Thomas Piketty - Capital In The Twenty-First Century, Part 2

    
TEN

     Inequality of Capital Ownership

     Let me turn now to the question of inequality of wealth and its historical evolution. The question is important, all the more so because the reduction of this type of inequality, and of the income derived from it, was the only reason why total income inequality diminished during the first half of the twentieth century. As noted, inequality of income from labor did not decrease in a structural sense between 1900–1910 and 1950–1960 in either France or the United States (contrary to the optimistic predictions of Kuznets's theory, which was based on the idea of a gradual and mechanical shift of labor from worse paid to better paid types of work), and the sharp drop in total income inequality was due essentially to the collapse of high incomes from capital. All the information at our disposal indicates that the same is true for all the other developed countries.1 It is therefore essential to understand how and why this historic compression of inequality of wealth came about.
     The question is all the more important because capital ownership is apparently becoming increasingly concentrated once again today, as the capital/income ratio rises and growth slows. The possibility of a widening wealth gap raises many questions as to its long-term consequences. In some respects it is even more worrisome than the widening income gap between supermanagers and others, which to date remains a geographically limited phenomenon.
 Hyperconcentrated Wealth: Europe and America

     As noted in Chapter 7, the distribution of wealth—and therefore of income from capital—is always much more concentrated than the distribution of income from labor. In all known societies, at all times, the least wealthy half of the population own virtually nothing (generally little more than 5 percent of total wealth); the top decile of the wealth hierarchy own a clear majority of what there is to own (generally more than 60 percent of total wealth and sometimes as much as 90 percent); and the remainder of the population (by construction, the 40 percent in the middle) own from 5 to 35 percent of all wealth.2 I also noted the emergence of a "patrimonial middle class," that is, an intermediate group who are distinctly wealthier than the poorer half of the population and own between a quarter and a third of national wealth. The emergence of this middle class is no doubt the most important structural transformation to affect the wealth distribution over the long run.
     Why did this transformation occur? To answer this question, one must first take a closer look at the chronology. When and how did inequality of wealth begin to decline? To be candid, because the necessary sources (mainly probate records) are unfortunately not always available, I have thus far not been able to study the historical evolution of wealth inequality in as many countries as I examined in the case of income inequality. We have fairly complete historical estimates for four countries: France, Britain, the United States, and Sweden. The lessons of these four histories are fairly clear and consistent, however, so that we can say something about the similarities and differences between the European and US trajectories.3 Furthermore, the wealth data have one enormous advantage over the income data: they allow us in some cases to go much farther back in time. Let me now examine one by one the four countries I have studied in detail.
 France: An Observatory of Private Wealth

     France is a particularly interesting case, because it is the only country for which we have a truly homogeneous historical source that allows us to study the distribution of wealth continuously from the late eighteenth century to the present. In 1791, shortly after the fiscal privileges of the nobility were abolished, a tax on estates and gifts was established, together with a wealth registry. These were astonishing innovations at the time, notable for their universal scope. The new estate tax was universal in three ways: first, it applied to all types of property: farmland, other urban and rural real estate, cash, public and private bonds, other kinds of financial assets such as shares of stock or partnerships, furniture, valuables, and so on; second, it applied to all owners of wealth, whether noble or common; and third, it applied to fortunes of all sizes, large or small. Moreover, the purpose of this fundamental reform was not only to fill the coffers of the new regime but also to enable the government to record all transfers of wealth, whether by bequest (at the owner's death) or gift (during the owner's lifetime), in order to guarantee to all the full exercise of their property rights. In official language, the estate and gift tax has always—from 1791 until now—been classified as one of a number of droits d'enregistrement (recording fees), and more specifically droits de mutation (transfer fees), which included both charges assessed on "free-will transfers," or transfers of title to property made without financial consideration, by bequest or gift, and "transfers for consideration" (that is, transfers made in exchange for cash or other valuable tokens). The purpose of the law was thus to allow every property owner, large or small, to record his title and thus to enjoy his property rights in full security, including the right to appeal to the public authorities in case of difficulty. Thus a fairly complete system of property records was established in the late 1790s and early 1800s, including a cadastre for real estate that still exists today.
     In Part Four I say more about the history of estate taxes in different countries. At this stage, taxes are of interest primarily as a historical source. In most other countries, it was not until the end of the nineteenth century or beginning of the twentieth that estate and gift taxes comparable to France's were established. In Britain, the reform of 1894 unified previous taxes on the conveyance of real estate, financial assets, and personal estate, but homogeneous probate statistics covering all types of property go back only to 1919–1920. In the United States, the federal tax on estates and gifts was not created until 1916 and covered only a tiny minority of the population. (Although taxes covering broader segments of the population do exist in some states, these are highly heterogeneous.) Hence it is very difficult to study the evolution of wealth inequalities in these two countries before World War I. To be sure, there are many probate documents and estate inventories, mostly of private origin, dealing with particular subsets of the population and types of property, but there is no obvious way to use these records to draw general conclusions.
     This is unfortunate, because World War I was a major shock to wealth and its distribution. One of the primary reasons for studying the French case is precisely that it will allow us to place this crucial turning point in a longer historical perspective. From 1791 to 1901, the estate and gift tax was strictly proportional: it varied with degree of kinship but was the same regardless of the amount transferred and was usually quite low (generally 1–2 percent). The tax was made slightly progressive in 1901 after a lengthy parliamentary battle. The government, which had begun publishing detailed statistics on the annual flow of bequests and donations as far back as the 1820s, began compiling a variety of statistics by size of estate in 1901, and from then until the 1950s, these became increasingly sophisticated (with cross-tabulations by age, size of estate, type of property, etc.). After 1970, digital files containing representative samples from estate and gift tax filings in a specific year became available, so that the data set can be extended to 2000–2010. In addition to the rich sources produced directly by the tax authorities over the past two centuries, I have also collected, together with Postel-Vinay and Rosenthal, tens of thousands of individual declarations (which have been very carefully preserved in national and departmental archives since the early nineteenth century) for the purpose of constructing large samples covering each decade from 1800–1810 to 2000–2010. All in all, French probate records offer an exceptionally rich and detailed view of two centuries of wealth accumulation and distribution.4
 The Metamorphoses of a Patrimonial Society

     Figure 10.1 presents the main results I obtained for the evolution of the wealth distribution from 1810 to 2010.5 The first conclusion is that prior to the shocks of 1914–1945, there was no visible trend toward reduced inequality of capital ownership. Indeed, there was a slight tendency for capital concentration to rise throughout the nineteenth century (starting from an already very high level) and even an acceleration of the inegalitarian spiral in the period 1880–1913. The top decile of the wealth hierarchy already owned between 80 and 85 percent of all wealth at the beginning of the nineteenth century; by the turn of the twentieth, it owned nearly 90 percent. The top centile alone owned 45–50 percent of the nation's wealth in 1800–1810; its share surpassed 50 percent in 1850–1860 and reached 60 percent in 1900–1910.6
     Looking at these data with the historical distance we enjoy today, we cannot help being struck by the impressive concentration of wealth in France during the Belle Époque, notwithstanding the reassuring rhetoric of the Third Republic's economic and political elites. In Paris, which was home to little more than one-twentieth of the population in 1900–1910 but claimed one-quarter of the wealth, the concentration of wealth was greater still and seems to have increased without limit during the decades leading up to World War I. In the capital, where in the nineteenth century two-thirds of the population died without any wealth to leave to the next generation (compared with half of the population in the rest of the country) but where the largest fortunes were also concentrated, the top centile's share was about 55 percent at the beginning of the century, rose to 60 percent in 1880–1890, and then to 70 percent on the eve of World War I (see Figure 10.2). Looking at this curve, it is natural to ask how high the concentration of wealth might have gone had there been no war.
      

     FIGURE 10.1.   Wealth inequality in France, 1810–2010
     The top decile (the top 10 percent highest wealth holders) owns 80–90 percent of total wealth in 1810–1910, and 60–65 percent today.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     The probate records also allow us to see that throughout the nineteenth century, wealth was almost as unequally distributed within each age cohort as in the nation as a whole. Note that the estimates indicated in Figures 10.1–2 (and subsequent figures) reflect inequality of wealth in the (living) adult population at each charted date: we start with wealth at the time of death but reweight each observation as a function of the number of living individuals in each age cohort as of the date in question. In practice, this does not make much difference: the concentration of wealth among the living is barely a few points higher than inequality of wealth at death, and the temporal evolution is nearly identical in each case.7
      

     FIGURE 10.2.   Wealth inequality in Paris versus France, 1810–2010
     The top percentile (the top 1 percent wealth holders) owns 70 percent of aggregate wealth in Paris on the eve of World War I.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     How concentrated was wealth in France during the eighteenth century up to the eve of the Revolution? Without a source comparable to the probate records created by the revolutionary assemblies (for the Ancien Régime we have only heterogeneous and incomplete sets of private data, as for Britain and the United States until the late nineteenth century), it is unfortunately impossible to make precise comparisons. Yet all signs are that inequality of private wealth decreased slightly between 1780 and 1810 owing to redistribution of agricultural land and cancellation of public debt during the Revolution, together with other shocks to aristocratic fortunes. It is possible that the top decile's share attained or even slightly exceeded 90 percent of total wealth on the eve of 1789 and that the upper centile's share attained or exceeded 60 percent. Conversely, the "émigré billion" (the billion francs paid to the nobility in compensation for land confiscated during the Revolution) and the return of the nobility to the forefront of the political scene contributed to the reconstitution of some old fortunes during the period of limited-suffrage monarchy (1815–1848). In fact, our probate data reveal that the percentage of aristocratic names in the top centile of the Parisian wealth hierarchy increased gradually from barely 15 percent in 1800–1810 to nearly 30 percent in 1840–1850 before embarking on an inexorable decline from 1850–1860 on, falling to less than 10 percent by 1890–1900.8
     The magnitude of the changes initiated by the French Revolution should not be overstated, however. Beyond the probable decrease of inequality of wealth between 1780 and 1810, followed by a gradual increase between 1810 and 1910, and especially after 1870, the most significant fact is that inequality of capital ownership remained relatively stable at an extremely high level throughout the eighteenth and nineteenth centuries. During this period, the top decile consistently owned 80 to 90 percent of total wealth and the top centile 50 to 60 percent. As I showed in Part Two, the structure of capital was totally transformed between the eighteenth century and the beginning of the twentieth century (landed capital was almost entirely replaced by industrial and financial capital and real estate), but total wealth, measured in years of national income, remained relatively stable. In particular, the French Revolution had relatively little effect on the capital/income ratio. As just shown, the Revolution also had relatively little effect on the distribution of wealth. In 1810–1820, the epoch of Père Goriot, Rastignac, and Mademoiselle Victorine, wealth was probably slightly less unequally distributed than during the Ancien Régime, but the difference was really rather minimal: both before and after the Revolution, France was a patrimonial society characterized by a hyperconcentration of capital, in which inheritance and marriage played a key role and inheriting or marrying a large fortune could procure a level of comfort not obtainable through work or study. In the Belle Époque, wealth was even more concentrated than when Vautrin lectured Rastignac. At bottom, however, France remained the same society, with the same basic structure of inequality, from the Ancien Régime to the Third Republic, despite the vast economic and political changes that took place in the interim.
     Probate records also enable us to observe that the decrease in the upper decile's share of national wealth in the twentieth century benefited the middle 40 percent of the population exclusively, while the share of the poorest 50 percent hardly increased at all (it remained less than 5 percent of total wealth). Throughout the nineteenth and twentieth centuries, the bottom half of the population had virtually zero net wealth. In particular, we find that at the time of death, individuals in the poorest half of the wealth distribution owned no real estate or financial assets that could be passed on to heirs, and what little wealth they had went entirely to expenses linked to death and to paying off debts (in which case the heirs generally chose to renounce their inheritance). The proportion of individuals in this situation at the time of death exceeded two-thirds in Paris throughout the nineteenth century and until the eve of World War I, and there was no downward trend. Père Goriot belonged to this vast group, dying as he did abandoned by his daughters and in abject poverty: his landlady, Madame Vauquer, dunned Rastignac for what the old man owed her, and he also had to pay the cost of burial, which exceeded the value of the deceased's meager personal effects. Roughly half of all French people in the nineteenth century died in similar circumstances, without any wealth to convey to heirs, or with only negative net wealth, and this proportion barely budged in the twentieth century.9
 Inequality of Capital in Belle Époque Europe

     The available data for other European countries, though imperfect, unambiguously demonstrate that extreme concentration of wealth in the eighteenth and nineteenth centuries and until the eve of World War I was a European and not just a French phenomenon.
     In Britain, we have detailed probate data from 1910–1920 on, and these records have been exhaustively studied by many investigators (most notably Atkinson and Harrison). If we complete these statistics with estimates from recent years as well as the more robust but less homogeneous estimates that Peter Linder has made for the period 1810–1870 (based on samples of estate inventories), we find that the overall evolution was very similar to the French case, although the level of inequality was always somewhat greater in Britain. The top decile's share of total wealth was on the order of 85 percent from 1810 to 1870 and surpassed 90 percent in 1900–1910; the uppermost centile's share rose from 55–60 percent in 1810–1870 to nearly 70 percent in 1910–1920 (see Figure 10.3). The British sources are imperfect, especially for the nineteenth century, but the orders of magnitude are quite clear: wealth in Britain was extremely concentrated in the nineteenth century and showed no tendency to decrease before 1914. From a French perspective, the most striking fact is that inequality of capital ownership was only slightly greater in Britain than in France during the Belle Époque, even though Third Republic elites at the time liked to portray France as an egalitarian country compared with its monarchical neighbor across the Channel. In fact, the formal nature of the political regime clearly had very little influence on the distribution of wealth in the two countries.
      

     FIGURE 10.3.   Wealth inequality in Britain, 1810–2010
     The top decile owns 80–90 percent of total wealth in 1810–1910, and 70 percent today.
     Sources and series: see piketty.pse.ens.fr/capital21c
     In Sweden, where the very rich data available from 1910, of which Ohlsonn, Roine, and Waldenstrom have recently made use, and for which we also have estimates for the period 1810–1870 (by Lee Soltow in particular), we find a trajectory very similar to what we observed in France and Britain (see Figure 10.4). Indeed, the Swedish wealth data confirm what we already know from income statements: Sweden was not the structurally egalitarian country that we sometimes imagine. To be sure, the concentration of wealth in Sweden in 1970–1980 attained the lowest level of inequality observed in any of our historical series (with barely 50 percent of total wealth owned by the top decile and slightly more than 15 percent by the top centile). This is still a fairly high level of inequality, however, and, what is more, inequality in Sweden has increased significantly since 1980–1990 (and in 2010 was just slightly lower than in France). It is worth stressing, moreover, that Swedish wealth was as concentrated as French and British wealth in 1900–1910. In the Belle Époque, wealth was highly concentrated in all European countries. It is essential to understand why this was so, and why things changed so much over the course of the twentieth century.
      

     FIGURE 10.4.   Wealth inequality in Sweden, 1810–2010
     The top 10 percent holds 80–90 percent of total wealth in 1810–1910 and 55–60 percent today.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     Note, moreover, that we also find the same extremely high concentration of wealth—with 80 to 90 percent of capital owned by the top decile and 50–60 percent by the top centile—in most societies prior to the nineteenth century, and in particular in traditional agrarian societies in the modern era, as well as in the Middle Ages and antiquity. The available sources are not sufficiently robust to permit precise comparisons or study temporal evolutions, but the orders of magnitude obtained for the shares of the top decile and centile in total wealth (and especially in total farmland) are generally close to what we find in France, Britain, and Sweden in the nineteenth century and Belle Époque.10
 The Emergence of the Patrimonial Middle Class

     Three questions will concern us in the remainder of this chapter. Why were inequalities of wealth so extreme, and increasing, before World War I? And why, despite the fact that wealth is once again prospering at the beginning of the twenty-first century as it did at the beginning of the twentieth century (as the evolution of the capital/income ratio shows), is the concentration of wealth today significantly below its historical record high? Finally, is this state of affairs irreversible?
     In fact, the second conclusion that emerges very clearly from the French data presented in Figure 10.1 is that the concentration of wealth, as well as the concentration of income from wealth, has never fully recovered from the shocks of 1914–1945. The upper decile's share of total wealth, which attained 90 percent in 1910–1920, fell to 60–70 percent in 1950–1970; the upper centile's share dropped even more precipitously, from 60 percent in 1910–1920 to 20–30 percent in 1950–1970. Compared with the trend prior to World War I, the break is clear and overwhelming. To be sure, inequality of wealth began to increase again in 1980–1990, and financial globalization has made it more and more difficult to measure wealth and its distribution in a national framework: inequality of wealth in the twenty-first century will have to be gauged more and more at the global level. Despite these uncertainties, however, there is no doubt that inequality of wealth today stands significantly below its level of a century ago: the top decile's share is now around 60–65 percent, which, though still quite high, is markedly below the level attained in the Belle Époque. The essential difference is that there is now a patrimonial middle class, which owns about a third of national wealth—a not insignificant amount.
     The available data for the other European countries confirm that this has been a general phenomenon. In Britain, the upper decile's share fell from more than 90 percent on the eve of World War I to 60–65 percent in the 1970s; it is currently around 70 percent. The top centile's share collapsed in the wake of the twentieth century's shocks, falling from nearly 70 percent in 1910–1920 to barely more than 20 percent in 1970–1980, then rising to 25–30 percent today (see Figure 10.3). In Sweden, capital ownership was always less concentrated than in Britain, but the overall trajectory is fairly similar (see Figure 10.4). In every case, we find that what the wealthiest 10 percent lost mainly benefited the "patrimonial middle class" (defined as the middle 40 percent of the wealth hierarchy) and did not go to the poorest half of the population, whose share of total wealth has always been minuscule (generally around 5 percent), even in Sweden (where it was never more than 10 percent). In some cases, such as Britain, we find that what the richest 1 percent lost also brought significant gains to the next lower 9 percent. Apart from such national specificities, however, the general similarity of the various European trajectories is quite striking. The major structural transformation was the emergence of a middle group, representing nearly half the population, consisting of individuals who managed to acquire some capital of their own—enough so that collectively they came to own one-quarter to one-third of the nation's total wealth.
 Inequality of Wealth in America

     I turn now to the US case. Here, too, we have probate statistics from 1910–1920 on, and these have been heavily exploited by researchers (especially Lampman, Kopczuk, and Saez). To be sure, there are important caveats associated with the use of these data, owing to the small percentage of the population covered by the federal estate tax. Nevertheless, estimates based on the probate data can be supplemented by information from the detailed wealth surveys that the Federal Reserve Bank has conducted since the 1960s (used notably by Arthur Kennickell and Edward Wolff), and by less robust estimates for the period 1810–1870 based on estate inventories and wealth census data exploited respectively by Alice Hanson Jones and Lee Soltow.11
     Several important differences between the European and US trajectories stand out. First, it appears that inequality of wealth in the United States around 1800 was not much higher than in Sweden in 1970–1980. Since the United States was a new country whose population consisted largely of immigrants who came to the New World with little or no wealth, this is not very surprising: not enough time had passed for wealth to be accumulated or concentrated. The data nevertheless leave much to be desired, and there is some variation between the northern states (where estimates suggest a level of inequality lower than that of Sweden in 1970–1980) and southern states (where inequality was closer to contemporary European levels).12
     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.
 The Mechanism of Wealth Divergence: r versus g in History

     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.
 Why Is the Return on Capital Greater Than the Growth Rate?

     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.
     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.
 The Question of Time Preference

     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).
     The economic model generally used to explain this relative stability of the return on capital at around 4–5 percent (as well as the fact that it never falls below 2–3 percent) is based on the notion of "time preference" in favor of the present. In other words, economic actors are characterized by a rate of time preference (usually denoted θ) that measures how impatient they are and how they take the future into account. For example, if θ = 5 percent, the actor in question is prepared to sacrifice 105 euros of consumption tomorrow in order to consume an additional 100 euros today. This "theory," like many theoretical models in economics, is somewhat tautological (one can always explain any observed behavior by assuming that the actors involved have preferences—or "utility functions" in the jargon of the profession—that lead them to act that way), and its predictive power is radical and implacable. In the case in point, assuming a zero-growth economy, it is not surprising to discover that the rate of return on capital must equal the time preference θ.17 According to this theory, the reason why the return on capital has been historically stable at 4–5 percent is ultimately psychological: since this rate of return reflects the average person's impatience and attitude toward the future, it cannot vary much from this level.
     In addition to being tautological, the theory raises a number of other difficulties. To be sure, the intuition that lies behind the model (like that which lies behind marginal productivity theory) cannot be entirely wrong. All other things equal, a more patient society, or one that anticipates future shocks, will of course amass greater reserves and accumulate more capital. Similarly, if a society accumulates so much capital that the return on capital is persistently low, say, 1 percent a year (or in which all forms of wealth, including the property of the middle and lower classes, are taxed so that the net return is very low), then a significant proportion of property-owning individuals will seek to sell their homes and financial assets, thus decreasing the capital stock until the yield rises.
     The problem with the theory is that it is too simplistic and systematic: it is impossible to encapsulate all savings behavior and all attitudes toward the future in a single inexorable psychological parameter. If we take the most extreme version of the model (called the "infinite horizon" model, because agents calculate the consequences of their savings strategy for all their descendants until the end of time as though they were thinking of themselves, in accordance with their own rate of time preference), it follows that the net rate of return on capital cannot vary by even as little as a tenth of a percent: any attempt to alter the net return (for example, by changing tax policy) will trigger an infinitely powerful reaction in one sense or another (saving or dissaving) in order to force the net return back to its unique equilibrium. Such a prediction is scarcely realistic: history shows that the elasticity of saving is positive but not infinite, especially when the rate of return varies within moderate and reasonable limits.18
     Another difficulty with this theoretical model (in its strictest interpretation) is that it implies that the rate of return on capital, r, must, in order to maintain the economy in equilibrium, rise very rapidly with the growth rate g, so that the gap between r and g should be greater in a rapidly growing economy than in one that is not growing at all. Once again, this prediction is not very realistic, nor is it compatible with historical experience (the return on capital may rise in a rapidly growing economy but probably not enough to increase the gap r − g significantly, to judge by observed historical experience), and it, too, is a consequence of the infinite horizon hypothesis. Note, however, that the intuition here is again partially valid and in any case interesting from a strictly logical point of view. In the standard economic model, based on the existence of a "perfect" market for capital (in which each owner of capital receives a return equal to the highest marginal productivity available in the economy, and everyone can borrow as much as he or she wants at that rate), the reason why the return on capital, r, is systematically and necessarily higher than the growth rate, g, is the following. If r were less than g, economic agents, realizing that their future income (and that of their descendants) will rise faster than the rate at which they can borrow, will feel infinitely wealthy and will therefore wish to borrow without limit in order to consume immediately (until r rises above g). In this extreme form, the mechanism is not entirely plausible, but it shows that r > g is true in the most standard of economic models and is even more likely to be true as capital markets become more efficient.19
     To recap: savings behavior and attitudes toward the future cannot be encapsulated in a single parameter. These choices need to be analyzed in more complex models, involving not only time preference but also precautionary savings, life-cycle effects, the importance attached to wealth in itself, and many other factors. These choices depend on the social and institutional environment (such as the existence of a public pension system), family strategies and pressures, and limitations that social groups impose on themselves (for example, in some aristocratic societies, heirs are not free to sell family property), in addition to individual psychological and cultural factors.
     To my way of thinking, the inequality r > g should be analyzed as a historical reality dependent on a variety of mechanisms and not as an absolute logical necessity. It is the result of a confluence of forces, each largely independent of the others. For one thing, the rate of growth, g, tends to be structurally low (generally not much more than 1 percent a year once the demographic transition is complete and the country reaches the world technological frontier, where the pace of innovation is fairly slow). For another, the rate of return on capital, r, depends on many technological, psychological, social, and cultural factors, which together seem to result in a return of roughly 4–5 percent (in any event distinctly greater than 1 percent).
 Is There an Equilibrium Distribution?

     Let me now turn to the consequences of r > g for the dynamics of the wealth distribution. The fact that the return on capital is distinctly and persistently greater than the growth rate is a powerful force for a more unequal distribution of wealth. For example, if g = 1 percent and r = 5 percent, wealthy individuals have to reinvest only one-fifth of their annual capital income to ensure that their capital will grow faster than average income. Under these conditions, the only forces that can avoid an indefinite inegalitarian spiral and stabilize inequality of wealth at a finite level are the following. First, if the fortunes of wealthy individuals grow more rapidly than average income, the capital/income ratio will rise indefinitely, which in the long run should lead to a decrease in the rate of return on capital. Nevertheless, this mechanism can take decades to operate, especially in an open economy in which wealthy individuals can accumulate foreign assets, as was the case in Britain and France in the nineteenth century and up to the eve of World War I. In principle, this process always comes to an end (when those who own foreign assets take possession of the entire planet), but this can obviously take time. This process was largely responsible for the vertiginous increase in the top centile's share of wealth in Britain and France during the Belle Époque.
     Furthermore, in regard to the trajectories of individual fortunes, this divergent process can be countered by shocks of various kinds, whether demographic (such as the absence of an heir or the presence of too many heirs, leading to dispersal of the family capital, or early death, or prolonged life) or economic (such as a bad investment or a peasant uprising or a financial crisis or a mediocre season, etc.). Shocks of this sort always affect family fortunes, so that changes in the wealth distribution occur even in the most static societies. Note, moreover, the importance of demographic choices (the fewer children the rich choose to have, the more concentrated wealth becomes) and inheritance laws.
     Many traditional aristocratic societies were based on the principle of primogeniture: the eldest son inherited all (or at any rate a disproportionately large share) of the family property so as to avoid fragmentation and to preserve or increase the family's wealth. The eldest son's privilege concerned the family's primary estate in particular and often placed heavy constraints on the property: the heir was not allowed to diminish its value and was obliged to live on the income from the capital, which was then conveyed in turn to the next heir in the line of succession, usually the eldest grandson. In British law this was the system of "entails" (the equivalent in French law being the system of substitution héréditaire under the Ancien Régime). It was the reason for the misfortune of Elinor and Marianne in Sense and Sensibility: the Norland estate passed directly to their father and half-brother, John Dashwood, who decided, after considering the matter with his wife, Fanny, to leave them nothing. The fate of the two sisters is a direct consequence of this sinister conversation. In Persuasion, Sir Walter's estate goes directly to his nephew, bypassing his three daughters. Jane Austen, herself disfavored by inheritance and left a spinster along with her sister, knew what she was talking about.
     The inheritance law that derived from the French Revolution and the Civil Code that followed rested on two main pillars: the abolition of substitutions héréditaires and primogeniture and the adoption of the principle of equal division of property among brothers and sisters (equipartition). This principle has been applied strictly and consistently since 1804: in France, the quotité disponible (that is, the share of the estate that parents are free to dispose of as they wish) is only a quarter of total wealth for parents with three or more children,20 and exemption is granted only in extreme circumstances (for example, if the children murder their stepmother). It is important to understand that the new law was based not only on a principle of equality (younger children were valued as much as the eldest and protected from the whims of the parents) but also on a principle of liberty and economic efficiency. In particular, the abolition of entails, which Adam Smith disliked and Voltaire, Rousseau, and Montesquieu abhorred, rested on a simple idea: this abolition allowed the free circulation of goods and the possibility of reallocating property to the best possible use in the judgment of the living generation, despite what dead ancestors may have thought. Interestingly, after considerable debate, Americans came to the same conclusion in the years after the Revolution: entails were forbidden, even in the South. As Thomas Jefferson famously put it, "the Earth belongs to the living." And equipartition of estates among siblings became the legal default, that is, the rule that applied in the absence of an explicit will (although the freedom to make one's will as one pleases still prevails in both the United States and Britain, in practice most estates are equally divided among siblings). This was an important difference between France and the United States on the one hand, where the law of equipartition applied from the nineteenth century on, and Britain on the other, where primogeniture remained the default in 1925 for a portion of the parental property, namely, landed and agricultural capital.21 In Germany, it was not until the Weimar Republic that the German equivalent of entails was abolished in 1919.22
     During the French Revolution, this egalitarian, antiauthoritarian, liberal legislation (which challenged parental authority while affirming that of the new family head, in some case to the detriment of his spouse) was greeted with considerable optimism, at least by men—despite being quite radical for the time.23 Proponents of this revolutionary legislation were convinced that they had found the key to future equality. Since, moreover, the Civil Code granted everyone equal rights with respect to the market and property, and guilds had been abolished, the ultimate outcome seemed clear: such a system would inevitably eliminate the inequalities of the past. The marquis de Condorcet gave forceful expression to this optimistic view in his Esquisse d'un tableau historique des progrès de l'esprit humain (1794): "It is easy to prove that fortunes tend naturally toward equality, and that excessive differences of wealth either cannot exist or must promptly cease, if the civil laws do not establish artificial ways of perpetuating and amassing such fortunes, and if freedom of commerce and industry eliminate the advantage that any prohibitive law or fiscal privilege gives to acquired wealth."24
 The Civil Code and the Illusion of the French Revolution

     How, then, are we to explain the fact that the concentration of wealth increased steadily in France throughout the nineteenth century and ultimately peaked in the Belle Époque at a level even more extreme than when the Civil Code was introduced and scarcely less than in monarchical and aristocratic Britain? Clearly, equality of rights and opportunities is not enough to ensure an egalitarian distribution of wealth.
     Indeed, once the rate of return on capital significantly and durably exceeds the growth rate, the dynamics of the accumulation and transmission of wealth automatically lead to a very highly concentrated distribution, and egalitarian sharing among siblings does not make much of a difference. As I mentioned a moment ago, there are always economic and demographic shocks that affect the trajectories of individual family fortunes. With the aid of a fairly simple mathematical model, one can show that for a given structure of shocks of this kind, the distribution of wealth tends toward a long-run equilibrium and that the equilibrium level of inequality is an increasing function of the gap r − g between the rate of return on capital and the growth rate. Intuitively, the difference r − g measures the rate at which capital income diverges from average income if none of it is consumed and everything is reinvested in the capital stock. The greater the difference r − g, the more powerful the divergent force. If the demographic and economic shocks take a multiplicative form (i.e., the greater the initial capital, the greater the effect of a good or bad investment), the long-run equilibrium distribution is a Pareto distribution (a mathematical form based on a power law, which corresponds fairly well to distributions observed in practice). One can also show fairly easily that the coefficient of the Pareto distribution (which measures the degree of inequality) is a steeply increasing function of the difference r − g.25
     Concretely, what this means is that if the gap between the return on capital and the growth rate is as high as that observed in France in the nineteenth century, when the average rate of return was 5 percent a year and growth was roughly 1 percent, the model predicts that the cumulative dynamics of wealth accumulation will automatically give rise to an extremely high concentration of wealth, with typically around 90 percent of capital owned by the top decile and more than 50 percent by the top centile.26
     In other words, the fundamental inequality r > g can explain the very high level of capital inequality observed in the nineteenth century, and thus in a sense the failure of the French Revolution. Although the revolutionary assemblies established a universal tax (and in so doing provided us with a peerless instrument for measuring the distribution of wealth), the tax rate was so low (barely 1–2 percent on directly transmitted estates, no matter how large, throughout the nineteenth century) that it had no measurable impact on the difference between the rate of return on capital and the growth rate. Under these conditions, it is no surprise that inequality of wealth was as great in nineteenth-century France and even during the republican Belle Époque as in monarchical Britain. The formal nature of the regime was of little moment compared with the inequality r > g.
     Equipartition of estates between siblings did have some effect, but less than the gap r − g. Concretely, primogeniture (or, more precisely, primogeniture on agricultural land, which accounted for a decreasing share of British national capital over the course of the nineteenth century), magnified the effects of demographic and economic shocks (creating additional inequality depending on one's rank in the sibling order) and thus increased the Pareto coefficient and gave rise to a more concentrated distribution of wealth. This may help to explain why the top decile's share of total wealth was greater in Britain than in France in 1900–1910 (slightly more than 90 percent, compared with slightly less in France), and especially why the top centile's share was significantly greater on the British side of the Channel (70 percent v. 60 percent), since this appears to have been based on the preservation of a small number of very large landed estates. But this effect was partly compensated by France's low demographic growth rate (cumulative inequality of wealth is structurally greater when the population is stagnant, again because of the difference between r and g), and in the end it had only a moderate effect on the overall distribution, which was fairly close in the two countries.27
     In Paris, where the Napoleonic Civil Code came into effect in 1804 and where inequality cannot be laid at the door of British aristocrats and the queen of England, the top centile owned more than 70 percent of total wealth in 1913, even more than in Britain. The reality was so striking that it even found expression in an animated cartoon, The Aristocats, set in Paris in 1910. The size of the old lady's fortune is not mentioned, but to judge by the splendor of her residence and by the zeal of her butler Edgar to get rid of Duchesse and her three kittens, it must have been considerable.
     In terms of the r > g logic, the fact that the growth rate increased from barely 0.2 percent prior to 1800 to 0.5 percent in the eighteenth century and then to 1 percent in the nineteenth century does not seem to have made much of a difference: it was still small compared to a return on capital of around 5 percent, especially since the Industrial Revolution appears to have slightly increased that return.28 According to the theoretical model, if the return on capital is around 5 percent a year, the equilibrium concentration of capital will not decrease significantly unless the growth rate exceeds 1.5–2 percent or taxes on capital reduce the net return to below 3–3.5 percent, or both.
     Note, finally, that if the difference r − g surpasses a certain threshold, there is no equilibrium distribution: inequality of wealth will increase without limit, and the gap between the peak of the distribution and the average will grow indefinitely. The exact level of this threshold of course depends on savings behavior: divergence is more likely to occur if the very wealthy have nothing to spend their money on and no choice but to save and add to their capital stock. The Aristocats calls attention to the problem: Adélaïde de Bonnefamille obviously enjoys a handsome income, which she lavishes on piano lessons and painting classes for Duchesse, Marie, Toulouse, and Berlioz, who are somewhat bored by it all.29 This kind of behavior explains quite well the rising concentration of wealth in France, and particularly in Paris, in the Belle Époque: the largest fortunes increasingly belonged to the elderly, who saved a large fraction of their capital income, so that their capital grew significantly faster than the economy. As noted, such an inegalitarian spiral cannot continue indefinitely: ultimately, there will be no place to invest the savings, and the global return on capital will fall, until an equilibrium distribution emerges. But that can take a very long time, and since the top centile's share of Parisian wealth in 1913 already exceeded 70 percent, it is legitimate to ask how high the equilibrium level would have been had the shocks due to World War I not occurred.
 Pareto and the Illusion of Stable Inequality

     It is worth pausing a moment to discuss some methodological and historical issues concerning the statistical measurement of inequality. In Chapter 7, I discussed the Italian statistician Corrado Gini and his famous coefficient. Although the Gini coefficient was intended to sum up inequality in a single number, it actually gives a simplistic, overly optimistic, and difficult-to-interpret picture of what is really going on. A more interesting case is that of Gini's compatriot Vilfredo Pareto, whose major works, including a discussion of the famous "Pareto law," were published between 1890 and 1910. In the interwar years, the Italian Fascists adopted Pareto as one of their own and promoted his theory of elites. Although they were no doubt seeking to capitalize on his prestige, it is nevertheless true that Pareto, shortly before his death in 1923, hailed Mussolini's accession to power. Of course the Fascists would naturally have been attracted to Pareto's theory of stable inequality and the pointlessness of trying to change it.
     What is more striking when one reads Pareto's work with the benefit of hindsight is that he clearly had no evidence to support his theory of stability. Pareto was writing in 1900 or thereabouts. He used available tax tables from 1880–1890, based on data from Prussia and Saxony as well as several Swiss and Italian cities. The information was scanty and covered a decade at most. What is more, it showed a slight trend toward higher inequality, which Pareto intentionally sought to hide.30 In any case, it is clear that such data provide no basis whatsoever for any conclusion about the long-term behavior of inequality around the world.
     Pareto's judgment was clearly influenced by his political prejudices: he was above all wary of socialists and what he took to be their redistributive illusions. In this respect he was hardly different from any number of contemporary colleagues, such as the French economist Pierre Leroy-Beaulieu, whom he admired. Pareto's case is interesting because it illustrates the powerful illusion of eternal stability, to which the uncritical use of mathematics in the social sciences sometimes leads. Seeking to find out how rapidly the number of taxpayers decreases as one climbs higher in the income hierarchy, Pareto discovered that the rate of decrease could be approximated by a mathematical law that subsequently became known as "Pareto's law" or, alternatively, as an instance of a general class of functions known as "power laws."31 Indeed, this family of functions is still used today to study distributions of wealth and income. Note, however, that the power law applies only to the upper tail of these distributions and that the relation is only approximate and locally valid. It can nevertheless be used to model processes due to multiplicative shocks, like those described earlier.
     Note, moreover, that we are speaking not of a single function or curve but of a family of functions: everything depends on the coefficients and parameters that define each individual curve. The data collected in the WTID as well as the data on wealth presented here show that these Pareto coefficients have varied enormously over time. When we say that a distribution of wealth is a Pareto distribution, we have not really said anything at all. It may be a distribution in which the upper decile receives only slightly more than 20 percent of total income (as in Scandinavia in 1970–1980) or one in which the upper decile receives 50 percent (as in the United States in 2000–2010) or one in which the upper decile owns more than 90 percent of total wealth (as in France and Britain in 1900–1910). In each case we are dealing with a Pareto distribution, but the coefficients are quite different. The corresponding social, economic, and political realities are clearly poles apart.32
     Even today, some people imagine, as Pareto did, that the distribution of wealth is rock stable, as if it were somehow a law of nature. In fact, nothing could be further from the truth. When we study inequality in historical perspective, the important thing to explain is not the stability of the distribution but the significant changes that occur from time to time. In the case of the wealth distribution, I have identified a way to explain the very large historical variations that occur (whether described in terms of Pareto coefficients or as shares of the top decile and centile) in terms of the difference r − g between the rate of return on capital and the growth rate of the economy.
 Why Inequality of Wealth Has Not Returned to the Levels of the Past

     I come now to the essential question: Why has the inequality of wealth not returned to the level achieved in the Belle Époque, and can we be sure that this situation is permanent and irreversible?
     Let me state at the outset that I have no definitive and totally satisfactory answer to this question. Several factors have played important roles in the past and will continue to do so in the future, and it is quite simply impossible to achieve mathematical certainty on this point.
     The very substantial reduction in inequality of wealth following the shocks of 1914–1945 is the easiest part to explain. Capital suffered a series of extremely violent shocks as a result of the wars and the policies to which they gave rise, and the capital/income ratio therefore collapsed. One might of course think that the reduction of wealth would have affected all fortunes proportionately, regardless of their rank in the hierarchy, leaving the distribution of wealth unchanged. But to believe this one would have to forget the fact that wealth has different origins and fulfills different functions. At the very top of the hierarchy, most wealth was accumulated long ago, and it takes much longer to reconstitute such a large fortune than to accumulate a modest one.
     Furthermore, the largest fortunes serve to finance a certain lifestyle. The detailed probate records collected from the archives show unambiguously that many rentiers in the interwar years did not reduce expenses sufficiently rapidly to compensate for the shocks to their fortunes and income during the war and in the decade that followed, so that they eventually had to eat into their capital to finance current expenditures. Hence they bequeathed to the next generation fortunes significantly smaller than those they had inherited, and the previous social equilibrium could no longer be sustained. The Parisian data are particularly eloquent on this point. For example, the wealthiest 1 percent of Parisians in the Belle Époque had capital income roughly 80–100 times as great as the average wage of that time, which enabled them to live very well and still reinvest a small portion of their income and thus increase their inherited wealth.33 From 1872 to 1912, the system appears to have been perfectly balanced: the wealthiest individuals passed on to the next generation enough to finance a lifestyle requiring 80–100 times the average wage or even a bit more, so that wealth became even more concentrated. This equilibrium clearly broke down in the interwar years: the wealthiest 1 percent of Parisians continued to live more or less as they had always done but left the next generation just enough to yield capital income of 30–40 times the average wage; by the late 1930s, this had fallen to just 20 times the average wage. For the rentiers, this was the beginning of the end. This was probably the most important reason for the deconcentration of wealth that we see in all European countries (and to a less extent in the United States) in the wake of the shocks of 1914–1945.
     In addition, the composition of the largest fortunes left them (on average) more exposed to losses due to the two world wars. In particular, the probate records show that foreign assets made up as a much as a quarter of the largest fortunes on the eve of World War I, nearly half of which consisted of the sovereign debt of foreign governments (especially Russia, which was on the verge of default). Unfortunately, we do not have comparable data for Britain, but there is no doubt that foreign assets played at least as important a role in the largest British fortunes. In both France and Britain, foreign assets virtually disappeared after the two world wars.
     The importance of this factor should not be overstated, however, since the wealthiest individuals were often in a good position to reallocate their portfolios at the most profitable moment. It is also striking to discover that many individuals, and not just the wealthiest, owned significant amounts of foreign assets on the eve of World War I. When we examine the structure of Parisian portfolios in the late nineteenth century and Belle Époque, we find that they were highly diversified and quite "modern" in their composition. On the eve of the war, about a third of assets were in real estate (of which approximately two-thirds was in Paris and one-third in the provinces, including a small amount of agricultural land), while financial assets made up almost two-thirds. The latter consisted of both French and foreign stocks and (public as well as private) bonds, fairly well balanced at all levels of wealth (see Table 10.1).34 The society of rentiers that flourished in the Belle Époque was not a society of the past based on static landed capital: it embodied a modern attitude toward wealth and investment. But the cumulative inegalitarian logic of r > g made it prodigiously and persistently inegalitarian. In such a society, there is not much chance that freer, more competitive markets or more secure property rights can reduce inequality, since markets were already highly competitive and property rights firmly secured. In fact, the only thing that undermined this equilibrium was the series of shocks to capital and its income that began with World War I.
     Finally, the period 1914–1945 ended in a number of European countries, and especially in France, with a redistribution of wealth that affected the largest fortunes disproportionately, especially those consisting largely of stock in large industrial firms. Recall, in particular, the nationalization of certain companies as a sanction after Liberation (the Renault automobile company is the emblematic example), as well as the national solidarity tax, which was also imposed in 1945. This progressive tax was a one-time levy on both capital and acquisitions made during the Occupation, but the rates were extremely high and imposed an additional burden on the individuals affected.35
      

 Some Partial Explanations: Time, Taxes, and Growth

     In the end, then, it is hardly surprising that the concentration of wealth decreased sharply everywhere between 1910 and 1950. In other words, the descending portion of Figures 10.1–5 is not the most difficult part to explain. The more surprising part at first glance, and in a way the more interesting part, is that the concentration of wealth never recovered from the shocks I have been discussing.
     To be sure, it is important to recognize that capital accumulation is a long-term process extending over several generations. The concentration of wealth in Europe during the Belle Époque was the result of a cumulative process over many decades or even centuries. It was not until 2000–2010 that total private wealth (in both real estate and financial assets), expressed in years of national income, regained roughly the level it had attained on the eve of World War I. This restoration of the capital/income ratio in the rich countries is in all probability a process that is still ongoing.
     It is not very realistic to think that the violent shocks of 1914–1945 could have been erased in ten or twenty years, thereby restoring by 1950–1960 a concentration of wealth equal to that seen in 1900–1910. Note, too, that inequality of wealth began to rise again in 1970–1980. It is therefore possible that a catch-up process is still under way today, a process even slower than the revival of the capital/income ratio, and that the concentration of wealth will soon return to past heights.
     In other words, the reason why wealth today is not as unequally distributed as in the past is simply that not enough time has passed since 1945. This is no doubt part of the explanation, but by itself it is not enough. When we look at the top decile's share of wealth and even more at the top centile's (which was 60–70 percent across Europe in 1910 and only 20–30 percent in 2010), it seems clear that the shocks of 1914–1945 caused a structural change that is preventing wealth from becoming quite as concentrated as it was previously. The point is not simply quantitative—far from it. In the next chapter, we will see that when we look again at the question raised by Vautrin's lecture on the different standards of living that can be attained by inheritance and labor, the difference between a 60–70 percent share for the top centile and a 20–30 percent share is relatively simple. In the first case, the top centile of the income hierarchy is very clearly dominated by top capital incomes: this is the society of rentiers familiar to nineteenth-century novelists. In the second case, top earned incomes (for a given distribution) roughly balance top capital incomes (we are now in a society of managers, or at any rate a more balanced society). Similarly, the emergence of a "patrimonial middle class" owning between a quarter and a third of national wealth rather than a tenth or a twentieth (scarcely more than the poorest half of society) represents a major social transformation.
     What structural changes occurred between 1914 and 1945, and more generally during the twentieth century, that are preventing the concentration of wealth from regaining its previous heights, even though private wealth overall is prospering almost as handsomely today as in the past? The most natural and important explanation is that governments in the twentieth century began taxing capital and its income at significant rates. It is important to notice that the very high concentration of wealth observed in 1900–1910 was the result of a long period without a major war or catastrophe (at least when compared to the extreme violence of twentieth-century conflicts) as well as without, or almost without, taxes. Until World War I there was no tax on capital income or corporate profits. In the rare cases in which such taxes did exist, they were assessed at very low rates. Hence conditions were ideal for the accumulation and transmission of considerable fortunes and for living on the income of those fortunes. In the twentieth century, taxes of various kinds were imposed on dividends, interest, profits, and rents, and this changed things radically.
     To simplify matters: assume initially that capital income was taxed at an average rate close to 0 percent (and in any case less than 5 percent) before 1900–1910 and at about 30 percent in the rich countries in 1950–1980 (and to some extent until 2000–2010, although the recent trend has been clearly downward as governments engage in fiscal competition spearheaded by smaller countries). An average tax rate of 30 percent reduces a pretax return of 5 percent to a net return of 3.5 percent after taxes. This in itself is enough to have significant long-term effects, given the multiplicative and cumulative logic of capital accumulation and concentration. Using the theoretical models described above, one can show that an effective tax rate of 30 percent, if applied to all forms of capital, can by itself account for a very significant deconcentration of wealth (roughly equal to the decrease in the top centile's share that we see in the historical data).36
     In this context, it is important to note that the effect of the tax on capital income is not to reduce the total accumulation of wealth but to modify the structure of the wealth distribution over the long run. In terms of the theoretical model, as well as in the historical data, an increase in the tax on capital income from 0 to 30 percent (reducing the net return on capital from 5 to 3.5 percent) may well leave the total stock of capital unchanged over the long run for the simple reason that the decrease in the upper centile's share of wealth is compensated by the rise of the middle class. This is precisely what happened in the twentieth century—although the lesson is sometimes forgotten today.
     It is also important to note the rise of progressive taxes in the twentieth century, that is, of taxes that imposed higher rates on top incomes and especially top capital incomes (at least until 1970–1980), along with estate taxes on the largest estates. In the nineteenth century, estate tax rates were extremely low, no more than 1–2 percent on bequests from parents to children. A tax of this sort obviously has no discernible effect on the process of capital accumulation. It is not so much a tax as a registration fee intended to protect property rights. The estate tax became progressive in France in 1901, but the highest rate on direct-line bequests was no more than 5 percent (and applied to at most a few dozen bequests a year). A rate of this magnitude, assessed once a generation, cannot have much effect on the concentration of wealth, no matter what wealthy individuals thought at the time. Quite different in their effect were the rates of 20–30 percent or higher that were imposed in most wealthy countries in the wake of the military, economic, and political shocks of 1914–1945. The upshot of such taxes was that each successive generation had to reduce its expenditures and save more (or else make particularly profitable investments) if the family fortune was to grow as rapidly as average income. Hence it became more and more difficult to maintain one's rank. Conversely, it became easier for those who started at the bottom to make their way, for instance by buying businesses or shares sold when estates went to probate. Simple simulations show that a progressive estate tax can greatly reduce the top centile's share of wealth over the long run.37 The differences between estate tax regimes in different countries can also help to explain international differences. For example, why have top capital incomes in Germany been more concentrated than in France since World War II, suggesting a higher concentration of wealth? Perhaps because the highest estate tax rate in Germany is no more than 15–20 percent, compared with 30–40 percent in France.38
     Both theoretical arguments and numerical simulations suggest that taxes suffice to explain most of the observed evolutions, even without invoking structural transformations. It is worth reiterating that the concentration of wealth today, though markedly lower than in 1900–1910, remains extremely high. It does not require a perfect, ideal tax system to achieve such a result or to explain a transformation whose magnitude should not be exaggerated.
 The Twenty-First Century: Even More Inegalitarian Than the Nineteenth?

     Given the many mechanisms in play and the multiple uncertainties involved in tax simulations, it would nevertheless be going too far to conclude that no other factors played a significant role. My analysis thus far has shown that two factors probably did play an important part, independent of changes in the tax system, and will continue to do so in the future. The first is the probable slight decrease in capital's share of income and in the rate of return on capital over the long run, and the second is that the rate of growth, despite a likely slowing in the twenty-first century, will be greater than the extremely low rate observed throughout most of human history up to the eighteenth century. (Here I am speaking of the purely economic component of growth, that is, growth of productivity, which reflects the growth of knowledge and technological innovation.) Concretely, as Figure 10.11 shows, it is likely that the difference r > g will be smaller in the future than it was before the eighteenth century, both because the return on capital will be lower (4–4.5 percent, say, rather than 4.5–5 percent) and growth will be higher (1–1.5 percent rather than 0.1–0.2 percent), even if competition between states leads to the elimination of all taxes on capital. If theoretical simulations are to be believed, the concentration of wealth, even if taxes on capital are abolished, would not necessarily return to the extreme level of 1900–1910.
     There are no grounds for rejoicing, however, in part because inequality of wealth would still increase substantially (halving the middle-class share of national wealth, for example, which voters might well find unacceptable) and in part because there is considerable uncertainty in the simulations, and other forces exist that may well push in the opposite direction, that is, toward an even greater concentration of capital than in 1900–1910. In particular, demographic growth may be negative (which could drive growth rates, especially in the wealthy countries, below those observed in the nineteenth century, and this would in turn give unprecedented importance to inherited wealth). In addition, capital markets may become more and more sophisticated and more and more "perfect" in the sense used by economists (meaning that the return on capital will become increasingly disconnected from the individual characteristics of the owner and therefore cut against meritocratic values, reinforcing the logic of r > g). As I will show later, in addition, financial globalization seems to be increasing the correlation between the return on capital and the initial size of the investment portfolio, creating an inequality of returns that acts as an additional—and quite worrisome—force for divergence in the global wealth distribution.
     To sum up: the fact that wealth is noticeably less concentrated in Europe today than it was in the Belle Époque is largely a consequence of accidental events (the shocks of 1914–1945) and specific institutions such as taxation of capital and its income. If those institutions were ultimately destroyed, there would be a high risk of seeing inequalities of wealth close to those observed in the past or, under certain conditions, even higher. Nothing is certain: inequality can move in either direction. Hence I must now look more closely at the dynamics of inheritance and then at the global dynamics of wealth. One conclusion is already quite clear, however: it is an illusion to think that something about the nature of modern growth or the laws of the market economy ensures that inequality of wealth will decrease and harmonious stability will be achieved.

