Capital in the Twenty-First Century (67 page)

The second method (“economic flow”) has the advantage of not relying on tax data and
therefore giving a more complete picture of the transmission of wealth, independent
of the vagaries of different countries’ tax systems. The ideal is to be able to use
both methods in the same country. What is more, one can interpret the gap between
the two curves in
Figure 11.1
(which shows that the economic flow is always a little greater than the fiscal flow)
as an estimate of tax fraud or deficiencies of the probate record-keeping system.
There may also be other reasons for the gap, including the many imperfections in the
available data sets and the methods used. For certain subperiods, the gap is far from
negligible. The long-run evolutions in which I am primarily interested are nevertheless
quite consistent, regardless of which method we use.

In fact, the main advantage of the economic flow approach is that it requires us to
take a comprehensive view of the three forces that everywhere determine the flow of
inheritance and its historical evolution.

In general, the annual economic flow of inheritances and gifts, expressed as a proportion
of national income that we denote
b
_y
, is equal to the product of three forces:

b
_y
=
μ
×
m
×
β
,

where
β
is the capital/income ratio (or, more precisely, the ratio of total private wealth,
which, unlike public assets, can be passed on by inheritance, to national income),
m
is the mortality rate, and
μ
is the ratio of average wealth at time of death to average wealth of living individuals.

This decomposition is a pure accounting identity: by definition, it is always true
in all times and places. In particular, this is the formula I used to estimate the
economic flow depicted in
Figure 11.1
. Although this decomposition of the economic flow into three forces is a tautology,
I think it is a useful tautology in that it enables us to clarify an issue that has
been the source of much confusion in the past, even though the underlying logic is
not terribly complex.

Let me examine the three forces one by one. The first is the capital/income ratio
β
. This force expresses a truism: if the flow of inherited wealth is to be high in
a given society, the total stock of private wealth capable of being inherited must
also be large.

The second force, the mortality rate
m
, describes an equally transparent mechanism. All other things being equal, the higher
the mortality rate, the higher the inheritance flow. In a society where everyone lives
forever, so that the mortality rate is exactly zero, inheritance must vanish. The
inheritance flow
b
_y
must also be zero, no matter how large the capital/income ratio
β
is.

The third force, the ratio
μ
of average wealth at time of death to average wealth of living individuals, is equally
transparent.
⁴

Suppose that the average wealth at time of death is the same as the average wealth
of the population as a whole. Then
μ
=
1, and the inheritance flow
b
_y
is simply the product of the mortality rate
m
and the capital/income ratio
β
. For example, if the capital/income ratio is 600 percent (that is, the stock of private
wealth represents six years of national income) and the mortality rate of the adult
population is 2 percent,
⁵
then the annual inheritance flow will automatically be 12 percent of national income.

If average wealth at time of death is twice the average wealth of the living, so that
μ
=
2, then the inheritance flow will be 24 percent of national income (assuming
β
=
6 and
m
=
2 percent), which is approximately the level observed in the nineteenth and early
twentieth centuries.

Clearly,
μ
depends on the age profile of wealth. The more wealth increases with age, the higher
μ
will be and therefore the larger the inheritance flow.

Conversely, in a society where the primary purpose of wealth is to finance retirement
and elderly individuals consume the capital accumulated during their working lives
in their years of retirement (by drawing down savings in a pension fund, for example),
in accordance with the “life-cycle theory of wealth” developed by the Italian-American
economist Franco Modigliani in the 1950s, then by construction
μ
will be almost zero, since everyone aims to die with little or no capital. In the
extreme case
μ
=
0, inheritance vanishes regardless of the values of
β
and
m
. In strictly logical terms, it is perfectly possible to imagine a world in which
there is considerable private capital (so
β
is very high) but most wealth is in pension funds or equivalent forms of wealth that
vanish at death (“annuitized wealth”), so that the inheritance flow is zero or close
to it. Modigliani’s theory offers a tranquil, one-dimensional view of social inequality:
inequalities of wealth are nothing more than a translation in time of inequalities
with respect to work. (Managers accumulate more retirement savings than workers, but
both groups consume all their capital by the time they die.) This theory was quite
popular in the decades after World War II, when functionalist American sociology,
exemplified by the work of Talcott Parsons, also depicted a middle-class society of
managers in which inherited wealth played virtually no role.
⁶
It is still quite popular today among baby boomers.

Our decomposition of the inheritance flow as the product of three forces (
b
_y
=
μ
×
m
×
β
) is important for thinking historically about inheritance and its evolution, for
each of the three forces embodies a significant set of beliefs and arguments (perfectly
plausible a priori) that led many people to imagine, especially during the optimistic
decades after World War II, that the end (or at any rate gradual and progressive decrease)
of inherited wealth was somehow the logical and natural culmination of history. However,
such a gradual end to inherited wealth is by no means inevitable, as the French case
clearly illustrates. Indeed, the U-shaped curve we see in France is a consequence
of three U-shaped curves describing each of the three forces,
μ
,
m
, and
β
. Furthermore, the three forces acted simultaneously, in part for accidental reasons,
and this explains the large amplitude of the overall change, and in particular the
exceptionally low level of inheritance flow in 1950–1960, which led many people to
believe that inherited wealth had virtually disappeared.

