Capital in the Twenty-First Century (61 page)

It is a well-established fact that wealth in the United States became increasingly
concentrated over the course of the nineteenth century. In 1910, capital inequality
there was very high, though still markedly lower than in Europe: the top decile owned
about 80 percent of total wealth and the top centile around 45 percent (see
Figure 10.5
). Interestingly, the fact that inequality in the New World seemed to be catching
up with inequality in old Europe greatly worried US economists at the time. Willford
King’s book on the distribution of wealth in the United States in 1915—the first broad
study of the question—is particularly illuminating in this regard.
¹³
From today’s perspective, this may seem surprising: we have been accustomed for several
decades now to the fact that the United States is more inegalitarian than Europe and
even that many Americans are proud of the fact (often arguing that inequality is a
prerequisite of entrepreneurial dynamism and decrying Europe as a sanctuary of Soviet-style
egalitarianism). A century ago, however, both the perception and the reality were
strictly the opposite: it was obvious to everyone that the New World was by nature
less inegalitarian than old Europe, and this difference was also a subject of pride.
In the late nineteenth century, in the period known as the Gilded Age, when some US
industrialists and financiers (for example John D. Rockefeller, Andrew Carnegie, and
J. P. Morgan) accumulated unprecedented wealth, many US observers were alarmed by
the thought that the country was losing its pioneering egalitarian spirit. To be sure,
that spirit was partly a myth, but it was also partly justified by comparison with
the concentration of wealth in Europe. In
Part Four
we will see that this fear of growing to resemble Europe was part of the reason why
the United States in 1910–1920 pioneered a very progressive estate tax on large fortunes,
which were deemed to be incompatible with US values, as well as a progressive income
tax on incomes thought to be excessive. Perceptions of inequality, redistribution,
and national identity changed a great deal over the course of the twentieth century,
to put it mildly.

FIGURE 10.5.
   Wealth inequality in the United States, 1810–2010

The top 10 percent wealth holders own about 80 percent of total wealth in 1910 and
75 percent today.

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

FIGURE 10.6.
   Wealth inequality in Europe versus the United States, 1810–2010

Until the mid-twentieth century, wealth inequality was higher in Europe than in the
United States.

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

Inequality of wealth in the United States decreased between 1910 and 1950, just as
inequality of income did, but much less so than in Europe: of course it started from
a lower level, and the shocks of war were less violent. By 2010, the top decile’s
share of total wealth exceeded 70 percent, and the top centile’s share was close to
35 percent.
¹⁴

In the end, the deconcentration of wealth in the United States over the course of
the twentieth century was fairly limited: the top decile’s share of total wealth dropped
from 80 to 70 percent, whereas in Europe it fell from 90 to 60 percent (see
Figure 10.6
).
¹⁵

The differences between the European and US experiences are clear. In Europe, the
twentieth century witnessed a total transformation of society: inequality of wealth,
which on the eve of World War I was as great as it had been under the Ancien Régime,
fell to an unprecedentedly low level, so low that nearly half the population were
able to acquire some measure of wealth and for the first time to own a significant
share of national capital. This is part of the explanation for the great wave of enthusiasm
that swept over Europe in the period 1945–1975. People felt that capitalism had been
overcome and that inequality and class society had been relegated to the past. It
also explains why Europeans had a hard time accepting that this seemingly ineluctable
social progress ground to a halt after 1980, and why they are still wondering when
the evil genie of capitalism will be put back in its bottle.

In the United States, perceptions are very different. In a sense, a (white) patrimonial
middle class already existed in the nineteenth century. It suffered a setback during
the Gilded Age, regained its health in the middle of the twentieth century, and then
suffered another setback after 1980. This “yo-yo” pattern is reflected in the history
of US taxation. In the United States, the twentieth century is not synonymous with
a great leap forward in social justice. Indeed, inequality of wealth there is greater
today than it was at the beginning of the nineteenth century. Hence the lost US paradise
is associated with the country’s beginnings: there is nostalgia for the era of the
Boston Tea Party, not for Trente Glorieuses and a heyday of state intervention to
curb the excesses of capitalism.

Let me try now to explain the observed facts: the hyperconcentration of wealth in
Europe during the nineteenth century and up to World War I; the substantial compression
of wealth inequality following the shocks of 1914–1945; and the fact that the concentration
of wealth has not—thus far—regained the record heights set in Europe in the past.

Several mechanisms may be at work here, and to my knowledge there is no evidence that
would allow us to determine the precise share of each in the overall movement. We
can, however, try to hierarchize the different mechanisms with the help of the available
data and analyses. Here is the main conclusion that I believe we can draw from what
we know.

The primary reason for the hyperconcentration of wealth in traditional agrarian societies
and to a large extent in all societies prior to World War I (with the exception of
the pioneer societies of the New World, which are for obvious reasons very special
and not representative of the rest of the world or the long run) is that these were
low-growth societies in which the rate of return on capital was markedly and durably
higher than the rate of growth.

This fundamental force for divergence, which I discussed briefly in the Introduction,
functions as follows. Consider a world of low growth, on the order of, say, 0.5–1
percent a year, which was the case everywhere before the eighteenth and nineteenth
centuries. The rate of return on capital, which is generally on the order of 4 or
5 percent a year, is therefore much higher than the growth rate. Concretely, this
means that wealth accumulated in the past is recapitalized much more quickly than
the economy grows, even when there is no income from labor.

For example, if
g
=
1% and
r
=
5%, saving one-fifth of the income from capital (while consuming the other four-fifths)
is enough to ensure that capital inherited from the previous generation grows at the
same rate as the economy. If one saves more, because one’s fortune is large enough
to live well while consuming somewhat less of one’s annual rent, then one’s fortune
will increase more rapidly than the economy, and inequality of wealth will tend to
increase even if one contributes no income from labor. For strictly mathematical reasons,
then, the conditions are ideal for an “inheritance society” to prosper—where by “inheritance
society” I mean a society characterized by both a very high concentration of wealth
and a significant persistence of large fortunes from generation to generation.

Now, it so happens that these conditions existed in any number of societies throughout
history, and in particular in the European societies of the nineteenth century. As
Figure 10.7
shows, the rate of return on capital was significantly higher than the growth rate
in France from 1820 to 1913, around 5 percent on average compared with a growth rate
of around 1 percent. Income from capital accounted for nearly 40 percent of national
income, and it was enough to save one-quarter of this to generate a savings rate on
the order of 10 percent (see
Figure 10.8
). This was sufficient to allow wealth to grow slightly more rapidly than income,
so that the concentration of wealth trended upward. In the next chapter I will show
that most wealth in this period did come from inheritance, and this supremacy of inherited
capital, despite the period’s great economic dynamism and impressive financial sophistication,
is explained by the dynamic effects of the fundamental inequality
r
>
g
: the very rich French probate data allow us to be quite precise about this point.

FIGURE 10.7.
   Return to capital and growth: France, 1820–1913

The rate of return on capital is a lot higher than the growth rate in France between
1820 and 1913.

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

FIGURE 10.8.
   Capital share and saving rate: France, 1820–1913

The share of capital income in national income is much larger than the saving rate
in France between 1820 and 1913.

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

Let me pursue the logic of the argument. Are there deep reasons why the return on
capital should be systematically higher than the rate of growth? To be clear, I take
this to be a historical fact, not a logical necessity.

It is an incontrovertible historical reality that
r
was indeed greater than
g
over a long period of time. Many people, when first confronted with this claim, express
astonishment and wonder why it should be true. The most obvious way to convince oneself
that
r
>
g
is indeed a historical fact is no doubt the following.