    \'7bELEVEN\'7d

     Merit and Inheritance in the Long Run

     The overall importance of capital today, as noted, is not very different from what it was in the eighteenth century. Only its form has changed: capital was once mainly land but is now industrial, financial, and real estate. We also know that the concentration of wealth remains high, although it is noticeably less extreme than it was a century ago. The poorest half of the population still owns nothing, but there is now a patrimonial middle class that owns between a quarter and a third of total wealth, and the wealthiest 10 percent now own only two-thirds of what there is to own rather than nine-tenths. We have also learned that the relative movements of the return on capital and the rate of growth of the economy, and therefore of the difference between them, r − g, can explain many of the observed changes, including the logic of accumulation that accounts for the very high concentration of wealth that we see throughout much of human history.
     In order to understand this cumulative logic better, we must now take a closer look at the long-term evolution of the relative roles of inheritance and saving in capital formation. This is a crucial issue, because a given level of capital concentration can come about in totally different ways. It may be that the global level of capital has remained the same but that its deep structure has changed dramatically, in the sense that capital was once largely inherited but is now accumulated over the course of a lifetime by savings from earned income. One possible explanation for such a change might be increased life expectancy, which might have led to a structural increase in the accumulation of capital in anticipation of retirement. However, this supposed great transformation in the nature of capital was actually less dramatic than is sometimes thought; indeed, in some countries it did not occur at all. In all likelihood, inheritance will again play a significant role in the twenty-first century, comparable to its role in the past.
     More precisely, I will come to the following conclusion. Whenever the rate of return on capital is significantly and durably higher than the growth rate of the economy, it is all but inevitable that inheritance (of fortunes accumulated in the past) predominates over saving (wealth accumulated in the present). In strict logic, it could be otherwise, but the forces pushing in this direction are extremely powerful. The inequality r > g in one sense implies that the past tends to devour the future: wealth originating in the past automatically grows more rapidly, even without labor, than wealth stemming from work, which can be saved. Almost inevitably, this tends to give lasting, disproportionate importance to inequalities created in the past, and therefore to inheritance.
     If the twenty-first century turns out to be a time of low (demographic and economic) growth and high return on capital (in a context of heightened international competition for capital resources), or at any rate in countries where these conditions hold true, inheritance will therefore probably again be as important as it was in the nineteenth century. An evolution in this direction is already apparent in France and a number of other European countries, where growth has already slowed considerably in recent decades. For the moment it is less prominent in the United States, essentially because demographic growth there is higher than in Europe. But if growth ultimately slows more or less everywhere in the coming century, as the median demographic forecasts by the United Nations (corroborated by other economic forecasts) suggest it will, then inheritance will probably take on increased importance throughout the world.
     This does not imply, however, that the structure of inequality in the twenty-first century will be the same as in the nineteenth century, in part because the concentration of wealth is less extreme (there will probably be more small to medium rentiers and fewer extremely wealthy rentiers, at least in the short term), in part because the earned income hierarchy is expanding (with the rise of the supermanager), and finally because wealth and income are more strongly correlated than in the past. In the twenty-first century it is possible to be both a supermanager and a "medium rentier": the new meritocratic order encourages this sort of thing, probably to the detriment of low- and medium-wage workers, especially those who own only a tiny amount of property, if any.
 Inheritance Flows over the Long Run

     I will begin at the beginning. In all societies, there are two main ways of accumulating wealth: through work or inheritance.1 How common is each of these in the top centiles and deciles of the wealth hierarchy? This is the key question.
     In Vautrin's lecture to Rastignac (discussed in Chapter 7), the answer is clear: study and work cannot possibly lead to a comfortable and elegant life, and the only realistic strategy is to marry Mademoiselle Victorine and her inheritance. One of my primary goals in this work is to find out how closely nineteenth-century French society resembled the society described by Vautrin and above all to learn how and why this type of society evolved over time.
     It is useful to begin by examining the evolution of the annual flow of inheritances over the long run, that is, the total value of bequests (and gifts between living individuals) during the course of a year, expressed as a percentage of national income. This figure measures the annual amount of past wealth conveyed each year relative to the total income earned that year. (Recall that earned income accounts for roughly two-thirds of national income each year, while part of capital income goes to remunerate the capital that is passed on to heirs.)
     I will examine the French case, which is by far the best known over the long run, and the pattern I find there, it turns out, also applies to a certain extent to other European countries. Finally, I will explore what it is possible to say at the global level.
     Figure 11.1 represents the evolution of the annual inheritance flow in France from 1820 to 2010.2 Two facts stand out clearly. First, the inheritance flow accounts for 20–25 percent of annual income every year in the nineteenth century, with a slight upward trend toward the end of the century. This is an extremely high flow, as I will show later, and it reflects the fact that nearly all of the capital stock came from inheritance. If inherited wealth is omnipresent in nineteenth-century novels, it was not only because writers, especially the debt-ridden Balzac, were obsessed by it. It was above all because inheritance occupied a structurally central place in nineteenth-century society—central as both economic flow and social force. Its importance did not diminish with time, moreover. On the contrary, in 1900–1910, the flow of inheritance was somewhat higher (25 percent of national income compared with barely 20) than it had been in the 1820s, the period of Vautrin, Rastignac, and the Vauquer boardinghouse.
      

     FIGURE 11.1.   The annual inheritance flow as a fraction of national income, France, 1820–2010
     The annual inheritance flow was about 20–25 percent of national income during the nineteenth century and until 1914; it then fell to less than 5 percent in the 1950s, and returned to about 15 percent in 2010.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     Subsequently, we find a spectacular decrease in the flow of inheritances between 1910 and 1950 followed by a steady rebound thereafter, with an acceleration in the 1980s. There were very large upward and downward variations during the twentieth century. The annual flow of inheritances and gifts was (to a first approximation, and compared with subsequent shocks) relatively stable until World War I but fell by a factor of 5 or 6 between 1910 and 1950 (when the inheritance flow was barely 4 or 5 percent of national income), after which it increased by a factor of 3 or 4 between 1950 and 2010 (at which time the flow accounted for 15 percent of national income).
     The evolution visible in Figure 11.1 reflects deep changes in the perception as well as the reality of inheritance, and to a large extent it also reflects changes in the structure of inequality. As we will soon see, the compression of the inheritance flow owing to the shocks of 1914–1945 was nearly twice as great as the decrease in private wealth. The inheritance collapse was therefore not simply the result of a wealth collapse (even if the two developments are obviously closely related). In the public mind, the idea that the age of inheritance was over was certainly even more influential than the idea of an end of capitalism. In 1950–1960, bequests and gifts accounted for just a few points of national income, so it was reasonable to think that inheritances had virtually disappeared and that capital, though less important overall than in the past, was now wealth that an individual accumulated by effort and saving during his or her lifetime. Several generations grew up under these conditions (even if perceptions somewhat exceeded reality), in particular the baby boom generation, born in the late 1940s and early 1950s, many of whom are still alive today, and it was natural for them to assume that this was the "new normal."
     Conversely, younger people, in particular those born in the 1970s and 1980s, have already experienced (to a certain extent) the important role that inheritance will once again play in their lives and the lives of their relatives and friends. For this group, for example, whether or not a child receives gifts from parents can have a major impact in deciding who will own property and who will not, at what age, and how extensive that property will be—in any case, to a much greater extent than in the previous generation. Inheritance is playing a larger part in their lives, careers, and individual and family choices than it did with the baby boomers. The rebound of inheritance is still incomplete, however, and the evolution is still under way (the inheritance flow in 2000–2010 stood at a point roughly midway between the nadir of the 1950s and the peak of 1900–1910). To date, it has had a less profound impact on perceptions than the previous change, which still dominates people's thinking. A few decades from now, things may be very different.
 Fiscal Flow and Economic Flow

     Several points about Figure 11.1 need to be clarified. First, it is essential to include gifts between living individuals (whether shortly before death or earlier in life) in the flow of inheritance, because this form of transmission has always played a very important role in France and elsewhere. The relative magnitude of gifts and bequests has varied greatly over time, so omitting gifts would seriously bias the analysis and distort spatial and temporal comparisons. Fortunately, gifts in France are carefully recorded (though no doubt somewhat underestimated). This is not the case everywhere.
     Second, and even more important, the wealth of French historical sources allows us to calculate inheritance flows in two different ways, using data and methods that are totally independent. What we find is that the two evolutions shown in Figure 11.1 (which I have labeled "fiscal flow" and "economic flow") are highly consistent, which is reassuring and demonstrates the robustness of the historical data. This consistency also helps us to decompose and analyze the various forces at work.3
     Broadly speaking, there are two ways to estimate inheritance flows in a particular country. One can make direct use of observed flows of inheritances and gifts (for example, by using tax data: this is what I call the "fiscal flow"). Or one can look at the private capital stock and calculate the theoretical flow that must have occurred in a given year (which I call the "economic flow"). Each method has its advantages and disadvantages. The first method is more direct, but the tax data in many countries are so incomplete that the results are not always satisfactory. In France, as noted previously, the system for recording bequests and gifts was established exceptionally early (at the time of the Revolution) and is unusually comprehensive (in theory it covers all transmissions, including those on which little or no tax is paid, though there are some exceptions), so the fiscal method can be applied. The tax data must be corrected, however, to take account of small bequests that do not have to be declared (the amounts involved are insignificant) and above all to correct for certain assets that are exempt from the estate tax, such as life insurance contracts, which have become increasingly common since 1970 (and today account for nearly one-sixth of total private wealth in France).
     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.
 The Three Forces: The Illusion of an End of Inheritance

     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 by, is equal to the product of three forces:
     by = 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 by 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 by 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 (by = 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.
 Mortality over the Long Run

     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).
 Wealth Ages with Population: The μ × m Effect

     Let us now forget the effects of variations in cohort size: though important, they are essentially transitory, unless we imagine that in the long run the population of the planet grows infinitely large or infinitely small. Instead, I will adopt the very long-run perspective and assume that cohort size is stable. How does increased life expectancy really affect the importance of inherited wealth? To be sure, a longer life expectancy translates into a structural decrease in the mortality rate. In France, where the average life expectancy in the twenty-first century will be eight to eighty-five years, the adult mortality rate will stabilize at less than 1.5 percent a year, compared with 2.2 percent in the nineteenth century, when the life expectancy was just over sixty. The increase in the average age of death inevitably gives rise to a similar increase in the average age of heirs at the moment of inheritance. In the nineteenth century, the average age of inheritance was just thirty; in the twenty-first century it will be somewhere around fifty. As Figure 11.3 shows, the difference between the average age of death and the average age of inheritance has always been around thirty years, for the simple reason that the average age of childbirth (often referred to as "generational duration") has been relatively stable at around thirty over the long run (although there has been a slight increase in the early twenty-first century).
     But does the fact that people die later and inherit later imply that inherited wealth is losing its importance? Not necessarily, in part because the growing importance of gifts between living individuals has partly compensated for this aging effect, and in part because it may be that people are inheriting later but receiving larger amounts, since wealth tends to age in an aging society. In other words, the downward trend in the mortality rate—ineluctable in the very long run—can be compensated by a similar structural increase in the relative wealth of older people, so that the product μ × m remains unchanged or in any case falls much more slowly than some have believed. This is precisely what happened in France: the ratio μ of average wealth at death to average wealth of the living rose sharply after 1950–1960, and this gradual aging of wealth explains much of the increased importance of inherited wealth in recent decades.
      

     FIGURE 11.3.   Average age of decedents and inheritors: France, 1820–2100
     The average of (adult) decedents rose from less than 60 years to almost 80 years during the twentieth century, and the average age at the time of inheritance rose from 30 years to 50 years.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     Concretely, one finds that the product μ × m, which by definition measures the annual rate of transmission by inheritance (or, in other words, the inheritance flow expressed as a percentage of total private wealth), clearly began to rise over the past few decades, despite the continuing decrease in the morality rate, as Figure 11.4 shows. The annual rate of transmission by inheritance, which nineteenth-century economists called the "rate of estate devolution," was according to my sources relatively stable from the 1820s to the 1910s at around 3.3–3.5 percent, or roughly 1/30. It was also said in those days that a fortune was inherited on average once every thirty years, that is, once a generation, which is a somewhat too static view of things but partially justified by the reality of the time.10 The transmission rate decreased sharply in the period 1910–1950 and in the 1950s stood at about 2 percent, before rising steadily to above 2.5 percent in 2000–2010.
      

     FIGURE 11.4.   Inheritance flow versus mortality rate: France, 1820–2010
     The annual flow of inheritance (bequests and gifts) is equal to about 2.5 percent of aggregate wealth in 2000–2010 versus 1.2 percent for the mortality rate.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     To sum up: inheritance occurs later in aging societies, but wealth also ages, and the latter tends to compensate the former. In this sense, a society in which people die older is very different from a society in which they don't die at all and inheritance effectively vanishes. Increased life expectancy delays important life events: people study longer, start work later, inherit later, retire later, and die later. But the relative importance of inherited wealth as opposed to earned income does not necessarily change, or at any rate changes much less than people sometimes imagine. To be sure, inheriting later in life may make choosing a profession more frequently necessary than in the past. But this is compensated by the inheritance of larger amounts or by the receipt of gifts. In any case, the difference is more one of degree than the dramatic change of civilization that is sometimes imagined.
 Wealth of the Dead, Wealth of the Living

     It is interesting to take a closer look at the evolution of μ, the ratio between average wealth at death and average wealth of the living, which I have presented in Figure 11.5. Note, first, that over the course of the past two centuries, from 1820 to the present, the dead have always been (on average) wealthier than the living in France: μ has always been greater than 100 percent, except in the period around World War II (1940–1950), when the ratio (without correcting for gifts made prior to death) fell to just below 100 percent. Recall that according to Modigliani's life-cycle theory, the primary reason for amassing wealth, especially in aging societies, is to pay for retirement, so that older individuals should consume most of their savings during old age and should therefore die with little or no wealth. This is the famous "Modigliani triangle," taught to all students of economics, according to which wealth at first increases with age as individuals accumulate savings in anticipation of retirement and then decreases. The ratio μ should therefore be equal to zero or close to it, in any case much less than 100 percent. But this theory of capital and its evolution in advanced societies, which is perfectly plausible a priori, cannot explain the observed facts—to put it mildly. Clearly, saving for retirement is only one of many reasons—and not the most important reason—why people accumulate wealth: the desire to perpetuate the family fortune has always played a central role. In practice, the various forms of annuitized wealth, which cannot be passed on to descendants, account for less than 5 percent of private wealth in France and at most 15–20 percent in the English-speaking countries, where pension funds are more developed. This is not a negligible amount, but it is not enough to alter the fundamental importance of inheritance as a motive for wealth accumulation (especially since life-cycle savings may not be a substitute for but rather a supplement to transmissible wealth).11 To be sure, it is quite difficult to say how different wealth accumulation would have been in the twentieth century in the absence of pay-as-you-go public pension systems, which guaranteed the vast majority of retirees a decent standard of living in a more reliable and equitable way than investment in financial assets, which plummeted after the war, could have done. It is possible that without such public pension systems, the overall level of wealth accumulation (measured by the capital/income ratio) would have been even greater than it is today.12 In any case, the capital/income ratio is approximately the same today as it was in the Belle Époque (when a shorter life expectancy greatly reduced the need to accumulate savings in anticipation of retirement), and annuitized wealth accounts for only a slightly larger portion of total wealth than it did a century ago.
      

     FIGURE 11.5.   The ratio between average wealth at death and average wealth of the living: France, 1820–2010
     In 2000–2010, the average wealth at death is 20 percent higher than that of the living if one omits the gifts that were made before death, but more than twice as large if one re-integrates gifts.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     Note also the importance of gifts between living individuals over the past two centuries, as well as their spectacular rise over the past several decades. The total annual value of gifts was 30–40 percent of the annual value of inheritances from 1820 to 1870 (during which time gifts came mainly in the form of dowries, that is, gifts to the spouse at the time of marriage, often with restrictions specified in the marriage contract). Between 1870 and 1970 the value of gifts decreased slightly, stabilizing at about 20–30 percent of inheritances, before increasing strongly and steadily to 40 percent in the 1980s, 60 percent in the 1990s, and more than 80 percent in 2000–2010. Today, transmission of capital by gift is nearly as important as transmission by inheritance. Gifts account for almost half of present inheritance flows, and it is therefore essential to take them into account. Concretely, if gifts prior to death were not included, we would find that average wealth at death in 2000–2010 was just over 20 percent higher than average wealth of the living. But this is simply a reflection of the fact that the dead have already passed on nearly half of their assets. If we include gifts made prior to death, we find that the (corrected) value of μ is actually greater than 220 percent: the corrected wealth of the dead is nearly twice as great as that of the living. We are once again living in a golden age of gift giving, much more so than in the nineteenth century.
     It is interesting to note that the vast majority of gifts, today as in the nineteenth century, go to children, often in the context of a real estate investment, and they are given on average about ten years before the death of the donor (a gap that has remained relatively stable over time). The growing importance of gifts since the 1970s has led to a decrease in the average age of the recipient: in 2000–2010, the average age of an heir is forty-five to fifty, while that of the recipient of a gift is thirty-five to forty, so that the difference between today and the nineteenth or early twentieth centuries is not as great as it seems from Figure 11.3.13 The most convincing explanation of this gradual and progressive increase of gift giving, which began in the 1970s, well before fiscal incentives were put in place in 1990–2000, is that parents with means gradually became aware that owing to the increase in life expectancy, there might be good reasons to share their wealth with their children at the age of thirty-five to forty rather than forty-five to fifty or even later. In any case, whatever the exact role of each of the various possible explanations, the fact is that the upsurge in gift giving, which we also find in other European countries, including Germany, is an essential ingredient in the revived importance of inherited wealth in contemporary society.
 The Fifties and the Eighties: Age and Fortune in the Belle Époque

     In order to better understand the dynamics of wealth accumulation and the detailed data used to calculate μ, it is useful to examine the evolution of the average wealth profile as a function of age. Table 11.1 presents wealth-age profiles for a number of years between 1820 and 2010.14 The most striking fact is no doubt the impressive aging of wealth throughout the nineteenth century, as capital became increasingly concentrated. In 1820, the elderly were barely wealthier on average than people in their fifties (which I have taken as a reference group): sexagenarians were 34 percent wealthier and octogenarians 53 percent wealthier. But the gaps widened steadily thereafter. By 1900–1910, the average wealth of sexagenarians and septuagenarians was on the order of 60–80 percent higher than the reference group, and octogenarians were two and a half times wealthier. Note that these are averages for all of France. If we restrict our attention to Paris, where the largest fortunes were concentrated, the situation is even more extreme. On the eve of World War I, Parisian fortunes swelled with age, with septuagenarians and octogenarians on average three or even four times as wealthy as fifty-year-olds.15 To be sure, the majority of people died with no wealth at all, and the absence of any pension system tended to aggravate this "golden-age poverty." But among the minority with some fortune, the aging of wealth is quite impressive. Quite clearly, the spectacular enrichment of octogenarians cannot be explained by income from labor or entrepreneurial activity: it is hard to imagine people in their eighties creating a new startup every morning.
      

     This enrichment of the elderly is striking, in part because it explains the high value of μ, the ratio of average wealth at time of death to average wealth of the living, in the Belle Époque (and therefore the high inheritance flows), and even more because it tells us something quite specific about the underlying economic process. The individual data we have are quite clear on this point: the very rapid increase of wealth among the elderly in the late nineteenth and early twentieth centuries was a straightforward consequence of the inequality r > g and of the cumulative and multiplicative logic it implies. Concretely, elderly people with the largest fortunes often enjoyed capital incomes far in excess of what they needed to live. Suppose, for example, that they obtained a return of 5 percent and consumed two-fifths of their capital income while reinvesting the other three-fifths. Their wealth would then have grown at a rate of 3 percent a year, and by the age of eighty-five they would have been more than twice as rich as they were at age sixty. The mechanism is simple but extremely powerful, and it explains the observed facts very well, except that the people with the largest fortunes could often save more than three-fifths of their capital income (which would have accelerated the divergence process), and the general growth of mean income and wealth was not quite zero (but about 1 percent a year, which would have slowed it down a bit).
     The study of the dynamics of accumulation and concentration of wealth in France in 1870–1914, especially in Paris, has many lessons to teach about the world today and in the future. Not only are the data exceptionally detailed and reliable, but this period is also emblematic of the first globalization of trade and finance. As noted, it had modern, diversified capital markets, and individuals held complex portfolios consisting of domestic and foreign, public and private assets paying fixed and variable amounts. To be sure, economic growth was only 1–1.5 percent a year, but such a growth rate, as I showed earlier, is actually quite substantial from a generational standpoint or in the historical perspective of the very long run. It is by no means indicative of a static agricultural society. This was an era of technological and industrial innovation: the automobile, electricity, the cinema, and many other novelties became important in these years, and many of them originated in France, at least in part. Between 1870 and 1914, not all fortunes of fifty- and sixty-year-olds were inherited. Far from it: we find a considerable number of wealthy people who made their money through entrepreneurial activities in industry and finance.
     Nevertheless, the dominant dynamic, which explains most of the concentration of wealth, was an inevitable consequence of the inequality r > g. Regardless of whether the wealth a person holds at age fifty or sixty is inherited or earned, the fact remains that beyond a certain threshold, capital tends to reproduce itself and accumulates exponentially. The logic of r > g implies that the entrepreneur always tends to turn into a rentier. Even if this happens later in life, the phenomenon becomes important as life expectancy increases. The fact that a person has good ideas at age thirty or forty does not imply that she will still be having them at seventy or eighty, yet her wealth will continue to increase by itself. Or it can be passed on to the next generation and continue to increase there. Nineteenth-century French economic elites were creative and dynamic entrepreneurs, but the crucial fact remains that their efforts ultimately—and largely unwittingly—reinforced and perpetuated a society of rentiers owing to the logic of r > g.
 The Rejuvenation of Wealth Owing to War

     This self-sustaining mechanism collapsed owing to the repeated shocks suffered by capital and its owners in the period 1914–1945. A significant rejuvenation of wealth was one consequence of the two world wars. One sees this clearly in Figure 11.5: for the first time in history—and to this day the only time—average wealth at death in 1940–1950 fell below the average wealth of the living. This fact emerges even more clearly in the detailed profiles by age cohort in Table 11.1. In 1912, on the eve of World War I, octogenarians were more than two and a half times as wealthy as people in their fifties. In 1931, they were only 50 percent wealthier. And in 1947, the fifty-somethings were 40 percent wealthier than the eighty-somethings. To add insult to injury, the octogenarians even fell slightly behind people in their forties in that year. This was a period in which all old certainties were called into question. In the years after World War II, the plot of wealth versus age suddenly took the form of a bell curve with a peak in the fifty to fifty-nine age bracket—a form close to the "Modigliani triangle," except for the fact that wealth did not fall to zero at the most advanced ages. This stands in sharp contrast to the nineteenth century, during which the wealth-age curve was monotonically increasing with age.
     There is a simple explanation for this spectacular rejuvenation of wealth. As noted in Part Two, all fortunes suffered multiple shocks in the period 1914–1945—destruction of property, inflation, bankruptcy, expropriation, and so on—so that the capital/income ratio fell sharply. To a first approximation, one might assume that all fortunes suffered to the same degree, leaving the age profile unchanged. In fact, however, the younger generations, which in any case did not have much to lose, recovered more quickly from these wartime shocks than their elders did. A person who was sixty years old in 1940 and lost everything he owned in a bombardment, expropriation, or bankruptcy had little hope of recovering. He would likely have died between 1950 and 1960 at the age of seventy or eighty with nothing to pass on to his heirs. Conversely, a person who was thirty in 1940 and lost everything (which was probably not much) still had plenty of time to accumulate wealth after the war and by the 1950s would have been in his forties and wealthier than that septuagenarian. The war reset all counters to zero, or close to zero, and inevitably resulted in a rejuvenation of wealth. In this respect, it was indeed the two world wars that wiped the slate clean in the twentieth century and created the illusion that capitalism had been overcome.
     This is the central explanation for the exceptionally low inheritance flows observed in the decades after World War II: individuals who should have inherited fortunes in 1950–1960 did not inherit much because their parents had not had time to recover from the shocks of the previous decades and died without much wealth to their names.
     In particular, this argument enables us to understand why the collapse of inheritance flows was greater than the collapse of wealth itself—nearly twice as large, in fact. As I showed in Part Two, total private wealth fell by more than two-thirds between 1910–1920 and 1950–1960: the private capital stock decreased from seven years of national income to just two to two and a half years (see Figure 3.6). The annual flow of inheritance fell by almost five-sixths, from 25 percent of national income on the eve of World War I to just 4–5 percent in the 1950s (see Figure 11.1).
     The crucial fact, however, is that this situation did not last long. "Reconstruction capitalism" was by its nature a transitional phase and not the structural transformation some people imagined. In 1950–1960, as capital was once again accumulated and the capital/income ratio β rose, fortunes began to age once more, so that the ratio μ between average wealth at death and average wealth of the living also increased. Growing wealth went hand in hand with aging wealth, thereby laying the groundwork for an even stronger comeback of inherited wealth. By 1960, the profile observed in 1947 was already a memory: sexagenarians and septuagenarians were slightly wealthier than people in their fifties (see Table 11.1). The octogenarians' turn came in the 1980s. In 1990–2000 the graph of wealth against age was increasing even more steeply. By 2010, the average wealth of people in their eighties was more than 30 percent higher than that of people in their fifties. If one were to include (which Table 11.1 does not) gifts made prior to death in the wealth of different age cohorts, the graph for 2000–2010 would be steeper still, approximately the same as in 1900–1910, with average wealth for people in their seventies and eighties on the order of twice as great as people in their fifties, except that most deaths now occur at a more advanced age, which yields a considerably higher μ (see Figure 11.5).
 How Will Inheritance Flows Evolve in the Twenty-First Century?

     In view of the rapid increase of inheritance flows in recent decades, it is natural to ask if this increase is likely to continue. Figure 11.6 shows two possible evolutions for the twenty-first century. The central scenario is based on the assumption of an annual growth rate of 1.7 percent for the period 2010–2100 and a net return on capital of 3 percent.16 The alternative scenario is based on the assumption that growth will be reduced to 1 percent for the period 2010–2100, while the return on capital will rise to 5 percent. This could happen, for instance, if all taxes on capital and capital income, including the corporate income tax, were eliminated, or if such taxes were reduced while capital's share of income increased.
     In the central scenario, simulations based on the theoretical model (which successfully accounts for the evolutions of 1820–2010) suggest that the annual inheritance flow would continue to grow until 2030–2040 and then stabilize at around 16–17 percent of national income. According to the alternative scenario, the inheritance flow should increase even more until 2060–2070 and then stabilize at around 24–25 percent of national income, a level similar to that observed in 1870–1910. In the first case, inherited wealth would make only a partial comeback; in the second, its comeback would be complete (as far as the total amount of inheritances and gifts is concerned). In both cases, the flow of inheritances and gifts in the twenty-first century is expected to be quite high, and in particular much higher than it was during the exceptionally low phase observed in the mid-twentieth century.
     Such predictions are obviously highly uncertain and are of interest primarily for their illustrative value. The evolution of inheritance flows in the twenty-first century depends on many economic, demographic, and political factors, and history shows that these are subject to large and highly unpredictable changes. It is easy to imagine other scenarios that would lead to different outcomes: for instance, a spectacular acceleration of demographic or economic growth (which seems rather implausible) or a radical change in public policy in regard to private capital or inheritance (which may be more realistic).17
      

     FIGURE 11.6.   Observed and simulated inheritance flow: France, 1820–2100
     Simulations based upon the theoretical model indicate that the level of the inheritance flow in the twenty-first century will depend upon the growth rate and the net rate of return to capital.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     It is also important to note that the evolution of the wealth-age profile depends primarily on savings behavior, that is, on the reasons why different groups of people accumulate wealth. As already discussed at some length, there are many such reasons, and their relative importance varies widely from individual to individual. One may save in anticipation of retirement or job loss (life-cycle or precautionary saving). Or one may save to amass or perpetuate a family fortune. Or, indeed, one may simply have a taste for wealth and the prestige that sometimes goes with it (dynastic saving or pure accumulation). In the abstract, it is perfectly possible to imagine a world in which all people would choose to convert all of their wealth into annuities and die with nothing. If such behavior were suddenly to become predominant in the twenty-first century, inheritance flows would obviously shrink to virtually zero, regardless of the growth rate or return on capital.
     Nevertheless, the two scenarios presented in Figure 11.6 are the most plausible in light of currently available information. In particular, I have assumed that savings behavior in 2010–2100 will remain similar to what it has been in the past, which can be characterized as follows. Despite wide variations in individual behavior, we find that savings rates increase with income and initial endowment, but variations by age group are much smaller: to a first approximation, people save on average at a similar rate regardless of age.18 In particular, the massive dissaving by the elderly predicted by the life-cycle theory of saving does not seem to occur, no matter how much life expectancy increases. The reason for this is no doubt the importance of the family transmission motive (no one really wants to die with nothing, even in aging societies), together with a logic of pure accumulation as well as the sense of security—and not merely prestige or power—that wealth brings.19 The very high concentration of wealth (with the upper decile always owning at least 50–60 percent of all wealth, even within each age cohort) is the missing link that explains all these facts, which Modigliani's theory totally overlooks. The gradual return to a dynastic type of wealth inequality since 1950–1960 explains the absence of dissaving by the elderly (most wealth belongs to individuals who have the means to finance their lifestyles without selling assets) and therefore the persistence of high inheritance flows and the perpetuation of the new equilibrium, in which mobility, though positive, is limited.
     The essential point is that for a given structure of savings behavior, the cumulative process becomes more rapid and inegalitarian as the return on capital rises and the growth rate falls. The very high growth of the three postwar decades explains the relatively slow increase of μ (the ratio of average wealth at death to average wealth of the living) and therefore of inheritance flows in the period 1950–1970. Conversely, slower growth explains the accelerated aging of wealth and the rebound of inherited wealth that have occurred since the 1980s. Intuitively, when growth is high, for example, when wages increase 5 percent a year, it is easier for younger generations to accumulate wealth and level the playing field with their elders. When the growth of wages drops to 1–2 percent a year, the elderly will inevitably acquire most of the available assets, and their wealth will increase at a rate determined by the return on capital.20 This simple but important process explains very well the evolution of the ratio μ and the annual inheritance flow. It also explains why the observed and simulated series are so close for the entire period 1820–2010.21
     Uncertainties notwithstanding, it is therefore natural to think that these simulations provide a useful guide for the future. Theoretically, one can show that for a large class of savings behaviors, when growth is low compared to the return on capital, the increase in μ nearly exactly balances the decrease in the mortality rate m, so that the product μ × m is virtually independent of life expectancy and is almost entirely determined by the duration of a generation. The central result is that a growth of about 1 percent is in this respect not very different from zero growth: in both cases, the intuition that an aging population will spend down its savings and thus put an end to inherited wealth turns out to be false. In an aging society, heirs come into their inheritances later in life but inherit larger amounts (at least for those who inherit anything), so the overall importance of inherited wealth remains unchanged.22
 From the Annual Inheritance Flow to the Stock of Inherited Wealth

     How does one go from the annual inheritance flow to the stock of inherited wealth? The detailed data assembled on inheritance flows and ages of the deceased, their heirs, and gift givers and recipients enable us to estimate for each year in the period 1820–2010 the share of inherited wealth in the total wealth of individuals alive in that year (the method is essentially to add up bequests and gifts received over the previous thirty years, sometimes more in the case of particularly early inheritances or exceptionally long lives or less in the opposite case) and thus to determine the share of inherited wealth in total private wealth. The principal results are indicated in Figure 11.7, where I also show the results of simulations for the period 2010–2100 based on the two scenarios discussed above.
     The orders of magnitude to bear in mind are the following. In the nineteenth and early twentieth centuries, when the annual inheritance flow was 20–25 percent of national income, inherited wealth accounted for nearly all private wealth: somewhere between 80 and 90 percent, with an upward trend. Note, however, that in all societies, at all levels of wealth, a significant number of wealthy individuals, between 10 and 20 percent, accumulate fortunes during their lifetimes, having started with nothing. Nevertheless, inherited wealth accounts for the vast majority of cases. This should come as no surprise: if one adds up an annual inheritance flow of 20 percent of national income for approximately thirty years, one accumulates a very large sum of legacies and gifts, on the order of six years of national income, which thus accounts for nearly all of private wealth.23
      

     FIGURE 11.7.   The share of inherited wealth in total wealth: France, 1850–2100
     Inherited wealth represents 80–90 percent of total wealth in France in the nineteenth century; this share fell to 40–50 percent during the twentieth century, and might return to 80–90 percent during the twenty-first century.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     Over the course of the twentieth century, following the collapse of inheritance flows, this equilibrium changed dramatically. The low point was attained in the 1970s: after several decades of small inheritances and accumulation of new wealth, inherited capital accounted for just over 40 percent of total private capital. For the first time in history (except in new countries), wealth accumulated in the lifetime of the living constituted the majority of all wealth: nearly 60 percent. It is important to realize two things: first, the nature of capital effectively changed in the postwar period, and second, we are just emerging from this exceptional period. Nevertheless, we are now clearly out of it: the share of inherited wealth in total wealth has grown steadily since the 1970s. Inherited wealth once again accounted for the majority of wealth in the 1980s, and according to the latest available figures it represents roughly two-thirds of private capital in France in 2010, compared with barely one-third of capital accumulated from savings. In view of today's very high inheritance flows, it is quite likely, if current trends continue, that the share of inherited wealth will continue to grow in the decades to come, surpassing 70 percent by 2020 and approaching 80 percent in the 2030s. If the scenario of 1 percent growth and 5 percent return on capital is correct, the share of inherited wealth could continue to rise, reaching 90 percent by the 2050s, or approximately the same level as in the Belle Époque.
     Thus we see that the U-shaped curve of annual inheritance flows as a proportion of national income in the twentieth century went hand in hand with an equally impressive U-shaped curve of accumulated stock of inherited wealth as a proportion of national wealth. In order to understand the relation between these two curves, it is useful to compare the level of inheritance flows to the savings rate, which as noted in Part Two is generally around 10 percent of national income. When the inheritance flow is 20–25 percent of national income, as it was in the nineteenth century, then the amounts received each year as bequests and gifts are more than twice as large as the flow of new savings. If we add that a part of the new savings comes from the income of inherited capital (indeed, this was the major part of saving in the nineteenth century), it is clearly inevitable that inherited wealth will largely predominate over saved wealth. Conversely, when the inheritance flow falls to just 5 percent of national income, or half of new savings (again assuming a savings rate of 10 percent), as in the 1950s, it is not surprising that saved capital will dominate inherited capital. The central fact is that the annual inheritance flow surpassed the savings rate again in the 1980s and rose well above it in 2000–2010. Today it is nearly 15 percent of national income (counting both inheritances and gifts).
     To get a better idea of the sums involved, it may be useful to recall that household disposable (monetary) income is 70–75 percent of national income in a country like France today (after correcting for transfers in kind, such as health, education, security, public services, etc. not included in disposable income). If we express the inheritance flow not as a proportion of national income, as I have done thus far, but as a proportion of disposable income, we find that the inheritances and gifts received each year by French households amounted to about 20 percent of their disposable income in the early 2010s, so that in this sense inheritance is already as important today as it was in 1820–1910 (see Figure 11.8). As noted in Chapter 5, it is probably better to use national income (rather than disposable income) as the reference denominator for purposes of spatial and temporal comparison. Nevertheless, the comparison with disposable income reflects today's reality in a more concrete way and shows that inherited wealth already accounts for one-fifth of household monetary resources (available for saving, for example) and will soon account for a quarter or more.
      

     FIGURE 11.8.   The annual inheritance flow as a fraction of household disposable income: France, 1820–2010
     Expressed as a fraction of household disposable income (rather than national income), the annual inheritance flow is about 20 percent in 2010, in other words, close to its nineteenth-century level.
     Sources and series: see piketty.pse.ens.fr/capital21c.
 Back to Vautrin's Lecture

     In order to have a more concrete idea of what inheritance represents in different people's lives, and in particular to respond more precisely to the existential question raised by Vautrin's lecture (what sort of life can one hope to live on earned income alone, compared to the life one can lead with inherited wealth?), the best way to proceed is to consider things from the point of view of successive generations in France since the beginning of the nineteenth century and compare the various resources to which they would have had access in their lifetime. This is the only way to account correctly for the fact that an inheritance is not a resource one receives every year.24
      

     FIGURE 11.9.   The share of inheritance in the total resources (inheritance and work) of cohorts born in 1790–2030
     Inheritance made about 25 percent of the resources of nineteenth-century cohorts, down to less than 10 percent for cohorts born in 1910–1920 (who should have inherited in 1950–1960).
     Sources and series: see piketty.pse.ens.fr/capital21c.
     Consider first the evolution of the share of inheritance in the total resources available to generations born in France in the period 1790–2030 (see Figure 11.9). I proceeded as follows. Starting with series of annual inheritance flows and detailed data concerning ages of the deceased, heirs, gift givers, and gift recipients, I calculated the share of inherited wealth in total available resources as a function of year of birth. Available resources include both inherited wealth (bequests and gifts) and income from labor, less taxes,25 capitalized over the individual's lifetime using the average net return on capital in each year. Although this is the most reasonable way to approach the question initially, note that it probably leads to a slight underestimate of the share of inheritance, because heirs (and people with large fortunes more generally) are usually able to obtain a higher return on capital than the interest rate paid on savings from earned income.26
     The results obtained are the following. If we look at all people born in France in the 1790s, we find that inheritance accounted for about 24 percent of the total resources available to them during their lifetimes, so that income from labor accounted for about 76 percent. For individuals born in the 1810s, the share of inheritance was 25 percent, leaving 75 percent for earned income. The same is approximately true for all the cohorts of the nineteenth century and up to World War I. Note that the 25 percent share for inheritance is slightly higher than the inheritance flow expressed as a percentage of national income (20–25 percent in the nineteenth century): this is because income from capital, generally about a third of national income, is de facto reassigned in part to inheritance and in part to earned income.27
     For cohorts born in the 1870s and after, the share of inheritance in total resources begins to decline gradually. This is because a growing share of these individuals should have inherited after World War I and therefore received less than expected owing to the shocks to their parents' assets. The lowest point was reached by cohorts born in 1910–1920: these individuals should have inherited in the years between the end of World War II and 1960, that is, at a time when the inheritance flow had reached its lowest level, so that inheritance accounted for only 8–10 percent of total resources. The rebound began with cohorts born in 1930–1950, who inherited in 1970–1990, and for whom inheritance accounted for 12–14 percent of total resources. But it is above all for cohorts born in 1970–1980, who began to receive gifts and bequests in 2000–2010, that inheritance regained an importance not seen since the nineteenth century: around 22–24 percent of total resources. These figures show clearly that we have only just emerged from the "end of inheritance" era, and they also show how differently different cohorts born in the twentieth century experienced the relative importance of savings and inheritance: the baby boom cohorts had to make it on their own, almost as much as the interwar and turn-of-the-century cohorts, who were devastated by war. By contrast, the cohorts born in the last third of the century experienced the powerful influence of inherited wealth to almost the same degree as the cohorts of the nineteenth and twenty-first centuries.
 Rastignac's Dilemma

     Thus far I have examined only averages. One of the principal characteristics of inherited wealth, however, is that it is distributed in a highly inegalitarian fashion. By introducing into the previous estimates inequality of inheritance on the one hand and inequality of earned income on the other, we will at last be able to analyze the degree to which Vautrin's somber lesson was true in different periods. Figure 11.10 shows that the cohorts born in the late eighteenth century and throughout the nineteenth century, including Eugène de Rastignac's cohort (Balzac tells us that he was born in 1798), did indeed face the terrible dilemma described by the ex-convict: those who could somehow lay hands on inherited wealth were able to live far better than those obliged to make their way by study and work.
     In order to make it possible to interpret the different levels of resources as concretely and intuitively as possible, I have expressed resources in terms of multiples of the average income of the least well paid 50 percent of workers in each period. We may take this baseline as the standard of living of the "lower class," which generally claimed about half of national income in this period. This is a useful reference point for judging inequality in a society.28
     The principal results obtained are the following. In the nineteenth century, the lifetime resources available to the wealthiest 1 percent of heirs (that is, the individuals inheriting the top 1 percent of legacies in their generation) were 25–30 times greater than the resources of the lower class. In other words, a person who could obtain such an inheritance, either from parents or via a spouse, could afford to pay a staff of 25–30 domestic servants throughout his life. At the same time, the resources afforded by the top 1 percent of earned incomes (in jobs such as judge, prosecutor, or attorney, as in Vautrin's lecture) were about ten times the resources of the lower class. This was not negligible, but it was clearly a much lower standard of living, especially since, as Vautrin observed, such jobs were not easy to obtain. It was not enough to do brilliantly in law school. Often one had to plot and scheme for many long years with no guarantee of success. Under such conditions, if the opportunity to lay hands on an inheritance in the top centile presented itself, it was surely better not to pass it up. At the very least, it was worth a moment's reflection.
     If we now do the same calculation for the generations born in 1910–1920, we find that they faced different life choices. The top 1 percent of inheritances afforded resources that were barely 5 times the lower class standard. The best paid 1 percent of jobs still afforded 10–12 times that standard (as a consequence of the fact that the top centile of the wage hierarchy was relatively stable at about 6–7 percent of total wages over a long period).29 For the first time in history, no doubt, one could live better by obtaining a job in the top centile rather than an inheritance in the top centile: study, work, and talent paid better than inheritance.
      

     FIGURE 11.10.   The dilemma of Rastignac for cohorts born in 1790–2030
     In the nineteenth century, the living standards that could be attained by the top 1 percent inheritors were a lot higher than those that could be attained by the top 1 percent labor earners.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     The choice was almost as clear for the baby boom cohorts: a Rastignac born in 1940–1950 had every reason to aim for a job in the top centile (which afforded resources 10–12 times greater than the lower class standard) and to ignore the Vautrins of the day (since the top centile of inheritances brought in just 6–7 times the lower class standard). For all these generations, success through work was more profitable and not just more moral.
     Concretely, these results also indicate that throughout this period, and for all the cohorts born between 1910 and 1960, the top centile of the income hierarchy consisted largely of people whose primary source of income was work. This was a major change, not only because it was a historical first (in France and most likely in all other European countries) but also because the top centile is an extremely important group in every society.30 As noted in Chapter 7, the top centile is a relatively broad elite that plays a central role in shaping the economic, political, and symbolic structure of society.31 In all traditional societies (remember that the aristocracy represented 1–2 percent of the population in 1789), and in fact down to the Belle Époque (despite the hopes kindled by the French Revolution), this group was always dominated by inherited capital. The fact that this was not the case for the cohorts born in the first half of the twentieth century was therefore a major event, which fostered unprecedented faith in the irreversibility of social progress and the end of the old social order. To be sure, inequality was not eradicated in the three decades after World War II, but it was viewed primarily from the optimistic angle of wage inequalities. To be sure, there were significant differences between blue-collar workers, white-collar workers, and managers, and these disparities tended to grow wider in France in the 1950s. But there was a fundamental unity to this society, in which everyone participated in the communion of labor and honored the meritocratic ideal. People believed that the arbitrary inequalities of inherited wealth were a thing of the past.
     For the cohorts born in the 1970s, and even more for those born later, things are quite different. In particular, life choices have become more complex: the inherited wealth of the top centile counts for about as much as the employment of the top centile (or even slightly more: 12–13 times the lower class standard of living for inheritance versus 10–11 times for earned income). Note, however, that the structure of inequality and of the top centile today is also quite different from what it was in the nineteenth century, because inherited wealth is significantly less concentrated today than in the past.32 Today's cohorts face a unique set of inequalities and social structures, which are in a sense somewhere between the world cynically described by Vautrin (in which inheritance predominated over labor) and the enchanted world of the postwar decades (in which labor predominated over inheritance). According to our findings, the top centile of the social hierarchy in France today are likely to derive their income about equally from inherited wealth and their own labor.
 The Basic Arithmetic of Rentiers and Managers

     To recapitulate: a society in which income from inherited capital predominates over income from labor at the summit of the social hierarchy—that is, a society like those described by Balzac and Austen—two conditions must be satisfied. First, the capital stock and, within it, the share of inherited capital, must be large. Typically, the capital/income ratio must be on the order of 6 or 7, and most of the capital stock must consist of inherited capital. In such a society, inherited wealth can account for about a quarter of the average resources available to each cohort (or even as much as a third if one assumes a high degree of inequality in returns on capital). This was the case in the eighteenth and nineteenth centuries, until 1914. This first condition, which concerns the stock of inherited wealth, is once again close to being satisfied today.
     The second condition is that inherited wealth must be extremely concentrated. If inherited wealth were distributed in the same way as income from labor (with identical levels for the top decile, top centile, etc., of the hierarchies of both inheritance and labor income), then Vautrin's world could never exist: income from labor would always far outweigh income from inherited wealth (by a factor of at least three),33 and the top 1 percent of earned incomes would systematically and mechanically outweigh the top 1 percent of incomes from inherited capital.34
     In order for the concentration effect to dominate the volume effect, the top centile of the inheritance hierarchy must by itself claim the lion's share of inherited wealth. This was indeed the case in the eighteenth and nineteenth centuries, when the top centile owned 50–60 percent of total wealth (or as much as 70 percent in Britain or Belle Époque Paris), which is nearly 10 times greater than the top centile's share of earned income (about 6–7 percent, a figure that remained stable over a very long period of time). This 10:1 ratio between wealth and salary concentrations is enough to counterbalance the 3:1 volume ratio and explains why an inherited fortune in the top centile enabled a person to live practically 3 times better than an employment in the top centile in the patrimonial society of the nineteenth century (see Figure 11.10).
     This basic arithmetic of rentiers and managers also helps us to understand why the top centiles of inherited wealth and earned income are almost balanced in France today: the concentration of wealth is about three times greater than the concentration of earned income (the top centile owns 20 percent of total wealth, while the top centile of earners claims 6–7 percent of total wages), so the concentration effect roughly balances the volume effect. We can also see why heirs were so clearly dominated by managers during the Trente Glorieuses (the 3:1 concentration effect was too small to balance the 10:1 mass effect). Apart from these situations, which are the result of extreme shocks and specific public policies (especially tax policies), however, the "natural" structure of inequality seems rather to favor a domination of rentiers over managers. In particular, when growth is low and the return on capital is distinctly greater than the growth rate, it is almost inevitable (at least in the most plausible dynamic models) that wealth will become so concentrated that top incomes from capital will predominate over top incomes from labor by a wide margin.35
 The Classic Patrimonial Society: The World of Balzac and Austen

     Nineteenth-century novelists obviously did not use the same categories we do to describe the social structures of their time, but they depicted the same deep structures: those of a society in which a truly comfortable life required the possession of a large fortune. It is striking to see how similar the inegalitarian structures, orders of magnitude, and amounts minutely specified by Balzac and Austen were on both sides of the English Channel, despite the differences in currency, literary style, and plot. As noted in Chapter 2, monetary markers were extremely stable in the inflation-free world described by both novelists, so that they were able to specify precisely how large an income (or fortune) one needed to rise above mediocrity and live with a minimum of elegance. For both writers, the material and psychological threshold was about 30 times the average income of the day. Below that level, a Balzacian or Austenian hero found it difficult to live a dignified life. It was quite possible to cross that threshold if one was among the wealthiest 1 percent (and even better if one approached the top 0.5 or even 0.1 percent) of French or British society in the nineteenth century. This was a well-defined and fairly numerous social group—a minority, to be sure, but a large enough minority to define the structure of society and sustain a novelistic universe.36 But it was totally out of reach for anyone content to practice a profession, no matter how well it paid: the best paid 1 percent of professions did not allow one to come anywhere near this standard of living (nor did the best paid 0.1 percent).37
     In most of these novels, the financial, social, and psychological setting is established in the first few pages and occasionally alluded to thereafter, so that the reader will not forget everything that sets the characters of the novel apart from the rest of society: the monetary markers that shape their lives, their rivalries, their strategies, and their hopes. In Père Goriot, the old man's fall from grace is conveyed at once by the fact that he has been obliged to make do with the filthiest room in the Vauquer boardinghouse and survive on the skimpiest of meals in order to reduce his annual expenditure to 500 francs (or roughly the average annual income at the time—abject poverty for Balzac).38 The old man sacrificed everything for his daughters, each of whom received a dowry of 500,000 francs, or an annual rent of 25,000 francs, about 50 times the average income: in Balzac's novels, this is the basic unit of fortune, the symbol of true wealth and elegant living. The contrast between the two extremes of society is thus established at the outset. Nevertheless, Balzac does not forget that between abject poverty and true wealth all sorts of intermediate situations exist—some more mediocre than others. The small Rastignac estate near Angoulême yields barely 3,000 francs a year (or 6 times the average income). For Balzac, this is typical of the moneyless lesser nobility of the provinces. Eugène's family can spare only 1,200 francs a year to pay for his law studies in the capital. In Vautrin's lecture, the annual salary of 5,000 francs (or 10 times average income) that young Rastignac could potentially earn as a royal prosecutor after much effort and with great uncertainty is the very symbol of mediocrity—proof, if proof were needed, that study leads nowhere. Balzac depicts a society in which the minimum objective is to obtain 20–30 times the average income of the day, or even 50 times (as Delphine and Anastasie are able to do thanks to their dowries), or better yet, 100 times, thanks to the 50,000 francs in annual rent that Mademoiselle Victorine's million will earn.
     In César Birotteau, the audacious perfumer also covets a fortune of a million francs so that he can keep half for himself and his wife while using the other half as a dowry for his daughter, which is what he believes it will take for her to marry well and allow his future son-in-law to purchase the practice of the notary Roguin. His wife, who would prefer to return to the land, tries to convince him that they can retire on an annual rent of 2,000 francs and marry their daughter with only 8,000 francs of rent, but César will not hear of it: he does not want to wind up like his associate, Pillerault, who retired with just 5,000 francs of rent. To live well, he needs 20–30 times the average income. With only 5–10 times the average, one barely survives.
     We find precisely the same orders of magnitude on the other side of the Channel. In Sense and Sensibility, the kernel of the plot (financial as well as psychological) is established in the first ten pages in the appalling dialogue between John Dashwood and his wife, Fanny. John has just inherited the vast Norland estate, which brings in 4,000 pounds a year, or more than 100 times the average income of the day (which was barely more than 30 pounds a year in 1800–1810).39 Norland is the quintessential example of a very large landed estate, the pinnacle of wealth in Jane Austen's novels. With 2,000 pounds a year (or more than 60 times the average income), Colonel Brandon and his Delaford estate are well within expectations for a great landowner. In other novels we discover that 1,000 pounds a year is quite sufficient for an Austenian hero. By contrast, 600 pounds a year (20 times average income) is just enough to leave John Willoughby at the lower limit of a comfortable existence, and people wonder how the handsome and impetuous young man can live so large on so little. This is no doubt the reason why he soon abandons Marianne, distraught and inconsolable, for Miss Grey and her dowry of 50,000 pounds (2,500 pounds in annual rent, or 80 times average income), which is almost exactly the same size as Mademoiselle Victorine's dowry of a million francs under prevailing exchange rates. As in Balzac, a dowry half that size, such as Delphine's or Anastasie's, is perfectly satisfactory. For example, Miss Morton, the only daughter of L-rd Norton, has a capital of 30,000 pounds (1,500 pounds of rent, or 50 times average income), which makes her the ideal heiress and the quarry of every prospective mother-in-law, starting with Mrs. Ferrars, who has no difficulty imagining the girl married to her son Edward.40
     From the opening pages, John Dashwood's opulence is contrasted with the comparative poverty of his half-sisters, Elinor, Marianne, and Margaret, who, along with their mother, must get by on 500 pounds a year (or 125 pounds apiece, barely four times the average per capita income), which is woefully inadequate for the girls to find suitable husbands. Mrs. Jennings, who revels in the social gossip of the Devonshire countryside, likes to remind them of this during the many balls, courtesy calls, and musical evenings that fill their days and frequently bring them into contact with young and attractive suitors, who unfortunately do not always tarry: "The smallness of your fortune may make him hang back." As in Balzac's novels, so too in Jane Austen's: only a very modest life is possible with just 5 or 10 times the average income. Incomes close to or below the average of 30 pounds a year are not even mentioned, moreover: this, one suspects, is not much above the level of the servants, so there is no point in talking about it. When Edward Ferrars thinks of becoming a pastor and accepting the parish of Deliford with its living of 200 pounds a year (between 6 and 7 times the average), he is nearly taken for a saint. Even though he supplements his living with the income from the small sum left him by his family as punishment for his mésalliance, and with the meager income that Elinor brings, the couple will not go very far, and "they were neither of them quite enough in love to think that three hundred and fifty pounds a year would supply them with the comforts of life."41 This happy and virtuous outcome should not be allowed to hide the essence of the matter: by accepting the advice of the odious Fanny and refusing to aid his half-sisters or to share one iota of his immense fortune, despite the promises he made to his father on his deathbed, John Dashwood forces Elinor and Marianne to live mediocre and humiliating lives. Their fate is entirely sealed by the appalling dialogue at the beginning of the book.
     Toward the end of the nineteenth century, the same type of inegalitarian financial arrangement could also be found in the United States. In Washington Square, a novel published by Henry James in 1881 and magnificently translated to the screen in William Wyler's film The Heiress (1949), the plot revolves entirely around confusion as to the amount of a dowry. But arithmetic is merciless, and it is best not to make a mistake, as Catherine Sloper discovers when her fiancé flees on learning that her dowry will bring him only $10,000 a year in rent rather than the $30,000 he was counting on (or just 20 times the average US income of the time instead of 60). "You are too ugly," her tyrannical, extremely rich, widower father tells her, in a manner reminiscent of Prince Bolkonsky with Princess Marie in War and Peace. Men can also find themselves in very fragile positions: in The Magnificent Ambersons, Orson Welles shows us the downfall of an arrogant heir, George, who at one point has enjoyed an annual income of $60,000 (120 times the average) before falling victim in the early 1900s to the automobile revolution and ending up with a job that pays a below-average $350 a year.
 Extreme Inequality of Wealth: A Condition of Civilization in a Poor Society?

