Piketty, T ~ Capital in the Twenty-First Century

Piketty, Thomas
Capital in the Twenty-First Century


What are the major conclusions to which these novel historical sources have led me? The first is that one should be wary of any economic determinism in regard to inequalities of wealth and income. The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms. In particular, the reduction of inequality that took place in most developed countries between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war. Similarly, the resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regard to taxation and finance. The history of inequality is shaped by the way economic, social, and political actors view what is just and what is not, as well as by the relative power of those actors and the collective choices that result. It is the joint product of all relevant actors combined.
The second conclusion, which is the heart of the book, is that the dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence. Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently.
Consider first the mechanisms pushing toward convergence, that is, toward reduction and compression of inequalities. The main forces for convergence are the diffusion of knowledge and investment in training and skills. The law of supply and demand, as well as the mobility of capital and labor, which is a variant of that law, may always tend toward convergence as well, but the influence of this economic law is less powerful than the diffusion of knowledge and skill and is frequently ambiguous or contradictory in its implications.

Unfortunately, these two optimistic beliefs (the human capital hypothesis [skills become more and more important, labour becomes more valuable, human capital triumphs over financial capital and real estate] and the substitution of generational conflict for class warfare [everybody gets wealthier with age, so everybody is equal over time]) are largely illusory. Transformations of this sort are both logically possible and to some extent real, but their influence is far less consequential than one might imagine. There is little evidence that labor’s share in national income has increased significantly in a very long time: “nonhuman” capital seems almost as indispensable in the twenty-first century as it was in the eighteenth or nineteenth, and there is no reason why it may not become even more so. Now as in the past, moreover, inequalities of wealth exist primarily within age cohorts, and inherited wealth comes close to being as decisive at the beginning of the twenty-first century as it was in the age of Balzac’s Père Goriot. Over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills.

What are these forces of divergence? First, top earners can quickly separate themselves from the rest by a wide margin (although the problem to date remains relatively localized). More important, there is a set of forces of divergence associated with the process of accumulation and concentration of wealth when growth is weak and the return on capital is high. This second process is potentially more destabilizing than the first, and it no doubt represents the principal threat to an equal distribution of wealth over the long run.

To sum up what has been said thus far: the process by which wealth is accumulated and distributed contains powerful forces pushing toward divergence, or at any rate toward an extremely high level of inequality. Forces of convergence also exist, and in certain countries at certain times, these may prevail, but the forces of divergence can at any point regain the upper hand, as seems to be happening now, at the beginning of the twenty-first century. The likely decrease in the rate of growth of both the population and the economy in coming decades makes this trend all the more worrisome.

It is possible to imagine public institutions and policies that would counter the effects of this implacable logic: for instance, a progressive global tax on capital. But establishing such institutions and policies would require a considerable degree of international coordination. It is unfortunately likely that actual responses to the problem—including various nationalist responses—will in practice be far more modest and less effective.

From 1900 to 1980, 70–80 percent of the global production of goods and services was concentrated in Europe and America, which incontestably dominated the rest of the world. By 2010, the European–American share had declined to roughly 50 percent, or approximately the same level as in 1860. In all probability, it will continue to fall and may go as low as 20–30 percent at some point in the twenty-first century. This was the level maintained up to the turn of the nineteenth century and would be consistent with the European–American share of the world’s population (see Figures 1.1 and 1.2).

Regardless of what measure is used, the world clearly seems to have entered a phase in which rich and poor countries are converging in income.

The only continent not in equilibrium is Africa, where a substantial share of capital is owned by foreigners. According to the balance of payments data compiled since 1970 by the United Nations and other international organizations such as the World Bank and International Monetary Fund, the income of Africans is roughly 5 percent less than the continent’s output (and as high as 10 percent lower in some individual countries). [Footnote 33: […] It is interesting to note that the outflow of income from capital was on the order of three times greater than the inflow of international aid (the measurement of which is open to debate, moreover).] With capital’s share of income at about 30 percent, this means that nearly 20 percent of African capital is owned by foreigners: think of the London stockholders of the Marikana platinum mine discussed at the beginning of this chapter.
It is important to realize what such a figure means in practice. Since some kinds of wealth (such as residential real estate and agricultural capital) are rarely owned by foreign investors, it follows that the foreign-owned share of Africa’s manufacturing capital may exceed 40–50 percent and may be higher still in other sectors. Despite the fact that there are many imperfections in the balance of payments data, foreign ownership is clearly an important reality in Africa today.

Overall, the European powers in 1913 owned an estimated one-third to one-half of the domestic capital of Asia and Africa and more than three-quarters of their industrial capital.

the possible convergence of output per head does not imply convergence of income per head. After the wealthy countries have invested in their poorer neighbors, they may continue to own them indefinitely, and indeed their share of ownership may grow to massive proportions, so that the per capita national income of the wealthy countries remains permanently greater than that of the poorer countries, which must continue to pay to foreigners a substantial share of what their citizens produce (as African countries have done for decades).

Furthermore, if we look at the historical record, it does not appear that capital mobility has been the primary factor promoting convergence of rich and poor nations. None of the Asian countries that have moved closer to the developed countries of the West in recent years has benefited from large foreign investments, whether it be Japan, South Korea, or Taiwan and more recently China. In essence, all of these countries themselves financed the necessary investments in physical capital and, even more, in human capital, which the latest research holds to be the key to long-term growth. Conversely, countries owned by other countries, whether in the colonial period or in Africa today, have been less successful, most notably because they have tended to specialize in areas without much prospect of future development and because they have been subject to chronic political instability.

Part of the reason for that instability may be the following. When a country is largely owned by foreigners, there is a recurrent and almost irrepressible social demand for expropriation. Other political actors respond that investment and development are possible only if existing property rights are unconditionally protected. The country is thus caught in an endless alternation between revolutionary governments (whose success in improving actual living conditions for their citizens is often limited) and governments dedicated to the protection of existing property owners, thereby laying the groundwork for the next revolution or coup. Inequality of capital ownership is already difficult to accept and peacefully maintain within a single national community. Internationally, it is almost impossible to sustain without a colonial type of political domination.
Make no mistake: participation in the global economy is not negative in itself. Autarky has never promoted prosperity. The Asian countries that have lately been catching up with the rest of the world have clearly benefited from openness to foreign influences. But they have benefited far more from open markets for goods and services and advantageous terms of trade than from free capital flows. China, for example, still imposes controls on capital: foreigners cannot invest in the country freely, but that has not hindered capital accumulation, for which domestic savings largely suffice. Japan, South Korea, and Taiwan all financed investment out of savings. Many studies also show that gains from free trade come mainly from the diffusion of knowledge and from the productivity gains made necessary by open borders, not from static gains associated with specialization, which appear to be fairly modest.
To sum up, historical experience suggests that the principal mechanism for convergence at the international as well as the domestic level is the diffusion of knowledge. In other words, the poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming the property of the wealthy. The diffusion of knowledge is not like manna from heaven: it is often hastened by international openness and trade (autarky does not encourage technological transfer). Above all, knowledge diffusion depends on a country’s ability to mobilize financing as well as institutions that encourage large-scale investment in education and training of the population while guaranteeing a stable legal framework that various economic actors can reliably count on. It is therefore closely associated with the achievement of legitimate and efficient government. Concisely stated, these are the main lessons that history has to teach about global growth and international inequalities.

The central thesis of this book is precisely that an apparently small gap between the return on capital and the rate of growth can in the long run have powerful and destabilizing effects on the structure and dynamics of social inequality.

Table 2.3, page 79

According to official forecasts, progress toward the demographic transition at the global level should now accelerate, leading to eventual stabilization of the planet’s population. According to a UN forecast, the demographic growth rate should fall to 0.4 percent by the 2030s and settle around 0.1 percent in the 2070s. If this forecast is correct, the world will return to the very low-growth regime of the years before 1700. The global demographic growth rate would then have followed a gigantic bell curve in the period 1700–2100, with a spectacular peak of close to 2 percent in the period 1950–1990 (see Figure 2.2).
-> Piketty acknowledges, that such projections are very unsure, but believes that the overall trend is relatively well understood.

Figure 2.2, page 80

This was his [Charles Dunoyer, 1845, De la liberté du travail] reason for rejecting state intervention of any kind: “superior abilities . . . are the source of everything that is great and useful. . . . Reduce everything to equality and you will bring everything to a standstill.” One sometimes hears the same thought expressed today in the idea that the new information economy will allow the most talented individuals to increase their productivity many times over. The plain fact is that this argument is often used to justify extreme inequalities and to defend the privileges of the winners without much consideration for the losers, much less for the facts, and without any real effort to verify whether this very convenient principle can actually explain the changes we observe.

[…] not only do these two sectors [health and education] account for more than 20 percent of GDP and employment in the most advanced countries—a percentage that will no doubt increase in the future—but health and education probably account for the most tangible and impressive improvement in standards of living over the past two centuries.
-> Health and education are structured very differently in US (50-50 taxes-privatised) and EU (>75% financed by taxes).

[…] many people think that growth ought to be at least 3 or 4 percent per year. As noted, both history and logic show this to be illusory.

Continental Europe and especially France have entertained considerable nostalgia for what the French call the Trente Glorieuses, the thirty years from the late 1940s to the late 1970s during which economic growth was unusually rapid. People still do not understand what evil spirit condemned them to such a low rate of growth beginning in the late 1970s. Even today, many people believe that the last thirty (soon to be thirty-five or forty) “pitiful years” will soon come to an end, like a bad dream, and things will once again be as they were before.
In fact, when viewed in historical perspective, the thirty postwar years were the exceptional period, quite simply because Europe had fallen far behind the United States over the period 1914–1945 but rapidly caught up during the Trente Glorieuses. Once this catch-up was complete, Europe and the United States both stood at the global technological frontier and began to grow at the same relatively slow pace, characteristic of economics at the frontier.

Figure 2.3, page 97

A glance at Figure 2.3, which shows the comparative evolution of European and North American growth rates, will make this point clear. In North America, there is no nostalgia for the postwar period, quite simply because the Trente Glorieuses never existed there: per capita output grew at roughly the same rate of 1.5–2 percent per year throughout the period 1820–2012. To be sure, growth slowed a bit between 1930 and 1950 to just over 1.5 percent, then increased again to just over 2 percent between 1950 and 1970, and then slowed to less than 1.5 percent between 1990 and 2012. In Western Europe, which suffered much more from the two world wars, the variations are considerably greater: per capita output stagnated between 1913 and 1950 (with a growth rate of just over 0.5 percent) and then leapt ahead to more than 4 percent from 1950 to 1970, before falling sharply to just slightly above US levels (a little more than 2 percent) in the period 1970–1990 and to barely 1.5 percent between 1990 and 2012.
Western Europe experienced a golden age of growth between 1950 and 1970, only to see its growth rate diminish to one-half or even one-third of its peak level during the decades that followed. Note that Figure 2.3 underestimates the depth of the fall, because I included Britain in Western Europe (as it should be), even though British growth in the twentieth century adhered fairly closely to the North American pattern of quasi stability. If we looked only at continental Europe, we would find an average per capita output growth rate of 5 percent between 1950 and 1970—a level well beyond that achieved in other advanced countries over the past two centuries.
These very different collective experiences of growth in the twentieth century largely explain why public opinion in different countries varies so widely in regard to commercial and financial globalization and indeed to capitalism in general. In continental Europe and especially France, people quite naturally continue to look on the first three postwar decades—a period of strong state intervention in the economy—as a period blessed with rapid growth, and many regard the liberalization of the economy that began around 1980 as the cause of a slowdown.
In Great Britain and the United States, postwar history is interpreted quite differently. Between 1950 and 1980, the gap between the English-speaking countries and the countries that had lost the war closed rapidly. By the late 1970s, US magazine covers often denounced the decline of the United States and the success of German and Japanese industry. In Britain, GDP per capita fell below the level of Germany, France, Japan, and even Italy. It may even be the case that this sense of being rivaled (or even overtaken in the case of Britain) played an important part in the “conservative revolution.” Margaret Thatcher in Britain and Ronald Reagan in the United States promised to “roll back the welfare state” that had allegedly sapped the animal spirits of Anglo-Saxon entrepreneurs and thus to return to pure nineteenth-century capitalism, which would allow the United States and Britain to regain the upper hand. Even today, many people in both countries believe that the conservative revolution was remarkably successful, because their growth rates once again matched continental European and Japanese levels.
In fact, neither the economic liberalization that began around 1980 nor the state interventionism that began in 1945 deserves such praise or blame. France, Germany, and Japan would very likely have caught up with Britain and the United States following their collapse of 1914–1945 regardless of what policies they had adopted (I say this with only slight exaggeration). The most one can say is that state intervention did no harm.
Similarly, once these countries had attained the global technological frontier, it is hardly surprising that they ceased to grow more rapidly than Britain and the United States or that growth rates in all of these wealthy countries more or less equalized, as Figure 2.3 shows (I will come back to this). Broadly speaking, the US and British policies of economic liberalization appear to have had little effect on this simple reality, since they neither increased growth nor decreased it.

If this were to occur as predicted, per capita output in China, Eastern Europe, South America, North Africa, and the Middle East would match that of the wealthiest countries by 2050. After that, the distribution of global output described in Chapter 1 would approximate the distribution of the population.
-> i.e. the world would be quite even economically, a massive shift from today or the past few hundred years.

By adding these two curves, we can obtain a third curve showing the rate of growth of total global output (Figure 2.5). Until 1950, this had always been less than 2 percent per year, before leaping to 4 percent in the period 1950–1990, an exceptionally high level that reflected both the highest demographic growth rate in history and the highest growth rate in output per head. The rate of growth of global output then began to fall, dropping below 3.5 percent in the period 1990–2012, despite extremely high growth rates in emerging countries, most notably China. According to my median scenario, this rate will continue through 2030 before dropping to 3 percent in 2030–2050 and then to roughly 1.5 percent during the second half of the twenty-first century.

Figure 2.4, page 100

Figure 2.5, page 101

I have already conceded that these “median” forecasts are highly hypothetical. The key point is that regardless of the exact dates and growth rates (details that are obviously important), the two bell curves of global growth are in large part already determined. The median forecast shown on Figures 2.2–5 is optimistic in two respects: first, because it assumes that productivity growth in the wealthy countries will continue at a rate of more than 1 percent per year (which assumes significant technological progress, especially in the area of clean energy), and second, perhaps more important, because it assumes that emerging economies will continue to converge with the rich economies, without major political or military impediments, until the process is complete, around 2050, which is very rapid. It is easy to imagine less optimistic scenarios, in which case the bell curve of global growth could fall faster to levels lower than those indicated on these graphs.

the first crucial fact to bear in mind is that inflation is largely a twentieth-century phenomenon. Before that, up to World War I, inflation was zero or close to it. Prices sometimes rose or fell sharply for a period of several years or even decades, but these price movements generally balanced out in the end. This was the case in all countries for which we possess long-run price series.
More precisely, if we look at average price increases over the periods 1700–1820 and 1820–1913, we find that inflation was insignificant in France, Britain, the United States, and Germany: at most 0.2–0.3 percent per year. We even find periods of slightly negative price movements: for example, Britain and the United States in the nineteenth century (−0.2 percent per year if we average the two cases between 1820 and 1913).

in the nineteenth and early twentieth centuries, everyone knew that a pound sterling was worth about 5 dollars, 20 marks, and 25 francs. The value of money had not changed for decades, and no one saw any reason to think it would be different in the future.

This world collapsed for good with World War I. To pay for this war of extraordinary violence and intensity, to pay for soldiers and for the ever more costly and sophisticated weapons they used, governments went deeply into debt. As early as August 1914, the principal belligerents ended the convertibility of their currency into gold. After the war, all countries resorted to one degree or another to the printing press to deal with their enormous public debts. Attempts to reintroduce the gold standard in the 1920s did not survive the crisis of the 1930s: Britain abandoned the gold standard in 1931, the United States in 1933, France in 1936. The post–World War II gold standard would prove to be barely more robust: established in 1946, it ended in 1971 when the dollar ceased to be convertible into gold.
Between 1913 and 1950, inflation in France exceeded 13 percent per year (so that prices rose by a factor of 100), and inflation in Germany was 17 percent per year (so that prices rose by a factor of more than 300). In Britain and the United States, which suffered less damage and less political destabilization from the two wars, the rate of inflation was significantly lower: barely 3 percent per year in the period 1913–1950. Yet this still means that prices were multiplied by three, following two centuries in which prices had barely moved at all.

Who remembers the prevailing wages of the late 1980s or early 1990s?
-> we have lost track of the value of money at other points in time. We only understand the current value and have no idea how we are doing compared to other moments in time.

Figure 2.6, page 108

[…] Germany and France, the two countries that resorted most to inflation in the twentieth century, and more specifically between 1913 and 1950, today seem to be the most hesitant when it comes to using inflationary policy. What is more, they built a monetary zone, the Eurozone, that is based almost entirely on the principle of combating inflation.

[…] the loss of stable monetary reference points in the twentieth century marks a significant rupture with previous centuries, not only in the realms of economics and politics but also in regard to social, cultural, and literary matters.

The process of financial intermediation (whereby individuals deposit money in a bank, which then invests it elsewhere) has become so complex that people are often unaware of who owns what. To be sure, we are in debt. How can we possibly forget it, when the media remind us every day? But to whom exactly do we owe money? In the nineteenth century, the rentiers who lived off the public debt were clearly identified. Is that still the case today?

In [Jane Austen’s] Mansfield Park, Fanny’s uncle, Sir Thomas, has to travel out to the West Indies for a year with his eldest son for the purpose of managing his affairs and investments. After returning to Mansfield, he is obliged to set out once again for the islands for a period of many months. In the early 1800s it was by no means simple to manage plantations several thousand miles away. Tending to one’s wealth was not a tranquil matter of collecting rent on land or interest on government debt.

Capital is never quiet: it is always risk-oriented and entrepreneurial, at least at its inception, yet it always tends to transform itself into rents as it accumulates in large enough amounts—that is its vocation, its logical destination.

As important as it is, this evolution of the overall capital/income ratio should not be allowed to obscure sweeping changes in the composition of capital since 1700. This is the second conclusion that emerges clearly from Figures 3.1 and 3.2. In terms of asset structure, twenty-first-century capital has little in common with eighteenth-century capital. The evolutions we see are again quite close to what we find happening in Britain and France. To put it simply, we can see that over the very long run, agricultural land has gradually been replaced by buildings, business capital, and financial capital invested in firms and government organizations. Yet the overall value of capital, measured in years of national income, has not really changed.

The nature of capital has changed: it once was mainly land but has become primarily housing plus industrial and financial assets. Yet it has lost none of its importance.

[…] if the governments of both countries decided to sell off all their assets in order to immediately pay off their debts, nothing would be left in Britain and very little in France.

the crucial fact here is that private wealth in 2010 accounts for virtually all of national wealth in both countries: more than 99 percent in Britain and roughly 95 percent in France, according to the latest available estimates. In any case, the true figure is certainly greater than 90 percent.

France and Britain have always been countries based on private property and never experimented with Soviet-style communism, where the state takes control of most capital. Hence it is not surprising that private wealth has always dominated public wealth. Conversely, neither country has ever amassed public debts sufficiently large to radically alter the magnitude of private wealth.

In France after World War II, public debts were canceled, and a large public sector was created; the same was true to a lesser extent in Britain during the same period. At present, both countries (along with most other wealthy countries) are running large public debts. Historical experience shows, however, that this can change fairly rapidly.

On two occasions—first at the end of the Napoleonic wars and again after World War II—Britain’s public debt attained extremely high levels, around 200 percent of GDP or even slightly above that. Although no country has sustained debt levels as high as Britain’s for a longer period of time, Britain never defaulted on its debt. Indeed, the latter fact explains the former: if a country does not default in one way or another, either directly by simply repudiating its debt or indirectly through high inflation, it can take a very long time to pay off such a large public debt.