In
Part Two
I showed that the capital/income ratio
β
was indeed described by a U-shaped curve. The optimistic belief associated with this
first force is quite clear and at first sight perfectly plausible: inherited wealth
has tended over time to lose its importance simply because wealth has lost its importance
(or, more precisely, wealth in the sense of nonhuman capital, that is, wealth that
can be owned, exchanged on a market, and fully transmitted to heirs under the prevailing
laws of property). There is no logical reason why this optimistic belief cannot be
correct, and it permeates the whole modern theory of human capital (including the
work of Gary Becker), even if it is not always explicitly formulated.
⁷
However, things did not unfold this way, or at any rate not to the degree that people
sometimes imagine: landed capital became financial and industrial capital and real
estate but retained its overall importance, as can be seen in the fact that the capital/income
ratio seems to be about to regain the record level attained in the Belle Époque and
earlier.

For partly technological reasons, capital still plays a central role in production
today, and therefore in social life. Before production can begin, funds are needed
for equipment and office space, to finance material and immaterial investments of
all kinds, and of course to pay for housing. To be sure, the level of human skill
and competence has increased over time, but the importance of nonhuman capital has
increased proportionately. Hence there is no obvious a priori reason to expect the
gradual disappearance of inherited wealth on these grounds.

The second force that might explain the natural end of inheritance is increased life
expectancy, which lowers the mortality rate
m
and increases the time to inheritance (which decreases the size of the legacy). Indeed,
there is no doubt that the mortality rate has decreased over the long run: the proportion
of the population that dies each year is smaller when the life expectancy is eighty
than when it is sixty. Other things being equal, for a given
β
and
μ
, a society with a lower mortality rate is also a society in which the flow of inheritance
is a smaller proportion of national income. In France, the mortality rate has declined
inexorably over the course of history, and the same is true of other countries. The
French mortality rate was around 2.2 percent (of the adult population) in the nineteenth
century but declined steadily throughout the twentieth century,
⁸
dropping to 1.1–1.2 percent in 2000–2010, a decrease of almost one-half in a century
(see
Figure 11.2
).

FIGURE 11.2.
   The mortality rate in France, 1820–2100

The mortality rate fell in France during the twentieth century (rise of life expectancy),
and should increase somewhat during the twenty-first century (baby-boom effect).

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

It would be a serious mistake, however, to think that changes in the mortality rate
lead inevitably to the disappearance of inherited wealth as a major factor in the
economy. For one thing, the mortality rate began to rise again in France in 2000–2010,
and according to official demographic forecasts this increase is likely to continue
until 2040–2050, after which adult mortality should stabilize at around 1.4–1.5 percent.
The explanation for this is that the baby boomers, who outnumber previous cohorts
(but are about the same size as subsequent ones), will reach the end of their life
spans in this period.
⁹
In other words, the baby boom, which led to a structural increase in the size of
birth cohorts, temporarily reduced the mortality rate simply because the population
grew younger and larger. French demographics are fortunately quite simple, so that
it is possible to present the principal effects of demographic change in a clear manner.
In the nineteenth century, the population was virtually stationary, and life expectancy
was about sixty years, so that the average person enjoyed a little over forty years
of adulthood, and the mortality rate was therefore close to 1/40, or actually about
2.2 percent. In the twenty-first century, the population, according to official forecasts,
will likely stabilize again, with a life expectancy of about eighty-five years, or
about sixty-five years of adult life, giving a mortality rate of about 1/65 in a static
population, which translates into 1.4–1.5 percent when we allow for slight demographic
growth. Over the long run, in a developed country with a quasi-stagnant population
like France (where population increase is primarily due to aging), the decrease in
the adult mortality rate is about one-third.

The anticipated increase in the mortality rate between 2000–2010 and 2040–2050 due
to the aging of the baby boom generation is admittedly a purely mathematical effect,
but it is nevertheless important. It partly explains the low inheritance flows of
the second half of the twentieth century, as well as the expected sharp increase in
these flows in the decades to come. This effect will be even stronger elsewhere. In
countries where the population has begun to decrease significantly or will soon do
so (owing to a decrease in cohort size)—most notably Germany, Italy, Spain, and of
course Japan—this phenomenon will lead to a much larger increase in the adult mortality
rate in the first half of the twenty-first century and thus automatically increase
inheritance flows by a considerable amount. People may live longer, but they still
die eventually; only a significant and steady increase in cohort size can permanently
reduce the mortality rate and inheritance flow. When an aging population is combined
with a stabilization of cohort size as in France, however, or even a reduced cohort
size as in a number of rich countries, very high inheritance flows are possible. In
the extreme case—a country in which the cohort size is reduced by half (because each
couple decides to have only one child), the mortality rate, and therefore the inheritance
flow, could rise to unprecedented levels. Conversely, in a country where the size
of each age cohort doubles every generation, as happened in many countries in the
twentieth century and is still happening in Africa, the mortality rate declines to
very low levels, and inherited wealth counts for little (other things equal).