Capital in the Twenty-First Century

by Thomas Piketty

  59. The German data presented here were collected by Christoph Schinke, “Inheritance in Germany 1911 to 2009: A Mortality Multiplier Approach,” Master’s thesis, Paris School of Economics, 2012. See the online technical appendix.

  60. The British flows seem to have been slightly smaller (20–21 percent rather than 23–24 percent). Note, however, that this is based on an estimate of the fiscal flow and not the economic flow and is therefore likely to be slightly too low. The British data were collected by Anthony Atkinson, “Wealth and Inheritance in Britain from 1896 to the Present,” London School of Economics, 2012.

  61. If this were to happen at the global level, the global return on capital might decrease, and greater life-cycle wealth might in part supplant transmissible wealth (because a lower return on capital discourages the second type of accumulation more than the first, which is not certain). I will come back to these questions in Chapter 12.

  62. On this subject see the remarkable book by Anne Gotman, Dilapidation et prodigalité (Paris: Nathan, 1995), based on interviews with individuals who squandered large fortunes.

  63. In particular, Modigliani quite simply failed to include capitalized incomes in inherited wealth. Kotlikoff and Summers, for their part, did take these into account without limit (even if the capitalized inheritance exceeded the wealth of the heir), which is also incorrect. See the online technical appendix for a detailed analysis of these questions.

  12. Global Inequality of Wealth in the Twenty-First Century

  1. Recall that global GDP, using purchasing power parity, was roughly $85 trillion (70 million euros) in 2012–2013, and according to my estimates total private wealth (real estate, business, and financial assets, net of liabilities) was around four years of global GDP, or about $340 trillion (280 million euros). See Chapters 1 and 6 and the online technical appendix.

  2. Inflation in this period averaged 2–2.5 percent a year (and was somewhat lower in euros than in dollars; see Chapter 1). All the detailed series are available in the online technical appendix.

  3. If one calculates these averages with respect to the total world population (including children as well as adults), which grew considerably less than the adult population in the period 1987–2013 (1.3 percent a year compared with 1.9 percent), all the growth rates increase, but the differences between them do not change. See Chapter 1 and the online technical appendix.

  4. See the online technical appendix, Supplemental Table S12.1, available online.

  5. For example, if we assume that the rate of divergence observed between 1987 and 2013 at the level of the top twenty-millionth will continue to apply in the future to the fractile consisting of the 1,400 billionaires included in the 2013 ranking (roughly the top three-millionths), the share of this fractile will increase from 1.5 percent of total global wealth in 2013 to 7.2 percent in 2050 and 59.6 percent in 2100.

  6. The national wealth rankings published by other magazines in the United States, France, Britain, and Germany reach a little lower in the wealth hierarchy than Forbes’s global ranking, and the share of wealth covered in some cases is as high as 2 or 3 percent of the country’s total private wealth. See the online technical appendix.

  7. In the media, the wealth of billionaires is sometimes expressed as a proportion of the annual flow of global output (or of the GDP of some country, which gives frightening results). This makes more sense than to express these large fortunes as a proportion of the global capital stock.

  8. These reports rely in particular on the innovative work of James B. Davies, Susanna Sandström, Anthony Shorrocks, and Edward N. Wolff, “The Level and Distribution of Global Household Wealth,” Economic Journal 121, no. 551 (March 2011): 223–54, and on data of the type presented in Chapter 10. See the online technical appendix.

  9. Generally speaking, the sources used to estimate wealth distributions (separately for each country) pertain to years some distance in the past, updated almost exclusively with aggregate data taken from national accounts and similar sources. See the online technical appendix.

  10. For example, the French media, accustomed for years to describing a massive flight of large fortunes from France (without really trying to verify the information other than by anecdote), have been astonished to learn every fall since 2010 from the Crédit Suisse reports that France is apparently the European wealth leader: the country is systematically ranked number 3 worldwide (behind the United States and Japan and well ahead of Britain and Germany) in number of millionaire residents. In this case, the information seems to be correct (as far as it is possible to judge from available sources), even if the bank’s methods tend to exaggerate the difference between France and Germany. See the online technical appendix.

  11. See the online technical appendix.

  12. In terms of the global income distribution, it seems that the sharp increase in the share of the top centile (which is not happening in all countries) has not prevented a decrease in the global Gini coefficient (although there are large uncertainties in the measurement of inequality in certain countries, especially China). Since the global wealth distribution is much more concentrated at the top of the distribution, it is quite possible that the increase in the share of the top centiles matters more. See the online technical appendix.

  13. The average fortune of the top ten-thousandth (450 adults out of 45 billion) is about 50 million euros, or nearly 1,000 times the global average wealth per adult, and their share of total global wealth is about 10 percent.

  14. Bill Gates was number one in the Forbes rankings from 1995 to 2007, before losing out to Warren Buffet in 2008–2009 and then to Carlos Slim in 2010–2013.

