Capital in the Twenty-First Century

by Thomas Piketty

g will be smaller in the future than it was before the eighteenth century, both because the return on capital will be lower (4–4.5 percent, say, rather than 4.5–5 percent) and growth will be higher (1–1.5 percent rather than 0.1–0.2 percent), even if competition between states leads to the elimination of all taxes on capital. If theoretical simulations are to be believed, the concentration of wealth, even if taxes on capital are abolished, would not necessarily return to the extreme level of 1900–1910.

  There are no grounds for rejoicing, however, in part because inequality of wealth would still increase substantially (halving the middle-class share of national wealth, for example, which voters might well find unacceptable) and in part because there is considerable uncertainty in the simulations, and other forces exist that may well push in the opposite direction, that is, toward an even greater concentration of capital than in 1900–1910. In particular, demographic growth may be negative (which could drive growth rates, especially in the wealthy countries, below those observed in the nineteenth century, and this would in turn give unprecedented importance to inherited wealth). In addition, capital markets may become more and more sophisticated and more and more “perfect” in the sense used by economists (meaning that the return on capital will become increasingly disconnected from the individual characteristics of the owner and therefore cut against meritocratic values, reinforcing the logic of r > g). As I will show later, in addition, financial globalization seems to be increasing the correlation between the return on capital and the initial size of the investment portfolio, creating an inequality of returns that acts as an additional—and quite worrisome—force for divergence in the global wealth distribution.

  To sum up: the fact that wealth is noticeably less concentrated in Europe today than it was in the Belle Époque is largely a consequence of accidental events (the shocks of 1914–1945) and specific institutions such as taxation of capital and its income. If those institutions were ultimately destroyed, there would be a high risk of seeing inequalities of wealth close to those observed in the past or, under certain conditions, even higher. Nothing is certain: inequality can move in either direction. Hence I must now look more closely at the dynamics of inheritance and then at the global dynamics of wealth. One conclusion is already quite clear, however: it is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures that inequality of wealth will decrease and harmonious stability will be achieved.

  {ELEVEN}

  Merit and Inheritance in the Long Run

  The overall importance of capital today, as noted, is not very different from what it was in the eighteenth century. Only its form has changed: capital was once mainly land but is now industrial, financial, and real estate. We also know that the concentration of wealth remains high, although it is noticeably less extreme than it was a century ago. The poorest half of the population still owns nothing, but there is now a patrimonial middle class that owns between a quarter and a third of total wealth, and the wealthiest 10 percent now own only two-thirds of what there is to own rather than nine-tenths. We have also learned that the relative movements of the return on capital and the rate of growth of the economy, and therefore of the difference between them, r − g, can explain many of the observed changes, including the logic of accumulation that accounts for the very high concentration of wealth that we see throughout much of human history.

  In order to understand this cumulative logic better, we must now take a closer look at the long-term evolution of the relative roles of inheritance and saving in capital formation. This is a crucial issue, because a given level of capital concentration can come about in totally different ways. It may be that the global level of capital has remained the same but that its deep structure has changed dramatically, in the sense that capital was once largely inherited but is now accumulated over the course of a lifetime by savings from earned income. One possible explanation for such a change might be increased life expectancy, which might have led to a structural increase in the accumulation of capital in anticipation of retirement. However, this supposed great transformation in the nature of capital was actually less dramatic than is sometimes thought; indeed, in some countries it did not occur at all. In all likelihood, inheritance will again play a significant role in the twenty-first century, comparable to its role in the past.

  More precisely, I will come to the following conclusion. Whenever the rate of return on capital is significantly and durably higher than the growth rate of the economy, it is all but inevitable that inheritance (of fortunes accumulated in the past) predominates over saving (wealth accumulated in the present). In strict logic, it could be otherwise, but the forces pushing in this direction are extremely powerful. The inequality r > g in one sense implies that the past tends to devour the future: wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved. Almost inevitably, this tends to give lasting, disproportionate importance to inequalities created in the past, and therefore to inheritance.

  If the twenty-first century turns out to be a time of low (demographic and economic) growth and high return on capital (in a context of heightened international competition for capital resources), or at any rate in countries where these conditions hold true, inheritance will therefore probably again be as important as it was in the nineteenth century. An evolution in this direction is already apparent in France and a number of other European countries, where growth has already slowed considerably in recent decades. For the moment it is less prominent in the United States, essentially because demographic growth there is higher than in Europe. But if growth ultimately slows more or less everywhere in the coming century, as the median demographic forecasts by the United Nations (corroborated by other economic forecasts) suggest it will, then inheritance will probably take on increased importance throughout the world.

