Capital in the Twenty-First Century

by Thomas Piketty

  Between 1987 and 2013, the share of the top 1/20 million fractile rose from 0.3 percent to 0.9 percent of world wealth, and the share of the top 1/100 million fractile rose from 0.1 percent to 0.4 percent.

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

  Can this conclusion perhaps be extended to broader segments of the global wealth distribution, in which case the divergence would occur much more rapidly? The first problem with the Forbes and other magazine rankings is that they list too few people to be truly significant in macroeconomic terms. Regardless of the rapid rates of divergence and the extreme size of certain individual fortunes, the data pertain to only a few hundred or at most a few thousand individuals, who at the present time represent only a little over 1 percent of global wealth.6 This leaves out nearly 99 percent of global capital, which is unfortunate.7

  From Rankings of Billionaires to “Global Wealth Reports”

  To proceed further and estimate the shares of the top decile, centile, and thousandth of the global wealth hierarchy, we need to use fiscal and statistical sources of the type I relied on in Chapter 10. There I showed that inequality of wealth has been trending upward in all the rich countries since 1980–1990, so it would not be surprising to discover that the same was true at the global level. Unfortunately, the available sources are marred by numerous approximations. (We may be underestimating the upward trend in the rich countries, and the statistics from many of the emerging countries are so inadequate, in part owing to the absence of any system of progressive taxation worthy of the name, that one hesitates to use them.) Hence it is quite difficult at present to arrive at anything close to a precise estimate of the evolving shares of the top decile, centile, and thousandth in global wealth.

  For some years now, a number of international financial institutions have attempted to respond to growing social demand for information on these issues by trying to extend the magazine rankings and publishing “global wealth reports” that include more than just billionaires. In particular, since 2010, Crédit Suisse, one of the leading Swiss banks, has published an ambitious annual report on the global distribution of wealth covering the entire population of the planet.8 Other banks, brokerages, and insurance companies (Merrill Lynch, Allianz, etc.) have specialized in the study of the world’s millionaires (the famous HNWI, or “high net worth individuals”). Every institution wants its own report, preferably on glossy paper. It is of course ironic to see institutions that make much of their money by managing fortunes filling the role of government statistical agencies by seeking to produce objective information about the global distribution of wealth. It is also important to note that these reports must often rely on heroic hypotheses and approximations, not all of them convincing, in order to arrive at anything like a “global” view of wealth. In any case, they rarely cover anything more than the past few years, a decade at most, and are unfortunately useless for studying long-term evolutions or even reliably detecting trends in global inequality, given the extremely piecemeal nature of the data used.9

  Like the Forbes and similar rankings, these reports have, if nothing else, the merit of existing, and the absence of anything better points up the failure of national and international agencies—and most economists—to play the role they ought to be playing. Democratic transparency requires it: in the absence of reliable information about the global distribution of wealth, it is possible to say anything and everything and to feed fantasies of all kinds. Imperfect as they are, and until better information comes along, these reports can at least impose some discipline on public debate.10

  If we adopt the same global approach as these reports and compare the various available estimates, we come to the following approximate conclusion: global inequality of wealth in the early 2010s appears to be comparable in magnitude to that observed in Europe in 1900–1910. The top thousandth seems to own nearly 20 percent of total global wealth today, the top centile about 50 percent, and the top decile somewhere between 80 and 90 percent. The bottom half of the global wealth distribution undoubtedly owns that less than 5 percent of total global wealth.

  Concretely, the wealthiest 0.1 percent of people on the planet, some 4.5 million out of an adult population of 4.5 billion, apparently possess fortunes on the order of 10 million euros on average, or nearly 200 times average global wealth of 60,000 euros per adult, amounting in aggregate to nearly 20 percent of total global wealth. The wealthiest 1 percent—45 million people out of 4.5 billion—have about 3 million euros apiece on average (broadly speaking, this group consists of those individuals whose personal fortunes exceed 1 million euros). This is about 50 times the size of the average global fortune, or 50 percent of total global wealth in aggregate.

  Bear in mind that these estimates are highly uncertain (including the figures given for total and average global wealth). Even more than most of the statistics cited in this book, these numbers should be taken simply as orders of magnitude, useful only for focusing one’s thoughts.11

  Note, too, that this very high concentration of wealth, significantly higher than is observed within countries, stems in large part from international inequalities. The average global fortune is barely 60,000 euros per adult, so that many people in the developed countries, including members of the “patrimonial middle class,” seem quite wealthy in terms of the global wealth hierarchy. For the same reason, it is by no means certain that inequalities of wealth are actually increasing at the global level: as the poorer countries catch up with the richer ones, catch-up effects may for the moment outweigh the forces of divergence. The available data do not allow for a clear answer at this point.12

  The information at our disposal suggests, however, that the forces of divergence at the top of the global wealth hierarchy are already very powerful. This is true not only for the billion-dollar fortunes in the Forbes ranking but probably also for smaller fortunes of 10–100 million euros. This is a much larger group of people: the top thousandth (a group of 4.5 million individuals with an average fortune of 10 million euros) owns about 20 percent of global wealth, which is much more than the 1.5 percent owned by the Forbes billionaires.13 It is therefore essential to understand the magnitude of the divergence mechanism acting on this group, which depends in particular on unequal returns to capital in portfolios of this size. This will determine whether divergence at the top is sufficiently powerful to overcome the force of international catch-up. Is the divergence process occurring solely among billionaires, or is it also affecting the groups immediately below?