First, there is no doubt that Britain’s high level of public debt enhanced the influence of private wealth in British society. Britons who had the necessary means lent what the state demanded without appreciably reducing private investment […].
The result was an exceptionally high level of overall private wealth. Interest on British government bonds supplemented land rents as private capital grew to dimensions never before seen.
Second, it is also quite clear that, all things considered, this very high level of public debt served the interests of the lenders and their descendants quite well, at least when compared with what would have happened if the British monarchy had financed its expenditures by making them pay taxes. From the standpoint of people with the means to lend to the government, it is obviously far more advantageous to lend to the state and receive interest on the loan for decades than to pay taxes without compensation.
The central fact—and the essential difference from the twentieth century—is that the compensation to those who lent to the government was quite high in the nineteenth century: inflation was virtually zero from 1815 to 1914, and the interest rate on government bonds was generally around 4–5 percent; in particular, it was significantly higher than the growth rate. Under such conditions, investing in public debt can be very good business for wealthy people and their heirs.
In broad outline, this is what Britain did in the nineteenth century. For an entire century, from 1815 to 1914, the British budget was always in substantial primary surplus: in other words, tax revenues always exceeded expenditures by several percent of GDP—an amount greater, for example, than the total expenditure on education throughout this period. It was only the growth of Britain’s domestic product and national income (nearly 2.5 percent a year from 1815 to 1914) that ultimately, after a century of penance, allowed the British to significantly reduce their public debt as a percentage of national income.

This historical record is fundamental for a number of reasons. First, it enables us to understand why nineteenth-century socialists, beginning with Marx, were so wary of public debt, which they saw—not without a certain perspicacity—as a tool of private capital.

The [French] government paid roughly 2–3 percent of national income in interest every year (more than the budget for national education), and a very substantial group of people lived on that interest.

In the twentieth century, a totally different view of public debt emerged, based on the conviction that debt could serve as an instrument of policy aimed at raising public spending and redistributing wealth for the benefit of the least well-off members of society. The difference between these two views is fairly simple: in the nineteenth century, lenders were handsomely reimbursed, thereby increasing private wealth; in the twentieth century, debt was drowned by inflation and repaid with money of decreasing value. In practice, this allowed deficits to be financed by those who had lent money to the state, and taxes did not have to be raised by an equivalent amount. This “progressive” view of public debt retains its hold on many minds today, even though inflation has long since declined to a rate not much above the nineteenth century’s, and the distributional effects are relatively obscure.

It is interesting to recall that redistribution via inflation was much more significant in France than in Britain. As noted in Chapter 2, French inflation in the period 1913–1950 averaged more than 13 percent a year, which multiplied prices by a factor of 100. When Proust published Swann’s Way in 1913, government bonds seemed as indestructible as the Grand Hotel in Cabourg, where the novelist spent his summers. By 1950, the purchasing power of those bonds was a hundredth of what it had been, so that the rentiers of 1913 and their progeny had virtually nothing left.

Britain was fully mobilized to pay for the war effort without undue dependence on the printing press, with the result that by 1950 the country found itself saddled with a colossal debt, more than 200 percent of GDP, even higher than in 1815. Only with the inflation of the 1950s (more than 4 percent a year) and above all of the 1970s (nearly 15 percent a year) did Britain’s debt fall to around 50 percent of GDP (see Figure 3.3).

The mechanism of redistribution via inflation is extremely powerful, and it played a crucial historical role in both Britain and France in the twentieth century. It nevertheless raises two major problems. First, it is relatively crude in its choice of targets: among people with some measure of wealth, those who own government bonds (whether directly or indirectly via bank deposits) are not always the wealthiest: far from it. Second, the inflation mechanism cannot work indefinitely. Once inflation becomes permanent, lenders will demand a higher nominal interest rate, and the higher price will not have the desired effects. Furthermore, high inflation tends to accelerate constantly, and once the process is under way, its consequences can be difficult to master: some social groups saw their incomes rise considerably, while others did not. It was in the late 1970s—a decade marked by a mix of inflation, rising unemployment, and relative economic stagnation (“stagflation”)—that a new consensus formed around the idea of low inflation.

Since the 1970s, analyses of the public debt have suffered from the fact that economists have probably relied too much on so-called representative agent models, that is, models in which each agent is assumed to earn the same income and to be endowed with the same amount of wealth (and thus to own the same quantity of government bonds). Such a simplification of reality can be useful at times in order to isolate logical relations that are difficult to analyze in more complex models. […] In view of the high degree of concentration that has always been characteristic of the wealth distribution, to study these questions without asking about inequalities between social groups is in fact to say nothing about significant aspects of the subject and what is really at stake.

Not only in France but in countries around the world, faith in private capitalism was greatly shaken by the economic crisis of the 1930s and the cataclysms that followed. The Great Depression, triggered by the Wall Street crash of October 1929, struck the wealthy countries with a violence that has never been repeated to this day: a quarter of the working population in the United States, Germany, Britain, and France found themselves out of work. The traditional doctrine of “laissez faire,” or nonintervention by the state in the economy, to which all countries adhered in the nineteenth century and to a large extent until the early 1930s, was durably discredited. Many countries opted for a greater degree of interventionism. Naturally enough, governments and the general public questioned the wisdom of financial and economic elites who had enriched themselves while leading the world to disaster. People began to think about different types of “mixed” economy, involving varying degrees of public ownership of firms alongside traditional forms of private property, or else, at the very least, a strong dose of public regulation and supervision of the financial system and of private capitalism more generally.

in 1950, the government of France owned 25–30 percent of the nation’s wealth, and perhaps even a little more.

[In France] in 1986 a liberal majority initiated a very important wave of privatization in all sectors.
In a context of slower growth, high unemployment, and large government deficits, the progressive sale of publicly held shares after 1990 brought additional funds into public coffers, although it did not prevent a steady increase in the public debt. Net public wealth fell to very low levels. Meanwhile, private wealth slowly returned to levels not seen since the shocks of the twentieth century. In this way, France totally transformed its national capital structure at two different points in time without really understanding why.

Capital in the New World took some quite unusual and specific forms, in the first place because land was so abundant that it did not cost very much; second, because of the existence of slavery; and finally, because this region of perpetual demographic growth tended to accumulate structurally smaller amounts of capital (relative to annual income and output) than Europe did.

In regard to public debt and the split between public and private capital, the German trajectory is fairly similar to the French. With average inflation of nearly 17 percent between 1930 and 1950, which means that prices were multiplied by a factor of 300 between those dates (compared with barely 100 in France), Germany was the country that, more than any other, drowned its public debt in inflation in the twentieth century. Despite running large deficits during both world wars (the public debt briefly exceeded 100 percent of GDP in 1918–1920 and 150 percent of GDP in 1943–1944), inflation made it possible in both instances to shrink the debt very rapidly to very low levels: barely 20 percent of GDP in 1930 and again in 1950 (see Figure 4.2). Yet the recourse to inflation was so extreme and so violently destabilized German society and economy, especially during the hyperinflation of the 1920s, that the German public came away from these experiences with a strongly antiinflationist attitude.2 That is why the following paradoxical situation exists today: Germany, the country that made the most dramatic use of inflation to rid itself of debt in the twentieth century, refuses to countenance any rise in prices greater than 2 percent a year, whereas Britain, whose government has always paid its debts, even more than was reasonable, has a more flexible attitude and sees nothing wrong with allowing its central bank to buy a substantial portion of its public debt even if it means slightly higher inflation.
-> Footnote regarding German inflation: p. 596, 2. The average inflation figure of 17 percent for the period 1913–1950 omits the year 1923, when prices increased by a factor of 100 million over the course of the year.

In regard to the accumulation of public assets, the German case is again similar to the French: the government took large positions in the banking and industrial sectors in the period 1950–1980, then partially sold off those positions between 1980 and 2000, but substantial holdings remain. For example, the state of Lower Saxony today owns more than 15 percent of the shares (and 20 percent of the voting rights, which are guaranteed by law, despite objections from the European Union) of Volkswagen, the leading automobile manufacturer in Europe and the world. In the period 1950–1980, when public debt was close to zero, net public capital was close to one year’s national income in Germany, compared with barely two years for private capital, which then stood at a very low level (see Figure 4.3). Just as in France, the government owned 25–30 percent of Germany’s national capital during the decades of postwar reconstruction and the German economic miracle. Just as in France, the slowdown in economic growth after 1970 and the accumulation of public debt (which began well before reunification and has continued since) led to a complete turnaround over the course of the past few decades. Net public wealth was almost exactly zero in 2010, and private wealth, which has grown steadily since 1950, accounts for nearly all of national wealth.

In fact, the budgetary and political shocks of two wars proved far more destructive to capital than combat itself. In addition to physical destruction, the main factors that explain the dizzying fall in the capital/income ratio between 1913 and 1950 were on the one hand the collapse of foreign portfolios and the very low savings rate characteristic of the time (together, these two factors, plus physical destruction, explain two-thirds to three-quarters of the drop) and on the other the low asset prices that obtained in the new postwar political context of mixed ownership and regulation (which accounted for one-quarter to one-third of the drop).

Owing to low growth and repeated recessions, the period 1914–1945 was a dark one for all Europeans but especially for the wealthy, whose income dwindled considerably in comparison with the Belle Époque. Private savings rates were therefore relatively low (especially if we deduct the amount of reparations and replacement of war-damaged property), and some people consequently chose to maintain their standard of living by gradually selling off part of their capital. When the Depression came in the 1930s, moreover, many stock- and bondholders were ruined as firm after firm went bankrupt.

Savers lent massively to their governments, in some cases selling their foreign assets, only to be ultimately expropriated by inflation, very quickly in France and Germany and more slowly in Britain, which created the illusion that private wealth in Britain was faring better in 1950 than private wealth on the continent. In fact, national wealth was equally affected in both places (see Figures 4.4 and 4.5). At times governments borrowed directly from abroad: that is how the United States went from a negative position on the eve of World War I to a positive position in the 1950s. But the effect on the national wealth of Britain or France was the same.
Ultimately, the decline in the capital/income ratio between 1913 and 1950 is the history of Europe’s suicide, and in particular of the euthanasia of European capitalists.
This political, military, and budgetary history would be woefully incomplete, however, if we did not insist on the fact that the low level of the capital/ income ratio after World War II was in some ways a positive thing, in that it reflected in part a deliberate policy choice aimed at reducing—more or less consciously and more or less efficaciously—the market value of assets and the economic power of their owners. Concretely, real estate values and stocks fell to historically low levels in the 1950s and 1960s relative to the price of goods and services, and this goes some way toward explaining the low capital/income ratio.

[In the USA in the 18th/19th century,] there was so much land that its market value was very low: anyone could own vast quantities, and therefore it was not worth very much. In other words, the price effect more than counterbalanced the volume effect: when the volume of a given type of capital exceeds certain thresholds, its price will inevitably fall to a level so low that the product of the price and volume, which is the value of the capital, is lower than it would be if the volume were smaller.

The fact that total wealth amounted to barely three years of national income in the United States compared with more than seven in Europe signified in a very concrete way that [in the 18th/19th century] the influence of landlords and accumulated wealth was less important in the New World. With a few years of work, the new arrivals were able to close the initial gap between themselves and their wealthier predecessors—or at any rate it was possible to close the wealth gap more rapidly than in Europe.

In 1840, Tocqueville noted quite accurately that “the number of large for- tunes [in the United States] is quite small, and capital is still scarce,” and he saw this as one obvious reason for the democratic spirit that in his view dominated there. He added that, as his observations showed, all of this was a consequence of the low price of agricultural land: “In America, land costs little, and anyone can easily become a landowner.” Here we can see at work the Jeffersonian ideal of a society of small landowners, free and equal.

Expressed in years of income or output, capital in the United States seems to have achieved virtual stability from the turn of the twentieth century on—so much so that a stable capital/income or capital/output ratio is sometimes treated as a universal law in US textbooks (like Paul Samuelson’s). In comparison, Europe’s relation to capital, and especially private capital, was notably chaotic in the century just past. In the Belle Époque capital was king. In the years after World War II many people thought capitalism had been almost eradicated. Yet at the beginning of the twenty-first century Europe seems to be in the avant-garde of the new patrimonial capitalism, with private fortunes once again surpassing US levels. This is fairly well explained by the lower rate of economic and especially demographic growth in Europe compared with the United States, leading automatically to increased influence of wealth accumulated in the past, as we will see in Chapter 5. In any case, the key fact is that the United States enjoyed a much more stable capital/income ratio than Europe in the twentieth century, perhaps explaining why Americans seem to take a more benign view of capitalism than Europeans.

Another key difference between the history of capital in America and Europe is that foreign capital never had more than a relatively limited importance in the United States. This is because the United States, the first colonized territory to have achieved independence, never became a colonial power itself.

the world of 1913 was one in which Europe owned a large part of Africa, Asia, and Latin America, while the United States owned itself.

The investments of US multinational corporations in Europe and the rest of the world attained levels that seemed considerable at the time, especially to Europeans, who were accustomed to owning the world and who chafed at the idea of owing their reconstruction in part to Uncle Sam and the Marshall Plan. In fact, despite these national traumas, US investments in Europe would always be fairly limited compared to the investments the former colonial powers had held around the globe a few decades earlier. Furthermore, US investments in Europe and elsewhere were balanced by continued strong foreign investment in the United States, particularly by Britain.

the United States is more than 95 percent American owned and less than 5 percent foreign owned.

It is interesting to observe that things took a very different course in Canada, where a very significant share of domestic capital—as much as a quarter in the late nineteenth and early twentieth century—was owned by foreign investors, mainly British, especially in the natural resources sector (copper, zinc, and aluminum mines as well as hydrocarbons).

Today, Canada’s situation is fairly close to that of the United States. […] Canada is thus more than 98 percent Canadian owned and less than 2 percent foreign owned.

This comparison of the United States with Canada is interesting, because it is difficult to find purely economic reasons why these two North American trajectories should differ so profoundly. Clearly, political factors played a central role. Although the United States has always been quite open to foreign investment, it is fairly difficult to imagine that nineteenth-century US citizens would have tolerated a situation in which one-quarter of the country was owned by its former colonizer.13 This posed less of a problem in Canada, which remained a British colony: the fact that a large part of the country was owned by Britain was therefore not so different from the fact that Londoners owned much of the land and many of the factories in Scotland or Sussex.

the number of slaves [in the US] had increased tenfold in less than a century [1770s – 1860]. The slave economy was growing rapidly when the Civil War broke out in 1861, leading ultimately to the abolition of slavery in 1865.

By 1860, the proportion of slaves in the overall population of the United States had fallen to around 15 percent (about 4 million slaves in a total population of 30 million), owing to rapid population growth in the North and West. In the South, however, the proportion remained at 40 percent: 4 million slaves and 6 million whites for a total population of 10 million.

What one finds is that the total market value of slaves represented nearly a year and a half of US national income in the late eighteenth century and the first half of the nineteenth century, which is roughly equal to the total value of farmland. If we include slaves along with other components of wealth, we find that total American wealth has remained relatively stable from the colonial era to the present, at around four and a half years of national income (see Figure 4.10).

Figure 4.10, page 160

Figure 4.11, page 161

Clearly, the antebellum United States was far from the country without capital discussed earlier. In fact, the New World combined two diametrically opposed realities. In the North we find a relatively egalitarian society in which capital was indeed not worth very much, because land was so abundant that anyone could became a landowner relatively cheaply, and also because recent immigrants had not had time to accumulate much capital. In the South we find a world where inequalities of ownership took the most extreme and violent form possible, since one half of the population owned the other half: here, slave capital largely supplanted and surpassed landed capital.

This complex and contradictory relation to inequality largely persists in the United States to this day: on the one hand this is a country of egalitarian promise, a land of opportunity for millions of immigrants of modest background; on the other it is a land of extremely brutal inequality, especially in relation to race, whose effects are still quite visible. (Southern blacks were deprived of civil rights until the 1960s and subjected to a regime of legal segregation that shared some features in common with the system of apartheid that was maintained in South Africa until the 1980s.) This no doubt accounts for many aspects of the development—or rather nondevelopment—of the US welfare state.

Attributing a monetary value to the stock of human capital makes sense only in societies where it is actually possible to own other individuals fully and entirely—societies that at first sight have definitively ceased to exist.

At the individual level, fortunes are sometimes amassed very quickly, but at the country level, the movement of the capital/ income ratio described by the law β = s /g is a long-run phenomenon.

The general evolution is clear: bubbles aside, what we are witnessing is a strong comeback of private capital in the rich countries since 1970, or, to put it another way, the emergence of a new patrimonial capitalism.

This structural evolution is explained by three sets of factors, which complement and reinforce one another to give the phenomenon a very significant amplitude. The most important factor in the long run is slower growth, especially demographic growth, which, together with a high rate of saving, automatically gives rise to a structural increase in the long-run capital/income ratio, owing to the law β = s /g. This mechanism is the dominant force in the very long run but should not be allowed to obscure the two other factors that have substantially reinforced its effects over the last few decades: first, the gradual privatization and transfer of public wealth into private hands in the 1970s and 1980s, and second, a long-term catch-up phenomenon affecting real estate and stock market prices, which also accelerated in the 1980s and 1990s in a political context that was on the whole more favorable to private wealth than that of the immediate postwar decades.

If [international] comparisons are made over periods of a few years, the differences can be significant, and these often spur national pride or jealousy. But if one takes averages over longer periods, the fact is that all the rich countries are growing at approximately the same rate. Between 1970 and 2010, the average annual rate of growth of per capita national income ranged from 1.6 to 2.0 percent in the eight most developed countries and more often than not remained between 1.7 and 1.9 percent.

[…] private saving consists of two components: savings made directly by private individuals (this is the part of disposable household income that is not consumed immediately) and savings by firms on behalf of the private individuals who own them, directly in the case of individual firms or indirectly via their financial investments. This second component consists of profits reinvested by firms (also referred to as “retained earnings”) and in some countries accounts for as much as half the total amount of private savings (see Table 5.2).

page 177, table 5.2

[…] the very considerable growth of private wealth in Russia and Eastern Europe between the late 1980s and the present, which led in some cases to the spectacularly rapid enrichment of certain individuals (I am thinking mainly of the Russian “oligarchs”), obviously had nothing to do with saving or the dynamic law β = s /g. It was purely and simply the result of a transfer of ownership of capital from the government to private individuals. The privatization of national wealth in the developed countries since 1970 can be regarded as a very attenuated form of this extreme case.

According to my estimates, this historical catch-up process is now complete: leaving aside erratic short-term price movements, the increase in asset prices [real estate and stocks] between 1950 and 2010 seems broadly speaking to have compensated for the decline between 1910 and 1950.

192 footnote 25, page 596
five years of German trade surpluses would be enough to buy all the real estate in Paris, and five more years would be enough to buy the CAC 40 (around 800–900 billion euros for each purchase). Germany’s very large trade surplus seems to be more a consequence of the vagaries of German competitiveness than of an explicit policy of accumulation. It is therefore possible that domestic demand will increase and the trade surplus will decrease in coming years. In the oil exporting countries, which are explicitly seeking to accumulate foreign assets, the trade surplus is more than 10 percent of GDP (in Saudi Arabia and Russia, for example) and even multiples of that in some of the smaller petroleum exporters.

the Japanese record of 1990 was recently beaten by Spain, where the total amount of net private capital reached eight years of national income on the eve of the crisis of 2007–2008, which is a year more than in Japan in 1990. The Spanish bubble began to shrink quite rapidly in 2010–2011, just as the Japanese bubble did in the early 1990s.

In most countries, the total amount of financial assets and liabilities in the early 1970s did not exceed four to five years of national income. By 2010, this amount had increased to ten to fifteen years of national income (in the United States, Japan, Germany, and France in particular) and to twenty years of national income in Britain, which set an absolute historical record. This reflects the unprecedented development of cross-investments involving financial and non-financial corporations in the same country (and, in particular, a significant inflation of bank balance sheets, completely out of proportion with the growth of the banks’ own capital), as well as cross-investments between countries.

the phenomenon of international cross-investments is much more prevalent in European countries, led by Britain, Germany, and France (where financial assets held by other countries represent between one-quarter and one-half of total domestic financial assets, which is considerable), than in larger economies such as the United States and Japan (where the proportion of foreign-held assets is not much more than one-tenth). This increases the feeling of dispossession, especially in Europe, in part for good reasons, though often to an exaggerated degree.

we find that capital’s share of income was on the order of 35–40 percent in both Britain and France in the late eighteenth century and throughout the nineteenth, before falling to 20–25 percent in the middle of the twentieth century and then rising again to 25–30 percent in the late twentieth and early twenty-first centuries.

the income of nonwage workers is “mixed,” because it combines income from labor with income from capital. This is also referred to as “entrepreneurial income.”

