear long-term trend.2 The wage level has obviously changed a great deal over the past century, and the composition and skills of the workforce have been totally transformed, but the wage hierarchy has remained more or less the same. If top incomes from capital had not decreased, income inequality would not have diminished in the twentieth century.

  FIGURE 8.2. The fall of rentiers in France, 1910–2010

  The fall in the top percentile share (the top 1 percent highest incomes) in France between 1914 and 1945 is due to the fall of top capital incomes.

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

  This fact stands out even more boldly when we climb the rungs of the social ladder. Look, in particular, at the evolution of the top centile (Figure 8.2).3 Compared with the peak inequality of the Belle Époque, the top centile’s share of income literally collapsed in France over the course of the twentieth century, dropping from more than 20 percent of national income in 1900–1910 to 8 or 9 percent in 2000–2010. This represents a decrease of more than half in one century, indeed nearly two-thirds if we look at the bottom of the curve in the early 1980s, when the top centile’s share of national income was barely 7 percent.

  Again, this collapse was due solely to the decrease of very high incomes from capital (or, crudely put, the fall of the rentier). If we look only at wages, we find that the upper centile’s share remains almost totally stable over the long run at around 6 or 7 percent of total wages. On the eve of World War I, income inequality (as measured by the share of the upper centile) was nearly three times greater than wage inequality. Today it is a nearly a third higher and largely identical with wage inequality, to the point where one might imagine—incorrectly—that top incomes from capital have virtually disappeared (see Figure 8.2).

  To sum up: the reduction of inequality in France during the twentieth century is largely explained by the fall of the rentier and the collapse of very high incomes from capital. No generalized structural process of inequality compression (and particularly wage inequality compression) seems to have operated over the long run, contrary to the optimistic predictions of Kuznets’s theory.

  Herein lies a fundamental lesson about the historical dynamics of the distribution of wealth, no doubt the most important lesson the twentieth century has to teach. This is all the more true when we recognize that the factual picture is more or less the same in all developed countries, with minor variations.

  The History of Inequality: A Chaotic Political History

  The third important fact to emerge from Figures 8.1 and 8.2 is that the history of inequality has not been a long, tranquil river. There have been many twists and turns and certainly no irrepressible, regular tendency toward a “natural” equilibrium. In France and elsewhere, the history of inequality has always been chaotic and political, influenced by convulsive social changes and driven not only by economic factors but by countless social, political, military, and cultural phenomena as well. Socioeconomic inequalities—disparities of income and wealth between social groups—are always both causes and effects of other developments in other spheres. All these dimensions of analysis are inextricably intertwined. Hence the history of the distribution of wealth is one way of interpreting a country’s history more generally.

  In the case of France, it is striking to see the extent to which the compression of income inequality is concentrated in one highly distinctive period: 1914–1945. The shares of both the upper decile and upper centile in total income reached their nadir in the aftermath of World War II and seem never to have recovered from the extremely violent shocks of the war years (see Figures 8.1 and 8.2). To a large extent, it was the chaos of war, with its attendant economic and political shocks, that reduced inequality in the twentieth century. There was no gradual, consensual, conflict-free evolution toward greater equality. In the twentieth century it was war, and not harmonious democratic or economic rationality, that erased the past and enabled society to begin anew with a clean slate.

  What were these shocks? I discussed them in Part Two: destruction caused by two world wars, bankruptcies caused by the Great Depression, and above all new public policies enacted in this period (from rent control to nationalizations and the inflation-induced euthanasia of the rentier class that lived on government debt). All of these things led to a sharp drop in the capital/income ratio between 1914 and 1945 and a significant decrease in the share of income from capital in national income. But capital is far more concentrated than labor, so income from capital is substantially overrepresented in the upper decile of the income hierarchy (even more so in the upper centile). Hence there is nothing surprising about the fact that the shocks endured by capital, especially private capital, in the period 1914–1945 diminished the share of the upper decile (and upper centile), ultimately leading to a significant compression of income inequality.

