Capital in the Twenty-First Century (32 page)

It is interesting to note that according to available historical estimates, these
orders of magnitude do not seem to have changed much over the long run. Estimates
of the value of durable goods are generally around 30–50 percent of national income
for both the nineteenth and twentieth centuries. Gregory King’s estimates of British
national wealth around 1700 show the same thing: the total value of furniture, china,
and so on was about 30 percent of national income. The amount of wealth represented
by valuables and precious objects seems to have decreased over the long run, however,
from 10–15 percent of national income in the late nineteenth and early twentieth century
to 5–10 percent today. According to King, the total value of such goods (including
metal coin) was as high as 25–30 percent of national income around 1700. In all cases,
these are relatively limited amounts compared to total accumulated wealth in Britain
of around seven years of national income, primarily in the form of farmland, dwellings,
and other capital goods (shops, factories, warehouses, livestock, ships, etc.), at
which King does not fail to rejoice and marvel.
¹⁵

Note, moreover, that the capital/income ratio would have attained even higher levels—no
doubt the highest ever recorded—in the rich countries in the 2000s and 2010s if I
had expressed total private wealth in terms of years of disposable income rather than
national income, as I have done thus far. This seemingly technical issue warrants
further discussion.

As the name implies, disposable household income (or simply “disposable income”) measures
the monetary income that households in a given country dispose of directly. To go
from national income to disposable income, one must deduct all taxes, fees, and other
obligatory payments and add all monetary transfers (pensions, unemployment insurance,
aid to families, welfare payments, etc.). Until the turn of the twentieth century,
governments played a limited role in social and economic life (total tax payments
were on the order of 10 percent of national income, which went essentially to pay
for traditional state functions such as police, army, courts, highways, and so on,
so that disposable income was generally around 90 percent of national income). The
state’s role increased considerably over the course of the twentieth century, so that
disposable income today amounts to around 70–80 percent of national income in the
rich countries. As a result, total private wealth expressed in years of disposable
income (rather than national income) is significantly higher. For example, private
capital in the 2000s represented four to seven years of national income in the rich
countries, which would correspond to five to nine years of disposable income (see
Figure 5.4
).

FIGURE 5.4.
   Private capital measured in years of disposable income

Expressed in years of household disposable income (about 70–80 percent of national
income), the capital/income ratio appears to be larger than when it is expressed in
years of national income.

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

Both ways of measuring the capital/income ratio can be justified, depending on how
one wants to approach the question. When expressed in terms of disposable income,
the ratio emphasizes strictly monetary realities and shows us the magnitude of wealth
in relation to the income actually available to households (to save, for instance).
In a way, this reflects the concrete reality of the family bank account, and it is
important to keep these orders of magnitude in mind. It is also important to note,
however, that the gap between disposable income and national income measures by definition
the value of public services from which households benefit, especially health and
education services financed directly by the public treasury. Such “transfers in kind”
are just as valuable as the monetary transfers included in disposable income: they
allow the individuals concerned to avoid spending comparable (or even greater) sums
on private producers of health and education services. Ignoring such transfers in
kind might well distort certain evolutions or international comparisons. That is why
it seemed to me preferable to express wealth in years of national income: to do so
is to adopt an economic (rather than strictly monetary) view of income. In this book,
whenever I refer to the capital/income ratio without further qualification, I am always
referring to the ratio of the capital stock to the flow of national income.
¹⁶

Note also that for the sake of completeness I have included in private wealth not
only the assets and liabilities of private individuals (“households” in national accounting
terminology) but also assets and liabilities held by foundations and other nonprofit
organizations. To be clear, this category includes only foundations and other organizations
financed primarily by gifts from private individuals or income from their properties.
Organizations that depend primarily on public subsidies are classified as governmental
organizations, and those that depend primarily on the sale of goods are classified
as corporations.

In practice, all of these distinctions are malleable and porous. It is rather arbitrary
to count the wealth of foundations as part of private wealth rather than public wealth
or to place it in a category of its own, since it is in fact a novel form of ownership,
intermediate between purely private and strictly public ownership. In practice, when
we think of the property owned by churches over the centuries, or the property owned
today by organizations such as Doctors without Borders or the Bill and Melinda Gates
Foundation, it is clear that we are dealing with a wide variety of moral persons pursuing
a range of specific objectives.