204 footnote 3, page 598
In the rich countries, the share of individually owned businesses in domestic output fell from 30–40 percent in the 1950s (and from perhaps 50 percent in the nineteenth and early twentieth centuries) to around 10 percent in the 1980s (reflecting mainly the decline in the share of agriculture) and then stabilized at around that level, at times rising to about 12–15 percent in response to changing fiscal advantages and disadvantages.

the available data on the rates of return earned by fortunes of different sizes suggest that there are important economies of scale in the management of wealth, and that the pure returns earned by the largest fortunes are significantly higher than the levels indicated here.

Today, the level of taxation of capital and its income may be fairly low if one adopts the correct strategy of fiscal optimization (and some particularly persuasive investors even manage to obtain subsidies), but in most cases the tax is substantial.

There is every reason to believe that the largest fortunes are often those that are best indexed and most diversified over the long run, while smaller fortunes—typically checking or savings accounts—are the most seriously affected by inflation.
-> As a little person you are fucked by definition. “Rigged” is the wrong word, but the system gives big capital holders a big advantage.

In all civilizations, capital fulfills two economic functions: first, it provides housing (more precisely, capital produces “housing services,” whose value is measured by the equivalent rental value of dwellings, defined as the increment of well-being due to sleeping and living under a roof rather than outside), and second, it serves as a factor of production in producing other goods and services (in processes of production that may require land, tools, buildings, offices, machinery, infrastructure, patents, etc.).

“short-termism” and “creative accounting” are sometimes the shortest path to maximizing the immediate private return on capital. Whatever institutional imperfections may exist, however, it is clear that systems of financial intermediation have played a central and irreplaceable role in the history of economic development. The process has always involved a very large number of actors, not just banks and formal financial markets: for example, in the eighteenth and nineteenth centuries, notaries played a central role in bringing investors together with entrepreneurs in need of financing, such as Père Goriot with his pasta factories and César Birotteau with his desire to invest in real estate.

Too much capital kills the return on capital: whatever the rules and institutions that structure the capital-labor split may be, it is natural to expect that the marginal productivity of capital decreases as the stock of capital increases. For example, if each agricultural worker already has thousands of hectares to farm, it is likely that the extra yield of an additional hectare of land will be limited. Similarly, if a country has already built a huge number of new dwellings, so that every resident enjoys hundreds of square feet of living space, then the increase to well-being of one additional building—as measured by the additional rent an individual would be prepared to pay in order to live in that building—would no doubt be very small. The same is true for machinery and equipment of any kind: marginal productivity decreases with quantity beyond a certain threshold. (Although it is possible that some minimum number of tools are needed to begin production, saturation is eventually reached.) Conversely, in a country where an enormous population must share a limited supply of land, scarce housing, and a small supply of tools, then the marginal product of an additional unit of capital will naturally be quite high, and the fortunate owners of that capital will not fail to take advantage of this.

the return to a historic regime of low growth, and in particular zero or even negative demographic growth, leads logically to the return of capital. This tendency for low-growth societies to reconstitute very large stocks of capital is expressed by the law β = s /g and can be summarized as follows: in stagnant societies, wealth accumulated in the past naturally takes on considerable importance.

With a capital/income ratio of seven to eight years and a rate of return on capital of 4–5 percent, capital’s share of global income could amount to 30 or 40 percent, a level close to that observed in the eighteenth and nineteenth centuries, and it might rise even higher.

Progress toward economic and technological rationality need not imply progress toward democratic and meritocratic rationality. The primary reason for this is simple: technology, like the market, has neither limits nor morality. The evolution of technology has certainly increased the need for human skills and competence. But it has also increased the need for buildings, homes, offices, equipment of all kinds, patents, and so on, so that in the end the total value of all these forms of nonhuman capital (real estate, business capital, industrial capital, financial capital) has increased almost as rapidly as total income from labor. If one truly wishes to found a more just and rational social order based on common utility, it is not enough to count on the caprices of technology.
To sum up: modern growth, which is based on the growth of productivity and the diffusion of knowledge, has made it possible to avoid the apocalypse predicted by Marx and to balance the process of capital accumulation. But it has not altered the deep structures of capital—or at any rate has not truly reduced the macroeconomic importance of capital relative to labor.

in all societies, income inequality can be decomposed into three terms: inequality in income from labor; inequality in the ownership of capital and the income to which it gives rise; and the interaction between these two terms.

the structure of the income and wealth hierarchies in nineteenth-century France was such that the standard of living the wealthiest French people could attain greatly exceeded that to which one could aspire on the basis of income from labor alone. Under such conditions, why work? And why behave morally at all? Since social inequality was in itself immoral and unjustified, why not be thoroughly immoral and appropriate capital by whatever means are available?

the key fact is that in nineteenth-century France and, for that matter, into the early twentieth century, work and study alone were not enough to achieve the same level of comfort afforded by inherited wealth and the income derived from it.

Nevertheless, democratic modernity is founded on the belief that inequalities based on individual talent and effort are more justified than other inequalities—or at any rate we hope to be moving in that direction. Indeed, Vautrin’s lesson to some extent ceased to be valid in twentieth-century Europe, at least for a time. During the decades that followed World War II, inherited wealth lost much of its importance, and for the first time in history, perhaps, work and study became the surest routes to the top. Today, even though all sorts of inequalities have reemerged, and many beliefs in social and democratic progress have been shaken, most people still believe that the world has changed radically since Vautrin lectured Rastignac.
In the vast majority of cases, however, it is not only more moral but also more profitable to rely on study, work, and professional success.

inequality with respect to capital is always greater than inequality with respect to labor. The distribution of capital ownership (and of income from capital) is always more concentrated than the distribution of income from labor.
Two points need to be clarified at once. First, we find this regularity in all countries in all periods for which data are available, without exception, and the magnitude of the phenomenon is always quite striking.
Second, this regularity is by no means foreordained, and its existence tells us something important about the nature of the economic and social processes that shape the dynamics of capital accumulation and the distribution of wealth.

Although precautionary saving in anticipation of short-term shocks does indeed exist in the real world, it is clearly not the primary explanation for the observed accumulation and distribution of wealth.
Life-cycle saving cannot explain the very highly concentrated ownership of capital we observe in practice, any more than precautionary saving can. To be sure, older individuals are certainly richer on average than younger ones. But the concentration of wealth is actually nearly as great within each age cohort as it is for the population as a whole. In other words, and contrary to a widespread belief, intergenerational warfare has not replaced class warfare. The very high concentration of capital is explained mainly by the importance of inherited wealth and its cumulative effects: for example, it is easier to save if you inherit an apartment and do not have to pay rent.

in the most inegalitarian countries, such as the United States in the early 2010s (where, as will emerge later, income from labor is about as unequally distributed as has ever been observed anywhere), the top decile gets 35 percent of the total, whereas the bottom half gets only 25 percent.

If the trend observed in the United States were to continue, then by 2030 the top 10 percent of earners will be making 9,000 euros a month (and the top 1 percent, 34,000 euros), the middle 40 percent will earn 1,750, and the bottom 50 percent just 800 a month. The top 10 percent could therefore use a small portion of their incomes to hire many of the bottom 50 percent as domestic servants.

inequalities of wealth in the countries that are most egalitarian in that regard (such as the Scandinavian countries in the 1970s and 1980s) appear to be considerably greater than wage inequalities in the countries that are most inegalitarian with respect to wages (such as the United States in the early 2010s: see Tables 7.1 and 7.2). To my knowledge, no society has ever existed in which ownership of capital can reasonably be described as “mildly” inegalitarian, by which I mean a distribution in which the poorest half of society would own a significant share (say, one-fifth to one-quarter) of total wealth.

For millions of people, “wealth” amounts to little more than a few weeks’ wages in a checking account or low-interest savings account, a car, and a few pieces of furniture. The inescapable reality is this: wealth is so concentrated that a large segment of society is virtually unaware of its existence, so that some people imagine that it belongs to surreal or mysterious entities.

Housing is the favorite investment of the middle class and moderately well-to-do, but true wealth always consists primarily of financial and business assets.
Make no mistake: the growth of a true “patrimonial (or propertied) middle class” was the principal structural transformation of the distribution of wealth in the developed countries in the twentieth century.
To go back a century in time, to the decade 1900–1910: in all the countries of Europe, the concentration of capital was then much more extreme than it is today.

In other words, there was no middle class in the specific sense that the middle 40 percent of the wealth distribution were almost as poor as the bottom 50 percent. The vast majority of people owned virtually nothing, while the lion’s share of society’s assets belonged to a minority. To be sure, this was not a tiny minority: the upper decile comprised an elite far larger than the upper centile, which even so included a substantial number of people. Nevertheless, it was a minority.
the poorer half of the population are as poor today as they were in the past, with barely 5 percent of total wealth in 2010, just as in 1910.
Nevertheless, the crumbs that the middle class has collected are important, and it would be wrong to underestimate the historical significance of the change. A person who has a fortune of 200,000 to 300,000 euros may not be rich but is a long way from being destitute, and most of these people do not like to be treated as poor. Tens of millions of individuals—40 percent of the population represents a large group, intermediate between rich and poor—individually own property worth hundreds of thousands of euros and collectively lay claim to one-quarter to one-third of national wealth: this is a change of some moment. In historical terms, it was a major transformation, which deeply altered the social landscape and the political structure of society and helped to redefine the terms of distributive conflict.
The rise of a propertied middle class was accompanied by a very sharp decrease in the wealth share of the upper centile, which fell by more than half
, going from more than 50 percent in Europe at the turn of the twentieth century to around 20–25 percent at the end of that century and beginning of the next.
-> The good news in all the analyses so far is that yes, capital has become hugely important again, but instead of only a few percent owning it, it is now distributed over half the population. Of course, the Richest still have the most (by far), but the middle class is doing OK.

Unsurprisingly, the level of inequality of total income falls between inequality of income from labor and inequality of ownership of capital. Note, too, that inequality of total income is closer to inequality of income from labor than to inequality of capital, which comes as no surprise, since income from labor generally accounts for two-thirds to three-quarters of total national income. Concretely, the top decile of the income hierarchy received about 25 percent of national income in the egalitarian societies of Scandinavia in the 1970s and 1980s (it was 30 percent in Germany and France at that time and is more than 35 percent now). In more inegalitarian societies, the top decile claimed as much as 50 percent of national income (with about 20 percent going to the top centile). This was true in France and Britain during the Ancien Régime as well as the Belle Époque and is true in the United States today.
Is it possible to imagine societies in which the concentration of income is much greater? Probably not. If, for example, the top decile appropriates 90 percent of each year’s output (and the top centile took 50 percent just for itself, as in the case of wealth), a revolution will likely occur, unless some peculiarly effective repressive apparatus exists to keep it from happening.
But if the same level of inequality applies to the totality of national income, it is hard to imagine that those at the bottom will accept the situation permanently.

whether such extreme inequality is or is not sustainable depends not only on the effectiveness of the repressive apparatus but also, and perhaps primarily, on the effectiveness of the apparatus of justification. If inequalities are seen as justified, say because they seem to be a consequence of a choice by the rich to work harder or more efficiently than the poor, or because preventing the rich from earning more would inevitably harm the worst-off members of society, then it is perfectly possible for the concentration of income to set new historical records.
the United States may set a new record around 2030 if inequality of income from labor — and to a lesser extent inequality of ownership of capital — continue to increase as they have done in recent decades. The top decile would them claim about 60 percent of national income, while the bottom half would get barely 15 percent.

The first of these two ways of achieving such high inequality is through a “hyperpatrimonial society” (or “society of rentiers”): a society in which inherited wealth is very important and where the concentration of wealth attains extreme levels (with the upper decile owning typically 90 percent of all wealth, with 50 percent belonging to the upper centile alone). The total income hierarchy is then dominated by very high incomes from capital, especially inherited capital. This is the pattern we see in Ancien Régime France and in Europe during the Belle Époque, with on the whole minor variations.

The second way of achieving such high inequality is relatively new. It was largely created by the United States over the past few decades. Here we see that a very high level of total income inequality can be the result of a “hypermeritocratic society” (or at any rate a society that the people at the top like to describe as hypermeritocratic). One might also call this a “society of superstars” (or perhaps “supermanagers,” a somewhat different characterization). In other words, this is a very inegalitarian society, but one in which the peak of the income hierarchy is dominated by very high incomes from labor rather than by inherited wealth. I want to be clear that at this stage I am not making a judgment about whether a society of this kind really deserves to be characterized as “hypermeritocratic.” It is hardly surprising that the winners in such a society would wish to describe the social hierarchy in this way, and sometimes they succeed in convincing some of the losers.

they may complement each other in the century ahead and combine their effects. If this happens, the future could hold in store a new world of inequality more extreme than any that preceded it.

In practice, the Gini coefficient varies from roughly 0.2 to 0.4 in the distributions of labor income observed in actual societies, from 0.6 to 0.9 for observed distributions of capital ownership, and from 0.3 to 0.5 for total income inequality. In Scandinavia in the 1970s and 1980s, the Gini coefficient of the labor income distribution was 0.19, not far from absolute equality. Conversely, the wealth distribution in Belle Époque Europe exhibited a Gini coefficient of 0.85, not far from absolute inequality.

statistical indices such as the Gini coefficient give an abstract and sterile view of inequality, which makes it difficult for people to grasp their position in the contemporary hierarchy (always a useful exercise, particularly when one belongs to the upper centiles of the distribution and tends to forget it, as is often the case with economists).

For similar reasons, caution is in order when using indices such as the interdecile ratios often cited in official reports on inequality from the OECD or national statistical agencies. The most frequently used interdecile ratio is the P90/P10, that is, the ratio between the ninetieth percentile of the income distribution and the tenth percentile.

Indeed, the methodological decision to ignore the top end is hardly neutral: the official reports of national and international agencies are supposed to inform public debate about the distribution of income and wealth, but in practice they often give an artificially rosy picture of inequality. It is as if an official government report on inequalities in France in 1789 deliberately ignored everything above the ninetieth percentile — a group 5 to 10 times larger than the entire aristocracy of the day — on the grounds that it was too complex to say anything about.

The way one tries to measure inequality is never neutral.

The wage level has obviously changed a great deal over the past century, and the composition and skills of the workforce have been totally transformed, but the wage hierarchy has remained more or less the same. If top incomes from capital had not decreased, income inequality would not have diminished in the twentieth century.
-> the world seems more equal now than 100 years ago, but that’s not because our wages are more equal, but because capital was destroyed and the rich became poorer (before getting richer again now).

In the twentieth century it was war, and not harmonious democratic or economic rationality, that erased the past and enabled society to begin anew with a clean slate.
What were these shocks? I discussed them in Part Two: destruction caused by two world wars, bankruptcies caused by the Great Depression, and above all new public policies enacted in this period (from rent control to nationalizations and the inflation-induced euthanasia of the rentier class that lived on government debt). All of these things led to a sharp drop in the capital/income ratio between 1914 and 1945 and a significant decrease in the share of income from capital in national income. But capital is far more concentrated than labor, so income from capital is substantially overrepresented in the upper decile of the income hierarchy (even more so in the upper centile). Hence there is nothing surprising about the fact that the shocks endured by capital, especially private capital, in the period 1914–1945 diminished the share of the upper decile (and upper centile), ultimately leading to a significant compression of income inequality.

To be sure, today as in the past, income from labor gradually disappears as one moves higher in the income hierarchy, and income from capital becomes more and more predominant in the top centiles and thousandths of the distribution: this structural feature has not changed. There is one crucial difference, however: today one has to climb much higher in the social hierarchy before income from capital outweighs income from labor. Currently, income from capital exceeds income from labor only in the top 0.1 percent of the income distribution (see Figure 8.4). In 1932, this social group was 5 times larger; in the Belle Époque it was 10 times larger.
-> the world is still more equal than 100 years ago. We have to preserve that.

To a large extent, we have gone from a society of rentiers to a society of managers, that is, from a society in which the top centile is dominated by rentiers (people who own enough capital to live on the annual income from their wealth) to a society in which the top of the income hierarchy, including to upper centile, consists mainly of highly paid individuals who live on income from labor. One might also say, more correctly (if less positively), that we have gone from a society of superrentiers to a less extreme form of rentier society, with a better balance between success through work and success through capital. It is important, however, to be clear that this major upheaval came about, in France at any rate, without any expansion of the wage hierarchy (which has been globally stable for a long time: the universe of individuals who are paid for their labor has never been as homogeneous as many people think); it was due entirely to the decrease in high incomes from capital.
To sum up: what happened in France is that rentiers (or at any rate nine-tenths of them) fell behind managers; managers did not race ahead of rentiers.

in the interwar years, high school teachers and even late-career grade school teachers belonged to “the 9 percent,” whereas today one has to be a college professor or researcher or, better yet, a senior government official to make the grade.8 In the past, a foreman or skilled technician came close to making it into this group. Today one has to be at least a middle manager and increasingly a top manager with a degree from a prestigious university or business school.
-> not a bad development in itself. Society is simply becoming more educated, which is a good thing. But we do have to make sure education is affordable/free. Otherwise you create castes: those who come from low income families will never move up the income ladder.

Thus the labor market was totally transformed over the past century, but the structure of wage inequality across the market barely changed over the long run, with “the 9 percent” just below the top and the 50 percent at the bottom still drawing about the same shares of income from labor over a very considerable period of time.

the top decile always encompasses two very different worlds: “the 9 percent,” in which income from labor clearly predominates, and “the 1 percent,” in which income from capital becomes progressively more important (more or less rapidly and massively, depending on the period). The transition between the two groups is always gradual, and the frontiers are of course porous, but the differences are nevertheless clear and systematic.

If we move even higher up the salary and bonus scale to look at the top 0.1 or 0.01 percent, we find even greater increases, with hikes in purchasing power greater than 50 percent in ten years. In a context of very low growth and virtual stagnation of purchasing power for the vast majority of workers, raises of this magnitude for top earners have not failed to attract attention.

The most striking fact is that the United States has become noticeably more inegalitarian than France (and Europe as a whole) from the turn of the twentieth century until now, even though the United States was more egalitarian at the beginning of this period. What makes the US case complex is that the end of the process did not simply mark a return to the situation that had existed at the beginning: US inequality in 2010 is quantitatively as extreme as in old Europe in the first decade of the twentieth century, but the structure of that inequality is rather clearly different.

[100 years ago,] US rentiers were fewer in number and not as rich (compared to the average US standard of living) as their European counterparts.

If we look at the period 1910–1950 as a whole, however, we find that the compression of inequality was noticeably smaller in the United States than in France (and, more generally, Europe). To sum up: inequality in the United States started from a lower peak on the eve of World War I but at its low point after World War II stood above inequality in Europe. Europe in 1914–1945 witnessed the suicide of rentier society, but nothing of the sort occurred in the United States.

Inequality reached its lowest ebb in the United States between 1950 and 1980: the top decile of the income hierarchy claimed 30 to 35 percent of US national income, or roughly the same level as in France today. This is what Paul Krugman nostalgically refers to as “the America we love”—the America of his childhood. In the 1960s, the period of the TV series Mad Men and General de Gaulle, the United States was in fact a more egalitarian society than France (where the upper decile’s share had increased dramatically to well above 35 percent), at least for those US citizens whose skin was white.

This is a crucial point: the facts show quite clearly that the financial crisis as such cannot be counted on to put an end to the structural increase of inequality in the United States. To be sure, in the immediate aftermath of a stock market crash, inequality always grows more slowly, just as it always grows more rapidly in a boom. The years 2008–2009, following the collapse of Lehman Brothers, like the years 2001–2002, after the bursting of the first Internet bubble, were not great times for taking profits on the stock market. Indeed, capital gains plummeted in those years. But these short-term movements did not alter the long-run trend, which is governed by other forces

In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.
In support of this thesis, it is important to note the considerable transfer of US national income — on the order of 15 points — from the poorest 90 percent to the richest 10 percent since 1980. Specifically, if we consider the total growth of the US economy in the thirty years prior to the crisis, that is, from 1977 to 2007, we find that the richest 10 percent appropriated three-quarters of the growth. The richest 1 percent alone absorbed nearly 60 percent of the total increase of US national income in this period. Hence for the bottom 90 percent, the rate of income growth was less than 0.5 percent per year. These figures are incontestable, and they are striking: whatever one thinks about the fundamental legitimacy of income inequality, the numbers deserve close scrutiny. It is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups.