  France first imposed a tax on income in 1914 (the Senate had blocked this
reform since the 1890s, and it was not finally adopted until July 15, 1914, a few weeks before war was declared, in an extremely tense climate). For that reason, we unfortunately have no detailed annual data on the structure of income before that date. In the first decade of the twentieth century, numerous estimates were made of the distribution of income in anticipation of the imposition of a general income tax, in order to predict how much revenue such a tax might bring in. We therefore have a rough idea of how concentrated income was in the Belle Époque. But these estimates are not sufficient to give us historical perspective on the shock of World War I (for that, the income tax would have to have been adopted several decades earlier).4 Fortunately, data on estate taxes, which have been levied since 1791, allow us to study the evolution of the wealth distribution throughout the nineteenth and twentieth centuries, and we are therefore able to confirm the central role played by the shocks of 1914–1945. For these data indicate that on the eve of World War I, nothing presaged a spontaneous reduction of the concentration of capital ownership—on the contrary. From the same source we also know that income from capital accounted for the lion’s share of the upper centile’s income in the period 1900–1910.

  FIGURE 8.3. The composition of top incomes in France in 1932

  Labor income becomes less and less important as one goes up within the top decile of total income. Notes: (i) “P90–95” includes individuals between percentiles 90 to 95, “P95–99” includes the next 4 percent, “P99–99.5” the next 0.5 percent, etc.; (ii) Labor income: wages, bonuses, pensions. Capital income: dividends, interest, rent. Mixed income: self-employment income.

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

  From a “Society of Rentiers” to a “Society of Managers”

  In 1932, despite the economic crisis, income from capital still represented the main source of income for the top 0.5 percent of the distribution (see Figure 8.3).5 But when we look at the composition of the top income group today, we find that a profound change has occurred. To be sure, today as in the past, income from labor gradually disappears as one moves higher in the income hierarchy, and income from capital becomes more and more predominant in the top centiles and thousandths of the distribution: this structural feature has not changed. There is one crucial difference, however: today one has to climb much higher in the social hierarchy before income from capital outweighs income from labor. Currently, income from capital exceeds income from labor only in the top 0.1 percent of the income distribution (see Figure 8.4). In 1932, this social group was 5 times larger; in the Belle Époque it was 10 times larger.

  FIGURE 8.4. The composition of top incomes in France in 2005

  Capital income becomes dominant at the level of the top 0.1 percent in France in 2005, as opposed to the top 0.5 percent in 1932.

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

  Make no mistake: this is a significant change. The top centile occupies a very prominent place in any society. It structures the economic and political landscape. This is much less true of the top thousandth.6 Although this is a matter of degree, it is nevertheless important: there are moments when the quantitative becomes qualitative. This change also explains why the share of income going to the upper centile today is barely higher than the upper centile’s share of total wages: income from capital assumes decisive importance only in the top thousandth or top ten-thousandth. Its influence in the top centile as a whole is relatively insignificant.

  To a large extent, we have gone from a society of rentiers to a society of managers, that is, from a society in which the top centile is dominated by rentiers (people who own enough capital to live on the annual income from their wealth) to a society in which the top of the income hierarchy, including to upper centile, consists mainly of highly paid individuals who live on income from labor. One might also say, more correctly (if less positively), that we have gone from a society of superrentiers to a less extreme form of rentier society, with a better balance between success through work and success through capital. It is important, however, to be clear that this major upheaval came about, in France at any rate, without any expansion of the wage hierarchy (which has been globally stable for a long time: the universe of individuals who are paid for their labor has never been as homogeneous as many people think); it was due entirely to the decrease in high incomes from capital.

  To sum up: what happened in France is that rentiers (or at any rate nine-tenths of them) fell behind managers; managers did not race ahead of rentiers. We need to understand the reasons for this long-term change, which are not obvious at first glance, since I showed in Part Two that the capital/income ratio has lately returned to Belle Époque levels. The collapse of the rentier between 1914 and 1945 is the obvious part of the story. Exactly why rentiers have not come back is the more complex and in some ways more important and interesting part. Among the structural factors that may have limited the concentration of wealth since World War II and to this day have helped prevent the resurrection of a society of rentiers as extreme as that which existed on the eve of World War I, we can obviously cite the creation of highly progressive taxes on income and inheritances (which for the most part did not exist prior to 1920). But other factors may also have played a significant and potentially equally important role.

