Capital in the Twenty-First Century (77 page)

For example, if the top thousandth enjoy a 6 percent rate of return on their wealth,
while average global wealth grows at only 2 percent a year, then after thirty years
the top thousandth’s share of global capital will have more than tripled. The top
thousandth would then own 60 percent of global wealth, which is hard to imagine in
the framework of existing political institutions unless there is a particularly effective
system of repression or an extremely powerful apparatus of persuasion, or perhaps
both. Even if the top thousandth’s capital returned only 4 percent a year, their share
would still practically double in thirty years to nearly 40 percent. Once again, the
force for divergence at the top of the wealth hierarchy would win out over the global
forces of catch-up and convergence, so that the shares of the top decile and centile
would increase significantly, with a large upward redistribution from the middle and
upper-middle classes to the very rich. Such an impoverishment of the middle class
would very likely trigger a violent political reaction. It is of course impossible
at this stage to be certain that such a scenario is about to unfold. But it is important
to realize that the inequality
r
>
g
, amplified by inequality in the returns on capital as a function of initial portfolio
size, can potentially give rise to a global dynamic of accumulation and distribution
of wealth characterized by explosive trajectories and uncontrolled inegalitarian spirals.
As we will see, only a progressive tax on capital can effectively impede such a dynamic.

One of the most striking lessons of the
Forbes
rankings is that, past a certain threshold, all large fortunes, whether inherited
or entrepreneurial in origin, grow at extremely high rates, regardless of whether
the owner of the fortune works or not. To be sure, one should be careful not to overestimate
the precision of the conclusions one can draw from these data, which are based on
a small number of observations and collected in a somewhat careless and piecemeal
fashion. The fact is nevertheless interesting.

Take a particularly clear example at the very top of the global wealth hierarchy.
Between 1990 and 2010, the fortune of Bill Gates—the founder of Microsoft, the world
leader in operating systems, and the very incarnation of entrepreneurial wealth and
number one in the
Forbes
rankings for more than ten years—increased from
$
4 billion to
$
50 billion.
¹⁴
At the same time, the fortune of Liliane Bettencourt—the heiress of L’Oréal, the
world leader in cosmetics, founded by her father Eugène Schueller, who in 1907 invented
a range of hair dyes that were destined to do well in a way reminiscent of César Birotteau’s
success with perfume a century earlier—increased from
$
2 billion to
$
25 billion, again according to
Forbes.
¹⁵
Both fortunes thus grew at an annual rate of more than 13 percent from 1990 to 2010,
equivalent to a real return on capital of 10 or 11 percent after correcting for inflation.

In other words, Liliane Bettencourt, who never worked a day in her life, saw her fortune
grow exactly as fast as that of Bill Gates, the high-tech pioneer, whose wealth has
incidentally continued to grow just as rapidly since he stopped working. Once a fortune
is established, the capital grows according to a dynamic of its own, and it can continue
to grow at a rapid pace for decades simply because of its size. Note, in particular,
that once a fortune passes a certain threshold, size effects due to economies of scale
in the management of the portfolio and opportunities for risk are reinforced by the
fact that nearly all the income on this capital can be plowed back into investment.
An individual with this level of wealth can easily live magnificently on an amount
equivalent to only a few tenths of percent of his capital each year, and he can therefore
reinvest nearly all of his income.
¹⁶
This is a basic but important economic mechanism, with dramatic consequences for
the long-term dynamics of accumulation and distribution of wealth. Money tends to
reproduce itself. This stark reality did not escape the notice of Balzac, who describes
the irresistible rise of his pasta manufacturer in the following terms: “Citizen Goriot
amassed the capital that would later allow him to do business with all the superiority
that a great sum of money bestows on the person who possesses it.”
¹⁷

Note, too, that Steve Jobs, who even more than Bill Gates is the epitome of the admired
and talented entrepreneur who fully deserves his fortune, was worth only about
$
8 billion in 2011, at the height of his glory and the peak of Apple’s stock price.
That is just one-sixth as wealthy as Microsoft’s founder (even though many observers
judge Gates to have been less innovative than Jobs) and one-third as wealthy as Liliane
Bettencourt. The
Forbes
rankings list dozens of people with inherited fortunes larger than Jobs’s. Obviously
wealth is not just a matter of merit. The reason for this is the simple fact that
the return on inherited fortunes is often very high solely because of their initial
size.

It is unfortunately impossible to proceed further with this type of investigation,
because the
Forbes
data are far too limited to allow for systematic and robust analysis (in contrast
to the data on university endowments that I will turn to next). In particular, the
methods used by
Forbes
and other magazines significantly underestimate the size of inherited fortunes. Journalists
do not have access to comprehensive tax or other government records that would allow
them to report more accurate figures. They do what they can to collect information
from a wide variety of sources. By telephone and e-mail they gather data not available
elsewhere, but these data are not always very reliable. There is nothing inherently
wrong with such a pragmatic approach, which is inevitable when governments fail to
collect this kind of information properly, for example, by requiring annual declarations
of wealth, which would serve a genuinely useful public purpose and could be largely
automated with the aid of modern technology. But it is important to be aware of the
consequences of the magazines’ haphazard methods. In practice, the journalists begin
with data on large publicly traded corporations and compile lists of their stockholders.
By its very nature, such an approach makes it far more difficult to measure the size
of inherited fortunes (which are often invested in diversified portfolios) as compared
with entrepreneurial or other nascent fortunes (which are generally more concentrated
in a single firm).