That said, it would be altogether too much to claim that the increase of inequality in the United States was the sole or even primary cause of the financial crisis of 2008 or, more generally, of the chronic instability of the global financial system. To my mind, a potentially more important cause of instability is the structural increase of the capital/income ratio (especially in Europe), coupled with an enormous increase in aggregate international asset positions.

this unprecedented increase in wage inequality does not appear to have been compensated by increased wage mobility over the course of a person’s career. [Footnote 37, page 607: Nor was it compensated by greater intergenerational mobility; quite the contrary.] This is a significant point, in that greater mobility is often mentioned as a reason to believe that increasing inequality is not that important.

in the United States, as in France and Europe, today as in the past, income from capital always becomes more important as one climbs the rungs of the income hierarchy.

the increase in very high incomes and very high salaries primarily reflects the advent of “supermanagers,” that is, top executives of large firms who have managed to obtain extremely high, historically unprecedented compensation packages for their labor.

the vast majority (60 to 70 percent, depending on what definitions one chooses) of the top 0.1 percent of the income hierarchy in 2000–2010 consists of top managers. By comparison, athletes, actors, and artists of all kinds make up less than 5 percent of this group. [Footnote 42, page 607: Other important professional groups include doctors and lawyers (about 10 percent of the total) and real estate promoters (around 5 percent).] In this sense, the new US inequality has much more to do with the advent of “supermanagers” than with that of “superstars.” [Footnote 43, page 607: “Superentrepreneurs” of the Bill Gates type are so few in number that they are not relevant for the analysis of income and are best studied in the context of an analysis of fortunes and in particular the evolution of different classes of fortune.]

The very high volatility of incentives, bonuses, and option prices explains why top incomes fluctuated so much in the period 2000–2010.

In the long run, the best way to reduce inequalities with respect to labor as well as to increase the average productivity of the labor force and the overall growth of the economy is surely to invest in education. If the purchasing power of wages increased fivefold in a century, it was because the improved skills of the workforce, coupled with technological progress, increased output per head fivefold. Over the long run, education and technology are the decisive determinants of wage levels.
-> education ist most important, because it 1. raises the skills of the workforce and 2. leads to technological progress (which in turn is the second largest driver of inequality reduction).

Both countries [USA and France] attach a great deal of importance to the central role of schools and vocational training in fostering social mobility, yet theoretical discussion of educational issues and of meritocracy is often out of touch with reality, and in particular with the fact that the most prestigious schools tend to favor students from privileged social backgrounds.

In all human societies, health and education have an intrinsic value: the ability to enjoy years of good health, like the ability to acquire knowledge and culture, is one of the fundamental purposes of civilization. […] As noted in Chapter 2, we are to some extent already on this path: a characteristic feature of modern growth is the considerable share of both output and employment devoted to education, culture, and medicine.

The payment of a monthly rather than a daily wage was a revolutionary innovation that gradually took hold in all the developed countries during the twentieth century. This innovation was inscribed in law and became a feature of wage negotiations between workers and employers. The daily wage, which had been the norm in the nineteenth century, gradually disappeared. This was a crucial step in the constitution of the working class: workers now enjoyed a legal status and received a stable, predictable remuneration for their work. This clearly distinguished them from day laborers and piece workers—the typical employees of the eighteenth and nineteenth centuries.

the particular functions and tasks that a firm needs to be performed often require workers to make specific investments in the firm, in the sense that these investments are of no (or limited) value to other firms: for instance, workers might need to learn specific work methods, organizational methods, or skills linked to the firm’s production process. If wages can be set unilaterally and changed at any moment by the firm, so that workers do not know in advance how much they will be paid, then it is highly likely that they will not invest as much in the firm as they should. It may therefore be in everyone’s interest to set pay scales in advance. The same “specific investments” argument can also apply to other decisions by the firm, and it is the main reason for limiting the power of stockholders (who are seen as having too short-term an outlook in some cases) in favor of a power-sharing arrangement with a broader group of “stakeholders” (including the firm’s workers), as in the “Rhenish model” of capitalism discussed earlier, in Part Two. This is probably the most important argument in favor of fixed wage scales.

To sum up: the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills. Over the long run, minimum wages and wage schedules cannot multiply wages by factors of five or ten: to achieve that level of progress, education and technology are the decisive forces.

313 footnote 10, page 608
The employer then sets the wage as low as possible, and an increase in the minimum wage does not reduce the level of employment, because the employer’s profit margin is so large as to make it possible to continue to hire all who seek employment. Employment may even increase [with higher wages], because more people will seek work, perhaps because at the higher wage they prefer work to illegal activities, which is a good thing, or because they prefer work to school, which may not be such a good thing. This is precisely what Card and Krueger observed.

Broadly speaking, the rise of the supermanager is largely an Anglo-Saxon phenomenon. Since 1980 the share of the upper centile in national income has risen significantly in the United States, Great Britain, Canada, and Australia

figure 9.2, page 316

figure 9.3, page 317

figure 9.5, page 319

figure 9.6, page 320

in the United States, income inequality in 2000–2010 regained the record levels observed in 1910–1920 (although the composition of income was now different, with a larger role played by high incomes from labor and a smaller role by high incomes from capital). In Britain and Canada, things moved in the same direction. In continental Europe and Japan, income inequality today remains far lower than it was at the beginning of the twentieth century and in fact has not changed much since 1945, if we take a long-run view.

Obviously, this does not mean that the European and Japanese evolutions of the past few decades should be neglected. On the contrary: their trajectory resembles that of the United States in some respects, with a delay of one or two decades, and one need not wait until the phenomenon assumes the macroeconomic significance observed in the United States to worry about it.

this quite large divergence in the way the income distribution has evolved in the various wealthy countries demands an explanation, which the theory of marginal productivity and of the race between technology and education does not seem capable of providing.

it was the New World [USA, Canada, Australia, New Zealand], and especially the newest and most recently settled parts of the New World, that appear to have been less inegalitarian than Old Europe in the Belle Époque.

Interestingly, the top centile’s share of German national income increased rapidly between 1933 and 1938, totally out of phase with other countries: this reflects the revival of industrial profits (boosted by demand for armaments), as well as a general reestablishment of income hierarchies in the Nazi era. Note, too, that the share of the top centile—and, even more, the top thousandth—in Germany has been noticeably higher since 1950 than in most other continental European countries (including, in particular, France) as well as Japan, even though the overall level of inequality in Germany is not very different. This can be explained in various ways, among which it is difficult to say that one is better than another.

Is it really the case that inequality of individual skills and productivities is greater in the United States today than in the half-illiterate India of the recent past (or even today) or in apartheid (or postapartheid) South Africa? If that were the case, it would be bad news for US educational institutions, which surely need to be improved and made more accessible but probably do not deserve such extravagant blame.
-> It is clearly bullshit that top-wages are justified because those people are that much more productive than the rest.

It is only reasonable to assume that people in a position to set their own salaries have a natural incentive to treat themselves generously, or at the very least to be rather optimistic in gauging their marginal productivity. To behave in this way is only human, especially since the necessary information is, in objective terms, highly imperfect. It may be excessive to accuse senior executives of having their “hands in the till,” but the metaphor is probably more apt than Adam Smith’s metaphor of the market’s “invisible hand.”

Simply put, wage inequalities increased rapidly in the United States and Britain because US and British corporations became much more tolerant of extremely generous pay packages after 1970. Social norms evolved in a similar direction in European and Japanese firms, but the change came later (in the 1980s or 1990s) and has thus far not gone as far as in the United States. Executive compensation of several million euros a year is still more shocking today in Sweden, Germany, France, Japan, and Italy than in the United States or Britain. It has not always been this way—far from it: recall that in the 1950s and 1960s the United States was more egalitarian than France, especially in regard to the wage hierarchy. But it has been this way since 1980, and all signs are that this change in senior management compensation has played a key role in the evolution of wage inequalities around the world.
-> It’s banal but true: in the end, societies have the power to change everything. Here for the bad, but in the future also for the good! But we shouldn’t forget the other factors Piketty talks about: the theory of marginal productivity and the theory of the race between technology and education.

The problem is now to explain where these social norms come from and how they evolve, which is obviously a question for sociology, psychology, cultural and political history, and the study of beliefs and perceptions at least as much as for economics per se. The problem of inequality is a problem for the social sciences in general, not for just one of its disciplines. In the case in point, I noted earlier that the “conservative revolution” that gripped the United States and Great Britain in the 1970s and 1980s, and that led to, among other things, greater tolerance of very high executive pay, was probably due in part to a feeling that these countries were being overtaken by others (even though the postwar period of high growth in Europe and Japan was in reality an almost mechanical consequence of the shocks of the period 1914–1945).

It is also possible that the explosion of top incomes can be explained as a form of “meritocratic extremism,” by which I mean the apparent need of modern societies, and especially US society, to designate certain individuals as “winners” and to reward them all the more generously if they seem to have been selected on the basis of their intrinsic merits rather than birth or background.
-> He calls them supermanagers and winners and meritocratic extremism – he’s more eloquent in this than me, I used to call them heroes. That the industry celebrates heroes as the ones who are unreachably good. Until they fall and they become the nemesis. Think Ackermann, Schrempp, Piech, etc.

If executive pay were determined by marginal productivity, one would expect its variance to have little to do with external variances and to depend solely or primarily on nonexternal variances. In fact, we observe just the opposite: it is when sales and profits increase for external reasons that executive pay rises most rapidly. This is particularly clear in the case of US corporations: Bertrand and Mullainhatan refer to this phenomenon as “pay for luck.”

the decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks.
-> Thank you, lobbies.

the [French] Revolution also had relatively little effect on the distribution of wealth. In 1810–1820, the epoch of Père Goriot, Rastignac, and Mademoiselle Victorine, wealth was probably slightly less unequally distributed than during the Ancien Régime, but the difference was really rather minimal: both before and after the Revolution, France was a patrimonial society characterized by a hyperconcentration of capital, in which inheritance and marriage played a key role and inheriting or marrying a large fortune could procure a level of comfort not obtainable through work or study. In the Belle Époque, wealth was even more concentrated than when Vautrin lectured Rastignac. At bottom, however, France remained the same society, with the same basic structure of inequality, from the Ancien Régime to the Third Republic, despite the vast economic and political changes that took place in the interim.
Probate records also enable us to observe that the decrease in the upper decile’s share of national wealth in the twentieth century benefited the middle 40 percent of the population exclusively, while the share of the poorest 50 percent hardly increased at all (it remained less than 5 percent of total wealth). Throughout the nineteenth and twentieth centuries, the bottom half of the population had virtually zero net wealth.

From a French perspective, the most striking fact is that inequality of capital ownership was only slightly greater in Britain than in France during the Belle Époque, even though Third Republic elites at the time liked to portray France as an egalitarian country compared with its monarchical neighbor across the Channel. In fact, the formal nature of the political regime clearly had very little influence on the distribution of wealth in the two countries.

we also find the same extremely high concentration of wealth—with 80 to 90 percent of capital owned by the top decile and 50–60 percent by the top centile—in most societies prior to the nineteenth century, and in particular in traditional agrarian societies in the modern era, as well as in the Middle Ages and antiquity.

The major structural transformation was the emergence of a middle group, representing nearly half the population, consisting of individuals who managed to acquire some capital of their own—enough so that collectively they came to own one-quarter to one-third of the nation’s total wealth.

The differences between the European and US experiences are clear. In Europe, the twentieth century witnessed a total transformation of society: inequality of wealth, which on the eve of World War I was as great as it had been under the Ancien Régime, fell to an unprecedentedly low level, so low that nearly half the population were able to acquire some measure of wealth and for the first time to own a significant share of national capital. This is part of the explanation for the great wave of enthusiasm that swept over Europe in the period 1945–1975. People felt that capitalism had been overcome and that inequality and class society had been relegated to the past. It also explains why Europeans had a hard time accepting that this seemingly ineluctable social progress ground to a halt after 1980, and why they are still wondering when the evil genie of capitalism will be put back in its bottle.
In the United States, perceptions are very different. In a sense, a (white) patrimonial middle class already existed in the nineteenth century. It suffered a setback during the Gilded Age, regained its health in the middle of the twentieth century, and then suffered another setback after 1980. This “yo-yo” pattern is reflected in the history of US taxation. In the United States, the twentieth century is not synonymous with a great leap forward in social justice. Indeed, inequality of wealth there is greater today than it was at the beginning of the nineteenth century. Hence the lost US paradise is associated with the country’s beginnings: there is nostalgia for the era of the Boston Tea Party, not for Trente Glorieuses and a heyday of state intervention to curb the excesses of capitalism.

Consider a world of low growth, on the order of, say, 0.5–1 percent a year, which was the case everywhere before the eighteenth and nineteenth centuries. The rate of return on capital, which is generally on the order of 4 or 5 percent a year, is therefore much higher than the growth rate. Concretely, this means that wealth accumulated in the past is recapitalized much more quickly than the economy grows, even when there is no income from labor.

figure 10.9, page 354

figure 10.10, page 356

Ultimately, we find that in the twentieth century, both fiscal and nonfiscal shocks created a situation in which, for the first time in history, the net return on capital was less than the growth rate. A concatenation of circumstances (wartime destruction, progressive tax policies made possible by the shocks of 1914– 1945, and exceptional growth during the three decades following the end of World War II) thus created a historically unprecedented situation, which lasted for nearly a century. All signs are, however, that it is about to end.

figure 10.11, page 357

Note, however, that the principal shortcoming of Figure 10.11 is that it relies on the assumption that no significant political reaction will alter the course of capitalism and financial globalization over the course of the next two centuries. Given the tumultuous history of the past century, this is a dubious and to my mind not very plausible hypothesis, precisely because its inegalitarian consequences would be considerable and would probably not be tolerated indefinitely.

From a strictly logical point of view, it is perfectly possible to imagine a society in which the growth rate is greater than the return on capital—even in the absence of state intervention. Everything depends on the one hand on technology (what is capital used for?) and on the other on attitudes toward saving and property (why do people choose to hold capital?).

In practice, however, there appears never to have been a society in which the rate of return on capital fell naturally and persistently to less than 2–3 percent, and the mean return we generally see (averaging over all types of investments) is generally closer to 4–5 percent (before taxes).

According to this theory, the reason why the return on capital has been historically stable at 4–5 percent is ultimately psychological: since this rate of return reflects the average person’s impatience and attitude toward the future, it cannot vary much from this level.
-> He thinks this “theory” of “time preference” is complete bullshit.

Even today, some people imagine, as Pareto did, that the distribution of wealth is rock stable, as if it were somehow a law of nature. In fact, nothing could be further from the truth. When we study inequality in historical perspective, the important thing to explain is not the stability of the distribution but the significant changes that occur from time to time.

370 footnote 35, page 615
In practice, in view of the very high inflation rate during the war (prices more than tripled between 1940 and 1945), this levy amounted to a 100 percent tax on anyone who did not sufficiently suffer during the war, as André Philip, a Socialist member of General de Gaulle’s provisional government, admitted, explaining that it was inevitable that the tax should weigh equally on “those who did not become wealthier and perhaps even those who, in monetary terms, became poorer, in the sense that their fortunes did not increase to the same degree as the general increase in prices, but who were able to preserve their overall fortunes at a time when so many people in France lost everything.”

In terms of the theoretical model, as well as in the historical data, an increase in the tax on capital income from 0 to 30 percent (reducing the net return on capital from 5 to 3.5 percent) may well leave the total stock of capital unchanged over the long run for the simple reason that the decrease in the upper centile’s share of wealth is compensated by the rise of the middle class. This is precisely what happened in the twentieth century—although the lesson is sometimes forgotten today.

why have top capital incomes in Germany been more concentrated than in France since World War II, suggesting a higher concentration of wealth? Perhaps because the highest estate tax rate in Germany is no more than 15–20 percent, compared with 30–40 percent in France.

If theoretical simulations are to be believed, the concentration of wealth, even if taxes on capital are abolished, would not necessarily return to the extreme level of 1900–1910.

There are no grounds for rejoicing, however, in part because inequality of wealth would still increase substantially (halving the middle-class share of national wealth, for example, which voters might well find unacceptable) and in part because there is considerable uncertainty in the simulations, and other forces exist that may well push in the opposite direction, that is, toward an even greater concentration of capital than in 1900–1910. In particular, demographic growth may be negative (which could drive growth rates, especially in the wealthy countries, below those observed in the nineteenth century, and this would in turn give unprecedented importance to inherited wealth). In addition, capital markets may become more and more sophisticated and more and more “perfect” in the sense used by economists (meaning that the return on capital will become increasingly disconnected from the individual characteristics of the owner and therefore cut against meritocratic values, reinforcing the logic of r > g). As I will show later, in addition, financial globalization seems to be increasing the correlation between the return on capital and the initial size of the investment portfolio, creating an inequality of returns that acts as an additional—and quite worrisome—force for divergence in the global wealth distribution.

To sum up: the fact that wealth is noticeably less concentrated in Europe today than it was in the Belle Époque is largely a consequence of accidental events (the shocks of 1914–1945) and specific institutions such as taxation of capital and its income. If those institutions were ultimately destroyed, there would be a high risk of seeing inequalities of wealth close to those observed in the past or, under certain conditions, even higher. Nothing is certain: inequality can move in either direction. Hence I must now look more closely at the dynamics of inheritance and then at the global dynamics of wealth. One conclusion is already quite clear, however: it is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures that inequality of wealth will decrease and harmonious stability will be achieved.

The overall importance of capital today, as noted, is not very different from what it was in the eighteenth century. Only its form has changed: capital was once mainly land but is now industrial, financial, and real estate. We also know that the concentration of wealth remains high, although it is noticeably less extreme than it was a century ago. The poorest half of the population still owns nothing, but there is now a patrimonial middle class that owns between a quarter and a third of total wealth, and the wealthiest 10 percent now own only two-thirds of what there is to own rather than nine-tenths. We have also learned that the relative movements of the return on capital and the rate of growth of the economy, and therefore of the difference between them, r − g, can explain many of the observed changes, including the logic of accumulation that accounts for the very high concentration of wealth that we see throughout much of human history.

Whenever the rate of return on capital is significantly and durably higher than the growth rate of the economy, it is all but inevitable that inheritance (of fortunes accumulated in the past) predominates over saving (wealth accumulated in the present). In strict logic, it could be otherwise, but the forces pushing in this direction are extremely powerful. The inequality r > g in one sense implies that the past tends to devour the future: wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved. Almost inevitably, this tends to give lasting, disproportionate importance to inequalities created in the past, and therefore to inheritance.

This does not imply, however, that the structure of inequality in the twenty-first century will be the same as in the nineteenth century, in part because the concentration of wealth is less extreme (there will probably be more small to medium rentiers and fewer extremely wealthy rentiers, at least in the short term), in part because the earned income hierarchy is expanding (with the rise of the supermanager), and finally because wealth and income are more strongly correlated than in the past. In the twenty-first century it is possible to be both a supermanager and a “medium rentier”: the new meritocratic order encourages this sort of thing, probably to the detriment of low- and medium-wage workers, especially those who own only a tiny amount of property, if any.

