Capital in the Twenty-First Century (74 page)

FIGURE 11.11.
   Which fraction of a cohort receives in inheritance the equivalent of a lifetime
labor income?

Within the cohorts born around 1970–1980, 12–14 percent of individuals receive in
inheritance the equivalent of the lifetime labor income received by the bottom 50
percent less well paid workers.

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

Second, there is no guarantee that the distribution of inherited capital will not
ultimately become as inegalitarian in the twenty-first century as it was in the nineteenth.
As noted in the previous chapter, there is no ineluctable force standing in the way
of a return to extreme concentration of wealth, as extreme as in the Belle Époque,
especially if growth slows and the return on capital increases, which could happen,
for example, if tax competition between nations heats up. If this were to happen,
I believe that it would lead to significant political upheaval. Our democratic societies
rest on a meritocratic worldview, or at any rate a meritocratic hope, by which I mean
a belief in a society in which inequality is based more on merit and effort than on
kinship and rents. This belief and this hope play a very crucial role in modern society,
for a simple reason: in a democracy, the professed equality of rights of all citizens
contrasts sharply with the very real inequality of living conditions, and in order
to overcome this contradiction it is vital to make sure that social inequalities derive
from rational and universal principles rather than arbitrary contingencies. Inequalities
must therefore be just and useful to all, at least in the realm of discourse and as
far as possible in reality as well. (“Social distinctions can be based only on common
utility,” according to article 1 of the 1789 Declaration of the Rights of Man and
the Citizen.) In 1893, Emile Durkheim predicted that modern democratic society would
not put up for long with the existence of inherited wealth and would ultimately see
to it that ownership of property ended at death.
⁵⁵

It is also significant that the words “rent” and “rentier” took on highly pejorative
connotations in the twentieth century. In this book, I use these words in their original
descriptive sense, to denote the annual rents produced by a capital asset and the
individuals who live on those rents. Today, the rents produced by an asset are nothing
other than the income on capital, whether in the form of rent, interest, dividends,
profits, royalties, or any other legal category of revenue, provided that such income
is simply remuneration for ownership of the asset, independent of any labor. It was
in this original sense that the words “rent” and “rentiers” were used in the eighteenth
and nineteenth centuries, for example in the novels of Balzac and Austen, at a time
when the domination of wealth and its income at the top of the income hierarchy was
acknowledged and accepted, at least among the elite. It is striking to observe that
this original meaning largely disappeared as democratic and meritocratic values took
hold. During the twentieth century, the word “rent” became an insult and a rather
abusive one. This linguistic change can be observed everywhere.

It is particularly interesting to note that the word “rent” is often used nowadays
in a very different sense: to denote an imperfection in the market (as in “monopoly
rent”), or, more generally, to refer to any undue or unjustified income. At times,
one almost has the impression that “rent” has become synonymous with “economic ill.”
Rent is the enemy of modern rationality and must be eliminated root and branch by
striving for ever purer and more perfect competition. A typical example of this use
of the word can be seen in a recent interview that the president of the European Central
Bank granted to several major European newspapers a few months after his nomination.
When the journalists posed questions about his strategy for resolving Europe’s problems,
he offered this lapidary response: “We must fight against rents.”
⁵⁶
No further details were offered. What the central banker had in mind, apparently,
was lack of competition in the service sector: taxi drivers, hairdressers, and the
like were presumably making too much money.
⁵⁷

The problem posed by this use of the word “rent” is very simple: the fact that capital
yields income, which in accordance with the original meaning of the word we refer
to in this book as “annual rent produced by capital,” has absolutely nothing to do
with the problem of imperfect competition or monopoly. If capital plays a useful role
in the process of production, it is natural that it should be paid. When growth is
slow, it is almost inevitable that this return on capital is significantly higher
than the growth rate, which automatically bestows outsized importance on inequalities
of wealth accumulated in the past. This logical contradiction cannot be resolved by
a dose of additional competition. Rent is not an imperfection in the market: it is
rather the consequence of a “pure and perfect” market for capital, as economists understand
it: a capital market in which each owner of capital, including the least capable of
heirs, can obtain the highest possible yield on the most diversified portfolio that
can be assembled in the national or global economy. To be sure, there is something
astonishing about the notion that capital yields rent, or income that the owner of
capital obtains without working. There is something in this notion that is an affront
to common sense and that has in fact perturbed any number of civilizations, which
have responded in various ways, not always benign, ranging from the prohibition of
usury to Soviet-style communism. Nevertheless, rent is a reality in any market economy
where capital is privately owned. The fact that landed capital became industrial and
financial capital and real estate left this deeper reality unchanged. Some people
think that the logic of economic development has been to undermine the distinction
between labor and capital. In fact, it is just the opposite: the growing sophistication
of capital markets and financial intermediation tends to separate owners from managers
more and more and thus to sharpen the distinction between pure capital income and
labor income. Economic and technological rationality at times has nothing to do with
democratic rationality. The former stems from the Enlightenment, and people have all
too commonly assumed that the latter would somehow naturally derive from it, as if
by magic. But real democracy and social justice require specific institutions of their
own, not just those of the market, and not just parliaments and other formal democratic
institutions.

