Capital in the Twenty-First Century

by Thomas Piketty

  The Society of Petits Rentiers

  The time has come to return to today’s world, and more precisely to France in the 2010s. According to my estimates, inheritance will represent about one quarter of total lifetime resources (from both inheritance and labor) for cohorts born in the 1970s and after. In terms of total amounts involved, inheritance has thus nearly regained the importance it had for nineteenth-century cohorts (see Figure 11.9). I should add that these predictions are based on the central scenario: if the alternative scenario turns out to be closer to the truth (lower growth, higher net return on capital), inheritance could represent a third or even as much as four-tenths of the resources of twenty-first-century cohorts.50

  The fact that the total volume of inheritance has regained the same level as in the past does not mean that it plays the same social role, however. As noted, the very significant deconcentration of wealth (which has seen the top centile’s share decrease by nearly two-thirds in a century from 60 percent in 1910–1920 to just over 20 percent today) and the emergence of a patrimonial middle class imply that there are far fewer very large estates today than there were in the nineteenth century. Concretely, the dowries of 500,000 francs that Père Goriot and César Birotteau sought for their daughters—dowries that yielded an annual rent of 25,000 francs, or 50 times the average annual per capita income of 500 francs at that time—would be equivalent to an estate of 30 million euros today, with a yield in interest, dividends, and rents on the order of 1.5 million euros a year (or 50 times the average per capita income of 30,000 euros).51 Inheritances of this magnitude do exist, as do considerably larger ones, but there are far fewer of them than in the nineteenth century, even though the total volume of wealth and inheritance has practically regained its previous high level.

  Furthermore, no contemporary novelist would fill her plots with estates valued at 30 million euros as Balzac, Austen, and James did. Explicit monetary references vanished from literature after inflation blurred the meaning of the traditional numbers. But more than that, rentiers themselves vanished from literature as well, and the whole social representation of inequality changed as a result. In contemporary fiction, inequalities between social groups appear almost exclusively in the form of disparities with respect to work, wages, and skills. A society structured by the hierarchy of wealth has been replaced by a society whose structure depends almost entirely on the hierarchy of labor and human capital. It is striking, for example, that many recent American TV series feature heroes and heroines laden with degrees and high-level skills, whether to cure serious maladies (House), solve mysterious crimes (Bones), or even to preside over the United States (West Wing). The writers apparently believe that it is best to have several doctorates or even a Nobel Prize. It is not unreasonable to interpret any number of such series as offering a hymn to a just inequality, based on merit, education, and the social utility of elites. Still, certain more recent creations depict a more worrisome inequality, based more clearly on vast wealth. Damages depicts unfeeling big businessmen who have stolen hundreds of millions of dollars from their workers and whose even more selfish spouses want to divorce their husbands without giving up the cash or the swimming pool. In season 3, inspired by the Madoff affair, the children of the crooked financier do everything they can to hold on to their father’s assets, which are stashed in Antigua, in order to maintain their high standard of living.52 In Dirty Sexy Money we see decadent young heirs and heiresses with little merit or virtue living shamelessly on family money. But these are the exceptions that prove the rule, and any character who lives on wealth accumulated in the past is normally depicted in a negative light, if not frankly denounced, whereas such a life is perfectly natural in Austen and Balzac and necessary if there are to be any true feelings among the characters.

  This huge change in the social representation of inequality is in part justified, yet it rests on a number of misunderstandings. First, it is obvious that education plays a more important role today than in the eighteenth century. (In a world where nearly everyone possesses some kind of degree and certain skills, it is not a good idea to go without: it is in everyone’s interest to acquire some skill, even those who stand to inherit substantial wealth, especially since inheritance often comes too late from the standpoint of the heirs.) However, it does not follow that society has become more meritocratic. In particular, it does not follow that the share of national income going to labor has actually increased (as noted, it has not, in any substantial amount), and it certainly does not follow that everyone has access to the same opportunities to acquire skills of every variety. Indeed, inequalities of training have to a large extent simply been translated upward, and there is no evidence that education has really increased intergenerational mobility.53 Nevertheless, the transmission of human capital is always more complicated than the transmission of financial capital or real estate (the heir must make some effort), and this has given rise to a widespread—and partially justified—faith in the idea that the end of inherited wealth has made for a more just society.

  The chief misunderstanding is, I think, the following. First, inheritance did not come to an end: the distribution of inherited capital has changed, which is something else entirely. In France today, there are certainly fewer very large estates—estates of 30 million or even 5 or 10 million euros are less common—than in the nineteenth century. But since the total volume of inherited wealth has almost regained its previous level, it follows that there are many more substantial and even fairly large inheritances: 200,000, 500,000, 1 million, or even 2 million euros. Such bequests, though much too small to allow the beneficiaries to give up all thought of a career and live on the interest, are nevertheless substantial amounts, especially when compared with what much of the population earns over the course of a working lifetime. In other words, we have moved from a society with a small number of very wealthy rentiers to one with a much larger number of less wealthy rentiers: a society of petits rentiers if you will.