[Inheritance flow] measures the annual amount of past wealth conveyed each year relative to the total income earned that year. (Recall that earned income accounts for roughly two-thirds of national income each year, while part of capital income goes to remunerate the capital that is passed on to heirs.)

the inheritance flow accounts for 20–25 percent of annual income every year in the nineteenth century, with a slight upward trend toward the end of the century. This is an extremely high flow, as I will show later, and it reflects the fact that nearly all of the capital stock came from inheritance. If inherited wealth is omnipresent in nineteenth-century novels, it was not only because writers, especially the debt-ridden Balzac, were obsessed by it. It was above all because inheritance occupied a structurally central place in nineteenth-century society—central as both economic flow and social force.

figure 11.1, page 380

younger people, in particular those born in the 1970s and 1980s, have already experienced (to a certain extent) the important role that inheritance will once again play in their lives and the lives of their relatives and friends. For this group, for example, whether or not a child receives gifts from parents can have a major impact in deciding who will own property and who will not, at what age, and how extensive that property will be—in any case, to a much greater extent than in the previous generation. Inheritance is playing a larger part in their lives, careers, and individual and family choices than it did with the baby boomers. The rebound of inheritance is still incomplete, however, and the evolution is still under way (the inheritance flow in 2000–2010 stood at a point roughly midway between the nadir of the 1950s and the peak of 1900–1910). To date, it has had a less profound impact on perceptions than the previous change, which still dominates people’s thinking. A few decades from now, things may be very different.

Concretely, if gifts prior to death were not included, we would find that average wealth at death in 2000–2010 was just over 20 percent higher than average wealth of the living. But this is simply a reflection of the fact that the dead have already passed on nearly half of their assets. If we include gifts made prior to death, we find that the (corrected) value of μ is actually greater than 220 percent: the corrected wealth of the dead is nearly twice as great as that of the living. We are once again living in a golden age of gift giving, much more so than in the nineteenth century.

392 footnote 12, page 617
To quote the usual proverb, public pensions are “the fortunes of those who have no fortune.”

It is interesting to note that the vast majority of gifts, today as in the nineteenth century, go to children, often in the context of a real estate investment, and they are given on average about ten years before the death of the donor (a gap that has remained relatively stable over time). The growing importance of gifts since the 1970s has led to a decrease in the average age of the recipient: in 2000–2010, the average age of an heir is forty-five to fifty, while that of the recipient of a gift is thirty-five to forty, so that the difference between today and the nineteenth or early twentieth centuries is not as great as it seems from Figure 11.3.

the upsurge in gift giving, which we also find in other European countries, including Germany, is an essential ingredient in the revived importance of inherited wealth in contemporary society.

The logic of r > g implies that the entrepreneur always tends to turn into a rentier. Even if this happens later in life, the phenomenon becomes important as life expectancy increases. The fact that a person has good ideas at age thirty or forty does not imply that she will still be having them at seventy or eighty, yet her wealth will continue to increase by itself. Or it can be passed on to the next generation and continue to increase there. Nineteenth-century French economic elites were creative and dynamic entrepreneurs, but the crucial fact remains that their efforts ultimately—and largely unwittingly—reinforced and perpetuated a society of rentiers owing to the logic of r > g.

The war reset all counters to zero, or close to zero, and inevitably resulted in a rejuvenation of wealth. In this respect, it was indeed the two world wars that wiped the slate clean in the twentieth century and created the illusion that capitalism had been overcome.
-> Maybe that feeling was stronger in France than in Germany. Maybe not – Germans did after all invent their own system called Soziale Marktwirtschaft and decisively influenced the Rhenish model / Rhine capitalism. Also I’m not sure he really means capitalism or just that the cruel aspects of it have been overcome.

this situation did not last long. “Reconstruction capitalism” was by its nature a transitional phase and not the structural transformation some people imagined. In 1950–1960, as capital was once again accumulated and the capital/income ratio β rose, fortunes began to age once more, so that the ratio μ between average wealth at death and average wealth of the living also increased. Growing wealth went hand in hand with aging wealth, thereby laying the groundwork for an even stronger comeback of inherited wealth.

In view of today’s very high inheritance flows, it is quite likely, if current trends continue, that the share of inherited wealth will continue to grow in the decades to come, surpassing 70 percent by 2020 and approaching 80 percent in the 2030s. If the scenario of 1 percent growth and 5 percent return on capital is correct, the share of inherited wealth could continue to rise, reaching 90 percent by the 2050s, or approximately the same level as in the Belle Époque. [in France]

The lowest point was reached by cohorts born in 1910–1920: these individuals should have inherited in the years between the end of World War II and 1960, that is, at a time when the inheritance flow had reached its lowest level, so that inheritance accounted for only 8–10 percent of total resources. The rebound began with cohorts born in 1930–1950, who inherited in 1970–1990, and for whom inheritance accounted for 12–14 percent of total resources. But it is above all for cohorts born in 1970–1980, who began to receive gifts and bequests in 2000–2010, that inheritance regained an importance not seen since the nineteenth century: around 22–24 percent of total resources. These figures show clearly that we have only just emerged from the “end of inheritance” era, and they also show how differently different cohorts born in the twentieth century experienced the relative importance of savings and inheritance: the baby boom cohorts had to make it on their own, almost as much as the interwar and turn-of-the-century cohorts, who were devastated by war. By contrast, the cohorts born in the last third of the century experienced the powerful influence of inherited wealth to almost the same degree as the cohorts of the nineteenth and twenty-first centuries.

In the nineteenth century, the lifetime resources available to the wealthiest 1 percent of heirs (that is, the individuals inheriting the top 1 percent of legacies in their generation) were 25–30 times greater than the resources of the lower class. In other words, a person who could obtain such an inheritance, either from parents or via a spouse, could afford to pay a staff of 25–30 domestic servants throughout his life. At the same time, the resources afforded by the top 1 percent of earned incomes (in jobs such as judge, prosecutor, or attorney, as in Vautrin’s lecture) were about ten times the resources of the lower class. This was not negligible, but it was clearly a much lower standard of living, especially since, as Vautrin observed, such jobs were not easy to obtain. It was not enough to do brilliantly in law school. Often one had to plot and scheme for many long years with no guarantee of success. Under such conditions, if the opportunity to lay hands on an inheritance in the top centile presented itself, it was surely better not to pass it up. At the very least, it was worth a moment’s reflection.
-> Regular people were triply fucked: chances were EXTREMELY low they would get a well-paying job, and even then they had A LOT less money then rentiers, and they had to WORK instead of chilling.

If we now do the same calculation for the generations born in 1910–1920, we find that they faced different life choices. The top 1 percent of inheritances afforded resources that were barely 5 times the lower class standard. The best paid 1 percent of jobs still afforded 10–12 times that standard (as a consequence of the fact that the top centile of the wage hierarchy was relatively stable at about 6–7 percent of total wages over a long period). For the first time in history, no doubt, one could live better by obtaining a job in the top centile rather than an inheritance in the top centile: study, work, and talent paid better than inheritance.

figure 11.10, page 408

[Regarding the top centile of the population:] In all traditional societies (remember that the aristocracy represented 1–2 percent of the population in 1789), and in fact down to the Belle Époque (despite the hopes kindled by the French Revolution), this group was always dominated by inherited capital. The fact that this was not the case for the cohorts born in the first half of the twentieth century was therefore a major event, which fostered unprecedented faith in the irreversibility of social progress and the end of the old social order. To be sure, inequality was not eradicated in the three decades after World War II, but it was viewed primarily from the optimistic angle of wage inequalities. To be sure, there were significant differences between blue-collar workers, white-collar workers, and managers, and these disparities tended to grow wider in France in the 1950s. But [after WWII] there was a fundamental unity to this society, in which everyone participated in the communion of labor and honored the meritocratic ideal. People believed that the arbitrary inequalities of inherited wealth were a thing of the past.

Note, however, that the structure of inequality and of the top centile today is also quite different from what it was in the nineteenth century, because inherited wealth is significantly less concentrated today than in the past. Today’s cohorts face a unique set of inequalities and social structures, which are in a sense somewhere between the world cynically described by Vautrin (in which inheritance predominated over labor) and the enchanted world of the postwar decades (in which labor predominated over inheritance). According to our findings, the top centile of the social hierarchy in France today are likely to derive their income about equally from inherited wealth and their own labor.

In Part One I noted that it was difficult and simplistic to compare purchasing power over long periods of time because consumption patterns and prices change radically in so many dimensions that no single index can capture the reality. Nevertheless, according to official indices, the average per capita purchasing power in Britain and France in 1800 was about one-tenth what it was in 2010. In other words, with 20 or 30 times the average income in 1800, a person would probably have lived no better than with 2 or 3 times the average income today. With 5–10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today.

Notwithstanding the extravagance of some of their characters, these nineteenth-century novelists describe a world in which inequality was to a certain extent necessary: if there had not been a sufficiently wealthy minority, no one would have been able to worry about anything other than survival. This view of inequality deserves credit for not describing itself as meritocratic, if nothing else. In a sense, a minority was chosen to live on behalf of everyone else, but no one tried to pretend that this minority was more meritorious or virtuous than the rest. In this world, it was perfectly obvious, moreover, that without a fortune it was impossible to live a dignified life. Having a diploma or skill might allow a person to produce, and therefore to earn, 5 or 10 times more than the average, but not much more than that. Modern meritocratic society, especially in the United States, is much harder on the losers, because it seeks to justify domination on the grounds of justice, virtue, and merit, to say nothing of the insufficient productivity of those at the bottom.

The most worrisome aspect of this defense of meritocracy is that one finds the same type of argument in the wealthiest societies, where Jane Austen’s points about need and dignity make little sense. In the United States in recent years, one frequently has heard this type of justification for the stratospheric pay of supermanagers (50–100 times average income, if not more). Proponents of such high pay argued that without it, only the heirs of large fortunes would be able to achieve true wealth, which would be unfair. In the end, therefore, the millions or tens of millions of dollars a year paid to supermanagers contribute to greater social justice. This kind of argument could well lay the groundwork for greater and more violent inequality in the future. The world to come may well combine the worst of two past worlds: both very large inequality of inherited wealth and very high wage inequalities justified in terms of merit and productivity (claims with very little factual basis, as noted). Meritocratic extremism can thus lead to a race between supermanagers and rentiers, to the detriment of those who are neither.

It also bears emphasizing that the role of meritocratic beliefs in justifying inequality in modern societies is evident not only at the top of hierarchy but lower down as well, as an explanation for the disparity between the lower and middle classes.

417 footnote 48, page 621
[In 1899] the egalitarian US dream was already a distant memory.

The fact that the total volume of inheritance has regained the same level as in the past does not mean that it plays the same social role, however. As noted, the very significant deconcentration of wealth (which has seen the top centile’s share decrease by nearly two-thirds in a century from 60 percent in 1910–1920 to just over 20 percent today) and the emergence of a patrimonial middle class imply that there are far fewer very large estates today than there were in the nineteenth century. Concretely, the dowries of 500,000 francs that Père Goriot and César Birotteau sought for their daughters—dowries that yielded an annual rent of 25,000 francs, or 50 times the average annual per capita income of 500 francs at that time—would be equivalent to an estate of 30 million euros today, with a yield in interest, dividends, and rents on the order of 1.5 million euros a year (or 50 times the average per capita income of 30,000 euros). Inheritances of this magnitude do exist, as do considerably larger ones, but there are far fewer of them than in the nineteenth century, even though the total volume of wealth and inheritance has practically regained its previous high level.

418 footnote 50, page 621
Labor incomes are taxed today at a substantial level (30 percent on average, excluding retirement and unemployment insurance contributions), whereas the average 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).
-> People who work actually finance the education, healthcare, etc. OF THE RICH!!! HOW PERVERSE IS THAT?

It is striking, for example, that many recent American TV series feature heroes and heroines laden with degrees and high-level skills, whether to cure serious maladies (House), solve mysterious crimes (Bones), or even to preside over the United States (West Wing). The writers apparently believe that it is best to have several doctorates or even a Nobel Prize. It is not unreasonable to interpret any number of such series as offering a hymn to a just inequality, based on merit, education, and the social utility of elites. Still, certain more recent creations depict a more worrisome inequality, based more clearly on vast wealth [Damages, Dirty Sexy Money].

we have moved from a society with a small number of very wealthy rentiers to one with a much larger number of less wealthy rentiers: a society of petits rentiers if you will.

The index that I think is most pertinent for representing this change is presented in Figure 11.11. It is the percentage of individuals in each cohort who inherit (as bequest or gift) amounts larger than the least well paid 50 percent of the population earn in a lifetime. This amount changes over time: at present, the average annual wage of the bottom half of the income distribution is around 15,000 euros, or a total of 750,000 euros over the course of a fifty-year career (including retirement). This is more less what a life at minimum wage brings in.

figure 11.11, page 421

nearly one-sixth of each cohort [born in 2010–2020] will receive an inheritance larger than the amount the bottom half of the population earns through labor in a lifetime. (And this group largely coincides with the half of the population that inherits next to nothing.). Of course, there is nothing to prevent the inheriting sixth from acquiring diplomas or working and no doubt earning more through work than the bottom half of the income distribution. This is nevertheless a fairly disturbing form of inequality, which is in the process of attaining historically unprecedented heights. It is also more difficult to represent artistically or to correct politically, because it is a commonplace inequality opposing broad segments of the population rather than pitting a small elite against the rest of society.

Second, there is no guarantee that the distribution of inherited capital will not ultimately become as inegalitarian in the twenty-first century as it was in the nineteenth. As noted in the previous chapter, there is no ineluctable force standing in the way of a return to extreme concentration of wealth, as extreme as in the Belle Époque, especially if growth slows and the return on capital increases, which could happen, for example, if tax competition between nations heats up. If this were to happen, I believe that it would lead to significant political upheaval. Our democratic societies rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean a belief in a society in which inequality is based more on merit and effort than on kinship and rents. This belief and this hope play a very crucial role in modern society, for a simple reason: in a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies. Inequalities must therefore be just and useful to all, at least in the realm of discourse and as far as possible in reality as well.

there is something astonishing about the notion that capital yields rent, or income that the owner of capital obtains without working. There is something in this notion that is an affront to common sense and that has in fact perturbed any number of civilizations, which have responded in various ways, not always benign, ranging from the prohibition of usury to Soviet-style communism.

Economic and technological rationality at times has nothing to do with democratic rationality. The former stems from the Enlightenment, and people have all too commonly assumed that the latter would somehow naturally derive from it, as if by magic. But real democracy and social justice require specific institutions of their own, not just those of the market, and not just parliaments and other formal democratic institutions.
-> It’s what I always call the rules/framework that we have to constantly adjust to the realities/developments of the world. Capitalism is not broken, it has to evolve. We never had pure capitalism anyway, there are no free markets, there always are rules. The question is only how far do the rules have to go.

To recapitulate: the fundamental force for divergence, which I have emphasized throughout this book, can be summed up in the inequality r > g, which has nothing to do with market imperfections and will not disappear as markets become freer and more competitive. The idea that unrestricted competition will put an end to inheritance and move toward a more meritocratic world is a dangerous illusion. The advent of universal suffrage and the end of property qualifications for voting (which in the nineteenth century limited the right to vote to people meeting a minimum wealth requirement, typically the wealthiest 1 or 2 percent in France and Britain in 1820–1840, or about the same percentage of the population as was subject to the wealth tax in France in 2000–2010), ended the legal domination of politics by the wealthy. But it did not abolish the economic forces capable of producing a society of rentiers.
-> There are no laws anymore that give the power to the rich. But because they have money, they are influential. And with the current system we are creating a rich class, which will only become more influential. If we don’t change the system, we are voluntarily giving them all power – the law will not even have to be changed to give the power to them.

Clearly, the individuals surveyed tend to forget to declare what they actually received [as inheritance] and to present the history of their fortunes in the most favorable light [that they achieved them through work and merit] (which is in itself an interesting fact about how inheritance is seen in modern society).
-> Even those who inherit money insist that they actually are rich, because they worked for it.

The global rebound of inherited wealth will no doubt be an important feature of the twenty-first century, but for some decades to come it will affect mainly Europe and to a lesser degree the United States.
-> The RoW is (and will be) in this regard more meritocratic than the developed world. Interesting: they are often in an extremely sucking situation, but in a perverse way they are more fair.


around the world, the largest fortunes (including inherited ones) have grown at very high rates in recent decades (on the order of 6–7 percent a year)— signi cantly higher than the average growth rate of wealth.

If the fortunes of the top decile or top centile of the global wealth hierarchy grow faster for structural reasons than the fortunes of the lower deciles, then inequality of wealth will of course tend to increase without limit. This inegalitarian process may take on unprecedented proportions in the new global economy. In view of the law of compound interest discussed in Chapter 1, it is also clear that this mechanism can account for very rapid divergence, so that if there is nothing to counteract it, very large fortunes can attain extreme levels within a few decades. Thus unequal returns on capital are a force for divergence that significantly amplifies and aggravates the effects of the inequality r>g. Indeed, the di erence r-g can be high for large fortunes without necessarily being high for the economy as a whole.

In strict logic, the only “natural” countervailing force (where by “natural” I mean not involving government intervention) is once again growth. If the global growth rate is high, the relative growth rate of very large fortunes will remain moderate—not much higher than the average growth rate of income and wealth. Concretely, if the global growth rate is 3.5 percent a year, as was the case between 1990 and 2012 and may continue to be the case until 2030, the largest fortunes will still grow more rapidly than the rest but less spectacularly so than if the global growth rate were only 1 or 2 percent. Furthermore, today’s global growth rate includes a large demographic component, and wealthy people from emerging economies are rapidly joining the ranks of the wealthiest people in the world. This gives the impression that the ranks of the wealthiest are changing rapidly, while leading many people in the wealthy countries to feel an oppressive and growing sense that they are falling behind. The resulting anxiety sometimes outweighs all other concerns. Yet in the long run, if and when the poor countries have caught up with the rich ones and global growth slows, the inequality of returns on capital should be of far greater concern. In the long run, unequal wealth within nations is surely more worrisome than unequal wealth between nations.

table 12.1, page 435

Between 1987 and 2013, the highest global wealth fractiles have grown at 6%–7% per year versus 2.1% for average world wealth and 1.4% for average world income. All growth rates are net of in ation (2.3% per year between 1987 and 2013).

436 footnote 5, p. 623
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.

437 footnote 10, p. 623
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.

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 e ects may for the moment outweigh the forces of divergence. The available data do not allow for a clear answer at this point.
-> Within rich countries, the poor are being left behind. But on a global scale, the poor countries are quite probably not being left behind by the rich countries, but are in fact catching up. Which is good for the poor countries, but actually sucks if you want to draw attention to the problem: no rich person will care (neither in the rich nor in the poor countries) and the poor people of the poor countries are actually catching up, so they don’t see that problem. The poor of the rich countries have to solve this on their own.

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 signi cantly, 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.

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.

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 o en very high solely because of their initial size.

[A] progressive annual tax on the largest fortunes worldwide is the only way of democratically controlling this potentially explosive process while preserving entrepreneurial dynamism and international economic openness.

Japanese growth from 1950 to 1990 was the greatest history had ever seen to that point, much greater than US growth in 1990–2010, and there is reason to believe that entrepreneurs played some role in this.

table 12.2, page 448

it is these alternative investment strategies [which require very expensive specialists] that enable the very largest endowments to obtain real returns of close to 10 percent a year, while smaller endowments must make do with 5 percent.

