Capital in the Twenty-First Century

by Thomas Piketty

  3. The discussion that follows is a little more technical than previous discussions (but necessary to understand what is behind the observed evolutions), and some readers may wish to skip a few pages and go directly to the implications and the discussion of what lies ahead in the twenty-first century, which can be found in the sections on Vautrin’s lecture and Rastignac’s dilemma.

  4. The term μ is corrected to take account of gifts (see below).

  5. In other words, one of every fifty adults dies each year. Since minors generally own very little capital, it is clearer to write the decomposition in terms of adult mortality (and to define μ in terms of adults alone). A small correction is then necessary to take account of the wealth of minors. See the online technical appendix.

  6. On this subject, see Jens Beckert, trans. Thomas Dunlop, Inherited Wealth (Princeton: Princeton University Press, 2008), 291.

  7. Becker never explicitly states the idea that the rise of human capital should eclipse the importance of inherited wealth, but it is often implicit in his work. In particular, he notes frequently that society has become “more meritocratic” owing to the increasing importance of education (without further detail). Becker has also proposed theoretical models in which parents can bequeath wealth to less gifted children, less well endowed with human capital, thereby reducing inequality. Given the extreme vertical concentration of inherited wealth (the top decile always owns more than 60 percent of the wealth available for inheritance, while the bottom half of the population owns nothing), this potential horizontal redistribution effect within groups of wealthy siblings (which, moreover, is not evident in the data, of which Becker makes almost no use) is hardly likely to predominate. See the online technical appendix.

  8. Apart from the bloodletting of the two world wars, which is masked in my data by the use of decennial averages. See the online technical appendix for the annual series.

  9. About 800,000 babies were born in France each year (actually between 750,000 and 850,000 with no trend up or down) from the late 1940s until the early 2010s, and according to official forecasts this will continue throughout the twenty-first century. In the nineteenth century there were about a million births per year, but the infant mortality rate was high, so the size of each adult cohort has varied little since the eighteenth century, except for the large losses due to war and the associated decline in births in the interwar years. See the online technical appendix.

  10. The theory of the “rate of estate devolution” was particularly popular in France in the period 1880–1910, thanks to the work of Albert de Foville, Clément Colson, and Pierre Emile Levasseur, who were pleased to discover that their estimates of national wealth (obtained through a census of assets) were approximately equal to 30 times the annual inheritance flow. This method, sometimes called the “estate multiplier,” was also used in England, particularly by Giffen, even though British economists—who had access to limited estate tax statistics—generally used the capital income flows series coming from the scheduler income tax system.

  11. In practice, both types of wealth are often mixed in the same financial products (reflecting the mixed motives of savers). In France, life insurance contracts sometimes include a share of capital that can be passed on to children and another, generally smaller share payable as an annuity (which ends with the death of the policy holder). In Britain and the United States, retirement funds and pension plans increasingly include a transmissible component.

  12. To quote the usual proverb, public pensions are “the fortunes of those who have no fortune.” I will come back to this in Chapter 13, when I analyze different pension systems.

  13. For detailed data on this subject, see Piketty, “On the Long-Run Evolution of Inheritance.”

  14. Complete annual data are available online.

  15. To be clear, these estimates include a fairly large correction for differential mortality (that is, for the fact the wealthy individuals on average live longer). This is an important phenomenon, but it is not the explanation for the profile described here. See the online technical appendix.

  16. The annual growth rate of 1.7 percent is exactly the same as the average growth rate for 1980–2010. The estimate of net return on capital of 3 percent assumes that capital’s share of national income will continue at its average level for 1980–2010 and that the current tax system will remain in place. See the online technical appendix.

  17. Other variants and scenarios are presented in the online technical appendix.

  18. “Savings rates increase with income and initial endowment”: one can save more when one’s income is higher or when one does not have to pay rent, and even more when both conditions are true. “Wide variations in individual behavior”: some people like wealth, while others prefer automobiles or opera, for example.

