Capital in the Twenty-First Century
Page 47
The orders of magnitude to bear in mind are the following. In the nineteenth and early twentieth centuries, when the annual inheritance flow was 20–25 percent of national income, inherited wealth accounted for nearly all private wealth: somewhere between 80 and 90 percent, with an upward trend. Note, however, that in all societies, at all levels of wealth, a significant number of wealthy individuals, between 10 and 20 percent, accumulate fortunes during their lifetimes, having started with nothing. Nevertheless, inherited wealth accounts for the vast majority of cases. This should come as no surprise: if one adds up an annual inheritance flow of 20 percent of national income for approximately thirty years, one accumulates a very large sum of legacies and gifts, on the order of six years of national income, which thus accounts for nearly all of private wealth.23
FIGURE 11.7. The share of inherited wealth in total wealth: France, 1850–2100
Inherited wealth represents 80–90 percent of total wealth in France in the nineteenth century; this share fell to 40–50 percent during the twentieth century, and might return to 80–90 percent during the twenty-first century.
Sources and series: see piketty.pse.ens.fr/capital21c.
Over the course of the twentieth century, following the collapse of inheritance flows, this equilibrium changed dramatically. The low point was attained in the 1970s: after several decades of small inheritances and accumulation of new wealth, inherited capital accounted for just over 40 percent of total private capital. For the first time in history (except in new countries), wealth accumulated in the lifetime of the living constituted the majority of all wealth: nearly 60 percent. It is important to realize two things: first, the nature of capital effectively changed in the postwar period, and second, we are just emerging from this exceptional period. Nevertheless, we are now clearly out of it: the share of inherited wealth in total wealth has grown steadily since the 1970s. Inherited wealth once again accounted for the majority of wealth in the 1980s, and according to the latest available figures it represents roughly two-thirds of private capital in France in 2010, compared with barely one-third of capital accumulated from savings. In view of today’s very high inheritance flows, it is quite likely, if current trends continue, that the share of inherited wealth will continue to grow in the decades to come, surpassing 70 percent by 2020 and approaching 80 percent in the 2030s. If the scenario of 1 percent growth and 5 percent return on capital is correct, the share of inherited wealth could continue to rise, reaching 90 percent by the 2050s, or approximately the same level as in the Belle Époque.
Thus we see that the U-shaped curve of annual inheritance flows as a proportion of national income in the twentieth century went hand in hand with an equally impressive U-shaped curve of accumulated stock of inherited wealth as a proportion of national wealth. In order to understand the relation between these two curves, it is useful to compare the level of inheritance flows to the savings rate, which as noted in Part Two is generally around 10 percent of national income. When the inheritance flow is 20–25 percent of national income, as it was in the nineteenth century, then the amounts received each year as bequests and gifts are more than twice as large as the flow of new savings. If we add that a part of the new savings comes from the income of inherited capital (indeed, this was the major part of saving in the nineteenth century), it is clearly inevitable that inherited wealth will largely predominate over saved wealth. Conversely, when the inheritance flow falls to just 5 percent of national income, or half of new savings (again assuming a savings rate of 10 percent), as in the 1950s, it is not surprising that saved capital will dominate inherited capital. The central fact is that the annual inheritance flow surpassed the savings rate again in the 1980s and rose well above it in 2000–2010. Today it is nearly 15 percent of national income (counting both inheritances and gifts).
To get a better idea of the sums involved, it may be useful to recall that household disposable (monetary) income is 70–75 percent of national income in a country like France today (after correcting for transfers in kind, such as health, education, security, public services, etc. not included in disposable income). If we express the inheritance flow not as a proportion of national income, as I have done thus far, but as a proportion of disposable income, we find that the inheritances and gifts received each year by French households amounted to about 20 percent of their disposable income in the early 2010s, so that in this sense inheritance is already as important today as it was in 1820–1910 (see Figure 11.8). As noted in Chapter 5, it is probably better to use national income (rather than disposable income) as the reference denominator for purposes of spatial and temporal comparison. Nevertheless, the comparison with disposable income reflects today’s reality in a more concrete way and shows that inherited wealth already accounts for one-fifth of household monetary resources (available for saving, for example) and will soon account for a quarter or more.
FIGURE 11.8. The annual inheritance flow as a fraction of household disposable income: France, 1820–2010
Expressed as a fraction of household disposable income (rather than national income), the annual inheritance flow is about 20 percent in 2010, in other words, close to its nineteenth-century level.
Sources and series: see piketty.pse.ens.fr/capital21c.
Back to Vautrin’s Lecture
In order to have a more concrete idea of what inheritance represents in different people’s lives, and in particular to respond more precisely to the existential question raised by Vautrin’s lecture (what sort of life can one hope to live on earned income alone, compared to the life one can lead with inherited wealth?), the best way to proceed is to consider things from the point of view of successive generations in France since the beginning of the nineteenth century and compare the various resources to which they would have had access in their lifetime. This is the only way to account correctly for the fact that an inheritance is not a resource one receives every year.24
FIGURE 11.9. The share of inheritance in the total resources (inheritance and work) of cohorts born in 1790–2030
Inheritance made about 25 percent of the resources of nineteenth-century cohorts, down to less than 10 percent for cohorts born in 1910–1920 (who should have inherited in 1950–1960).