  This does not imply, however, that the structure of inequality in the twenty-first century will be the same as in the nineteenth century, in part because the concentration of wealth is less extreme (there will probably be more small to medium rentiers and fewer extremely wealthy rentiers, at least in the short term), in part because the earned income hierarchy is expanding (with the rise of the supermanager), and finally because wealth and income are more strongly correlated than in the past. In the twenty-first century it is possible to be both a supermanager and a “medium rentier”: the new meritocratic order encourages this sort of thing, probably to the detriment of low- and medium-wage workers, especially those who own only a tiny amount of property, if any.

  Inheritance Flows over the Long Run

  I will begin at the beginning. In all societies, there are two main ways of accumulating wealth: through work or inheritance.1 How common is each of these in the top centiles and deciles of the wealth hierarchy? This is the key question.

  In Vautrin’s lecture to Rastignac (discussed in Chapter 7), the answer is clear: study and work cannot possibly lead to a comfortable and elegant life, and the only realistic strategy is to marry Mademoiselle Victorine and her inheritance. One of my primary goals in this work is to find out how closely nineteenth-century French society resembled the society described by Vautrin and above all to learn how and why this type of society evolved over time.

  It is useful to begin by examining the evolution of the annual flow of inheritances over the long run, that is, the total value of bequests (and gifts between living individuals) during the course of a year, expressed as a percentage of national income. This figure measures the annual amount of past wealth conveyed each year relative to the total income earned that year. (Recall that earned income accounts for roughly two-thirds of national income each year, while part of capital income goes to remunerate the capital that is passed on to heirs.)

  I will examine the French case, which is by far the best known over the long run, and the pattern I find there, it turns out, also applies to a certain extent to other European countries. Final
ly, I will explore what it is possible to say at the global level.

  Figure 11.1 represents the evolution of the annual inheritance flow in France from 1820 to 2010.2 Two facts stand out clearly. First, the inheritance flow accounts for 20–25 percent of annual income every year in the nineteenth century, with a slight upward trend toward the end of the century. This is an extremely high flow, as I will show later, and it reflects the fact that nearly all of the capital stock came from inheritance. If inherited wealth is omnipresent in nineteenth-century novels, it was not only because writers, especially the debt-ridden Balzac, were obsessed by it. It was above all because inheritance occupied a structurally central place in nineteenth-century society—central as both economic flow and social force. Its importance did not diminish with time, moreover. On the contrary, in 1900–1910, the flow of inheritance was somewhat higher (25 percent of national income compared with barely 20) than it had been in the 1820s, the period of Vautrin, Rastignac, and the Vauquer boardinghouse.

  FIGURE 11.1. The annual inheritance flow as a fraction of national income, France, 1820–2010

  The annual inheritance flow was about 20–25 percent of national income during the nineteenth century and until 1914; it then fell to less than 5 percent in the 1950s, and returned to about 15 percent in 2010.

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

  Subsequently, we find a spectacular decrease in the flow of inheritances between 1910 and 1950 followed by a steady rebound thereafter, with an acceleration in the 1980s. There were very large upward and downward variations during the twentieth century. The annual flow of inheritances and gifts was (to a first approximation, and compared with subsequent shocks) relatively stable until World War I but fell by a factor of 5 or 6 between 1910 and 1950 (when the inheritance flow was barely 4 or 5 percent of national income), after which it increased by a factor of 3 or 4 between 1950 and 2010 (at which time the flow accounted for 15 percent of national income).

  The evolution visible in Figure 11.1 reflects deep changes in the perception as well as the reality of inheritance, and to a large extent it also reflects changes in the structure of inequality. As we will soon see, the compression of the inheritance flow owing to the shocks of 1914–1945 was nearly twice as great as the decrease in private wealth. The inheritance collapse was therefore not simply the result of a wealth collapse (even if the two developments are obviously closely related). In the public mind, the idea that the age of inheritance was over was certainly even more influential than the idea of an end of capitalism. In 1950–1960, bequests and gifts accounted for just a few points of national income, so it was reasonable to think that inheritances had virtually disappeared and that capital, though less important overall than in the past, was now wealth that an individual accumulated by effort and saving during his or her lifetime. Several generations grew up under these conditions (even if perceptions somewhat exceeded reality), in particular the baby boom generation, born in the late 1940s and early 1950s, many of whom are still alive today, and it was natural for them to assume that this was the “new normal.”

  Conversely, younger people, in particular those born in the 1970s and 1980s, have already experienced (to a certain extent) the important role that inheritance will once again play in their lives and the lives of their relatives and friends. For this group, for example, whether or not a child receives gifts from parents can have a major impact in deciding who will own property and who will not, at what age, and how extensive that property will be—in any case, to a much greater extent than in the previous generation. Inheritance is playing a larger part in their lives, careers, and individual and family choices than it did with the baby boomers. The rebound of inheritance is still incomplete, however, and the evolution is still under way (the inheritance flow in 2000–2010 stood at a point roughly midway between the nadir of the 1950s and the peak of 1900–1910). To date, it has had a less profound impact on perceptions than the previous change, which still dominates people’s thinking. A few decades from now, things may be very different.

