Capital in the Twenty-First Century (20 page)

I will have more to say later about the role played by inflation in the dynamics of
wealth distribution, and in particular about the accumulation and distribution of
fortunes, in various periods of time.

At this stage, I merely want to stress the fact that 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. It is surely no accident that money—at least in the form of
specific amounts—virtually disappeared from literature after the shocks of 1914–1945.
Specific references to wealth and income were omnipresent in the literature of all
countries before 1914; these references gradually dropped out of sight between 1914
and 1945 and never truly reemerged. This is true not only of European and American
novels but also of the literature of other continents. The novels of Naguib Mahfouz,
or at any rate those that unfold in Cairo between the two world wars, before prices
were distorted by inflation, lavish attention on income and wealth as a way of situating
characters and explaining their anxieties. We are not far from the world of Balzac
and Austen. Obviously, the social structures are very different, but it is still possible
to orient perceptions, expectations, and hierarchies in relation to monetary references.
The novels of Orhan Pamuk, set in Istanbul in the 1970s, that is, in a period during
which inflation had long since rendered the meaning of money ambiguous, omit mention
of any specific sums. In
Snow,
Pamuk even has his hero, a novelist like himself, say that there is nothing more
tiresome for a novelist than to speak about money or discuss last year’s prices and
incomes. The world has clearly changed a great deal since the nineteenth century.

PART TWO

THE DYNAMICS OF THE CAPITAL/INCOME RATIO

{THREE}

The Metamorphoses of Capital

In
Part One
, I introduced the basic concepts of income and capital and reviewed the main stages
of income and output growth since the Industrial Revolution.

In this part, I am going to concentrate on the evolution of the capital stock, looking
at both its overall size, as measured by the capital/income ratio, and its breakdown
into different types of assets, whose nature has changed radically since the eighteenth
century. I will consider various forms of wealth (land, buildings, machinery, firms,
stocks, bonds, patents, livestock, gold, natural resources, etc.) and examine their
development over time, starting with Great Britain and France, the countries about
which we possess the most information over the long run. But first I want to take
a brief detour through literature, which in the cases of Britain and France offers
a very good introduction to the subject of wealth.

When Honoré de Balzac and Jane Austen wrote their novels at the beginning of the nineteenth
century, the nature of wealth was relatively clear to all readers. Wealth seemed to
exist in order to produce rents, that is, dependable, regular payments to the owners
of certain assets, which usually took the form of land or government bonds. Père Goriot
owned the latter, while the small estate of the Rastignacs consisted of the former.
The vast Norland estate that John Dashwood inherits in
Sense and Sensibility
is also agricultural land, from which he is quick to expel his half-sisters Elinor
and Marianne, who must make do with the interest on the small capital in government
bonds left to them by their father. In the classic novels of the nineteenth century,
wealth is everywhere, and no matter how large or small the capital, or who owns it,
it generally takes one of two forms: land or government bonds.

From the perspective of the twenty-first century, these types of assets may seem old-fashioned,
and it is tempting to consign them to the remote and supposedly vanished past, unconnected
with the economic and social realities of the modern era, in which capital is supposedly
more “dynamic.” Indeed, the characters in nineteenth-century novels often seem like
archetypes of the rentier, a suspect figure in the modern era of democracy and meritocracy.
Yet what could be more natural to ask of a capital asset than that it produce a reliable
and steady income: that is in fact the goal of a “perfect” capital market as economists
define it. It would be quite wrong, in fact, to assume that the study of nineteenth-century
capital has nothing to teach us today.

When we take a closer look, the differences between the nineteenth and twenty-first
centuries are less apparent than they might seem at first glance. In the first place,
the two types of capital asset—land and government bonds—raise very different issues
and probably should not be added together as cavalierly as nineteenth-century novelists
did for narrative convenience. Ultimately, a government bond is nothing more than
a claim of one portion of the population (those who receive interest) on another (those
who pay taxes): it should therefore be excluded from national wealth and included
solely in private wealth. The complex question of government debt and the nature of
the wealth associated with it is no less important today than it was in 1800, and
by studying the past we can learn a lot about an issue of great contemporary concern.
Although today’s public debt is nowhere near the astronomical levels attained at the
beginning of the nineteenth century, at least in Britain, it is at or near a historical
record in France and many other countries and is probably the source of as much confusion
today as in the Napoleonic era. 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? This mystery needs to be dispelled,
and studying the past can help us do so.