Sources and series: see piketty.pse.ens.fr/capital21c.
Consider first the evolution of the share of inheritance in the total resources available to generations born in France in the period 1790–2030 (see Figure 11.9). I proceeded as follows. Starting with series of annual inheritance flows and detailed data concerning ages of the deceased, heirs, gift givers, and gift recipients, I calculated the share of inherited wealth in total available resources as a function of year of birth. Available resources include both inherited wealth (bequests and gifts) and income from labor, less taxes,25 capitalized over the individual’s lifetime using the average net return on capital in each year. Although this is the most reasonable way to approach the question initially, note that it probably leads to a slight underestimate of the share of inheritance, because heirs (and people with large fortunes more generally) are usually able to obtain a higher return on capital than the interest rate paid on savings from earned income.26
The results obtained are the following. If we look at all people born in France in the 1790s, we find that inheritance accounted for about 24 percent of the total resources available to them during their lifetimes, so that income from labor accounted for about 76 percent. For individuals born in the 1810s, the share of inheritance was 25 percent, leaving 75 percent for earned income. The same is approximately true for all the cohorts of the nineteenth century and up to World War I. Note that the 25 percent share for inheritance is slightly higher than the inheritance flow expressed as a percentage of national income (20–25 percent in the nineteenth century): this is because income from capital, generally about a third of national income, is de facto reassigned in part to inheritance and in part to earned income.27
For cohorts born in the 1870s and after, the share of inheritan
ce in total resources begins to decline gradually. This is because a growing share of these individuals should have inherited after World War I and therefore received less than expected owing to the shocks to their parents’ assets. The lowest point was reached by cohorts born in 1910–1920: these individuals should have inherited in the years between the end of World War II and 1960, that is, at a time when the inheritance flow had reached its lowest level, so that inheritance accounted for only 8–10 percent of total resources. The rebound began with cohorts born in 1930–1950, who inherited in 1970–1990, and for whom inheritance accounted for 12–14 percent of total resources. But it is above all for cohorts born in 1970–1980, who began to receive gifts and bequests in 2000–2010, that inheritance regained an importance not seen since the nineteenth century: around 22–24 percent of total resources. These figures show clearly that we have only just emerged from the “end of inheritance” era, and they also show how differently different cohorts born in the twentieth century experienced the relative importance of savings and inheritance: the baby boom cohorts had to make it on their own, almost as much as the interwar and turn-of-the-century cohorts, who were devastated by war. By contrast, the cohorts born in the last third of the century experienced the powerful influence of inherited wealth to almost the same degree as the cohorts of the nineteenth and twenty-first centuries.
Rastignac’s Dilemma
Thus far I have examined only averages. One of the principal characteristics of inherited wealth, however, is that it is distributed in a highly inegalitarian fashion. By introducing into the previous estimates inequality of inheritance on the one hand and inequality of earned income on the other, we will at last be able to analyze the degree to which Vautrin’s somber lesson was true in different periods. Figure 11.10 shows that the cohorts born in the late eighteenth century and throughout the nineteenth century, including Eugène de Rastignac’s cohort (Balzac tells us that he was born in 1798), did indeed face the terrible dilemma described by the ex-convict: those who could somehow lay hands on inherited wealth were able to live far better than those obliged to make their way by study and work.
In order to make it possible to interpret the different levels of resources as concretely and intuitively as possible, I have expressed resources in terms of multiples of the average income of the least well paid 50 percent of workers in each period. We may take this baseline as the standard of living of the “lower class,” which generally claimed about half of national income in this period. This is a useful reference point for judging inequality in a society.28
The principal results obtained are the following. In the nineteenth century, the lifetime resources available to the wealthiest 1 percent of heirs (that is, the individuals inheriting the top 1 percent of legacies in their generation) were 25–30 times greater than the resources of the lower class. In other words, a person who could obtain such an inheritance, either from parents or via a spouse, could afford to pay a staff of 25–30 domestic servants throughout his life. At the same time, the resources afforded by the top 1 percent of earned incomes (in jobs such as judge, prosecutor, or attorney, as in Vautrin’s lecture) were about ten times the resources of the lower class. This was not negligible, but it was clearly a much lower standard of living, especially since, as Vautrin observed, such jobs were not easy to obtain. It was not enough to do brilliantly in law school. Often one had to plot and scheme for many long years with no guarantee of success. Under such conditions, if the opportunity to lay hands on an inheritance in the top centile presented itself, it was surely better not to pass it up. At the very least, it was worth a moment’s reflection.
