Capital in the Twenty-First Century (110 page)

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

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

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

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

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

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

14
. Complete annual data are available online.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

42
. Austen,
Sense and Sensibility,
135.

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

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

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

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