  The Different Worlds of the Top Decile

  But first, let me dwell a moment on the very diverse social groups that make up the top decile of the income hierarchy. The boundaries between the various subgroups have changed over time: income from capital used to predominate in the top centile but today predominates only in the top thousandth. More than that, the coexistence of several worlds within the top decile can help us to understand the often chaotic short- and medium-term evolutions we see in the data. Income statements required by the new tax laws have proved to be a rich historical source, despite their many imperfections. With their help, it is possible to precisely describe and analyze the diversity at the top of the income distribution and its evolution over time. It is particularly striking to note that in all the countries for which we have this type of data, in all periods, the composition of the top income group can be characterized by intersecting curves like those shown in Figures 8.3 and 8.4 for France in 1932 and 2005, respectively: the share of income from labor always decreases rapidly as one moves progressively higher in the top decile, and the share of income from capital always rises sharply.

  In the poorer half of the top decile, we are truly in the world of managers: 80–90 percent of income comes from compensation for labor.7 Moving up to the next 4 percent, the share of income from labor decreases slightly but remains clearly dominant at 70–80 percent of total income in the interwar period as well as today (see Figures 8.3 and 8.4). In this large “9 percent” group (that is, the upper decile exclusive of the top centile), we find mainly individuals living primarily on income from labor, including both private sector managers and engineers and senior officials and teachers from the public sector. Here, pay is usually 2 to 3 times the average wage for society as a whole: if average wages are 2,000 euros a month, in other words, this group earns 4,000–6,000 a month.

  Obviously, the types of jobs and levels of skill required at this level have changed considerably over time: in the interwar years, high school teachers and even late-career grade school teachers belonged to “the 9 percent,” whereas today one has to be a college professor or researcher or, better yet, a senior government official to make the grade.8 In the past, a foreman or skilled technician came close to making it into this group. Today one has to be at least a middle manager and increasingly a top manager with a degree from a prestigious university or business school. The same is true lower down the pay scale: once upon a time, the least well paid workers (typically paid about half the average wage, or 1,000 euros a month if the average is 2,000) were farm laborers and domestic servants. At a later point, these were replaced by less skilled industrial workers, many of whom were women in the textile and food proc
essing industries. This group still exists today, but the lowest paid workers are now in the service sector, employed as waiters and waitresses in restaurants or as shop clerks (again, many of these are women). Thus the labor market was totally transformed over the past century, but the structure of wage inequality across the market barely changed over the long run, with “the 9 percent” just below the top and the 50 percent at the bottom still drawing about the same shares of income from labor over a very considerable period of time.

  Within “the 9 percent” we also find doctors, lawyers, merchants, restaurateurs, and other self-employed entrepreneurs. Their number grows as we move closer to “the 1 percent,” as is shown by the curve indicating the share of “mixed incomes” (that is, incomes of nonwage workers, which includes both compensation for labor and income from business capital, which I have shown separately in Figures 8.3 and 8.4). Mixed incomes account for 20–30 percent of total income in the neighborhood of the top centile threshold, but this percentage decreases as we move higher into the top centile, where pure capital income (rent, interest, and dividends) clearly predominates. To make it into “the 9 percent” or even rise into the lower strata of “the 1 percent,” which means attaining an income 4–5 times higher than the average (that is, 8,000–10,000 euros a month in a society where the average income is 2,000), choosing to become a doctor, lawyer, or successful restaurateur may therefore be a good strategy, and it is almost as common (actually about half as common) as the choice to become a top manager in a large firm.9 But to reach the stratosphere of “the 1 percent” and enjoy an income several tens of times greater than average (hundreds of thousands if not millions of euros per year), such a strategy is unlikely to be enough. A person who owns substantial amounts of assets is more likely to reach the top of the income hierarchy.10