     Interestingly, nineteenth-century novelists were not content simply to describe precisely the income and wealth hierarchies that existed in their time. They often give a very concrete and intimate account of how people lived and what different levels of income meant in terms of the realities of everyday life. Sometimes this went along with a certain justification of extreme inequality of wealth, in the sense that one can read between the lines an argument that without such inequality it would have been impossible for a very small elite to concern themselves with something other than subsistence: extreme inequality is almost a condition of civilization.
     In particular, Jane Austen minutely describes daily life in the early nineteenth century: she tells us what it cost to eat, to buy furniture and clothing, and to travel about. And indeed, in the absence of modern technology, everything is very costly and takes time and above all staff. Servants are needed to gather and prepare food (which cannot easily be preserved). Clothing costs money: even the most minimal fancy dress might cost several months' or even years' income. Travel was also expensive. It required horses, carriages, servants to take care of them, feed for the animals, and so on. The reader is made to see that life would have been objectively quite difficult for a person with only 3–5 times the average income, because it would then have been necessary to spend most of one's time attending to the needs of daily life. If you wanted books or musical instruments or jewelry or ball gowns, then there was no choice but to have an income 20–30 times the average of the day.
     In Part One I noted that it was difficult and simplistic to compare purchasing power over long periods of time because consumption patterns and prices change radically in so many dimensions that no single index can capture the reality. Nevertheless, according to official indices, the average per capita purchasing power in Britain and France in 1800 was about one-tenth what it was in 2010. In other words, with 20 or 30 times the average income in 1800, a person would probably have lived no better than with 2 or 3 times the average income today. With 5–10 times the average income in 1800, one would have been in a situation somewhere between the minimum and average wage today.
     In any case, a Balzacian or Austenian character would have used the services of dozens of servants with no embarrassment. For the most part, we are not even told their names. At times both novelists mocked the pretensions and extravagant needs of their characters, as, for example, when Marianne, who imagines herself in an elegant marriage with Willoughby, explains with a blush that according to her calculations it is difficult to live with less than 2,000 pounds a year (more than 60 times the average income of the time): "I am sure I am not extravagant in my demands. A proper establishment of servants, a carriage, perhaps two, and hunters, cannot be supported on less."42 Elinor cannot refrain from pointing out to her sister that she is being extravagant. Similarly, Vautrin himself observed that it took an income of 25,000 francs (more than 50 times the average) to live with a minimum of dignity. In particular, he insists, with an abundance of detail, on the cost of clothing, servants, and travel. No one tells him that he is exaggerating, but Vautrin is so cynical that readers are in no doubt.43 One finds a similarly unembarrassed recital of needs, with a similar notion of how much it takes to live comfortably, in Arthur Young's account of his travels.44
     Notwithstanding the extravagance of some of their characters, these nineteenth-century novelists describe a world in which inequality was to a certain extent necessary: if there had not been a sufficiently wealthy minority, no one would have been able to worry about anything other than survival. This view of inequality deserves credit for not describing itself as meritocratic, if nothing else. In a sense, a minority was chosen to live on behalf of everyone else, but no one tried to pretend that this minority was more meritorious or virtuous than the rest. In this world, it was perfectly obvious, moreover, that without a fortune it was impossible to live a dignified life. Having a diploma or skill might allow a person to produce, and therefore to earn, 5 or 10 times more than the average, but not much more than that. Modern meritocratic society, especially in the United States, is much harder on the losers, because it seeks to justify domination on the grounds of justice, virtue, and merit, to say nothing of the insufficient productivity of those at the bottom.45
 Meritocratic Extremism in Wealthy Societies

     It is interesting, moreover, to note that the most ardent meritocratic beliefs are often invoked to justify very large wage inequalities, which are said to be more justified than inequalities due to inheritance. From the time of Napoleon to World War I, France has had a small number of very well paid and high-ranking civil servants (earning 50–100 times the average income of the day), starting with government ministers. This has always been justified—including by Napoleon himself, a scion of the minor Corsican nobility—by the idea that the most capable and talented individuals ought to be able to live on their salaries with as much dignity and elegance as the wealthiest heirs (a top-down response to Vautrin, as it were). As Adolphe Thiers remarked in the Chamber of Deputies in 1831: "prefects should be able to occupy a rank equal to the notable citizens in the départements they live in."46 In 1881, Paul Leroy-Beaulieu explained that the state went too far by raising only the lowest salaries. He vigorously defended the high civil servants of his day, most of whom received little more than "15,000 to 20,000 francs a year"; these were "figures that might seem enormous to the common man" but actually "make it impossible to live with elegance or amass savings of any size."47
     The most worrisome aspect of this defense of meritocracy is that one finds the same type of argument in the wealthiest societies, where Jane Austen's points about need and dignity make little sense. In the United States in recent years, one frequently has heard this type of justification for the stratospheric pay of supermanagers (50–100 times average income, if not more). Proponents of such high pay argued that without it, only the heirs of large fortunes would be able to achieve true wealth, which would be unfair. In the end, therefore, the millions or tens of millions of dollars a year paid to supermanagers contribute to greater social justice.48 This kind of argument could well lay the groundwork for greater and more violent inequality in the future. The world to come may well combine the worst of two past worlds: both very large inequality of inherited wealth and very high wage inequalities justified in terms of merit and productivity (claims with very little factual basis, as noted). Meritocratic extremism can thus lead to a race between supermanagers and rentiers, to the detriment of those who are neither.
     It also bears emphasizing that the role of meritocratic beliefs in justifying inequality in modern societies is evident not only at the top of hierarchy but lower down as well, as an explanation for the disparity between the lower and middle classes. In the late 1980s, Michèle Lamont conducted several hundred in-depth interviews with representatives of the "upper middle class" in the United States and France, not only in large cities such as New York and Paris but also in smaller cities such as Indianapolis and Clermont-Ferrand. She asked about their careers, how they saw their social identity and place in society, and what differentiated them from other social groups and categories. One of the main conclusions of her study was that in both countries, the "educated elite" placed primary emphasis on their personal merit and moral qualities, which they described using terms such as rigor, patience, work, effort, and so on (but also tolerance, kindness, etc.).49 The heroes and heroines in the novels of Austen and Balzac would never have seen the need to compare their personal qualities to those of their servants (who go unmentioned in their texts).
 The Society of Petits Rentiers

     The time has come to return to today's world, and more precisely to France in the 2010s. According to my estimates, inheritance will represent about one quarter of total lifetime resources (from both inheritance and labor) for cohorts born in the 1970s and after. In terms of total amounts involved, inheritance has thus nearly regained the importance it had for nineteenth-century cohorts (see Figure 11.9). I should add that these predictions are based on the central scenario: if the alternative scenario turns out to be closer to the truth (lower growth, higher net return on capital), inheritance could represent a third or even as much as four-tenths of the resources of twenty-first-century cohorts.50
     The fact that the total volume of inheritance has regained the same level as in the past does not mean that it plays the same social role, however. As noted, the very significant deconcentration of wealth (which has seen the top centile's share decrease by nearly two-thirds in a century from 60 percent in 1910–1920 to just over 20 percent today) and the emergence of a patrimonial middle class imply that there are far fewer very large estates today than there were in the nineteenth century. Concretely, the dowries of 500,000 francs that Père Goriot and César Birotteau sought for their daughters—dowries that yielded an annual rent of 25,000 francs, or 50 times the average annual per capita income of 500 francs at that time—would be equivalent to an estate of 30 million euros today, with a yield in interest, dividends, and rents on the order of 1.5 million euros a year (or 50 times the average per capita income of 30,000 euros).51 Inheritances of this magnitude do exist, as do considerably larger ones, but there are far fewer of them than in the nineteenth century, even though the total volume of wealth and inheritance has practically regained its previous high level.
     Furthermore, no contemporary novelist would fill her plots with estates valued at 30 million euros as Balzac, Austen, and James did. Explicit monetary references vanished from literature after inflation blurred the meaning of the traditional numbers. But more than that, rentiers themselves vanished from literature as well, and the whole social representation of inequality changed as a result. In contemporary fiction, inequalities between social groups appear almost exclusively in the form of disparities with respect to work, wages, and skills. A society structured by the hierarchy of wealth has been replaced by a society whose structure depends almost entirely on the hierarchy of labor and human capital. It is striking, for example, that many recent American TV series feature heroes and heroines laden with degrees and high-level skills, whether to cure serious maladies (House), solve mysterious crimes (Bones), or even to preside over the United States (West Wing). The writers apparently believe that it is best to have several doctorates or even a Nobel Prize. It is not unreasonable to interpret any number of such series as offering a hymn to a just inequality, based on merit, education, and the social utility of elites. Still, certain more recent creations depict a more worrisome inequality, based more clearly on vast wealth. Damages depicts unfeeling big businessmen who have stolen hundreds of millions of dollars from their workers and whose even more selfish spouses want to divorce their husbands without giving up the cash or the swimming pool. In season 3, inspired by the Madoff affair, the children of the crooked financier do everything they can to hold on to their father's assets, which are stashed in Antigua, in order to maintain their high standard of living.52 In Dirty Sexy Money we see decadent young heirs and heiresses with little merit or virtue living shamelessly on family money. But these are the exceptions that prove the rule, and any character who lives on wealth accumulated in the past is normally depicted in a negative light, if not frankly denounced, whereas such a life is perfectly natural in Austen and Balzac and necessary if there are to be any true feelings among the characters.
     This huge change in the social representation of inequality is in part justified, yet it rests on a number of misunderstandings. First, it is obvious that education plays a more important role today than in the eighteenth century. (In a world where nearly everyone possesses some kind of degree and certain skills, it is not a good idea to go without: it is in everyone's interest to acquire some skill, even those who stand to inherit substantial wealth, especially since inheritance often comes too late from the standpoint of the heirs.) However, it does not follow that society has become more meritocratic. In particular, it does not follow that the share of national income going to labor has actually increased (as noted, it has not, in any substantial amount), and it certainly does not follow that everyone has access to the same opportunities to acquire skills of every variety. Indeed, inequalities of training have to a large extent simply been translated upward, and there is no evidence that education has really increased intergenerational mobility.53 Nevertheless, the transmission of human capital is always more complicated than the transmission of financial capital or real estate (the heir must make some effort), and this has given rise to a widespread—and partially justified—faith in the idea that the end of inherited wealth has made for a more just society.
     The chief misunderstanding is, I think, the following. First, inheritance did not come to an end: the distribution of inherited capital has changed, which is something else entirely. In France today, there are certainly fewer very large estates—estates of 30 million or even 5 or 10 million euros are less common—than in the nineteenth century. But since the total volume of inherited wealth has almost regained its previous level, it follows that there are many more substantial and even fairly large inheritances: 200,000, 500,000, 1 million, or even 2 million euros. Such bequests, though much too small to allow the beneficiaries to give up all thought of a career and live on the interest, are nevertheless substantial amounts, especially when compared with what much of the population earns over the course of a working lifetime. In other words, we have moved from a society with a small number of very wealthy rentiers to one with a much larger number of less wealthy rentiers: a society of petits rentiers if you will.
     The index that I think is most pertinent for representing this change is presented in Figure 11.11. It is the percentage of individuals in each cohort who inherit (as bequest or gift) amounts larger than the least well paid 50 percent of the population earn in a lifetime. This amount changes over time: at present, the average annual wage of the bottom half of the income distribution is around 15,000 euros, or a total of 750,000 euros over the course of a fifty-year career (including retirement). This is more less what a life at minimum wage brings in. As the figure shows, in the nineteenth century about 10 percent of a cohort inherited amounts greater than this. This proportion fell to barely more than 2 percent for cohorts born in 1910–1920 and 4–5 percent for cohorts born in 1930–1950. According to my estimates, the proportion has already risen to about 12 percent for cohorts born in 1970–1980 and may reach or exceed 15 percent for cohorts born in 2010–2020. In other words, nearly one-sixth of each cohort will receive an inheritance larger than the amount the bottom half of the population earns through labor in a lifetime. (And this group largely coincides with the half of the population that inherits next to nothing.).54 Of course, there is nothing to prevent the inheriting sixth from acquiring diplomas or working and no doubt earning more through work than the bottom half of the income distribution. This is nevertheless a fairly disturbing form of inequality, which is in the process of attaining historically unprecedented heights. It is also more difficult to represent artistically or to correct politically, because it is a commonplace inequality opposing broad segments of the population rather than pitting a small elite against the rest of society.
      

     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.
 The Rentier, Enemy of Democracy

     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.
 The Return of Inherited Wealth: A European or Global Phenomenon?

     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
     It is also possible that the lower inheritance flow in Britain is due to different psychological attitudes toward savings and familial gifts and bequests. Before reaching that conclusion, however, it is important to note that the difference observed in 2000–2010 can be explained entirely by a lower level of gift giving in Britain, where gifts have remained stable at about 10 percent of the total amount of inheritances since 1970–1980, whereas gift giving in France and Germany increased to 60–80 percent of the total. Given the difficulty of recording gifts and correcting for different national practices, the gap seems somewhat suspect, and it cannot be ruled out that it is due, at least in part, to an underestimation of gift giving in Britain. In the current state of the data, it is unfortunately impossible to say with certainty whether the smaller rebound of inheritance flows in Britain reflects an actual difference in behavior (Britons with means consume more of their wealth and pass on less to their children than their French and German counterparts) or a purely statistical bias. (If we applied the same gift/inheritance ratio that we observe in France and Germany, the British inheritance flow in 2000–2010 would be on the order of 15 percent of national income, as in France.)
     The available inheritance sources for the United States pose even more difficult problems. The federal estate tax, created in 1916, has never applied to more than a small minority of estates (generally less than 2 percent), and the requirements for declaring gifts are also fairly limited, so that the statistical data derived from this tax leave much to be desired. It is unfortunately impossible to make up for this lack by relying on other sources. In particular, bequests and gifts are notoriously underestimated in surveys conducted by national statistical bureaus. This leaves major gaps in our knowledge, which all too many studies based on such surveys forget. In France, for example, we find that gifts and bequests declared in the surveys represent barely half the flow observed in the fiscal data (which is only a lower bound on the actual flow, since exempt assets such as life insurance contracts are omitted). Clearly, the individuals surveyed tend to forget to declare what they actually received and to present the history of their fortunes in the most favorable light (which is in itself an interesting fact about how inheritance is seen in modern society).62 In many countries, including the United States, it is unfortunately impossible to compare the survey data with fiscal records. But there is no reason to believe that the underestimation by survey participants is any smaller than in France, especially since the public perception of inherited wealth is at least as negative in the United States.
     In any case, the unreliability of the US sources makes it very difficult to study the historical evolution of inheritance flows in the United States with any precision. This partly explains the intensity of the controversy that erupted in the 1980s over two diametrically opposed economic theories: Modigliani's life-cycle theory, and with it the idea that inherited wealth accounts for only 20–30 percent of total US capital, and the Kotlikoff-Summers thesis, according to which inherited wealth accounts for 70–80 percent of total capital. I was a young student when I discovered this work in the 1990s, and the controversy stunned me: how could such a dramatic disagreement exist among serious economists? Note, first of all, that both sides in the dispute relied on rather poor quality data from the late 1960s and early 1970s. If we reexamine their estimates in light of the data available today, it seems that the truth lies somewhere between the two positions but significantly closer to Kotlikoff-Summers than Modigliani: inherited wealth probably accounted for at least 50–60 percent of total private capital in the United States in 1970–1980.63 More generally, if one tries to estimate for the United States the evolution of the share of inherited wealth over the course of the twentieth century, as we did for France in Figure 11.7 (on the basis of much more complete data), it seems that the U-shaped curve was less pronounced in the United States and that the share of inherited wealth was somewhat smaller than in France at both the turn of the twentieth century and the turn of the twenty-first (and slightly larger in 1950–1970). The main reason for this is the higher rate of demographic growth in the United States, which implies a smaller capital/income ratio (β effect) and a less pronounced aging of wealth (m and μ effects). The difference should not be exaggerated, however: inheritance also plays an important role in the United States. Above all, it once again bears emphasizing that this difference between Europe and the United States has little to do a priori with eternal cultural differences: it seems to be explained mainly by differences in demographic structure and population growth. If population growth in the United States someday decreases, as long-term forecasts suggest it will, then inherited wealth will probably rebound as strongly there as in Europe.
     As for the poor and emerging countries, we unfortunately lack reliable historical sources concerning inherited wealth and its evolution. It seems plausible that if demographic and economic growth ultimately decrease, as they are likely to do this century, then inherited wealth will acquire as much importance in most countries as it has had in low-growth countries throughout history. In countries that experience negative demographic growth, inherited wealth could even take on hitherto unprecedented importance. It is important to point out, however, that this will take time. With the rate of growth currently observed in emergent countries such as China, it seems clear that inheritance flows are for the time being quite limited. For working-age Chinese, who are currently experiencing income growth of 5–10 percent a year, wealth in the vast majority of cases comes primarily from savings and not from grandparents, whose income was many times smaller. The global rebound of inherited wealth will no doubt be an important feature of the twenty-first century, but for some decades to come it will affect mainly Europe and to a lesser degree the United States.

    \'7bTWELVE\'7d

     Global Inequality of Wealth in the Twenty-First Century

     I have thus far adopted a too narrowly national point of view concerning the dynamics of wealth inequality. To be sure, the crucial role of foreign assets owned by citizens of Britain and France in the nineteenth and early twentieth centuries has been mentioned several times, but more needs to be said, because the question of international inequality of wealth concerns the future above all. Hence I turn now to the dynamics of wealth inequality at the global level and to the principal forces at work today. Is there a danger that the forces of financial globalization will lead to an even greater concentration of capital in the future than ever before? Has this not perhaps already happened?
     To begin my examination of this question, I will look first at individual fortunes: Will the share of capital owned by the people listed by magazines as "the richest in the world" increase in the twenty-first century? Then I will ask about inequalities between countries: Will today's wealthy countries end up owned by petroleum exporting states or China or perhaps by their own billionaires? But before doing either of these things, I must discuss a hitherto neglected force, which will play an essential role in the analysis: unequal returns on capital.
 The Inequality of Returns on Capital

     Many economic models assume that the return on capital is the same for all owners, no matter how large or small their fortunes. This is far from certain, however: it is perfectly possible that wealthier people obtain higher average returns than less wealthy people. There are several reasons why this might be the case. The most obvious one is that a person with 10 million euros rather than 100,000, or 1 billion euros rather than 10 million, has greater means to employ wealth management consultants and financial advisors. If such intermediaries make it possible to identify better investments, on average, there may be "economies of scale" in portfolio management that give rise to higher average returns on larger portfolios. A second reason is that it is easier for an investor to take risks, and to be patient, if she has substantial reserves than if she owns next to nothing. For both of these reasons—and all signs are that the first is more important in practice than the second—it is quite plausible to think that if the average return on capital is 4 percent, wealthier people might get as much as 6 or 7 percent, whereas less wealthy individuals might have to make do with as little as 2 or 3 percent. Indeed, I will show in a moment that around the world, the largest fortunes (including inherited ones) have grown at very high rates in recent decades (on the order of 6–7 percent a year)—significantly higher than the average growth rate of wealth.
     It is easy to see that such a mechanism can automatically lead to a radical divergence in the distribution of capital. If the fortunes of the top decile or top centile of the global wealth hierarchy grow faster for structural reasons than the fortunes of the lower deciles, then inequality of wealth will of course tend to increase without limit. This inegalitarian process may take on unprecedented proportions in the new global economy. In view of the law of compound interest discussed in Chapter 1, it is also clear that this mechanism can account for very rapid divergence, so that if there is nothing to counteract it, very large fortunes can attain extreme levels within a few decades. Thus unequal returns on capital are a force for divergence that significantly amplifies and aggravates the effects of the inequality r > g. Indeed, the difference r − g can be high for large fortunes without necessarily being high for the economy as a whole.
     In strict logic, the only "natural" countervailing force (where by "natural" I mean not involving government intervention) is once again growth. If the global growth rate is high, the relative growth rate of very large fortunes will remain moderate—not much higher than the average growth rate of income and wealth. Concretely, if the global growth rate is 3.5 percent a year, as was the case between 1990 and 2012 and may continue to be the case until 2030, the largest fortunes will still grow more rapidly than the rest but less spectacularly so than if the global growth rate were only 1 or 2 percent. Furthermore, today's global growth rate includes a large demographic component, and wealthy people from emerging economies are rapidly joining the ranks of the wealthiest people in the world. This gives the impression that the ranks of the wealthiest are changing rapidly, while leading many people in the wealthy countries to feel an oppressive and growing sense that they are falling behind. The resulting anxiety sometimes outweighs all other concerns. Yet in the long run, if and when the poor countries have caught up with the rich ones and global growth slows, the inequality of returns on capital should be of far greater concern. In the long run, unequal wealth within nations is surely more worrisome than unequal wealth between nations.
     I will begin to tackle the question of unequal returns on capital by looking at international wealth rankings. Then I will look at the returns obtained by the endowments of major US universities. This might seem like anecdotal evidence, but it will enable us to analyze in a clear and dispassionate way unequal returns as a function of portfolio size. I will then examine the returns on sovereign wealth funds, in particular those of the petroleum exporting countries and China, and this will bring the discussion back to the question of inequalities of wealth between countries.
 The Evolution of Global Wealth Rankings

     Economists as a general rule do not have much respect for the wealth rankings published by magazines such as Forbes in the United States and other weeklies in many countries around the world. Indeed, such rankings suffer from important biases and serious methodological problems (to put it mildly). But at least they exist, and in their way they respond to a legitimate and pressing social demand for information about a major issue of the day: the global distribution of wealth and its evolution over time. Economists should take note. It is important, moreover, to recognize that we suffer from a serious lack of reliable information about the global dynamics of wealth. National governments and statistical agencies cannot begin to keep up with the globalization of capital, and the tools they use, such as household surveys confined to a single country, are insufficient for analyzing how things are evolving in the twenty-first century. The magazines' wealth rankings can and must be improved by comparison with government statistics, tax records, and bank data, but it would be absurd and counterproductive to ignore the magazine rankings altogether, especially since these supplementary sources are at present very poorly coordinated at the global level. I will therefore examine what useful information can be derived from these league tables of wealth.
     The oldest and most systematic ranking of large fortunes is the global list of billionaires that Forbes has published since 1987. Every year, the magazine's journalists try to compile from all kinds of sources a complete list of everyone in the world whose net worth exceeds a billion dollars. The list was led by a Japanese billionaire from 1987 to 1995, then an American one from 1995 to 2009, and finally a Mexican since 2010. According to Forbes, the planet was home to just over 140 billionaires in 1987 but counts more than 1,400 today (2013), an increase by a factor of 10 (see Figure 12.1). In view of inflation and global economic growth since 1987, however, these spectacular numbers, repeated every year by media around the world, are difficult to interpret. If we look at the numbers in relation to the global population and total private wealth, we obtain the following results, which make somewhat more sense. The planet boasted barely 5 billionaires per 100 million adults in 1987 and 30 in 2013. Billionaires owned just 0.4 percent of global private wealth in 1987 but more than 1.5 percent in 2013, which is above the previous record attained in 2008, on the eve of the global financial crisis and the bankruptcy of Lehman Brothers (see Figure 12.2).1 This is an obscure way of presenting the data, however: there is nothing really surprising about the fact that a group containing 6 times as many people as a proportion of the population should own 4 times as great a proportion of the world's wealth.
      

     FIGURE 12.1.   The world's billionaires according to Forbes, 1987–2013
     Between 1987 and 2013, the number of $ billionaires rose according to Forbes from 140 to 1,400, and their total wealth rose from 300 to 5,400 billion dollars.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     The only way to make sense of these wealth rankings is to examine the evolution of the amount of wealth owned by a fixed percentage of the world's population, say the richest twenty-millionth of the adult population of the planet: roughly 150 people out of 3 billion adults in the late 1980s and 225 people out of 4.5 billion in the early 2010s. We then find that the average wealth of this group has increased from just over $1.5 billion in 1987 to nearly $15 billion in 2013, for an average growth rate of 6.4 percent above inflation.2 If we now consider the one-hundred-millionth wealthiest part of the world's population, or about 30 people out of 3 billion in the late 1980s and 45 out of 4.5 billion in the early 2010s, we find that their average wealth increased from just over $3 billion to almost $35 billion, for an even higher growth rate of 6.8 percent above inflation. For the sake of comparison, average global wealth per capita increased by 2.1 percent a year, and average global income by 1.4 percent a year, as indicated in Table 12.1.3
      

     FIGURE 12.2.   Billionaires as a fraction of global population and wealth, 1987–2013
     Between 1987 and 2013, the number of billionaires per 100 million adults rose from five to thirty, and their share in aggregate private wealth rose from 0.4 percent to 1.5 percent.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     To sum up: since the 1980s, global wealth has increased on average a little faster than income (this is the upward trend in the capital/income ratio examined in Part Two), and the largest fortunes grew much more rapidly than average wealth. This is the new fact that the Forbes rankings help us bring to light, assuming that they are reliable.
     Note that the precise conclusions depend quite heavily on the years chosen for consideration. For example, if we look at the period 1990–2010 instead of 1987–2013, the real rate of growth of the largest fortunes drops to 4 percent a year instead of 6 or 7.4 This is because 1990 marked a peak in global stock and real estate prices, while 2010 was a fairly low point for both (see Figure 12.2). Nevertheless, no matter what years we choose, the structural rate of growth of the largest fortunes seems always to be greater than the average growth of the average fortune (roughly at least twice as great). If we look at the evolution of the shares of the various millionths of large fortunes in global wealth, we find increases by more than a factor of 3 in less than thirty years (see Figure 12.3). To be sure, the amounts remain relatively small when expressed as a proportion of global wealth, but the rate of divergence is nevertheless spectacular. If such an evolution were to continue indefinitely, the share of these extremely tiny groups could reach quite substantial levels by the end of the twenty-first century.5
      

      

     FIGURE 12.3.   The share of top wealth fractiles in world wealth, 1987–2013
     Between 1987 and 2013, the share of the top 1/20 million fractile rose from 0.3 percent to 0.9 percent of world wealth, and the share of the top 1/100 million fractile rose from 0.1 percent to 0.4 percent.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     Can this conclusion perhaps be extended to broader segments of the global wealth distribution, in which case the divergence would occur much more rapidly? The first problem with the Forbes and other magazine rankings is that they list too few people to be truly significant in macroeconomic terms. Regardless of the rapid rates of divergence and the extreme size of certain individual fortunes, the data pertain to only a few hundred or at most a few thousand individuals, who at the present time represent only a little over 1 percent of global wealth.6 This leaves out nearly 99 percent of global capital, which is unfortunate.7
 From Rankings of Billionaires to "Global Wealth Reports"

     To proceed further and estimate the shares of the top decile, centile, and thousandth of the global wealth hierarchy, we need to use fiscal and statistical sources of the type I relied on in Chapter 10. There I showed that inequality of wealth has been trending upward in all the rich countries since 1980–1990, so it would not be surprising to discover that the same was true at the global level. Unfortunately, the available sources are marred by numerous approximations. (We may be underestimating the upward trend in the rich countries, and the statistics from many of the emerging countries are so inadequate, in part owing to the absence of any system of progressive taxation worthy of the name, that one hesitates to use them.) Hence it is quite difficult at present to arrive at anything close to a precise estimate of the evolving shares of the top decile, centile, and thousandth in global wealth.
     For some years now, a number of international financial institutions have attempted to respond to growing social demand for information on these issues by trying to extend the magazine rankings and publishing "global wealth reports" that include more than just billionaires. In particular, since 2010, Crédit Suisse, one of the leading Swiss banks, has published an ambitious annual report on the global distribution of wealth covering the entire population of the planet.8 Other banks, brokerages, and insurance companies (Merrill Lynch, Allianz, etc.) have specialized in the study of the world's millionaires (the famous HNWI, or "high net worth individuals"). Every institution wants its own report, preferably on glossy paper. It is of course ironic to see institutions that make much of their money by managing fortunes filling the role of government statistical agencies by seeking to produce objective information about the global distribution of wealth. It is also important to note that these reports must often rely on heroic hypotheses and approximations, not all of them convincing, in order to arrive at anything like a "global" view of wealth. In any case, they rarely cover anything more than the past few years, a decade at most, and are unfortunately useless for studying long-term evolutions or even reliably detecting trends in global inequality, given the extremely piecemeal nature of the data used.9
     Like the Forbes and similar rankings, these reports have, if nothing else, the merit of existing, and the absence of anything better points up the failure of national and international agencies—and most economists—to play the role they ought to be playing. Democratic transparency requires it: in the absence of reliable information about the global distribution of wealth, it is possible to say anything and everything and to feed fantasies of all kinds. Imperfect as they are, and until better information comes along, these reports can at least impose some discipline on public debate.10
     If we adopt the same global approach as these reports and compare the various available estimates, we come to the following approximate conclusion: global inequality of wealth in the early 2010s appears to be comparable in magnitude to that observed in Europe in 1900–1910. The top thousandth seems to own nearly 20 percent of total global wealth today, the top centile about 50 percent, and the top decile somewhere between 80 and 90 percent. The bottom half of the global wealth distribution undoubtedly owns that less than 5 percent of total global wealth.
     Concretely, the wealthiest 0.1 percent of people on the planet, some 4.5 million out of an adult population of 4.5 billion, apparently possess fortunes on the order of 10 million euros on average, or nearly 200 times average global wealth of 60,000 euros per adult, amounting in aggregate to nearly 20 percent of total global wealth. The wealthiest 1 percent—45 million people out of 4.5 billion—have about 3 million euros apiece on average (broadly speaking, this group consists of those individuals whose personal fortunes exceed 1 million euros). This is about 50 times the size of the average global fortune, or 50 percent of total global wealth in aggregate.
     Bear in mind that these estimates are highly uncertain (including the figures given for total and average global wealth). Even more than most of the statistics cited in this book, these numbers should be taken simply as orders of magnitude, useful only for focusing one's thoughts.11
     Note, too, that this very high concentration of wealth, significantly higher than is observed within countries, stems in large part from international inequalities. The average global fortune is barely 60,000 euros per adult, so that many people in the developed countries, including members of the "patrimonial middle class," seem quite wealthy in terms of the global wealth hierarchy. For the same reason, it is by no means certain that inequalities of wealth are actually increasing at the global level: as the poorer countries catch up with the richer ones, catch-up effects may for the moment outweigh the forces of divergence. The available data do not allow for a clear answer at this point.12
     The information at our disposal suggests, however, that the forces of divergence at the top of the global wealth hierarchy are already very powerful. This is true not only for the billion-dollar fortunes in the Forbes ranking but probably also for smaller fortunes of 10–100 million euros. This is a much larger group of people: the top thousandth (a group of 4.5 million individuals with an average fortune of 10 million euros) owns about 20 percent of global wealth, which is much more than the 1.5 percent owned by the Forbes billionaires.13 It is therefore essential to understand the magnitude of the divergence mechanism acting on this group, which depends in particular on unequal returns to capital in portfolios of this size. This will determine whether divergence at the top is sufficiently powerful to overcome the force of international catch-up. Is the divergence process occurring solely among billionaires, or is it also affecting the groups immediately below?
     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.
 Heirs and Entrepreneurs in the Wealth Rankings

     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.
 The Moral Hierarchy of Wealth

     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.
     All too often, the global debate about great wealth comes down to a few peremptory—and largely arbitrary—assertions about the relative merits of this or that individual. For example, it is rather common to contrast the man who is currently the world's wealthiest, Carlos Slim, a Mexican real estate and telecom tycoon who is of Lebanese extraction and is often described in the Western press as one who owes his great wealth to monopoly rents obtained through (implicitly corrupt) government favors, and Bill Gates, the former number one, who is seen as a model of the meritorious entrepreneur. At times one almost has the impression that Bill Gates himself invented computer science and the microprocessor and that he would be 10 times richer still if he had been paid his full marginal productivity and compensated for his personal contribution to global well-being (and fortunately the good people of the planet have been the beneficiaries of his "positive externalities" since he retired). No doubt the veritable cult of Bill Gates is an outgrowth of the apparently irrepressible need of modern democratic societies to make sense of inequality. To be frank, I know virtually nothing about exactly how Carlos Slim or Bill Gates became rich, and I am quite incapable of assessing their relative merits. Nevertheless, it seems to me that Bill Gates also profited from a virtual monopoly on operating systems (as have many other high-tech entrepreneurs in industries ranging from telecommunications to Facebook, whose fortunes were also built on monopoly rents). Furthermore, I believe that Gates's contributions depended on the work of thousands of engineers and scientists doing basic research in electronics and computer science, without whom none of his innovations would have been possible. These people did not patent their scientific papers. In short, it seems unreasonable to draw such an extreme contrast between Gates and Slim without so much as a glance at the facts.20
     As for the Japanese billionaires (Yoshiaka Tsutsumi and Taikichiro Mori) who from 1987 to 1994 preceded Bill Gates at the top of the Forbes ranking, people in the Western world have all but forgotten their names. Perhaps there is a feeling that these men owe their fortunes entirely to the real estate and stock market bubbles that existed at the time in the Land of the Rising Sun, or else to some not very savory Asian wheeling and dealing. Yet Japanese growth from 1950 to 1990 was the greatest history had ever seen to that point, much greater than US growth in 1990–2010, and there is reason to believe that entrepreneurs played some role in this.
     Rather than indulge in constructing a moral hierarchy of wealth, which in practice often amounts to an exercise in Western ethnocentrism, I think it is more useful to try to understand the general laws that govern the dynamics of wealth—leaving individuals aside and thinking instead about modes of regulation, and in particular taxation, that apply equally to everyone, regardless of nationality. In France, when Arcelor (then the second largest steel company worldwide) was bought by the steel magnate Lakshmi Mittal in 2006, the French media found the actions of the Indian billionaire particularly outrageous. They renewed their outrage in the fall of 2012, when Mittal was accused of failing to invest enough in the firm's factory in Florange. In India, everyone believes that the hostility to Mittal is due, at least in part, to the color of his skin. And who can be sure that this did not play a role? To be sure, Mittal's methods are brutal, and his sumptuous lifestyle is seen as scandalous. The entire French press took umbrage at his luxurious London residences, "worth three times as much as his investment in Florange."21 Somehow, though, the outrage is soft-pedaled when it comes to a certain residence in Neuilly-sur-Seine, a posh suburb of Paris, or a homegrown billionaire like Arnaud Lagardère, a young heir not particularly well known for his merit, virtue, or social utility yet on whom the French government decided at about the same time to bestow the sum of a billion euros in exchange for his share of the European Aeronautic, Defense, and Space Co. (EADS), a world leader in aeronautics.
     One final example, even more extreme: in February 2012, a French court ordered the seizure of more than 200 cubic meters of property (luxury cars, old master paintings, etc.) from the Avenue Foch home of Teodorin Obiang, the son of the dictator of Equatorial Guinea. It is an established fact that his share of the company, which was authorized to exploit Guinea's forests (from which he derives most of his income), was acquired in a dubious way and that these forest resources were to a large extent stolen from the people of Equatorial Guinea. The case is instructive in that it shows that private property is not quite as sacred as people sometimes think, and that it was technically possible, when someone really wanted to, to find a way through the maze of dummy corporations by means of which Teodorin Obiang administered his capital. There is little doubt, however, that it would not be very difficult to find in Paris or London other individuals—Russian oligarchs or Quatari billionaires, say—with fortunes ultimately derived from the private appropriation of natural resources. It may be that these appropriations of oil, gas, and aluminum deposits are not as clear-cut cases of theft as Obiang's forests. And perhaps judicial action is more justified when the theft is committed at the expense of a very poor country, as opposed to a less poor one.22 At the very least, the reader will grant that these various cases are not fundamentally different but belong to a continuum, and that a fortune is often deemed more suspect if its owner is black. In any case, the courts cannot resolve every case of ill-gotten gains or unjustified wealth. A tax on capital would be a less blunt and more systematic instrument for dealing with the question.
     Broadly speaking, the central fact is that the return on capital often inextricably combines elements of true entrepreneurial labor (an absolutely indispensable force for economic development), pure luck (one happens at the right moment to buy a promising asset at a good price), and outright theft. The arbitrariness of wealth accumulation is a much broader phenomenon than the arbitrariness of inheritance. The return on capital is by nature volatile and unpredictable and can easily generate capital gains (or losses) equivalent to dozens of years of earned income. At the top of the wealth hierarchy, these effects are even more extreme. It has always been this way. In the novel Ibiscus (1926), Alexei Tolstoy depicted the horrors of capitalism. In 1917, in St. Petersburg, the accountant Simon Novzorov bashes in the skull of an antique dealer who has offered him a job and steals a small fortune. The antique dealer had become rich by purchasing, at rock-bottom prices, the possessions of aristocrats fleeing the Revolution. Novzorov manages to multiply his initial capital by 10 in six months, thanks to the gambling den he sets up in Moscow with his new friend Ritechev. Novzorov is a nasty, petty parasite who embodies the idea that wealth and merit are totally unrelated: property sometimes begins with theft, and the arbitrary return on capital can easily perpetuate the initial crime.
 The Pure Return on University Endowments

     In order to gain a better understanding of unequal returns on capital without being distracted by issues of individual character, it is useful to look at what has happened with the endowments of American universities over the past few decades. Indeed, this is one of the few cases where we have very complete data about investments made and returns received over a relatively long period of time, as a function of initial capital.
     There are currently more than eight hundred public and private universities in the United States that manage their own endowments. These endowments range from some tens of millions of dollars (for example, North Iowa Community College, ranked 785th in 2012 with an endowment of $11.5 million) to tens of billions. The top-ranked universities are invariably Harvard (with an endowment of some $30 billion in the early 2010s), Yale ($20 billion), and Princeton and Stanford (more than $15 billion). Then come MIT and Columbia, with a little less than $10 billion, then Chicago and Pennsylvania, at around $7 billion, and so on. All told, these eight hundred US universities owned nearly $400 billion worth of assets in 2010 (or a little under $500 million per university on average, with a median slightly less than $100 million). To be sure, this is less than 1 percent of the total private wealth of US households, but it is still a large sum, which annually yields significant income for US universities—or at any rate some of them.23 Above all—and this is the point that is of interest here—US universities publish regular, reliable, and detailed reports on their endowments, which can be used to study the annual returns each institution obtains. This is not possible with most private fortunes. In particular, these data have been collected since the late 1970s by the National Association of College and University Business Officers, which has published voluminous statistical surveys every year since 1979.
     The main results I have been able to derive from these data are shown in Table 12.2.24 The first conclusion is that the return on US university endowments has been extremely high in recent decades, averaging 8.2 percent a year between 1980 and 2010 (and 7.2 percent for the period 1990–2010).25 To be sure, there have been ups and downs in each decade, with years of low or even negative returns, such as 2008–2009, and good years in which the average endowment grew by more than 10 percent. But the important point is that if we average over ten, twenty, or thirty years, we find extremely high returns, of the same sort I examined for the billionaires in the Forbes rankings.
     To be clear, the returns indicated in Table 12.2 are net real returns allowing for capital gains and inflation, prevailing taxes (virtually nonexistent for nonprofit institutions), and management fees. (The latter include the salaries of everyone inside or outside the university who is involved in planning and executing the institution's investment strategy.) Hence these figures reflect the pure return on capital as defined in this book, that is, the return that comes simply from owning capital, apart from any remuneration of the labor required to manage it.
      

     The second conclusion that emerges clearly from Table 12.2 is that the return increases rapidly with size of endowment. For the 500 of 850 universities whose endowment was less than $100 million, the average return was 6.2 percent in 1980–2010 (and 5.1 percent in 1990–2010), which is already fairly high and significantly above the average return on all private wealth in these periods.26 The greater the endowment, the greater the return. For the 60 universities with endowments of more than $1 billion, the average return was 8.8 percent in 1980–2010 (and 7.8 percent in 1990–2010). For the top trio (Harvard, Yale, and Princeton), which has not changed since 1980, the yield was 10.2 percent in 1980–2010 (and 10.0 percent in 1990–2010), twice as much as the less well-endowed institutions.27
     If we look at the investment strategies of different universities, we find highly diversified portfolios at all levels, with a clear preference for US and foreign stocks and private sector bonds (government bonds, especially US Treasuries, which do not pay well, account for less than 10 percent of all these portfolios and are almost totally absent from the largest endowments). The higher we go in the endowment hierarchy, the more often we find "alternative investment strategies," that is, very high yield investments such as shares in private equity funds and unlisted foreign stocks (which require great expertise), hedge funds, derivatives, real estate, and raw materials, including energy, natural resources, and related products (these, too, require specialized expertise and offer very high potential yields).28 If we consider the importance in these various portfolios of "alternative investments," whose only common feature is that they abandon the usual strategies of investing in stocks and bonds accessible to all, we find that they represent only 10 percent of the portfolios of institutions with endowments of less than 50 million euros, 25 percent of those with endowments between 50 and 100 million euros, 35 percent of those between 100 and 500 million euros, 45 percent of those between 500 million and 1 billion euros, and ultimately more than 60 percent of those above 1 billion euros. The available data, which are both public and extremely detailed, show unambiguously that it is these alternative investment strategies that enable the very largest endowments to obtain real returns of close to 10 percent a year, while smaller endowments must make do with 5 percent.
     It is interesting to note that the year-to-year volatility of these returns does not seem to be any greater for the largest endowments than for the smaller ones: the returns obtained by Harvard and Yale vary around their mean but not much more so than the returns of smaller institutions, and if one averages over several years, the mean returns of the largest institutions are systematically higher than those of the smaller ones, with a gap that remains fairly constant over time. In other words, the higher returns of the largest endowments are not due primarily to greater risk taking but to a more sophisticated investment strategy that consistently produces better results.29
     How can these facts be explained? By economies of scale in portfolio management. Concretely, Harvard currently spends nearly $100 million a year to manage its endowment. This munificent sum goes to pay a team of top-notch portfolio managers capable of identifying the best investment opportunities around the world. But given the size of Harvard's endowment (around $30 billion), $100 million in management costs is just over 0.3 percent a year. If paying that amount makes it possible to obtain an annual return of 10 percent rather than 5, it is obviously a very good deal. On the other hand, a university with an endowment of only $1 billion (which is nevertheless substantial) could not afford to pay $100 million a year—10 percent of its portfolio—in management costs. In practice, no university pays more than 1 percent for portfolio management, and most pay less than 0.5 percent, so to manage assets worth $1 billion, one would pay $5 million, which is not enough to pay the kind of specialists in alternative investments that one can hire with $100 million. As for North Iowa Community College, with an endowment of $11.5 million, even 1 percent a year would amount to only $115,000, which is just enough to pay a half-time or even quarter-time financial advisor at going market rates. Of course a US citizen at the median of the wealth distribution has only $100,000 to invest, so he must be his own money manager and probably has to rely on the advice of his brother-in-law. To be sure, financial advisors and money managers are not infallible (to say the least), but their ability to identify more profitable investments is the main reason why the largest endowments obtain the highest returns.
     These results are striking, because they illustrate in a particularly clear and concrete way how large initial endowments can give rise to better returns and thus to substantial inequalities in returns on capital. These high returns largely account for the prosperity of the most prestigious US universities. It is not alumni gifts, which constitute a much smaller flow: just one-tenth to one-fifth of the annual return on endowment.30
     These findings should be interpreted cautiously, however. In particular, it would be too much to try to use them to predict how global wealth inequality will evolve over the next few decades. For one thing, the very high returns that we see in the period 1980–2010 in part reflect the long-term rebound of global asset prices (stocks and real estate), which may not continue (in which case the long-term returns discussed above would have to be reduced somewhat in the future).31 For another, it is possible that economies of scale affect mainly the largest portfolios and are greatly reduced for more "modest" fortunes of 10–50 million euros, which, as noted, account for a much larger share of total global wealth than do the Forbes billionaires. Finally, leaving management fees aside, these returns still depend on the institution's ability to choose the right managers. But a family is not an institution: there always comes a time when a prodigal child squanders the family fortune, which the Harvard Corporation is unlikely to do, simply because any number of people would come forward to stand in the way. Because family fortunes are subject to this kind of random "shock," it is unlikely that inequality of wealth will grow indefinitely at the individual level; rather, the wealth distribution will converge toward a certain equilibrium.
     These arguments are not altogether reassuring, however. It would in any case be rather imprudent to rely solely on the eternal but arbitrary force of family degeneration to limit the future proliferation of billionaires. As noted, a gap r − g of fairly modest size is all that it takes to arrive at an extremely inegalitarian distribution of wealth. The return on capital does not need to rise as high as 10 percent for all large fortunes: a smaller gap would be enough to deliver a major inegalitarian shock.
     Another important point is that wealthy people are constantly coming up with new and ever more sophisticated legal structures to house their fortunes. Trust funds, foundations, and the like often serve to avoid taxes, but they also constrain the freedom of future generations to do as they please with the associated assets. In other words, the boundary between fallible individuals and eternal foundations is not as clear-cut as is sometimes thought. Restrictions on the rights of future generations were in theory drastically reduced when entails were abolished more than two centuries ago (see Chapter 10). In practice, however, the rules can be circumvented when the stakes require. In particular, it is often difficult to distinguish purely private family foundations from true charitable foundations. In fact, families often use foundations for both private and charitable purposes and are generally careful to maintain control of their assets even when housed in a primarily charitable foundation.32 It is often not easy to know what exact rights children and relatives have in these complex structures, because important details are often hidden in legal documents that are not public. In some cases, a family trust whose purpose is primarily to serve as an inheritance vehicle exists alongside a foundation with a more charitable purpose.33 It is also interesting to note that the amount of gifts declared to the tax authorities always falls drastically when oversight is tightened (for example, when donors are required to submit accurate receipts, or when foundations are required to submit more detailed financial statements to certify that their official purpose is in fact respected and private use of foundation funds does not exceed certain limits), confirming the idea that there is a certain porosity between public and private uses of these legal entities.34 Ultimately, it is very difficult to say precisely what proportion of foundations fulfill purposes that can truly be characterized as being in the public interest.35
 What Is the Effect of Inflation on Inequality of Returns to Capital?