For the largest inherited fortunes, on the order of tens of billions of dollars or
euros, one can probably assume that most of the money remains invested in the family
firm (as is the case with the Bettencourt family with L’Oréal and the Walton family
with Walmart in the United States). If so, then the size of these fortunes is as easy
to measure as the wealth of Bill Gates or Steve Jobs. But this is probably not true
at all levels: as we move down the list into the
$
1–10 billion range (and according to
Forbes,
several hundred new fortunes appear in this range somewhere in the world almost every
year), or even more into the
$
10–
$
100 million range, it is likely that many inherited fortunes are held in diversified
portfolios, in which case they are difficult for journalists to detect (especially
since the individuals involved are generally far less eager to be known publicly than
entrepreneurs are). Because of this straightforward statistical bias, wealth rankings
inevitably tend to underestimate the size of inherited fortunes.

Some magazines, such as
Challenges
in France, state openly that their goal is simply to catalog so-called business-related
fortunes, that is, fortunes consisting primarily of the stock of a particular company.
Diversified portfolios do not interest them. The problem is that it is difficult to
find out what their definition of a “business-related fortune” is. How is the ownership
threshold defined, that is, when does a portfolio cease being considered diversified
and begin to be seen as representing a controlling stake? Does it depend on the size
of the company, and if so, how is this decided? In fact, the criteria for inclusion
seem thoroughly pragmatic. First, journalists need to have heard of the fortune. Then
it has to meet certain criteria: for
Forbes
, to be worth more than a billion dollars; for
Challenges
and magazines in many other countries, to be among the five hundred wealthiest people
in the country. Such pragmatism is understandable, but such a haphazard sampling method
obviously raises serious problems when it comes to international or intertemporal
comparison. Furthermore, the magazine rankings are never very clear about the unit
of observation: in principle it is the individual, but sometimes entire family groups
are counted as a single fortune, which creates a bias in the other direction, because
it tends to exaggerate the size of large fortunes. Clearly, this is not a very robust
basis for studying the delicate question of the role of inheritance in capital formation
or the evolution of inequalities of wealth.
¹⁸

Furthermore, the magazines often exhibit a rather obvious ideological bias in favor
of entrepreneurs and do not bother to hide their wish to celebrate them, even if it
means exaggerating their importance. It is no insult to
Forbes
to observe that it can often be read, and even presents itself as, an ode to the
entrepreneur and the usefulness of merited wealth. The owner of the magazine, Steve
Forbes, himself a billionaire and twice an unsuccessful candidate for the presidential
nomination of the Republican Party, is nevertheless an heir: it was his grandfather
who founded the magazine in 1917, establishing the Forbes family fortune, which he
subsequently increased. The magazine’s rankings sometimes break billionaires down
into three groups: pure entrepreneurs, pure heirs, and heirs who subsequently “grow
their wealth.” According to
Forbes
’s own data, each of these three groups represents about a third of the total, although
the magazine also says that the number of pure heirs is decreasing and that of partial
heirs increasing. The problem is that
Forbes
has never given a precise definition of these groups (in particular of the exact
boundary between “pure” and “partial”), and the amount of inherited wealth is never
specified.
¹⁹
Under these conditions, it is quite difficult to reach any precise conclusions about
this possible trend.

In view of all these difficulties, what can we say about the respective numbers of
heirs and entrepreneurs among the largest fortunes? If we include both the pure and
partial heirs in the
Forbes
rankings (and assume that half of the wealth of the latter is inherited), and if
we allow for the methodological biases that lead to underestimating the size of inherited
fortunes, it seems fairly clear that inherited wealth accounts for more than half
of the total amount of the largest fortunes worldwide. An estimate of 60–70 percent
seems fairly realistic a priori, and this is a level markedly lower than that observed
in France in the Belle Époque (80–90 percent). This might be explained by the currently
high global growth rate, which would imply that new fortunes from the emerging countries
are rapidly being added to the rankings. But this is a hypothesis, not a certainty.

In any case, I think there is an urgent need to move beyond the often sterile debate
about merit and wealth, which is ill conceived. No one denies that it is important
for society to have entrepreneurs, inventions, and innovations. There were many innovations
in the Belle Époque, such as the automobile, movies, and electricity, just as there
are many today. The problem is simply that the entrepreneurial argument cannot justify
all inequalities of wealth, no matter how extreme. The inequality
r
>
g,
combined with the inequality of returns on capital as a function of initial wealth,
can lead to excessive and lasting concentration of capital: no matter how justified
inequalities of wealth may be initially, fortunes can grow and perpetuate themselves
beyond all reasonable limits and beyond any possible rational justification in terms
of social utility.

Entrepreneurs thus tend to turn into rentiers, not only with the passing of generations
but even within a single lifetime, especially as life expectancy increases: a person
who has had good ideas at the age of forty will not necessarily still be having them
at ninety, nor are his children sure to have any. Yet the wealth remains, in some
cases multiplied more than tenfold in twenty years, as in the case of Bill Gates or
Liliane Bettencourt.

This is the main justification for a progressive annual tax on the largest fortunes
worldwide. Such a tax is the only way of democratically controlling this potentially
explosive process while preserving entrepreneurial dynamism and international economic
openness. In
Part Four
we will examine this idea further, as well as its limitations.

The fiscal approach is also a way to move beyond the futile debate about the moral
hierarchy of wealth. Every fortune is partially justified yet potentially excessive.
Outright theft is rare, as is absolute merit. The advantage of a progressive tax on
capital is that it provides a way to treat different situations in a supple, consistent,
and predictable manner while exposing large fortunes to democratic control—which is
already quite a lot.