Capital in the Twenty-First Century (62 page)

As I showed in
Part One
, economic growth was virtually nil throughout much of human history: combining demographic
with economic growth, we can say that the annual growth rate from antiquity to the
seventeenth century never exceeded 0.1–0.2 percent for long. Despite the many historical
uncertainties, there is no doubt that the rate of return on capital was always considerably
greater than this: the central value observed over the long run is 4–5 percent a year.
In particular, this was the return on land in most traditional agrarian societies.
Even if we accept a much lower estimate of the pure yield on capital—for example,
by accepting the argument that many landowners have made over the years that it is
no simple matter to manage a large estate, so that this return actually reflects a
just compensation for the highly skilled labor contributed by the owner—we would still
be left with a minimum (and to my mind unrealistic and much too low) return on capital
of at least 2–3 percent a year, which is still much greater than 0.1–0.2 percent.
Thus throughout most of human history, the inescapable fact is that the rate of return
on capital was always at least 10 to 20 times greater than the rate of growth of output
(and income). Indeed, this fact is to a large extent the very foundation of society
itself: it is what allowed a class of owners to devote themselves to something other
than their own subsistence.

In order to illustrate this point as clearly as possible, I have shown in
Figure 10.9
the evolution of the global rate of return on capital and the growth rate from antiquity
to the twenty-first century.

FIGURE 10.9.
   Rate of return versus growth rate at the world level, from Antiquity until 2100

The rate of return to capital (pretax) has always been higher than the world growth
rate, but the gap was reduced during the twentieth century, and might widen again
in the twenty-first century.

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

These are obviously approximate and uncertain estimates, but the orders of magnitude
and overall evolutions may be taken as valid. For the global growth rate, I have used
the historical estimates and projections discussed in
Part One
. For the global rate of return on capital, I have used the estimates for Britain
and France in the period 1700–2010, which were analyzed in
Part Two
. For early periods, I have used a pure return of 4.5 percent, which should be taken
as a minimum value (available historical data suggest average returns on the order
of 5–6 percent).
¹⁶
For the twenty-first century, I have assumed that the value observed in the period
1990–2010 (about 4 percent) will continue, but this is of course uncertain: there
are forces pushing toward a lower return and other forces pushing toward a higher.
Note, too, that the returns on capital in
Figure 10.8
are pretax returns (and also do not take account of capital losses due to war, or
of capital gains and losses, which were especially large in the twentieth century).

As
Figure 10.9
shows, the pure rate of return on capital—generally 4–5 percent—has throughout history
always been distinctly greater than the global growth rate, but the gap between the
two shrank significantly during the twentieth century, especially in the second half
of the century, when the global economy grew at a rate of 3.5–4 percent a year. In
all likelihood, the gap will widen again in the twenty-first century as growth (especially
demographic growth) slows. According to the central scenario discussed in
Part One
, global growth is likely to be around 1.5 percent a year between 2050 and 2100, roughly
the same rate as in the nineteenth century. The gap between
r
and
g
would then return to a level comparable to that which existed during the Industrial
Revolution.

In such a context, it is easy to see that taxes on capital—and shocks of various kinds—can
play a central role. Before World War I, taxes on capital were very low (most countries
did not tax either personal income or corporate profits, and estate taxes were generally
no more than a few percent). To simplify matters, we may therefore assume that the
rate of return on capital was virtually the same after taxes as before. After World
War I, the tax rates on top incomes, profits, and wealth quickly rose to high levels.
Since the 1980s, however, as the ideological climate changed dramatically under the
influence of financial globalization and heightened competition between states for
capital, these same tax rates have been falling and in some cases have almost entirely
disappeared.

Figure 10.10
shows my estimates of the average return on capital after taxes and after accounting
for estimated capital losses due to destruction of property in the period 1913–1950.
For the sake of argument, I have also assumed that fiscal competition will gradually
lead to total disappearance of taxes on capital in the twenty-first century: the average
tax rate on capital is set at 30 percent for 1913–2012, 10 percent for 2012–2050,
and 0 percent in 2050–2100. Of course, things are more complicated in practice: taxes
vary enormously, depending on the country and type of property. At times, they are
progressive (meaning that the tax rate increases with the level of income or wealth,
at least in theory), and obviously it is not foreordained that fiscal competition
must proceed to its ultimate conclusion.