  19. For example, at a given income level, childless individuals save as much as others.

  20. The growth of wages may drop even lower, if one subtracts the increasing proportion of national income that goes to finance pensions and health care.

  21. For a more precise technical description of these simulations, which aim primarily to reproduce the evolution of the wealth profile by age group (on the basis of macroeconomic and demographic data), see the online technical appendix.

  22. More precisely, one can show that μ × m approaches 1/H when growth decreases, regardless of the life expectancy. With a capital/income ratio β of 600–700 percent, one may see why the inheritance flow by tends to return to β/H, that is, about 20–25 percent. Thus the idea of a “rate of estate devolution” developed by nineteenth-century economists is approximately correct in a society where growth is low. See the online technical appendix.

  23. In reality, things are somewhat more complex, because we allow for the fact that some heirs consume a part of their inheritance. Conversely, we include in inherited wealth the cumulative income on wealth (within the limits of the heir’s wealth: if one fully capitalized all of the bequest, including the income consumed by the inheritor, for example in the form of rent that the inheritor of an apartment does not have to pay, one would obviously exceed 100 percent of total wealth). See the online technical appendix for estimates using different definitions.

  24. In particular, when we say that the inheritance flow represents the equivalent of 20 percent of disposable income, this obviously does not mean that each individual receives 20 percent additional income every year in the form of a regular flow of bequests and gifts. It means rather that at certain points in a person’s life (typically on the death of a parent and in some cases on the occasion of receipt of a gift), much larger sums may be transferred, sums equivalent to several years’ income, and that all told these bequests and gifts represent the equivalent of 20 percent of the disposable income of all households.

  25. Replacement incomes (retirement pensions and unemployment benefits) are included in income from labor, as in Part Two.

  26. All resources were capitalized at the age of fifty, but if one uses the same rate of return to capitalize different resources, the choice of a reference age is not important for calculation the shares of inheritance and earned income in the total. The question of unequal returns on capital is examined in the next chapter.

  27. For a complete analysis of the relations between these different ratios, see the online technical appendix. The fact that the inheritance flow (20–25 percent of national income) and capital income (typically 25–35 percent of national income) are sometimes close should be regarded as a coincidence due to specific demographic and technological parameters (the equilibrium inheritance flow by = β/H depends on the capital/income ratio and the duration of a generation, whereas the equilibrium capital share α depends on the production function).

  28. As a general rule, the bottom 50 percent of the income hierarchy collectively received about 30 percent of total earned income (see Table 7.1), and therefore individually received about 60 percent of the average wage (or 40–50 percent of average national inc
ome per capita, allowing for the fact that income from labor generally accounts for 65–75 percent of national income). For example, in France today, the least well paid 50 percent have incomes that range between the minimum wage and 1.5 times the minimum wage, and earn on average 15,000 euros a year (1,250 euros a month), compared with 30,000 euros a year (2,500 a month) for average per capita national income.

  29. Recall that 6–7 percent of total wages for the top centile means that each member of that group earned on average 6–7 times the average wage, or 10–12 times the average wage of the least well paid 50 percent. See Chapters 7 and 8.

  30. Evolutions similar to those depicted in Figure 11.10 are obtained if one considers the top decile or top thousandth instead of the top centile (which I nevertheless believe is the most significant group to study). See Supplemental Figures S11.9–10, available online.

  31. By definition, 500,000 adult individuals in a society of 50 million adults, such as France today.

  32. The total value of inherited wealth is not far below its nineteenth-century level, but it has become rarer for individuals to inherit enough wealth to finance, without working, a lifestyle several dozen times the lower-class standard of living.

  33. Roughly 3 times larger in the eighteenth and nineteenth centuries as well as the twenty-first century (when income from labor accounted for approximately three-quarters of total resources and income from inherited wealth for roughly one-quarter) and nearly 10 times larger in the twentieth century (when income from labor accounted for nine-tenths of resources and income from inherited wealth one-tenth). See Figure 11.9.

