Capital in the Twenty-First Century

by Thomas Piketty

  The second sentence of article 1 of the Declaration of the Rights of Man of 1789 formulates a kind of answer to this question, since it in a sense reverses the burden of proof: equality is the norm, and inequality is acceptable only if based on “common utility.” It remains to define the term “common utility.” The drafters of the Declaration were thinking mainly of the abolition of the orders and privileges of the Ancien Régime, which were seen at the time as the very epitome of arbitrary, useless inequality, hence as not contributing to “common utility.” One can interpret the phrase more broadly, however. One reasonable interpretation is that social inequalities are acceptable only if they are in the interest of all and in particular of the most disadvantaged social groups.20 Hence basic rights and material advantages must be extended insofar as possible to everyone, as long as it is in the interest of those who have the fewest rights and opportunities to do so.21 The “difference principle” introduced by the US philosopher John Rawls in his Theory of Justice is similar in intent.22 And the “capabilities” approach favored by the Indian economist Amartya Sen is not very different in its basic logic.23

  At a purely theoretical level, there is in fact a certain (partly artificial) consensus concerning the abstract principles of social justice. The disagreements become clearer when one tries to give a little substance to these social rights and inequalities and to anchor them in specific historical and economic contexts. In practice, the conflicts have to do mainly with the means of effecting real improvement in the living conditions of the least advantaged, the precise extent of the rights that can be granted to all (in view of economic and budgetary constraints and the many related uncertainties), and exactly what factors are within and beyond the control of individuals (where does luck end and where do effort and merit begin?). Such questions will never be answered by abstract principles or mathematical formulas. The only way to answer them is through democratic deliberation and political confrontation. The institutions and rules that govern democratic debate and decision-making therefore play a central role, as do the relative power and persuasive capabilities of different social groups. The US and French Revolutions both affirmed equality of rights as an absolute principle—a progressive stance at that time. But in practice, during the nineteenth century, the political systems that grew out of those revolutions concentrated mainly on the protection of property rights.

  Modernizing Rather Than Dismantling the Social State

  Modern redistribution, as exemplified by the social states constructed by the wealthy countries in the twentieth century, is based on a set of fundamental social rights: to education, health, and retirement. Whatever limitations and challenges these systems of taxation and social spending face today, they nevertheless marked an immense step forward in historical terms. Partisan conflict aside, a broad consensus has formed around these social systems, particularly in Europe, which remains deeply attached to what is seen as a “European social model.” No major movement or important political force seriously envisions a return to a world in which only 10 or 20 percent of national income would go to taxes and government would be pared down to its regalian functions.24

  On the other hand, there is no significant support for continuing to expand the social state at its 1930–1980 growth rate (which would mean that by 2050–2060, 70–80 percent of national income would go to taxes). In theory, of course, there is no reason why a country cannot decide to devote two-thirds or three-quarters of its national income to taxes, assuming that taxes are collected in a transparent and efficient manner and used for purposes that everyone agrees are of high priority, such as education, health, culture, clean energy, and sustainable development. Taxation is neither good nor bad in itself. Everything depends on how taxes are collected and what they are used for. There are nevertheless two good reasons to believe that such a drastic increase in the size of the social state is neither realistic nor desirable, at least for the foreseeable future.

  First, the very rapid expansion of the role of government in the three decades after World War II was greatly facilitated and accelerated by exceptionally rapid economic growth, at least in continental Europe.25 When incomes are increasing 5 percent a year, it is not too difficult to get people to agree to devote an increasing share of that growth to social spending (which therefore increases more rapidly than the economy), especially when the need for better education, more health care, and more generous pensions is obvious (given the very limited funds allocated for these purposes from 1930 to 1950). The situation has been very different since the 1980s: with per capita income growth of just over 1 percent a year, no one wants large and steady tax increases, which would mean even slower if not negative income growth. Of course it is possible to imagine a redistribution of income via the tax system or more progressive tax rates applied to a more or less stable total income, but it is very difficult to imagine a general and durable increase in the average tax rate. The fact that tax revenues have stabilized in all the rich countries, notwithstanding national differences and changes of government, is no accident (see Figure 13.1). Furthermore, it is by no means certain that social needs justify ongoing tax increases. To be sure, there are objectively growing needs in the educational and health spheres, which may well justify slight tax increases in the future. But the citizens of the wealthy countries also have a legitimate need for enough income to purchase all sorts of goods and services produced by the private sector—for instance, to travel, buy clothing, obtain housing, avail themselves of new cultural services, purchase the latest tablet, and so on. In a world of low productivity growth, on the order of 1–1.5 percent (which is in fact a decent rate of growth over the long term), society has to choose among different types of needs, and there is no obvious reason to think that nearly all needs should by paid for through taxation.