In other words, the higher returns of the largest endowments are not due primarily to greater risk taking but to a more sophisticated investment strategy that consistently produces better results.
How can these facts be explained? By economies of scale in portfolio management. Concretely, Harvard currently spends nearly $100 million a year to manage its endowment. is muni cent sum goes to pay a team of top-notch portfolio managers capable of identifying the best investment opportunities around the world. But given the size of Harvard’s endowment (around $30 billion), $100 million in management costs is just over 0.3 percent a year. If paying that amount makes it possible to obtain an annual return of 10 percent rather than 5, it is obviously a very good deal. On the other hand, a university with an endowment of only $1 billion (which is nevertheless substantial) could not a ord to pay $100 million a year—10 percent of its portfolio—in management costs. In practice, no university pays more than 1 percent for portfolio management, and most pay less than 0.5 percent, so to manage assets worth $1 billion, one would pay $5 million, which is not enough to pay the kind of specialists in alternative investments that one can hire with $100 million. As for North Iowa Community College, with an endowment of $11.5 million, even 1 percent a year would amount to only $115,000, which is just enough to pay a half-time or even quarter-time nancial advisor at going market rates. Of course a US citizen at the median of the wealth distribution has only $100,000 to invest, so he must be his own money manager and probably has to rely on the advice of his brother-in-law. To be sure, nancial advisors and money managers are not infallible (to say the least), but their ability to identify more pro table investments is the main reason why the largest endowments obtain the highest returns.

a family is not an institution: there always comes a time when a prodigal child squanders the family fortune, which the Harvard Corporation is unlikely to do, simply because any number of people would come forward to stand in the way. Because family fortunes are subject to this kind of random “shock,” it is unlikely that inequality of wealth will grow indefinitely at the individual level; rather, the wealth distribution will converge toward a certain equilibrium.

those who start out with a small initial fortune will often remain tenants, who must therefore pay a substantial rent (a ording a high return on capital to the landlord) for a long period of time, possibly for life, while their bank savings are just barely protected from in ation.
Conversely, a person who starts out with more wealth thanks to an inheritance or gift, or who earns a su ciently high salary, or both, will more quickly be in a position to buy a home or apartment and therefore earn a real return of 3–4 percent on their investment while being able to save more thanks to not having to pay rent.
This unequal access to real estate as an e ect of fortune size has of course always existed. One could conceivably circumvent the barrier by buying a smaller apartment than one needs (in order to rent it) or by investing in other types of assets. But the problem has to some extent been aggravated by modern in ation: in the nineteenth century, when in ation was zero, it was relatively easy for a small saver to obtain a real return of 3 or 4 percent, for example by buying government bonds. Today, many small savers cannot enjoy such returns.

454 footnote 37, p. 626
[In Paris,] before World War I most buildings were not chopped up into apartments. One therefore needed to be wealthy enough to buy an entire building.

To sum up: the main effect of inflation is not to reduce the average return on capital but to redistribute it. And even though the effects of inflation are complex and multidimensional, the preponderance of the evidence suggests that the redistribution induced by inflation is mainly to the detriment of the least wealthy and to the benefit of the wealthiest, hence in the opposite direction from what is generally desired. To be sure, inflation may slightly reduce the pure return on capital, in that it forces everyone to spend more time doing asset management. One might compare this historic change to the very long-run increase in the rate of depreciation of capital, which requires more frequent investment decisions and replacement of old assets with new ones. In both cases, one has to work a little harder today to obtain a given return: capital has become more “dynamic.” But these are relatively indirect and ineffective ways of combating rent: the evidence suggests that the slight decrease in the pure return on capital due to these causes is much smaller than the increase of inequality of returns on capital; in particular, it poses little threat to the largest fortunes.
Inflation does not do away with rent: on the contrary, it probably helps to make the distribution of capital more unequal.

The dynamics of the global distribution of capital are at once economic, political, and military. This was already the case in the colonial era, when the great powers of the day, Britain and France foremost among them, were quick to roll out the cannon to protect their investments. Clearly, the same will be true in the twenty-first century, in a tense new global political con guration whose contours are difficult to predict in advance.

figure 12.5, page 462

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.

462 footnote 46, p. 627
capital has historically taken a variety of forms (land, oil, nancial 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.

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.

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.

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 o cial accounts. e same is true of the upward trend of the share of large fortunes in total wealth. Indeed, this shows how di cult it is to track assets in the globalized capitalism of the early twenty- rst century, thus blurring our picture of the basic geography of wealth.

467 footnote 58, p. 628
accounting for assets held abroad (estimated from inconsistencies in the Swedish balance of payments) can, under certain assumptions, lead to the conclusion that the top centile in Sweden is close to the same level of wealth as the top centile in the United States (which probably should also be increased).
-> Sweden is not that egalitarian and fair as we think. Very maybe.

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 po liti cal 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 demo cratic 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 par tic u lar in Europe, starting with countries willing to accept such a tax.

Th e possibility of greater state intervention in the economy raises very different issues today than it did in the 1930s, for a simple reason: the influence of the state is much greater now than it was then, indeed, in many ways greater than it has ever been. Th at is why today’s crisis is both an indictment of the markets and a challenge to the role of government.

figure 13.1, page 475

476 footnote 8, p. 629
[In terms of how much of their national income was consumed by taxes,] Japan is slightly above the United States (32–33 percent of national income). Canada, Australia, and New Zealand are closer to Britain (35–40 percent).

in terms of tax receipts and government outlays, the state has never played as important an economic role as it has in recent decades. No downward trend is evident, contrary to what is sometimes said. To be sure, in the face of an aging population, advances in medical technology, and constantly growing educational needs, the mere fact of having stabilized the tax bill as a percentage of national income is in itself no mean feat: cutting the government bud get is always easier to promise in opposition than to achieve once in power. Nevertheless, the fact remains that taxes today claim nearly half of national income in most Eu ro pe an countries, and no one seriously envisions an increase in the future comparable to that which occurred between 1930 and 1980. In the wake of the Depression, World War II, and postwar reconstruction, it was reasonable to think that the solution to the problems of capitalism was to expand the role of the state and increase social spending as much as necessary. Today’s choices are necessarily more complex. The state’s great leap forward has already taken place: there will be no second leap—not like the first one, in any event.

477 footnote 13, p. 629
If one adds the cost of private insurance, the US health care system is by far the most expensive in the world (nearly 20 percent of national income, compared with 10–12 percent in Europe), even though a large part of the population is not covered and health indicators are not as good as in Europe. There is no doubt that universal public health insurance systems, in spite of their defects, o er a better cost-benefit ratio than the US system.

Despite the defects of these public pensions systems and the challenges they now face, the fact is that without them it would have been impossible to eradicate poverty among the elderly, which was endemic as recently as the 1950s. Along with access to education and health, public pensions constitute the third social revolution that the fiscal revolution of the twentieth century made possible.

All told, if we add up state spending on health and education (10-15 percent of national income) and replacement and transfer payments (another 10–15 or perhaps as high as 20 percent of national income), we come up with total social spending (broadly speaking) of 25–35 percent of national income, which accounts for nearly all of the increase in government revenues in the wealthy countries in the twentieth century. In other words, the growth of the fiscal state over the last century basically reflects the constitution of a social state.

To sum up: modern redistribution does not consist in transferring income from the rich to the poor, at least not in so explicit a way. It consists rather in financing public services and replacement incomes that are more or less equal for everyone, especially in the areas of health, education, and pensions. In the latter case, the principle of equality often takes the form of a quasi proportionality between replacement income and lifetime earnings. For education and health, there is real equality of access for everyone regardless of income (or parents’ income), at least in principle. Modern redistribution is built around a logic of rights and a principle of equal access to a certain number of goods deemed to be fundamental.

intergenerational reproduction is lowest in the Nordic countries and highest in the United States (with a correlation coeffi cient 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.
-> In the Nordic countries, people are not stuck in (or dependent on) the social class of their parents. Each person’s social class depends on that person, not on their parents. At least more so than in the rest of Europe, and much more so than in the USA.

[In the USA] 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. In other words, parents’ income has become an almost perfect predictor of university access.

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. 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. 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.

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.

Tuition fees create an unacceptable in equality of access, but they foster the independence, prosperity, and energy that make US universities the envy of the world. In the abstract, it should be possible to combine the advantages of decentralization with those of equal access by providing universities with substantial publicly financed incentives. In some respects this is what public health insurance systems do: producers (doctors and hospitals) are granted a certain in dependence, 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.

486 footnote 36, p. 632
One finds the same redistribution from bottom to top in primary and secondary education: students at the most disadvantaged schools and high schools are assigned the least experienced and least trained teachers and therefore receive less public money per child than students at more advantaged schools and high schools. is is all the more regrettable because a better distribution of resources at the primary level would greatly reduce inequalities of educational opportunity.

486 fotnote 38, p. 632
According to the well-known Shanghai rankings, 53 of the 100 best universities in the world in 2012–2013 were in the United States, compared with 31 in Europe (9 of which were in Britain). The order is reversed, however, when we look at the 500 best universities (150 for the United States and 202 for Europe, of which 38 are in Britain). This reflects significant inequalities among the 800 US universities.
-> Also in education there is MASSIVE inequality in the US.

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.”
-> The rich have to have access to exclusive education so they can maintain the distance to the poor, the inequality in society.

487 fotnote 40, p. 633
tuition at Sciences Po currently ranges from zero for parents with the least income to 10,000 euros a year for parents with incomes above 200,000 euros. […] Compared with Scandinavian-style public nancing, however, such a system amounts to a privatization of the progressive income tax: the additional sums paid by wealthy parents go to their own children and not to the children of other people. This is evidently in their own interest, not in the public interest.

487 fotnote 41, p. 633
Australia and Britain offer “income-contingent loans” to students of modest background. These are not repaid until the graduates achieve a certain level of income. This is tantamount to a supplementary income tax on students of modest background, while students from wealthier backgrounds received (usually untaxed) gifts from their parents.

Tax levels in the rich countries rose (from 30–35 percent of national income in the 1970s to 35–40 percent in the 1980s) before stabilizing at today’s levels, whereas tax levels in the poor and intermediate countries decreased significantly. In Sub-Saharan Africa and South Asia, the average tax bite was slightly below 15 percent in the 1970s and early 1980s but fell to a little over 10 percent in the 1990s.
This evolution is a concern in that, in all the developed countries in the world today, building a fiscal and social state has been an essential part of the process of modernization and economic development. The historical evidence suggests that with only 10–15 percent of national income in tax receipts, it is impossible for a state to fulfill much more than its traditional regalian responsibilities: after paying for a proper police force and judicial system, there is not much left to pay for education and health. Another possible choice is to pay everyone—police, judges, teachers, and nurses—poorly, in which case it is unlikely that any of these public services will work well. This can lead to a vicious circle: poorly functioning public services undermine confidence in government, which makes it more difficult to raise taxes significantly. The development of a fiscal and social state is intimately related to the process of state-building as such. Hence the history of economic development is also a matter of political and cultural development, and each country must find its own distinctive path and cope with its own internal divisions.

the rich countries [tend] to use the less developed world as a field of experimentation, without really seeking to capitalize on the lessons of their own historical experience.
-> e.g. they tell poor countries to abolish tariffs without thinking about how long it took for the rich countries to abolish tariffs, and even that only very selectively.

the question of what kind of fiscal and social state will emerge in the developing world is of the utmost importance for the future of the planet.

The major twentieth-century innovation in taxation was the creation and development of the progressive income tax. This institution, which played a key role in the reduction of inequality in the last century, is today seriously threatened by international tax competition. It may also be in jeopardy because its foundations were never clearly thought through, owing to the fact that it was instituted in an emergency that left little time for reflection. The same is true of the progressive tax on inheritances, which was the second major fiscal innovation of the twentieth century and has also been challenged in recent de cades.

Taxation is not a technical matter. It is preeminently a political and philosophical issue, perhaps the most important of all political issues. Without taxes, society has no common destiny, and collective action is impossible. This has always been true. At the heart of every major political upheaval lies a fiscal revolution.

One usually distinguishes among taxes on income, taxes on capital, and taxes on consumption.

If the modern social state is to continue to exist, it is therefore essential that the underlying tax system retain a minimum of progressivity, or at any rate that it not become overtly regressive at the top.

One final point bears emphasizing: to the extent that globalization weighs particularly heavily on the least skilled workers in the wealthy countries, a more progressive tax system might in principle be justified, adding yet another layer of complexity to the overall picture. To be sure, if one wants to maintain total taxes at about 50 percent of national income, it is inevitable that everyone must pay a substantial amount. But instead of a slightly progressive tax system (leaving aside the very top of the hierarchy), one can easily imagine a more steeply progressive one. This would not solve all the problems, but it would be enough to improve the situation of the least skilled significantly. If the tax system is not made more progressive, it should come as no surprise that those who derive the least benefit from free trade may well turn against it. The progressive tax is indispensable for making sure that everyone benefits from globalization, and the increasingly glaring absence of progressive taxation may ultimately undermine support for a globalized economy.
For all of these reasons, a progressive tax is a crucial component of the social state: it played a central role in its development and in the transformation of the structure of inequality in the twentieth century, and it remains important for ensuring the viability of the social state in the future. But progressive taxation is today under serious threat, both intellectually (because its various functions have never been fully debated) and politically (because tax competition is allowing entire categories of income to gain exemption from the common rules).

figure 14.1, page 499

[At one point in 18th century France,] taxes were calculated on the basis of indices that were supposed to reflect the taxpayer’s ability to pay rather than actual income, which did not have to be declared. For instance, the “door and window tax” was based on the number of doors and windows in the taxpayer’s primary residence, which was taken to be an index of wealth.

When we look at the history of progressive taxation in the twentieth century, it is striking to see how far out in front Britain and the United States were, especially the latter, which invented the confiscatory tax on “excessive” incomes and fortunes. Figures 14.1 and 14.2 are particularly clear in this regard. This finding stands in such stark contrast to the way most people both inside and outside the United States and Britain have seen those two countries since 1980 that it is worth pausing a moment to consider the point further.

When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much). It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive—or if not to end them, then at least to make it extremely costly to sustain them and strongly discourage their perpetuation. Yet there is no absolute prohibition or expropriation. The progressive tax is thus a relatively liberal method for reducing inequality, in the sense that free competition and private property are respected while private incentives are modified in potentially radical ways, but always according to rules thrashed out in democratic debate. The progressive tax thus represents an ideal compromise between social justice and individual freedom. It is no accident that the United States and Britain, which throughout their histories have shown themselves to value individual liberty highly, adopted more progressive tax systems than many other countries. Note, however, that the countries of continental Europe, especially France and Germany, explored other avenues a er World War II, such as taking public ownership of rms and directly setting executive salaries. ese measures, which also emerged from democratic deliberation, in some ways served as substitutes for progressive taxes.

[In 1919, Irving Fisher, president of the American Economic Association worried:] The fact that “2 percent of the population owns more than 50 percent of the wealth” and that “two-thirds of the population owns almost nothing” struck him as “an undemocratic distribution of wealth,” which threatened the very foundations of US society. Rather than restrict the share of pro ts or the return on capital arbitrarily—possibilities Fisher mentioned only to reject them—he argued that the best solution was to impose a heavy tax on the largest estates (he mentioned a tax rate of two-thirds the size of the estate, rising to 100 percent if the estate was more than three generations old). It is striking to see how much more Fisher worried about inequality than Leroy-Beaulieu did, even though Leroy-Beaulieu lived in a far more inegalitarian society. The fear of coming to resemble Old Europe was no doubt part of the reason for the American interest in progressive taxes.

506 footnote 29, page 637
The idea of taxing wealth that had been accumulated in the previous generation less heavily than older wealth that had been passed down through several generations is very interesting, in the sense that there is a stronger sense of double taxation in the former case than in the latter, even if different generations and therefore different individuals are involved in both cases. It is nevertheless difficult to formalize and implement this idea in practice (because estates often follow complex trajectories), which is probably why it has never been tried.

All told, over the period 1932–1980, nearly half a century, the top federal income tax rate in the United States averaged 81 percent.

507 footnote 30, page 637
To this federal tax one should also add state income tax (which is generally 5–10 percent).

It is important to emphasize that no continental European country has ever imposed such high rates (except in exceptional circumstances, for a few years at most, and never for as long as half a century).

The Anglo-Saxon attraction to progressive taxation becomes even clearer when we look at the estate tax. In the United States, the top estate tax rate remained between 70 and 80 percent from the 1930s to the 1980s, while in France and Germany the top rate never exceeded 30–40 percent except for the years 1946–1949 in Germany (see Figure 14.2).

Note, too, that both countries distinguished between “earned income,” that is, income from labor (including both wages and nonwage compensation) and “unearned income,” meaning capital income (rent, interests, dividends, etc.). The top rates indicated in Figure 14.1 for the United States and Britain applied to unearned income. At times, the top rate on earned income was slightly lower, especially in the 1970s. This distinction is interesting, because it is a translation into fiscal terms of the suspicion that surrounded very high incomes: all excessively high incomes were suspect, but unearned incomes were more suspect than earned incomes. The contrast between attitudes then and now, with capital income treated more favorably today than labor income in many countries, especially in Europe, is striking. Note, too, that although the threshold for application of the top rates has varied over time, it has always been extremely high: expressed in terms of average income in the decade 2000–2010, the threshold has generally ranged between 500,000 and 1 million euros. In terms of today’s income distribution, the top rate would therefore apply to less than 1 percent of the population (generally somewhere between 0.1 and 0.5 percent).
-> High taxes were seen as a sign of a free and equal society – the exact opposite of today! Also, the highest taxes only applied to the very rich, not to the upper middle class like in Germany today.

The Anglo-Saxon countries have played yo-yo with the wealthy since the 1930s. By contrast, attitudes toward top incomes in both continental Europe (of which Germany and France are fairly typical) and Japan have held steady.

This sense that other countries were catching up contributed to the rise of Thatcherism and Reaganism.

If we look at all the developed countries, we find that the size of the decrease in the top marginal income tax rate between 1980 and the present is closely related to the size of the increase in the top centile’s share of national income over the same period. Concretely, the two phenomena are perfectly correlated: the countries with the largest decreases in their top tax rates are also the countries where the top earners’ share of national income has increased the most (especially when it comes to the remuneration of executives of large firms). Conversely, the countries that did not reduce their top tax rates very much saw much more moderate increases in the top earners’ share of national income.

In the 1950s and 1960s, executives in British and US firms had little reason to ght for such raises, and other interested parties were less inclined to accept them, because 80–90 percent of the increase would in any case go directly to the government. After 1980, the game was utterly transformed, however, and the evidence suggests that executives went to considerable lengths to persuade other interested parties to grant them substantial raises. Because it is objectively di cult to measure individual contributions to a rm’s output, top managers found it relatively easy to persuade boards and stockholders that they were worth the money, especially since the members of compensation committees were o en chosen in a rather incestuous manner.

In contrast to what many people in Britain and the United States believe, the true gures on growth (as best one can judge from official national accounts data) show that Britain and the United States have not grown any more rapidly since 1980 than Germany, France, Japan, Denmark, or Sweden. In other words, the reduction of top marginal income tax rates and the rise of top incomes do not seem to have stimulated productivity (contrary to the predictions of supply-side theory) or at any rate did not stimulate productivity enough to be statistically detectable at the macro level.
Considerable confusion exists around these issues because comparisons are o en made over periods of just a few years (a procedure that can be used to justify virtually any conclusion). Or one forgets to correct for population growth (which is the primary reason for the structural di erence in GDP growth between the United States and Europe). Sometimes the level of per capita output (which has always been about 20 percent higher in the United States, in 1970–1980 as well as 2000–2010) is confused with the growth rate (which has been about the same on both continents over the past three decades).
-> The US grows faster than Europe, mostly, because of high immigration. And per capita output is higher, because Americans work more and take fewer holidays? (Which has no effect on growth, since they did that in 1970 just as in 2010.)

510 footnote 42, page 639
The difference in per capita GDP stems from the fact that US citizens work more hours than Europeans. According to standard international data, GDP per hour worked is approximately the same in the United States as in the wealthiest countries of the European continent (but significantly lower in Britain: see the online technical appendix).

511 footnote 44, page 639
Per capita GDP in the United States grew at 2.3 percent a year from 1950 to 1970, 2.2
percent between 1970 and 1990, and 1.4 percent from 1990 to 2012. See Figure 2.3.

512 footnote 49, page 640
Contrary to an idea that is often taught but rarely verified, there is no evidence that executives in the period 1950–1980 made up for low pay with compensation in kind, such as private planes, sumptuous offices, etc. On the contrary, all the evidence suggests that such benefits in kind have increased since 1980.

According to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent. Do not be misled by the apparent precision of this estimate: no mathematical formula or econometric estimate can tell us exactly what tax rate ought to be applied to what level of income. Only collective deliberation and democratic experimentation can do that. What is certain, however, is that our estimates pertain to extremely high levels of income, those observed in the top 1 percent or 0.5 percent of the income hierarchy.
-> The top rate should apply to the very rich, not to the upper middle classe like in Germany (and many other places) today.
-> If you reduce education, you reduce the voice of the people who can’t afford it, you destroy democracy.

Obviously it would be easier to apply such a policy in a country the size of the United States than in a small European country where close fiscal coordination with neighboring countries is lacking.