  For example, if the top thousandth enjoy a 6 percent rate of return on their wealth, while average global wealth grows at only 2 percent a year, then after thirty years the top thousandth’s share of global capital will have more than tripled. The top thousandth would then own 60 percent of global wealth, which is hard to imagine in the framework of existing political institutions unless there is a particularly effective system of repression or an extremely powerful apparatus of persuasion, or perhaps both. Even if the top thousandth’s capital returned only 4 percent a year, their share would still practically double in thirty years to nearly 40 percent. Once again, the force for divergence at the top of the wealth hierarchy would win out over the global forces of catch-up and convergence, so that the shares of the top decile and centile would increase significantly, with a large upward redistribution from the middle and upper-middle classes to the very rich. Such an impoverishment of the middle class would very likely trigger a violent political reaction. It is of course impossible at this stage to be certain that such a scenario is about to unfold. But it is important to realize that the inequality r > g, amplified by inequality in the returns on capital as a function of initial portfolio size, can potentially give rise to a global dynamic of accumulation and distribution of wealth characterized by explosive trajectories and uncontrolled inegalitarian spirals. As we will see, only a progressive tax on capital can effectively impede such a dynamic.

  Heirs and Entrepreneurs in the Wealth Rankings


  One of the most striking lessons of the Forbes rankings is that, past a certain threshold, all large fortunes, whether inherited or entrepreneurial in origin, grow at extremely high rates, regardless of whether the owner of the fortune works or not. To be sure, one should be careful not to overestimate the precision of the conclusions one can draw from these data, which are based on a small number of observations and collected in a somewhat careless and piecemeal fashion. The fact is nevertheless interesting.

  Take a particularly clear example at the very top of the global wealth hierarchy. Between 1990 and 2010, the fortune of Bill Gates—the founder of Microsoft, the world leader in operating systems, and the very incarnation of entrepreneurial wealth and number one in the Forbes rankings for more than ten years—increased from $4 billion to $50 billion.14 At the same time, the fortune of Liliane Bettencourt—the heiress of L’Oréal, the world leader in cosmetics, founded by her father Eugène Schueller, who in 1907 invented a range of hair dyes that were destined to do well in a way reminiscent of César Birotteau’s success with perfume a century earlier—increased from $2 billion to $25 billion, again according to Forbes.15 Both fortunes thus grew at an annual rate of more than 13 percent from 1990 to 2010, equivalent to a real return on capital of 10 or 11 percent after correcting for inflation.

  In other words, Liliane Bettencourt, who never worked a day in her life, saw her fortune grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has incidentally continued to grow just as rapidly since he stopped working. Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size. Note, in particular, that once a fortune passes a certain threshold, size effects due to economies of scale in the management of the portfolio and opportunities for risk are reinforced by the fact that nearly all the income on this capital can be plowed back into investment. An individual with this level of wealth can easily live magnificently on an amount equivalent to only a few tenths of percent of his capital each year, and he can therefore reinvest nearly all of his income.16 This is a basic but important economic mechanism, with dramatic consequences for the long-term dynamics of accumulation and distribution of wealth. Money tends to reproduce itself. This stark reality did not escape the notice of Balzac, who describes the irresistible rise of his pasta manufacturer in the following terms: “Citizen Goriot amassed the capital that would later allow him to do business with all the superiority that a great sum of money bestows on the person who possesses it.”17

  Note, too, that Steve Jobs, who even more than Bill Gates is the epitome of the admired and talented entrepreneur who fully deserves his fortune, was worth only about $8 billion in 2011, at the height of his glory and the peak of Apple’s stock price. That is just one-sixth as wealthy as Microsoft’s founder (even though many observers judge Gates to have been less innovative than Jobs) and one-third as wealthy as Liliane Bettencourt. The Forbes rankings list dozens of people with inherited fortunes larger than Jobs’s. Obviously wealth is not just a matter of merit. The reason for this is the simple fact that the return on inherited fortunes is often very high solely because of their initial size.

  It is unfortunately impossible to proceed further with this type of investigation, because the Forbes data are far too limited to allow for systematic and robust analysis (in contrast to the data on university endowments that I will turn to next). In particular, the methods used by Forbes and other magazines significantly underestimate the size of inherited fortunes. Journalists do not have access to comprehensive tax or other government records that would allow them to report more accurate figures. They do what they can to collect information from a wide variety of sources. By telephone and e-mail they gather data not available elsewhere, but these data are not always very reliable. There is nothing inherently wrong with such a pragmatic approach, which is inevitable when governments fail to collect this kind of information properly, for example, by requiring annual declarations of wealth, which would serve a genuinely useful public purpose and could be largely automated with the aid of modern technology. But it is important to be aware of the consequences of the magazines’ haphazard methods. In practice, the journalists begin with data on large publicly traded corporations and compile lists of their stockholders. By its very nature, such an approach makes it far more difficult to measure the size of inherited fortunes (which are often invested in diversified portfolios) as compared with entrepreneurial or other nascent fortunes (which are generally more concentrated in a single firm).