Note, however, that the stakes are relatively limited, since the amount of wealth
owned by moral persons is generally rather small compared with what physical persons
retain for themselves. Available estimates for the various rich countries in the period
1970–2010 show that foundations and other nonprofit organizations always own less
than 10 percent and generally less than 5 percent of total private wealth, though
with interesting variations between countries: barely 1 percent in France, around
3–4 percent in Japan, and as much as 6–7 percent in the United States (with no apparent
trend). Available historical sources indicate that the total value of church-owned
property in eighteenth-century France amounted to about 7–8 percent of total private
wealth, or approximately 50–60 percent of national income (some of this property was
confiscated and sold during the French Revolution to pay off debts incurred by the
government of the Ancien Régime).
¹⁷
In other words, the Catholic Church owned more property in Ancien Régime France (relative
to the total private wealth of the era) than prosperous US foundations own today.
It is interesting to observe that the two levels are nevertheless fairly close.

These are quite substantial holdings of wealth, especially if we compare them with
the meager (and sometimes negative) net wealth owned by the government at various
points in time. Compared with total private wealth, however, the wealth of foundations
remains fairly modest. In particular, it matters little whether or not we include
foundations when considering the general evolution of the ratio of private capital
to national income over the long run. Inclusion is justified, moreover, by the fact
that it is never easy to define the boundary line between on the one hand various
legal structures such as foundations, trust funds, and the like used by wealthy individuals
to manage their assets and further their private interests (which are in principle
counted in national accounts as individual holdings, assuming they are identified
as such) and on the other hand foundations and nonprofits said to be in the public
interest. I will come back to this delicate issue in
Part Three
, where I will discuss the dynamics of global inequality of wealth, and especially
great wealth, in the twenty-first century.

The very sharp increase in private wealth observed in the rich countries, and especially
in Europe and Japan, between 1970 and 2010 thus can be explained largely by slower
growth coupled with continued high savings, using the law
β
=
s
/
g
. I will now return to the two other complementary phenomena that amplified this mechanism,
which I mentioned earlier: the privatization or gradual transfer of public wealth
into private hands and the “catch-up” of asset prices over the long run.

FIGURE 5.5.
   Private and public capital in rich countries, 1970–2010

In Italy, private capital rose from 240 percent to 680 percent of national income
between 1970 and 2010, while public capital dropped from 20 percent to
−
70 percent.

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

I begin with privatization. As noted, the proportion of public capital in national
capital has dropped sharply in recent decades, especially in France and Germany, where
net public wealth represented as much as a quarter or even a third of total national
wealth in the period 1950–1970, whereas today it represents just a few percent (public
assets are just enough to balance public debt). This evolution reflects a quite general
phenomenon that has affected all eight leading developed economies: a gradual decrease
in the ratio of public capital to national income in the period 1970–2010, accompanied
by an increase in the ratio of private capital to national income (see
Figure 5.5
). In other words, the revival of private wealth is partly due to the privatization
of national wealth. To be sure, the increase in private capital in all countries was
greater than the decrease in public capital, so national capital (measured in years
of national income) did indeed increase. But it increased less rapidly than private
capital owing to privatization.

The case of Italy is particularly clear. Net public wealth was slightly positive in
the 1970s, then turned slightly negative in the 1980s as large government deficits
mounted. All told, public wealth decreased by an amount equal to nearly a year of
national income over the period 1970–2010. At the same time, private wealth rose from
barely two and a half years of national income in 1970 to nearly seven in 2010, an
increase of roughly four and a half years. In other words, the decrease in public
wealth represented between one-fifth and one-quarter of the increase in private wealth—a
nonnegligible share. Italian national wealth did indeed rise significantly, from around
two and a half years of national income in 1970 to about six in 2010, but this was
a smaller increase than in private wealth, whose exceptional growth was to some extent
misleading, since nearly a quarter of it reflected a growing debt that one portion
of the Italian population owed to another. Instead of paying taxes to balance the
government’s budget, the Italians—or at any rate those who had the means—lent money
to the government by buying government bonds or public assets, which increased their
private wealth without increasing the national wealth.

Indeed, despite a very high rate of private saving (roughly 15 percent of national
income), national saving in Italy was less than 10 percent of national income in the
period 1970–2010. In other words, more than a third of private saving was absorbed
by government deficits. A similar pattern exists in all the rich countries, but one
generally less extreme than in Italy: in most countries, public saving was negative
(which means that public investment was less than the public deficit: the government
invested less than it borrowed or used borrowed money to pay current expenses). In
France, Britain, Germany, and the United States, government deficits exceeded public
investment by 2–3 percent of national income on average over the period 1970–2010,
compared with more than 6 percent in Italy (see
Table 5.4
).
¹⁸