  34. Roughly 3 times greater in the eighteenth and nineteenth centuries as well as the twenty-first century, and nearly 10 times larger in the twentieth century. The same would be true for the top 10 percent, the top 0.1 percent, etc.

  35. See the online technical appendix for an analysis of the mathematical conditions on the various distributions that imply that rentiers dominate managers (and vice versa).

  36. The top 1 percent of inherited fortunes enjoyed a standard of living 25–30 times higher than that of the bottom 50 percent in the nineteenth century (see Figure 11.10) or about 12–15 times the average per capita national income. The top 0.1 percent enjoyed a living standard approximately 5 times more opulent (see Chapter 10 on Pareto coefficients), or 60–75 times the average income. The threshold chosen by Balzac and Austen, 20–30 times average income, corresponds to the average income of the top 0.5 percent of the inheritance hierarchy (about 100,000 individuals out of an adult population of 20 million in France in 1820–1830, or 50,000 out of a population of 10 million British adults in 1800–1810). Both Balzac and Austen therefore had a vast range of characters to choose from.

  37. In the nineteenth century, the best paid 1 percent of jobs offered a standard of living about 10 times greater than that of the lower class (see Figure 11.10), or 5 times the average income. One can estimate that only the best paid 0.01 percent (2,000 people out of 20 million at most) earned on average 20–30 times the average income for the period. Vautrin was probably not far off when he said that there were no more than five lawyers in Paris who earned more than 50,000 francs a year (or 100 times the average income). See the online technical appendix.

  38. As in Chapter 2, the average incomes mentioned here are national per capita average incomes. In 1810–1820, the average income in France was 400–500 francs per year and probably a little more than 500 francs in Paris. The wages of domestic servants were one-third to one-half that.

  39. Recall that a pound sterling was worth 25 francs in the nineteenth century and as late as 1914. See Chapter 2.

  40. Had not an intimate of George III said to Barry Lyndon thirty years earlier, in the 1770s, that anyone with a capital of 30,000 pounds ought to be knighted? Redmond Barry had come quite a way since enlisting in the British army for barely 15 pounds a year (1 shilling a day), or barely half the average British income in 1750–1760. The fall was inevitable. Note that Stanley Kubrick, who took his inspiration from the celebrated nineteenth-century British novel, is just as precise about amounts as Jane Austen was.

  41. Jane Austen, Sense and Sensibility (Cambridge, MA: Belknap Press, 2013), 405.

  42. Austen, Sense and Sensibility, 135.

  43. His cynicism ultimately persuades Rastignac, who in La maison de Nucingen engages in business dealings with Delphine’s husband in order to lay hands on a fortune of 400,000 francs.

  44. In October 1788, as he is about to leave Normandy, Young notes: “Europe is now so much assimilated, that if one goes to a house where the fortune is 15 or 20,000 livres a year, we shall find in the mode of living much more resemblance than a young traveller will ever be prepared to look for” (Arthur Young, Travels in 1787, 1788, 1789, pub. 1792, reprinted as Arthur Young’s Travels in France [Cambridge: Cambridge University Press, 2012], 145). He is speaking of the livre tournois, equivalent to the franc germinal. This amount was equal to 700–900 pounds sterling, or the equivalent of 30–50 times the average French or British income of the day. Later on he is more specific: with this amount of income, one can afford “six men-servants, five maids, eight horses, a garden, and a regular table.” By contrast, with only 6,000–8,000 livres tournois, one can barely afford “2 servants and 3 horses.” Note that livestock was an important part of capital and expenses. In November 1789, Young sold his horse in Toulon for 600 livres tournois (or four years of annual wages for an “ordinary servant”). The price was typical for the time. See the online technical appendix.