  15. The first dyes invented in 1907 were named “L’Auréale,” after a hair style in vogue at the time and reminiscent of an aureole. Their invention led to the creation in 1909 of the French Company for Harmless Hair Dyes, which eventually, after the creation of many other brands (such as Monsavon in 1920) became L’Oréal in 1936. The similarity to the career of César Birotteau, whom Balzac depicts as having made his fortune by inventing “L’Eau Carminative” and “La Pâte des Sultanes” in the early nineteenth century, is striking.

  16. With a capital of 10 billion euros, a mere 0.1 percent is enough to finance annual consumption of 10 million euros. If the return on capital is 5 percent, 98 percent of it can be saved. If the return is 10 percent, 99 percent can be saved. In any case, consumption is insignificant.

  17. Honoré de Balzac, Le père Goriot (Paris: Livre de Poche, 1983), 105–9.

  18. In the case of Challenges, there seem to be too few fortunes in the 50–500 million euro range compared with the number of wealth tax declarations in the corresponding brackets (especially since a large part of business capital is not taxable under the wealth tax and therefore does not appear in the statistics). This may be because Challenges does not look at diversified fortunes. Indeed, both sources underestimate the actual number of large fortunes for opposite reasons: the Challenges source overvalues business capital, while the fiscal source underestimates it, and both rely on vague and shifting definitions. Citizens are left perplexed and made to feel that the subject of wealth is quite opaque. See the online technical appendix.

  19. Conceptually, moreover, it is no simple matter to define what a normal return on inherited wealth might be. In Chapter 11, I applied the same average return on capital to all fortunes, which no doubt leads to treating Liliane Bettencourt as a very partial heir (in view of the very high return on her capital), more partial than Steve Forbes himself, who nevertheless classifies her as a pure heiress, even though he counts himself among the “nurturers” of inherited wealth. See the online technical appendix.

  20. For some particularly strong assertions about the relative merits of Slim and Gates, unfortunately without any precise factual basis, see, for example, Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty (New York: Crown Publishing, 2012), 34–41. The authors’ harsh tone is all the more
surprising in that they do not really discuss the ideal distribution of wealth. The book is built around a defense of the role of systems of property rights stemming from the British, American, and French revolutions in the development process (and little is said about more recent social institutions or systems of taxation).

  21. See, for example, the magazine Capital, no. 255, December 3, 2012: “180 million euros … a sum that pales in comparison to the value of the real estate that the head of the firm, Lakshmi Mittal, recently acquired in London for three times that amount. Indeed, the businessman recently purchased the former embassy of the Philippines (for 70 million pounds, or 86 million euros), supposedly for his daughter Vanisha. A short while earlier, his son Aditya was the recipient of the generous gift of a home worth 117 million pounds (144 million euros). The two properties are located on Kensington Palace Gardens, known as Billionaires’ Row, not far from the paternal palace. Lakshmi Mittal’s residence is said to be the ‘most expensive private home in the world’ and is equipped with a Turkish bath, a jewel-encrusted swimming pool, marble from the same quarry as the Taj Mahal, and servants’ quarters.… All told, these three homes cost 542 million euros, or 3 times the 180 million invested in Florange.”

  22. The Forbes ranking uses an interesting criterion, but one that is hard to apply in any precise way: it excludes “despots” and indeed anyone whose fortune depends on “their political position” (like the Queen of England). But if an individual acquires his fortune before coming to power, he remains in the ranking: for example, the Georgia oligarch Bidzina Ivanishvili is still in the 2013 list, although he became prime minister in late 2012. He is credited with a fortune of $5 billion, or one-quarter of his country’s GDP (between 5 percent and 10 percent of Georgia’s national wealth).

  23. The total capital endowment of US universities is about 3 percent of GDP, and the annual income on this capital is about 0.2 percent of GDP, which is a little over 10 percent of total US expenditure on higher education. But this share is as high as 30 or 40 percent of the resources of the most richly endowed universities. Furthermore, these capital endowments play a role in the governance of these institutions that often outweighs their monetary importance. See the online technical appendix.

  24. The data used here come mainly from reports published by the National Association of College and University Business Officers, as well as from financial reports published by Harvard University, Yale University, Princeton University, and other institutions. See the online technical appendix.

  25. For results by subperiod, see the online technical appendix, Supplemental Table S12.2, available online.

  26. Note, however, that the main difference arises from the fact that most owners of private wealth must pay significant taxes: the average real return before taxes was around 5 percent in the United States in 1980–2010. See the online technical appendix.

  27. The numbers of universities in each category indicated in parentheses in Table 12.2 are based on 2010 endowments, but so as not to bias the results, the returns were calculated by ranking universities according to their endowment at the beginning of each decade. All the detailed results are available in the online technical appendix. See in particular Supplemental Table S12.2, available online.

  28. Real estate can be a very high yield investment if one identifies the right projects around the world. In practice, these include business and commercial as well as residential properties, often on a very large scale.

  29. This is confirmed by the fact that relative rankings do not change much over the thirty-year period 1980–2010. The hierarchy of university endowments remains more or less the same.