  Furthermore, no matter how the proceeds of growth are allocated among different needs, there remains the fact that once the public sector grows beyond a certain size, it must contend with serious problems of organization. Once again, it is hard to foresee what will happen in the very long run. It is perfectly possible to imagine that new decentralized and participatory forms of organization will be developed, along with innovative types of governance, so that a much larger public sector than exists today can be operated efficiently. The very notion of “public sector” is in any case reductive: the fact that a service is publicly financed does not mean that it is produced by people directly employed by the state or other public entities. In education and health, services are provided by many kinds of organizations, including foundations and associations, which are in fact intermediate forms between the state and private enterprise. All told, education and health account for 20 percent of employment and GDP in the developed economies, which is more than all sectors of industry combined. This way of organizing production is durable and universal. For example, no one has proposed transforming private US universities into publicly owned corporations. It is perfectly possible that such intermediary forms will become more common in the future, for example, in the cultural and media sectors, where profit-making corporations already face serious competition and raise concerns about potential conflicts of interest. As I showed earlier when discussing how capitalism is organized in Germany, the notion of private property can vary from country to country, even in the automobile business, one of the most traditional branches of industry. There is no single variety of capitalism or organization of production in the developed world today: we live in a mixed economy, different to be sure from the mixed economy that people envisioned after World War II but nonetheless quite real. This will continue to be true in the future, no doubt more than ever: new forms of organization and ownership remain to be invented.

  That said, before we can learn to efficiently organize public financing equivalent to two-thirds to three-quarters of national income, it would be good to improve the organization and operation of the existing public sector, which represents only half of national income (including replacement a
nd transfer payments)—no small affair. In Germany, France, Italy, Britain, and Sweden, debates about the social state in the decades to come will revolve mainly around issues of organization, modernization, and consolidation: if total taxes and social spending remain more or less unchanged in proportion to national income (or perhaps rise slightly in response to growing needs), how can we improve the operation of hospitals and day care centers, adjust doctors’ fees and drug costs, reform universities and primary schools, and revise pension and unemployment benefits in response to changing life expectancies and youth unemployment rates? At a time when nearly half of national income goes to public spending, such debates are legitimate and even indispensable. If we do not constantly ask how to adapt our social services to the public’s needs, the consensus supporting high levels of taxation and therefore the social state may not last forever.

  Obviously, an analysis of the prospects for reform of all aspects of the social state would far exceed the scope of this book. I will therefore confine myself to a few issues of particular importance for the future and directly related to the themes of my work: first, the question of equal access to education, and especially higher education, and second, the future of pay-as-you-go retirement systems in a world of low growth.

  Do Educational Institutions Foster Social Mobility?

  In all countries, on all continents, one of the main objectives of public spending for education is to promote social mobility. The stated goal is to provide access to education for everyone, regardless of social origin. To what extent do existing institutions fulfill this objective?

  In Part Three, I showed that even with the considerable increase in the average level of education over the course of the twentieth century, earned income inequality did not decrease. Qualification levels shifted upward: a high school diploma now represents what a grade school certificate used to mean, a college degree what a high school diploma used to stand for, and so on. As technologies and workplace needs changed, all wage levels increased at similar rates, so that inequality did not change. What about mobility? Did mass education lead to more rapid turnover of winners and losers for a given skill hierarchy? According to the available data, the answer seems to be no: the intergenerational correlation of education and earned incomes, which measures the reproduction of the skill hierarchy over time, shows no trend toward greater mobility over the long run, and in recent years mobility may even have decreased.26 Note, however, that it is much more difficult to measure mobility across generations than it is to measure inequality at a given point in time, and the sources available for estimating the historical evolution of mobility are highly imperfect.27 The most firmly established result in this area of research is that intergenerational reproduction is lowest in the Nordic countries and highest in the United States (with a correlation coefficient two-thirds higher than in Sweden). France, Germany, and Britain occupy a middle ground, less mobile than northern Europe but more mobile than the United States.28

  These findings stand in sharp contrast to the belief in “American exceptionalism” that once dominated US sociology, according to which social mobility in the United States was exceptionally high compared with the class-bound societies of Europe. No doubt the settler society of the early nineteenth century was more mobile. As I have shown, moreover, inherited wealth played a smaller role in the United States than in Europe, and US wealth was for a long time less concentrated, at least up to World War I. Throughout most of the twentieth century, however, and still today, the available data suggest that social mobility has been and remains lower in the United States than in Europe.

  One possible explanation for this is the fact that access to the most elite US universities requires the payment of extremely high tuition fees. Furthermore, these fees rose sharply in the period 1990–2010, following fairly closely the increase in top US incomes, which suggests that the reduced social mobility observed in the United States in the past will decline even more in the future.29 The issue of unequal access to higher education is increasingly a subject of debate in the United States. Research has shown that the proportion of college degrees earned by children whose parents belong to the bottom two quartiles of the income hierarchy stagnated at 10–20 percent in 1970–2010, while it rose from 40 to 80 percent for children with parents in the top quartile.30 In other words, parents’ income has become an almost perfect predictor of university access.