To recapitulate: the fundamental force for divergence, which I have emphasized throughout
this book, can be summed up in the inequality
r
>
g,
which has nothing to do with market imperfections and will not disappear as markets
become freer and more competitive. The idea that unrestricted competition will put
an end to inheritance and move toward a more meritocratic world is a dangerous illusion.
The advent of universal suffrage and the end of property qualifications for voting
(which in the nineteenth century limited the right to vote to people meeting a minimum
wealth requirement, typically the wealthiest 1 or 2 percent in France and Britain
in 1820–1840, or about the same percentage of the population as was subject to the
wealth tax in France in 2000–2010), ended the legal domination of politics by the
wealthy.
⁵⁸
But it did not abolish the economic forces capable of producing a society of rentiers.

Can our results concerning the return of inherited wealth in France be extended to
other countries? In view of the limitations of the available data, it is unfortunately
impossible to give a precise answer to this question. There are apparently no other
countries with estate records as rich and comprehensive as the French data. Nevertheless,
a number of points seem to be well established. First, the imperfect data collected
to date for other European countries, especially Germany and Britain, suggest that
the U-shaped curve of inheritance flows in France in the twentieth century actually
reflects the reality everywhere in Europe (see
Figure 11.12
).

FIGURE 11.12.
   The inheritance flow in Europe, 1900–2010

The inheritance flow follows a U-shape in curve in France as well as in the United
Kingdom and Germany. It is possible that gifts are underestimated in the United Kingdom
at the end of the period.

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

In Germany, in particular, available estimates—unfortunately based on a limited number
of years—suggest that inheritance flows collapsed even further than in France following
the shocks of 1914–1945, from about 16 percent of national income in 1910 to just
2 percent in 1960. Since then they have risen sharply and steadily, with an acceleration
in 1980–1990, until in 2000–2010 they attained a level of 10–11 percent of national
income. This is lower than in France (where the figure for 2010 was about 15 percent
of national income), but since Germany started from a lower point in 1950–1960, the
rebound of inheritance flows has actually been stronger there. In addition, the current
difference between flows in France and Germany is entirely due to the difference in
the capital/income ratio (
β
, presented in
Part Two
). If total private wealth in Germany were to rise to the same level as in France,
the inheritance flows would also equalize (all other things being equal). It is also
interesting to note that the strong rebound of inheritance flows in Germany is largely
due to a very sharp increase in gifts, just as in France. The annual volume of gifts
recorded by the German authorities represented the equivalent of 10–20 percent of
the total amount of inheritances before 1970–1980. Thereafter it rose gradually to
about 60 percent in 2000–2010. Finally, the smaller inheritance flow in Germany in
1910 was largely a result of more rapid demographic growth north of the Rhine at that
time (the “m effect,” as it were). By the same token, because German demographic growth
today is stagnant, it is possible that inheritance flows there will exceed those in
France in the decades to come.
⁵⁹
Other European countries affected by demographic decline and a falling birthrate,
such as Italy and Spain, should obey a similar logic, although we unfortunately have
no reliable historical data on inheritance flows in these two cases.

As for Britain, inheritance flows there at the turn of the twentieth century were
approximately the same as in France: 20–25 percent of national income.
⁶⁰
The inheritance flow did not fall as far as in France or Germany after the two world
wars, and this seems consistent with the fact that the stock of private wealth was
less violently affected (the
β
effect) and that wealth accumulation was not set back as far (
μ
effect). The annual inheritance and gift flow fell to about 8 percent of national
income in 1950–1960 and to 6 percent in 1970–1980. The rebound since the 1980s has
been significant but not as strong as in France or Germany: according to the available
data, the inheritance flow in Britain in 2000–2010 was just over 8 percent of national
income.

In the abstract, several explanations are possible. The lower British inheritance
flow might be due to the fact that a larger share of private wealth is held in pension
funds and is therefore not transmissible to descendants. This can only be a small
part of the explanation, however, because pension funds account for only 15–20 percent
of the British private capital stock. Furthermore, it is by no means certain that
life-cycle wealth is supplanting transmissible wealth: logically speaking, the two
types of wealth should be added together, so that a country that relies more on pension
funds to finance its retirements should be able to accumulate a larger total stock
of private wealth and perhaps to invest part of this in other countries.
⁶¹