513 footnote 51, page 640
Note that the progressive tax plays two very distinct roles in this theoretical model (as well as in the history of progressive taxation): confiscatory rates (on the order of 80–90 percent on the top 0.5 or 1 percent of the distribution) would end indecent and useless compensation, while high but nonconfiscatory rates (of 50– 60 percent on the top 5 or 10 percent) would raise revenues to finance the social state above the revenues coming from the bottom 90 percent of the distribution.
-> “Regular” wealthy people wouldn’t pay a lot more taxes than today, if at all.

Has the US political process been captured by the 1 percent? This idea has become increasingly popular among observers of the Washington political scene. For reasons of natural optimism as well as professional predilection, I am inclined to grant more in uence to ideas and intellectual debate. Careful examination of various hypotheses and bodies of evidence, and access to better data, can in uence political debate and perhaps push the process in a direction more favorable to the general interest.
-> He is an optimist who believes you can win with arguments, even in Washington. Which is why he wrote this book.

Some economists have an unfortunate tendency to defend their private interest while implausibly claiming to champion the general interest. Although data on this are sparse, it also seems that US politicians of both parties are much wealthier than their European counterparts and in a totally different category from the average American, which might explain why they tend to confuse their own private interest with the general interest. Without a radical shock, it seems fairly likely that the current equilibrium will persist for quite some time. The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century’s globalized economy.

But if democracy is to regain control over the globalized financial capitalism of this century, it must also invent new tools, adapted to today’s challenges. The ideal tool would be a progressive global tax on capital, coupled with a very high level of international financial transparency. Such a tax would provide a way to avoid an endless inegalitarian spiral and to control the worrisome dynamics of global capital concentration.

Protectionism and capital controls are actually unsatisfactory substitutes for the ideal form of regulation, which is a global tax on capital—a solution that has the merit of preserving economic openness while e ectively regulating the global economy and justly distributing the bene ts among and within nations. Many people will reject the global tax on capital as a dangerous illusion, just as the income tax was rejected in its time, a little more than a century ago. When looked at closely, however, this solution turns out to be far less dangerous than the alternatives.

The largest fortunes are to be taxed more heavily, and all types of assets are to be included: real estate, financial assets, and business assets—no exceptions. This is one clear difference between my proposed capital tax and the taxes on capital that currently exist in one country or another, even though important aspects of those existing taxes should be retained. To begin with, nearly every country taxes real estate: the English-speaking countries have “property taxes,” while France has a taxe foncière. One drawback of these taxes is that they are based solely on real property. (Financial assets are ignored, and property is taxed at its market value regardless of debt, so that a heavily indebted person is taxed in the same way as a person with no debt.) Furthermore, real estate is generally taxed at a at rate, or close to it.

The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world.

Citizens would no longer be forced to rely on Forbes, glossy financial reports from global wealth managers, and other unofficial sources to fill the official statistical void.

greater financial transparency would not only lay the groundwork for a permanent annual tax on capital; it would also pave the way to a more just and efficient management of banking crises like the one in Cyprus, possibly by way of carefully calibrated and progressive special levies on capital.

An 0.1 percent tax on capital would be more in the nature of a compulsory reporting law than a true tax. Everyone would be required to report ownership of capital assets to the world’s financial authorities in order to be recognized as the legal owner, with all the advantages and disadvantages thereof.
-> Everybody has to pay Piketty’s tax, no matter how poor they are. At first this sounds like total control in some kind of dystopian future, but really, that’s the same thing we are doing with our income tax anyway. So why should the rich not have to declare their money if everybody else has to?

It is important to understand that a tax is always more than just a tax: it is also a way of defining norms and categories and imposing a legal framework on economic activity. This has always been the case, especially in regard to land ownership. In the modern era, the imposition of new taxes around the time of World War I required precise definitions of income, wages, and profits. This fiscal innovation in turn fostered the development of accounting standards, which had not previously existed. One of the main goals of a tax on capital would thus be to refine the definitions of various asset types and set rules for valuing assets, liabilities, and net wealth. Under the private accounting standards now in force, prescribed procedures are imperfect and often vague. These flaws have contributed to the many financial scandals the world has seen since 2000.

520 footnote 4, page 641
For this reason, it would be useful to institute a low-rate tax on net corporate capital together with a higher-rate tax on private wealth. Governments would then be forced to set accounting standards, a task currently left to associations of private accountants.

This type of automated system, applied to the entire population, is far better adapted to the twenty-first century than the archaic method of asking all persons to declare honestly how much they own.

No one has the right to set his own tax rates. It is not right for individuals to grow wealthy from free trade and economic integration only to rake off the profits at the expense of their neighbors. That is outright theft.
-> He is talking about tax havens and the way countries are competing with each other to attract rich people/companies.

It is particularly striking to discover that the countries that are most dependent on substantial tax revenues to pay for their social programs, namely the European countries, are also the ones that have accomplished the least, even though the technical challenges are quite simple. This is a good example of the difficult situation that smaller countries face in dealing with globalization. Nation-states built over centuries find that they are too small to impose and enforce rules on today’s globalized patrimonial capitalism. The countries of Europe were able to unite around a single currency (to be discussed more extensively in the next chapter), but they have accomplished almost nothing in the area of taxation.

Very likely the only way to obtain tangible results is to impose automatic sanctions not only on banks but also on countries that refuse to require their financial institutions to provide the required information. One might contemplate, for example, a tariff of 30 percent or more on the exports of offending states. To be clear, the goal is not to impose a general embargo on tax havens or engage in an endless trade war with Switzerland or Luxembourg. Protectionism does not produce wealth, and free trade and economic openness are ultimately in everyone’s interest, provided that some countries do not take advantage of their neighbors by siphoning off their tax base. The requirement to provide comprehensive banking data automatically should have been part of the free trade and capital liberalization agreements negotiated since 1980. It was not, but that is not a good reason to stick with the status quo forever.
-> He is against tariffs, but they may need to be applied in order to enforce financial transparency.

Nevertheless, the tax havens will undoubtedly suffer significant losses if financial transparency becomes the norm.

524 footnote 9, page 641
It is difficult to estimate the extent of such losses, but in a country like Luxembourg or Switzerland they might amount to as much as 10–20 percent of national income, which would have a substantial impact on their standard of living. (The same is true of a financial enclave like the City of London.) In the more exotic tax havens and microstates, the loss might be as high as 50 percent or more of national income, indeed as high as 80–90 percent in territories that function solely as domiciles for fictitious corporations.
-> Panama Papers

According to information published in the press and revealed by Bettencourt herself, her declared income was never more than 5 million a year, or little more than one ten-thousandth of her wealth (which is currently more than 30 billion euros). Uncertainties about individual cases aside (they are of little importance), the income declared for tax purposes in a case like this is less than a hundredth of the taxpayer’s economic income.13
The crucial point here is that no tax evasion or undeclared Swiss bank account is involved (as far as we know).

525 footnote 13, p. 642
Even with a return on capital of 2 percent (much lower than the actual return on the Bettencourt fortune in the period 1987–2013), the economic income on 30 billion euros would amount to 600 million euros, not 5 million.

If some people are taxed on the basis of declared incomes that are only 1 percent of their economic incomes, or even 10 percent, then nothing is accomplished by taxing that income at a rate of 50 percent or even 98 percent. The problem is that this is how the tax system works in practice in the developed countries. Effective tax rates (expressed as a percentage of economic income) are extremely low at the top of the wealth hierarchy, which is problematic, since it accentuates the explosive dynamic of wealth inequality, especially when larger fortunes are able to garner larger returns. In fact, the tax system ought to attenuate this dynamic, not accentuate it.

capital is a better indicator of the contributive capacity of very wealthy individuals than is income, which is often difficult to measure. A tax on capital is thus needed in addition to the income tax for those individuals whose taxable income is clearly too low in light of their wealth.
-> Once you’re rich enough, your labour income is only a very small part of your total income. In these cases, taxing labout income is kind of pointless, even at high percentages.

another classic argument in favor of a capital tax should not be neglected. It relies on a logic of incentives. The basic idea is that a tax on capital is an incentive to seek the best possible return on one’s capital stock. Concretely, a tax of 1 or 2 percent on wealth is relatively light for an entrepreneur who manages to earn 10 percent a year on her capital. By contrast, it is quite heavy for a person who is content to park her wealth in investments returning at most 2 or 3 percent a year. According to this logic, the purpose of the tax on capital is thus to force people who use their wealth ine ciently to sell assets in order to pay their taxes, thus ensuring that those assets wind up in the hands of more dynamic investors.

The ideal tax system is therefore a compromise between the incentive logic (which favors a tax on the capital stock) and an insurance logic (which favors a tax on the revenue stream stemming from capital). The unpredictability of the return on capital explains, moreover, why it is more efficient to tax heirs not once and for all, at the moment of inheritance (by way of the estate tax), but throughout their lives, via taxes based on both capital income and the value of the capital stock. In other words, all three types of tax—on inheritance, income, and capital—play useful and complementary roles (even if income is perfectly observable for all taxpayers, no matter how wealthy).

a wealth tax of 0 percent on fortunes below 1 million euros, 1 percent between 1 and 5 million euros, and 2 percent above 5 million euros. If applied to all member states of the European Union, such a tax would affect about 2.5 percent of the population and bring in revenues equivalent to 2 percent of Europe’s GDP.

It would make sense to tax net wealth below 200,000 euros at 0.1 percent and net wealth between 200,000 and 1 million euros at 0.5 percent. This would replace the property tax, which in most countries is tantamount to a wealth tax on the propertied middle class. The new system would be both more just and more efficient, because it targets all assets (not only real estate) and relies on transparent data and market values net of mortgage debt. To a large extent a tax of this sort could be readily implemented by individual countries acting alone.
-> Those of the middle class that have built something for themselves, are being taxed. But the rich are not.

Since the real returns on the largest fortunes in Europe and around the world are 6 to 7 percent or more, it would not be excessive to tax fortunes above 100 million or 1 billion euros at rates well above 2 percent. The simplest and fairest procedure would be to set rates on the basis of observed returns in each wealth bracket over several prior years. In that way, the degree of progressivity can be adjusted to match the evolution of returns to capital and the desired level of wealth concentration. To avoid divergence of the wealth distribution (that is, a steadily increasing share belonging to the top centiles and thousandths), which on its face seems to be a minimal desirable objective, it would probably be necessary to levy rates of about 5 percent on the largest fortunes. If a more ambitious goal is preferred—say, to reduce wealth inequality to more moderate levels than exist today (and which history shows are not necessary for growth)—one might envision rates of 10 percent or higher on billionaires.

it makes little sense to take the yield on public debt as a reference, as is often done in political debate. The largest fortunes are clearly not invested in government bonds.
-> This is mydlenie oczu: in public debate, a reference point is taken that is way too low – and everybody knows it’s way too low, but like to use it anyway, because it serves the argument that the rich cannot be taxed higher.

In [Aristotle’s] view, money ought not to “give birth” [in Greek, ‘interest’ literally means ‘child’] to more money. In a world of low or even near-zero growth, where both population and output remained more or less the same generation a er generation, “limitlessness” seemed particularly dangerous.
-> And we’re back in this world.

Unfortunately for the people caught up in these totalitarian experiments [communism], the problem was that private property and the market economy do not serve solely to ensure the domination of capital over those who have nothing to sell but their labor power. They also play a useful role in coordinating the actions of millions of individuals, and it is not so easy to do without them. The human disasters caused by Soviet-style centralized planning illustrate this quite clearly.

533 footnote 37, p. 645
Apart from the degeneration of the tax base, which also affected the estate tax in both countries, the perception of fiscal competition also played a role in Sweden, where the estate tax was abolished in 2005. This episode, at odds with Sweden’s egalitarian values, is a good example of the growing inability of smaller countries to maintain an independent fiscal policy.

protectionism, when deployed on a large scale over a long period of time, is not in itself a source of prosperity or a creator of wealth. Historical experience suggests that a country that chooses this road while promising its people a robust improvement in their standard of living is likely to meet with serious disappointment. Furthermore, protectionism does nothing to counter the inequality r > g or the tendency for wealth to accumulate in fewer and fewer hands.

Immigration is the mortar that holds the United States together, the stabilizing force that prevents accumulated capital from acquiring the importance it has in Europe; it is also the force that makes the increasingly large inequalities of labor income in the United States politically and socially bearable. For a fair proportion of Americans in the bottom 50 percent of the income distribution, these inequalities are of secondary importance for the very simple reason that they were born in a less wealthy country and see themselves as being on an upward trajectory. Note, moreover, that the mechanism of redistribution through immigration, which enables individuals born in poor countries to improve their lot by moving to a rich country, has lately been an important factor in Europe as well as the United States. In this respect, the distinction between the Old World and the New may be less salient than in the past.

Redistribution through immigration postpones the problem but does not dispense with the need for a new type of regulation: a social state with progressive taxes on income and capital. One might hope, moreover, that immigration will be more readily accepted by the less advantaged members of the wealthier societies if such institutions are in place to ensure that the economic benefits of globalization are shared by everyone. If you have free trade and free circulation of capital and people but destroy the social state and all forms of progressive taxation, the temptations of defensive nationalism and identity politics will very likely grow stronger than ever in both Europe and the United States.
-> Globalization and free trade / movement of people and capital has made the rich unbelievably rich, while the regular people are left behind. If that positive development of the rich/globalization is partly redistributed to regular people, those people may be more open to globalization.

In Africa, the outflow of capital has always exceeded the inflow of foreign aid by a wide margin. It is no doubt a good thing that several wealthy countries have launched judicial proceedings against former African leaders who ed their countries with ill-gotten gains. But it would be even more useful to establish international scal cooperation and data sharing to enable countries in Africa and elsewhere to root out such pillage in a more systematic and methodical fashion, especially since foreign companies and stockholders of all nationalities are at least as guilty as unscrupulous African elites. Once again, financial transparency and a progressive global tax on capital are the right answers.

From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them.
-> What people forget is that if a country takes on debt, it is taking it on from somebody. And that somebody is a rich private person (at the end of a long chain of banks and institutions).

This shows that the question of public debt is a question of the distribution of wealth, between public and private actors in particular, and not a question of absolute wealth. The rich world is rich, but the governments of the rich world are poor. Europe is the most extreme case: it has both the highest level of private wealth in the world and the greatest di culty in resolving its public debt crisis—a strange paradox.

How can a public debt as large as today’s European debt be signi cantly reduced? There are three main methods, which can be combined in various proportions: taxes on capital, in ation, and austerity. An exceptional tax on private capital is the most just and e cient solution. Failing that, in ation can play a useful role: historically, that is how most large public debts have been dealt with. The worst solution in terms of both justice and e ciency is a prolonged dose of austerity—yet that is the course Europe is currently following.

541 footnote 2, p. 646f
If we count assets owned by European households in tax havens, then Europe’s
net asset position vis-à-vis the rest of the world becomes significantly positive: European households own the equivalent of all that there is to own in Europe plus a part of the rest of the world.

According to the national accounts of the various European countries, the proceeds from selling all public buildings, schools, universities, hospitals, police stations, infrastructure, and so on would be roughly sufficient to pay off all outstanding public debt. Instead of holding public debt via their financial investments, the wealthiest European households would become the direct owners of schools, hospitals, police stations, and so on. Everyone else would then have to pay rent to use these assets and continue to produce the associated public services. This solution, which some very serious people actually advocate, should to my mind be dismissed out of hand. If the European social state is to fulfill its mission adequately and durably, especially in the areas of education, health, and security, it must continue to own the related public assets. It is nevertheless important to understand that as things now stand, governments must pay heavy interest (rather than rent) on their outstanding public debt, so the situation is not all that different from paying rent to use the same assets, since these interest payments weigh just as heavily on the public exchequer.

Complete or partial default on the public debt is sometimes tried in situations of extreme overindebtedness, as in Greece in 2011–2012. Bondholders are forced to accept a “haircut” (as the jargon has it): the value of government bonds held by banks and other creditors is reduced by 10–20 percent or perhaps even more. The problem is that if one applies a measure of this sort on a large scale—for example, all of Europe and not just Greece (which accounts for just 2 percent of European GDP)—it is likely to trigger a banking panic and a wave of bankruptcies. Depending on which banks are holding various types of bonds, as well as on the structure of their balance sheets, the identity of their creditors, the households that have invested their savings in these various institutions, the nature of those investments, and so on, one can end up with quite different final incidences, which cannot be accurately predicted in advance. Furthermore, it is quite possible that the people with the largest portfolios will be able to restructure their investments in time to avoid the haircut almost entirely. People sometimes think that imposing a haircut is a way of penalizing those investors who have taken the largest risks. Nothing could be further from the truth: financial assets are constantly being traded, and there is no guarantee that the people who would be penalized in the end are the ones who ought to be. The advantage of an exceptional tax on capital, which is similar to a haircut, is precisely that it would arrange things in a more civilized manner. Everyone would be required to contribute, and, equally important, bank failures would be avoided, since it is the ultimate owners of wealth (physical individuals) who would have to pay, not nancial institutions. If such a tax were to be levied, however, the tax authorities would of course need to be permanently and automatically apprised of any bank accounts, stocks, bonds, and other nancial assets held by the citizens under their jurisdiction. Without such a financial cadaster, every policy choice would be risky.

But the main advantage of a fiscal solution is that the contribution demanded of each individual can be adjusted to the size of his fortune. It would not make much sense to levy an exceptional tax of 15 percent on all private wealth in Europe. It would be better to apply a progressive tax designed to spare the more modest fortunes and require more of the largest ones. In some respects, this is what Europe an banking law already does, since it generally guarantees deposits up to 100,000 euros in case of bank failure. Th e progressive capital tax is a generalization of this logic, since it allows much fi ner gradations of required levies. One can imagine a number of different brackets: full deposit guarantee up to 100,000 euros, partial guarantee between 100,000 and 500,000 euros, and so on, with as many brackets as seem useful. The progressive tax would also apply to all assets (including listed and unlisted shares), not just bank deposits. This is essential if one really wants to reach the wealthiest individuals, who rarely keep their money in checking accounts.

inflation in France and Germany averaged 13 and 17 percent a year, respectively, from 1913 to 1950. It was inflation that allowed both countries to embark on reconstruction eff orts in the 1950s with a very small burden of public debt. Germany, in particular, is by far the country that has used inflation most freely (along with outright debt repudiation) to eliminate public debt throughout its history. Apart from the ECB, which is by far the most averse to this solution, it is no accident that all the other major central banks—the US Federal Reserve, the Bank of Japan, and the Bank of England—are currently trying to raise their inflation targets more or less explicitly and are also experimenting with various so-called unconventional monetary policies. If they succeed—say, by increasing infl ation from 2 to 5 percent a year (which is by no means assured)—these countries will emerge from the debt crisis much more rapidly than the countries of the Eurozone, whose economic prospects are clouded by the absence of any obvious way out, as well as by their lack of clarity concerning the long-term future of budgetary and fiscal union in Eu rope.

it is important to understand that without an exceptional tax on capital and without additional inflation, it may take several decades to get out from under a burden of public debt as large as that which currently exists in Europe.

The first problem is that inflation is hard to control: once it gets started, there is no guarantee that it can be stopped at 5 percent a year. In an inflationary spiral, everyone wants to make sure that the wages he receives and the prices he must pay evolve in a way that suits him. Such a spiral can be hard to stop. In France, the inflation rate exceeded 50 percent for four consecutive years, from 1945 to 1948. This reduced the public debt to virtually nothing in a far more radical way than the exceptional tax on capital that was collected in 1945. But millions of small savers were wiped out, and this aggravated the persistent problem of poverty among the elderly in the 1950s. In Germany, prices were multiplied by a factor of 100 million between the beginning of 1923 and the end. Germany’s society and economy were permanently traumatized by this episode, which undoubtedly continues to influence German perceptions of inflation. The second difficulty with inflation is that much of the desired effect disappears once it becomes permanent and embedded in expectations (in particular, anyone willing to lend to the government will demand a higher rate of interest).