     The results concerning the returns on university endowments suggest that it may also be useful to say a few words about the pure return on capital and the inegalitarian effects of inflation. As I showed in Chapter 1, the rate of inflation in the wealthy countries has been stable at around 2 percent since the 1980s: this new norm is both much lower than the peak inflation rates seen in the twentieth century and much higher than the zero or virtually zero inflation that prevailed in the nineteenth century and up to World War I. In the emerging countries, inflation is currently higher than in the rich countries (often above 5 percent). The question, then, is the following: What is the effect on returns to capital of inflation at 2 percent or even 5 percent rather than 0 percent?
     Some people think, wrongly, that inflation reduces the average return on capital. This is false, because the average asset price (that is, the average price of real estate and financial securities) tends to rise at the same pace as consumer prices. Take a country with a capital stock equal to six years of national income (β = 6) and where capital's share of national income equals 30 percent (α = 30%), so that the average return on capital is 5 percent (r = 5%). Imagine that inflation in this country increases from 0 to 2 percent a year. Is it really true that the average return on capital will then decrease from 5 percent to 3? Obviously not. To a first approximation, if consumer prices rise by 2 percent a year, then it is probable that asset prices will also increase by 2 percent a year on average. There will be no capital gains or losses, and the return on capital will still be 5 percent. By contrast, it is likely that inflation changes the distribution of this average return among individual citizens. The problem is that in practice the redistributions induced by inflation are always complex, multidimensional, and largely unpredictable and uncontrollable.
     People sometimes believe that inflation is the enemy of the rentier and that this may in part explain why modern societies like inflation. This is partly true, in the sense that inflation forces people to pay some attention to their capital. When inflation exists, anyone who is content to perch on a pile of banknotes will see that pile melt away before his eyes, leaving him with nothing even if wealth is untaxed. In this respect, inflation is indeed a tax on the idle rich, or, more precisely, on wealth that is not invested. But as I have noted a number of times already, it is enough to invest one's wealth in real assets, such as real estate or shares of stock, in order to escape the inflation tax entirely.36 Our results on university endowments confirm this in the clearest possible terms. There can be no doubt that inflation of 2 percent rather than 0 percent in no way prevents large fortunes from obtaining very high real returns.
     One can even imagine that inflation tends to improve the relative position of the wealthiest individuals compared to the least wealthy, in that it enhances the importance of financial managers and intermediaries. A person with 10 or 50 million euros cannot afford the money managers that Harvard has but can nevertheless pay financial advisors and stockbrokers to mitigate the effects of inflation. By contrast, a person with only 10 or 50 thousand euros to invest will not be offered the same choices by her broker (if she has one): contacts with financial advisors are briefer, and many people in this category keep most of their savings in checking accounts that pay little or nothing and/or savings accounts that pay little more than the rate of inflation. Furthermore, some assets exhibit size effects of their own, but these are generally unavailable to small investors. It is important to realize that this inequality of access to the most remunerative investments as a reality for everyone (and thus much broader than the extreme case of "alternative investments" available only to the wealthiest individuals and largest endowments). For example, some financial products require very large minimum investments (on the order of hundreds of thousands of euros), so that small investors must make do with less profitable opportunities (allowing intermediaries to charge big investors more for their services).
     These size effects are particularly important in regard to real estate. In practice, this is the most important type of capital asset for the vast majority of the population. For most people, the simplest way to invest is to buy a home. This provides protection against inflation (since the price of housing generally rises at least as fast as the price of consumption), and it also allows the owner to avoid paying rent, which is equivalent to a real return on investment of 3–4 percent a year. But for a person with 10 to 50 thousand euros, it is not enough to decide to buy a home: the possibility may not exist. And even for a person with 100 or 200 thousand euros but who works in a big city in a job whose pay is not in the top 2 or 3 centiles of the wage hierarchy, it may be difficult to purchase a home or apartment even if one is willing to go into debt for a long period of time and pay a high rate of interest. As a result, those who start out with a small initial fortune will often remain tenants, who must therefore pay a substantial rent (affording a high return on capital to the landL-rd) for a long period of time, possibly for life, while their bank savings are just barely protected from inflation.
     Conversely, a person who starts out with more wealth thanks to an inheritance or gift, or who earns a sufficiently high salary, or both, will more quickly be in a position to buy a home or apartment and therefore earn a real return of 3–4 percent on their investment while being able to save more thanks to not having to pay rent. This unequal access to real estate as an effect of fortune size has of course always existed.37 One could conceivably circumvent the barrier by buying a smaller apartment than one needs (in order to rent it) or by investing in other types of assets. But the problem has to some extent been aggravated by modern inflation: in the nineteenth century, when inflation was zero, it was relatively easy for a small saver to obtain a real return of 3 or 4 percent, for example by buying government bonds. Today, many small savers cannot enjoy such returns.
     To sum up: the main effect of inflation is not to reduce the average return on capital but to redistribute it. And even though the effects of inflation are complex and multidimensional, the preponderance of the evidence suggests that the redistribution induced by inflation is mainly to the detriment of the least wealthy and to the benefit of the wealthiest, hence in the opposite direction from what is generally desired. To be sure, inflation may slightly reduce the pure return on capital, in that it forces everyone to spend more time doing asset management. One might compare this historic change to the very long-run increase in the rate of depreciation of capital, which requires more frequent investment decisions and replacement of old assets with new ones.38 In both cases, one has to work a little harder today to obtain a given return: capital has become more "dynamic." But these are relatively indirect and ineffective ways of combating rent: the evidence suggests that the slight decrease in the pure return on capital due to these causes is much smaller than the increase of inequality of returns on capital; in particular, it poses little threat to the largest fortunes.
     Inflation does not do away with rent: on the contrary, it probably helps to make the distribution of capital more unequal.
     To avoid any misunderstanding, let me say at once that I am not proposing a return to the gold standard or zero inflation. Under some conditions, inflation may have virtues, though smaller virtues than is sometimes imagined. I will come back to this when I discuss the role of central banks in monetary creation, especially in times of financial crisis and large sovereign debt. There are ways for people of modest means to have access to remunerative saving without zero inflation and government bonds as in the nineteenth century. But it is important to realize that inflation is today an extremely blunt instrument, and often a counterproductive one, if the goal is to avoid a return to a society of rentiers and, more generally, to reduce inequalities of wealth. A progressive tax on capital is a much more appropriate policy in terms of both democratic transparency and real efficacy.
 The Return on Sovereign Wealth Funds: Capital and Politics

     Consider now the case of sovereign wealth funds, which have grown substantially in recent years, particularly in the petroleum exporting countries. Unfortunately, there is much less publicly available data concerning the investment strategies and returns obtained by sovereign wealth funds than there is for university endowments, and this is all the more unfortunate in that the financial stakes are much, much larger. The Norwegian sovereign wealth fund, which alone was worth more than 700 billion euros in 2013 (twice as much as all US university endowments combined), publishes the most detailed financial reports. Its investment strategy, at least at the beginning, seems to have been more standard than that of the university endowments, in part, no doubt, because it was subject to public scrutiny (and the people of Norway may have been less willing than the Harvard Corporation to accept massive investments in hedge funds and unlisted stocks), and the returns obtained were apparently not as good.39 The fund's officials recently received authorization to place larger amounts in alternative investments (especially international real estate), and returns may be higher in the future. Note, too, that the fund's management costs are less than 0.1 percent of its assets (compared with 0.3 percent for Harvard), but since the Norwegian fund is 20 times larger than Harvard's endowment, this is enough to pay for thorough investment advice. We also learn that during the period 1970–2010, about 60 percent of the money Norway earned from petroleum was invested in the fund, while 40 percent a year went to government expenses. The Norwegian authorities do not tell us what their long-term objective for the fund is or when the country can begin to consume all or part of the returns on its investment. They probably do not know themselves: everything depends on how Norway's petroleum reserves evolve as well as on the price of a barrel of oil and the fund's returns in the decades ahead.
     If we look at other sovereign wealth funds, particularly n the Middle East, we unfortunately find that they are much more opaque than the Norwegian fund. Their financial reports are frequently rather scanty. It is generally impossible to know precisely what the investment strategy is, and returns are discussed obliquely at best, with little consistency from year to year. The most recent reports published by the Abu Dhabi Investment Authority, which manages the world's largest sovereign wealth fund (about the same size as Norway's), speak of a real return greater than 7 percent a year for 1990–2010 and more than 8 percent for 1980–2010. In view of the returns obtained by university endowments, these figures seem entirely plausible, but in the absence of detailed annual information, it is difficult to say more.
     It is interesting to note that different funds apparently follow very different investment strategies, which are related, moreover, to very different ways of communicating with the public and very different approaches to global politics. Abu Dhabi is outspoken about its fund's high returns, but Saudi Arabia's sovereign wealth fund, which ranks third after Abu Dhabi and Norway among sovereign wealth funds of petroleum exporting states and ahead of Kuwait, Qatar, and Russia, has chosen to keep a very low profile. The small petroleum states of the Persian Gulf, which have only tiny populations to worry about, are clearly addressing the international financial community as the primary audience for their reports. The Saudi reports are more sober and provide information not only about oil reserves but also about national accounts and the government budget. These are clearly addressed to the people of the Kingdom of Saudi Arabia, whose population was close to 20 million in 2010—still small compared to the large countries in the region (Iran, 80 million; Egypt, 85 million; Iraq, 35 million) but far larger than the microstates of the Gulf.40 And that is not the only difference: Saudi funds seem to be invested much less aggressively. According to official documents, the average return on the Saudi sovereign wealth fund was no more than 2–3 percent, mainly because much of the money was invested in US Treasury bonds. Saudi financial reports do not come close to providing enough information to know how the portfolio has evolved, but the information they do provide is much more detailed than that provided by the Emirates, and on this specific point they seem to be accurate.
     Why would Saudi Arabia choose to invest in US Treasury bonds when it is possible to get far better returns elsewhere? The question is worth asking, especially since US university endowments stopped investing in their own government's debt decades ago and roam the world in search of the best return, investing in hedge funds, unlisted shares, and commodities-based derivatives. To be sure, US Treasuries offer an enviable guarantee of stability in an unstable world, and it is possible that the Saudi public has little taste for alternative investments. But the political and military aspects of the choice must also be taken into account: even though it is never stated explicitly, it is not illogical for Saudia Arabia to lend at low interest to the country that protects it militarily. To my knowledge, no one has ever attempted to calculate precisely the return on such an investment, but it seems clear that it is rather high. If the United States, backed by other Western powers, had not driven the Iraqi army out of Kuwait in 1991, Iraq would probably have threatened Saudi Arabia's oil fields next, and it is possible that other countries in the region, such as Iran, would have joined the fray to redistribute the region's petroleum rents. The dynamics of the global distribution of capital are at once economic, political, and military. This was already the case in the colonial era, when the great powers of the day, Britain and France foremost among them, were quick to roll out the cannon to protect their investments. Clearly, the same will be true in the twenty-first century, in a tense new global political configuration whose contours are difficult to predict in advance.
 Will Sovereign Wealth Funds Own the World?

     How much richer can the sovereign wealth funds become in the decades ahead? According to available (and notoriously imperfect) estimates, sovereign wealth funds in 2013 had total investments worth a little over $5.3 trillion, of which about $3.2 trillion belongs to the funds of petroleum exporting states (including, in addition to those mentioned above, the smaller funds of Dubai, Libya, Kazakhstan, Algeria, Iran, Azerbaijan, Brunei, Oman, and many others), and approximately $2.1 trillion to funds of nonpetroleum states (primarily China, Hong Kong, Singapore, and many smaller funds).41 For reference, note that this is almost exactly the same total wealth as that represented by the Forbes billionaires (around $5.4 trillion in 2013). In other words, billionaires today own roughly 1.5 percent of the world's total private wealth, and sovereign wealth funds own another 1.5 percent. It is perhaps reassuring to note that this leaves 97 percent of global capital for the rest.42 One can also do projections for the sovereign wealth funds just as I did for billionaires, from which it follows that they will not achieve decisive importance—10–20 percent of global capital—before the second half of the twenty-first century, and we are still a long way from having to pay our monthly rent to the emir of Qatar (or the taxpayers of Norway). Nevertheless, it would still be a mistake to ignore the issue. In the first place, there is no reason why we should not worry about the rents our children and grandchildren may have to pay, and we need not wait until things come to a head to think about what to do. Second, a substantial part of global capital is in relatively illiquid form (including real estate and business capital that cannot be traded on financial markets), so that the share of truly liquid capital owned by sovereign wealth funds (and to a lesser extent billionaires)—capital that can be used, say, to take over a bankrupt company, buy a football team, or invest in a decaying neighborhood when strapped governments lack the means to do so—is actually much higher.43 In fact, the issue of investments originating in the petroleum exporting countries has become increasingly salient in the wealthy countries, especially France, and as noted, these are perhaps the countries least psychologically prepared for the comeback of capital.
     Last but not least, the key difference between the sovereign wealth funds and the billionaires is that the funds, or at any rate those of the petroleum exporting countries, grow not only by reinvesting their returns but also by investing part of the proceeds of oil sales. Although the future amounts of such proceeds are highly uncertain, owing to uncertainties about the amount of oil still in the ground, the demand for oil, and the price per barrel, it is quite plausible to assume that this income from petroleum sales will largely outweigh the returns on existing investments. The annual rent derived from the exploitation of natural resources, defined as the difference between receipts from sales and the cost of production, has been about 5 percent of global GDP since the mid-2000s (half of which is petroleum rent and the rest rent on other natural resources, mainly gas, coal, minerals, and wood), compared with about 2 percent in the 1990s and less than 1 percent in the early 1970s.44 According to some forecasting models, the price of petroleum, currently around $100 a barrel (compared with $25 in the early 2000s) could rise as high as $200 a barrel by 2020–2030. If a sufficiently large fraction of the corresponding rent is invested in sovereign wealth funds every year (a fraction that should be considerably larger than it is today), one can imagine a scenario in which the sovereign wealth funds would own 10–20 percent or more of global capital by 2030–2040. No law of economics rules this out. Everything depends on supply and demand, on whether or not new oil deposits and/or sources of energy are discovered, and on how rapidly people learn to live without petroleum. In any event, it is almost inevitable that the sovereign wealth funds of the petroleum exporting countries will continue to grow and that their share of global assets in 2030–2040 will be at least two to three times greater than it is today—a significant increase.
     If this happens, it is likely that the Western countries would find it increasingly difficult to accept the idea of being owned in substantial part by the sovereign wealth funds of the oil states, and sooner or later this would trigger political reactions, such as restrictions on the purchase of real estate and industrial and financial assets by sovereign wealth funds or even partial or total expropriations. Such a reaction would neither be terribly smart politically nor especially effective economically, but it is the kind of response that is within the power of national governments, even of smaller states. Note, moreover, that the petroleum exporting countries themselves have already begun to limit their foreign investments and have begun investing heavily in their own countries to build museums, hotels, universities, and even ski slopes, at times on a scale that seems devoid of economic and financial rationality. It may be that this behavior reflects awareness of the fact that it is harder to expropriate an investment made at home than one made abroad. There is no guarantee, however, that the process will always be peaceful: no one knows the precise location of the psychological and political boundaries that must not be crossed when it comes to the ownership of one country by another.
 Will China Own the World?

     The sovereign wealth funds of non-petroleum-exporting countries raise a different kind of problem. Why would a country with no particular natural resources to speak of decide to own another country? One possibility is of course neocolonial ambitions, a pure will to power, as in the era of European colonialism. But the difference is that in those days the European countries enjoyed a technological advantage that ensured their domination. China and other emerging nonpetroleum countries are growing very rapidly, to be sure, but the evidence suggests that this rapid growth will end once they catch up with the leaders in terms of productivity and standard of living. The diffusion of knowledge and productive technologies is a fundamentally equalizing process: once the less advanced countries catch up with the more advanced, they cease to grow more rapidly.
     In the central scenario for the evolution of the global capital/income ratio that I discussed in Chapter 5, I assumed that the savings rate would stabilize at around 10 percent of national income as this international convergence process neared its end. In that case, the accumulation of capital would attain comparable proportions everywhere. A very large share of the world's capital stock would of course be accumulated in Asia, and especially China, in keeping with the region's future share of global output. But according to the central scenario, the capital/income ratio would be the same on all continents, so that there would be no major imbalance between savings and investment in any region. Africa would be the only exception: in the central scenario depicted in Figures 12.4 and 12.5, the capital/income ratio is expected to be lower in Africa than in other continents throughout the twenty-first century (essentially because Africa is catching up economically much more slowly and its demographic transition is also delayed).45 If capital can flow freely across borders, one would expect to see a flow of investments in Africa from other countries, especially China and other Asian nations. For the reasons discussed above, this could give rise to serious tensions, signs of which are already visible.
      

     FIGURE 12.4.   The world capital/income ratio, 1870–2100
     According to the simulations (central scenario), the world capital/income ratio might be near to 700 percent by the end of the twenty-first century.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     To be sure, one can easily imagine scenarios much more unbalanced than the central scenario. Nevertheless, the forces of divergence are much less obvious than in the case of the sovereign wealth funds, whose growth depends on windfalls totally disproportionate to the needs of the populations benefiting from them (especially where those populations are tiny). This leads to endless accumulation, which the inequality r > g transforms into a permanent divergence in the global capital distribution. To sum up, petroleum rents might well enable the oil states to buy the rest of the planet (or much of it) and to live on the rents of their accumulated capital.46
      

     FIGURE 12.5.   The distribution of world capital, 1870–2100
     According to the central scenatio, Asian countries should own about half of world capital by the end of the twenty-first century.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     China, India, and other emerging countries are different. These countries have large populations whose needs (for both consumption and investment) remain far from satisfied. One can of course imagine scenarios in which the Chinese savings rate would remain persistently above the savings rate in Europe or North America: for example, China might choose a retirement system funded by investments rather than a pay-as-you-go system—a rather tempting choice in a low-growth environment (and even more tempting if demographic growth is negative).47 For example, if China saves 20 percent of its national income until 2100, while Europe and the United States save only 10 percent, then by 2100 a large part of the Old and New Worlds will be owned by enormous Chinese pension funds.48 Although this is logically possible, it is not very plausible, in part because Chinese workers and Chinese society as a whole would no doubt prefer (not without reason) to rely in large part on a public partition system for their retirement (as in Europe and the United States) and in part because of the political considerations already noted in the case of the petroleum exporting countries and their sovereign wealth funds, which would apply with equal force to Chinese pension funds.
 International Divergence, Oligarchic Divergence

     In any case, this threat of international divergence owing to a gradual acquisition of the rich countries by China (or by the petroleum exporters' sovereign wealth funds) seems less credible and dangerous than an oligarchic type of divergence, that is, a process in which the rich countries would come to be owned by their own billionaires or, more generally, in which all countries, including China and the petroleum exporters, would come to be owned more and more by the planet's billionaires and multimillionaires. As noted, this process is already well under way. As global growth slows and international competition for capital heats up, there is every reason to believe that r will be much greater than g in the decades ahead. If we add to this the fact that the return on capital increases with the size of the initial endowment, a phenomenon that may well be reinforced by the growing complexity of global financial markets, then clearly all the ingredients are in place for the top centile and thousandth of the global wealth distribution to pull farther and farther ahead of the rest. To be sure, it is quite difficult to foresee how rapidly this oligarchic divergence will occur, but the risk seems much greater than the risk of international divergence.49
     In particular, it is important to stress that the currently prevalent fears of growing Chinese ownership are a pure fantasy. The wealthy countries are in fact much wealthier than they sometimes think. The total real estate and financial assets net of debt owned by European households today amount to some 70 trillion euros. By comparison, the total assets of the various Chinese sovereign wealth funds plus the reserves of the Bank of China represent around 3 trillion euros, or less than one-twentieth the former amount.50 The rich countries are not about to be taken over by the poor countries, which would have to get much richer to do anything of the kind, and that will take many more decades.
     What, then, is the source of this fear, this feeling of dispossession, which is partly irrational? Part of the reason is no doubt the universal tendency to look elsewhere for the source of domestic difficulties. For example, many people in France believe that rich foreign buyers are responsible for the skyrocketing price of Paris real estate. When one looks closely at who is buying what type of apartment, however, one finds that the increase in the number of foreign (or foreign-resident) buyers can explain barely 3 percent of the price increase. In other words, 97 percent of today's very high real estate prices are due to the fact that there are enough French buyers residing in France who are prosperous enough to pay such large amounts for property.51
     To my mind, this feeling of dispossession is due primarily to the fact that wealth is very highly concentrated in the rich countries (so that for much of the population, capital is an abstraction) and the process of the political secession of the largest fortunes is already well under way. For most people living in the wealthy countries, of Europe especially, the idea that European households own 20 times as much capital as China is rather hard to grasp, especially since this wealth is private and cannot be mobilized by governments for public purposes such as aiding Greece, as China helpfully proposed not long ago. Yet this private European wealth is very real, and if the governments of the European Union decided to tap it, they could. But the fact is that it is very difficult for any single government to regulate or tax capital and the income it generates. The main reason for the feeling of dispossession that grips the rich countries today is this loss of democratic sovereignty. This is especially true in Europe, whose territory is carved up into small states in competition with one another for capital, which aggravates the whole process. The very substantial increase in gross foreign asset positions (with each country owning a larger and larger stake in its neighbors, as discussed in Chapter 5) is also part of this process, and contributes to the sense of helplessness.
     In Part Four I will show how useful a tool a global (or if need be European) tax on capital would be for overcoming these contradictions, and I will also consider what other government responses might be possible. To be clear, oligarchic divergence is not only more probable than international divergence, it is also much more difficult to combat, because it demands a high degree of international coordination among countries that are ordinarily engaged in competition with one another. The secession of wealth tends, moreover, to obscure the very idea of nationality, since the wealthiest individuals can to some extent take their money and change their nationality, cutting all ties to their original community. Only a coordinated response at a relatively broad regional level can overcome this difficulty.
 Are the Rich Countries Really Poor?

     Another point that needs to be emphasized is that a substantial fraction of global financial assets is already hidden away in various tax havens, thus limiting our ability to analyze the geographic distribution of global wealth. To judge by official statistics alone (relying on national data collated by international organizations such as the IMF), it would seem that the net asset position of the wealthy countries vis-à-vis the rest of the world is negative. As noted in Part Two, Japan and Germany are in substantial surplus relative to the rest of the world (meaning that their households, firms, and governments own a lot more foreign assets than the rest of the world owns of their assets), which reflects the fact that they have been running large trade surpluses in recent decades. But the net position of the United States is negative, and that of most European countries other than Germany is close to zero, if not in the red.52 All told, when one adds up the positions of all the wealthy countries, one is left with a slightly negative position, equivalent to about −4 percent of global GDP in 2010, compared with close to zero in the mid-1980s, as Figure 12.6 shows.53 It is important to recognize, however, that it is a very slightly negative position (amounting to just 1 percent of global wealth). In any case, as I have already discussed at length, we are living in a time when international positions are relatively balanced, at least when compared with the colonial period, when the rich countries enjoyed a much larger positive position with respect to the rest of the world.54
     Of course this slightly negative official position should in principle be counterbalanced by an equivalent positive position for the rest of the world. In other words, the poor countries should own more assets in the rich countries than vice versa, with a surplus on the order of 4 percent of global GDP (or 1 percent of global wealth) in their favor. In fact, this is not the case: if one adds up the financial statistics for the various countries of the world, one finds that the poor countries also have a negative position and that the world as a whole is in a substantially negative situation. It seems, in other words, that Earth must be owned by Mars. This is a fairly old "statistical anomaly," but according to various international organizations it has gotten worse in recent years. (The global balance of payments is regularly negative: more money leaves countries than enters them, which is theoretically impossible.) No real explanation of this phenomenon has been forthcoming. Note that these financial statistics and balance-of-payments data in theory cover the entire world. In particular, banks in the tax havens are theoretically required to report their accounts to international institutions. The "anomaly" can presumably be explained by various statistical biases and measurement errors.
      

     FIGURE 12.6.   The net foreign asset position of rich countries
     Unregistered financial assets held in tax havens are higher than the official net foreign debt of rich countries.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     By comparing all the available sources and exploiting previously unused Swiss bank data, Gabriel Zucman was able to show that the most plausible reason for the discrepancy is that large amounts of unreported financial assets are held in tax havens. By his cautious estimate, these amount to nearly 10 percent of global GDP.55 Certain nongovernmental organizations have proposed even larger estimates (up to 2 or 3 times larger). Given the current state of the available sources, I believe that Zucman's estimate is slightly more realistic, but such estimates are by nature uncertain, and it is possible that Zucman's is a lower bound.56 In any event, the important fact is that this lower bound is already extremely high. In particular, it is more than twice as large as the official negative net position of the combined rich countries (see Figure 12.6).57 Now, all the evidence indicates that the vast majority (at least three-quarters) of the financial assets held in tax havens belongs to residents of the rich countries. The conclusion is obvious: the net asset position of the rich countries relative to the rest of the world is in fact positive (the rich countries own on average more than the poor countries and not vice versa, which ultimately is not very surprising), but this is masked by the fact that the wealthiest residents of the rich countries are hiding some of their assets in tax havens. In particular, this implies that the very sharp increase in private wealth (relative to national income) in the rich countries in recent decades is actually even larger than we estimated on the basis of official accounts. The same is true of the upward trend of the share of large fortunes in total wealth.58 Indeed, this shows how difficult it is to track assets in the globalized capitalism of the early twenty-first century, thus blurring our picture of the basic geography of wealth.

    PART FOUR

     REGULATING CAPITAL IN THE TWENTY-FIRST CENTURY


    \'7bTHIRTEEN\'7d

     A Social State for the Twenty-First Century

     In the first three parts of this book, I analyzed the evolution of the distribution of wealth and the structure of inequality since the eighteenth century. From this analysis I must now try to draw lessons for the future. One major lesson is already clear: it was the wars of the twentieth century that, to a large extent, wiped away the past and transformed the structure of inequality. Today, in the second decade of the twenty-first century, inequalities of wealth that had supposedly disappeared are close to regaining or even surpassing their historical highs. The new global economy has brought with it both immense hopes (such as the eradication of poverty) and equally immense inequities (some individuals are now as wealthy as entire countries). Can we imagine a twenty-first century in which capitalism will be transcended in a more peaceful and more lasting way, or must we simply await the next crisis or the next war (this time truly global)? On the basis of the history I have brought to light here, can we imagine political institutions that might regulate today's global patrimonial capitalism justly as well as efficiently?
     As I have already noted, the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a progressive global tax on capital. Such a tax would also have another virtue: it would expose wealth to democratic scrutiny, which is a necessary condition for effective regulation of the banking system and international capital flows. A tax on capital would promote the general interest over private interests while preserving economic openness and the forces of competition. The same cannot be said of various forms of retreat into national or other identities, which may well be the alternative to this ideal policy. But a truly global tax on capital is no doubt a utopian ideal. Short of that, a regional or continental tax might be tried, in particular in Europe, starting with countries willing to accept such a tax. Before I come to that, I must first reexamine in a much broader context the question of a tax on capital (which is of course only one component of an ideal social and fiscal system). What is the role of government in the production and distribution of wealth in the twenty-first century, and what kind of social state is most suitable for the age?
 The Crisis of 2008 and the Return of the State

     The global financial crisis that began in 2007–2008 is generally described as the most serious crisis of capitalism since the crash of 1929. The comparison is in some ways justified, but essential differences remain. The most obvious of these is that the recent crisis has not led to a depression as devastating as the Great Depression of the 1930s. Between 1929 and 1935, production in the developed countries fell by a quarter, unemployment rose by the same amount, and the world did not entirely recover from the Depression until the onset of World War II. Fortunately, the current crisis has been significantly less cataclysmic. That is why it has been given a less alarming name: the Great Recession. To be sure, the leading developed economies in 2013 are not quite back to the level of output they had achieved in 2007, government finances are in pitiful condition, and prospects for growth look gloomy for the foreseeable future, especially in Europe, which is mired in an endless sovereign debt crisis (which is ironic, since Europe is also the continent with the highest capital/income ratio in the world). Yet even in the depths of the recession, in 2009, production did not fall by more than five percentage points in the wealthiest countries. This was enough to make it the most serious global recession since the end of World War II, but it is still a very different thing from the dramatic collapse of output and waves of bankruptcies of the 1930s. Furthermore, growth in the emerging countries quickly bounced back and is buoying global growth today.
     The main reason why the crisis of 2008 did not trigger a crash as serious as the Great Depression is that this time the governments and central banks of the wealthy countries did not allow the financial system to collapse and agreed to create the liquidity necessary to avoid the waves of bank failures that led the world to the brink of the abyss in the 1930s. This pragmatic monetary and financial policy, poles apart from the "liquidationist" orthodoxy that reigned nearly everywhere after the 1929 crash, managed to avoid the worst. (Herbert Hoover, the US president in 1929, thought that limping businesses had to be "liquidated," and until Franklin Roosevelt replaced Hoover in 1933, they were.) The pragmatic response to the crisis also reminded the world that central banks do not exist just to twiddle their thumbs and keep down inflation. In situations of total financial panic, they play an indispensable role as lender of last resort—indeed, they are the only public institution capable of averting a total collapse of the economy and society in an emergency. That said, central banks are not designed to solve all the world's problems. The pragmatic policies adopted after the crisis of 2008 no doubt avoided the worst, but they did not really provide a durable response to the structural problems that made the crisis possible, including the crying lack of financial transparency and the rise of inequality. The crisis of 2008 was the first crisis of the globalized patrimonial capitalism of the twenty-first century. It is unlikely to be the last.
     Many observers deplore the absence of any real "return of the state" to managing the economy. They point out that the Great Depression, as terrible as it was, at least deserves credit for bringing about radical changes in tax policy and government spending. Indeed, within a few years of his inauguration, Roosevelt increased the top marginal rate of the federal income tax to more than 80 percent on extremely high incomes, whereas the top rate under Hoover had been only 25 percent. By contrast, at the time of this writing, Washington is still wondering whether the Obama administration will be able in its second term to raise the top rate left by Bush (of around 35 percent) above what it was under Clinton in the 1990s (around 40 percent).
     In Chapter 14 I will look at the question of confiscatory tax rates on incomes deemed to be indecent (and economically useless), which was in fact an impressive US innovation of the interwar years. To my mind, it deserves to be reconceived and revived, especially in the country that first thought of it.
     To be sure, good economic and social policy requires more than just a high marginal tax rate on extremely high incomes. By its very nature, such a tax brings in almost nothing. A progressive tax on capital is a more suitable instrument for responding to the challenges of the twenty-first century than a progressive income tax, which was designed for the twentieth century (although the two tools can play complementary roles in the future). For now, however, it is important to dispel a possible misunderstanding.
     The possibility of greater state intervention in the economy raises very different issues today than it did in the 1930s, for a simple reason: the influence of the state is much greater now than it was then, indeed, in many ways greater than it has ever been. That is why today's crisis is both an indictment of the markets and a challenge to the role of government. Of course, the role of government has been constantly challenged since the 1970s, and the challenges will never end: once the government takes on the central role in economic and social life that it acquired in the decades after World War II, it is normal and legitimate for that role to be permanently questioned and debated. To some this may seem unjust, but it is inevitable and natural. Some people are baffled by the new role of government, and vehement if uncomprehending clashes between apparently irreconcilable positions are not uncommon. Some are outspoken in favor of an even greater role for the state, as if it no longer played any role at all, while still others call for the state to be dismantled at once, especially in the country where it is least present, the United States. There, groups affiliated with the Tea Party call for abolishing the Federal Reserve and returning to the gold standard. In Europe, the verbal clashes between "lazy Greeks" and "Nazi Germans" can be even more vitriolic. None of this helps to solve the real problems at hand. Both the antimarket and antistate camps are partly correct: new instruments are needed to regain control over a financial capitalism that has run amok, and at the same time the tax and transfer systems that are the heart of the modern social state are in constant need of reform and modernization, because they have achieved a level of complexity that makes them difficult to understand and threatens to undermine their social and economic efficacy.
     This twofold task may seem insurmountable. It is in fact an enormous challenge, which our democratic societies will have to meet in the years ahead. But it will be impossible to convince a majority of citizens that our governing institutions (especially at the supranational level) need new tools unless the instruments already in place can be shown to be working properly. To clarify all this, I must first take a look backward and briefly discuss how taxation and government spending have evolved in the rich countries since the nineteenth century.
 The Growth of the Social State in the Twentieth Century

     The simplest way to measure the change in the government's role in the economy and society is to look at the total amount of taxes relative to national income. Figure 13.1 shows the historical trajectory of four countries (the United States, Britain, France, and Sweden) that are fairly representative of what has happened in the rich countries.1 There are both striking similarities and important differences in the observed evolutions.
      

     FIGURE 13.1.   Tax revenues in rich countries, 1870–2010
     Total tax revenues were less than 10 percent of national income in rich countries until 1900–1910; they represent between 30 percent and 55 percent of national income in 2000–2010.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     The first similarity is that taxes consumed less than 10 percent of national income in all four countries during the nineteenth century and up to World War I. This reflects the fact that the state at that time had very little involvement in economic and social life. With 7–8 percent of national income, it is possible for a government to fulfill its central "regalian" functions (police, courts, army, foreign affairs, general administration, etc.) but not much more. After paying to maintain order, enforce property rights, and sustain the military (which often accounts for more than half of total expenditures), not much remained in the government's coffers.2 States in this period also paid for some roads and other infrastructure, as well as schools, universities, and hospitals, but most people had access only to fairly rudimentary educational and health services.3
     Between 1920 and 1980, the share of national income that the wealthy countries chose to devote to social spending increased considerably. In just half a century, the share of taxes in national income increased by a factor of at least 3 or 4 (and in the Nordic countries more than 5). Between 1980 and 2010, however, the tax share stabilized everywhere. This stabilization took place at different levels in each country, however: just over 30 percent of national income in the United States, around 40 percent in Britain, and between 45 and 55 percent on the European continent (45 percent in Germany, 50 percent in France, and nearly 55 percent in Sweden).4 The differences between countries are significant.5 Nevertheless, the secular evolutions are closely matched, in particular the almost perfect stability observed in all four countries over the past three decades. Political changes and national peculiarities are also noticeable in Figure 13.1 (between Britain and France, for example).6 But their importance is on the whole rather limited compared with this common stabilization.7
     In other words, all the rich countries, without exception, went in the twentieth century from an equilibrium in which less than a tenth of their national income was consumed by taxes to a new equilibrium in which the figure rose to between a third and a half.8 Several important points about this fundamental transformation call for further clarification.
     First, it should be clear why the question of whether or not there has been a "return to the state" in the present crisis is misleading: the role of the government is greater than ever. In order to fully appreciate the state's role in economic and social life, other indicators of course need to be considered. The state also intervenes by setting rules, not just by collecting taxes to pay its expenses. For example, the financial markets were much less tightly regulated after 1980 than before. The state also produces and owns capital: privatization of formerly state-owned industrial and financial assets over the past three decades has also reduced the state's role in comparison with the three decades after World War II. Nevertheless, in terms of tax receipts and government outlays, the state has never played as important an economic role as it has in recent decades. No downward trend is evident, contrary to what is sometimes said. To be sure, in the face of an aging population, advances in medical technology, and constantly growing educational needs, the mere fact of having stabilized the tax bill as a percentage of national income is in itself no mean feat: cutting the government budget is always easier to promise in opposition than to achieve once in power. Nevertheless, the fact remains that taxes today claim nearly half of national income in most European countries, and no one seriously envisions an increase in the future comparable to that which occurred between 1930 and 1980. In the wake of the Depression, World War II, and postwar reconstruction, it was reasonable to think that the solution to the problems of capitalism was to expand the role of the state and increase social spending as much as necessary. Today's choices are necessarily more complex. The state's great leap forward has already taken place: there will be no second leap—not like the first one, in any event.
     To gain a better understanding of what is at stake behind these figures, I want to describe in somewhat greater detail what this historic increase in government tax revenues was used for: the construction of a "social state."9 In the nineteenth century, governments were content to fulfill their "regalian" missions. Today these same functions command a little less than one-tenth of national income. The growing tax bite enabled governments to take on ever broader social functions, which now consume between a quarter and a third of national income, depending on the country. This can be broken down initially into two roughly equal halves: one half goes to health and education, the other to replacement incomes and transfer payments.10
     Spending on education and health consumes 10–15 percent of national income in all the developed countries today.11 There are significant differences between countries, however. Primary and secondary education are almost entirely free for everyone in all the rich countries, but higher education can be quite expensive, especially in the United States and to a lesser extent in Britain. Public health insurance is universal (that is, open to the entire population) in most countries in Europe, including Britain.12 In the United States, however, it is reserved for the poor and elderly (which does not prevent it from being very costly).13 In all the developed countries, public spending covers much of the cost of education and health services: about three-quarters in Europe and half in the United States. The goal is to give equal access to these basic goods: every child should have access to education, regardless of his or her parents' income, and everyone should have access to health care, even, indeed especially, when circumstances are difficult.
     Replacement incomes and transfer payments generally consume 10–15 (or even 20) percent of national income in most of the rich countries today. Unlike public spending on education and health, which may be regarded as transfers in kind, replacement income and transfer payments form part of household disposable income: the government takes in large sums in taxes and social insurance contributions and then pays them out to other households in the form of replacement income (pensions and unemployment compensation) and transfer payments (family allowances, guaranteed income, etc.), so that the total disposable income of all households in the aggregate remains unchanged.14
     In practice, pensions account for the lion's share (two-thirds to three-quarters) of total replacement income and transfer payments. Here, too, there are significant differences between countries. In continental Europe, pensions alone often consume 12–13 percent of national income (with Italy and France at the top, ahead of Germany and Sweden). In the United States and Britain, the public pension system is much more drastically capped for those at the middle and top of the income hierarchy (the replacement rate, that is, the amount of the pension in proportion to the wage earned prior to retirement, falls rather quickly for those who earned above the average wage), and pensions consume only 6–7 percent of national income.15 These are very large sums in all cases: in all the rich countries, public pensions are the main source of income for at least two-thirds of retirees (and generally three-quarters). Despite the defects of these public pensions systems and the challenges they now face, the fact is that without them it would have been impossible to eradicate poverty among the elderly, which was endemic as recently as the 1950s. Along with access to education and health, public pensions constitute the third social revolution that the fiscal revolution of the twentieth century made possible.
     Compared with pension outlays, payments for unemployment insurance are much smaller (typically 1–2 percent of national income), reflecting the fact that people spend less time in unemployment than in retirement. The replacement income is nevertheless useful when needed. Finally, income support outlays are even smaller (less than 1 percent of national income), almost insignificant when measured against total government spending. Yet this type of spending is often the most vigorously challenged: beneficiaries are suspected of wanting to live their lives on the dole, even though the proportion of the population relying on welfare payments is generally far smaller than for other government programs, because the stigma attached to welfare (and in many cases the complexity of the process) dissuades many who are entitled to benefits from asking for them.16 Welfare benefits are questioned not only in Europe but also in the United States (where the unemployed black single mother is often singled out for criticism by opponents of the US "welfare state").17 In both cases, the sums involved are in fact only a very small part of state social spending.
     All told, if we add up state spending on health and education (10–15 percent of national income) and replacement and transfer payments (another 10–15 or perhaps as high as 20 percent of national income), we come up with total social spending (broadly speaking) of 25–35 percent of national income, which accounts for nearly all of the increase in government revenues in the wealthy countries in the twentieth century. In other words, the growth of the fiscal state over the last century basically reflects the constitution of a social state.
 Modern Redistribution: A Logic of Rights

     To sum up: modern redistribution does not consist in transferring income from the rich to the poor, at least not in so explicit a way. It consists rather in financing public services and replacement incomes that are more or less equal for everyone, especially in the areas of health, education, and pensions. In the latter case, the principle of equality often takes the form of a quasi proportionality between replacement income and lifetime earnings.18 For education and health, there is real equality of access for everyone regardless of income (or parents' income), at least in principle. Modern redistribution is built around a logic of rights and a principle of equal access to a certain number of goods deemed to be fundamental.
     At a relatively abstract level, it is possible to find justifications for this rights-based approach in various national political and philosophical traditions. The US Declaration of Independence (1776) asserts that everyone has an equal right to the pursuit of happiness.19 In a sense, our modern belief in fundamental rights to education and health can be linked to this assertion, even though it took quite a while to get there. Article 1 of the Declaration of the Rights of Man and the Citizen (1789) also proclaims that "men are born free and remain free and equal in rights." This is followed immediately, however, by the statement that "social distinctions can be based only on common utility." This is an important addition: the second sentence alludes to the existence of very real inequalities, even though the first asserts the principle of absolute equality. Indeed, this is the central tension of any rights-based approach: how far do equal rights extend? Do they simply guarantee the right to enter into free contract—the equality of the market, which at the time of the French Revolution actually seemed quite revolutionary? And if one includes equal rights to an education, to health care, and to a pension, as the twentieth-century social state proposed, should one also include rights to culture, housing, and travel?
     The second sentence of article 1 of the Declaration of the Rights of Man of 1789 formulates a kind of answer to this question, since it in a sense reverses the burden of proof: equality is the norm, and inequality is acceptable only if based on "common utility." It remains to define the term "common utility." The drafters of the Declaration were thinking mainly of the abolition of the orders and privileges of the Ancien Régime, which were seen at the time as the very epitome of arbitrary, useless inequality, hence as not contributing to "common utility." One can interpret the phrase more broadly, however. One reasonable interpretation is that social inequalities are acceptable only if they are in the interest of all and in particular of the most disadvantaged social groups.20 Hence basic rights and material advantages must be extended insofar as possible to everyone, as long as it is in the interest of those who have the fewest rights and opportunities to do so.21 The "difference principle" introduced by the US philosopher John Rawls in his Theory of Justice is similar in intent.22 And the "capabilities" approach favored by the Indian economist Amartya Sen is not very different in its basic logic.23
     At a purely theoretical level, there is in fact a certain (partly artificial) consensus concerning the abstract principles of social justice. The disagreements become clearer when one tries to give a little substance to these social rights and inequalities and to anchor them in specific historical and economic contexts. In practice, the conflicts have to do mainly with the means of effecting real improvement in the living conditions of the least advantaged, the precise extent of the rights that can be granted to all (in view of economic and budgetary constraints and the many related uncertainties), and exactly what factors are within and beyond the control of individuals (where does luck end and where do effort and merit begin?). Such questions will never be answered by abstract principles or mathematical formulas. The only way to answer them is through democratic deliberation and political confrontation. The institutions and rules that govern democratic debate and decision-making therefore play a central role, as do the relative power and persuasive capabilities of different social groups. The US and French Revolutions both affirmed equality of rights as an absolute principle—a progressive stance at that time. But in practice, during the nineteenth century, the political systems that grew out of those revolutions concentrated mainly on the protection of property rights.
 Modernizing Rather Than Dismantling the Social State

     Modern redistribution, as exemplified by the social states constructed by the wealthy countries in the twentieth century, is based on a set of fundamental social rights: to education, health, and retirement. Whatever limitations and challenges these systems of taxation and social spending face today, they nevertheless marked an immense step forward in historical terms. Partisan conflict aside, a broad consensus has formed around these social systems, particularly in Europe, which remains deeply attached to what is seen as a "European social model." No major movement or important political force seriously envisions a return to a world in which only 10 or 20 percent of national income would go to taxes and government would be pared down to its regalian functions.24
     On the other hand, there is no significant support for continuing to expand the social state at its 1930–1980 growth rate (which would mean that by 2050–2060, 70–80 percent of national income would go to taxes). In theory, of course, there is no reason why a country cannot decide to devote two-thirds or three-quarters of its national income to taxes, assuming that taxes are collected in a transparent and efficient manner and used for purposes that everyone agrees are of high priority, such as education, health, culture, clean energy, and sustainable development. Taxation is neither good nor bad in itself. Everything depends on how taxes are collected and what they are used for. There are nevertheless two good reasons to believe that such a drastic increase in the size of the social state is neither realistic nor desirable, at least for the foreseeable future.
     First, the very rapid expansion of the role of government in the three decades after World War II was greatly facilitated and accelerated by exceptionally rapid economic growth, at least in continental Europe.25 When incomes are increasing 5 percent a year, it is not too difficult to get people to agree to devote an increasing share of that growth to social spending (which therefore increases more rapidly than the economy), especially when the need for better education, more health care, and more generous pensions is obvious (given the very limited funds allocated for these purposes from 1930 to 1950). The situation has been very different since the 1980s: with per capita income growth of just over 1 percent a year, no one wants large and steady tax increases, which would mean even slower if not negative income growth. Of course it is possible to imagine a redistribution of income via the tax system or more progressive tax rates applied to a more or less stable total income, but it is very difficult to imagine a general and durable increase in the average tax rate. The fact that tax revenues have stabilized in all the rich countries, notwithstanding national differences and changes of government, is no accident (see Figure 13.1). Furthermore, it is by no means certain that social needs justify ongoing tax increases. To be sure, there are objectively growing needs in the educational and health spheres, which may well justify slight tax increases in the future. But the citizens of the wealthy countries also have a legitimate need for enough income to purchase all sorts of goods and services produced by the private sector—for instance, to travel, buy clothing, obtain housing, avail themselves of new cultural services, purchase the latest tablet, and so on. In a world of low productivity growth, on the order of 1–1.5 percent (which is in fact a decent rate of growth over the long term), society has to choose among different types of needs, and there is no obvious reason to think that nearly all needs should by paid for through taxation.
     Furthermore, no matter how the proceeds of growth are allocated among different needs, there remains the fact that once the public sector grows beyond a certain size, it must contend with serious problems of organization. Once again, it is hard to foresee what will happen in the very long run. It is perfectly possible to imagine that new decentralized and participatory forms of organization will be developed, along with innovative types of governance, so that a much larger public sector than exists today can be operated efficiently. The very notion of "public sector" is in any case reductive: the fact that a service is publicly financed does not mean that it is produced by people directly employed by the state or other public entities. In education and health, services are provided by many kinds of organizations, including foundations and associations, which are in fact intermediate forms between the state and private enterprise. All told, education and health account for 20 percent of employment and GDP in the developed economies, which is more than all sectors of industry combined. This way of organizing production is durable and universal. For example, no one has proposed transforming private US universities into publicly owned corporations. It is perfectly possible that such intermediary forms will become more common in the future, for example, in the cultural and media sectors, where profit-making corporations already face serious competition and raise concerns about potential conflicts of interest. As I showed earlier when discussing how capitalism is organized in Germany, the notion of private property can vary from country to country, even in the automobile business, one of the most traditional branches of industry. There is no single variety of capitalism or organization of production in the developed world today: we live in a mixed economy, different to be sure from the mixed economy that people envisioned after World War II but nonetheless quite real. This will continue to be true in the future, no doubt more than ever: new forms of organization and ownership remain to be invented.
     That said, before we can learn to efficiently organize public financing equivalent to two-thirds to three-quarters of national income, it would be good to improve the organization and operation of the existing public sector, which represents only half of national income (including replacement and transfer payments)—no small affair. In Germany, France, Italy, Britain, and Sweden, debates about the social state in the decades to come will revolve mainly around issues of organization, modernization, and consolidation: if total taxes and social spending remain more or less unchanged in proportion to national income (or perhaps rise slightly in response to growing needs), how can we improve the operation of hospitals and day care centers, adjust doctors' fees and drug costs, reform universities and primary schools, and revise pension and unemployment benefits in response to changing life expectancies and youth unemployment rates? At a time when nearly half of national income goes to public spending, such debates are legitimate and even indispensable. If we do not constantly ask how to adapt our social services to the public's needs, the consensus supporting high levels of taxation and therefore the social state may not last forever.
     Obviously, an analysis of the prospects for reform of all aspects of the social state would far exceed the scope of this book. I will therefore confine myself to a few issues of particular importance for the future and directly related to the themes of my work: first, the question of equal access to education, and especially higher education, and second, the future of pay-as-you-go retirement systems in a world of low growth.
 Do Educational Institutions Foster Social Mobility?

     In all countries, on all continents, one of the main objectives of public spending for education is to promote social mobility. The stated goal is to provide access to education for everyone, regardless of social origin. To what extent do existing institutions fulfill this objective?
     In Part Three, I showed that even with the considerable increase in the average level of education over the course of the twentieth century, earned income inequality did not decrease. Qualification levels shifted upward: a high school diploma now represents what a grade school certificate used to mean, a college degree what a high school diploma used to stand for, and so on. As technologies and workplace needs changed, all wage levels increased at similar rates, so that inequality did not change. What about mobility? Did mass education lead to more rapid turnover of winners and losers for a given skill hierarchy? According to the available data, the answer seems to be no: the intergenerational correlation of education and earned incomes, which measures the reproduction of the skill hierarchy over time, shows no trend toward greater mobility over the long run, and in recent years mobility may even have decreased.26 Note, however, that it is much more difficult to measure mobility across generations than it is to measure inequality at a given point in time, and the sources available for estimating the historical evolution of mobility are highly imperfect.27 The most firmly established result in this area of research is that intergenerational reproduction is lowest in the Nordic countries and highest in the United States (with a correlation coefficient two-thirds higher than in Sweden). France, Germany, and Britain occupy a middle ground, less mobile than northern Europe but more mobile than the United States.28
     These findings stand in sharp contrast to the belief in "American exceptionalism" that once dominated US sociology, according to which social mobility in the United States was exceptionally high compared with the class-bound societies of Europe. No doubt the settler society of the early nineteenth century was more mobile. As I have shown, moreover, inherited wealth played a smaller role in the United States than in Europe, and US wealth was for a long time less concentrated, at least up to World War I. Throughout most of the twentieth century, however, and still today, the available data suggest that social mobility has been and remains lower in the United States than in Europe.
     One possible explanation for this is the fact that access to the most elite US universities requires the payment of extremely high tuition fees. Furthermore, these fees rose sharply in the period 1990–2010, following fairly closely the increase in top US incomes, which suggests that the reduced social mobility observed in the United States in the past will decline even more in the future.29 The issue of unequal access to higher education is increasingly a subject of debate in the United States. Research has shown that the proportion of college degrees earned by children whose parents belong to the bottom two quartiles of the income hierarchy stagnated at 10–20 percent in 1970–2010, while it rose from 40 to 80 percent for children with parents in the top quartile.30 In other words, parents' income has become an almost perfect predictor of university access.
     This inequality of access also seems to exist at the top of the economic hierarchy, not only because of the high cost of attending the most prestigious private universities (high even in relation to the income of upper-middle-class parents) but also because admissions decisions clearly depend in significant ways on the parents' financial capacity to make donations to the universities. For example, one study has shown that gifts by graduates to their former universities are strangely concentrated in the period when the children are of college age.31 By comparing various sources of data, moreover, it is possible to estimate that the average income of the parents of Harvard students is currently about $450,000, which corresponds to the average income of the top 2 percent of the US income hierarchy.32 Such a finding does not seem entirely compatible with the idea of selection based solely on merit. The contrast between the official meritocratic discourse and the reality seems particularly extreme in this case. The total absence of transparency regarding selection procedures should also be noted.33
     It would be wrong, however, to imagine that unequal access to higher education is a problem solely in the United States. It is one of the most important problems that social states everywhere must face in the twenty-first century. To date, no country has come up with a truly satisfactory response. To be sure, university tuitions fees are much lower in Europe if one leaves Britain aside.34 In other countries, including Sweden and other Nordic countries, Germany, France, Italy, and Spain, tuition fees are relatively low (less than 500 euros). Although there are exceptions, such as business schools and Sciences Po in France, and although the situation is changing rapidly, this remains a very striking difference between continental Europe and the United States: in Europe, most people believe that access to higher education should be free or nearly free, just as primary and secondary education are.35 In Quebec, the decision to raise tuition gradually from $2,000 to nearly $4,000 was interpreted as an attempt to move toward an inegalitarian US-style system, which led to a student strike in the winter of 2012 and ultimately to a change of government and cancellation of the decision.
     It would be naïve, however, to think that free higher education would resolve all problems. In 1964, Pierre Bourdieu and Jean-Claude Passeron analyzed, in Les héritiers, more subtle mechanisms of social and cultural selection, which often do the same work as financial selection. In practice, the French system of "grandes écoles" leads to spending more public money on students from more advantaged social backgrounds, while less money is spent on university students who come from more modest backgrounds. Again, the contrast between the official discourse of "republican meritocracy" and the reality (in which social spending amplifies inequalities of social origin) is extreme.36 According to the available data, it seems that the average income of parents of students at Sciences Po is currently around 90,000 euros, which roughly corresponds to the top 10 percent of the French income hierarchy. Recruitment is thus 5 times broader than at Harvard but still relatively limited.37 We lack the data to do a similar calculation for students at the other grandes écoles, but the results would likely be similar.
     Make no mistake: there is no easy way to achieve real equality of opportunity in higher education. This will be a key issue for the social state in the twenty-first century, and the ideal system has yet to be invented. Tuition fees create an unacceptable inequality of access, but they foster the independence, prosperity, and energy that make US universities the envy of the world.38 In the abstract, it should be possible to combine the advantages of decentralization with those of equal access by providing universities with substantial publicly financed incentives. In some respects this is what public health insurance systems do: producers (doctors and hospitals) are granted a certain independence, but the cost of care is a collective responsibility, thus ensuring that patients have equal access to the system. One could do the same thing with universities and students. The Nordic countries have adopted a strategy of this kind in higher education. This of course requires substantial public financing, which is not easy to come by in the current climate of consolidation of the social state.39 Such a strategy is nevertheless far more satisfactory than other recent attempts, which range from charging tuition fees that vary with parents' income40 to offering loans that are to be paid back by a surtax added to the recipient's income tax.41
     If we are to make progress on these issues in the future, it would be good to begin by working toward greater transparency than exists today. In the United States, France, and most other countries, talk about the virtues of the national meritocratic model is seldom based on close examination of the facts. Often the purpose is to justify existing inequalities while ignoring the sometimes patent failures of the current system. In 1872, Emile Boutmy created Sciences Po with a clear mission in mind: "obliged to submit to the rule of the majority, the classes that call themselves the upper classes can preserve their political hegemony only by invoking the rights of the most capable. As traditional upper-class prerogatives crumble, the wave of democracy will encounter a second rampart, built on eminently useful talents, superiority that commands prestige, and abilities of which society cannot sanely deprive itself."42 If we take this incredible statement seriously, what it clearly means is that the upper classes instinctively abandoned idleness and invented meritocracy lest universal suffrage deprive them of everything they owned. One can of course chalk this up to the political context: the Paris Commune had just been put down, and universal male suffrage had just been reestablished. Yet Boutmy's statement has the virtue of reminding us of an essential truth: defining the meaning of inequality and justifying the position of the winners is a matter of vital importance, and one can expect to see all sorts of misrepresentations of the facts in service of the cause.
 The Future of Retirement: Pay-As-You-Go and Low Growth

     Public pension systems are generally pay-as-you-go (PAYGO) systems: contributions deducted from the wages of active workers are directly paid out as benefits to retirees. In contrast to capitalized pension plans, in a PAYGO system nothing is invested, and incoming funds are immediately disbursed to current retirees. In PAYGO schemes, based on the principle of intergenerational solidarity (today's workers pay benefits to today's retirees in the hope that their children will pay their benefits tomorrow), the rate of return is by definition equal to the growth rate of the economy: the contributions available to pay tomorrow's retirees will rise as average wages rise. In theory, this also implies that today's active workers have an interest in ensuring that average wages rise as rapidly as possible. They should therefore invest in schools and universities for their children and promote a higher birth rate. In other words, there exists a bond among generations that in principle makes for a virtuous and harmonious society.43
     When PAYGO systems were introduced in the middle of the twentieth century, conditions were in fact ideal for such a virtuous series of events to occur. Demographic growth was high and productivity growth higher still. The growth rate was close to 5 percent in the countries of continental Europe, so this was the rate of return on the PAYGO system. Concretely, workers who contributed to state retirement funds between the end of World War II and 1980 were repaid (or are still being repaid) out of much larger wage pools than those from which their contributions were drawn. The situation today is different. The falling growth rate (now around 1.5 percent in the rich countries and perhaps ultimately in all countries) reduces the return on the pool of shared contributions. All signs are that the rate of return on capital in the twenty-first century will be significantly higher than the growth rate of the economy (4–5 percent for the former, barely 1.5 percent for the latter).44
     Under these conditions, it is tempting to conclude that the PAYGO system should be replaced as quickly as possible by a capitalized system, in which contributions by active workers are invested rather than paid out immediately to retirees. These investments can then grow at 4 percent a year in order to finance the pensions of today's workers when they retire several decades from now. There are several major flaws in this argument, however. First, even if we assume that a capitalized system is indeed preferable to a PAYGO system, the transition from PAYGO to capitalized benefits raises a fundamental problem: an entire generation of retirees is left with nothing. The generation that is about to retire, who paid for the pensions of the previous generation with their contributions, would take a rather dim view of the fact that the contributions of today's workers, which current retirees had expected to pay their rent and buy their food during the remaining years of their lives, would in fact be invested in assets around the world. There is no simple solution to this transition problem, and this alone makes such a reform totally unthinkable, at least in such an extreme form.
     Second, in comparing the merits of the two pension systems, one must bear in mind that the return on capital is in practice extremely volatile. It would be quite risky to invest all retirement contributions in global financial markets. The fact that r > g on average does not mean that it is true for each individual investment. For a person of sufficient means who can wait ten or twenty years before taking her profits, the return on capital is indeed quite attractive. But when it comes to paying for the basic necessities of an entire generation, it would be quite irrational to bet everything on a roll of the dice. The primary justification of the PAYGO system is that it is the best way to guarantee that pension benefits will be paid in a reliable and predictable manner: the rate of wage growth may be less than the rate of return on capital, but the former is 5–10 times less volatile than the latter.45 This will continue to be true in the twenty-first century, and PAYGO pensions will therefore continue to be part of the ideal social state of the future everywhere.
     That said, it remains true that the logic of r > g cannot be entirely ignored, and some things may have to change in the existing pension systems of the developed countries. One challenge is obviously the aging of the population. In a world where people die between eighty and ninety, it is difficult to maintain parameters that were chosen when the life expectancy was between sixty and seventy. Furthermore, increasing the retirement age is not just a way of increasing the resources available to both workers and retirees (which is a good thing in an era of low growth). It is also a response to the need that many people feel for fulfillment through work. For them, to be forced to retire at sixty and to spend more time in retirement in some cases than in a career, is not an appetizing prospect. The problem is that individual situations vary widely. Some people have primarily intellectual occupations, and they may wish to remain on the job until they are seventy (and it is possible that the number of such people as a share of total employment will increase over time). There are many others, however, who began work early and whose work is arduous or not very rewarding and who legitimately aspire to retire relatively early (especially since their life expectancy is often lower than that of more highly qualified workers). Unfortunately, recent reforms in many developed countries fail to distinguish adequately between these different types of individual, and in some cases more is demanded of the latter than of the former, which is why these reforms sometimes provoke strong opposition.
     One of the main difficulties of pension reform is that the systems one is trying to reform are extremely complex, with different rules for civil servants, private sector workers, and nonworkers. For a person who has worked in different types of jobs over the course of a lifetime, which is increasingly common in the younger generations, it is sometimes difficult to know which rules apply. That such complexity exists is not surprising: today's pension systems were in many cases built in stages, as existing schemes were extended to new social groups and occupations from the nineteenth century on. But this makes it difficult to obtain everyone's cooperation on reform efforts, because many people feel that they are being treated worse than others. The hodgepodge of existing rules and schemes frequently confuses the issue, and people underestimate the magnitude of the resources already devoted to public pensions and fail to realize that these amounts cannot be increased indefinitely. For example, the French system is so complex that many younger workers do not have a clear understanding of what they are entitled to. Some even think that they will get nothing even though they are paying a substantial amount into the system (something like 25 percent of gross pay). One of the most important reforms the twenty-first-century social state needs to make is to establish a unified retirement scheme based on individual accounts with equal rights for everyone, no matter how complex one's career path.46 Such a system would allow each person to anticipate exactly what to expect from the PAYGO public plan, thus allowing for more intelligent decisions about private savings, which will inevitably play a more important supplementary role in a low-growth environment. One often hears that "a public pension is the patrimony of those without patrimony." This is true, but it does not mean that it would not be wise to encourage people of more modest means to accumulate nest eggs of their own.47
 The Social State in Poor and Emerging Countries

     Does the kind of social state that emerged in the developed countries in the twentieth century have a universal vocation? Will we see a similar development in the poor and emerging countries? Nothing could be less certain. To begin with, there are important differences among the rich countries: the countries of Western Europe seem to have stabilized government revenues at about 45–50 percent of national income, whereas the United States and Japan seem to be stuck at around the 30–35 percent level. Clearly, different choices are possible at equivalent levels of development.
     If we look at the poorest countries around the world in 1970–1980, we find that governments generally took 10–15 percent of national income, both in Sub-Saharan Africa and in South Asia (especially India). Turning to countries at an intermediate level of development in Latin America, North Africa, and China, we find governments taking 15–20 percent of national income, lower than in the rich countries at comparable levels of development. The most striking fact is that the gap between the rich and the not-so-rich countries has continued to widen in recent years. Tax levels in the rich countries rose (from 30–35 percent of national income in the 1970s to 35–40 percent in the 1980s) before stabilizing at today's levels, whereas tax levels in the poor and intermediate countries decreased significantly. In Sub-Saharan Africa and South Asia, the average tax bite was slightly below 15 percent in the 1970s and early 1980s but fell to a little over 10 percent in the 1990s.
     This evolution is a concern in that, in all the developed countries in the world today, building a fiscal and social state has been an essential part of the process of modernization and economic development. The historical evidence suggests that with only 10–15 percent of national income in tax receipts, it is impossible for a state to fulfill much more than its traditional regalian responsibilities: after paying for a proper police force and judicial system, there is not much left to pay for education and health. Another possible choice is to pay everyone—police, judges, teachers, and nurses—poorly, in which case it is unlikely that any of these public services will work well. This can lead to a vicious circle: poorly functioning public services undermine confidence in government, which makes it more difficult to raise taxes significantly. The development of a fiscal and social state is intimately related to the process of state-building as such. Hence the history of economic development is also a matter of political and cultural development, and each country must find its own distinctive path and cope with its own internal divisions.
     In the present case, however, it seems that part of the blame lies with the rich countries and international organizations. The initial situation was not very promising. The process of decolonization was marked by a number of chaotic episodes in the period 1950–1970: wars of independence with the former colonial powers, somewhat arbitrary borders, military tensions linked to the Cold War, abortive experiments with socialism, and sometimes a little of all three. After 1980, moreover, the new ultraliberal wave emanating from the developed countries forced the poor countries to cut their public sectors and lower the priority of developing a tax system suitable to fostering economic development. Recent research has shown that the decline in government receipts in the poorest countries in 1980–1990 was due to a large extent to a decrease in customs duties, which had brought in revenues equivalent to about 5 percent of national income in the 1970s. Trade liberalization is not necessarily a bad thing, but only if it is not peremptorily imposed from without and only if the lost revenue can gradually be replaced by a strong tax authority capable of collecting new taxes and other substitute sources of revenue. Today's developed countries reduced their tariffs over the course of the nineteenth and twentieth centuries at a pace they judged to be reasonable and with clear alternatives in mind. They were fortunate enough not to have anyone tell them what they ought to be doing instead.48 This illustrates a more general phenomenon: the tendency of the rich countries to use the less developed world as a field of experimentation, without really seeking to capitalize on the lessons of their own historical experience.49 What we see in the poor and emerging countries today is a wide range of different tendencies. Some countries, like China, are fairly advanced in the modernization of their tax system: for instance, China has an income tax that is applicable to a large portion of the population and brings in substantial revenues. It is possibly in the process of developing a social state similar to those found in the developed countries of Europe, America, and Asia (albeit with specific Chinese features and of course great uncertainty as to its political and democratic underpinnings). Other countries, such as India, have had greater difficulty moving beyond an equilibrium based on a low level of taxation.50 In any case, the question of what kind of fiscal and social state will emerge in the developing world is of the utmost importance for the future of the planet.

