Capital in the Twenty-First Century

by Thomas Piketty

  If this happens, it is likely that the Western countries would find it increasingly difficult to accept the idea of being owned in substantial part by the sovereign wealth funds of the oil states, and sooner or later this would trigger political reactions, such as restrictions on the purchase of real estate and industrial and financial assets by sovereign wealth funds or even partial or total expropriations. Such a reaction would neither be terribly smart politically nor especially effective economically, but it is the kind of response that is within the power of national governments, even of smaller states. Note, moreover, that the petroleum exporting countries themselves have already begun to limit their foreign investments and have begun investing heavily in their own countries to build museums, hotels, universities, and even ski slopes, at times on a scale that seems devoid of economic and financial rationality. It may be that this behavior reflects awareness of the fact that it is harder to expropriate an investment made at home than one made abroad. There is no guarantee, however, that the process will always be peaceful: no one knows the precise location of the psychological and political boundaries that must not be crossed when it comes to the ownership of one country by another.

  Will China Own the World?

  The sovereign wealth funds of non-petroleum-exporting countries raise a different kind of problem. Why would a country with no particular natural resources to speak of decide to own another country? One possibility is of course neocolonial ambitions, a pure will to power, as in the era of European colonialism. But the difference is that in those days the European countries enjoyed a technological advantage that ensured their domination. China and other emerging nonpetroleum countries are growing very rapidly, to be sure, but the evidence suggests that this rapid growth will end once they catch up with the leaders in terms of productivity and standard of living. The diffusion of knowledge and productive technologies is a fundamentally equalizing process: once the less advanced countries catch up with the more advanced, they cease to grow more rapidly.

  In the central scenario for the evolution of the global capital/income ratio that I discussed in Chapter 5, I assumed that the savings rate would stabilize at around 10 percent of national income as this international convergence process neared its end. In that case, the accumulation of capital would attain comparable proportions everywhere. A very large share of the world’s capital stock would of course be accumulated in Asia, and especially China, in keeping with the region’s future share of global output. But according to the central scenario, the capital/income ratio would be the same on all continents, so that there would be no major imbalance between savings and investment in any region. Africa would be the only exception: in the central scenario depicted in Figures 12.4 and 12.5, the capital/income ratio is expected to be lower in Africa than in other continents throughout the twenty-first century (essentially because Africa is catching up economically much more slowly and its demographic transition is also delayed).45 If capital can flow freely across borders, one would expect to see a flow of investments in Africa from other countries, especially China and other Asian nations. For the reasons discussed above, this could give rise to serious tensions, signs of which are already visible.

  FIGURE 12.4. The world capital/income ratio, 1870–2100

  According to the simulations (central scenario), the world capital/income ratio might be near to 700 percent by the end of the twenty-first century.

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

  To be sure, one can easily imagine scenarios much more unbalanced than the central scenario. Nevertheless, the forces of divergence are much less obvious than in the case of the sovereign wealth funds, whose growth depends on windfalls totally disproportionate to the needs of the populations benefiting from them (especially where those populations are tiny). This leads to endless accumulation, which the inequality r > g transforms into a permanent divergence in the global capital distribution. To sum up, petroleum rents might well enable the oil states to buy the rest of the planet (or much of it) and to live on the rents of their accumulated capital.46

  FIGURE 12.5. The distribution of world capital, 1870–2100

  According to the central scenatio, Asian countries should own about half of world capital by the end of the twenty-first century.

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

  China, India, and other emerging countries are different. These countries have large populations whose needs (for both consumption and investment) remain far from satisfied. One can of course imagine scenarios in which the Chinese savings rate would remain persistently above the savings rate in Europe or North America: for example, China might choose a retirement system funded by investments rather than a pay-as-you-go system—a rather tempting choice in a low-growth environment (and even more tempting if demographic growth is negative).47 For example, if China saves 20 percent of its national income until 2100, while Europe and the United States save only 10 percent, then by 2100 a large part of the Old and New Worlds will be owned by enormous Chinese pension funds.48 Although this is logically possible, it is not very plausible, in part because Chinese workers and Chinese society as a whole would no doubt prefer (not without reason) to rely in large part on a public partition system for their retirement (as in Europe and the United States) and in part because of the political considerations already noted in the case of the petroleum exporting countries and their sovereign wealth funds, which would apply with equal force to Chinese pension funds.