Under these assumptions, we find that the return on capital, net of taxes (and losses),
fell to 1–1.5 percent in the period 1913–1950, which was less than the rate of growth.
This novel situation continued in the period 1950–2012 owing to the exceptionally
high growth rate. Ultimately, we find that in the twentieth century, both fiscal and
nonfiscal shocks created a situation in which, for the first time in history, the
net return on capital was less than the growth rate. A concatenation of circumstances
(wartime destruction, progressive tax policies made possible by the shocks of 1914–1945,
and exceptional growth during the three decades following the end of World War II)
thus created a historically unprecedented situation, which lasted for nearly a century.
All signs are, however, that it is about to end. If fiscal competition proceeds to
its logical conclusion—which it may—the gap between
r
and
g
will return at some point in the twenty-first century to a level close to what it
was in the nineteenth century (see
Figure 10.10
). If the average tax rate on capital stays at around 30 percent, which is by no means
certain, the net rate of return on capital will most likely rise to a level significantly
above the growth rate, at least if the central scenario turns out to be correct.

FIGURE 10.10.
   After tax rate of return versus growth rate at the world level, from Antiquity
until 2100

The rate of return to capital (after tax and capital losses) fell below the growth
rate during the twentieth century, and may again surpass it in the twenty-first century.

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

FIGURE 10.11.
   After tax rate of return versus growth rate at the world level, from Antiquity
until 2200

The rate of return to capital (after tax and capital losses) fell below the growth
rate during the twentieth century, and might again surpass it in the twenty-first
century.

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

To bring this possible evolution out even more clearly, I have combined in
Figure 10.11
the two subperiods 1913–1950 and 1950–2012 into a single average for the century
1913–2012, the unprecedented era during which the net rate of return on capital was
less than the growth rate. I have also combined the two subperiods 2012–2050 and 2050–2100
into a single average for 2012–2100 and assumed that the rates for the second half
of the twenty-first century would continue into the twenty-second century (which is
of course by no means guaranteed). In any case,
Figure 10.11
at least brings out the unprecedented—and possibly unique—character of the twentieth
century in regard to the relation between
r
and
g
. Note, too, that the hypothesis that global growth will continue at a rate of 1.5
percent a year over the very long run is regarded as excessively optimistic by many
observers. Recall that the average growth of global per capita output was 0.8 percent
a year between 1700 and 2012, and demographic growth (which also averaged 0.8 percent
a year over the past three centuries) is expected to drop sharply between now and
the end of the twenty-first century (according to most forecasts). Note, however,
that the principal shortcoming of
Figure 10.11
is that it relies on the assumption that no significant political reaction will alter
the course of capitalism and financial globalization over the course of the next two
centuries. Given the tumultuous history of the past century, this is a dubious and
to my mind not very plausible hypothesis, precisely because its inegalitarian consequences
would be considerable and would probably not be tolerated indefinitely.

To sum up: the inequality
r
>
g
has clearly been true throughout most of human history, right up to the eve of World
War I, and it will probably be true again in the twenty-first century. Its truth depends,
however, on the shocks to which capital is subject, as well as on what public policies
and institutions are put in place to regulate the relationship between capital and
labor.

To recap: the inequality
r
>
g
is a contingent historical proposition, which is true in some periods and political
contexts and not in others. From a strictly logical point of view, it is perfectly
possible to imagine a society in which the growth rate is greater than the return
on capital—even in the absence of state intervention. Everything depends on the one
hand on technology (what is capital used for?) and on the other on attitudes toward
saving and property (why do people choose to hold capital?). As noted, it is perfectly
possible to imagine a society in which capital has no uses (other than to serve as
a pure store of value, with a return strictly equal to zero), but in which people
would choose to hold a lot of it, in anticipation, say, of some future catastrophe
or grand potlatch or simply because they are particularly patient and take a generous
attitude toward future generations. If, moreover, productivity growth in this society
is rapid, either because of constant innovation or because the country is rapidly
catching up with more technologically advanced countries, then the growth rate may
very well be distinctly higher than the rate of return on capital.

In practice, however, there appears never to have been a society in which the rate
of return on capital fell naturally and persistently to less than 2–3 percent, and
the mean return we generally see (averaging over all types of investments) is generally
closer to 4–5 percent (before taxes). In particular, the return on agricultural land
in traditional societies, like the return on real estate in today’s societies—these
being the most common and least risky forms of investment in each case—is generally
around 4–5 percent, with perhaps a slight downward trend over the very long run (to
3–4 percent rather than 4–5).