    \'7bFOURTEEN\'7d

     Rethinking the Progressive Income Tax

     In the previous chapter I examined the constitution and evolution of the social state, focusing on the nature of social needs and related social spending (education, health, retirement, etc.). I treated the overall level of taxes as a given and described its evolution. In this chapter and the next, I will examine more closely the structure of taxes and other government revenues, without which the social state could never have emerged, and attempt to draw lessons for the future. The major twentieth-century innovation in taxation was the creation and development of the progressive income tax. This institution, which played a key role in the reduction of inequality in the last century, is today seriously threatened by international tax competition. It may also be in jeopardy because its foundations were never clearly thought through, owing to the fact that it was instituted in an emergency that left little time for reflection. The same is true of the progressive tax on inheritances, which was the second major fiscal innovation of the twentieth century and has also been challenged in recent decades. Before I examine these two taxes more closely, however, I must first situate them in the context of progressive taxation in general and its role in modern redistribution.
 The Question of Progressive Taxation

     Taxation is not a technical matter. It is preeminently a political and philosophical issue, perhaps the most important of all political issues. Without taxes, society has no common destiny, and collective action is impossible. This has always been true. At the heart of every major political upheaval lies a fiscal revolution. The Ancien Régime was swept away when the revolutionary assemblies voted to abolish the fiscal privileges of the nobility and clergy and establish a modern system of universal taxation. The American Revolution was born when subjects of the British colonies decided to take their destiny in hand and set their own taxes. ("No taxation without representation"). Two centuries later the context is different, but the heart of the issue remains the same. How can sovereign citizens democratically decide how much of their resources they wish to devote to common goals such as education, health, retirement, inequality reduction, employment, sustainable development, and so on? Precisely what concrete form taxes take is therefore the crux of political conflict in any society. The goal is to reach agreement on who must pay what in the name of what principles—no mean feat, since people differ in many ways. In particular, they earn different incomes and own different amounts of capital. In every society there are some individuals who earn a lot from work but inherited little, and vice versa. Fortunately, the two sources of wealth are never perfectly correlated. Views about the ideal tax system are equally varied.
     One usually distinguishes among taxes on income, taxes on capital, and taxes on consumption. Taxes of each type can be found in varying proportions in nearly all periods. These categories are not exempt from ambiguity, however, and the dividing lines are not always clear. For example, the income tax applies in principle to capital income as well as earned income and is therefore a tax on capital as well. Taxes on capital generally include any levy on the flow of income from capital (such as the corporate income tax), as well as any tax on the value of the capital stock (such as a real estate tax, an estate tax, or a wealth tax). In the modern era, consumption taxes include value-added taxes as well as taxes on imported goods, drink, gasoline, tobacco, and services. Such taxes have always existed and are often the most hated of all, as well as the heaviest burden on the lower class (one thinks of the salt tax under the Ancien Régime). They are often called "indirect" taxes because they do not depend directly on the income or capital of the individual taxpayer: they are paid indirectly, as part of the selling price of a purchased good. In the abstract, one might imagine a direct tax on consumption, which would depend on each taxpayer's total consumption, but no such tax has ever existed.1
     In the twentieth century, a fourth category of tax appeared: contributions to government-sponsored social insurance programs. These are a special type of tax on income, usually only income from labor (wages and remuneration for nonwage labor). The proceeds go to social insurance funds intended to finance replacement income, whether pensions for retired workers or unemployment benefits for unemployed workers. This mode of collection ensures that the taxpayer will be aware of the purpose for which the tax is to be used. Some countries, such as France, also use social contributions to pay for other social spending such as health insurance and family allowances, so that total social contributions account for nearly half of all government revenue. Rather than clarify the purpose of tax collection, a system of such complexity can actually obscure matters. By contrast, other states, such as Denmark, finance all social spending with an enormous income tax, the revenues from which are allocated to pensions, unemployment and health insurance, and many other purposes. In fact, these distinctions among different legal categories of taxation are partly arbitrary.2
     Beyond these definitional quibbles, a more pertinent criterion for characterizing different types of tax is the degree to which each type is proportional or progressive. A tax is called "proportional" when its rate is the same for everyone (the term "flat tax" is also used). A tax is progressive when its rate is higher for some than for others, whether it be those who earn more, those who own more, or those who consume more. A tax can also be regressive, when its rate decreases for richer individuals, either because they are partially exempt (either legally, as a result of fiscal optimization, or illegally, through evasion) or because the law imposes a regressive rate, like the famous "poll tax" that cost Margaret Thatcher her post as prime minister in 1990.3
     In the modern fiscal state, total tax payments are often close to proportional to individual income, especially in countries where the total is large. This is not surprising: it is impossible to tax half of national income to finance an ambitious program of social entitlements without asking everyone to make a substantial contribution. The logic of universal rights that governed the development of the modern fiscal and social state fits rather well, moreover, with the idea of a proportional or slightly progressive tax.
     It would be wrong, however, to conclude that progressive taxation plays only a limited role in modern redistribution. First, even if taxation overall is fairly close to proportional for the majority of the population, the fact that the highest incomes and largest fortunes are taxed at significantly higher (or lower) rates can have a strong influence on the structure of inequality. In particular, the evidence suggests that progressive taxation of very high incomes and very large estates partly explains why the concentration of wealth never regained its astronomic Belle Époque levels after the shocks of 1914–1945. Conversely, the spectacular decrease in the progressivity of the income tax in the United States and Britain since 1980, even though both countries had been among the leaders in progressive taxation after World War II, probably explains much of the increase in the very highest earned incomes. At the same time, the recent rise of tax competition in a world of free-flowing capital has led many governments to exempt capital income from the progressive income tax. This is particularly true in Europe, whose relatively small states have thus far proved incapable of achieving a coordinated tax policy. The result is an endless race to the bottom, leading, for example, to cuts in corporate tax rates and to the exemption of interest, dividends, and other financial revenues from the taxes to which labor incomes are subject.
     One consequence of this is that in most countries taxes have (or will soon) become regressive at the top of the income hierarchy. For example, a detailed study of French taxes in 2010, which looked at all forms of taxation, found that the overall rate of taxation (47 percent of national income on average) broke down as follows. The bottom 50 percent of the income distribution pay a rate of 40–45 percent; the next 40 percent pay 45–50 percent; but the top 5 percent and even more the top 1 percent pay lower rates, with the top 0.1 percent paying only 35 percent. The high tax rates on the poor reflect the importance of consumption taxes and social contributions (which together account for three-quarters of French tax revenues). The slight progressivity observed in the middle class is due to the growing importance of the income tax. Conversely, the clear regressivity in the top centiles reflects the importance at this level of capital income, which is largely exempt from progressive taxation. The effect of this outweighs the effect of taxes on the capital stock (which are the most progressive of all).4 All signs are that taxes elsewhere in Europe (and probably also in the United States) follow a similar bell curve, which is probably even more pronounced than this imperfect estimate indicates.5
     If taxation at the top of the social hierarchy were to become more regressive in the future, the impact on the dynamics of wealth inequality would likely be significant, leading to a very high concentration of capital. Clearly, such a fiscal secession of the wealthiest citizens could potentially do great damage to fiscal consent in general. Consensus support for the fiscal and social state, which is already fragile in a period of low growth, would be further reduced, especially among the middle class, who would naturally find it difficult to accept that they should pay more than the upper class. Individualism and selfishness would flourish: since the system as a whole would be unjust, why continue to pay for others? If the modern social state is to continue to exist, it is therefore essential that the underlying tax system retain a minimum of progressivity, or at any rate that it not become overtly regressive at the top.
     Furthermore, looking at the progressivity of the tax system by examining how heavily top incomes are taxed obviously fails to weigh inherited wealth, whose importance has been increasing.6 In practice, estates are much less heavily taxed than income.7 This exacerbates what I have called "Rastignac's dilemma." If individuals were classified by centile of total resources accrued over a lifetime (including both earned income and capitalized inheritance), which is a more satisfactory criterion for progressive taxation, the bell curve would be even more markedly regressive at the top of the hierarchy than it is when only labor incomes are considered.8
     One final point bears emphasizing: to the extent that globalization weighs particularly heavily on the least skilled workers in the wealthy countries, a more progressive tax system might in principle be justified, adding yet another layer of complexity to the overall picture. To be sure, if one wants to maintain total taxes at about 50 percent of national income, it is inevitable that everyone must pay a substantial amount. But instead of a slightly progressive tax system (leaving aside the very top of the hierarchy), one can easily imagine a more steeply progressive one.9 This would not solve all the problems, but it would be enough to improve the situation of the least skilled significantly.10 If the tax system is not made more progressive, it should come as no surprise that those who derive the least benefit from free trade may well turn against it. The progressive tax is indispensable for making sure that everyone benefits from globalization, and the increasingly glaring absence of progressive taxation may ultimately undermine support for a globalized economy.
     For all of these reasons, a progressive tax is a crucial component of the social state: it played a central role in its development and in the transformation of the structure of inequality in the twentieth century, and it remains important for ensuring the viability of the social state in the future. But progressive taxation is today under serious threat, both intellectually (because its various functions have never been fully debated) and politically (because tax competition is allowing entire categories of income to gain exemption from the common rules).
 The Progressive Tax in the Twentieth Century: An Ephemeral Product of Chaos

     To gaze backward for a moment: how did we get to this point? First, it is important to realize that progressive taxation was as much a product of two world wars as it was of democracy. It was adopted in a chaotic climate that called for improvisation, which is part of the reason why its various purposes were not sufficiently thought through and why it is being challenged today.
     To be sure, a number of countries adopted a progressive income tax before the outbreak of World War I. In France, the law creating a "general tax on income" was passed on July 15, 1914, in direct response to the anticipated financial needs of the impending conflict (after being buried in the Senate for several years); the law would not have passed had a declaration of war not been imminent.11 Aside from this exception, most countries adopted a progressive income tax after due deliberation in the normal course of parliamentary proceedings. Such a tax was adopted in Britain, for example, in 1909 and in the United States in 1913. Several countries in northern Europe, a number of German states, and Japan adopted a progressive income tax even earlier: Denmark in 1870, Japan in 1887, Prussia in 1891, and Sweden in1903. Even though not all the developed countries had adopted a progressive tax by 1910, an international consensus was emerging around the principle of progressivity and its application to overall income (that is, to the sum of income from labor, including both wage and nonwage labor, and capital income of all kinds, including rent, interest, dividends, profits, and in some cases capital gains).12 To many people, such a system appeared to be both a more just and a more efficient way of apportioning taxes. Overall income measured each person's ability to contribute, and progressive taxation offered a way of limiting the inequalities produced by industrial capitalism while maintaining respect for private property and the forces of competition. Many books and reports published at the time helped popularize the idea and win over some political leaders and liberal economists, although many would remain hostile to the very principle of progressivity, especially in France.13
     Is the progressive income tax therefore the natural offspring of democracy and universal suffrage? Things are actually more complicated. Indeed, tax rates, even on the most astronomical incomes, remained extremely low prior to World War I. This was true everywhere, without exception. The magnitude of the political shock due to the war is quite clear in Figure 14.1, which shows the evolution of the top rate (that is, the tax rate on the highest income bracket) in the United States, Britain, Germany, and France from 1900 to 2013. The top rate stagnated at insignificant levels until 1914 and then skyrocketed after the war. These curves are typical of those seen in other wealthy countries.14
      

     FIGURE 14.1.   Top income tax rates, 1900–2013
     The top marginal tax rate of the income tax (applying to the highest incomes) in the United States dropped from 70 percent in 1980 to 28 percent in 1988.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     In France, the 1914 income tax law provided for a top rate of just 2 percent, which applied to only a tiny minority of taxpayers. It was only after the war, in a radically different political and financial context, that the top rate was raised to "modern" levels: 50 percent in 1920, then 60 percent in 1924, and even 72 percent in 1925. Particularly striking is the fact that the crucial law of June 25, 1920, which raised the top rate to 50 percent and can actually be seen as a second coming of the income tax, was adopted by the so-called blue-sky Chamber (one of the most right-wing Chambers of Deputies in the history of the French Republic) with its "National Bloc" majority, made up largely of the very delegations who had most vehemently opposed the creation of an income tax with a top rate of 2 percent before the war. This complete reversal of the right-wing position on progressive taxation was of course due to the disastrous financial situation created by the war. During the conflict the government had run up considerable debts, and despite the ritual speeches in which politician after politician declared that "Germany will pay," everyone knew that new fiscal resources would have to be found. Postwar shortages and the recourse to the printing press had driven inflation to previously unknown heights, so that the purchasing power of workers remained below 1914 levels, and several waves of strikes in May and June of 1919 threatened the country with paralysis. In such circumstances, political proclivities hardly mattered: new sources of revenue were essential, and no one believed that those with the highest incomes ought to be spared. The Bolshevik Revolution of 1917 was fresh in everyone's mind. It was in this chaotic and explosive situation that the modern progressive income tax was born.15
     The German case is particularly interesting, because Germany had had a progressive income tax for more than twenty years before the war. Throughout that period of peace, tax rates were never raised significantly. In Prussia, the top rate remained stable at 3 percent from 1891 to 1914 and then rose to 4 percent from 1915 to 1918, before ultimately shooting up to 40 percent in 1919–1920, in a radically changed political climate. In the United States, which was intellectually and politically more prepared than any other country to accept a steeply progressive income tax and would lead the movement in the interwar period, it was again not until 1918–1919 that the top rate was abruptly increased, first to 67 and then to 77 percent. In Britain, the top rate was set at 8 percent in 1909, a fairly high level for the time, but again it was not until after the war that it was suddenly raised to more than 40 percent.
     Of course it is impossible to say what would have happened had it not been for the shock of 1914–1918. A movement had clearly been launched. Nevertheless, it seems certain that had that shock not occurred, the move toward a more progressive tax system would at the very least have been much slower, and top rates might never have risen as high as they did. The rates in force before 1914, which were always below 10 percent (and generally below 5), including the top rates, were not very different from tax rates in the eighteenth and nineteenth centuries. Even though the progressive tax on total income was a creation of the late nineteenth and early twentieth centuries, there were much earlier forms of income tax, generally with different rules for different types of income, and usually with flat or nearly flat rates (for example, a flat rate after allowing for a certain fixed deduction). In most cases the rates were 5–10 percent (at most). For example, this was true of the categorical or schedular tax, which applied separate rates to each category (or schedule) of income (land rents, interest, profits, wages, etc.). Britain adopted such a categorical tax in 1842, and it remained the British version of the income tax until the creation in 1909 of a "supertax" (a progressive tax on total income).16
     In Ancien Régime France, there were also various forms of direct taxation of incomes, such as the taille, the dixième, and the vingtième, with typical rates of 5 or 10 percent (as the names indicate) applied to some but not all sources of income, with numerous exemptions. In 1707, Vauban proposed a "dixième royal," which was intended to be a 10 percent tax on all incomes (including rents paid to aristocratic and ecclesiastical landL-rds), but it was never fully implemented. Various improvements to the tax system were nevertheless attempted over the course of the eighteenth century.17 Revolutionary lawmakers, hostile to the inquisitorial methods of the fallen monarchy and probably keen as well to protect the emerging industrial bourgeoisie from bearing too heavy a tax burden, chose to institute an "indicial" tax system: taxes were calculated on the basis of indices that were supposed to reflect the taxpayer's ability to pay rather than actual income, which did not have to be declared. For instance, the "door and window tax" was based on the number of doors and windows in the taxpayer's primary residence, which was taken to be an index of wealth. Taxpayers liked this system because the authorities could determine how much tax they owed without having to enter their homes, much less examine their account books. The most important tax under the new system created in 1792, the property tax, was based on the rental value of all real estate owned by the taxpayer.18 The income tax was based on estimates of average rental value, which were revised once a decade when the tax authorities inventoried all property in France; taxpayers were not required to declare their actual income. Since inflation was slow, this made little difference. In practice, this real estate tax amounted to a flat tax on rents and was not very different from the British categorical tax. (The effective rate varied from time to time and département to département but never exceeded 10 percent.)
     To round out the system, the nascent Third Republic decided in 1872 to impose a tax on income from financial assets. This was a flat tax on interest, dividends, and other financial revenues, which were rapidly proliferating in France at the time but almost totally exempt from taxation, even though similar revenues were taxed in Britain. Once again, however, the tax rate was set quite low (3 percent from 1872 to 1890 and then 4 percent from 1890 to 1914), at any rate in comparison with the rates assessed after 1920. Until World War I, it seems to have been the case in all the developed countries that a tax on income was not considered "reasonable" unless the rate was under 10 percent, no matter how high the taxable income.
 The Progressive Tax in the Third Republic

     Interestingly, this was also true of the progressive inheritance or estate tax, which, along with the progressive income tax, was the second important fiscal innovation of the early twentieth century. Estate tax rates also remained quite low until 1914 (see Figure 14.2). Once again, the case of France under the Third Republic is emblematic: here was a country that was supposed to nurse a veritable passion for the ideal of equality, in which universal male suffrage was reestablished in 1871, and which nevertheless stubbornly refused for nearly half a century to fully embrace the principle of progressive taxation. Attitudes did not really change until World War I made change inevitable. To be sure, the estate tax instituted by the French Revolution, which remained strictly proportional from 1791 to 1901, was made progressive by the law of February 25, 1901. In reality, however, not much changed: the highest rate was set at 5 percent from 1902 to 1910 and then at 6.5 percent from 1911 to 1914 and applied to only a few dozen fortunes every year. In the eyes of wealthy taxpayers, such rates seemed exorbitant. Many felt that it was a "sacred duty" to ensure that "a son would succeed his father," thereby perpetuating the family property, and that such straightforward perpetuation should not incur a tax of any kind.19 In reality, however, the low inheritance tax did not prevent estates from being passed on largely intact from one generation to the next. The effective average rate on the top centile of inheritances was no more than 3 percent after the reform of 1901 (compared to 1 percent under the proportional regime in force in the nineteenth century). In hindsight, it is clear that the reform had scarcely any impact on the process of accumulation and hyperconcentration of wealth that was under way at the time, regardless of what contemporaries may have believed.
     It is striking, moreover, how frequently opponents of progressive taxation, who were clearly in the majority among the economic and financial elite of Belle Époque France, rather hypocritically relied on the argument that France, being a naturally egalitarian country, had no need of progressive taxes. A typical and particularly instructive example is that of Paul Leroy-Beaulieu, one of the most influential economists of the day, who in 1881 published his famous Essai sur la répartition des richesses et sur la tendance à une moindre inégalité des conditions (Essay on the Distribution of Wealth and the Tendency toward Reduced Inequality of Conditions), a work that went through numerous editions up to the eve of World War I.20 Leroy-Beaulieu actually had no data of any kind to justify his belief in a "tendency toward a reduced inequality of conditions." But never mind that: he managed to come up with dubious and not very convincing arguments based on totally irrelevant statistics to show that income inequality was decreasing.21 At times he seemed to notice that his argument was flawed, and he then simply stated that reduced inequality was just around the corner and that in any case nothing of any kind must be done to interfere with the miraculous process of commercial and financial globalization, which allowed French savers to invest in the Panama and Suez canals and would soon extend to czarist Russia. Clearly, Leroy-Beaulieu was fascinated by the globalization of his day and scared stiff by the thought that a sudden revolution might put it all in jeopardy.22 There is of course nothing inherently reprehensible about such a fascination as long as it does not stand in the way of sober analysis. The great issue in France in 1900–1910 was not the imminence of a Bolshevik revolution (which was no more likely than a revolution is today) but the advent of progressive taxation. For Leroy-Beaulieu and his colleagues of the "center right" (in contrast to the monarchist right), there was one unanswerable argument to progressivity, which right-thinking people should oppose tooth and nail: France, he maintained, became an egalitarian country thanks to the French Revolution, which redistributed the land (up to a point) and above all established equality before the law with the Civil Code, which instituted equal property rights and the right of free contract. Hence there was no need for a progressive and confiscatory tax. Of course, he added, such a tax might well be useful in a class-ridden aristocratic society like that of Britain, across the English Channel, but not in France.23
      

     FIGURE 14.2.   Top inheritance tax rates, 1900–2013
     The top marginal tax rate of the inheritance tax (applying to the highest inheritances) in the United States dropped from 70 percent in 1980 to 35 percent in 2013.
     Sources and series: see piketty.pse.ens.fr/capital21c.
     As it happens, if Leroy-Beaulieu had bothered to consult the probate records published by the tax authorities shortly after the reform of 1901, he would have discovered that wealth was nearly as concentrated in republican France during the Belle Époque as it was in monarchical Britain. In parliamentary debate in 1907 and 1908, proponents of the income tax frequently referred to these statistics.24 This interesting example shows that even a tax with low rates can be a source of knowledge and a force for democratic transparency.
     In other countries the estate tax was also transformed after World War I. In Germany, the idea of imposing a small tax on the very largest estates was extensively discussed in parliamentary debate at the end of the nineteenth century and beginning of the twentieth. Leaders of the Social Democratic Party, starting with August Bebel and Eduard Bernstein, pointed out that an estate tax would make it possible to decrease the heavy burden of indirect taxes on workers, who would then be able to improve their lot. But the Reichstag could not agree on a new tax: the reforms of 1906 and 1909 did institute a very small estate tax, but bequests to a spouse or children (that is, the vast majority of estates) were entirely exempt, no matter how large. It was not until 1919 that the German estate tax was extend to family bequests, and the top rate (on the largest estates) was abruptly increased from 0 to 35 percent.25 The role of the war and of the political changes it induced seems to have been absolutely crucial: it is hard to see how the stalemate of 1906–1909 would have been overcome otherwise.26
     Figure 14.2 shows a slight upward tick in Britain around the turn of the century, somewhat greater for the estate tax than for the income tax. The rate on the largest estates, which had been 8 percent since the reform of 1896, rose to 15 percent in 1908—a fairly substantial amount. In the United States, a federal tax on estates and gifts was not instituted until 1916, but its rate very quickly rose to levels higher than those found in France and Germany.
 Confiscatory Taxation of Excessive Incomes: An American Invention

     When we look at the history of progressive taxation in the twentieth century, it is striking to see how far out in front Britain and the United States were, especially the latter, which invented the confiscatory tax on "excessive" incomes and fortunes. Figures 14.1 and 14.2 are particularly clear in this regard. This finding stands in such stark contrast to the way most people both inside and outside the United States and Britain have seen those two countries since 1980 that it is worth pausing a moment to consider the point further.
     Between the two world wars, all the developed countries began to experiment with very high top rates, frequently in a rather erratic fashion. But it was the United States that was the first country to try rates above 70 percent, first on income in 1919–1922 and then on estates in 1937–1939. When a government taxes a certain level of income or inheritance at a rate of 70 or 80 percent, the primary goal is obviously not to raise additional revenue (because these very high brackets never yield much). It is rather to put an end to such incomes and large estates, which lawmakers have for one reason or another come to regard as socially unacceptable and economically unproductive—or if not to end them, then at least to make it extremely costly to sustain them and strongly discourage their perpetuation. Yet there is no absolute prohibition or expropriation. The progressive tax is thus a relatively liberal method for reducing inequality, in the sense that free competition and private property are respected while private incentives are modified in potentially radical ways, but always according to rules thrashed out in democratic debate. The progressive tax thus represents an ideal compromise between social justice and individual freedom. It is no accident that the United States and Britain, which throughout their histories have shown themselves to value individual liberty highly, adopted more progressive tax systems than many other countries. Note, however, that the countries of continental Europe, especially France and Germany, explored other avenues after World War II, such as taking public ownership of firms and directly setting executive salaries. These measures, which also emerged from democratic deliberation, in some ways served as substitutes for progressive taxes.27
     Other, more specific factors also mattered. During the Gilded Age, many observers in the United States worried that the country was becoming increasingly inegalitarian and moving farther and farther away from its original pioneering ideal. In Willford King's 1915 book on the distribution of wealth in the United States, he worried that the nation was becoming more like what he saw as the hyperinegalitarian societies of Europe.28 In 1919, Irving Fisher, then president of the American Economic Association, went even further. He chose to devote his presidential address to the question of US inequality and in no uncertain terms told his colleagues that the increasing concentration of wealth was the nation's foremost economic problem. Fisher found King's estimates alarming. The fact that "2 percent of the population owns more than 50 percent of the wealth" and that "two-thirds of the population owns almost nothing" struck him as "an undemocratic distribution of wealth," which threatened the very foundations of US society. Rather than restrict the share of profits or the return on capital arbitrarily—possibilities Fisher mentioned only to reject them—he argued that the best solution was to impose a heavy tax on the largest estates (he mentioned a tax rate of two-thirds the size of the estate, rising to 100 percent if the estate was more than three generations old).29 It is striking to see how much more Fisher worried about inequality than Leroy-Beaulieu did, even though Leroy-Beaulieu lived in a far more inegalitarian society. The fear of coming to resemble Old Europe was no doubt part of the reason for the American interest in progressive taxes.
     Furthermore, the Great Depression of the 1930s struck the United States with extreme force, and many people blamed the economic and financial elites for having enriched themselves while leading the country to ruin. (Bear in mind that the share of top incomes in US national income peaked in the late 1920s, largely due to enormous capital gains on stocks.) Roosevelt came to power in 1933, when the crisis was already three years old and one-quarter of the country was unemployed. He immediately decided on a sharp increase in the top income tax rate, which had been decreased to 25 percent in the late 1920s and again under Hoover's disastrous presidency. The top rate rose to 63 percent in 1933 and then to 79 percent in 1937, surpassing the previous record of 1919. In 1942 the Victory Tax Act raised the top rate to 88 percent, and in 1944 it went up again to 94 percent, due to various surtaxes. The top rate then stabilized at around 90 percent until the mid-1960s, but then it fell to 70 percent in the early 1980s. All told, over the period 1932–1980, nearly half a century, the top federal income tax rate in the United States averaged 81 percent.30
     It is important to emphasize that no continental European country has ever imposed such high rates (except in exceptional circumstances, for a few years at most, and never for as long as half a century). In particular, France and Germany had top rates between 50 and 70 percent from the late 1940s until the 1980s, but never as high as 80–90 percent. The only exception was Germany in 1947–1949, when the rate was 90 percent. But this was a time when the tax schedule was fixed by the occupying powers (in practice, the US authorities). As soon as Germany regained fiscal sovereignty in 1950, the country quickly returned to rates more in keeping with its traditions, and the top rate fell within a few years to just over 50 percent (see Figure 14.1). We see exactly the same phenomenon in Japan.31
     The Anglo-Saxon attraction to progressive taxation becomes even clearer when we look at the estate tax. In the United States, the top estate tax rate remained between 70 and 80 percent from the 1930s to the 1980s, while in France and Germany the top rate never exceeded 30–40 percent except for the years 1946–1949 in Germany (see Figure 14.2).32
     The only country to match or surpass peak US estate tax rates was Britain. The rates applicable to the highest British incomes as well as estates in the 1940s was 98 percent, a peak attained again in the 1970s—an absolute historical record.33 Note, too, that both countries distinguished between "earned income," that is, income from labor (including both wages and nonwage compensation) and "unearned income," meaning capital income (rent, interests, dividends, etc.). The top rates indicated in Figure 14.1 for the United States and Britain applied to unearned income. At times, the top rate on earned income was slightly lower, especially in the 1970s.34 This distinction is interesting, because it is a translation into fiscal terms of the suspicion that surrounded very high incomes: all excessively high incomes were suspect, but unearned incomes were more suspect than earned incomes. The contrast between attitudes then and now, with capital income treated more favorably today than labor income in many countries, especially in Europe, is striking. Note, too, that although the threshold for application of the top rates has varied over time, it has always been extremely high: expressed in terms of average income in the decade 2000–2010, the threshold has generally ranged between 500,000 and 1 million euros. In terms of today's income distribution, the top rate would therefore apply to less than 1 percent of the population (generally somewhere between 0.1 and 0.5 percent).
     The urge to tax unearned income more heavily than earned income reflects an attitude that is also consistent with a steeply progressive inheritance tax. The British case is particularly interesting in a long-run perspective. Britain was the country with the highest concentration of wealth in the nineteenth and early twentieth centuries. The shocks (destruction, expropriation) endured by large fortunes fell less heavily there than on the continent, yet Britain chose to impose its own fiscal shock—less violent than war but nonetheless significant: the top rate ranged from 70 to 80 percent or more throughout the period 1940–1980. No other country devoted more thought to the taxation of inheritances in the twentieth century, especially between the two world wars.35 In November 1938, Josiah Wedgwood, in the preface to a new edition of his classic 1929 book on inheritance, agreed with his compatriot Bertrand Russell that the "plutodemocracies" and their hereditary elites had failed to stem the rise of fascism. He was convinced that "political democracies that do not democratize their economic systems are inherently unstable." In his eyes, a steeply progressive inheritance tax was the main tool for achieving the economic democratization that he believed to be necessary.36
 The Explosion of Executive Salaries: The Role of Taxation

     After experiencing a great passion for equality from the 1930s through the 1970s, the United States and Britain veered off with equal enthusiasm in the opposite direction. Over the past three decades, their top marginal income tax rates, which had been significantly higher than the top rates in France and Germany, fell well below French and German levels. While the latter remained stable at 50–60 percent from 1930 to 2010 (with a slight decrease toward the end of the period), British and US rates fell from 80–90 percent in 1930–1980 to 30–40 percent in 1980–2010 (with a low point of 28 percent after the Reagan tax reform of 1986) (see Figure 14.1).37 The Anglo-Saxon countries have played yo-yo with the wealthy since the 1930s. By contrast, attitudes toward top incomes in both continental Europe (of which Germany and France are fairly typical) and Japan have held steady. I showed in Part One that part of the explanation for this difference might be that the United States and Britain came to feel that they were being overtaken by other countries in the 1970s. This sense that other countries were catching up contributed to the rise of Thatcherism and Reaganism. To be sure, the catch-up that occurred between 1950 and 1980 was largely a mechanical consequence of the shocks endured by continental Europe and Japan between 1914 and 1945. The people of Britain and the United States nevertheless found it hard to accept: for countries as well as individuals, the wealth hierarchy is not just about money; it is also a matter of honor and moral values. What were the consequences of this great shift in attitudes in the United States and Britain?
     If we look at all the developed countries, we find that the size of the decrease in the top marginal income tax rate between 1980 and the present is closely related to the size of the increase in the top centile's share of national income over the same period. Concretely, the two phenomena are perfectly correlated: the countries with the largest decreases in their top tax rates are also the countries where the top earners' share of national income has increased the most (especially when it comes to the remuneration of executives of large firms). Conversely, the countries that did not reduce their top tax rates very much saw much more moderate increases in the top earners' share of national income.38 If one believes the classic economic models based on the theory of marginal productivity and the labor supply, one might try to explain this by arguing that the decrease in top tax rates spurred top executive talent to increase their labor supply and productivity. Since their marginal productivity increased, their salaries increased commensurately and therefore rose well above executive salaries in other countries. This explanation is not very plausible, however. As I showed in Chapter 9, the theory of marginal productivity runs into serious conceptual and economic difficulties (in addition to suffering from a certain naïveté) when it comes to explaining how pay is determined at the top of the income hierarchy.
     A more realistic explanation is that lower top income tax rates, especially in the United States and Britain, where top rates fell dramatically, totally transformed the way executive salaries are determined. It is always difficult for an executive to convince other parties involved in the firm (direct subordinates, workers lower down in the hierarchy, stockholders, and members of the compensation committee) that a large pay raise—say of a million dollars—is truly justified. In the 1950s and 1960s, executives in British and US firms had little reason to fight for such raises, and other interested parties were less inclined to accept them, because 80–90 percent of the increase would in any case go directly to the government. After 1980, the game was utterly transformed, however, and the evidence suggests that executives went to considerable lengths to persuade other interested parties to grant them substantial raises. Because it is objectively difficult to measure individual contributions to a firm's output, top managers found it relatively easy to persuade boards and stockholders that they were worth the money, especially since the members of compensation committees were often chosen in a rather incestuous manner.
     Furthermore, this "bargaining power" explanation is consistent with the fact that there is no statistically significant relationship between the decrease in top marginal tax rates and the rate of productivity growth in the developed countries since 1980. Concretely, the crucial fact is that the rate of per capita GDP growth has been almost exactly the same in all the rich countries since 1980. In contrast to what many people in Britain and the United States believe, the true figures on growth (as best one can judge from official national accounts data) show that Britain and the United States have not grown any more rapidly since 1980 than Germany, France, Japan, Denmark, or Sweden.39 In other words, the reduction of top marginal income tax rates and the rise of top incomes do not seem to have stimulated productivity (contrary to the predictions of supply-side theory) or at any rate did not stimulate productivity enough to be statistically detectable at the macro level.40
     Considerable confusion exists around these issues because comparisons are often made over periods of just a few years (a procedure that can be used to justify virtually any conclusion).41 Or one forgets to correct for population growth (which is the primary reason for the structural difference in GDP growth between the United States and Europe). Sometimes the level of per capita output (which has always been about 20 percent higher in the United States, in 1970–1980 as well as 2000–2010) is confused with the growth rate (which has been about the same on both continents over the past three decades).42 But the principal source of confusion is probably the catch-up phenomenon mentioned above. There can be no doubt that British and US decline ended in the 1970s, in the sense that growth rates in Britain and the United States, which had been lower than growth rates in Germany, France, Scandinavia, and Japan, ceased to be so. But it is also incontestable that the reason for this convergence is quite simple: Europe and Japan had caught up with the United States and Britain. Clearly, this had little to do with the conservative revolution in the latter two countries in the 1980s, at least to a first approximation.43
     No doubt these issues are too strongly charged with emotion and too closely bound up with national identities and pride to allow for calm examination. Did Maggie Thatcher save Britain? Would Bill Gates's innovations have existed without Ronald Reagan? Will Rhenish capitalism devour the French social model? In the face of such powerful existential anxieties, reason is often at a loss, especially since it is objectively quite difficult to draw perfectly precise and absolutely unassailable conclusions on the basis of growth rate comparisons that reveal differences of a few tenths of a percent. As for Bill Gates and Ronald Reagan, each with his own cult of personality (Did Bill invent the computer or just the mouse? Did Ronnie destroy the USSR single-handedly or with the help of the pope?), it may be useful to recall that the US economy was much more innovative in 1950–1970 than in 1990–2010, to judge by the fact that productivity growth was nearly twice as high in the former period as in the latter, and since the United States was in both periods at the world technology frontier, this difference must be related to the pace of innovation.44 A new argument has recently been advanced: it is possible that the US economy has become more innovative in recent years but that this innovation does not show up in the productivity figures because it spilled over into the other wealthy countries, which have thrived on US inventions. It would nevertheless be quite astonishing if the United States, which has not always been hailed for international altruism (Europeans regularly complain about US carbon emissions, while the poor countries complain about American stinginess) were proven not to have retained some of this enhanced productivity for itself. In theory, that is the purpose of patents. Clearly, the debate is nowhere close to over.45
     In an attempt to make some progress on these issues, Emmanuel Saez, Stefanie Stantcheva, and I have tried to go beyond international comparisons and to make use of a new database containing information about executive compensation in listed companies throughout the developed world. Our findings suggest that skyrocketing executive pay is fairly well explained by the bargaining model (lower marginal tax rates encourage executives to negotiate harder for higher pay) and does not have much to do with a hypothetical increase in managerial productivity.46 We again found that the elasticity of executive pay is greater with respect to "luck" (that is, variations in earnings that cannot have been due to executive talent, because, for instance, other firms in the same sector did equally well) than with respect to "talent" (variations not explained by sector variables). As I explained in Chapter 9, this finding poses serious problems for the view that high executive pay is a reward for good performance. Furthermore, we found that elasticity with respect to luck—broadly speaking, the ability of executives to obtain raises not clearly justified by economic performance—was higher in countries where the top marginal tax rate was lower. Finally, we found that variations in the marginal tax rate can explain why executive pay rose sharply in some countries and not in others. In particular, variations in company size and in the importance of the financial sector definitely cannot explain the observed facts.47 Similarly, the idea that skyrocketing executive pay is due to lack of competition, and that more competitive markets and better corporate governance and control would put an end to it, seems unrealistic.48 Our findings suggest that only dissuasive taxation of the sort applied in the United States and Britain before 1980 can do the job.49 In regard to such a complex and comprehensive question (which involves political, social, and cultural as well as economic factors), it is obviously impossible to be totally certain: that is the beauty of the social sciences. It is likely, for instance, that social norms concerning executive pay directly influence the levels of compensation we observe in different countries, independent of the influence of tax rates. Nevertheless, the available evidence suggests that our explanatory model gives the best explanation of the observed facts.
 Rethinking the Question of the Top Marginal Rate

     These findings have important implications for the desirable degree of fiscal progressivity. Indeed, they indicate that levying confiscatory rates on top incomes is not only possible but also the only way to stem the observed increase in very high salaries. According to our estimates, the optimal top tax rate in the developed countries is probably above 80 percent.50 Do not be misled by the apparent precision of this estimate: no mathematical formula or econometric estimate can tell us exactly what tax rate ought to be applied to what level of income. Only collective deliberation and democratic experimentation can do that. What is certain, however, is that our estimates pertain to extremely high levels of income, those observed in the top 1 percent or 0.5 percent of the income hierarchy. The evidence suggests that a rate on the order of 80 percent on incomes over $500,000 or $1 million a year not only would not reduce the growth of the US economy but would in fact distribute the fruits of growth more widely while imposing reasonable limits on economically useless (or even harmful) behavior. Obviously it would be easier to apply such a policy in a country the size of the United States than in a small European country where close fiscal coordination with neighboring countries is lacking. I say more about international coordination in the next chapter; here I will simply note that the United States is big enough to apply this type of fiscal policy effectively. The idea that all US executives would immediately flee to Canada and Mexico and no one with the competence or motivation to run the economy would remain is not only contradicted by historical experience and by all the firm-level data at our disposal; it is also devoid of common sense. A rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level but without reducing the productivity of the US economy, so that pay would rise at lower levels. In order for the government to obtain the revenues it sorely needs to develop the meager US social state and invest more in health and education (while reducing the federal deficit), taxes would also have to be raised on incomes lower in the distribution (for example, by imposing rates of 50 or 60 percent on incomes above $200,000).51 Such a social and fiscal policy is well within the reach of the United States.
     Nevertheless, it seems quite unlikely that any such policy will be adopted anytime soon. It is not even certain that the top marginal income tax rate in the United States will be raised as high as 40 percent in Obama's second term. Has the US political process been captured by the 1 percent? This idea has become increasingly popular among observers of the Washington political scene.52 For reasons of natural optimism as well as professional predilection, I am inclined to grant more influence to ideas and intellectual debate. Careful examination of various hypotheses and bodies of evidence, and access to better data, can influence political debate and perhaps push the process in a direction more favorable to the general interest. For example, as I noted in Part Three, US economists often underestimate the increase in top incomes because they rely on inadequate data (especially survey data that fails to capture the very highest incomes). As a result, they pay too much attention to wage gaps between workers with different skill levels (a crucial question for the long run but not very relevant to understanding why the 1 percent have pulled so far ahead—the dominant phenomenon from a macroeconomic point of view).53 The use of better data (in particular, tax data) may therefore ultimately focus attention on the right questions.
     That said, the history of the progressive tax over the course of the twentieth century suggests that the risk of a drift toward oligarchy is real and gives little reason for optimism about where the United States is headed. It was war that gave rise to progressive taxation, not the natural consequences of universal suffrage. The experience of France in the Belle Époque proves, if proof were needed, that no hypocrisy is too great when economic and financial elites are obliged to defend their interests—and that includes economists, who currently occupy an enviable place in the US income hierarchy.54 Some economists have an unfortunate tendency to defend their private interest while implausibly claiming to champion the general interest.55 Although data on this are sparse, it also seems that US politicians of both parties are much wealthier than their European counterparts and in a totally different category from the average American, which might explain why they tend to confuse their own private interest with the general interest. Without a radical shock, it seems fairly likely that the current equilibrium will persist for quite some time. The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century's globalized economy.