  International Divergence, Oligarchic Divergence

  In any case, this threat of international divergence owing to a gradual acquisition of the rich countries by China (or by the petroleum exporters’ sovereign wealth funds) seems less credible and dangerous than an oligarchic type of divergence, that is, a process in which the rich countries would come to be owned by their own billionaires or, more generally, in which all countries, including China and the petroleum exporters, would come to be owned more and more by the planet’s billionaires and multimillionaires. As noted, this process is already well under way. As global growth slows and international competition for capital heats up, there is every reason to believe that r will be much greater than g in the decades ahead. If we add to this the fact that the return on capital increases with the size of the initial endowment, a phenomenon that may well be reinforced by the growing complexity of global financial markets, then clearly all the ingredients are in place for the top centile and thousandth of the global wealth distribution to pull farther and farther ahead of the rest. To be sure, it is quite difficult to foresee how rapidly this oligarchic divergence will occur, but the risk seems much greater than the risk of international divergence.49

  In particular, it is important to stress that the currently prevalent fears of growing Chinese ownership are a pure fantasy. The wealthy countries are in fact much wealthier than they sometimes think. The total real estate and financial assets net of debt owned by European households today amount to some 70 trillion euros. By comparison, the total assets of the various Chinese sovereign wealth funds plus the reserves of the Bank of China represent around 3 trillion euros, or less than one-twentieth the former amount.50 The rich countries are not about to be taken over by the poor countries, which would have to get much richer to do anything of the kind, and that will take many more decades.

  What, then, is the source of this fear, this feeling of dispossession, which is partly irrational? Part of the reason is no doubt the universal tendency to look elsewhere for the source of domestic difficulties. For example, many people in France believe that rich foreign buyers are responsible for the skyrocketing price of Paris real estate. When one looks closely at who is buying what type of apartment, however, one finds that the increase in the number of foreign (or foreign-resident) buyers can explain barely 3 percent of the price increase. In other words, 97 percent of today’s very high real estate prices are due to the fact that there are enough French buyers residing in France who are prosperous enoug
h to pay such large amounts for property.51

  To my mind, this feeling of dispossession is due primarily to the fact that wealth is very highly concentrated in the rich countries (so that for much of the population, capital is an abstraction) and the process of the political secession of the largest fortunes is already well under way. For most people living in the wealthy countries, of Europe especially, the idea that European households own 20 times as much capital as China is rather hard to grasp, especially since this wealth is private and cannot be mobilized by governments for public purposes such as aiding Greece, as China helpfully proposed not long ago. Yet this private European wealth is very real, and if the governments of the European Union decided to tap it, they could. But the fact is that it is very difficult for any single government to regulate or tax capital and the income it generates. The main reason for the feeling of dispossession that grips the rich countries today is this loss of democratic sovereignty. This is especially true in Europe, whose territory is carved up into small states in competition with one another for capital, which aggravates the whole process. The very substantial increase in gross foreign asset positions (with each country owning a larger and larger stake in its neighbors, as discussed in Chapter 5) is also part of this process, and contributes to the sense of helplessness.

  In Part Four I will show how useful a tool a global (or if need be European) tax on capital would be for overcoming these contradictions, and I will also consider what other government responses might be possible. To be clear, oligarchic divergence is not only more probable than international divergence, it is also much more difficult to combat, because it demands a high degree of international coordination among countries that are ordinarily engaged in competition with one another. The secession of wealth tends, moreover, to obscure the very idea of nationality, since the wealthiest individuals can to some extent take their money and change their nationality, cutting all ties to their original community. Only a coordinated response at a relatively broad regional level can overcome this difficulty.

  Are the Rich Countries Really Poor?

  Another point that needs to be emphasized is that a substantial fraction of global financial assets is already hidden away in various tax havens, thus limiting our ability to analyze the geographic distribution of global wealth. To judge by official statistics alone (relying on national data collated by international organizations such as the IMF), it would seem that the net asset position of the wealthy countries vis-à-vis the rest of the world is negative. As noted in Part Two, Japan and Germany are in substantial surplus relative to the rest of the world (meaning that their households, firms, and governments own a lot more foreign assets than the rest of the world owns of their assets), which reflects the fact that they have been running large trade surpluses in recent decades. But the net position of the United States is negative, and that of most European countries other than Germany is close to zero, if not in the red.52 All told, when one adds up the positions of all the wealthy countries, one is left with a slightly negative position, equivalent to about −4 percent of global GDP in 2010, compared with close to zero in the mid-1980s, as Figure 12.6 shows.53 It is important to recognize, however, that it is a very slightly negative position (amounting to just 1 percent of global wealth). In any case, as I have already discussed at length, we are living in a time when international positions are relatively balanced, at least when compared with the colonial period, when the rich countries enjoyed a much larger positive position with respect to the rest of the world.54