  The index that I think is most pertinent for representing this change is presented in Figure 11.11. It is the percentage of individuals in each cohort who inherit (as bequest or gift) amounts larger than the least well paid 50 percent of the population earn in a lifetime. This amount changes over time: at present, the average annual wage of the bottom half of the income distribution is around 15,000 euros, or a total of 750,000 euros over the course of a fifty-year career (including retirement). This is more less what a life at minimum wage brings in. As the figure shows, in the nineteenth century about 10 percent of a cohort inherited amounts greater than this. This proportion fell to barely more than 2 percent for cohorts born in 1910–1920 and 4–5 percent for cohorts born in 1930–1950. According to my estimates, the proportion has already risen to about 12 percent for cohorts born in 1970–1980 and may reach or exceed 15 percent for cohorts born in 2010–2020. In other words, nearly one-sixth of each cohort will receive an inheritance larger than the amount the bottom half of the population earns through labor in a lifetime. (And this group largely coincides with the half of the population that inherits next to nothing.).54 Of course, there is nothing to prevent the inheriting sixth from acquiring diplomas or working and no doubt earning more through work than the bottom half of the income distribution. This is nevertheless a fairly disturbing form of inequality, which is in the process of attaining historically unprecedented heights. It is also more difficult to represent artistically or to correct politically, because it is a commonplace inequality opposing broad segments of the population rather than pitting a small elite against the rest of society.

  FIGURE 11.11. Which fraction of a cohort receives in inheritance the equivalent of a lifetime labor income?

  Within the cohorts born around 1970–1980, 12–14 percent of individuals receive in inheritance the equivalent of the lifetime labor income received by the bottom 50 percent less well paid workers.

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

  The Rentier, Enemy of Democracy
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  Second, there is no guarantee that the distribution of inherited capital will not ultimately become as inegalitarian in the twenty-first century as it was in the nineteenth. As noted in the previous chapter, there is no ineluctable force standing in the way of a return to extreme concentration of wealth, as extreme as in the Belle Époque, especially if growth slows and the return on capital increases, which could happen, for example, if tax competition between nations heats up. If this were to happen, I believe that it would lead to significant political upheaval. Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and effort than on kinship and rents. This belief and this hope play a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. Inequalities must therefore be just and useful to all, at least in the realm of discourse and as far as possible in reality as well. (“Social distinctions can be based only on common utility,” according to article 1 of the 1789 Declaration of the Rights of Man and the Citizen.) In 1893, Emile Durkheim predicted that modern democratic society would not put up for long with the existence of inherited wealth and would ultimately see to it that ownership of property ended at death.55

  It is also significant that the words “rent” and “rentier” took on highly pejorative connotations in the twentieth century. In this book, I use these words in their original descriptive sense, to denote the annual rents produced by a capital asset and the individuals who live on those rents. Today, the rents produced by an asset are nothing other than the income on capital, whether in the form of rent, interest, dividends, profits, royalties, or any other legal category of revenue, provided that such income is simply remuneration for ownership of the asset, independent of any labor. It was in this original sense that the words “rent” and “rentiers” were used in the eighteenth and nineteenth centuries, for example in the novels of Balzac and Austen, at a time when the domination of wealth and its income at the top of the income hierarchy was acknowledged and accepted, at least among the elite. It is striking to observe that this original meaning largely disappeared as democratic and meritocratic values took hold. During the twentieth century, the word “rent” became an insult and a rather abusive one. This linguistic change can be observed everywhere.

  It is particularly interesting to note that the word “rent” is often used nowadays in a very different sense: to denote an imperfection in the market (as in “monopoly rent”), or, more generally, to refer to any undue or unjustified income. At times, one almost has the impression that “rent” has become synonymous with “economic ill.” Rent is the enemy of modern rationality and must be eliminated root and branch by striving for ever purer and more perfect competition. A typical example of this use of the word can be seen in a recent interview that the president of the European Central Bank granted to several major European newspapers a few months after his nomination. When the journalists posed questions about his strategy for resolving Europe’s problems, he offered this lapidary response: “We must fight against rents.”56 No further details were offered. What the central banker had in mind, apparently, was lack of competition in the service sector: taxi drivers, hairdressers, and the like were presumably making too much money.57