    \'7bFIFTEEN\'7d

     A Global Tax on Capital

     To regulate the globalized patrimonial capitalism of the twenty-first century, rethinking the twentieth-century fiscal and social model and adapting it to today's world will not be enough. To be sure, appropriate updating of the last century's social-democratic and fiscal-liberal program is essential, as I tried to show in the previous two chapters, which focused on two fundamental institutions that were invented in the twentieth century and must continue to play a central role in the future: the social state and the progressive income tax. But if democracy is to regain control over the globalized financial capitalism of this century, it must also invent new tools, adapted to today's challenges. The ideal tool would be a progressive global tax on capital, coupled with a very high level of international financial transparency. Such a tax would provide a way to avoid an endless inegalitarian spiral and to control the worrisome dynamics of global capital concentration. Whatever tools and regulations are actually decided on need to be measured against this ideal. I will begin by analyzing practical aspects of such a tax and then proceed to more general reflections about the regulation of capitalism from the prohibition of usury to Chinese capital controls.
 A Global Tax on Capital: A Useful Utopia

     A global tax on capital is a utopian idea. It is hard to imagine the nations of the world agreeing on any such thing anytime soon. To achieve this goal, they would have to establish a tax schedule applicable to all wealth around the world and then decide how to apportion the revenues. But if the idea is utopian, it is nevertheless useful, for several reasons. First, even if nothing resembling this ideal is put into practice in the foreseeable future, it can serve as a worthwhile reference point, a standard against which alternative proposals can be measured. Admittedly, a global tax on capital would require a very high and no doubt unrealistic level of international cooperation. But countries wishing to move in this direction could very well do so incrementally, starting at the regional level (in Europe, for instance). Unless something like this happens, a defensive reaction of a nationalist stripe would very likely occur. For example, one might see a return to various forms of protectionism coupled with imposition of capital controls. Because such policies are seldom effective, however, they would very likely lead to frustration and increase international tensions. Protectionism and capital controls are actually unsatisfactory substitutes for the ideal form of regulation, which is a global tax on capital—a solution that has the merit of preserving economic openness while effectively regulating the global economy and justly distributing the benefits among and within nations. Many people will reject the global tax on capital as a dangerous illusion, just as the income tax was rejected in its time, a little more than a century ago. When looked at closely, however, this solution turns out to be far less dangerous than the alternatives.
     To reject the global tax on capital out of hand would be all the more regrettable because it is perfectly possible to move toward this ideal solution step by step, first at the continental or regional level and then by arranging for closer cooperation among regions. One can see a model for this sort of approach in the recent discussions on automatic sharing of bank data between the United States and the European Union. Furthermore, various forms of capital taxation already exist in most countries, especially in North America and Europe, and these could obviously serve as starting points. The capital controls that exist in China and other emerging countries also hold useful lessons for all. There are nevertheless important differences between these existing measures and the ideal tax on capital.
     First, the proposals for automatic sharing of banking information currently under discussion are far from comprehensive. Not all asset types are included, and the penalties envisioned are clearly insufficient to achieve the desired results (despite new US banking regulations that are more ambitious than any that exist in Europe). The debate is only beginning, and it is unlikely to produce tangible results unless relatively heavy sanctions are imposed on banks and, even more, on countries that thrive on financial opacity.
     The issue of financial transparency and information sharing is closely related to the ideal tax on capital. Without a clear idea of what all the information is to be used for, current data-sharing proposals are unlikely to achieve the desired result. To my mind, the objective ought to be a progressive annual tax on individual wealth—that is, on the net value of assets each person controls. For the wealthiest people on the planet, the tax would thus be based on individual net worth—the kinds of numbers published by Forbes and other magazines. (And collecting such a tax would tell us whether the numbers published in the magazines are anywhere near correct.) For the rest of us, taxable wealth would be determined by the market value of all financial assets (including bank deposits, stocks, bonds, partnerships, and other forms of participation in listed and unlisted firms) and nonfinancial assets (especially real estate), net of debt. So much for the basis of the tax. At what rate would it be levied? One might imagine a rate of 0 percent for net assets below 1 million euros, 1 percent between 1 and 5 million, and 2 percent above 5 million. Or one might prefer a much more steeply progressive tax on the largest fortunes (for example, a rate of 5 or 10 percent on assets above 1 billion euros). There might also be advantages to having a minimal rate on modest-to-average wealth (for example, 0.1 percent below 200,000 euros and 0.5 percent between 200,000 and 1 million).
     I discuss these issues later on. Here, the important point to keep in mind is that the capital tax I am proposing is a progressive annual tax on global wealth. The largest fortunes are to be taxed more heavily, and all types of assets are to be included: real estate, financial assets, and business assets—no exceptions. This is one clear difference between my proposed capital tax and the taxes on capital that currently exist in one country or another, even though important aspects of those existing taxes should be retained. To begin with, nearly every country taxes real estate: the English-speaking countries have "property taxes," while France has a taxe foncière. One drawback of these taxes is that they are based solely on real property. (Financial assets are ignored, and property is taxed at its market value regardless of debt, so that a heavily indebted person is taxed in the same way as a person with no debt.) Furthermore, real estate is generally taxed at a flat rate, or close to it. Still, such taxes exist and generate significant revenue in most developed countries, especially in the English-speaking world (typically 1–2 percent of national income). Furthermore, property taxes in some countries (such as the United States) rely on fairly sophisticated assessment procedures with automatic adjustment to changing market values, procedures that ought to be generalized and extended to other asset classes. In some European countries (including France, Switzerland, Spain, and until recently Germany and Sweden), there are also progressive taxes on total wealth. Superficially, these taxes are closer in spirit to the ideal capital tax I am proposing. In practice, however, they are often riddled with exemptions. Many asset classes are left out, while others are assessed at arbitrary values having nothing to do with their market value. That is why several countries have moved to eliminate such taxes. it is important to heed the lessons of these various experiences in order to design an appropriate capital tax for the century ahead.
 Democratic and Financial Transparency

     What tax schedule is ideal for my proposed capital tax, and what revenues should we expect such a tax to produce? Before I attempt to answer these questions, note that the proposed tax is in no way intended to replace all existing taxes. It would never be more than a fairly modest supplement to the other revenue streams on which the modern social state depends: a few points of national income (three or four at most—still nothing to sneeze at).1 The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world.
     Why is the goal of transparency so important? Imagine a very low global tax on capital, say a flat rate of 0.1 percent a year on all assets. The revenue from such a tax would of course be limited, by design: if the global stock of private capital is about five years of global income, the tax would generate revenue equal to 0.5 percent of global income, with minor variations from country to country according to their capital/income ratio (assuming that the tax is collected in the country where the owner of the asset resides and not where the asset itself is located—an assumption that can by no means be taken for granted). Even so, such a limited tax would already play a very useful role.
     First, it would generate information about the distribution of wealth. National governments, international organizations, and statistical offices around the world would at last be able to produce reliable data about the evolution of global wealth. Citizens would no longer be forced to rely on Forbes, glossy financial reports from global wealth managers, and other unofficial sources to fill the official statistical void. (Recall that I explored the deficiencies of those unofficial sources in Part Three.) Instead, they would have access to public data based on clearly prescribed methods and information provided under penalty of law. The benefit to democracy would be considerable: it is very difficult to have a rational debate about the great challenges facing the world today—the future of the social state, the cost of the transition to new sources of energy, state-building in the developing world, and so on—because the global distribution of wealth remains so opaque. Some people think that the world's billionaires have so much money that it would be enough to tax them at a low rate to solve all the world's problems. Others believe that there are so few billionaires that nothing much would come of taxing them more heavily. As we saw in Part Three, the truth lies somewhere between these two extremes. In macroeconomic terms, one probably has to descend a bit in the wealth hierarchy (to fortunes of 10–100 million euros rather than 1 billion) to obtain a tax basis large enough to make a difference. I have also discovered some objectively disturbing trends: without a global tax on capital or some similar policy, there is a substantial risk that the top centile's share of global wealth will continue to grow indefinitely—and this should worry everyone. In any case, truly democratic debate cannot proceed without reliable statistics.
     The stakes for financial regulation are also considerable. The international organizations currently responsible for overseeing and regulating the global financial system, starting with the IMF, have only a very rough idea of the global distribution of financial assets, and in particular of the amount of assets hidden in tax havens. As I have shown, the planet's financial accounts are not in balance. (Earth seems to be perpetually indebted to Mars.) Navigating our way through a global financial crisis blanketed in such a thick statistical fog is fraught with peril. Take, for example, the Cypriot banking crisis of 2013. Neither the European authorities nor the IMF had much information about who exactly owned the financial assets deposited in Cyprus or what amounts they owned, hence their proposed solutions proved crude and ineffective. As we will see in the next chapter, greater financial transparency would not only lay the groundwork for a permanent annual tax on capital; it would also pave the way to a more just and efficient management of banking crises like the one in Cyprus, possibly by way of carefully calibrated and progressive special levies on capital.
     An 0.1 percent tax on capital would be more in the nature of a compulsory reporting law than a true tax. Everyone would be required to report ownership of capital assets to the world's financial authorities in order to be recognized as the legal owner, with all the advantages and disadvantages thereof. As noted, this was what the French Revolution accomplished with its compulsory reporting and cadastral surveys. The capital tax would be a sort of cadastral financial survey of the entire world, and nothing like it currently exists.2 It is important to understand that a tax is always more than just a tax: it is also a way of defining norms and categories and imposing a legal framework on economic activity. This has always been the case, especially in regard to land ownership.3 In the modern era, the imposition of new taxes around the time of World War I required precise definitions of income, wages, and profits. This fiscal innovation in turn fostered the development of accounting standards, which had not previously existed. One of the main goals of a tax on capital would thus be to refine the definitions of various asset types and set rules for valuing assets, liabilities, and net wealth. Under the private accounting standards now in force, prescribed procedures are imperfect and often vague. These flaws have contributed to the many financial scandals the world has seen since 2000.4
     Last but not least, a capital tax would force governments to clarify and broaden international agreements concerning the automatic sharing of banking data. The principle is quite simple: national tax authorities should receive all the information they need to calculate the net wealth of every citizen. Indeed, the capital tax should work in the same way as the income tax currently does in many countries, where data on income are provided to the tax authorities by employers (via the W-2 and 1099 forms in the United States, for example). There should be similar reporting on capital assets (indeed, income and capital reporting could be combined into one form). All taxpayers would receive a form listing their assets and liabilities as reported to the tax authorities. Many US states use this method to administer the property tax: taxpayers receive an annual form indicating the current market value of any real estate they own, as calculated by the government on the basis of observed prices in transactions involving comparable properties. Taxpayers can of course challenge these valuations with appropriate evidence. In practice, corrections are rare, because data on real estate transactions are readily available and hard to contest: nearly everyone is aware of changing real estate values in the local market, and the authorities have comprehensive databases at their disposal.5 Note, in passing, that this reporting method has two advantages: it makes the taxpayer's life simple and eliminates the inevitable temptation to slightly underestimate the value of one's own property.6
     It is essential—and perfectly feasible—to extend this reporting system to all types of financial assets (and debts). For assets and liabilities associated with financial institutions within national borders, this could be done immediately, since banks, insurance companies, and other financial intermediaries in most developed countries are already required to inform the tax authorities about bank accounts and other assets they administer. In France, for example, the government knows that Monsieur X owns an apartment worth 400,000 euros and a stock portfolio worth 200,000 euros and has 100,000 euros in outstanding debts. It could thus send him a form indicating these various amounts (along with his net worth of 500,000 euros) with a request for corrections and additions if appropriate. This type of automated system, applied to the entire population, is far better adapted to the twenty-first century than the archaic method of asking all persons to declare honestly how much they own.7
 A Simple Solution: Automatic Transmission of Banking Information

     The first step toward a global tax on capital should be to extend to the international level this type of automatic transmission of banking data in order to include information on assets held in foreign banks in the precomputed asset statements issued to each taxpayer. It is important to recognize that there is no technical obstacle to doing so. Banking data are already automatically shared with the tax authorities in a country with 300 million people like the United States, as well as in countries like France and Germany with populations of 60 and 80 million, respectively, so there is obviously no reason why including the banks in the Cayman Islands and Switzerland would radically increase the volume of data to be processed. Of course the tax havens regularly invoke other excuses for maintaining bank secrecy. One of these is the alleged worry that governments will misuse the information. This is not a very convincing argument: it is hard to see why it would not also apply to information about the bank accounts of those incautious enough to keep their money in the country where they pay taxes. The most plausible reason why tax havens defend bank secrecy is that it allows their clients to evade their fiscal obligations, thereby allowing the tax havens to share in the gains. Obviously this has nothing whatsoever to do with the principles of the market economy. No one has the right to set his own tax rates. It is not right for individuals to grow wealthy from free trade and economic integration only to rake off the profits at the expense of their neighbors. That is outright theft.
     To date, the most thoroughgoing attempt to end these practices is the Foreign Account Tax Compliance Act (FATCA) adopted in the United States in 2010 and scheduled to be phased in by stages in 2014 and 2015. It requires all foreign banks to inform the Treasury Department about bank accounts and investments held abroad by US taxpayers, along with any other sources of revenue from which they might benefit. This is a far more ambitious law than the 2003 EU directive on foreign savings, which concerns only interest-bearing deposit accounts (equity portfolios are not covered, which is unfortunate, since large fortunes are held primarily in the form of stocks, which are fully covered by FATCA) and applies only to European banks and not worldwide (again unlike FATCA). Even though the European directive is timid and almost meaningless, it is not enforced, since, despite numerous discussions and proposed amendments since 2008, Luxembourg and Austria managed to win from other EU member states an agreement to extend their exemption from automatic data reporting and retain their right to share information only on formal request. This system, which also applies to Switzerland and other territories outside the European Union,8 means that a government must already possess something close to proof of fraud in order to obtain information about the foreign bank accounts of one of its citizens. This obviously limits drastically the ability to detect and control fraud. In 2013, after Luxembourg and Switzerland announced their intention to abide by the provisions of FATCA, discussions in Europe resumed with the intention of incorporating some or all of these in a new EU directive. It is impossible to know when these discussions will conclude or whether they will lead to a legally binding agreement.
     Note, moreover, that in this realm there is often a chasm between the triumphant declarations of political leaders and the reality of what they accomplish. This is extremely worrisome for the future equilibrium of our democratic societies. It is particularly striking to discover that the countries that are most dependent on substantial tax revenues to pay for their social programs, namely the European countries, are also the ones that have accomplished the least, even though the technical challenges are quite simple. This is a good example of the difficult situation that smaller countries face in dealing with globalization. Nation-states built over centuries find that they are too small to impose and enforce rules on today's globalized patrimonial capitalism. The countries of Europe were able to unite around a single currency (to be discussed more extensively in the next chapter), but they have accomplished almost nothing in the area of taxation. The leaders of the largest countries in the European Union, who naturally bear primary responsibility for this failure and for the gaping chasm between their words and their actions, nevertheless continue to blame other countries and the institutions of the European Union itself. There is no reason to think that things will change anytime soon.
     Furthermore, although FATCA is far more ambitious than any EU directive in this realm, it, too, is insufficient. For one thing, its language is not sufficiently precise or comprehensive, so that there is good reason to believe that certain trust funds and foundations can legally avoid any obligation to report their assets. For another, the sanction envisioned by the law (a 30 percent surtax on income that noncompliant banks derive from their US operations) is insufficient. It may be enough to persuade certain banks (such as the big Swiss and Luxembourgian institutions that need to do business in the United States) to abide by the law, but there may well be a resurgence of smaller banks that specialize in managing overseas portfolios and do not operate on US soil. Such institutions, whether located in Switzerland, Luxembourg, London, or more exotic locales, can continue to manage the assets of US (or European) taxpayers without conveying any information to the authorities, with complete impunity.
     Very likely the only way to obtain tangible results is to impose automatic sanctions not only on banks but also on countries that refuse to require their financial institutions to provide the required information. One might contemplate, for example, a tariff of 30 percent or more on the exports of offending states. To be clear, the goal is not to impose a general embargo on tax havens or engage in an endless trade war with Switzerland or Luxembourg. Protectionism does not produce wealth, and free trade and economic openness are ultimately in everyone's interest, provided that some countries do not take advantage of their neighbors by siphoning off their tax base. The requirement to provide comprehensive banking data automatically should have been part of the free trade and capital liberalization agreements negotiated since 1980. It was not, but that is not a good reason to stick with the status quo forever. Countries that have thrived on financial opacity may find it difficult to accept reform, especially since a legitimate financial services industry often develops alongside illicit (or questionable) banking activities. The financial services industry responds to genuine needs of the real international economy and will obviously continue to exist no matter what regulations are adopted. Nevertheless, the tax havens will undoubtedly suffer significant losses if financial transparency becomes the norm.9 Such countries would be unlikely to agree to reform without sanctions, especially since other countries, and in particular the largest countries in the European Union, have not for the moment shown much determination to deal with the problem. Note, moreover, that the construction of the European Union has thus far rested on the idea that each country could have a single market and free capital flows without paying any price (or much of one). Reform is necessary, even indispensable, but it would be naïve to think that it will happen without a fight. Because it moves the debate away from the realm of abstractions and high-flown rhetoric and toward concrete sanctions, which are important, especially in Europe, FATCA is useful.
     Finally, note that neither FATCA nor the EU directives were intended to support a progressive tax on global wealth. Their purpose was primarily to provide the tax authorities with information about taxpayer assets to be used for internal purposes such as identifying omissions in income tax returns. The information can also be used to identify possible evasion of the estate tax or wealth tax (in countries that have one), but the primary emphasis is on enforcement of the income tax. Clearly, these various issues are closely related, and international financial transparency is a crucial matter for the modern fiscal state across the board.
 What Is the Purpose of a Tax on Capital?

     Suppose next that the tax authorities are fully informed about the net asset position of each citizen. Should they be content to tax wealth at a very low rate (of, say, 0.1 percent, in keeping with the logic of compulsory reporting), or should a more substantial tax be assessed, and if so, why? The key question can be reformulated as follows. Since a progressive income tax exists and, in most countries, a progressive estate tax as well, what is the purpose of a progressive tax on capital? In fact, these three progressive taxes play distinct and complementary roles. Each is an essential pillar of an ideal tax system.10 There are two distinct justifications of a capital tax: a contributive justification and an incentive justification.
     The contributive logic is quite simple: income is often not a well-defined concept for very wealthy individuals, and only a direct tax on capital can correctly gauge the contributive capacity of the wealthy. Concretely, imagine a person with a fortune of 10 billion euros. As we saw in our examination of the Forbes rankings, fortunes of this magnitude have increased very rapidly over the past three decades, with real growth rates of 6–7 percent a year or even higher for the wealthiest individuals (such as Liliane Bettencourt and Bill Gates).11 By definition, this means that income in the economic sense, including dividends, capital gains, and all other new resources capable of financing consumption and increasing the capital stock, amounted to at least 6–7 percent of the individual's capital (assuming that virtually none of this is consumed).12 To simplify things, imagine that the individual in question enjoys an economic income of 5 percent of her fortune of 10 billion euros, which would be 500 million a year. Now, it is unlikely that such an individual would declare an income of 500 million euros on her income tax return. In France, the United States, and all other countries we have studied, the largest incomes declared on income tax returns are generally no more than a few tens of millions of euros or dollars. Take Liliane Bettencourt, the L'Oréal heiress and the wealthiest person in France. According to information published in the press and revealed by Bettencourt herself, her declared income was never more than 5 million a year, or little more than one ten-thousandth of her wealth (which is currently more than 30 billion euros). Uncertainties about individual cases aside (they are of little importance), the income declared for tax purposes in a case like this is less than a hundredth of the taxpayer's economic income.13
     The crucial point here is that no tax evasion or undeclared Swiss bank account is involved (as far as we know). Even a person of the most refined taste and elegance cannot easily spend 500 million euros a year on current expenses. It is generally enough to take a few million a year in dividends (or some other type of payout) while leaving the remainder of the return on one's capital to accumulate in a family trust or other ad hoc legal entity created for the sole purpose of managing a fortune of this magnitude, just as university endowments are managed.
     This is perfectly legal and not inherently problematic.14 Nevertheless, it does present a challenge to the tax system. If some people are taxed on the basis of declared incomes that are only 1 percent of their economic incomes, or even 10 percent, then nothing is accomplished by taxing that income at a rate of 50 percent or even 98 percent. The problem is that this is how the tax system works in practice in the developed countries. Effective tax rates (expressed as a percentage of economic income) are extremely low at the top of the wealth hierarchy, which is problematic, since it accentuates the explosive dynamic of wealth inequality, especially when larger fortunes are able to garner larger returns. In fact, the tax system ought to attenuate this dynamic, not accentuate it.
     There are several ways to deal with this problem. One would be to tax all of a person's income, including the part that accumulates in trusts, holding companies, and partnerships. A simpler solution is to compute the tax due on the basis of wealth rather than income. One could then assume a flat yield (of, say, 5 percent a year) to estimate the income on the capital and include that amount in the income subject to a progressive income tax. Some countries, such as the Netherlands, have tried this but have run into a number of difficulties having to do with the range of assets covered and the choice of a return on capital.15 Another solution is to apply a progressive tax directly to an individual's total wealth. The important advantage of this approach is that one can vary the tax rate with the size of the fortune, since we know that in practice larger fortunes earn larger returns.
     In view of the finding that fortunes at the top of the wealth hierarchy are earning very high returns, this contributive argument is the most important justification of a progressive tax on capital. According to this reasoning, capital is a better indicator of the contributive capacity of very wealthy individuals than is income, which is often difficult to measure. A tax on capital is thus needed in addition to the income tax for those individuals whose taxable income is clearly too low in light of their wealth.16
     Nevertheless, another classic argument in favor of a capital tax should not be neglected. It relies on a logic of incentives. The basic idea is that a tax on capital is an incentive to seek the best possible return on one's capital stock. Concretely, a tax of 1 or 2 percent on wealth is relatively light for an entrepreneur who manages to earn 10 percent a year on her capital. By contrast, it is quite heavy for a person who is content to park her wealth in investments returning at most 2 or 3 percent a year. According to this logic, the purpose of the tax on capital is thus to force people who use their wealth inefficiently to sell assets in order to pay their taxes, thus ensuring that those assets wind up in the hands of more dynamic investors.
     There is some validity to this argument, but it should not be overstated.17 In practice, the return on capital does not depend solely on the talent and effort supplied by the capitalist. For one thing, the average return varies systematically with the size of the initial fortune. For another, individual returns are largely unpredictable and chaotic and are affected by all sorts of economic shocks. For example, there are many reasons why a firm might be losing money at any given point in time. A tax system based solely on the capital stock (and not on realized profits) would put disproportionate pressure on companies in the red, because their taxes would be as high when they were losing money as when they were earning high profits, and this could plunge them into bankruptcy.18 The ideal tax system is therefore a compromise between the incentive logic (which favors a tax on the capital stock) and an insurance logic (which favors a tax on the revenue stream stemming from capital).19 The unpredictability of the return on capital explains, moreover, why it is more efficient to tax heirs not once and for all, at the moment of inheritance (by way of the estate tax), but throughout their lives, via taxes based on both capital income and the value of the capital stock.20 In other words, all three types of tax—on inheritance, income, and capital—play useful and complementary roles (even if income is perfectly observable for all taxpayers, no matter how wealthy).21
 A Blueprint for a European Wealth Tax

     Taking all these factors into account, what is the ideal schedule for a tax on capital, and how much would such a tax bring in? To be clear, I am speaking here of a permanent annual tax on capital at a rate that must therefore be fairly moderate. A tax collected only once a generation, such as an inheritance tax, can be assessed at a very high rate: a third, a half, or even two-thirds, as was the case for the largest estates in Britain and the United States from 1930 to 1980.22 The same is true of exceptional one-time taxes on capital levied in unusual circumstances, such as the tax levied on capital in France in 1945 at rates as high as 25 percent, indeed 100 percent for additions to capital during the Occupation (1940–1945). Clearly, such taxes cannot be applied for very long: if the government takes a quarter of the nation's wealth every year, there will be nothing left to tax after a few years. That is why the rates of an annual tax on capital must be much lower, on the order of a few percent. To some this may seem surprising, but it is actually quite a substantial tax, since it is levied every year on the total stock of capital. For example, the property tax rate is frequently just 0.5–1 percent of the value of real estate, or a tenth to a quarter of the rental value of the property (assuming an average rental return of 4 percent a year).23
     The next point is important, and I want to insist on it: given the very high level of private wealth in Europe today, a progressive annual tax on wealth at modest rates could bring in significant revenue. Take, for example, a wealth tax of 0 percent on fortunes below 1 million euros, 1 percent between 1 and 5 million euros, and 2 percent above 5 million euros. If applied to all member states of the European Union, such a tax would affect about 2.5 percent of the population and bring in revenues equivalent to 2 percent of Europe's GDP.24 The high return should come as no surprise: it is due simply to the fact that private wealth in Europe today is worth more than five years of GDP, and much of that wealth is concentrated in the upper centiles of the distribution.25 Although a tax on capital would not by itself bring in enough to finance the social state, the additional revenues it would generate are nevertheless significant.
     In principle, each member state of the European Union could generate similar revenues by applying such a tax on its own. But without automatic sharing of bank information both inside and outside EU territory (starting with Switzerland among nonmember states) the risks of evasion would be very high. This partly explains why countries that have adopted a wealth tax (such as France, which employs a tax schedule similar to the one I am proposing) generally allow numerous exemptions, especially for "business assets" and, in practice, for nearly all large stakes in listed and unlisted companies. To do this is to drain much of the content from the progressive tax on capital, and that is why existing taxes have generated revenues so much smaller than the ones described above.26 An extreme example of the difficulties European countries face when they try to impose a capital tax on their own can be seen in Italy. In 2012, the Italian government, faced with one of the largest public debts in Europe and also with an exceptionally high level of private wealth (also one of the highest in Europe, along with Spain),27 decided to introduce a new tax on wealth. But for fear that financial assets would flee the country in search of refuge in Swiss, Austrian, and French banks, the rate was set at 0.8 percent on real estate and only 0.1 percent on bank deposits and other financial assets (except stocks, which were totally exempt), with no progressivity. Not only is it hard to think of an economic principle that would explain why some assets should be taxed at one-eighth the rate of others; the system also had the unfortunate consequence of imposing a regressive tax on wealth, since the largest fortunes consist mainly of financial assets and especially stocks. This design probably did little to earn social acceptance for the new tax, which became a major issue in the 2013 Italian elections; the candidate who had proposed the tax—with the compliments of European and international authorities—was roundly defeated at the polls. The crux of the problem is this: without automatic sharing of bank information among European countries, which would allow the tax authorities to obtain reliable information about the net assets of all taxpayers, no matter where those assets are located, it is very difficult for a country acting on its own to impose a progressive tax on capital. This is especially unfortunate, because such a tax is a tool particularly well suited to Europe's current economic predicament.
     Suppose that bank information is automatically shared and the tax authorities have accurate assessments of who owns what, which may happen some day. What would then be the ideal tax schedule? As usual, there is no mathematical formula for answering this question, which is a matter for democratic deliberation. It would make sense to tax net wealth below 200,000 euros at 0.1 percent and net wealth between 200,000 and 1 million euros at 0.5 percent. This would replace the property tax, which in most countries is tantamount to a wealth tax on the propertied middle class. The new system would be both more just and more efficient, because it targets all assets (not only real estate) and relies on transparent data and market values net of mortgage debt.28 To a large extent a tax of this sort could be readily implemented by individual countries acting alone.
     Note that there is no reason why the tax rate on fortunes above 5 million euros should be limited to 2 percent. Since the real returns on the largest fortunes in Europe and around the world are 6 to 7 percent or more, it would not be excessive to tax fortunes above 100 million or 1 billion euros at rates well above 2 percent. The simplest and fairest procedure would be to set rates on the basis of observed returns in each wealth bracket over several prior years. In that way, the degree of progressivity can be adjusted to match the evolution of returns to capital and the desired level of wealth concentration. To avoid divergence of the wealth distribution (that is, a steadily increasing share belonging to the top centiles and thousandths), which on its face seems to be a minimal desirable objective, it would probably be necessary to levy rates of about 5 percent on the largest fortunes. If a more ambitious goal is preferred—say, to reduce wealth inequality to more moderate levels than exist today (and which history shows are not necessary for growth)—one might envision rates of 10 percent or higher on billionaires. This is not the place to resolve the issue. What is certain is that it makes little sense to take the yield on public debt as a reference, as is often done in political debate.29 The largest fortunes are clearly not invested in government bonds.
     Is a European wealth tax realistic? There is no technical reason why not. It is the tool best suited to meet the economic challenges of the twenty-first century, especially in Europe, where private wealth is thriving to a degree not seen since the Belle Époque. But if the countries of the Old Continent are to cooperate more closely, European political institutions will have to change. The only strong European institution at the moment is the ECB, which is important but notoriously insufficient. I come back to this in the next chapter, when I turn to the question of the public debt crisis. Before that, it will be useful to look at the proposed tax on capital in a broader historical perspective.
 Capital Taxation in Historical Perspective

     In all civilizations, the fact that the owners of capital claim a substantial share of national income without working and that the rate of return on capital is generally 4–5 percent a year has provoked vehement, often indignant, reactions as well as a variety of political responses. One of the most common of the latter has been the prohibition of usury, which we find in one form or another in most religious traditions, including those of Christianity and Islam. The Greek philosophers were of two minds about interest, which, since time never ceases to flow, can in principle increase wealth without limit. It was the danger of limitless wealth that Aristotle singled out when he observed that the word "interest" in Greek (tocos) means "child." In his view, money ought not to "give birth" to more money.30 In a world of low or even near-zero growth, where both population and output remained more or less the same generation after generation, "limitlessness" seemed particularly dangerous.
     Unfortunately, the attempts to prohibit interest were often illogical. The effect of outlawing loans at interest was generally to restrict certain types of investment and certain categories of commercial or financial activity that the political or religious authorities deemed less legitimate or worthy than others. They did not, however, question the legitimacy of returns to capital in general. In the agrarian societies of Europe, the Christian authorities never questioned the legitimacy of land rents, from which they themselves benefited, as did the social groups on which they depended to maintain the social order. The prohibition of usury in the society of that time is best thought of as a form of social control: some types of capital were more difficult to control than others and therefore more worrisome. The general principle according to which capital can provide income for its owner, who need not work to justify it, went unquestioned. The idea was rather to be wary of infinite accumulation. Income from capital was supposed to be used in healthy ways, to pay for good works, for example, and certainly not to launch into commercial or financial adventures that might lead to estrangement from the true faith. Landed capital was in this respect very reassuring, since it could do nothing but reproduce itself year after year and century after century.31 Consequently, the whole social and spiritual order also seemed immutable. Land rent, before it became the sworn enemy of democracy, was long seen as the wellspring of social harmony, at least by those to whom it accrued.
     The solution to the problem of capital suggested by Karl Marx and many other socialist writers in the nineteenth century and put into practice in the Soviet Union and elsewhere in the twentieth century was far more radical and, if nothing else, more logically consistent. By abolishing private ownership of the means of production, including land and buildings as well as industrial, financial, and business capital (other than a few individual plots of land and small cooperatives), the Soviet experiment simultaneously eliminated all private returns on capital. The prohibition of usury thus became general: the rate of exploitation, which for Marx represented the share of output appropriated by the capitalist, thus fell to zero, and with it the rate of private return. With zero return on capital, man (or the worker) finally threw off his chains along with the yoke of accumulated wealth. The present reasserted its rights over the past. The inequality r > g was nothing but a bad memory, especially since communism vaunted its affection for growth and technological progress. Unfortunately for the people caught up in these totalitarian experiments, the problem was that private property and the market economy do not serve solely to ensure the domination of capital over those who have nothing to sell but their labor power. They also play a useful role in coordinating the actions of millions of individuals, and it is not so easy to do without them. The human disasters caused by Soviet-style centralized planning illustrate this quite clearly.
     A tax on capital would be a less violent and more efficient response to the eternal problem of private capital and its return. A progressive levy on individual wealth would reassert control over capitalism in the name of the general interest while relying on the forces of private property and competition. Each type of capital would be taxed in the same way, with no discrimination a priori, in keeping with the principle that investors are generally in a better position than the government to decide what to invest in.32 If necessary, the tax can be quite steeply progressive on very large fortunes, but this is a matter for democratic debate under a government of laws. A capital tax is the most appropriate response to the inequality r > g as well as to the inequality of returns to capital as a function of the size of the initial stake.33
     In this form, the tax on capital is a new idea, designed explicitly for the globalized patrimonial capitalism of the twenty-first century. To be sure, capital in the form of land has been taxed since time immemorial. But property is generally taxed at a low flat rate. The main purpose of the property tax is to guarantee property rights by requiring registration of titles; it is certainly not to redistribute wealth. The English, American, and French revolutions all conformed to this logic: the tax systems they put in place were in no way intended to reduce inequalities of wealth. During the French Revolution the idea of progressive taxation was the subject of lively debate, but in the end the principle of progressivity was rejected. What is more, the boldest tax proposals of that time seem quite moderate today in the sense that the proposed tax rates were quite low.34
     The progressive tax revolution had to await the twentieth century and the period between the two world wars. It occurred in the midst of chaos and came primarily in the form of progressive taxes on income and inheritances. To be sure, some countries (most notably Germany and Sweden) established an annual progressive tax on capital as early as the late nineteenth century or early twentieth. But the United States, Britain, and France (until the 1980s) did not move in this direction.35 Furthermore, in the countries that did tax capital, the rates were relatively low, no doubt because these taxes were designed in a context very different from that which exists today. These taxes also suffered from a fundamental technical flaw: they were based not on the market value of the assets subject to taxation, to be revised annually, but on infrequently revised assessments of their value by the tax authorities. These assessed valuations eventually lost all connection with market values, which quickly rendered the taxes useless. The same flaw undermined the property tax in France and many other countries subsequent to the inflationary shock of the period 1914–1945.36 Such a design flaw can be fatal to a progressive tax on capital: the threshold for each tax bracket depends on more or less arbitrary factors such as the date of the last property assessment in a given town or neighborhood. Challenges to such arbitrary taxation became increasingly common after 1960, in a period of rapidly rising real estate and stock prices. Often the courts became involved (to rule on violations of the principle of equal taxation). Germany and Sweden abolished their annual taxes on capital in 1990–2010. This had more to do with the archaic design of these taxes (which went back to the nineteenth century) than with any response to tax competition.37
     The current wealth tax in France (the impôt de solidarité sur la fortune, or ISF) is in some ways more modern: it is based on the market value of various types of assets, reevaluated annually. This is because the tax was created relatively recently: it was introduced in the 1980s, at a time when inflation, especially in asset prices, could not be ignored. There are perhaps advantages to being at odds with the rest of the developed world in regard to economic policy: in some cases it allows a country to be ahead of its time.38 Although the French ISF is based on market values, in which respect it resembles the ideal capital tax, it is nevertheless quite different from the ideal in other respects. As noted earlier, it is riddled with exemptions and based on self-declared asset holdings. In 2012, Italy introduced a rather strange wealth tax, which illustrates the limits of what a single country can do on its own in the current climate. The Spanish case is also interesting. The Spanish wealth tax, like the now defunct Swedish and German ones, is based on more or less arbitrary assessments of real estate and other assets. Collection of the tax was suspended in 2008–2010, then restored in 2011–2012 in the midst of an acute budget crisis, but without modifications to its structure.39 Similar tensions exist almost everywhere: although a capital tax seems logical in view of growing government needs (as large private fortunes increase and incomes stagnate, a government would have to be blind to pass up such a tempting source of revenue, no matter what party is in power), it is difficult to design such a tax properly within a single country.
     To sum up: the capital tax is a new idea, which needs to be adapted to the globalized patrimonial capitalism of the twenty-first century. The designers of the tax must consider what tax schedule is appropriate, how the value of taxable assets should be assessed, and how information about asset ownership should be supplied automatically by banks and shared internationally so that the tax authorities need not rely on taxpayers to declare their own asset holdings.
 Alternative Forms of Regulation: Protectionism and Capital Controls

     Is there no alternative to the capital tax? No: there are other ways to regulate patrimonial capitalism in the twenty-first century, and some of these are already being tried in various parts of the world. Nevertheless, these alternative forms of regulation are less satisfactory than the capital tax and sometimes create more problems than they solve. As noted, the simplest way for a government to reclaim a measure of economic and financial sovereignty is to resort to protectionism and controls on capital. Protectionism is at times a useful way of sheltering relatively undeveloped sectors of a country's economy (until domestic firms are ready to face international competition).40 It is also a valuable weapon against countries that do not respect the rules (of financial transparency, health norms, human rights, etc.), and it would be foolish for a country to rule out its potential use. Nevertheless, protectionism, when deployed on a large scale over a long period of time, is not in itself a source of prosperity or a creator of wealth. Historical experience suggests that a country that chooses this road while promising its people a robust improvement in their standard of living is likely to meet with serious disappointment. Furthermore, protectionism does nothing to counter the inequality r > g or the tendency for wealth to accumulate in fewer and fewer hands.
     The question of capital controls is another matter. Since the 1980s, governments in most wealthy countries have advocated complete and absolute liberalization of capital flows, with no controls and no sharing of information about asset ownership among nations. International organizations such as the OECD, the World Bank, and the IMF promoted the same set of measures in the name of the latest in economic science.41 But the movement was propelled essentially by democratically elected governments, reflecting the dominant ideas of a particular historical moment marked by the fall of the Soviet Union and unlimited faith in capitalism and self-regulating markets. Since the financial crisis of 2008, serious doubts about the wisdom of this approach have arisen, and it is quite likely that the rich countries will have increasing recourse to capital controls in the decades ahead. The emerging world has shown the way, starting in the aftermath of the Asian financial crisis of 1998, which convinced many countries, including Indonesia, Brazil, and Russia, that the policies and "shock therapies" dictated by the international community were not always well advised and the time had come to set their own courses. The crisis also encouraged some countries to amass excessive reserves of foreign exchange. This may not be the optimal response to global economic instability, but it has the virtue of allowing single countries to cope with economic shocks without forfeiting their sovereignty.
 The Mystery of Chinese Capital Regulation

     It is important to recognize that some countries have always enforced capital controls and remained untouched by the stampede toward complete deregulation of financial flows and current accounts. A notable example of such a country is China, whose currency has never been convertible (though it may be someday, when China is convinced that it has accumulated sufficient reserves to bury any speculator who bets against the renminbi). China has also imposed strict controls on both incoming capital (no one can invest in or purchase a large Chinese firm without authorization from the government, which is generally granted only if the foreign investor is content to take a minority stake) and outgoing capital (no assets can be removed from China without government approval). The issue of outgoing capital is currently quite a sensitive one in China and is at the heart of the Chinese model of capital regulation. This raises a very simple question: Are China's millionaires and billionaires, whose names are increasingly prevalent in global wealth rankings, truly the owners of their wealth? Can they, for example, take their money out of China if they wish? Although the answers to these questions are shrouded in mystery, there is no doubt that the Chinese notion of property rights is different from the European or American notions. It depends on a complex and evolving set of rights and duties. To take one example, a Chinese billionaire who acquired a 20 percent stake in Telecom China and who wished to move to Switzerland with his family while holding on to his shares and collecting millions of euros in dividends would very likely have a much harder time doing so than, say, a Russian oligarch, to judge by the fact that vast sums commonly leave Russia for suspect destinations. One never sees this in China, at least for now. In Russia, to be sure, an oligarch must take care not to tangle with the president, which can land him in prison. But if he can avoid such trouble, he can apparently live quite well on wealth derived from exploitation of Russia's natural resources. In China things seem to be controlled more tightly. That is one of many reasons why the kinds of comparisons that one reads frequently in the Western press between the fortunes of wealthy Chinese political leaders and their US counterparts, who are said to be far less wealthy, probably cannot withstand close scrutiny.42
     It is not my intention to defend China's system of capital regulation, which is extremely opaque and probably unstable. Nevertheless, capital controls are one way of regulating and containing the dynamics of wealth inequality. Furthermore, China has a more progressive income tax than Russia (which adopted a flat tax in the 1990s, like most countries in the former Soviet bloc), though it is still not progressive enough. The revenues it brings in are invested in education, health, and infrastructure on a far larger scale than in other emerging countries such as India, which China has clearly outdistanced.43 If China wishes, and above all if its elites agree to allow the kind of democratic transparency and government of laws that go hand in hand with a modern tax system (by no means a certainty), then China is clearly large enough to impose the kind of progressive tax on income and capital that I have been discussing. In some respects, it is better equipped to meet these challenges than Europe is, because Europe must contend with political fragmentation and with a particularly intense form of tax competition, which may be with us for some time to come.44
     In any case, if the European countries do not join together to regulate capital cooperatively and effectively, individual countries are highly likely to impose their own controls and national preferences. (Indeed, this has already begun, with a sometimes irrational promotion of national champions and domestic stockholders, on the frequently illusory premise that they can be more easily controlled than foreign stockholders.) In this respect, China has a clear advantage and will be difficult to beat. The capital tax is the liberal form of capital control and is better suited to Europe's comparative advantage.
 The Redistribution of Petroleum Rents

     When it comes to regulating global capitalism and the inequalities it generates, the geographic distribution of natural resources and especially of "petroleum rents" constitutes a special problem. International inequalities of wealth—and national destinies—are determined by the way borders were drawn, in many cases quite arbitrarily. If the world were a single global democratic community, an ideal capital tax would redistribute petroleum rents in an equitable manner. National laws sometimes do this by declaring natural resources to be common property. Such laws of course vary from country to country. It is to be hoped that democratic deliberation will point in the right direction. For example, if, tomorrow, someone were to find in her backyard a treasure greater than all of her country's existing wealth combined, it is likely that a way would be found to amend the law to share that wealth in a reasonable manner (or so one hopes).
     Since the world is not a single democratic community, however, the redistribution of natural resources is often decided in far less peaceful ways. In 1990–1991, just after the collapse of the Soviet Union, another fateful event took place. Iraq, a country of 35 million people, decided to invade its tiny neighbor, Kuwait, with barely 1 million people but in possession of petroleum reserves virtually equal to those of Iraq. This was in part a geographical accident, of course, but it was also the result of a stroke of the postcolonial pen: Western oil companies and their governments in some cases found it easier to do business with countries without too many people living in them (although the long-term wisdom of such a choice may be doubted). In any case, the Western powers and their allies immediately sent some 900,000 troops to restore the Kuwaitis as the sole legitimate owners of their oilfields (proof, if proof were needed, that governments can mobilize impressive resources to enforce their decisions when they choose to do so). This happened in 1991. The first Gulf war was followed by a second in 2003, in Iraq, with a somewhat sparser coalition of Western powers. The consequences of these events are still with us today.
     It is not up to me to calculate the optimal schedule for the tax on petroleum capital that would ideally exist in a global political community based on social justice and utility, or even in a Middle Eastern political community. I observe simply that the unequal distribution of wealth in this region has attained unprecedented levels of injustice, which would surely have ceased to exist long ago were it not for foreign military protection. In 2012, the total budget of the Egyptian ministry of education for all primary, middle, and secondary schools and universities in a country of 85 million was less than $5 billion.45 A few hundred kilometers to the east, Saudi Arabia and its 20 million citizens enjoyed oil revenues of $300 billion, while Qatar and its 300,000 Qataris take in more than $100 billion annually. Meanwhile, the international community wonders if it ought to extend a loan of a few billion dollars to Egypt or wait until the country increases, as promised, its tax on carbonated drinks and cigarettes. Surely the international norm should be to prevent redistribution of wealth by force of arms insofar as it is possible to do so (particularly when the intention of the invader is to buy more arms, not to build schools, as was the case with the Iraqi invader in 1991). But such a norm should carry with it the obligation to find other ways to achieve a more just distribution of petroleum rents, be it by way of sanctions, taxes, or foreign aid, in order to give countries without oil the opportunity to develop.
 Redistribution through Immigration

     A seemingly more peaceful form of redistribution and regulation of global wealth inequality is immigration. Rather than move capital, which poses all sorts of difficulties, it is sometimes simpler to allow labor to move to places where wages are higher. This was of course the great contribution of the United States to global redistribution: the country grew from a population of barely 3 million at the time of the Revolutionary War to more than 300 million today, largely thanks to successive waves of immigration. That is why the United States is still a long way from becoming the new Old Europe, as I speculated it might in Chapter 14. Immigration is the mortar that holds the United States together, the stabilizing force that prevents accumulated capital from acquiring the importance it has in Europe; it is also the force that makes the increasingly large inequalities of labor income in the United States politically and socially bearable. For a fair proportion of Americans in the bottom 50 percent of the income distribution, these inequalities are of secondary importance for the very simple reason that they were born in a less wealthy country and see themselves as being on an upward trajectory. Note, moreover, that the mechanism of redistribution through immigration, which enables individuals born in poor countries to improve their lot by moving to a rich country, has lately been an important factor in Europe as well as the United States. In this respect, the distinction between the Old World and the New may be less salient than in the past.46
     It bears emphasizing, however, that redistribution through immigration, as desirable as it may be, resolves only part of the problem of inequality. Even after average per capita output and income are equalized between countries by way of immigration and, even more, by poor countries catching up with rich ones in terms of productivity, the problem of inequality—and in particular the dynamics of global wealth concentration—remains. Redistribution through immigration postpones the problem but does not dispense with the need for a new type of regulation: a social state with progressive taxes on income and capital. One might hope, moreover, that immigration will be more readily accepted by the less advantaged members of the wealthier societies if such institutions are in place to ensure that the economic benefits of globalization are shared by everyone. If you have free trade and free circulation of capital and people but destroy the social state and all forms of progressive taxation, the temptations of defensive nationalism and identity politics will very likely grow stronger than ever in both Europe and the United States.
     Note, finally, that the less developed countries will be among the primary beneficiaries of a more just and transparent international tax system. In Africa, the outflow of capital has always exceeded the inflow of foreign aid by a wide margin. It is no doubt a good thing that several wealthy countries have launched judicial proceedings against former African leaders who fled their countries with ill-gotten gains. But it would be even more useful to establish international fiscal cooperation and data sharing to enable countries in Africa and elsewhere to root out such pillage in a more systematic and methodical fashion, especially since foreign companies and stockholders of all nationalities are at least as guilty as unscrupulous African elites. Once again, financial transparency and a progressive global tax on capital are the right answers.

    \'7bSIXTEEN\'7d

     The Question of the Public Debt

     There are two main ways for a government to finance its expenses: taxes and debt. In general, taxation is by far preferable to debt in terms of justice and efficiency. The problem with debt is that it usually has to be repaid, so that debt financing is in the interest of those who have the means to lend to the government. From the standpoint of the general interest, it is normally preferable to tax the wealthy rather than borrow from them. There are nevertheless many reasons, both good and bad, why governments sometimes resort to borrowing and to accumulating debt (if they do not inherit it from previous governments). At the moment, the rich countries of the world are enmeshed in a seemingly interminable debt crisis. To be sure, history offers examples of even higher public debt levels, as we saw in Part Two: in Britain in particular, public debt twice exceeded two years of national income, first at the end of the Napoleonic wars and again after World War II. Still, with public debt in the rich countries now averaging about one year of national income (or 90 percent of GDP), the developed world is currently indebted at a level not seen since 1945. Although the emerging economies are poorer than the rich ones in both income and capital, their public debt is much lower (around 30 percent of GDP on average). This shows that the question of public debt is a question of the distribution of wealth, between public and private actors in particular, and not a question of absolute wealth. The rich world is rich, but the governments of the rich world are poor. Europe is the most extreme case: it has both the highest level of private wealth in the world and the greatest difficulty in resolving its public debt crisis—a strange paradox.
     I begin by examining various ways of dealing with high public debt levels. This will lead to an analysis of how central banks regulate and redistribute capital and why European unification, overly focused as it was on the issue of currency while neglecting taxation and debt, has led to an impasse. Finally, I will explore the optimal accumulation of public capital and its relation to private capital in the probable twenty-first-century context of low growth and potential degradation of natural capital.
 Reducing Public Debt: Tax on Capital, Inflation, and Austerity

     How can a public debt as large as today's European debt be significantly reduced? There are three main methods, which can be combined in various proportions: taxes on capital, inflation, and austerity. An exceptional tax on private capital is the most just and efficient solution. Failing that, inflation can play a useful role: historically, that is how most large public debts have been dealt with. The worst solution in terms of both justice and efficiency is a prolonged dose of austerity—yet that is the course Europe is currently following.
     I begin by recalling the structure of national wealth in Europe today. As I showed in Part Two, national wealth in most European countries is close to six years of national income, and most of it is owned by private agents (households). The total value of public assets is approximately equal to the total public debt (about one year of national income), so net public wealth is close to zero.1 Private wealth (net of debt) can be divided into two roughly equal halves: real estate and financial assets. Europe's average net asset position vis-à-vis the rest of the world is close to equilibrium, which means that European firms and sovereign debt are owned by European households (or, more precisely, what the rest of the world owns of Europe is compensated by what Europeans own of the rest of the world). This reality is obscured by the complexity of the system of financial intermediation: people deposit their savings in a bank or invest in a financial product, and the bank then invests the money elsewhere. There is also considerable cross-ownership between countries, which makes things even more opaque. Yet the fact remains that European households (or at any rate those that own anything at all: bear in mind that wealth is still very concentrated, with 60 percent of the total owned by the wealthiest 10 percent) own the equivalent of all that there is to own in Europe, including its public debt.2
     Under such conditions, how can public debt be reduced to zero? One solution would be to privatize all public assets. According to the national accounts of the various European countries, the proceeds from selling all public buildings, schools, universities, hospitals, police stations, infrastructure, and so on would be roughly sufficient to pay off all outstanding public debt.3 Instead of holding public debt via their financial investments, the wealthiest European households would become the direct owners of schools, hospitals, police stations, and so on. Everyone else would then have to pay rent to use these assets and continue to produce the associated public services. This solution, which some very serious people actually advocate, should to my mind be dismissed out of hand. If the European social state is to fulfill its mission adequately and durably, especially in the areas of education, health, and security, it must continue to own the related public assets. It is nevertheless important to understand that as things now stand, governments must pay heavy interest (rather than rent) on their outstanding public debt, so the situation is not all that different from paying rent to use the same assets, since these interest payments weigh just as heavily on the public exchequer.
     A much more satisfactory way of reducing the public debt is to levy an exceptional tax on private capital. For example, a flat tax of 15 percent on private wealth would yield nearly a year's worth of national income and thus allow for immediate reimbursement of all outstanding public debt. The state would continue to own its public assets, but its debt would be reduced to zero after five years and it would therefore have no interest to pay.4 This solution is equivalent to a total repudiation of the public debt, except for two essential differences.5
     First, it is always very difficult to predict the ultimate incidence of a debt repudiation, even a partial one—that is, it is difficult to know who will actually bear the cost. Complete or partial default on the public debt is sometimes tried in situations of extreme overindebtedness, as in Greece in 2011–2012. Bondholders are forced to accept a "haircut" (as the jargon has it): the value of government bonds held by banks and other creditors is reduced by 10–20 percent or perhaps even more. The problem is that if one applies a measure of this sort on a large scale—for example, all of Europe and not just Greece (which accounts for just 2 percent of European GDP)—it is likely to trigger a banking panic and a wave of bankruptcies. Depending on which banks are holding various types of bonds, as well as on the structure of their balance sheets, the identity of their creditors, the households that have invested their savings in these various institutions, the nature of those investments, and so on, one can end up with quite different final incidences, which cannot be accurately predicted in advance. Furthermore, it is quite possible that the people with the largest portfolios will be able to restructure their investments in time to avoid the haircut almost entirely. People sometimes think that imposing a haircut is a way of penalizing those investors who have taken the largest risks. Nothing could be further from the truth: financial assets are constantly being traded, and there is no guarantee that the people who would be penalized in the end are the ones who ought to be. The advantage of an exceptional tax on capital, which is similar to a haircut, is precisely that it would arrange things in a more civilized manner. Everyone would be required to contribute, and, equally important, bank failures would be avoided, since it is the ultimate owners of wealth (physical individuals) who would have to pay, not financial institutions. If such a tax were to be levied, however, the tax authorities would of course need to be permanently and automatically apprised of any bank accounts, stocks, bonds, and other financial assets held by the citizens under their jurisdiction. Without such a financial cadaster, every policy choice would be risky.
     But the main advantage of a fiscal solution is that the contribution demanded of each individual can be adjusted to the size of his fortune. It would not make much sense to levy an exceptional tax of 15 percent on all private wealth in Europe. It would be better to apply a progressive tax designed to spare the more modest fortunes and require more of the largest ones. In some respects, this is what European banking law already does, since it generally guarantees deposits up to 100,000 euros in case of bank failure. The progressive capital tax is a generalization of this logic, since it allows much finer gradations of required levies. One can imagine a number of different brackets: full deposit guarantee up to 100,000 euros, partial guarantee between 100,000 and 500,000 euros, and so on, with as many brackets as seem useful. The progressive tax would also apply to all assets (including listed and unlisted shares), not just bank deposits. This is essential if one really wants to reach the wealthiest individuals, who rarely keep their money in checking accounts.
     In any event, it would no doubt be too much to try to reduce public debt to zero in one fell swoop. To take a more realistic example, assume that we want to reduce European government debt by around 20 percent of GDP, which would bring debt levels down from the current 90 percent of GDP to 70 percent, not far from the maximum of 60 percent set by current European treaties.6 As noted in the previous chapter, a progressive tax on capital at a rate of 0 percent on fortunes up to 1 million euros, 1 percent on fortunes between 1 and 5 million euros, and 2 percent on fortunes larger than 5 million euros would bring in the equivalent of about 2 percent of European GDP. To obtain one-time receipts of 20 percent of GDP, it would therefore suffice to apply a special levy with rates 10 times as high: 0 percent up to 1 million, 10 percent between 1 and 5 million, and 20 percent above 5 million.7 It is interesting to note that the exceptional tax on capital that France applied in 1945 in order to substantially reduce its public debt had progressive rates that ranged from 0 to 25 percent.8
     One could obtain the same result by applying a progressive tax with rates of 0, 1, and 2 percent for a period of ten years and earmarking the receipts for debt reduction. For example, one could set up a "redemption fund" similar to the one proposed in 2011 by a council of economists appointed by the German government. This proposal, which was intended to mutualize all Eurozone public debt above 60 percent of GDP (and especially the debt of Germany, France, Italy, and Spain) and then to reduce the fund gradually to zero, is far from perfect. In particular, it lacks the democratic governance without which the mutualization of European debt is not feasible. But it is a concrete plan that could easily be combined with an exceptional one-time or special ten-year tax on capital.9
 Does Inflation Redistribute Wealth?