  For the largest inherited fortunes, on the order of tens of billions of dollars or euros, one can probably assume that most of the money remains invested in the family firm (as is the case with the Bettencourt family with L’Oréal and the Walton family with Walmart in the United States). If so, then the size of these fortunes is as easy to measure as the wealth of Bill Gates or Steve Jobs. But this is probably not true at all levels: as we move down the list into the $1–10 billion range (and according to Forbes, several hundred new fortunes appear in this range somewhere in the world almost every year), or even more into the $10–$100 million range, it is likely that many inherited fortunes are held in diversified portfolios, in which case they are difficult for journalists to detect (especially since the individuals involved are generally far less eager to be known publicly than entrepreneurs are). Because of this straightforward statistical bias, wealth rankings inevitably tend to underestimate the size of inherited fortunes.

  Some magazines, such as Challenges in France, state openly that their goal is simply to catalog so-called business-related fortunes, that is, fortunes consisting primarily of the stock of a particular company. Diversified portfolios do not interest them. The problem is that it is difficult to find out what their definition of a “business-related fortune” is. How is the ownership threshold defined, that is, when does a portfolio cease being considered diversified and begin to be seen as representing a controlling stake? Does it depend on the size of the company, and if so, how is this decided? In fact, the criteria for inclusion seem thoroughly pragmatic. First, journalists need to have heard of the fortune. Then it has to meet certain criteria: for Forbes, to be worth more than a billion dollars; for Challenges and magazines in many other countries, to be among the five hundred wealthiest people in the country. Such pragmatism is understandable, but such a haphazard sampling method obviously raises serious problems when it comes to international or intertemporal comparison. Furthermore, the magazine rankings are never very clear about the unit of observation: in principle it is the individual, but sometimes entire family groups are counted as a single fortune, which creates a bias in the other direction, because it tends to exaggerate the size of large fortunes. Clearly, this is not a very robust basis for studying the delicate question of the role of inheritance in capital formation or the evolution of inequalities of wealth.18

  Furthermore, the magazines often exhibit a rather obvious ideological bias in favor of entrepreneurs and do not bother to hide their wish to celebrate them, even if it means exaggerating their importance. It is no insult to Forbes to observe that it can often be read, and even presents itself as, an ode to the entrepreneur and the usefulness of merited wealth. The owner of the magazine, Steve Forbes, himself a billionaire and twice an unsuccessful candidate for the presidential nomination of the Republican Party, is nevertheless an heir: it was his grandfather who founded the magazine in 1917, establishing the Forbes family fortune, which he subsequently increased. The magazine’s rankings sometimes break billionaires down into three groups: pure entrepreneurs, pure heirs, and heirs who subsequently “grow their wealth.” According to Forbes’s own data, each of these three groups represents about a third of the total, although the magazine also says that the number of pure heirs is decreasing and that of partial heirs increasing. The problem is that Forbes has never given a precise definition of these groups (in particular of the exact boundary between “pure” and “par
tial”), and the amount of inherited wealth is never specified.19 Under these conditions, it is quite difficult to reach any precise conclusions about this possible trend.

  In view of all these difficulties, what can we say about the respective numbers of heirs and entrepreneurs among the largest fortunes? If we include both the pure and partial heirs in the Forbes rankings (and assume that half of the wealth of the latter is inherited), and if we allow for the methodological biases that lead to underestimating the size of inherited fortunes, it seems fairly clear that inherited wealth accounts for more than half of the total amount of the largest fortunes worldwide. An estimate of 60–70 percent seems fairly realistic a priori, and this is a level markedly lower than that observed in France in the Belle Époque (80–90 percent). This might be explained by the currently high global growth rate, which would imply that new fortunes from the emerging countries are rapidly being added to the rankings. But this is a hypothesis, not a certainty.

  The Moral Hierarchy of Wealth

  In any case, I think there is an urgent need to move beyond the often sterile debate about merit and wealth, which is ill conceived. No one denies that it is important for society to have entrepreneurs, inventions, and innovations. There were many innovations in the Belle Époque, such as the automobile, movies, and electricity, just as there are many today. The problem is simply that the entrepreneurial argument cannot justify all inequalities of wealth, no matter how extreme. The inequality r > g, combined with the inequality of returns on capital as a function of initial wealth, can lead to excessive and lasting concentration of capital: no matter how justified inequalities of wealth may be initially, fortunes can grow and perpetuate themselves beyond all reasonable limits and beyond any possible rational justification in terms of social utility.