546 footnote 12, p. 648
The capital tax puts most of the burden on the very wealthy, whereas austerity policies generally aim to spare them.

one argument in favor of inflation remains: compared with a capital tax, which, like any other tax, inevitably deprives people of resources they would have spent usefully (for consumption or investment), inflation (at least in its idealized form) primarily penalizes people who do not know what to do with their money, namely, those who have kept too much cash in their bank account or stuffed into their mattress. It spares those who have already spent everything or invested everything in real economic assets (real estate or business capital), and, better still, it spares those who are in debt (inflation reduces nominal debt, which enables the indebted to get back on their feet more quickly and make new investments). In this idealized version, inflation is in a way a tax on idle capital and an encouragement to dynamic capital.

In the end, the truth is that inflation is a relatively crude and imprecise tool. Sometimes it redistributes wealth in the right direction, sometimes not. To be sure, if the choice is between a little more inflation and a little more austerity, inflation is no doubt preferable. But in France one sometimes hears the view that inflation is a nearly ideal tool for redistributing wealth (a way of taking money from “German rentiers” and forcing the aging population on the other side of the Rhine to show more solidarity with the rest of Europe). This is naïve and preposterous. In practice, a great wave of inflation in Europe would have all sorts of unintended consequences for the redistribution of wealth and would be particularly harmful to people of modest means in France, Germany, and elsewhere. Conversely, those with fortunes in real estate and the stock market would largely be spared on both sides of the Rhine and everywhere else as well.

548 footnote 17, p. 648
The most important argument in favor of low but positive inflation (typically 2 percent) is that it allows for easier adjustment of relative wages and prices than zero or negative inflation.

all economists—monetarists, Keynesians, and neoclassicals—together with all other observers, regardless of their political stripe, have agreed that central banks ought to act as lenders of last resort and do whatever is necessary to avoid financial collapse and a deflationary spiral.

What in fact do central banks do? For present purposes, it is important to realize that central banks do not create wealth as such; they redistribute it. More precisely, when the Fed or the ECB decides to create a billion additional dollars or euros, US or European capital is not augmented by that amount. In fact, national capital does not change by a single dollar or euro, because the operations in which central banks engage are always loans. They therefore result in the creation of financial assets and liabilities, which, at the moment they are created, exactly balance each other. For example, the Fed might lend $1 billion to Lehman Brothers or General Motors (or the US government), and these entities contract an equivalent debt. The net wealth of the Fed and Lehman Brothers (or General Motors) does not change at all, nor, a fortiori, does that of the United States or the planet. Indeed, it would be astonishing if central banks could simply by the stroke of a pen increase the capital of their nation or the world.
What happens next depends on how this monetary policy influences the real economy. If the loan initiated by the central bank enables the recipient to escape from a bad pass and avoid a final collapse (which might decrease the national wealth), then, when the situation has been stabilized and the loan repaid, it makes sense to think that the loan from the Fed increased the national wealth (or at any rate prevented national wealth from decreasing). On the other hand, if the loan from the Fed merely postpones the recipient’s inevitable collapse and even prevents the emergence of a viable competitor (which can happen), one can argue that the Fed’s policy ultimately decreased the nation’s wealth. Both outcomes are possible, and every monetary policy raises both possibilities to one degree or another.

550 footnote 20, p. 648
Note that there is no such thing as a “money printing press” in the following sense: when a central bank creates money in order to lend it to the government, the loan is recorded on the books of the central bank. This happens even in the most chaotic of times, as in France in 1944–1948. The money is not simply given as a gift. Again, everything depends on what happens next: if the money creation increases inflation, substantial redistribution of wealth can occur (for instance, the real value of the public debt can be reduced dramatically, to the detriment of private nominal assets). The overall effect on national income and capital depends on the impact of policy on the country’s overall level of economic activity. It can in theory be either positive or negative, just as loans to private actors can be. Central banks redistribute monetary wealth, but they do not have the ability to create new wealth directly.

Central banks are powerful because they can redistribute wealth very quickly and, in theory, as extensively as they wish. If necessary, a central bank can create as many billions as it wants in seconds and credit all that cash to the account of a company or government in need. In an emergency (such as a financial panic, war, or natural disaster), this ability to create money immediately in unlimited amounts is an invaluable attribute. No tax authority can move that quickly to levy a tax: it is necessary first to establish a taxable base, set rates, pass a law, collect the tax, forestall possible challenges, and so on. If this were the only way to resolve a financial crisis, all the banks in the world would already be bankrupt.

The weakness of central banks is clearly their limited ability to decide who should receive loans in what amount and for what duration, as well as the difficulty of managing the resulting financial portfolio. One consequence of this is that the size of a central bank’s balance sheet should not exceed certain limits.

552 footnote 22, p. 649
The central banks thus hold only a few percent of the total assets and liabilities of the rich countries. The balance sheets of the various central banks are published online on a weekly or monthly basis. The amount of each type of asset and liability on the balance sheet is known in aggregate (but is not broken down by recipient of central bank loans).

It is of course possible in the abstract to imagine much larger central bank balance sheets. The central banks could decide to buy up all of a country’s firms and real estate, finance the transition to renewable energy, invest in universities, and take control of the entire economy. Clearly, the problem is that central banks are not well suited to such activities and lack the democratic legitimacy to try them. They can redistribute wealth quickly and massively, but they can also be very wrong in their choice of targets (just as the effects of inflation on inequality can be quite perverse). Hence it is preferable to limit the size of central bank balance sheets. That is why they operate under strict mandates focused largely on maintaining the stability of the financial system.

The existing European councils of heads of state and finance ministers cannot do the work of this budgetary body [that Piketty suggests Europe should have]. They meet in secret, do not engage in open public debate, and regularly end their meetings with triumphal midnight communique’s announcing that Europe has been saved, even though the participants themselves do not always seem to be sure about what they have decided. The decision on the Cypriot tax is typical in this regard: although it was approved unanimously, no one wanted to accept responsibility in public. This type of proceeding is worthy of the Congress of Vienna (1815) but has no place in the Europe of the twenty-first century.

560 footnote 32, p. 650
Progressive income and capital taxes are more satisfactory than corporate income taxes because they allow adjustment of the tax rate in accordance with the income or capital of each taxpayer, whereas the corporate tax is levied on all corporate profits at the same level, affecting large and small shareholders alike.

The right approach would be to require corporations to make a single declaration of their profits at the European level and then tax that profit in a way that is less subject to manipulation than is the current system of taxing the profits of each subsidiary individually. The problem with the current system is that multinational corporations often end up paying ridiculously small amounts because they can assign all their profits artficially to a subsidiary located in a place where taxes are very low; such a practice is not illegal, and in the minds of many corporate managers it is not even unethical.

561 footnote 33, p. 650f
To believe the statements of the managers of companies like Google, their reasoning is more or less as follows: “We contribute far more wealth to society than our profits and salaries suggest, so it is perfectly reasonable for us to pay low taxes.” Indeed, if a company or individual contributes marginal well-being to the rest of the economy greater than the price it charges for its products, then it is perfectly legitimate for it to pay less in tax or even to receive a subsidy (economists refer to this as a positive externality). The problem, obviously, is that it is in everyone’s interest to claim that he or she contributes a large positive externality to the rest of the world. Google has not of course offered the slightest evidence to prove that it actually does make such a contribution. In any case, it is obvious that it is not easy to manage a society in which each individual can set his or her own tax rate in this way.

Are all these proposals utopian? No more so than attempting to create a stateless currency. When countries relinquish monetary sovereignty, it is essential to restore their fiscal sovereignty over matters no longer within the purview of the nation-state, such as the interest rate on public debt, the progressive tax on capital, or the taxation of multinational corporations. For the countries of Europe, the priority now should be to construct a continental political authority capable of reasserting control over patrimonial capitalism and private interests and of advancing the European social model in the twenty-first century. The minor disparities between national social models are of secondary importance in view of the challenges to the very survival of the common European model.

562 footnote 35, p. 651
Dani Rodrik […] argues that the nation-state, democracy, and globalization are an unstable trio (one of the three must give way before the other two, at least to a certain extent). See Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy (New York: Norton, 2011).

It is important to realize that tax competition regularly leads to a reliance on consumption taxes, that is, to the kind of tax system that existed in the nineteenth century, where no progressivity is possible. In practice, this favors individuals who are able to save, to change their country of residence, or both. Note, however, that progress toward some forms of fiscal cooperation has been more rapid than one might imagine at first glance: consider, for example, the proposed financial transactions tax, which could become one of the first truly European taxes. Although such a tax is far less significant than a tax on capital or corporate pro ts (in terms of both revenues and distributive impact), recent progress on this tax shows that nothing is foreordained. Political and fiscal history always blaze their own trails.

562 footnote 38, p. 651
The purpose of the fiscal transactions tax is to decrease the number of very high-frequency financial transactions, which is no doubt a good thing. By definition, however, the tax will not raise much revenue, because its purpose is to dry up its source. Estimates of potential revenues are often optimistic. They cannot be much more than 0.5 percent of GDP, which is a good thing, because the tax cannot target different levels of individual incomes or wealth.

At a purely theoretical level, everything depends in principle on the origins of growth. If there is no productivity growth, so that the only source of growth is demographic, then accumulating capital to the level required by the golden rule might make sense.

In 1992, when the Treaty of Maastricht created the euro, it was stipulated that member states should ensure that their budget deficits would be less than 3 percent of GDP and that total public debt would remain below 60 percent of GDP. The precise economic logic behind these choices has never been completely explained. Indeed, if one does not include public assets and total national capital, it is difficult to justify any particular level of public debt on rational grounds. I have already mentioned the real reason for these strict budgetary constraints, which are historically unprecedented. (The United States, Britain, and Japan have never imposed such rules on themselves.) It is an almost inevitable consequence of the decision to create a common currency without a state, and in particular without pooling the debt of member states or coordinating deficits. Presumably, the Maastricht criteria would become unnecessary if the Eurozone were to equip itself with a budgetary parliament empowered to decide and coordinate deficit levels for the various member states. The decision would then be a sovereign and democratic one. There is no convincing reason to impose a priori constraints, much less to enshrine limits on debts and deficits in state constitutions. Since the construction of a budgetary union has only just begun, of course, special rules may be necessary to build confidence: for example, one can imagine requiring a parliamentary supermajority in order to exceed a certain level of debt. But there is no justification for engraving untouchable debt and deficit limits in stone in order to thwart future political majorities.

historical experience suggests that in a serious crisis it is often necessary to make emergency budget decisions on a scale that would have been unimaginable before the crisis. To leave it to a constitutional judge (or committee of experts) to judge such decisions case by case is to take a step back from democracy. In any case, turning the power to decide over to the courts is not without risk. Indeed, history shows that constitutional judges have an unfortunate tendency to interpret fiscal and budgetary laws in very conservative ways.

When we look at all the available data today, what is most striking is that national wealth in Europe has never been so high. To be sure, net public wealth is virtually zero, given the size of the public debt, but net private wealth is so high that the sum of the two is as great as it has been in a century. Hence the idea that we are about to bequeath a shameful burden of debt to our children and grandchildren and that we ought to wear sackcloth and ashes and beg for forgiveness simply makes no sense. The nations of Europe have never been so rich. What is true and shameful, on the other hand, is that this vast national wealth is very unequally distributed. Private wealth rests on public poverty, and one particularly unfortunate consequence of this is that we currently spend far more in interest on the debt than we invest in higher education. This has been true, moreover, for a very long time: because growth has been fairly slow since 1970, we are in a period of history in which debt weighs very heavily on our public finances.

If we take a global view, then [climate change and, more generally, the possibility of deterioration of humanity’s natural capital in the century ahead] is clearly the world’s principal long-term worry.

For [economist] Stern, the loss of global well-being is so great that it justifies spending at least 5 points of global GDP a year right now to attempt to mitigate climate change in the future. For [economist] Nordhaus, such a large expenditure would be entirely unreasonable, because future generations will be richer and more productive than we are. They will find a way to cope, even if it means consuming less, which will in any case be less costly from the standpoint of universal well-being than making the kind of effort Stern envisions. So in the end, all of these expert calculations come down to a stark difference of opinion.
-> A nice example how nobody can help you with the really big decisions. You can listen to opinions and then you have to make a choice. That applies to both political leaders and the general population: do we believe in climate change? If yes, how much are we prepared to do to avert it? No economist or other specialist can really help you with that. The same applies to Brexit, refugee topics, etc.

568 footnote 52, p. 654
[] if natural capital is destroyed, consuming fewer iPhones in the future will not be enough to repair the damage.

This is a very important debate for the decades ahead. The public debt (which is much smaller than total private wealth and perhaps not really that difficult to eliminate) is not our major worry. The more urgent need is to increase our educational capital and prevent the degradation of our natural capital. This is a far more serious and difficult challenge, because climate change cannot be eliminated at the stroke of a pen (or with a tax on capital, which comes to the same thing). The key practical issue is the following. Suppose that Stern is approximately correct that there is good reason to spend the equivalent of 5 percent of global GDP annually to ward off an environmental catastrophe. Do we really know what we ought to invest in and how we should organize our effort? If we are talking about public investments of this magnitude, it is important to realize that this would represent public spending on a vast scale, far vaster than any previous public spending by the rich countries. If we are talking about private investment, we need to be clear about the manner of public financing and who will own the resulting technologies and patents. Should we count on advanced research to make rapid progress in developing renewable energy sources, or should we immediately subject ourselves to strict limits on hydrocarbon consumption? It would prob- ably be wise to choose a balanced strategy that would make use of all available tools. So much for common sense. But the fact remains that no one knows for now how these challenges will be met or what role governments will play in preventing the degradation of our natural capital in the years ahead.

More generally, it is important, I think, to insist that one of the most important issues in coming years will be the development of new forms of property and democratic control of capital. The dividing line between public capital and private capital is by no means as clear as some have believed since the fall of the Berlin Wall. As noted, there are already many areas, such as education, health, culture, and the media, in which the dominant forms of organization and ownership have little to do with the polar paradigms of purely private capital (modeled on the joint-stock company entirely owned by its shareholders) and purely public capital (based on a similar top-down logic in which the sovereign government decides on all investments). There are obviously many intermediate forms of organization capable of mobilizing the talent of different individuals and the information at their disposal. When it comes to organizing collective decisions, the market and the ballot box are merely two polar extremes. New forms of participation and governance remain to be invented.
-> Democracy needs to evolve!

The essential point is that these various forms of democratic control of capital depend in large part on the availability of economic information to each of the involved parties. Economic and financial transparency are important for tax purposes, to be sure, but also for much more general reasons. They are essential for democratic governance and participation. In this respect, what matters is not transparency regarding individual income and wealth, which is of no intrinsic interest (except perhaps in the case of political officials or in situations where there is no other way to establish trust). For collective action, what would matter most would be the publication of detailed accounts of private corporations (as well as government agencies). The accounting data that companies are currently required to publish are entirely inadequate for allowing workers or ordinary citizens to form an opinion about corporate decisions, much less to intervene in them. For example, to take a concrete case mentioned at the very beginning of this book, the published accounts of Lonmin, Inc., the owner of the Marikana platinum mine where thirty-four strikers were shot dead in August 2012, do not tell us precisely how the wealth produced by the mine is divided between profits and wages. This is generally true of published corporate accounts around the world: the data are grouped in very broad statistical categories that reveal as little as possible about what is actually at stake, while more detailed information is reserved for investors. It is then easy to say that workers and their representatives are insufficiently informed about the economic realities facing the firm to participate in investment decisions. Without real accounting and financial transparency and sharing of information, there can be no economic democracy. Conversely, without a real right to intervene in corporate decision-making (including seats for workers on the company’s board of directors), transparency is of little use. Information must support democratic institutions; it is not an end in itself. If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again.
-> Again: democracy needs to evolve. I agree. But is it realistic that workers will really engage with provided information and then understand it enough – including all global, political, economic contexts – to make solid decisions? Is it realistic to see the future of democracy in having to understand everything and be involved in every decision? From bike lanes in Berlin, strategic business decisions of the corporation one works for, to foreign policy in PNG?


The overall conclusion of this study is that a market economy based on private property, if left to itself, contains powerful forces of convergence, associated in particular with the diffusion of knowledge and skills; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based.

The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.

The problem is enormous, and there is no simple solution. Growth can of course be encouraged by investing in education, knowledge, and nonpolluting technologies. But none of these will raise the growth rate to 4 or 5 percent a year. History shows that only countries that are catching up with more advanced economies—such as Europe during the three decades after World War II or China and other emerging countries today—can grow at such rates. For countries at the world technological frontier—and thus ultimately for the planet as a whole—there is ample reason to believe that the growth rate will not exceed 1–1.5 percent in the long run, no matter what economic policies are adopted.
With an average return on capital of 4–5 percent, it is therefore likely that r > g will again become the norm in the twenty-first century, as it had been throughout history until the eve of World War I. In the twentieth century, it took two world wars to wipe away the past and significantly reduce the return on capital, thereby creating the illusion that the fundamental structural contradiction of capitalism (r > g) had been overcome.
To be sure, one could tax capital income heavily enough to reduce the private return on capital to less than the growth rate. But if one did that indiscriminately and heavy-handedly, one would risk killing the motor of accumulation and thus further reducing the growth rate. Entrepreneurs would then no longer have the time to turn into rentiers, since there would be no more entrepreneurs.
The right solution is a progressive annual tax on capital. This will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation.
For example, I earlier discussed the possibility of a capital tax schedule with rates of 0.1 or 0.5 percent on fortunes under 1 million euros, 1 percent on fortunes between 1 and 5 million euros, 2 percent between 5 and 10 million euros, and as high as 5 or 10 percent for fortunes of several hundred million or several billion euros. This would contain the unlimited growth of global inequality of wealth, which is currently increasing at a rate that cannot be sustained in the long run and that ought to worry even the most fervent champions of the self-regulated market. Historical experience shows, moreover, that such immense inequalities of wealth have little to do with the entrepreneurial spirit and are of no use in promoting growth.

The difficulty is that this solution, the progressive tax on capital, requires a high level of international cooperation and regional political integration. It is not within the reach of the nation-states in which earlier social compromises were hammered out. Many people worry that moving toward greater cooperation and political integration within, say, the European Union only undermines existing achievements (starting with the social states that the various countries of Europe constructed in response to the shocks of the twentieth century) without constructing anything new other than a vast market predicated on ever purer and more perfect competition. Yet pure and perfect competition cannot alter the inequality r > g, which is not the consequence of any market “imperfection.” On the contrary. Although the risk is real, I do not see any genuine alternative: if we are to regain control of capitalism, we must bet everything on democracy—and in Europe, democracy on a European scale. Larger political communities such as the United States and China have a wider range of options, but for the small countries of Europe, which will soon look very small indeed in relation to the global economy, national withdrawal can only lead to even worse frustration and disappointment than currently exists with the European Union. The nation-state is still the right level at which to modernize any number of social and fiscal policies and to develop new forms of governance and shared ownership intermediate between public and private ownership, which is one of the major challenges for the century ahead. But only regional political integration can lead to effective regulation of the globalized patrimonial capitalism of the twenty-first century.

The bipolar confrontations of the period 1917–1989 are now clearly behind us. The clash of communism and capitalism sterilized rather than stimulated research on capital and inequality by historians, economists, and even philosophers. It is long since time to move beyond these old controversies and the historical research they engendered, which to my mind still bears their stamp.

Yet it seems to me that all social scientists, all journalists and commentators, all activists in the unions and in politics of whatever stripe, and especially all citizens should take a serious interest in money, its measurement, the facts surrounding it, and its history. Those who have a lot of it never fail to defend their interests. Refusing to deal with numbers rarely serves the interests of the least well-off.

About the author

Woitek Konzal

Producer, Consultant, Lecturer & Researcher. I love working where technology meets media in novel ways. Once, I even won an Emmy for digital innovation doing that. Be it for a small but exciting campaign about underground electronic music collectives or for a monster project combining two movies, various 360° videos, 72 ARG-like mini puzzles, and a Unity game, all wrapped up in one cross-platform app – I have proven my ability to adapt to what is required. This passion for novel technologies has regularly allowed me to cross paths with tech startups – an industry and philosophy I am all set to engage with more. I intensely enjoy balancing out my practical work with academic research, teaching, and consulting. Also, I have a PhD in Creative Industries, a M.Sc. in Business Administration, and love to kitesurf.

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