     To recapitulate the argument thus far: I observed that an exceptional tax on capital is the best way to reduce a large public debt. This is by far the most transparent, just, and efficient method. Inflation is another possible option, however. Concretely, since a government bond is a nominal asset (that is, an asset whose price is set in advance and does not depend on inflation) rather than a real asset (whose price evolves in response to the economic situation, generally increasing at least as fast as inflation, as in the case of real estate and shares of stock), a small increase in the inflation rate is enough to significantly reduce the real value of the public debt. With an inflation rate of 5 percent a year rather than 2 percent, the real value of the public debt, expressed as a percentage of GDP, would be reduced by more than 15 percent (all other things equal)—a considerable amount.
     Such a solution is extremely tempting. Historically, this is how most large public debts were reduced, particularly in Europe in the twentieth century. For example, inflation in France and Germany averaged 13 and 17 percent a year, respectively, from 1913 to 1950. It was inflation that allowed both countries to embark on reconstruction efforts in the 1950s with a very small burden of public debt. Germany, in particular, is by far the country that has used inflation most freely (along with outright debt repudiation) to eliminate public debt throughout its history.10 Apart from the ECB, which is by far the most averse to this solution, it is no accident that all the other major central banks—the US Federal Reserve, the Bank of Japan, and the Bank of England—are currently trying to raise their inflation targets more or less explicitly and are also experimenting with various so-called unconventional monetary policies. If they succeed—say, by increasing inflation from 2 to 5 percent a year (which is by no means assured)—these countries will emerge from the debt crisis much more rapidly than the countries of the Eurozone, whose economic prospects are clouded by the absence of any obvious way out, as well as by their lack of clarity concerning the long-term future of budgetary and fiscal union in Europe.
     Indeed, it is important to understand that without an exceptional tax on capital and without additional inflation, it may take several decades to get out from under a burden of public debt as large as that which currently exists in Europe. To take an extreme case: suppose that inflation is zero and GDP grows at 2 percent a year (which is by no means assured in Europe today because of the obvious contractionary effect of budgetary rigor, at least in the short term), with a budget deficit limited to 1 percent of GDP (which in practice implies a substantial primary surplus, given the interest on the debt). Then by definition it would take 20 years to reduce the debt-to-GDP ratio by twenty points.11 If growth were to fall below 2 percent in some years and debt were to rise above 1 percent, it could easily take thirty or forty years. It takes decades to accumulate capital; it can also take a very long time to reduce a debt.
     The most interesting historical example of a prolonged austerity cure can be found in nineteenth-century Britain. As noted in Chapter 3, it would have taken a century of primary surpluses (of 2–3 points of GDP from 1815 to 1914) to rid the country of the enormous public debt left over from the Napoleonic wars. Over the course of this period, British taxpayers spent more on interest on the debt than on education. The choice to do so was no doubt in the interest of government bondholders but unlikely to have been in the general interest of the British people. It may be that the setback to British education was responsible for the country's decline in the decades that followed. To be sure, the debt was then above 200 percent of GDP (and not barely 100 percent, as is the case today), and inflation in the nineteenth century was close to zero (whereas an inflation target of 2 percent is generally accepted nowadays). Hence there is hope that European austerity might last only ten or twenty years (at a minimum) rather than a century. Still, that would be quite a long time. It is reasonable to think that Europe might find better ways to prepare for the economic challenges of the twenty-first century than to spend several points of GDP a year servicing its debt, at a time when most European countries spend less than one point of GDP a year on their universities.12
     That said, I want to insist on the fact that inflation is at best a very imperfect substitute for a progressive tax on capital and can have some undesirable secondary effects. The first problem is that inflation is hard to control: once it gets started, there is no guarantee that it can be stopped at 5 percent a year. In an inflationary spiral, everyone wants to make sure that the wages he receives and the prices he must pay evolve in a way that suits him. Such a spiral can be hard to stop. In France, the inflation rate exceeded 50 percent for four consecutive years, from 1945 to 1948. This reduced the public debt to virtually nothing in a far more radical way than the exceptional tax on capital that was collected in 1945. But millions of small savers were wiped out, and this aggravated the persistent problem of poverty among the elderly in the 1950s.13 In Germany, prices were multiplied by a factor of 100 million between the beginning of 1923 and the end. Germany's society and economy were permanently traumatized by this episode, which undoubtedly continues to influence German perceptions of inflation. The second difficulty with inflation is that much of the desired effect disappears once it becomes permanent and embedded in expectations (in particular, anyone willing to lend to the government will demand a higher rate of interest).
     To be sure, one argument in favor of inflation remains: compared with a capital tax, which, like any other tax, inevitably deprives people of resources they would have spent usefully (for consumption or investment), inflation (at least in its idealized form) primarily penalizes people who do not know what to do with their money, namely, those who have kept too much cash in their bank account or stuffed into their mattress. It spares those who have already spent everything or invested everything in real economic assets (real estate or business capital), and, better still, it spares those who are in debt (inflation reduces nominal debt, which enables the indebted to get back on their feet more quickly and make new investments). In this idealized version, inflation is in a way a tax on idle capital and an encouragement to dynamic capital. There is some truth to this view, and it should not be dismissed out of hand.14 But as I showed in examining unequal returns on capital as a function of the initial stake, inflation in no way prevents large and well-diversified portfolios from earning a good return simply by virtue of their size (and without any personal effort by the owner).15
     In the end, the truth is that inflation is a relatively crude and imprecise tool. Sometimes it redistributes wealth in the right direction, sometimes not. To be sure, if the choice is between a little more inflation and a little more austerity, inflation is no doubt preferable. But in France one sometimes hears the view that inflation is a nearly ideal tool for redistributing wealth (a way of taking money from "German rentiers" and forcing the aging population on the other side of the Rhine to show more solidarity with the rest of Europe). This is naïve and preposterous. In practice, a great wave of inflation in Europe would have all sorts of unintended consequences for the redistribution of wealth and would be particularly harmful to people of modest means in France, Germany, and elsewhere. Conversely, those with fortunes in real estate and the stock market would largely be spared on both sides of the Rhine and everywhere else as well.16 When it comes to decreasing inequalities of wealth for good or reducing unusually high levels of public debt, a progressive tax on capital is generally a better tool than inflation.
 What Do Central Banks Do?

     In order to gain a better understanding of the role of inflation and, more generally, of central banks in the regulation and redistribution of capital, it is useful to take a step back from the current crisis and to examine these issues in broader historical perspective. Back when the gold standard was the norm everywhere, before World War I, central banks played a much smaller role than they do today. In particular, their power to create money was severely limited by the existing stock of gold and silver. One obvious problem with the gold standard was that the evolution of the overall price level depended primarily on the hazards of gold and silver discoveries. If the global stock of gold was static but global output increased, the price level had to fall (since the same money stock now had to support a larger volume of commercial exchange). In practice this was a source of considerable difficulty.17 If large deposits of gold or silver were suddenly discovered, as in Spanish America in the sixteenth and seventeenth centuries or California in the mid-nineteenth century, prices could skyrocket, which created other kinds of problems and brought undeserved windfalls to some.18 These drawbacks make it highly unlikely that the world will ever return to the gold standard. (Keynes referred to gold as a "barbarous relic.")
     Once currency ceases to be convertible into precious metals, however, the power of central banks to create money is potentially unlimited and must therefore be strictly regulated. This is the crux of the debate about central bank independence as well as the source of numerous misunderstandings. Let me quickly retrace the stages of this debate. At the beginning of the Great Depression, the central banks of the industrialized countries adopted an extremely conservative policy: having only recently abandoned the gold standard, they refused to create the liquidity necessary to save troubled banks, which led to a wave of bankruptcies that seriously aggravated the crisis and pushed the world to the brink of the abyss. It is important to understand the trauma occasioned by this tragic historical experience. Since then, everyone agrees that the primary function of central banking is to ensure the stability of the financial system, which requires central banks to assume the role of "lenders of last resort": in case of absolute panic, they must create the liquidity necessary to avoid a broad collapse of the financial system. It is essential to realize that this view has been shared by all observers of the system since the 1930s, regardless of their position on the New Deal or the various forms of social state created in the United States and Europe at the end of World War II. Indeed, faith in the stabilizing role of central banking at times seems inversely proportional to faith in the social and fiscal policies that grew out of the same period.
     This is particularly clear in the monumental Monetary History of the United States published in 1963 by Milton Friedman and Anna Schwartz. In this fundamental work, the leading figure in monetary economics follows in minute detail the changes in United States monetary policy from 1857 to 1960, based on voluminous archival records.19 Unsurprisingly, the focal point of the book is the Great Depression. For Friedman, no doubt is possible: it was the unduly restrictive policy of the Federal Reserve that transformed the stock market crash into a credit crisis and plunged the economy into a deflationary spiral and a depression of unprecedented magnitude. The crisis was primarily monetary, and therefore its solution was also monetary. From this analysis, Friedman drew a clear political conclusion: in order to ensure regular, undisrupted growth in a capitalist economy, it is necessary and sufficient to make sure that monetary policy is designed to ensure steady growth of the money supply. Accordingly, monetarist doctrine held that the New Deal, which created a large number of government jobs and social transfer programs, was a costly and useless sham. Saving capitalism did not require a welfare state or a tentacular government: the only thing necessary was a well-run Federal Reserve. In the 1960s–1970s, although many Democrats in the United States still dreamed of completing the New Deal, the US public had begun to worry about their country's decline relative to Europe, which was then still in a phase of rapid growth. In this political climate, Friedman's simple but powerful political message had the effect of a bombshell. The work of Friedman and other Chicago School economists fostered suspicion of the ever-expanding state and created the intellectual climate in which the conservative revolution of 1979–1980 became possible.
     One can obviously reinterpret these events in a different light: there is no reason why a properly functioning Federal Reserve cannot function as a complement to a properly functioning social state and a well-designed progressive tax policy. These institutions are clearly complements rather than substitutes. Contrary to monetarist doctrine, the fact that the Fed followed an unduly restrictive monetary policy in the early 1930s (as did the central banks of the other rich countries) says nothing about the virtues and limitations of other institutions. That is not the point that interests me here, however. The fact is that all economists—monetarists, Keynesians, and neoclassicals—together with all other observers, regardless of their political stripe, have agreed that central banks ought to act as lenders of last resort and do whatever is necessary to avoid financial collapse and a deflationary spiral.
     This broad consensus explains why all of the world's central banks—in Japan and Europe as well as the United States—reacted to the financial crisis of 2007–2008 by taking on the role of lenders of last resort and stabilizers of the financial system. Apart from the collapse of Lehman Brothers in September 2008, bank failures in the crisis have been fairly limited in scope. There is, however, no consensus as to the exact nature of the "unconventional" monetary policies that should be followed in situations like this.
     What in fact do central banks do? For present purposes, it is important to realize that central banks do not create wealth as such; they redistribute it. More precisely, when the Fed or the ECB decides to create a billion additional dollars or euros, US or European capital is not augmented by that amount. In fact, national capital does not change by a single dollar or euro, because the operations in which central banks engage are always loans. They therefore result in the creation of financial assets and liabilities, which, at the moment they are created, exactly balance each other. For example, the Fed might lend $1 billion to Lehman Brothers or General Motors (or the US government), and these entities contract an equivalent debt. The net wealth of the Fed and Lehman Brothers (or General Motors) does not change at all, nor, a fortiori, does that of the United States or the planet. Indeed, it would be astonishing if central banks could simply by the stroke of a pen increase the capital of their nation or the world.
     What happens next depends on how this monetary policy influences the real economy. If the loan initiated by the central bank enables the recipient to escape from a bad pass and avoid a final collapse (which might decrease the national wealth), then, when the situation has been stabilized and the loan repaid, it makes sense to think that the loan from the Fed increased the national wealth (or at any rate prevented national wealth from decreasing). On the other hand, if the loan from the Fed merely postpones the recipient's inevitable collapse and even prevents the emergence of a viable competitor (which can happen), one can argue that the Fed's policy ultimately decreased the nation's wealth. Both outcomes are possible, and every monetary policy raises both possibilities to one degree or another. To the extent that the world's central banks limited the damage from the recession of 2008–2009, they helped to increase GDP and investment and therefore augmented the capital of the wealthy countries and of the world. Obviously, however, a dynamic evaluation of this kind is always uncertain and open to challenge. What is certain is that when central banks increase the money supply by lending to a financial or nonfinancial corporation or a government, there is no immediate impact on national capital (both public and private).20
     What "unconventional" monetary policies have been tried since the crisis of 2007–2008? In calm periods, central banks are content to ensure that the money supply grows at the same pace as economic activity in order to guarantee a low inflation rate of 1 or 2 percent a year. Specifically, they create new money by lending to banks for very short periods, often no more than a few days. These loans guarantee the solvency of the entire financial system. Households and firms deposit and withdraw vast sums of money every day, and these deposits and withdrawals are never perfectly balanced for any particular bank. The major innovation since 2008 has been in the duration of loans to private banks. Instead of lending for a few days, the Fed and ECB began lending for three to six months: the volume of loans of these durations increased dramatically in the last quarter of 2008 and the first quarter of 2009. They also began lending at similar durations to nonfinancial corporations. In the United States especially, the Fed also made loans of nine to twelve months to the banking sector and purchased long-dated bonds outright. In 2011–2012, the central banks again expanded the range of their interventions. The Fed, the Bank of Japan, and the Bank of England had been buying sovereign debt since the beginning of the crisis, but as the debt crisis worsened in southern Europe the ECB decided to follow suit.
     These policies call for several clarifications. First, the central banks have the power to prevent a bank or nonfinancial corporation from failing by lending it the money needed to pay its workers and suppliers, but they cannot oblige companies to invest or households to consume, and they cannot compel the economy to resume its growth. Nor do they have the power to set the rate of inflation. The liquidity created by the central banks probably warded off deflation and depression, but the economic outlook in the wealthy countries remains gloomy, especially in Europe, where the crisis of the euro has undermined confidence. The fact that governments in the wealthiest countries (United States, Japan, Germany, France, and Britain) could borrow at exceptionally low rates (just over 1 percent) in 2012–2013 attests to the importance of central bank stabilization policies, but it also shows that private investors have no clear idea of what to do with the money lent by the monetary authorities at rates close to zero. Hence they prefer to lend their cash back to the governments deemed the most solid at ridiculously low interest rates. The fact that rates are very low in some countries and much higher in others is the sign of an abnormal economic situation.21
     Central banks are powerful because they can redistribute wealth very quickly and, in theory, as extensively as they wish. If necessary, a central bank can create as many billions as it wants in seconds and credit all that cash to the account of a company or government in need. In an emergency (such as a financial panic, war, or natural disaster), this ability to create money immediately in unlimited amounts is an invaluable attribute. No tax authority can move that quickly to levy a tax: it is necessary first to establish a taxable base, set rates, pass a law, collect the tax, forestall possible challenges, and so on. If this were the only way to resolve a financial crisis, all the banks in the world would already be bankrupt. Rapid execution is the principal strength of the monetary authorities.
     The weakness of central banks is clearly their limited ability to decide who should receive loans in what amount and for what duration, as well as the difficulty of managing the resulting financial portfolio. One consequence of this is that the size of a central bank's balance sheet should not exceed certain limits. With all the new types of loans and financial market interventions that have been introduced since 2008, central bank balance sheets have roughly doubled in size. The sum of the Federal Reserve's assets and liabilities has gone from 10 to more than 20 percent of GDP; the same is true of the Bank of England; and the ECB's balance sheet has expanded from 15 to 30 percent of GDP. These are striking developments, but these sums are still fairly modest compared with total net private wealth, which is 500 to 600 percent of GDP in most of the rich countries.22
     It is of course possible in the abstract to imagine much larger central bank balance sheets. The central banks could decide to buy up all of a country's firms and real estate, finance the transition to renewable energy, invest in universities, and take control of the entire economy. Clearly, the problem is that central banks are not well suited to such activities and lack the democratic legitimacy to try them. They can redistribute wealth quickly and massively, but they can also be very wrong in their choice of targets (just as the effects of inflation on inequality can be quite perverse). Hence it is preferable to limit the size of central bank balance sheets. That is why they operate under strict mandates focused largely on maintaining the stability of the financial system. In practice, when a government decides to aid a particular branch of industry, as the United States did with General Motors in 2009–2010, it was the federal government and not the Federal Reserve that took charge of making loans, acquiring shares, and setting conditions and performance objectives. The same is true in Europe: industrial and educational policy are matters for states to decide, not central banks. The problem is not one of technical impossibility but of democratic governance. The fact that it takes time to pass tax and spending legislation is not an accident: when significant shares of national wealth are shifted about, it is best not to make mistakes.
     Among the many controversies concerning limiting the role of central banks, two issues are of particular interest here. One has to do with the complementary nature of bank regulation and taxation of capital (as the recent crisis in Cyprus made quite clear). The other has to do with the increasingly apparent deficiencies of Europe's current institutional architecture: the European Union is engaged in a historically unprecedented experiment: attempting to create a currency on a very large scale without a state.
 The Cyprus Crisis: When the Capital Tax and Banking Regulation Come Together

     The primary and indispensable role of central banking is to ensure the stability of the financial system. Central banks are uniquely equipped to evaluate the position of the various banks that make up the system and can refinance them if necessary in order to ensure that the payment system functions normally. They are sometimes assisted by other authorities specifically charged with regulating the banks: for example, by issuing banking licenses and ensuring that certain financial ratios are maintained (in order to make sure that the banks keep sufficient reserves of cash and "safe" assets relative to loans and other assets deemed to be higher risk). In all countries, the central banks and bank regulators (who are often affiliated with the central banks) work together. In current discussions concerning the creation of a European banking union, the ECB is supposed to play the central role. In particularly severe banking crises, central banks also work in concert with international organizations such as the IMF. Since 2009–2010, a "Troika" consisting of the European Commission, the ECB, and the IMF has been working to resolve the financial crisis in Europe, which involves both a public debt crisis and a banking crisis, especially in southern Europe. The recession of 2008–2009 caused a sharp rise in the public debt of many countries that were already heavily indebted before the crisis (especially Greece and Italy) and also led to a rapid deterioration of bank balance sheets, especially in countries affected by a collapsing real estate bubble (most notably Spain). In the end, the two crises are inextricably linked. The banks are holding government bonds whose precise value is unknown. (Greek bonds were subjected to a substantial "haircut," and although the authorities have promised not to repeat this strategy elsewhere, the fact remains that future actions are unpredictable in such circumstances.) State finances can only continue to get worse as long as the economic outlook continues to be bleak, as it probably will as long as the financial and credit system remains largely blocked.
     One problem is that neither the Troika nor the various member state governments have automatic access to international banking data or what I have called a "financial cadaster," which would allow them to distribute the burdens of adjustment in an efficient and transparent manner. I have already discussed the difficulties that Italy and Spain faced in attempting to impose a progressive tax on capital on their own in order to restore their public finances to a sound footing. The Greek case is even more extreme. Everyone is insisting that Greece collect more taxes from its wealthier citizens. This is no doubt an excellent idea. The problem is that in the absence of adequate international cooperation, Greece obviously has no way to levy a just and efficient tax on its own, since the wealthiest Greeks can easily move their money abroad, often to other European countries. The European and international authorities have never taken steps to implement the necessary laws and regulations, however.23 Lacking tax revenues, Greece has therefore been obliged to sell public assets, often at fire-sale prices, to buyers of Greek or other European nationalities, who evidently would rather take advantage of such an opportunity than pay taxes to the Greek government.
     The March 2013 crisis in Cyprus is a particularly interesting case to examine. Cyprus is an island with a million inhabitants, which joined the European Union in 2004 and the Eurozone in 2008. It has a hypertrophied banking sector, apparently due to very large foreign deposits, most notably from Russia. This money was drawn to Cyprus by low taxes and indulgent local authorities. According to statements by officials of the Troika, these Russian deposits include a number of very large individual accounts. Many people therefore imagine that the depositors are oligarchs with fortunes in the tens of millions or even billions of euros—people of the sort one reads about in the magazine rankings. The problem is that neither the European authorities nor the IMF have published any statistics, not even the crudest estimate. Very likely they do not have much information themselves, for the simple reason that they have never equipped themselves with the tools they need to move forward on this issue, even though it is absolutely central. Such opacity is not conducive to a considered and rational resolution of this sort of conflict. The problem is that the Cypriot banks no longer have the money that appears on their balance sheets. Apparently, they invested it in Greek bonds that were since written down and in real estate that is now worthless. Naturally, European authorities are hesitant to use the money of European taxpayers to keep the Cypriot banks afloat without some kind of guarantees in return, especially since in the end what they will really be keeping afloat is Russian millionaires.
     After months of deliberation, the members of the Troika came up with the disastrous idea of proposing an exceptional tax on all bank deposits with rates of 6.75 percent on deposits up to 100,000 euros and 9.9 percent above that limit. To the extent that this proposal resembles a progressive tax on capital, it might seem intriguing, but there are two important caveats. First, the very limited progressivity of the tax is illusory: in effect, almost the same tax rate is being imposed on small Cypriot savers with accounts of 10,000 euros and on Russian oligarchs with accounts of 10 million euros. Second, the tax base was never precisely defined by the European and international authorities handling the matter. The tax seems to apply only to bank deposits as such, so that a depositor could escape it by shifting his or her funds to a brokerage account holding stocks or bonds or by investing in real estate or other financial assets. Had this tax been applied, in other words, it would very likely have been extremely regressive, given the composition of the largest portfolios and the opportunities for reallocating investments. After the tax was unanimously approved by the members of the Troika and the seventeen finance ministers of the Eurozone in March 2013, it was vigorously rejected by the people of Cyprus. In the end, a different solution was adopted: deposits under 100,000 euros were exempted from the tax (this being the ceiling of the deposit guarantee envisioned under the terms of the proposed European banking union). The exact terms of the new tax remain relatively obscure, however. A bank-by-bank approach seems to have been adopted, although the precise tax rates and bases have not been spelled out explicitly.
     This episode is interesting because it illustrates the limits of the central banks and financial authorities. Their strength is that they can act quickly; their weakness is their limited capacity to correctly target the redistributions they cause to occur. The conclusion is that a progressive tax on capital is not only useful as a permanent tax but can also function well as an exceptional levy (with potentially high rates) in the resolution of major banking crises. In the Cypriot case, it is not necessarily shocking that savers were asked to help resolve the crisis, since the country as a whole bears responsibility for the development strategy chosen by its government. What is deeply shocking, on the other hand, is that the authorities did not even seek to equip themselves with the tools needed to apportion the burden of adjustment in a just, transparent, and progressive manner. The good news is that this episode may lead international authorities to recognize the limits of the tools currently at their disposal. If one asks the officials involved why the tax proposed for Cyprus had such little progressivity built into it and was imposed on such a limited base, their immediate response is that the banking data needed to apply a more steeply progressive schedule were not available.24 The bad news is that the authorities seem in no great hurry to resolve the problem, even though the technical solution is within reach. It may be that a progressive tax on capital faces purely ideological obstacles that will take some time to overcome.
 The Euro: A Stateless Currency for the Twenty-First Century?

     The various crises that have afflicted southern European banks since 2009 raise a more general question, which has to do with the overall architecture of the European Union. How did Europe come to create—for the first time in human history on such a vast scale—a currency without a state? Since Europe's GDP accounted for nearly one-quarter of global GDP in 2013, the question is of interest not just to inhabitants of the Eurozone but to the entire world.
     The usual answer to this question is that the creation of the euro—agreed on in the 1992 Maastricht Treaty in the wake of the fall of the Berlin Wall and the reunification of Germany and made a reality on January 1, 2002, when automatic teller machines across the Eurozone first began to dispense euro notes—is but one step in a lengthy process. Monetary union is supposed to lead naturally to political, fiscal, and budgetary union, to ever closer cooperation among the member states. Patience is essential, and union must proceed step by step. No doubt this is true to some extent. In my view, however, the unwillingness to lay out a precise path to the desired end—the repeated postponement of any discussion of the itinerary to be followed, the stages along the way, or the ultimate endpoint—may well derail the entire process. If Europe created a stateless currency in 1992, it did so for reasons that were not simply pragmatic. It settled on this institutional arrangement in the late 1980s and early 1990s, at a time when many people believed that the only function of central banking was to control inflation. The "stagflation" of the 1970s had convinced governments and people that central banks ought to be independent of political control and target low inflation as their only objective. That is why Europe created a currency without a state and a central bank without a government. The crisis of 2008 shattered this static vision of central banking, as it became apparent that in a serious economic crisis central banks have a crucial role to play and that the existing European institutions were wholly unsuited to the task at hand.
     Make no mistake. Given the power of central banks to create money in unlimited amounts, it is perfectly legitimate to subject them to rigid constraints and clear restrictions. No one wants to empower a head of state to replace university presidents and professors at will, much less to define the content of their teaching. By the same token, there is nothing shocking about imposing tight restrictions on the relations between governments and monetary authorities. But the limits of central bank independence should also be precise. In the current crisis, no one, to my knowledge, has proposed that central banks be returned to the private status they enjoyed in many countries prior to World War I (and in some places as recently as 1945).25 Concretely, the fact that central banks are public institutions means that their leaders are appointed by governments (and in some cases by parliaments). In many cases these leaders cannot be removed for the length of their mandate (usually five or six years) but can be replaced at the end of that term if their policies are deemed inadequate, which provides a measure of political control. In practice, the leaders of the Federal Reserve, the Bank of Japan, and the Bank of England are expected to work hand in hand with the legitimate, democratically elected governments of their countries. In each of these countries, the central bank has in the past played an important role in stabilizing interest rates and public debt at low and predictable levels.
     The ECB faces a unique set of problems. First, the ECB's statutes are more restrictive than those of other central banks: the objective of keeping inflation low has absolute priority over the objectives of maintaining growth and full employment. This reflects the ideological context in which the ECB was conceived. Furthermore, the ECB is not allowed to purchase newly issued government debt: it must first allow private banks to lend to the member states of the Eurozone (possibly at a higher rate of interest than that which the ECB charges the private banks) and then purchase the bonds on the secondary market, as it did ultimately, after much hesitation, for the sovereign debt of governments in southern Europe.26 More generally, it is obvious that the ECB's main difficulty is that it must deal with seventeen separate national debts and seventeen separate national governments. It is not easy for the bank to play its stabilizing role in such a context. If the Federal Reserve had to choose every morning whether to concentrate on the debt of Wyoming, California, or New York and set its rates and quantities in view of its judgment of the tensions in each particular market and under pressure from each region of the country, it would have a very hard time maintaining a consistent monetary policy.
     From the introduction of the euro in 2002 to the onset of the crisis in 2007–2008, interest rates were more or less identical across Europe. No one anticipated the possibility of an exit from the euro, so everything seemed to work well. When the global financial crisis began, however, interest rates began to diverge rapidly. The impact on government budgets was severe. When a government runs a debt close to one year of GDP, a difference of a few points of interest can have considerable consequences. In the face of such uncertainty, it is almost impossible to have a calm democratic debate about the burdens of adjustment or the indispensable reforms of the social state. For the countries of southern Europe, the options were truly impossible. Before joining the euro, they could have devalued their currency, which would at least have restored competitiveness and spurred economic activity. Speculation on national interest rates was in some ways more destabilizing than the previous speculation on exchange rates among European currencies, particularly since crossborder bank lending had meanwhile grown to such proportions that panic on the part of a handful of market actors was enough to trigger capital flows large enough to seriously affect countries such as Greece, Portugal, and Ireland, and even larger countries such as Spain and Italy. Logically, such a loss of monetary sovereignty should have been compensated by guaranteeing that countries could borrow if need be at low and predictable rates.
 The Question of European Unification

     The only way to overcome these contradictions is for the countries of the Eurozone (or at any rate those who are willing) to pool their public debts. The German proposal to create a "redemption fund," which I touched on earlier, is a good starting point, but it lacks a political component.27 Concretely, it is impossible to decide twenty years in advance what the exact pace of "redemption" will be—that is, how quickly the stock of pooled debt will be reduced to the target level. Many parameters will affect the outcome, starting with the state of the economy. To decide how quickly to pay down the pooled debt, or, in other words, to decide how much public debt the Eurozone should carry, one would need to empower a European "budgetary parliament" to decide on a European budget. The best way to do this would be to draw the members of this parliament from the ranks of the national parliaments, so that European parliamentary sovereignty would rest on the legitimacy of democratically elected national assemblies.28 Like any other parliament, this body would decide issues by majority vote after open public debate. Coalitions would form, based partly on political affiliation and partly on national affiliation. The decisions of such a body will never be ideal, but at least we would know what had been decided and why, which is important. It is preferable, I think, to create such a new body rather than rely on the current European Parliament, which is composed of members from twenty-seven states (many of which do not belong to the Eurozone and do not wish to pursue further European integration at this time). To rely on the existing European Parliament would also conflict too overtly with the sovereignty of national parliaments, which would be problematic in regard to decisions affecting national budget deficits. That is probably the reason why transfers of power to the European Parliament have always been quite limited in the past and will likely remain so for quite some time. It is time to accept this fact and to create a new parliamentary body to reflect the desire for unification that exists within the Eurozone countries (as indicated most clearly by their agreement to relinquish monetary sovereignty with due regard for the consequences).
     Several institutional arrangements are possible. In the spring of 2013, the new Italian government pledged to support a proposal made a few years earlier by German authorities concerning the election by universal suffrage of a president of the European Union—a proposal that logically ought to be accompanied by a broadening of the president's powers. If a budgetary parliament decides what the Eurozone's debt ought to be, then there clearly needs to be a European finance minister responsible to that body and charged with proposing a Eurozone budget and annual deficit. What is certain is that the Eurozone cannot do without a genuine parliamentary chamber in which to set its budgetary strategy in a public, democratic, and sovereign manner, and more generally to discuss ways to overcome the financial and banking crisis in which Europe currently finds itself mired. The existing European councils of heads of state and finance ministers cannot do the work of this budgetary body. They meet in secret, do not engage in open public debate, and regularly end their meetings with triumphal midnight communiqués announcing that Europe has been saved, even though the participants themselves do not always seem to be sure about what they have decided. The decision on the Cypriot tax is typical in this regard: although it was approved unanimously, no one wanted to accept responsibility in public.29 This type of proceeding is worthy of the Congress of Vienna (1815) but has no place in the Europe of the twenty-first century. The German and Italian proposals alluded to above show that progress is possible. It is nevertheless striking to note that France has been mostly absent from this debate through two presidencies,30 even though the country is prompt to lecture others about European solidarity and the need for debt mutualization (at least at the rhetorical level).31
     Unless things change in the direction I have indicated, it is very difficult to imagine a lasting solution to the crisis of the Eurozone. In addition to pooling debts and deficits, there are of course other fiscal and budgetary tools that no country can use on its own, so that it would make sense to think about using them jointly. The first example that comes to mind is of course the progressive tax on capital.
     An even more obvious example is a tax on corporate profits. Tax competition among European states has been fierce in this respect since the early 1990s. In particular, several small countries, with Ireland leading the way, followed by several Eastern European countries, made low corporate taxes a key element of their economic development strategies. In an ideal tax system, based on shared and reliable bank data, the corporate tax would play a limited role. It would simply be a form of withholding on the income tax (or capital tax) due from individual shareholders and bondholders.32 In practice, the problem is that this "withholding" tax is often the only tax paid, since much of what corporations declare as profit does not figure in the taxable income of individual shareholders, which is why it is important to collect a significant amount of tax at the source through the corporate tax.
     The right approach would be to require corporations to make a single declaration of their profits at the European level and then tax that profit in a way that is less subject to manipulation than is the current system of taxing the profits of each subsidiary individually. The problem with the current system is that multinational corporations often end up paying ridiculously small amounts because they can assign all their profits artificially to a subsidiary located in a place where taxes are very low; such a practice is not illegal, and in the minds of many corporate managers it is not even unethical.33 It makes more sense to give up the idea that profits can be pinned down to a particular state or territory; instead, one can apportion the revenues of the corporate tax on the basis of sales or wages paid within each country.
     A related problem arises in connection with the tax on individual capital. The general principle on which most tax systems are based is the principle of residence: each country taxes the income and wealth of individuals who reside within its borders for more than six months a year. This principle is increasingly difficult to apply in Europe, especially in border areas (for example, along the Franco-Belgian border). What is more, wealth has always been taxed partly as a function of the location of the asset rather than of its owner. For example, the owner of a Paris apartment must pay property tax to the city of Paris, even if he lives halfway around the world and regardless of his nationality. The same principle applies to the wealth tax, but only in regard to real estate. There is no reason why it could not also be applied to financial assets, based on the location of the corresponding business activity or company. The same is true for government bonds. Extending the principle of "residence of the capital asset" (rather than of its owner) to financial assets would obviously require automatic sharing of bank data to allow the tax authorities to assess complex ownership structures. Such a tax would also raise the issue of multinationality.34 Adequate answers to all these questions can clearly be found only at the European (or global) level. The right approach is therefore to create a Eurozone budgetary parliament to deal with them.
     Are all these proposals utopian? No more so than attempting to create a stateless currency. When countries relinquish monetary sovereignty, it is essential to restore their fiscal sovereignty over matters no longer within the purview of the nation-state, such as the interest rate on public debt, the progressive tax on capital, or the taxation of multinational corporations. For the countries of Europe, the priority now should be to construct a continental political authority capable of reasserting control over patrimonial capitalism and private interests and of advancing the European social model in the twenty-first century. The minor disparities between national social models are of secondary importance in view of the challenges to the very survival of the common European model.35
     Another point to bear in mind is that without such a European political union, it is highly likely that tax competition will continue to wreak havoc. The race to the bottom continues in regard to corporate taxes, as recently proposed "allowances for corporate equity" show.36 It is important to realize that tax competition regularly leads to a reliance on consumption taxes, that is, to the kind of tax system that existed in the nineteenth century, where no progressivity is possible. In practice, this favors individuals who are able to save, to change their country of residence, or both.37 Note, however, that progress toward some forms of fiscal cooperation has been more rapid than one might imagine at first glance: consider, for example, the proposed financial transactions tax, which could become one of the first truly European taxes. Although such a tax is far less significant than a tax on capital or corporate profits (in terms of both revenues and distributive impact), recent progress on this tax shows that nothing is foreordained.38 Political and fiscal history always blaze their own trails.
 Government and Capital Accumulation in the Twenty-First Century

     Let me now take a step back from the immediate issues of European construction and raise the following question: In an ideal society, what level of public debt is desirable? Let me say at once that there is no certainty about the answer, and only democratic deliberation can decide, in keeping with the goals each society sets for itself and the particular challenges each country faces. What is certain is that no sensible answer is possible unless a broader question is also raised: What level of public capital is desirable, and what is the ideal level of total national capital?
     In this book, I have looked in considerable detail at the evolution of the capital/income ratio β across space and time. I have also examined how β is determined in the long run by the savings and growth rates of each country, according to the law β = s / g. But I have not yet asked what β is desirable. In an ideal society, should the capital stock be equal to five years of national income, or ten years, or twenty? How should we think about this question? It is impossible to give a precise answer. Under certain hypotheses, however, one can establish a ceiling on the quantity of capital that one can envision accumulating a priori. The maximal level of capital is attained when so much has been accumulated that the return on capital, r, supposed to be equal to its marginal productivity, falls to be equal to the growth rate g. In 1961 Edmund Phelps baptized the equality r = g the "golden rule of capital accumulation." If one takes it literally, the golden rule implies much higher capital/income ratios than have been observed historically, since, as I have shown, the return on capital has always been significantly higher than the growth rate. Indeed, r was much greater than g before the nineteenth century (with a return on capital of 4–5 percent and a growth rate below 1 percent), and it will probably be so again in the twenty-first century (with a return of 4–5 percent once again and long-term growth not much above 1.5 percent).39 It is very difficult to say what quantity of capital would have to be accumulated for the rate of return to fall to 1 or 1.5 percent. It is surely far more than the six to seven years of national income currently observed in the most capital-intensive countries. Perhaps it would take ten to fifteen years of national income, maybe even more. It is even harder to imagine what it would take for the return on capital to fall to the low growth levels observed before the eighteenth century (less than 0.2 percent). One might need to accumulate capital equivalent to twenty to thirty years of national income: everyone would then own so much real estate, machinery, tools, and so on that an additional unit of capital would add less than 0.2 percent to each year's output.
     The truth is that to pose the question in this way is to approach it too abstractly. The answer given by the golden rule is not very useful in practice. It is unlikely that any human society will ever accumulate that much capital. Nevertheless, the logic that underlies the golden rule is not without interest. Let me summarize the argument briefly.40 If the golden rule is satisfied, so r = g, then by definition capital's long-run share of national income is exactly equal to the savings rate: α = s. Conversely, as long as r > g, capital's long-run share is greater than the savings rate: α > s.41 In other words, in order for the golden rule to be satisfied, one has to have accumulated so much capital that capital no longer yields anything. Or, more precisely, one has to have accumulated so much capital that merely maintaining the capital stock at the same level (in proportion to national income) requires reinvesting all of the return to capital every year. That is what α = s means: all of the return to capital must be saved and added back to the capital stock. Conversely, if r > g, than capital returns something in the long run, in the sense that it is no longer necessary to reinvest all of the return on capital to maintain the same capital/income ratio.
     Clearly, then, the golden rule is related to a "capital saturation" strategy. So much capital is accumulated that rentiers have nothing left to consume, since they must reinvest all of their return if they want their capital to grow at the same rate as the economy, thereby preserving their social status relative to the average for the society. Conversely, if r > g, it suffices to reinvest a fraction of the return on capital equal to the growth rate (g) and to consume the rest (r − g). The inequality r > g is the basis of a society of rentiers. Accumulating enough capital to reduce the return to the growth rate can therefore end the reign of the rentier.
     But is it the best way to achieve that end? Why would the owners of capital, or society as a whole, choose to accumulate that much capital? Bear in mind that the argument that leads to the golden rule simply sets an upper limit but in no way justifies reaching it.42 In practice, there are much simpler and more effective ways to deal with rentiers, namely, by taxing them: no need to accumulate capital worth dozens of years of national income, which might require several generations to forgo consumption.43 At a purely theoretical level, everything depends in principle on the origins of growth. If there is no productivity growth, so that the only source of growth is demographic, then accumulating capital to the level required by the golden rule might make sense. For example, if one assumes that the population will grow forever at 1 percent a year and that people are infinitely patient and altruistic toward future generations, then the right way to maximize per capita consumption in the long run is to accumulate so much capital that the rate of return falls to 1 percent. But the limits of this argument are obvious. In the first place, it is rather odd to assume that demographic growth is eternal, since it depends on the reproductive choices of future generations, for which the present generation is not responsible (unless we imagine a world with a particularly underdeveloped contraceptive technology). Furthermore, if demographic growth is also zero, one would have to accumulate an infinite quantity of capital: as long as the return on capital is even slightly positive, it will be in the interest of future generations for the present generation to consume nothing and accumulate as much as possible. According to Marx, who implicitly assumes zero demographic and productivity growth, this is the ultimate consequence of the capitalist's unlimited desire to accumulate more and more capital, and in the end it leads to the downfall of capitalism and the collective appropriation of the means of production. Indeed, in the Soviet Union, the state claimed to serve the common good by accumulating unlimited industrial capital and ever-increasing numbers of machines: no one really knew where the planners thought accumulation should end.44
     If productivity growth is even slightly positive, the process of capital accumulation is described by the law β = s / g. The question of the social optimum then becomes more difficult to resolve. If one knows in advance that productivity will increase forever by 1 percent a year, it follows that future generations will be more productive and prosperous than present ones. That being the case, is it reasonable to sacrifice present consumption to the accumulation of vast amounts of capital? Depending on how one chooses to compare and weigh the well-being of different generations, one can reach any desired conclusion: that it is wiser to leave nothing at all for future generations (except perhaps our pollution), or to abide by the golden rule, or any other split between present and future consumption between those two extremes. Clearly, the golden rule is of limited practical utility.45
     In truth, simple common sense should have been enough to conclude that no mathematical formula will enable us to resolve the complex issue of deciding how much to leave for future generations. Why, then, did I feel it necessary to present these conceptual debates around the golden rule? Because they have had a certain impact on public debate in recent years in regard first to European deficits and second to controversies around the issue of climate change.
 Law and Politics

     First, a rather different idea of "the golden rule" has figured in the European debate about public deficits.46 In 1992, when the Treaty of Maastricht created the euro, it was stipulated that member states should ensure that their budget deficits would be less than 3 percent of GDP and that total public debt would remain below 60 percent of GDP.47 The precise economic logic behind these choices has never been completely explained.48 Indeed, if one does not include public assets and total national capital, it is difficult to justify any particular level of public debt on rational grounds. I have already mentioned the real reason for these strict budgetary constraints, which are historically unprecedented. (The United States, Britain, and Japan have never imposed such rules on themselves.) It is an almost inevitable consequence of the decision to create a common currency without a state, and in particular without pooling the debt of member states or coordinating deficits. Presumably, the Maastricht criteria would become unnecessary if the Eurozone were to equip itself with a budgetary parliament empowered to decide and coordinate deficit levels for the various member states. The decision would then be a sovereign and democratic one. There is no convincing reason to impose a priori constraints, much less to enshrine limits on debts and deficits in state constitutions. Since the construction of a budgetary union has only just begun, of course, special rules may be necessary to build confidence: for example, one can imagine requiring a parliamentary supermajority in order to exceed a certain level of debt. But there is no justification for engraving untouchable debt and deficit limits in stone in order to thwart future political majorities.
     Make no mistake: I have no particular liking for public debt. As I noted earlier, debt often becomes a backhanded form of redistribution of wealth from the poor to the rich, from people with modest savings to those with the means to lend to the government (who as a general rule ought to be paying taxes rather than lending). Since the middle of the twentieth century and the large-scale public debt repudiations (and debt shrinkage through inflation) after World War II, many dangerous illusions have arisen in regard to government debt and its relation to social redistribution. These illusions urgently need to be dispelled.
     There are nevertheless a number of reasons why it is not very judicious to enshrine budgetary restrictions in statutory or constitutional stone. For one thing, historical experience suggests that in a serious crisis it is often necessary to make emergency budget decisions on a scale that would have been unimaginable before the crisis. To leave it to a constitutional judge (or committee of experts) to judge such decisions case by case is to take a step back from democracy. In any case, turning the power to decide over to the courts is not without risk. Indeed, history shows that constitutional judges have an unfortunate tendency to interpret fiscal and budgetary laws in very conservative ways.49 Such judicial conservatism is particularly dangerous in Europe, where there has been a tendency to see the free circulation of people, goods, and capital as fundamental rights with priority over the right of member states to promote the general interest of their people, if need be by levying taxes.
     Finally, it is impossible to judge the appropriate level of debts and deficits without taking into account numerous other factors affecting national wealth. When we look at all the available data today, what is most striking is that national wealth in Europe has never been so high. To be sure, net public wealth is virtually zero, given the size of the public debt, but net private wealth is so high that the sum of the two is as great as it has been in a century. Hence the idea that we are about to bequeath a shameful burden of debt to our children and grandchildren and that we ought to wear sackcloth and ashes and beg for forgiveness simply makes no sense. The nations of Europe have never been so rich. What is true and shameful, on the other hand, is that this vast national wealth is very unequally distributed. Private wealth rests on public poverty, and one particularly unfortunate consequence of this is that we currently spend far more in interest on the debt than we invest in higher education. This has been true, moreover, for a very long time: because growth has been fairly slow since 1970, we are in a period of history in which debt weighs very heavily on our public finances.50 This is the main reason why the debt must be reduced as quickly as possible, ideally by means of a progressive one-time tax on private capital or, failing that, by inflation. In any event, the decision should be made by a sovereign parliament after democratic debate.51
 Climate Change and Public Capital

     The second important issue on which these golden rule–related questions have a major impact is climate change and, more generally, the possibility of deterioration of humanity's natural capital in the century ahead. If we take a global view, then this is clearly the world's principal long-term worry. The Stern Report, published in 2006, calculated that the potential damage to the environment by the end of the century could amount, in some scenarios, to dozens of points of global GDP per year. Among economists, the controversy surrounding the report hinged mainly on the question of the rate at which future damage to the environment should be discounted. Nicholas Stern, who is British, argued for a relatively low discount rate, approximately the same as the growth rate (1–1.5 percent a year). With that assumption, present generations weigh future damage very heavily in their own calculations. William Nordhaus, an American, argued that one ought to choose a discount rate closer to the average return on capital (4–4.5 percent a year), a choice that makes future disasters seem much less worrisome. In other words, even if everyone agrees about the cost of future disasters (despite the obvious uncertainties), they can reach different conclusions. For Stern, the loss of global well-being is so great that it justifies spending at least 5 points of global GDP a year right now to attempt to mitigate climate change in the future. For Nordhaus, such a large expenditure would be entirely unreasonable, because future generations will be richer and more productive than we are. They will find a way to cope, even if it means consuming less, which will in any case be less costly from the standpoint of universal well-being than making the kind of effort Stern envisions. So in the end, all of these expert calculations come down to a stark difference of opinion.
     Stern's opinion seems more reasonable to me than Nordhaus's, whose optimism is attractive, to be sure, as well as opportunely consistent with the US strategy of unrestricted carbon emissions, but ultimately not very convincing.52 In any case, this relatively abstract debate about discount rates largely sidesteps what seems to me the central issue. Public debate, especially in Europe but also in China and the United States, has taken an increasingly pragmatic turn, with discussion of the need for major investment in the search for new nonpolluting technologies and forms of renewable energy sufficiently abundant to enable the world to do without hydrocarbons. Discussion of "ecological stimulus" is especially prevalent in Europe, where many people see it as a possible way out of today's dismal economic climate. This strategy is particularly tempting because many governments are currently able to borrow at very low interest rates. If private investors are unwilling to spend and invest, then why shouldn't governments invest in the future to avoid a likely degradation of natural capital?53
     This is a very important debate for the decades ahead. The public debt (which is much smaller than total private wealth and perhaps not really that difficult to eliminate) is not our major worry. The more urgent need is to increase our educational capital and prevent the degradation of our natural capital. This is a far more serious and difficult challenge, because climate change cannot be eliminated at the stroke of a pen (or with a tax on capital, which comes to the same thing). The key practical issue is the following. Suppose that Stern is approximately correct that there is good reason to spend the equivalent of 5 percent of global GDP annually to ward off an environmental catastrophe. Do we really know what we ought to invest in and how we should organize our effort? If we are talking about public investments of this magnitude, it is important to realize that this would represent public spending on a vast scale, far vaster than any previous public spending by the rich countries.54 If we are talking about private investment, we need to be clear about the manner of public financing and who will own the resulting technologies and patents. Should we count on advanced research to make rapid progress in developing renewable energy sources, or should we immediately subject ourselves to strict limits on hydrocarbon consumption? It would probably be wise to choose a balanced strategy that would make use of all available tools.55 So much for common sense. But the fact remains that no one knows for now how these challenges will be met or what role governments will play in preventing the degradation of our natural capital in the years ahead.
 Economic Transparency and Democratic Control of Capital

     More generally, it is important, I think, to insist that one of the most important issues in coming years will be the development of new forms of property and democratic control of capital. The dividing line between public capital and private capital is by no means as clear as some have believed since the fall of the Berlin Wall. As noted, there are already many areas, such as education, health, culture, and the media, in which the dominant forms of organization and ownership have little to do with the polar paradigms of purely private capital (modeled on the joint-stock company entirely owned by its shareholders) and purely public capital (based on a similar top-down logic in which the sovereign government decides on all investments). There are obviously many intermediate forms of organization capable of mobilizing the talent of different individuals and the information at their disposal. When it comes to organizing collective decisions, the market and the ballot box are merely two polar extremes. New forms of participation and governance remain to be invented.56
     The essential point is that these various forms of democratic control of capital depend in large part on the availability of economic information to each of the involved parties. Economic and financial transparency are important for tax purposes, to be sure, but also for much more general reasons. They are essential for democratic governance and participation. In this respect, what matters is not transparency regarding individual income and wealth, which is of no intrinsic interest (except perhaps in the case of political officials or in situations where there is no other way to establish trust).57 For collective action, what would matter most would be the publication of detailed accounts of private corporations (as well as government agencies). The accounting data that companies are currently required to publish are entirely inadequate for allowing workers or ordinary citizens to form an opinion about corporate decisions, much less to intervene in them. For example, to take a concrete case mentioned at the very beginning of this book, the published accounts of Lonmin, Inc., the owner of the Marikana platinum mine where thirty-four strikers were shot dead in August 2012, do not tell us precisely how the wealth produced by the mine is divided between profits and wages. This is generally true of published corporate accounts around the world: the data are grouped in very broad statistical categories that reveal as little as possible about what is actually at stake, while more detailed information is reserved for investors.58 It is then easy to say that workers and their representatives are insufficiently informed about the economic realities facing the firm to participate in investment decisions. Without real accounting and financial transparency and sharing of information, there can be no economic democracy. Conversely, without a real right to intervene in corporate decision-making (including seats for workers on the company's board of directors), transparency is of little use. Information must support democratic institutions; it is not an end in itself. If democracy is someday to regain control of capitalism, it must start by recognizing that the concrete institutions in which democracy and capitalism are embodied need to be reinvented again and again.59

    Conclusion

     I have presented the current state of our historical knowledge concerning the dynamics of the distribution of wealth and income since the eighteenth century, and I have attempted to draw from this knowledge whatever lessons can be drawn for the century ahead.
     The sources on which this book draws are more extensive than any previous author has assembled, but they remain imperfect and incomplete. All of my conclusions are by nature tenuous and deserve to be questioned and debated. It is not the purpose of social science research to produce mathematical certainties that can substitute for open, democratic debate in which all shades of opinion are represented.
 The Central Contradiction of Capitalism: r > g

     The overall conclusion of this study is that a market economy based on private property, if left to itself, contains powerful forces of convergence, associated in particular with the diffusion of knowledge and skills; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based.
     The principal destabilizing force has to do with the fact that the private rate of return on capital, r, can be significantly higher for long periods of time than the rate of growth of income and output, g.
     The inequality r > g implies that wealth accumulated in the past grows more rapidly than output and wages. This inequality expresses a fundamental logical contradiction. The entrepreneur inevitably tends to become a rentier, more and more dominant over those who own nothing but their labor. Once constituted, capital reproduces itself faster than output increases. The past devours the future.
     The consequences for the long-term dynamics of the wealth distribution are potentially terrifying, especially when one adds that the return on capital varies directly with the size of the initial stake and that the divergence in the wealth distribution is occurring on a global scale.
     The problem is enormous, and there is no simple solution. Growth can of course be encouraged by investing in education, knowledge, and nonpolluting technologies. But none of these will raise the growth rate to 4 or 5 percent a year. History shows that only countries that are catching up with more advanced economies—such as Europe during the three decades after World War II or China and other emerging countries today—can grow at such rates. For countries at the world technological frontier—and thus ultimately for the planet as a whole—there is ample reason to believe that the growth rate will not exceed 1–1.5 percent in the long run, no matter what economic policies are adopted.1
     With an average return on capital of 4–5 percent, it is therefore likely that r > g will again become the norm in the twenty-first century, as it had been throughout history until the eve of World War I. In the twentieth century, it took two world wars to wipe away the past and significantly reduce the return on capital, thereby creating the illusion that the fundamental structural contradiction of capitalism (r > g) had been overcome.
     To be sure, one could tax capital income heavily enough to reduce the private return on capital to less than the growth rate. But if one did that indiscriminately and heavy-handedly, one would risk killing the motor of accumulation and thus further reducing the growth rate. Entrepreneurs would then no longer have the time to turn into rentiers, since there would be no more entrepreneurs.
     The right solution is a progressive annual tax on capital. This will make it possible to avoid an endless inegalitarian spiral while preserving competition and incentives for new instances of primitive accumulation. For example, I earlier discussed the possibility of a capital tax schedule with rates of 0.1 or 0.5 percent on fortunes under 1 million euros, 1 percent on fortunes between 1 and 5 million euros, 2 percent between 5 and 10 million euros, and as high as 5 or 10 percent for fortunes of several hundred million or several billion euros. This would contain the unlimited growth of global inequality of wealth, which is currently increasing at a rate that cannot be sustained in the long run and that ought to worry even the most fervent champions of the self-regulated market. Historical experience shows, moreover, that such immense inequalities of wealth have little to do with the entrepreneurial spirit and are of no use in promoting growth. Nor are they of any "common utility," to borrow the nice expression from the 1789 Declaration of the Rights of Man and the Citizen with which I began this book.
     The difficulty is that this solution, the progressive tax on capital, requires a high level of international cooperation and regional political integration. It is not within the reach of the nation-states in which earlier social compromises were hammered out. Many people worry that moving toward greater cooperation and political integration within, say, the European Union only undermines existing achievements (starting with the social states that the various countries of Europe constructed in response to the shocks of the twentieth century) without constructing anything new other than a vast market predicated on ever purer and more perfect competition. Yet pure and perfect competition cannot alter the inequality r > g, which is not the consequence of any market "imperfection." On the contrary. Although the risk is real, I do not see any genuine alternative: if we are to regain control of capitalism, we must bet everything on democracy—and in Europe, democracy on a European scale. Larger political communities such as the United States and China have a wider range of options, but for the small countries of Europe, which will soon look very small indeed in relation to the global economy, national withdrawal can only lead to even worse frustration and disappointment than currently exists with the European Union. The nation-state is still the right level at which to modernize any number of social and fiscal policies and to develop new forms of governance and shared ownership intermediate between public and private ownership, which is one of the major challenges for the century ahead. But only regional political integration can lead to effective regulation of the globalized patrimonial capitalism of the twenty-first century.
 For a Political and Historical Economics

     I would like to conclude with a few words about economics and social science. As I made clear in the introduction, I see economics as a subdiscipline of the social sciences, alongside history, sociology, anthropology, and political science. I hope that this book has given the reader an idea of what I mean by that. I dislike the expression "economic science," which strikes me as terribly arrogant because it suggests that economics has attained a higher scientific status than the other social sciences. I much prefer the expression "political economy," which may seem rather old-fashioned but to my mind conveys the only thing that sets economics apart from the other social sciences: its political, normative, and moral purpose.
     From the outset, political economy sought to study scientifically, or at any rate rationally, systematically, and methodically, the ideal role of the state in the economic and social organization of a country. The question it asked was: What public policies and institutions bring us closer to an ideal society? This unabashed aspiration to study good and evil, about which every citizen is an expert, may make some readers smile. To be sure, it is an aspiration that often goes unfulfilled. But it is also a necessary, indeed indispensable, goal, because it is all too easy for social scientists to remove themselves from public debate and political confrontation and content themselves with the role of commentators on or demolishers of the views and data of others. Social scientists, like all intellectuals and all citizens, ought to participate in public debate. They cannot be content to invoke grand but abstract principles such as justice, democracy, and world peace. They must make choices and take stands in regard to specific institutions and policies, whether it be the social state, the tax system, or the public debt. Everyone is political in his or her own way. The world is not divided between a political elite on one side and, on the other, an army of commentators and spectators whose only responsibility is to drop a ballot in a ballot box once every four or five years. It is illusory, I believe, to think that the scholar and the citizen live in separate moral universes, the former concerned with means and the latter with ends. Although comprehensible, this view ultimately strikes me as dangerous.
     For far too long economists have sought to define themselves in terms of their supposedly scientific methods. In fact, those methods rely on an immoderate use of mathematical models, which are frequently no more than an excuse for occupying the terrain and masking the vacuity of the content. Too much energy has been and still is being wasted on pure theoretical speculation without a clear specification of the economic facts one is trying to explain or the social and political problems one is trying to resolve. Economists today are full of enthusiasm for empirical methods based on controlled experiments. When used with moderation, these methods can be useful, and they deserve credit for turning some economists toward concrete questions and firsthand knowledge of the terrain (a long overdue development). But these new approaches themselves succumb at times to a certain scientistic illusion. It is possible, for instance, to spend a great deal of time proving the existence of a pure and true causal relation while forgetting that the question itself is of limited interest. The new methods often lead to a neglect of history and of the fact that historical experience remains our principal source of knowledge. We cannot replay the history of the twentieth century as if World War I never happened or as if the income tax and PAYGO pensions were never created. To be sure, historical causality is always difficult to prove beyond a shadow of a doubt. Are we really certain that a particular policy had a particular effect, or was the effect perhaps due to some other cause? Nevertheless, the imperfect lessons that we can draw from history, and in particular from the study of the last century, are of inestimable, irreplaceable value, and no controlled experiment will ever be able to equal them. To be useful, economists must above all learn to be more pragmatic in their methodological choices, to make use of whatever tools are available, and thus to work more closely with other social science disciplines.
     Conversely, social scientists in other disciplines should not leave the study of economic facts to economists and must not flee in horror the minute a number rears its head, or content themselves with saying that every statistic is a social construct, which of course is true but insufficient. At bottom, both responses are the same, because they abandon the terrain to others.
 The Interests of the Least Well-Off

     "As long as the incomes of the various classes of contemporary society remain beyond the reach of scientific inquiry, there can be no hope of producing a useful economic and social history." This admirable sentence begins Le mouvement du profit en France au 19e siècle, which Jean Bouvier, François Furet, and Marcel Gillet published in 1965. The book is still worth reading, in part because it is a good example of the "serial history" that flourished in France between 1930 and 1980, with its characteristic virtues and flaws, but even more because it reminds us of the intellectual trajectory of François Furet, whose career offers a marvelous illustration of both the good and the bad reasons why this research program eventually died out.
     When Furet began his career as a promising young historian, he chose a subject that he believed was at the center of contemporary research: "the incomes of the various classes of contemporary society." The book is rigorous, eschews all prejudgment, and seeks above all to collect data and establish facts. Yet this would be Furet's first and last work in this realm. In the splendid book he published with Jacques Ozouf in 1977, Lire et écrire, devoted to "literacy in France from Calvin to Jules Ferry," one finds the same eagerness to compile serial data, no longer about industrial profits but now about literacy rates, numbers of teachers, and educational expenditures. In the main, however, Furet became famous for his work on the political and cultural history of the French Revolution, in which one endeavors in vain to find any trace of the "incomes of the various classes of contemporary society," and in which the great historian, preoccupied as he was in the 1970s with the battle he was waging against the Marxist historians of the French Revolution (who at the time were particularly dogmatic and clearly dominant, notably at the Sorbonne), seems to have turned against economic and social history of any kind. To my mind, this is a pity, since I believe it is possible to reconcile the different approaches. Politics and ideas obviously exist independently of economic and social evolutions. Parliamentary institutions and the government of laws were never merely the bourgeois institutions that Marxist intellectuals used to denounce before the fall of the Berlin Wall. Yet it is also clear that the ups and downs of prices and wages, incomes and fortunes, help to shape political perceptions and attitudes, and in return these representations engender political institutions, rules, and policies that ultimately shape social and economic change. It is possible, and even indispensable, to have an approach that is at once economic and political, social and cultural, and concerned with wages and wealth. The bipolar confrontations of the period 1917–1989 are now clearly behind us. The clash of communism and capitalism sterilized rather than stimulated research on capital and inequality by historians, economists, and even philosophers.2 It is long since time to move beyond these old controversies and the historical research they engendered, which to my mind still bears their stamp.
     As I noted in the introduction, there are also technical reasons for the premature death of serial history. The material difficulty of collecting and processing large volumes of data in those days probably explains why works in this genre (including Le mouvement du profit en France au 19e siècle) had little room for historical interpretation, which makes reading them rather arid. In particular, there is often very little analysis of the relation between observed economic changes and the political and social history of the period under study. Instead, one gets a meticulous description of the sources and raw data, information that is more naturally presented nowadays in spreadsheets and online databases.
     I also think that the demise of serial history was connected with the fact that the research program petered out before it reached the twentieth century. In studying the eighteenth or nineteenth centuries it is possible to think that the evolution of prices and wages, or incomes and wealth, obeys an autonomous economic logic having little or nothing to do with the logic of politics or culture. When one studies the twentieth century, however, such an illusion falls apart immediately. A quick glance at the curves describing income and wealth inequality or the capital/income ratio is enough to show that politics is ubiquitous and that economic and political changes are inextricably intertwined and must be studied together. This forces one to study the state, taxes, and debt in concrete ways and to abandon simplistic and abstract notions of the economic infrastructure and political superstructure.
     To be sure, the principle of specialization is sound and surely makes it legitimate for some scholars to do research that does not depend on statistical series. There are a thousand and one ways to do social science, and accumulating data is not always indispensable or even (I concede) especially imaginative. Yet it seems to me that all social scientists, all journalists and commentators, all activists in the unions and in politics of whatever stripe, and especially all citizens should take a serious interest in money, its measurement, the facts surrounding it, and its history. Those who have a lot of it never fail to defend their interests. Refusing to deal with numbers rarely serves the interests of the least well-off.