  30. To take Harvard University as an example, annual financial reports show that the endowment yielded an average real return of about 10 percent from 1990 to 2010, whereas new gifts added an average of about 2 percent a year to the endowment. Thus the total real income (from return on the endowment plus gifts) amounted to 12 percent of the endowment; a portion of this, amounting to 5 percent of the endowment, was used to pay current university expenses, while the other 7 percent was added to the endowment. This enabled the endowment to increase from $5 billion in 1990 to nearly $30 billion in 2010 while allowing the university to consume an annual flow of resources 2.5 times as great as it received in gifts.

  31. Note, however, that the historic rebound of asset prices appears to add no more than a point of additional annual return, which is fairly small compared with the level of return I have been discussing. See the online technical appendix.

  32. For example, because Bill Gates maintains effective control over the assets of the Bill and Melinda Gates Foundation, Forbes chooses to count those assets as part of Gates’s personal fortune. Maintaining control seems incompatible with the idea of a disinterested gift.

  33. According to Bernard Arnault, the principal stockholder in LVMH, the world leader in luxury goods, the purpose of the Belgian foundation that holds his assets is neither charitable nor fiscal. Rather, it is primarily an estate vehicle. “Among my five children and two nephews, there is surely one who will prove capable of taking over after I am gone,” he remarked. But he is afraid of disputes. By placing his assets in the foundation, he forces his heirs to vote “indissociably,” which “ensures the survival of the group if I should die and my heirs should be unable to agree.” See Le Monde, April 11, 2013.

  34. The work of Gabrielle Fack and Camille Landais, which is based on these types of reforms in the United States and France, speaks eloquently to this point. See the online technical appendix.

  35. For an incomplete estimate for the United States, see the online technical appendix.

  36. See Chapter 5.

  37. It was even worse in the nineteenth century, at least in the city, and especially in Paris, where before World War I most buildings were not chopped up into apartments. One therefore needed to be wealthy enough to buy an entire building.

  38. See Chapter 5.

  39. The nominal average return for 1998–2012 was only 5 percent a year. It is difficult to compare these returns with those on university endowments, however, in part because the period 1998–2012 was not as good as 1990–2010 or 1980–2010 (and unfortunately the Norwegian fund’s statistics go back only as far as 1998), and because this relatively low return was due in part to appreciation of the Norwegian krone.

  40. According to the census of 2010, the United Arab Emirates (of which Abu Dhabi is the largest member state) have a native population of a little over 1 million (plus 7 million foreign workers). The native population of Kuwait is about the same size. Qatar has about 300,000 nationals and 1.5 million foreigners. Saudi Arabia alone employs nearly 10 million foreign workers (in addition to its native population of nearly 20 million).

  41. See the online technical appendix.

  42. One should also take into account public nonfinancial assets (public buildings, school, hospitals, etc.) as well as financial assets not formally included in sovereign wealth funds, and then subtract public debts. Net public wealth is currently less than 3 percent of private wealth in the rich countries, on average (in some cases net public wealth is negative), so this does not make much difference. See Chapters 3–5 and the online technical appendix.

  43. If we exclude real estate and unlisted business assets, financial assets in the narrow sense represented between a quarter and a third of global private wealth in 2010, that is, between a year and a year and a half of global GDP (and not four years). The sovereign wealth funds thus own 5 percent of global financial assets. Here I refer to net financial assets owned by households and governments. In view of the very substantial cross-holdings of financial and nonfinancial corporations within and between countries, gross financial assets amount to much more than three years of global GDP. See the online technical appendix.

  44. The rent on natural resources had already exceeded 5 percent of global GDP from the mid-1970s to the mid-1980s. See the online technical appendix.

  45. My hypotheses implic
itly include the long-run savings rate in China (and elsewhere), counting both public and private saving. We cannot predict the future relationship between public property (notably in sovereign wealth funds) and private property in China.

  46. In any case, this transparent process of rent transformation (from oil rent to a diversified capital rent) illustrates the following point: capital has historically taken a variety of forms (land, oil, financial assets, business capital, real estate, etc.), but its underlying logic has not really changed, or at any rate has changed much less than people sometimes think.

  47. In a pay-as-you-go, the contributions to the pension fund by active workers are directly paid out to retirees without being invested. On these issues, see Chapter 13.

  48. Between one-quarter and one-half of European and US capital (or even more, depending on various assumptions). See the online technical appendix.

  49. The divergence of the petroleum exporters can be seen as an oligarchic divergence, moreover, because petroleum rents go to a small number of individuals, who may be able to sustain a high level of accumulation through sovereign wealth funds.

  50. The GDP of the European Union was close to 15 trillion euros in 2012–2013, compared with 10 trillion euros for China’s GDP at purchasing power parity (or 6 trillion at current exchange rates, which may be better for comparing international financial assets). See Chapter 1. China’s net foreign assets are growing rapidly, but not fast enough to overtake the total private wealth of the rich countries. See the online technical appendix.

  51. See Aurélie Sotura, “Les étrangers font-ils monter les prix de l’immobilier? Estimation à partir de la base de la chambre des Notaires de Paris, 1993–2008,” Paris, Ecoles des Hautes Etudes en Sciences Social and Paris School of Economics, 2011.