There is also another, even more important complication: many other forms of capital,
some of them quite “dynamic,” played an essential role not only in classic novels
but in the society of the time. After starting out as a noodle maker, Père Goriot
made his fortune as a pasta manufacturer and grain merchant. During the wars of the
revolutionary and Napoleonic eras, he had an unrivaled eye for the best flour and
a knack for perfecting pasta production technologies and setting up distribution networks
and warehouses so that he could deliver the right product to the right place at the
right time. Only after making a fortune as an entrepreneur did he sell his share of
the business, much in the manner of a twenty-first-century startup founder exercising
his stock options and pocketing his capital gains. Goriot then invested the proceeds
in safer assets: perpetual government bonds that paid interest indefinitely. With
this capital he was able to arrange good marriages for his daughters and secure an
eminent place for them in Parisian high society. On his deathbed in 1821, abandoned
by his daughters Delphine and Anastasie, old Goriot still dreamt of juicy investments
in the pasta business in Odessa.

César Birotteau, another Balzac character, made his money in perfumes. He was the
ingenious inventor of any number of beauty products—Sultan’s Cream, Carminative Water,
and so on—that Balzac tells us were all the rage in late imperial and Restoration
France. But this was not enough for him: when the time came to retire, he sought to
triple his capital by speculating boldly on real estate in the neighborhood of La
Madeleine, which was developing rapidly in the 1820s. After rejecting the sage advice
of his wife, who urged him to invest in good farmland near Chinon and government bonds,
he ended in ruin.

Jane Austen’s heroes were more rural than Balzac’s. Prosperous landowners all, they
were nevertheless wiser than Balzac’s characters in appearance only. In
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.

So which was it: quiet capital or risky investments? Is it safe to conclude that nothing
has really changed since 1800? What actual changes have occurred in the structure
of capital since the eighteenth century? Père Goriot’s pasta may have become Steve
Jobs’s tablet, and investments in the West Indies in 1800 may have become investments
in China or South Africa in 2010, but has the deep structure of capital really changed?
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. What, then,
gives us the vague sense that social inequality today is very different from social
inequality in the age of Balzac and Austen? Is this just empty talk with no purchase
on reality, or can we identify objective factors to explain why some people think
that modern capital has become more “dynamic” and less “rent-seeking?”

FIGURE 3.1.
   Capital in Britain, 1700–2010

National capital is worth about seven years of national income in Britain in 1700
(including four in agricultural land).

Sources and series: see
piketty.pse.ens.fr/capital21c
.

I will begin by looking at changes in the capital structure of Britain and France
since the eighteenth century. These are the countries for which we possess the richest
historical sources and have therefore been able to construct the most complete and
homogeneous estimates over the long run. The principal results of this work are shown
in
Figures 3.1
and
3.2
, which attempt to summarize several key aspects of three centuries in the history
of capitalism. Two clear conclusions emerge.

FIGURE 3.2.
   Capital in France, 1700–2010

National capital is worth almost seven years of national income in France in 1910
(including one invested abroad).

Sources and series: see
piketty.pse.ens.fr/capital21c
.

We find, to begin with, that the capital/income ratio followed quite similar trajectories
in both countries, remaining relatively stable in the eighteenth and nineteenth centuries,
followed by an enormous shock in the twentieth century, before returning to levels
similar to those observed on the eve of World War I. In both Britain and France, the
total value of national capital fluctuated between six and seven years of national
income throughout the eighteenth and nineteenth centuries, up to 1914. Then, after
World War I, the capital/income ratio suddenly plummeted, and it continued to fall
during the Depression and World War II, to the point where national capital amounted
to only two or three years of national income in the 1950s. The capital/income ratio
then began to climb and has continued to do so ever since. In both countries, the
total value of national capital in 2010 is roughly five to six years’ worth of national
income, indeed a bit more than six in France, compared with less than four in the
1980s and barely more than two in the 1950s. The measurements are of course not perfectly
precise, but the general shape of the curve is clear.

In short, what we see over the course of the century just past is an impressive “U-shaped
curve.” The capital/income ratio fell by nearly two-thirds between 1914 and 1945 and
then more than doubled in the period 1945–2012.