If we now do the same calculation for the generations born in 1910–1920, we find that they faced different life choices. The top 1 percent of inheritances afforded resources that were barely 5 times the lower class standard. The best paid 1 percent of jobs still afforded 10–12 times that standard (as a consequence of the fact that the top centile of the wage hierarchy was relatively stable at about 6–7 percent of total wages over a long period).29 For the first time in history, no doubt, one could live better by obtaining a job in the top centile rather than an inheritance in the top centile: study, work, and talent paid better than inheritance.
FIGURE 11.10. The dilemma of Rastignac for cohorts born in 1790–2030
In the nineteenth century, the living standards that could be attained by the top 1 percent inheritors were a lot higher than those that could be attained by the top 1 percent labor earners.
Sources and series: see piketty.pse.ens.fr/capital21c.
The choice was almost as clear for the baby boom cohorts: a Rastignac born in 1940–1950 had every reason to aim for a job in the top centile (which afforded resources 10–12 times greater than the lower class standard) and to ignore the Vautrins of the day (since the top centile of inheritances brought in just 6–7 times the lower class standard). For all these generations, success through work was more profitable and not just more moral.
Concretely, these results also indicate that throughout this period, and for all the cohorts born between 1910 and 1960, the top centile of the income hierarchy consisted largely of people whose primary source of income was work. This was a major change, not only because it was a historical first (in France and most likely in all other European countries) but also because the top centile is an extremely important group in every society.30 As noted in Chapter 7, the top centile is a relatively broad elite that plays a central role in shaping the economic, political, and symbolic structure of society.31 In all traditional societies (remember that the aristocracy represented 1–2 percent of the population in 1789), and in fact down to the Belle Époque (despite the hopes kindled by the French Revolution), this group was always dominated by inherited capital. The fact that this was not the case for the cohorts born in the first half of the twentieth century was therefore a major event, which fostered unprecedented faith in the irreversibility of social progress and the end of the old social order. To be sure, inequality was not eradicated in the three decades after World War II, but it was viewed primarily from the optimistic angle of wage inequalities. To be sure, there were significant differences between blue-collar workers, white-collar workers, and managers, and these disparities tended to grow wider in France in the 1950s. But there was a fundamental unity to this society, in which everyone participated in the communion of labor and honored the meritocratic ideal. People believed that the arbitrary inequalities of inherited wealth were a thing of the past.
For the cohorts born in the 1970s, and even more for those born later, things are quite different. In particular, life choices have become more complex: the inherited wealth of the top centile counts for about as much as the employment of the top centile (or even slightly more: 12–13 times the lower class standard of living for inheritance versus 10–11 times for earned income). Note, however, that the structure of inequality and of the top centile today is also quite different from what it was in the nineteenth century, because inherited wealth is significantly less concentrated today than in the past.32 Today’s cohorts face a unique set of inequalities and social structures, which are in a sense somewhere between the world cynically described by Vautrin (in which inheritance predominated over labor) and the enchanted world of the postwar decades (in which labor predominated over inheritance). According to our findings, the top centile of the social hierarchy in France today are likely to derive their income about equally from inherited wealth and their own labor.
The Basic Arithmetic of Rentiers and Managers
To recapitulate: a society in which income from inherited capital predominates over income from labor at the summit of the social hierarchy—that is, a society like those described by Balzac and Austen—two conditions must be satisfied. First, the capital stock and, within it, the share of inherited capital, must be large. Typically, the capital/income ratio must be on the order of 6 or 7, and most of the capital stock must consist of inherited capital. In such a society, inherited wealth can a
ccount for about a quarter of the average resources available to each cohort (or even as much as a third if one assumes a high degree of inequality in returns on capital). This was the case in the eighteenth and nineteenth centuries, until 1914. This first condition, which concerns the stock of inherited wealth, is once again close to being satisfied today.
The second condition is that inherited wealth must be extremely concentrated. If inherited wealth were distributed in the same way as income from labor (with identical levels for the top decile, top centile, etc., of the hierarchies of both inheritance and labor income), then Vautrin’s world could never exist: income from labor would always far outweigh income from inherited wealth (by a factor of at least three),33 and the top 1 percent of earned incomes would systematically and mechanically outweigh the top 1 percent of incomes from inherited capital.34
In order for the concentration effect to dominate the volume effect, the top centile of the inheritance hierarchy must by itself claim the lion’s share of inherited wealth. This was indeed the case in the eighteenth and nineteenth centuries, when the top centile owned 50–60 percent of total wealth (or as much as 70 percent in Britain or Belle Époque Paris), which is nearly 10 times greater than the top centile’s share of earned income (about 6–7 percent, a figure that remained stable over a very long period of time). This 10:1 ratio between wealth and salary concentrations is enough to counterbalance the 3:1 volume ratio and explains why an inherited fortune in the top centile enabled a person to live practically 3 times better than an employment in the top centile in the patrimonial society of the nineteenth century (see Figure 11.10).