  The problem posed by this use of the word “rent” is very simple: the fact that capital yields income, which in accordance with the original meaning of the word we refer to in this book as “annual rent produced by capital,” has absolutely nothing to do with the problem of imperfect competition or monopoly. If capital plays a useful role in the process of production, it is natural that it should be paid. When growth is slow, it is almost inevitable that this return on capital is significantly higher than the growth rate, which automatically bestows outsized importance on inequalities of wealth accumulated in the past. This logical contradiction cannot be resolved by a dose of additional competition. Rent is not an imperfection in the market: it is rather the consequence of a “pure and perfect” market for capital, as economists understand it: a capital market in which each owner of capital, including the least capable of heirs, can obtain the highest possible yield on the most diversified portfolio that can be assembled in the national or global economy. To be sure, there is something astonishing about the notion that capital yields rent, or income that the owner of capital obtains without working. There is something in this notion that is an affront to common sense and that has in fact perturbed any number of civilizations, which have responded in various ways, not always benign, ranging from the prohibition of usury to Soviet-style communism. Nevertheless, rent is a reality in any market economy where capital is privately owned. The fact that landed capital became industrial and financial capital and real estate left this deeper reality unchanged. Some people think that the logic of economic development has been to undermine the distinction between labor and capital. In fact, it is just the opposite: the growing sophistication of capital markets and financial intermediation tends to separate owners from managers more and more and thus to sharpen the distinction between pure capital income and labor income. Economic and technological rationality at times has nothing to do with democratic rationality. The former stems from the Enlightenment, and people have all too commonly assumed that the latter would somehow naturally derive from it, as if by magic. But real democracy and social justice require specific institutions of their own, not just those of the market, and not just parliaments and other formal democratic institutions.

  To recapitulate: the fundamental force for divergence, which I have emphasized throughout this book, can be summed up in the inequality r > g, which has nothing to do with market imperfections and will not disappear as markets become freer and more competitive. The idea that unrestricted competition will put an end to inheritance and move toward a more meritocratic world is a dangerous illusion. The advent of universal suffrage and the end of property qualifications for voting (which in the nineteenth century limited the right to vote to people meeting a minimum wealth requirement, typically the wealthiest 1 or 2 percent in France and Britain in 1820–1840, or about the same percentage of the population as was subject to the wealth tax in France in 2000–2010), ended the legal domination of politics by the wealthy.58 But it did not abolish the economic forces capable of producing a society of rentiers.

  The Return of Inherited Wealth: A European or Global Phenomenon?

  Can our results concerning the return of inherited wealth in France be extended to other countries? In view of the limitations of the available data, it is unfortunately impossible to give a precise answer to this question. There are apparently no other countries with estate records as rich and comprehensive as the French data. Nevertheless, a number of points seem to be well established. First, the imperfect data collected to date for other European countries, especially Germany and Britain, suggest that the U-shaped curve of inheritance flows in France in the twentieth century actually reflects the reality everywhere in Europe (see Figure 11.12).

  FIGURE 11.12. The inheritance flow in Europe, 1900–2010

  The inheritance flow follows a U-shape in curve in France as well as in the United Kingdom and Germany. It is possible that gifts are underestimated in the United Kingdom at the end of the period.

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

  In Germany, in particular, available estimates—unfortunately based on a limited number of years—suggest that inheritance flows collapsed even further than in France following the shocks of 1914–1945, from about 16 percent of national income in 1910 to just 2 percent in 1960. Since then they have risen sharply and steadily, with an acceleration in 1980–1990, until in 2000–2010 they attained a level of 10–11 percent of
national income. This is lower than in France (where the figure for 2010 was about 15 percent of national income), but since Germany started from a lower point in 1950–1960, the rebound of inheritance flows has actually been stronger there. In addition, the current difference between flows in France and Germany is entirely due to the difference in the capital/income ratio (β, presented in Part Two). If total private wealth in Germany were to rise to the same level as in France, the inheritance flows would also equalize (all other things being equal). It is also interesting to note that the strong rebound of inheritance flows in Germany is largely due to a very sharp increase in gifts, just as in France. The annual volume of gifts recorded by the German authorities represented the equivalent of 10–20 percent of the total amount of inheritances before 1970–1980. Thereafter it rose gradually to about 60 percent in 2000–2010. Finally, the smaller inheritance flow in Germany in 1910 was largely a result of more rapid demographic growth north of the Rhine at that time (the “m effect,” as it were). By the same token, because German demographic growth today is stagnant, it is possible that inheritance flows there will exceed those in France in the decades to come.59 Other European countries affected by demographic decline and a falling birthrate, such as Italy and Spain, should obey a similar logic, although we unfortunately have no reliable historical data on inheritance flows in these two cases.

  As for Britain, inheritance flows there at the turn of the twentieth century were approximately the same as in France: 20–25 percent of national income.60 The inheritance flow did not fall as far as in France or Germany after the two world wars, and this seems consistent with the fact that the stock of private wealth was less violently affected (the β effect) and that wealth accumulation was not set back as far (μ effect). The annual inheritance and gift flow fell to about 8 percent of national income in 1950–1960 and to 6 percent in 1970–1980. The rebound since the 1980s has been significant but not as strong as in France or Germany: according to the available data, the inheritance flow in Britain in 2000–2010 was just over 8 percent of national income.