  45. Michael Young expressed this fear in The Rise of Meritocracy (London: Thames and Hudson, 1958).

  46. The question of the salary scale for civil servants gave rise to many political conflicts in this period. In 1792, revolutionaries had tried to establish a restricted pay scale with a ratio of 8:1 (it was finally adopted in 1948 but was very quickly circumvented by a system of opaque bonuses for the highest civil servants that still exists today). Napoleon created a small number of highly paid posts, so few that Thiers in 1831 saw little reason to reduce their number (“with three million more or less given to or taken from the prefects, generals, magistrates, and ambassadors, we have the luxury of the Empire or American-style simplicity,” he added in the same speech). The fact that the highest US civil servants at the time were paid much less than in France was also noted by Tocqueville, who saw it as a sure sign that the democratic spirit prevailed in the United States. Despite many ups and downs, this handful of very high salaries persisted in France until World War I (and thus to the fall of the rentier). On these evolutions, see the online technical appendix.

  47. See Piketty, Les hauts revenus en France, 530.

  48. This argument sets aside the logic of need in favor of a logic of disproportion and conspicuous consumption. Thorstein Veblen said much the same thing in The Theory of the Leisure Class (New York: Macmillan, 1899): the egalitarian US dream was already a distant memory.

  49. Michèle Lamont, Money, Morals and Manners: The Culture of the French and the American Upper-Middle Class (Chicago: University of Chicago Press, 1992). The individuals Lamont interviewed were no doubt closer to the ninetieth or ninety-fifth percentile of the income hierarchy (or in some cases the ninety-eighth or ninety-ninth percentile) than to the sixtieth or seventieth percentile. See also J. Naudet, Entrer dans l’élite: Parcours de réussite en France, aux États-Unis et en Inde (Paris: Presses Universitaires de France, 2012).

  50. In order to avoid painting too dark a picture, Figures 11.9–11 show only the results for the central scenario. The results for the alternative scenario are even more worrisome and are available online (Supplemental Figures S11.9–11). The evolution of the tax system explains why the share of inheritance in total resources may exceed its nineteenth-century level even if the inheritance flow as a proportion of national income does not. Labor incomes are taxed today at a substantial level (30 percent on average, excluding retirement and unemployment insurance contributions), whereas the aver
age effective tax rate on inheritances is less than 5 percent (even though inheritance gives rise to the same rights as labor income in regard to access to transfers in kind—education, health, security, etc.—which are financed by taxes). The tax issues are examined in Part Four.

  51. The same is true of the landed estates worth 30,000 pounds of which Jane Austen speaks in a world where the average per capita income was around 30 pounds a year.

  52. A fortune hidden in the Bahamas also figures in season 4 of Desperate Housewives (Carlos Solis has to get back his $10 million, which leads to endless complications with his wife), even though the show is as saccharine as could be and not out to portray social inequalities in a worrisome light, unless, of course, it is a matter of cunning ecological terrorists who threaten the established order or mentally handicapped minorities engaged in a conspiracy.

  53. I will come back to this point in Chapter 13.

  54. If the alternative scenario is correct, this proportion may exceed 25 percent. See Supplemental Figure S11.11, available online.

  55. Compared with the socioeconomic theories of Modigliani, Becker, and Parsons, Durkheim’s theory, formulated in De la division du travail social (1893), is primarily a political theory of the end of inheritance. Its prediction has proved no more accurate than those of the other theories, but it may be that the wars of the twentieth century merely postponed the problem to the twenty-first.

  56. Mario Draghi, Le Monde, July 22, 2012.

  57. I do not mean to underestimate the importance of the taxi problem. But I would not venture to suggest that this is the foremost problem faced by Europe or global capitalism in the twenty-first century.

  58. In France, fewer than 1 percent of adult males had the right to vote under the Restoration (90,000 voters out of 10 million); this proportion rose to 2 percent under the July Monarchy. Property requirements for holding office were even stricter: fewer than 0.2 percent of adult males met them. Universal male suffrage, briefly introduced in 1793, became the norm after 1848. Less than 2 percent of the British population could vote until 1831. Subsequent reforms in 1831 and especially 1867, 1884, and 1918 gradually put an end to property qualifications.