  This inequality of access also seems to exist at the top of the economic hierarchy, not only because of the high cost of attending the most prestigious private universities (high even in relation to the income of upper-middle-class parents) but also because admissions decisions clearly depend in significant ways on the parents’ financial capacity to make donations to the universities. For example, one study has shown that gifts by graduates to their former universities are strangely concentrated in the period when the children are of college age.31 By comparing various sources of data, moreover, it is possible to estimate that the average income of the parents of Harvard students is currently about $450,000, which corresponds to the average income of the top 2 percent of the US income hierarchy.32 Such a finding does not seem entirely compatible with the idea of selection based solely on merit. The contrast between the official meritocratic discourse and the reality seems particularly extreme in this case. The total absence of transparency regarding selection procedures should also be noted.33

  It would be wrong, however, to imagine that unequal access to higher education is a problem solely in the United States. It is one of the most important problems that social states everywhere must face in the twenty-first century. To date, no country has come up with a truly satisfactory response. To be sure, university tuitions fees are much lower in Europe if one leaves Britain aside.34 In other countries, including Sweden and other Nordic countries, Germany, France, Italy, and Spain, tuition fees are relatively low (less than 500 euros). Although there are exceptions, such as business schools and Sciences Po in France, and although the situation is changing rapidly, this remains a very striking difference between continental Europe and the United States: in Europe, most people believe that access to higher education should be free or nearly free, just as primary and secondary education are.35 In Quebec, the decision to raise tuition gradually from $2,000 to nearly $4,000 was interpreted as an attempt to move toward an inegalitarian US-style system, which led to a student strike in the winter of 2012 and ultimately to a change of government and cancellation of the decision.

  It would be naïve, however, to think that free higher education would resolve all problems. In 1964, Pierre Bourdieu and Jean-Claude Passeron analyzed, in Les héritiers, more subtle mechanisms of social and cultural selection, which often do the same work as financial selection. In practice, the French system of “grandes écoles” leads to spending more public money on students from more advantaged social backgrounds, while less money is spent on university students who come from more modest backgrounds. Again, the contrast between the official discourse of “republican meritocracy” and the reality (in which social spending amplifies inequalities of social origin) is extreme.36 According to the available data, it seems that the average income of parents of students at Sciences Po is currently around 90,000 euros, which roughly corresponds to the top 10 percent of the French income hierarchy. Recruitment is thus 5 times broader than at Harvard but still relatively limited.37 We lack the data to do a similar calculation for students at the other grandes écoles, but the results would likely be similar.

  Make no mistake: there is no easy way to achieve real equality of opportunity in higher education. This will be a key issue for the social state in the twenty-first century, and the ideal system has yet to be invented. Tuition fees create an unacceptable inequality of access, but they foster the independence, prosperity, and energy that make US universities the envy of the world.38 In the abstract, it should be possible to combine the advantages of decentralization with those of equal access by providing universities with substantial public
ly financed incentives. In some respects this is what public health insurance systems do: producers (doctors and hospitals) are granted a certain independence, but the cost of care is a collective responsibility, thus ensuring that patients have equal access to the system. One could do the same thing with universities and students. The Nordic countries have adopted a strategy of this kind in higher education. This of course requires substantial public financing, which is not easy to come by in the current climate of consolidation of the social state.39 Such a strategy is nevertheless far more satisfactory than other recent attempts, which range from charging tuition fees that vary with parents’ income40 to offering loans that are to be paid back by a surtax added to the recipient’s income tax.41

  If we are to make progress on these issues in the future, it would be good to begin by working toward greater transparency than exists today. In the United States, France, and most other countries, talk about the virtues of the national meritocratic model is seldom based on close examination of the facts. Often the purpose is to justify existing inequalities while ignoring the sometimes patent failures of the current system. In 1872, Emile Boutmy created Sciences Po with a clear mission in mind: “obliged to submit to the rule of the majority, the classes that call themselves the upper classes can preserve their political hegemony only by invoking the rights of the most capable. As traditional upper-class prerogatives crumble, the wave of democracy will encounter a second rampart, built on eminently useful talents, superiority that commands prestige, and abilities of which society cannot sanely deprive itself.”42 If we take this incredible statement seriously, what it clearly means is that the upper classes instinctively abandoned idleness and invented meritocracy lest universal suffrage deprive them of everything they owned. One can of course chalk this up to the political context: the Paris Commune had just been put down, and universal male suffrage had just been reestablished. Yet Boutmy’s statement has the virtue of reminding us of an essential truth: defining the meaning of inequality and justifying the position of the winners is a matter of vital importance, and one can expect to see all sorts of misrepresentations of the facts in service of the cause.