  Fiscal Flow and Economic Flow

  Several points about Figure 11.1 need to be clarified. First, it is essential to include gifts between living individuals (whether shortly before death or earlier in life) in the flow of inheritance, because this form of transmission has always played a very important role in France and elsewhere. The relative magnitude of gifts and bequests has varied greatly over time, so omitting gifts would seriously bias the analysis and distort spatial and temporal comparisons. Fortunately, gifts in France are carefully recorded (though no doubt somewhat underestimated). This is not the case everywhere.

  Second, and even more important, the wealth of French historical sources allows us to calculate inheritance flows in two different ways, using data and methods that are totally independent. What we find is that the two evolutions shown in Figure 11.1 (which I have labeled “fiscal flow” and “economic flow”) are highly consistent, which is reassuring and demonstrates the robustness of the historical data. This consistency also helps us to decompose and analyze the various forces at work.3

  Broadly speaking, there are two ways to estimate inheritance flows in a particular country. One can make direct use of observed flows of inheritances and gifts (for example, by using tax data: this is what I call the “fiscal flow”). Or one can look at the private capital stock and calculate the theoretical flow that must have occurred in a given year (which I call the “economic flow”). Each method has its advantages and disadvantages. The first method is more direct, but the tax data in many countries are so incomplete that the results are not always satisfactory. In France, as noted previously, the system for recording bequests and gifts was established exceptionally early (at the time of the Revolution) and is unusually comprehensive (in theory it covers all transmissions, including those on which little or no tax is paid, though there are some exceptions), so the fiscal method can be applied. The tax data must be corrected, however, to take account of small bequests that do not have to be declared (the amounts involved are insignificant) and above all to correct for certain assets that are exempt from the estate tax, such as life insurance contracts, which have become increasingly common since 1970 (and today account for nearly one-sixth of total private wealth in France).

  The second method (“economic flow”) has the advantage of not relying on tax data and therefore giving a more complete picture of the transmission of wealth, independent of the vagaries of different countries’ tax systems. The ideal is to be able to use both methods in the same country. What is more, one can interpret the gap between the two curves in Figure 11.1 (which shows that the economic flow is always a little greater than the fiscal flow) as an estimate of tax fraud or deficiencies of the probate record-keeping system. There may also be other reasons for the gap, including the many imperfections in the available data sets and the methods used. For certain subperiods, the gap is far from negligible. The long-run evolutions in which I am primarily interested are nevertheless quite consistent, regardless of which method we use.

  The Three Forces: The Illusion of an End of Inheritance

  In fact, the main advantage of the economic flow approach is that it requires us to take a comprehensive view of the three forces that everywhere determine the flow of inheritance and its historical evolution.

  In general, the annual economic flow of inheritances and gifts, expressed as a proportion of national income that we denote by, is equal to the product of three forces:

  by = μ × m × β,

  where β is the capital/income ratio (or, more precisely, the ratio of total private wealth, which, unlike public assets, can be passed on by inheritance, to national income), m is the mortality rate, and μ is the ratio of average wealth at time of death to average wealth of living individuals.

  This decomposition is a pure accounting identity: by definition, it is always true in all times and places. In particular, this is the formula I used to estimate the economic flow depicted in
Figure 11.1. Although this decomposition of the economic flow into three forces is a tautology, I think it is a useful tautology in that it enables us to clarify an issue that has been the source of much confusion in the past, even though the underlying logic is not terribly complex.

  Let me examine the three forces one by one. The first is the capital/income ratio β. This force expresses a truism: if the flow of inherited wealth is to be high in a given society, the total stock of private wealth capable of being inherited must also be large.

  The second force, the mortality rate m, describes an equally transparent mechanism. All other things being equal, the higher the mortality rate, the higher the inheritance flow. In a society where everyone lives forever, so that the mortality rate is exactly zero, inheritance must vanish. The inheritance flow by must also be zero, no matter how large the capital/income ratio β is.

  The third force, the ratio μ of average wealth at time of death to average wealth of living individuals, is equally transparent.4

  Suppose that the average wealth at time of death is the same as the average wealth of the population as a whole. Then μ = 1, and the inheritance flow by is simply the product of the mortality rate m and the capital/income ratio β. For example, if the capital/income ratio is 600 percent (that is, the stock of private wealth represents six years of national income) and the mortality rate of the adult population is 2 percent,5 then the annual inheritance flow will automatically be 12 percent of national income.

  If average wealth at time of death is twice the average wealth of the living, so that μ = 2, then the inheritance flow will be 24 percent of national income (assuming β = 6 and m = 2 percent), which is approximately the level observed in the nineteenth and early twentieth centuries.