Capital in the Twenty-First Century (66 page)

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.

{ELEVEN}

Merit and Inheritance in the Long Run

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.

In order to understand this cumulative logic better, we must now take a closer look
at the long-term evolution of the relative roles of inheritance and saving in capital
formation. This is a crucial issue, because a given level of capital concentration
can come about in totally different ways. It may be that the global level of capital
has remained the same but that its deep structure has changed dramatically, in the
sense that capital was once largely inherited but is now accumulated over the course
of a lifetime by savings from earned income. One possible explanation for such a change
might be increased life expectancy, which might have led to a structural increase
in the accumulation of capital in anticipation of retirement. However, this supposed
great transformation in the nature of capital was actually less dramatic than is sometimes
thought; indeed, in some countries it did not occur at all. In all likelihood, inheritance
will again play a significant role in the twenty-first century, comparable to its
role in the past.

More precisely, I will come to the following conclusion. 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.

If the twenty-first century turns out to be a time of low (demographic and economic)
growth and high return on capital (in a context of heightened international competition
for capital resources), or at any rate in countries where these conditions hold true,
inheritance will therefore probably again be as important as it was in the nineteenth
century. An evolution in this direction is already apparent in France and a number
of other European countries, where growth has already slowed considerably in recent
decades. For the moment it is less prominent in the United States, essentially because
demographic growth there is higher than in Europe. But if growth ultimately slows
more or less everywhere in the coming century, as the median demographic forecasts
by the United Nations (corroborated by other economic forecasts) suggest it will,
then inheritance will probably take on increased importance throughout the world.

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.

I will begin at the beginning. In all societies, there are two main ways of accumulating
wealth: through work or inheritance.
¹
How common is each of these in the top centiles and deciles of the wealth hierarchy?
This is the key question.

In Vautrin’s lecture to Rastignac (discussed in
Chapter 7
), the answer is clear: study and work cannot possibly lead to a comfortable and elegant
life, and the only realistic strategy is to marry Mademoiselle Victorine and her inheritance.
One of my primary goals in this work is to find out how closely nineteenth-century
French society resembled the society described by Vautrin and above all to learn how
and why this type of society evolved over time.

It is useful to begin by examining the evolution of the annual flow of inheritances
over the long run, that is, the total value of bequests (and gifts between living
individuals) during the course of a year, expressed as a percentage of national income.
This figure 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.)

I will examine the French case, which is by far the best known over the long run,
and the pattern I find there, it turns out, also applies to a certain extent to other
European countries. Finally, I will explore what it is possible to say at the global
level.

Figure 11.1
represents the evolution of the annual inheritance flow in France from 1820 to 2010.
²
Two facts stand out clearly. First, 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. Its importance did not diminish with time,
moreover. On the contrary, in 1900–1910, the flow of inheritance was somewhat higher
(25 percent of national income compared with barely 20) than it had been in the 1820s,
the period of Vautrin, Rastignac, and the Vauquer boardinghouse.

FIGURE 11.1.
   The annual inheritance flow as a fraction of national income, France, 1820–2010

The annual inheritance flow was about 20–25 percent of national income during the
nineteenth century and until 1914; it then fell to less than 5 percent in the 1950s,
and returned to about 15 percent in 2010.

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

Subsequently, we find a spectacular decrease in the flow of inheritances between 1910
and 1950 followed by a steady rebound thereafter, with an acceleration in the 1980s.
There were very large upward and downward variations during the twentieth century.
The annual flow of inheritances and gifts was (to a first approximation, and compared
with subsequent shocks) relatively stable until World War I but fell by a factor of
5 or 6 between 1910 and 1950 (when the inheritance flow was barely 4 or 5 percent
of national income), after which it increased by a factor of 3 or 4 between 1950 and
2010 (at which time the flow accounted for 15 percent of national income).

The evolution visible in
Figure 11.1
reflects deep changes in the perception as well as the reality of inheritance, and
to a large extent it also reflects changes in the structure of inequality. As we will
soon see, the compression of the inheritance flow owing to the shocks of 1914–1945
was nearly twice as great as the decrease in private wealth. The inheritance collapse
was therefore not simply the result of a wealth collapse (even if the two developments
are obviously closely related). In the public mind, the idea that the age of inheritance
was over was certainly even more influential than the idea of an end of capitalism.
In 1950–1960, bequests and gifts accounted for just a few points of national income,
so it was reasonable to think that inheritances had virtually disappeared and that
capital, though less important overall than in the past, was now wealth that an individual
accumulated by effort and saving during his or her lifetime. Several generations grew
up under these conditions (even if perceptions somewhat exceeded reality), in particular
the baby boom generation, born in the late 1940s and early 1950s, many of whom are
still alive today, and it was natural for them to assume that this was the “new normal.”

Conversely, 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.

Several points about
Figure 11.1
need to be clarified. First, it is essential to include gifts between living individuals
(whether shortly before death or earlier in life) in the flow of inheritance, because
this form of transmission has always played a very important role in France and elsewhere.
The relative magnitude of gifts and bequests has varied greatly over time, so omitting
gifts would seriously bias the analysis and distort spatial and temporal comparisons.
Fortunately, gifts in France are carefully recorded (though no doubt somewhat underestimated).
This is not the case everywhere.

Second, and even more important, the wealth of French historical sources allows us
to calculate inheritance flows in two different ways, using data and methods that
are totally independent. What we find is that the two evolutions shown in
Figure 11.1
(which I have labeled “fiscal flow” and “economic flow”) are highly consistent, which
is reassuring and demonstrates the robustness of the historical data. This consistency
also helps us to decompose and analyze the various forces at work.
³

Broadly speaking, there are two ways to estimate inheritance flows in a particular
country. One can make direct use of observed flows of inheritances and gifts (for
example, by using tax data: this is what I call the “fiscal flow”). Or one can look
at the private capital stock and calculate the theoretical flow that must have occurred
in a given year (which I call the “economic flow”). Each method has its advantages
and disadvantages. The first method is more direct, but the tax data in many countries
are so incomplete that the results are not always satisfactory. In France, as noted
previously, the system for recording bequests and gifts was established exceptionally
early (at the time of the Revolution) and is unusually comprehensive (in theory it
covers all transmissions, including those on which little or no tax is paid, though
there are some exceptions), so the fiscal method can be applied. The tax data must
be corrected, however, to take account of small bequests that do not have to be declared
(the amounts involved are insignificant) and above all to correct for certain assets
that are exempt from the estate tax, such as life insurance contracts, which have
become increasingly common since 1970 (and today account for nearly one-sixth of total
private wealth in France).