  Of course this slightly negative official position should in principle be counterbalanced by an equivalent positive position for the rest of the world. In other words, the poor countries should own more assets in the rich countries than vice versa, with a surplus on the order of 4 percent of global GDP (or 1 percent of global wealth) in their favor. In fact, this is not the case: if one adds up the financial statistics for the various countries of the world, one finds that the poor countries also have a negative position and that the world as a whole is in a substantially negative situation. It seems, in other words, that Earth must be owned by Mars. This is a fairly old “statistical anomaly,” but according to various international organizations it has gotten worse in recent years. (The global balance of payments is regularly negative: more money leaves countries than enters them, which is theoretically impossible.) No real explanation of this phenomenon has been forthcoming. Note that these financial statistics and balance-of-payments data in theory cover the entire world. In particular, banks in the tax havens are theoretically required to report their accounts to international institutions. The “anomaly” can presumably be explained by various statistical biases and measurement errors.

  FIGURE 12.6. The net foreign asset position of rich countries

  Unregistered financial assets held in tax havens are higher than the official net foreign debt of rich countries.

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

  By comparing all the available sources and exploiting previously unused Swiss bank data, Gabriel Zucman was able to show that the most plausible reason for the discrepancy is that large amounts of unreported financial assets are held in tax havens. By his cautious estimate, these amount to nearly 10 percent of global GDP.55 Certain nongovernmental organizations have proposed even larger estimates (up to 2 or 3 times larger). Given the current state of the available sources, I believe that Zucman’s estimate is slightly more realistic, but such estimates are by nature uncertain, and it is possible that Zucman’s is a lower bound.56 In any event, the important fact is that this lower bound is already extremely high. In particular, it is more than twice as large as the official negative net position of the combined rich countries (see Figure 12.6).57 Now, all the evidence indicates that the vast majority (at least three-quarters) of the financial assets held in tax havens belongs to residents of the rich countries. The conclusion is obvious: the net asset position of the rich countries relative to the rest of the world is in fact positive (the rich countries own on average more than the poor countries and not vice versa, which ultimately is not very surprising), but this is masked by the fact that the wealthiest residents of the rich countries are hiding some of their assets in tax havens. In particular, this implies that the very sharp increase in private wealth (relative to national income) in the rich countries in recent decades is actually even larger than we estimated on the basis of official accounts. The same is true of the upward trend of the share of large fortunes in total wealth.58 Indeed, this shows how difficult it is to track assets in the globalized capitalism of the early twenty-first century, thus blurring our picture of the basic geography of wealth.

  PART FOUR

  REGULATING CAPITAL IN THE TWENTY-FIRST CENTURY

  {THIRTEEN}

  A Social State for the Twenty-First Century

  In the first three parts of this book, I analyzed the evolution of the distribution of wealth and the structure of inequality since the eighteenth century. From this analysis I must now try to draw lessons for the future. One major lesson is already clear: it was the wars of the twentieth century that, to a large extent, wiped away the past and transformed the structure of inequality. Today, in the second decade of the twenty-first century, inequalities of wealth that had supposedly disappeared are close to regaining or even surpassing their historical highs. The new global economy has brought with it both immense hopes (such as the eradication of poverty) and equally immense inequities (some individuals are now as wealthy as entire countries). Can we imagine a twenty-first century in which capitalism will be transcended in a more peaceful and more lasting way, or must we simply await the next crisis or the next war (this time truly global)? On the basis of the history I have brought to light here, can we imagine political institutions that might regulate today’s global patrimonial capitalism justly as well as efficiently?

  As I have already noted, the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics
of accumulation would be a progressive global tax on capital. Such a tax would also have another virtue: it would expose wealth to democratic scrutiny, which is a necessary condition for effective regulation of the banking system and international capital flows. A tax on capital would promote the general interest over private interests while preserving economic openness and the forces of competition. The same cannot be said of various forms of retreat into national or other identities, which may well be the alternative to this ideal policy. But a truly global tax on capital is no doubt a utopian ideal. Short of that, a regional or continental tax might be tried, in particular in Europe, starting with countries willing to accept such a tax. Before I come to that, I must first reexamine in a much broader context the question of a tax on capital (which is of course only one component of an ideal social and fiscal system). What is the role of government in the production and distribution of wealth in the twenty-first century, and what kind of social state is most suitable for the age?