    Notes

     In order to avoid burdening the text and endnotes with technical matters, precise details concerning historical sources, bibliographic references, statistical methods, and mathematical models have been included in a technical appendix, which can be accessed on the Internet at http://piketty.pse.ens.fr/capital21c.
     In particular, the online technical appendix contains the data from which the graphs in the text were constructed, along with detailed descriptions of the relevant sources and methods. The bibliographic references and endnotes in the text have been pared down as much as possible, with more detailed references relegated to this appendix. It also contains a number of supplementary tables and figures, some of which are referred to in the notes (e.g., "see Supplementary Figure S1.1," in Chapter 1, note 21). The online technical appendix and Internet site were designed as a complement to the book, which can thus be read on several levels.
     Interested readers will also find online all relevant data files (mainly in Excel or Stata format), programs, mathematical formulas and equations, references to primary sources, and links to more technical papers on which this book draws.
     My goal in writing was to make this book accessible to people without any special technical training, while the book together with the technical appendix should satisfy the demands of specialists in the field. This procedure will also allow me to post revised online versions and updates of the tables, graphs, and technical apparatus. I welcome input from readers of the book or website, who can send comments and criticisms to piketty@ens.fr.
 Introduction

     1. The English economist Thomas Malthus (1766–1834) is considered to be one of the most influential members of the "classical" school, along with Adam Smith (1723–1790) and David Ricardo (1772–1823).
     2. There is of course a more optimistic school of liberals: Adam Smith seems to belong to it, and in fact he never really considered the possibility that the distribution of wealth might grow more unequal over the long run. The same is true of Jean-Baptiste Say (1767–1832), who also believed in natural harmony.
     3. The other possibility is to increase supply of the scarce good, for example by finding new oil deposits (or new sources of energy, if possible cleaner than oil), or by moving toward a more dense urban environment (by constructing high-rise housing, for example), which raises other difficulties. In any case, this, too, can take decades to accomplish.
     4. Friedrich Engels (1820–1895), who had direct experience of his subject, would become the friend and collaborator of the German philosopher and economist Karl Marx (1818–1883). He settled in Manchester in 1842, where he managed a factory owned by his father.
     5. The historian Robert Allen recently proposed to call this long period of wage stagnation "Engels' pause." See Allen, "Engels' Pause: A Pessimist's Guide to the British Industrial Revolution," Oxford University Department of Economics Working Papers 315 (2007). See also "Engels' Pause: Technical Change, Capital Accumulation, and Inequality in the British Industrial Revolution," in Explorations in Economic History 46, no. 4 (October 2009): 418–35.
     6. The opening passage continues: "All the powers of old Europe have entered into a holy alliance to exorcise this specter: Pope and Tsar, Metternich and Guizot, French Radicals and German police-spies." No doubt Marx's literary talent partially accounts for his immense influence.
     7. In 1847 Marx published The Misery of Philosophy, in which he mocked Proudhon's Philosophy of Misery, which was published a few years earlier.
     8. In Chapter 6 I return to the theme of Marx's use of statistics. To summarize: he occasionally sought to make use of the best available statistics of the day (which were better than the statistics available to Malthus and Ricardo but still quite rudimentary), but he usually did so in a rather impressionistic way and without always establishing a clear connection to his theoretical argument.
     9. Simon Kuznets, "Economic Growth and Income Inequality," American Economic Review 45, no. 1 (1955): 1–28.
     10. Robert Solow, "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics 70, no. 1 (February 1956): 65–94.
     11. See Simon Kuznets, Shares of Upper Income Groups in Income and Savings (Cambridge, MA: National Bureau of Economic Research, 1953). Kuznets was an American economist, born in Ukraine in 1901, who settled in the United States in 1922 and became a professor at Harvard after studying at Columbia University. He died in 1985. He was the first person to study the national accounts of the United States and the first to publish historical data on inequality.
     12. Because it is often the case that only a portion of the population is required to file income tax returns, we also need national accounts in order to measure total income.
     13. Put differently, the middle and working classes, defined as the poorest 90 percent of the US population, saw their share of national income increase from 50–55 percent in the 1910s and 1920s to 65–70 percent in the late 1940s.
     14. See Kuznets, Shares of Upper Income Groups, 12–18. The Kuznets curve is sometimes referred to as "the inverted-U curve." Specifically, Kuznets suggests that growing numbers of workers move from the poor agricultural sector into the rich industrial sector. At first, only a minority benefits from the wealth of the industrial sector, hence inequality increases. But eventually everyone benefits, so inequality decreases. It should be obvious that this highly stylized mechanism can be generalized. For example, labor can be transferred between industrial sectors or between jobs that are more or less well paid.
     15. It is interesting to note that Kuznets had no data to demonstrate the increase of inequality in the nineteenth century, but it seemed obvious to him (as to most observers) that such an increase had occurred.
     16. As Kuznets himself put it: "This is perhaps 5 percent empirical information and 95 percent speculation, some of it possibly tainted by wishful thinking." See Kuznets, Shares of Upper Income Groups, 24–26.
     17. "The future prospect of underdeveloped countries within the orbit of the free world" (28).
     18. In these representative-agent models, which have become ubiquitous in economic teaching and research since the 1960s, one assumes from the outset that each agent receives the same wage, is endowed with the same wealth, and enjoys the same sources of income, so that growth proportionately benefits all social groups by definition. Such a simplification of reality may be justified for the study of certain very specific problems but clearly limits the set of economic questions one can ask.
     19. Household income and budget studies by national statistical agencies rarely date back before 1970 and tend to seriously underestimate higher incomes, which is problematic because the upper income decile often owns as much as half the national wealth. Tax records, for all their limitations, tell us more about high incomes and enable us to look back a century in time.
     20. See Thomas Piketty, Les hauts revenus en France au 20e siècle: Inégalités et redistributions 1901–1998 (Paris: Grasset, 2001). For a summary, see "Income Inequality in France, 1901–1998," Journal of Political Economy 111, no. 5 (2003): 1004–42.
     21. See Anthony Atkinson and Thomas Piketty, Top Incomes over the Twentieth Century: A Contrast between Continental-European and English-Speaking Countries (Oxford: Oxford University Press, 2007), and Top Incomes: A Global Perspective (Oxford: Oxford University Press, 2010).
     22. See Thomas Piketty and Emmanuel Saez, "Income Inequality in the United States, 1913–1998," Quarterly Journal of Economics 118, no. 1 (February 2003): 1–39.
     23. A complete bibliography is available in the online technical appendix. For an overview, see also Anthony Atkinson, Thomas Piketty, and Emmanuel Saez, "Top Incomes in the Long-Run of History," Journal of Economic Literature 49, no. 1 (March 2011): 3–71.
     24. It is obviously impossible to give a detailed account of each country in this book, which offers a general overview. Interested readers can turn to the complete data series, which are available online at the WTID website (http://topincomes.parisschoolofeconomics.eu) as well as in the more technical books and articles cited above. Many texts and documents are also available in the online technical appendix (http://piketty.pse.ens.fr/capital21c).
     25. The WTID is currently being transformed into the World Wealth and Income Database (WWID), which will integrate the three subtypes of complementary data. In this book I will present an overview of the information that is currently available.
     26. One can also use annual wealth tax returns in countries where such a tax is imposed in living individuals, but over the long run estate tax data are easier to come by.
     27. See the following pioneering works: R.J. Lampman, The Share of Top Wealth-Holders in National Wealth, 1922–1956 (Princeton: Princeton University Press, 1962); Anthony Atkinson and A.J. Harrison, Distribution of Personal Wealth in Britain, 1923–1972 (Cambridge: Cambridge University Press, 1978).
     28. See Thomas Piketty, Gilles Postel-Vinay, and Jean-Laurent Rosenthal, "Wealth Concentration in a Developing Economy: Paris and France, 1807–1994," American Economic Review 96, no. 1 (March 2006): 236–56.
     29. See Jesper Roine and Daniel Waldenström, "Wealth Concentration over the Path of Development: Sweden, 1873–2006," Scandinavian Journal of Economics 111, no. 1 (March 2009): 151–87.
     30. See Thomas Piketty, "On the Long-Run Evolution of Inheritance: France 1820–2050," École d'économie de Paris, PSE Working Papers (2010). Summary version published in Quarterly Journal of Economics 126, no. 3 (2011): 1071–1131.
     31. See Thomas Piketty and Gabriel Zucman, "Capital Is Back: Wealth-Income Ratios in Rich Countries, 1700–2010" (Paris: École d'économie de Paris, 2013).
     32. See esp. Raymond Goldsmith, Comparative National Balance Sheets: A Study of Twenty Countries, 1688–1978 (Chicago: University of Chicago Press, 1985). More complete references may be found in the online technical appendix.
     33. See A.H. Jones, American Colonial Wealth: Documents and Methods (New York: Arno Press, 1977), and Adeline Daumard, Les fortunes françaises au 19e siècle: Enquête sur la répartition et la composition des capitaux privés à Paris, Lyon, Lille, Bordeaux et Toulouse d'après l'enregistrement des déclarations de successions, (Paris: Mouton, 1973).
     34. See in particular François Simiand, Le salaire, l'évolution sociale et la monnaie (Paris: Alcan, 1932); Ernest Labrousse, Esquisse du mouvement des prix et des revenus en France au 18e siècle (Paris: Librairie Dalloz, 1933); Jean Bouvier, François Furet, and M. Gilet, Le mouvement du profit en France au 19e siècle: Matériaux et études (Paris: Mouton, 1965).
     35. There are also intrinsically intellectual reasons for the decline of economic and social history based on the evolution of prices, incomes, and fortunes (sometimes referred to as "serial history"). In my view, this decline is unfortunate as well as reversible. I will come back to this point.
     36. This destabilizing mechanism (the richer one is, the wealthier one gets) worried Kuznets a great deal, and this worry accounts for the title of his 1953 book Shares of Upper Income Groups in Income and Savings. But he lacked the historical distance to analyze it fully. This force for divergence was also central to James Meade's classic Efficiency, Equality, and the Ownership of Property (London: Allen and Unwin, 1964), and to Atkinson and Harrison, Distribution of Personal Wealth in Britain, which in a way was the continuation of Meade's work. Our work follows in the footsteps of these authors.
 1. Income and Output

     1. "South African Police Open Fire on Striking Miners," New York Times, August 17, 2012.
     2. See the company's official communiqué, "Lonmin Seeks Sustainable Peace at Marikana," August 25, 2012, www.lonmin.com. According to this document, the base wage of miners before the strike was 5,405 rand per month, and the raise granted was 750 rand per month (1 South African rand is roughly equal to 0.1 euro). These figures seem consistent with those reported by the strikers and published in the press.
     3. The "factorial" distribution is sometimes referred to as "functional" or "macroeconomic," and the "individual" distribution is sometimes called "personal" or "microeconomic." In reality, both types of distribution depend on both microeconomic mechanisms (which must be analyzed at the level of the firm or individual agents) and macroeconomic mechanisms (which can be understood only at the level of the national or global economy).
     4. One million euros per year (equivalent to the wages of 200 miners), according to the strikers. Unfortunately, no information about this is available on the company's website.
     5. Roughly 65–70 percent for wages and other income from labor and 30–35 percent for profits, rents, and other income from capital.
     6. About 65–70 percent for wages and other income from labor and 30–35 percent for profits, rents, and other income from capital.
     7. National income is also called "net national product" (as opposed to "gross national product" (GNP), which includes the depreciation of capital). I will use the expression "national income," which is simpler and more intuitive. Net income from abroad is defined as the difference between income received from abroad and income paid out to foreigners. These opposite flows consist primarily of income from capital but also include income from labor and unilateral transfers (such as remittances by immigrant workers to their home countries). See the online appendix for details.
     8. In English one speaks of "national wealth" or "national capital." In the eighteenth and nineteenth centuries, French authors spoke of fortune nationale and English authors of "national estate" (with a distinction in English between "real estate" and other property referred to as "personal estate").
     9. I use essentially the same definitions and the same categories of assets and liabilities as the current international standards for national accounts, with slight differences that are discussed in the online appendix.
     10. Detailed figures for each country can be consulted in the tables available in the online appendix.
     11. In practice, the median income (that is, the income level below which 50 percent of the population sits) is generally on the order of 20–30 percent less than average income. This is because the upper tail of the income distribution is much more drawn out than the lower tail and the middle, which raises the average (but not the median). Note, too, that "per capita national income" refers to average income before taxes and transfers. In practice, citizens of the rich countries have chosen to pay one-third to one-half of their national income in taxes and other charges in order to pay for public services, infrastructure, social protection, a substantial share of expenditures for health and education, etc. The issue of taxes and public expenditures is taken up primarily in Part Four.
     12. Cash holdings (including in financial assets) accounted for only a minuscule part of total wealth, a few hundred euros per capita, or a few thousand if one includes gold, silver, and other valuable objects, or about 1–2 percent of total wealth. See the online technical appendix. Moreover, public assets are today approximately equal to public debts, so it is not absurd to say that households can include them in their financial assets.
     13. The formula α = r × β is read as "α equals r times β." Furthermore, "β = 600%" is the same as "β = 6," and "α = 30%" is the same as "α = 0.30" and "r = 5%" is the same as "r = 0.05."
     14. I prefer "rate of return on capital" to "rate of profit" in part because profit is only one of the legal forms that income from capital may take and in part because the expression "rate of profit" has often been used ambiguously, sometimes referring to the rate of return and other times (mistakenly) to the share of profits in income or output (that is, to denote what I am calling α rather than r, which is quite different). Sometimes the expression "marginal rate" is used to denote the share of profits α.
     15. Interest is a very special form of the income from capital, much less representative than profits, rents, and dividends (which account for much larger sums than interest, given the typical composition of capital). The "rate of interest" (which, moreover, varies widely depending on the identity of the borrower) is therefore not representative of the average rate of return on capital and is often much lower. This idea will prove useful when it comes to analyzing the public debt.
     16. The annual output to which I refer here corresponds to what is sometimes called the firm's "value added," that is, the difference between what the firm earns by selling goods and services ("gross revenue") and what it pays other firms for goods and services ("intermediate consumption"). Value added measures the firm's contribution to the domestic product. By definition, value added also measures the sum available to the firm to pay the labor and capital used in production. I refer here to value added net of capital depreciation (that is, after deducting the cost of wear and tear on capital and infrastructure) and profits net of depreciation.
     17. See esp. Robert Giffen, The Growth of Capital (London: George Bell and Sons, 1889). For more detailed bibliographic data, see the online appendix.
     18. The advantage of the ideas of national wealth and income is that they give a more balanced view of a country's enrichment than the idea of GDP, which in some respects is too "productivist." For instance, if a natural disaster destroys a great deal of wealth, the depreciation of capital will reduce national income, but GDP will be increased by reconstruction efforts.
     19. For a history of official systems of national accounting since World War II, written by one of the principal architects of the new system adopted by the United Nations in 1993 (the so-called System of National Accounts [SNA] 1993, which was the first to propose consistent definitions for capital accounts), see André Vanoli, Une histoire de la comptabilité nationale (Paris: La Découverte, 2002). See also the instructive comments of Richard Stone, "Nobel Memorial Lecture, 1984: The Accounts of Society," Journal of Applied Econometrics 1, no. 1 (January 1986): 5–28. Stone was one of the pioneers of British and UN accounts in the postwar period. See also François Fourquet, Les comptes de la puissance—Histoire de la comptabilité nationale et du plan (Paris: Recherches, 1980), an anthology of contributions by individuals involved in constructing French national accounts in the period 1945–1975.
     20. Angus Maddison (1926–2010) was a British economist who specialized in reconstituting national accounts at the global level over a very long run. Note that Maddison's historical series are concerned solely with the flow of output (GDP, population, and GDP per capita) and say nothing about national income, the capital-labor split, or the stock of capital. On the evolution of the global distribution of output and income, see also the pioneering work of François Bourguignon and Branko Milanovic. See the online technical appendix.
     21. The series presented here go back only as far as 1700, but Maddison's estimates go back all the way to antiquity. His results suggest that Europe began to move ahead of the rest of the world as early as 1500. By contrast, around the year 1000, Asia and Africa (and especially the Arab world) enjoyed a slight advantage. See Supplemental Figures S1.1, S1.2, and S1.3 (available online).
     22. To simplify the exposition, I include in the European Union smaller European countries such as Switzerland, Norway, and Serbia, which are surrounded by the European Union but not yet members (the population of the European Union in the narrow sense was 510 million in 2012, not 540 million). Similarly, Belarus and Moldavia are included in the Russia-Ukraine bloc. Turkey, the Caucasus, and Central Asia are included in Asia. Detailed figures for each country are available online.
     23. See Supplemental Table S1.1 (available online).
     24. The same can be said of Australia and New Zealand (with a population of barely 30 million, or less than 0.5 percent of the world's population, with a per capita GDP of around 30,000 euros per year). For simplicity's sake, I include these two countries in Asia. See Supplemental Table S1.1 (available online).
     25. If the current exchange rate of $1.30 per euro to convert American GDP had been used, the United States would have appeared to be 10 percent poorer, and GDP per capital would have declined from 40,000 to about 35,000 euros (which would in fact be a better measure of the purchasing power of an American tourist in Europe). See Supplemental Table S1.1. The official ICP estimates are made by a consortium of international organizations, including the World Bank, Eurostat, and others. Each country is treated separately. There are variations within the Eurozone, and the euro/dollar parity of $1.20 is an average. See the online technical appendix.
     26. The secular decline of US dollar purchasing power vis-à-vis the euro since 1990 simply reflects the fact that inflation in the United States was slightly higher (0.8 percent, or nearly 20 percent over 20 years). The current exchange rates shown in Figure 1.4 are annual averages and thus obscure the enormous short-term volatility.
     27. See Global Purchasing Power Parities and Real Expenditures—2005 International Comparison Programme (Washington, DC: World Bank, 2008), table 2, pp. 38–47. Note that in these official accounts, free or reduced-price public services are measured in terms of their production cost (for example, teachers' wages in education), which is ultimately paid by taxpayers. This is the result of a statistical protocol that is ultimately paid by the taxpayer. It is an imperfect statistical contract, albeit still more satisfactory than most. A statistical convention that refused to take any of these national statistics into account would be worse, resulting in highly distorted international comparisons.
     28. This is the usual expectation (in the so-called Balassa-Samuelson model), which seems to explain fairly well why the purchasing-power parity adjustment is greater than 1 for poor countries vis-à-vis rich countries. Within rich countries, however, things are not so clear: the richest country in the world (the United States) had a purchasing-power parity correction greater than 1 until 1970, but it was less than 1 in the 1980s. Apart from measurement error, one possible explanation would be the high degree of wage inequality observed in the United States in recent years, which might lead to lower prices in the unskilled, labor-intensive, nontradable service sector (just as in the poor countries). See the online technical appendix.
     29. See Supplementary Table S1.2 (available online).
     30. I have used official estimates for the recent period, but it is entirely possible that the next ICP survey will result in a reevaluation of Chinese GDP. On the Maddison/ICP controversy, see the online technical appendix.
     31. See Supplemental Table S1.2 (available online). The European Union's share would rise from 21 to 25 percent, that of the US–Canada bloc from 20 to 24 percent, and that of Japan from 5 to 8 percent.
     32. This of course does not mean that each continent is hermetically sealed off from the others: these net flows hide large cross-investments between continents.
     33. This 5 percent figure for the African continent appears to have remained fairly stable during the period 1970–2012. It is interesting to note that the outflow of income from capital was on the order of three times greater than the inflow of international aid (the measurement of which is open to debate, moreover). For further details on all these estimates, see the online technical appendix.
     34. In other words, the Asian and African share of world output in 1913 was less than 30 percent, and their share of world income was closer to 25 percent. See the online technical appendix.
     35. It has been well known since the 1950s that accumulation of physical capital explains only a small part of long-term productivity growth; the essential thing is the accumulation of human capital and new knowledge. See in particular Robert M. Solow, "A Contribution to the Theory of Economic Growth," Quarterly Journal of Economics 70, no. 1 (February 1956): 65–94. The recent articles of Charles I. Jones and Paul M. Romer, "The New Kaldor Facts: Ideas, Institutions, Population and Human Capital," American Economic Journal: Macroeconomics 2, no. 1 (January 2010): 224–45, and Robert J. Gordon, "Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds," NBER Working Paper 18315 (August 2012), are good points of entry into the voluminous literature on the determinants of long-run growth.
     36. According to one recent study, the static gains from the opening of India and China to global commerce amount to just 0.4 percent of global GDP, 3.5 percent of GDP for China, and 1.6 percent for India. In view of the enormous redistributive effects between sectors and countries (with very large numbers of losers in all countries), it seems difficult to justify trade openness (to which these countries nevertheless seem attached) solely on the basis of such gains. See the online technical appendix.
 2. Growth: Illusions and Realities

     1. See Supplemental Table S2.1, available online, for detailed results by subperiod.
     2. The emblematic example is the Black Plague of 1347, which ostensibly claimed more than a third of the European population, thus negating several centuries of slow growth.
     3. If we take aging into account, the growth rate of the global adult population was even higher: 1.9 percent in the period 1990–2012 (during which the proportion of adults in the population rose from 57 percent to 65 percent, reaching close to 80 percent in Europe and Japan and 75 percent in North America in 2012). See the online technical appendix.
     4. If the fertility rate is 1.8 (surviving) children per woman, or 0.9 per adult, than the population will automatically decrease by 10 percent every generation, or roughly −0.3 percent per year. Conversely, a fertility rate of 2.2 children per woman, or 1.1 per adult, yields a growth rate of 10 percent per generation (or +0.3 percent per year). With 1.5 children per woman, the growth rate is −1.0 percent per year, and with 2.5 children per women, it is +0.7 percent.
     5. It is impossible to do justice here to the large number of works of history, sociology, and anthropology that have tried to analyze, by country and region, the evolution and variations of demographic behavior (which, broadly speaking, encompasses questions of fertility, marriage, family structure, and so on). To take just one example, consider the work of Emmanuel Todd and Hervé Le Bras in mapping family systems in France, Europe, and around the world, from L'Invention de la France (Paris: Livre de Poche, 1981; reprint, Paris: Gallimard, 2012) to L'origine des systèmes familiaux (Paris: Gallimard, 2011). Or, to take a totally different perspective, see the work of Gosta Esping Andersen on the different types of welfare state and the growing importance of policies designed to make work life and family life compatible: for example, The Three Worlds of Welfare Capitalism (Princeton: Princeton University Press, 1990).
     6. See the online technical appendix for detailed series by country.
     7. The global population growth rate from 2070 to 2100 will be 0.1 percent according to the central scenario, −1.0 percent according to the low scenario, and +1.2 percent according to the high scenario. See the online technical appendix.
     8. See Pierre Rosanvallon, The Society of Equals, trans. Arthur Goldhammer (Cambridge, MA: Harvard University Press, 2013), 93.
     9. In 2012, the average per capita GDP in Sub-Saharan Africa was about 2,000 euros, implying an average monthly income of 150 euros per person (cf. Chapter 1, Table 1.1). But the poorest countries (such as Congo-Kinshasa, Niger, Chad, and Ethiopia) stand at one-third to one-half that level, while the richest (such as South Africa) are two to three times better off (and close to North African levels). See the online technical appendix.
     10. Maddison's estimates (which are fragile for this period) suggest that in 1700, North America and Japan were closer to the global average than to Western Europe, so that overall growth in average income in the period 1700–2012 would be closer to thirty times than to twenty.
     11. Over the long run, the average number of hours worked per capita has been cut by approximately one-half (with significant variation between countries), so that productivity growth has been roughly twice that of per capita output growth.
     12. See Supplemental Table S2.2, available online.
     13. Interested readers will find in the online technical appendix historical series of average income for many countries since the turn of the eighteenth century, expressed in today's currency. For detailed examples of the price of foodstuffs, manufactured goods, and services in nineteenth- and twentieth-century France (taken from various historical sources including official indices and compilations of prices published by Jean Fourastié), along with analysis of the corresponding increases in purchasing power, see Thomas Piketty, Les Hauts revenus en France au 20e siècle (Paris: Grasset, 2001), 80–92.
     14. Of course, everything depended on where carrots were purchased. I am speaking here of the average price.
     15. See Piketty, Les Hauts revenus en France, 83–85.
     16. Ibid., 86–87.
     17. For a historical analysis of the constitution of these various strata of services from the late nineteenth century to the late twentieth, starting with the examples of France and the United States, see Thomas Piketty, "Les Créations d'emploi en France et aux Etats-Unis: Services de proximité contre petits boulots?" Les Notes de la Fondation Saint-Simon 93, 1997. See also "L'Emploi dans les services en France et aux Etats-Unis: Une analyse structurelle sur longue période," Economie et statistique 318, no. 1 (1998): 73–99. Note that in government statistics the pharmaceutical industry is counted in industry and not in health services, just as the automobile and aircraft industries are counted in industry and not transport services, etc. It would probably be more perspicuous to group activities in terms of their ultimate purpose (health, transport, housing, etc.) and give up on the distinction agriculture/industry/services.
     18. Only the depreciation of capital (replacement of used buildings and equipment) is taken into account in calculating costs of production. But the remuneration of public capital, net of depreciation, is conventionally set at zero.
     19. In Chapter 6 I take another look at the magnitude of the bias thus introduced into international comparisons.
     20. Hervé Le Bras and Emmanuel Todd say much the same thing when they speak of the "Trente glorieuses culturelles" in describing the period 1980–2010 in France. This was a time of rapid educational expansion, in contrast to the "Trente glorieuses économiques" of 1950–1980. See Le mystère français (Paris: Editions du Seuil, 2013).
     21. To be sure, growth was close to zero in the period 2007–2012 because of the 2008–2009 recession. See Supplemental Table S2.2, available online, for detailed figures for Western Europe and North America (not very different from the figures indicated here for Europe and North America as a whole) and for each country separately.
     22. See Robert J. Gordon, Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds, NBER Working Paper 18315 (August 2012).
     23. I return to this question later. See esp. Part Four, Chapter 11.
     24. Note that global per capita output, estimated to have grown at a rate of 2.1 percent between 1990 and 2012, drops to 1.5 percent if we look at output growth per adult rather than per capita. This is a logical consequence of the fact that demographic growth rose from 1.3 to 1.9 percent per year during this period, which allows us to calculate both the total population and the adult population. This shows the importance of the demographic issue when it comes to breaking down global output growth (3.4 percent per year). See the online technical appendix.
     25. Only Sub-Saharan Africa and India continue to lag. See the online technical appendix.
     26. See Chapter 1, Figures 1.1–2.
     27. The law of 25 germinal, Year IV (April 14, 1796), confirmed the silver parity of the franc, and the law of 17 germinal, Year XI (April 7, 1803), set a double parity: the franc was equal to 4.5 grams of fine silver and 0.29 grams of gold (for a gold:silver ratio of 1/15.5). It was the law of 1803, promulgated a few years after the creation of the Banque de France in 1800, that give rise to the appellation "franc germinal." See the online technical appendix.
     28. Under the gold standard observed from 1816 to 1914, a pound sterling was worth 7.3 grams of fine gold, or exactly 25.2 times the gold parity of the franc. Gold-silver bimetallism introduced several complications, about which I will say nothing here.
     29. Until 1971, the pound sterling was divided into 20 shillings, each of which was further divided into 12 pence (so that there were 240 pence in a pound). A guinea was worth 21 shillings, or 1.05 pounds. It was often used to quote prices for professional services and in fashionable stores. In France, the livre tournois was also divided into 20 deniers and 240 sous until the decimal reform of 1795. After that, the franc was divided into 100 centimes, sometimes called "sous" in the nineteenth century. In the eighteenth century, a louis d'or was a coin worth 20 livres tournois, or approximately 1 pound sterling. An écu was worth 3 livres tournois until 1795, after which it referred to a silver coin worth 5 francs from 1795 to 1878. To judge by the way novelists shifted from one unit to another, it would seem that contemporaries were perfectly aware of these subtleties.
     30. The estimates referred to here concern national income per adult, which I believe is more significant than national income per capita. See the online technical appendix.
     31. Average annual income in France ranged from 700 to 800 francs in the 1850s and from 1300 to 1400 francs in 1900–1910. See the online technical appendix.
 3. The Metamorphoses of Capital

     1. According to available estimates (especially King's and Petty's for Britain and Vauban's and Boisguillebert's for France), farm buildings and livestock accounted for nearly half of what I am classifying as "other domestic capital" in the eighteenth century. If we subtracted these items in order to concentrate on industry and services, then the increase in other domestic capital not associated with agriculture would be as large as the increase in housing capital, indeed slightly higher.
     2. César Birotteau's real estate speculation in the Madeleine quarter is a good example.
     3. Think of Père Goriot's pasta factories or César Birotteau's perfume operation.
     4. For further details, see the online technical appendix.
     5. See the online technical appendix.
     6. Detailed annual series of trade and payment balances for Britain and France are available in the online technical appendix.
     7. Since 1950, the net foreign holdings of both countries have nearly always ranged between −10 and +10 percent of national income, which is one-tenth to one-twentieth of the level attained around the turn of the twentieth century. The difficulty of measuring net foreign holdings today does not undermine this finding.
     8. More precisely, for an average income of 30,000 euros in 1700, average wealth would have been on the order of 210,000 euros (seven years of income rather than six), 150,000 of which would have been in land (roughly five years of income if one includes farm buildings and livestock), 30,000 in housing, and 30,000 in other domestic assets.
     9. Again, for an average income of 30,000 euros, average wealth in 1910 would have been closer to 210,000 euros (seven years of national income), with other domestic assets closer to 90,000 (three years income) than 60,000 (two years). All the figures given here are deliberately simplified and rounded off. See the online technical appendix for further details.
     10. More precisely, Britain's public assets amount to 93 percent of national income, and its public debts amount to 92 percent, for a net public wealth of +1 percent of national income. In France, public assets amount to 145 percent of national income and debts to 114 percent, for a net public wealth of +31 percent. See the online technical appendix for detailed annual series for both countries.
     11. See François Crouzet, La Grande inflation: La monnaie en France de Louis XVI à Napoléon (Paris: Fayard, 1993).
     12. In the period 1815–1914, Britain's primary budget surplus varied between 2 and 3 percent of GDP, and this went to pay interest on government debt of roughly the same amount. The total budget for education in this period was less than 2 percent of GDP. For detailed annual series of primary and secondary public deficits, see the online technical appendix.
     13. These two series of transfers explain most of the increase in French public debt in the nineteenth century. On the amounts and sources, see the online technical appendix.
     14. Between 1880 and 1914, France paid more interest on its debt than Britain did. For detailed annual series of government deficits in both countries and on the evolution of the rate of return on public debt, see the online technical appendix.
     15. Ricardo's discussion of this issue in Principles of Political Economy and Taxation (London: George Bell and Sons, 1817) is not without ambiguity, however. On this point, see Gregory Clark's interesting historical analysis, "Debt, Deficits, and Crowding Out: England, 1716–1840," European Review of Economic History 5, no. 3 (December 2001): 403–36.
     16. See Robert Barro, "Are Government Bonds Net Wealth?" Journal of Political Economy82, no. 6 (1974): 1095–1117, and "Government Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom, 1701–1918," Journal of Monetary Economics 20, no. 2 (1987): 221–48.
     17. Paul Samuelson, Economics, 8th ed. (New York: McGraw-Hill, 1970), 831.
     18. See Claire Andrieu, L. Le Van, and Antoine Prost, Les Nationalisations de la Libération: De l'utopie au compromis (Paris: FNSP, 1987), and Thomas Piketty, Les hauts revenus en France au 20e siècle (Paris: Grasset, 2001), 137–138.
     19. It is instructive to reread British estimates of national capital at various points during the twentieth century, as the form and magnitude of public assets and liabilities changed utterly. See in particular H. Campion, Public and Private Property in Great Britain (Oxford: Oxford University Press, 1939), and J. Revell, The Wealth of the Nation: The National Balance Sheet of the United Kingdom, 1957–1961 (Cambridge: Cambridge University Press, 1967). The question barely arose in Giffen's time, since private capital so clearly outweighed public capital. We find the same evolution in France, for example in the 1956 work published by François Divisia, Jean Dupin, and René Roy and quite aptly entitled A la recherche du franc perdu (Paris: Société d'édition de revues et de publications, 1954), whose third volume is titled La fortune de la France and attempts, not without difficulty, to update Clément Colson's estimates for the Belle Époque.
 4. From Old Europe to the New World

     1. In order to concentrate on long-run evolutions, the figures accompanying this chapter indicate values by decade only and thus ignore extremes that lasted for only a few years. For complete annual series, see the online technical appendix.
     2. The average inflation figure of 17 percent for the period 1913–1950 omits the year 1923, when prices increased by a factor of 100 million over the course of the year.
     3. Virtually equal to General Motors, Toyota, and Renault-Nissan, with sales of around 8 million vehicles each in 2011. The French government still holds about 15 percent of the capital of Renault (the third leading European manufacturer after Volkswagen and Peugeot).
     4. Given the limitations of the available sources, it is also possible that this gap can be explained in part by various statistical biases. See the online technical appendix.
     5. See, for example, Michel Albert, Capitalisme contre capitalisme (Paris: Le Seuil, 1991).
     6. See, for example, Guillaume Duval, Made in Germany (Paris: Le Seuil, 2013).
     7. See the online technical appendix.
     8. The difference from Ricardo's day was that wealthy Britons in the 1800s and 1810s were prosperous enough to generate the additional private saving needed to absorb public deficits without affecting national capital. By contrast, the European deficits of 1914–1945 occurred in a context where private wealth and saving had already been subjected to repeated negative shocks, so that public indebtedness aggravated the decline of national capital.
     9. See the online technical appendix.
     10. See Alexis de Tocqueville, Democracy in America, trans. Arthur Goldhammer (New York: Library of America, 2004), II.2.19, p. 646, and II.3.6, p. 679.
     11. On Figures 3.1–2, 4.1, 4.6, and 4.9, positive positions relative to the rest of the world are unshaded (indicating periods of net positive foreign capital) and negative positions are shaded (periods of net positive foreign debt). The complete series used to establish all these figures are available in the online technical appendix.
     12. See Supplemental Figures S4.1–2, available online.
     13. On reactions to European investments in the United States during the nineteenth century, see, for example, Mira Wilkins, The History of Foreign Investment in the United States to 1914 (Cambridge, MA: Harvard University Press, 1989), chap. 16.
     14. Only a few tens of thousands of slaves were held in the North. See the online technical appendix.
     15. If each person is treated as an individual subject, then slavery (which can be seen as an extreme form of debt between individuals) does not increase national wealth, like any other private or public debt (debts are liabilities for some individuals and assets for others, hence they cancel out at the global level).
     16. The number of slaves in French colonies emancipated in 1848 has been estimated at 250,000 (or less than 10 percent of the number of slaves in the United States). As in the United States, however, forms of legal inequality continued well after formal emancipation: in Réunion, for example, after 1848 former slaves could be arrested and imprisoned as indigents unless they could produce a labor contract as a servant or worker on a plantation. Compared with the previous legal regime, under which fugitive slaves were hunted down and returned to their masters if caught, the difference was real, but it represented a shift in policy rather than a complete break with the previous regime.
     17. See the online technical appendix.
     18. For example, if national income consists of 70 percent income from labor and 30 percent income from capital and one capitalizes these incomes at 5 percent, then the total value of the stock of human capital will equal fourteen years of national income, that of the stock of nonhuman capital will equal six years of national income, and the whole will by construction equal twenty years. With a 60–40 percent split of national income, which is closer to what we observe in the eighteenth century (at least in Europe), we obtain twelve years and eight years, respectively, again for a total of twenty years.
 5. The Capital/Income Ratio over the Long Run

     1. The European capital/income ratio indicated in Figures 5.1 and 5.2 was estimated by calculating the average of the available series for the four largest European economies (Germany, France, Britain, and Italy), weighted by the national income of each country. Together, these four countries represent more than three-quarters of Western European GDP and nearly two-thirds of European GDP. Including other countries (especially Spain) would yield an even steeper rise in the capital/income ratio over the last few decades. See the online technical appendix.
     2. The formula β = s / g is read as "β equals s divided by g." Recall, too, that "β = 600%" is equivalent to "β = 6," just as "s = 12%" is equivalent to "s = 0.12" and "g = 2%" is equivalent to "g = 0.02." The savings rate represents truly new savings—hence net of depreciation of capital—divided by national income. I will come back to this point.
     3. Sometimes g is used to denote the growth rate of national income per capita and n the population growth rate, in which case the formula would be written β = s / (g + n). To keep the notation simple, I have chosen to use g for the overall growth rate of the economy, so that my formula is β = s / g.
     4. Twelve percent of income gives 12 divided by 6 or 2 percent of capital. More generally, if the savings rate is s and the capital/income ratio is β, then the capital stock grows at a rate equal to s / β.
     5. The simple mathematical equation describing the dynamics of the capital/income ratio β and its convergence toward β = s / g is given in the online technical appendix.
     6. From 2.2 years in Germany to 3.4 years in the United States in 1970. See Supplemental Table S5.1, available online, for the complete series.
     7. From 4.1 years in Germany and the United States to 6.1 years in Japan and 6.8 years in Italy in 2010. The values indicated for each year are annual averages. (For example, the value indicated for 2010 is the average of the wealth estimates on January 1, 2010, and January 1, 2011.) The first available estimates for 2012–2013 are not very different. See the online technical appendix.
     8. In particular, it would suffice to change from one price index to another (there are several of them, and none is perfect) to alter the relative rank of these various countries. See the online technical appendix.
     9. See Supplemental Figure S5.1, available online.
     10. More precisely: the series show that the private capital/national income ratio rose from 299 percent in 1970 to 601 percent in 2010, whereas the accumulated flows of savings would have predicted an increase from 299 to 616 percent. The error is therefore 15 percent of national income out of an increase on the order of 300 percent, or barely 5 percent: the flow of savings explains 95 percent of the increase in the private capital/national income ratio in Japan between 1970 and 2010. Detailed calculations for all countries are available in the online technical appendix.
     11. When a firm buys its own shares, it enables its shareholders to realize capital gains, which will generally be taxed less heavily than if the firm had used the same sum of money to distribute dividends. It is important to realize that the same is true when a firm buys the stock of other firms, so that overall the business sector allows the individual sector to realize capital gains by purchasing financial instruments.
     12. One can also write the law β = s / g with s standing for the total rather than the net rate of saving. In that case the law becomes β = s / (g + δ) (where δ now stands for the rate of depreciation of capital expressed as a percentage of the capital stock). For example, if the raw savings rate is s = 24%, and if the depreciation rate of the capital stock is δ = 2%, for a growth rate of g = 2%, then we obtain a capital income ratio β = s / (g + δ) = 600%. See the online technical appendix.
     13. With a growth of g = 2%, it would take a net expenditure on durable goods equal to s = 1% of national income per year to accumulate a stock of durable goods equal to β = s / g = 50% of national income. Durable goods need to be replaced frequently, however, so the gross expenditure would be considerably higher. For example, if average replacement time is five years, one would need a gross expenditure on durable goods of 10 percent of national income per year simply to replace used goods, and 11 percent a year to generate a net expenditure of 1% and an equilibrium stock of 50% of national income (still assuming growth g = 2%). See the online technical appendix.
     14. The total value of the world's gold stock has decreased over the long run (it was 2 to 3 percent of total private wealth in the nineteenth century but less than 0.5 percent at the end of the twentieth century). It tends to rise during periods of crisis, however, because gold serves as a refuge, so that it currently accounts for 1.5 percent of total private wealth, of which roughly one-fifth is held by central banks. These are impressive variations, yet they are minor compared with the overall value of the capital stock. See the online technical appendix.
     15. Even though it does not make much difference, for the sake of consistency I have used the same conventions for the historical series discussed in Chapters 3 and 4 and for the series discussed here for the period 1970–2010: durable goods have been excluded from wealth, and valuables have been included in the category labeled "other domestic capital."
     16. In Part Four I return to the question of taxes, transfers, and redistributions effected by the government, and in particular to the question of their impact on inequality and on the accumulation and distribution of capital.
     17. See the online technical appendix.
     18. Net public investment is typically rather low (generally around 0.5–1 percent of national income, of which 1.5–2 percent goes to gross public investment and 0.5–1 percent to depreciation of public capital), so negative public saving is often fairly close to the government deficit. (There are exceptions, however: public investment is higher in Japan, which is the reason why public saving is slightly positive despite significant government deficits.) See the online technical appendix.
     19. This possible undervaluation is linked to the small number of public asset transactions in this period. See the online technical appendix.
     20. Between 1870 and 2010, the average rate of growth of national income was roughly 2–2.2 percent in Europe (of which 0.4–0.5 percent came from population growth) compared with 3.4 percent in the United States (of which 1.5 percent came from population growth). See the online technical appendix.
     21. An unlisted firm whose shares are difficult to sell because of the small number of transactions, so that it takes a long time to find an interested buyer, may be valued 10 to 20 percent lower than a similar company listed on the stock exchange, for which it is always possible to find an interested buyer or seller on the same day.
     22. The harmonized international norms used for national accounts—which I use here—prescribe that assets and liabilities must always be recorded at their market value as of the date of the balance sheet (that is, the value that could be obtained if the firm decided to liquidate its assets, estimated if need be by using recent transactions for similar goods). The private accounting norms that firms use when publishing their balance sheets are not exactly the same as the norms for national accounts and vary from country to country, raising multiple problems for financial and prudential regulation as well as for taxation. In Part Four I come back to the crucial issue of harmonization of accounting standards.
     23. See, for example, "Profil financier du CAC 40," a report by the accounting firm Ricol Lasteyrie, June 26, 2012. The same extreme variation in Tobin's Q is found in all countries and all stock markets.
     24. See the online technical appendix.
     25. Germany's trade surplus attained 6 percent of GDP in the early 2010s, and this enabled the Germans to rapidly amass claims on the rest of the world. By comparison, the Chinese trade surplus is only 2 percent of GDP (both Germany and China have trade surpluses of 170–180 billion euros a year, but China's GDP is three times that of Germany: 10 trillion euros versus 3 trillion). Note, too, that five years of German trade surpluses would be enough to buy all the real estate in Paris, and five more years would be enough to buy the CAC 40 (around 800–900 billion euros for each purchase). Germany's very large trade surplus seems to be more a consequence of the vagaries of German competitiveness than of an explicit policy of accumulation. It is therefore possible that domestic demand will increase and the trade surplus will decrease in coming years. In the oil exporting countries, which are explicitly seeking to accumulate foreign assets, the trade surplus is more than 10 percent of GDP (in Saudi Arabia and Russia, for example) and even multiples of that in some of the smaller petroleum exporters. See Chapter 12 and the online technical appendix.
     26. See Supplemental Figure S5.2, available online.
     27. In the case of Spain, many people noticed the very rapid rise of real estate and stock market indices in the 2000s. Without a precise point of reference, however, it is very difficult to determine when valuations have truly climbed to excessive heights. The advantage of the capital/income ratio is that it provides a precise point of reference useful for making comparisons in time and space.
     28. See Supplemental Figures S5.3–4, available online. It bears emphasizing, moreover, that the balances established by central banks and government statistical agencies concern only primary financial assets (notes, shares, bonds, and other securities) and not derivatives (which are like insurance contracts indexed to these primary assets or, perhaps better, like wagers, depending on how one sees the problem), which would bring the total to even higher levels (twenty to thirty years of national income, depending on the definitions one adopts). It is nevertheless important to realize that these quantities of financial assets and liabilities, which are higher today than ever in the past (in the nineteenth century and until World War I, the total amount of financial assets and liabilities did not exceed four to five years of national income) by definition have no impact on net wealth (any more than the amount of bets placed on a sporting event influences the level of national wealth). See the online technical appendix.
     29. For example, the financial assets held in France by the rest of the world amounted to 310 percent of national income in 2010, and financial assets held by French residents in the rest of the world amounted to 300 percent of national income, for a negative net position of −10 percent. In the United States, a negative net position of −20 percent corresponds to financial assets on the order of 120 percent of national income held by the rest of the world in the United States and 100 percent of national income owned by US residents in other countries. See Supplemental Figures S5.5–11, available online, for detailed series by country.
     30. In this regard, note that one key difference between the Japanese and Spanish bubbles is that Spain now has a net negative foreign asset position of roughly one year's worth of national income (which seriously complicates Spain's situation), whereas Japan has a net positive position of about the same size. See the online technical appendix.
     31. In particular, in view of the very large trade deficits the United States has been running, its net foreign asset position ought to be far more negative than it actually is. The gap is explained in part by the very high return on foreign assets (primarily stocks) owned by US citizens and the low return paid on US liabilities (especially US government bonds). On this subject, see the work of Pierre-Olivier Gourinchas and Hélène Rey cited in the online technical appendix. Conversely, Germany's net position should be higher than it is, and this discrepancy is explained by the low rates of return on Germany's investments abroad, which may partially account for Germany's current wariness. For a global decomposition of the accumulation of foreign assets by rich countries between 1970 and 2010, which distinguishes between the effects of trade balances and the effects of returns on the foreign asset portfolio, see the online technical appendix (esp. Supplemental Table S5.13, available online).
     32. For example, it is likely that a significant part of the US trade deficit simply corresponds to fictitious transfers to US firms located in tax havens, transfers that are subsequently repatriated in the form of profits realized abroad (which restores the balance of payments). Clearly, such accounting games can interfere with the analysis of the most basic economic phenomena.
     33. It is difficult to make comparisons with ancient societies, but the rare available estimates suggest that the value of land sometimes reached even higher levels: six years of national income in ancient Rome, according to R. Goldsmith, Pre-modern Financial Systems: A Historical Comparative Study (Cambridge: Cambridge University Press, 1987), 58. Estimates of the intergenerational mobility of wealth in small primitive societies suggest that the importance of transmissible wealth varied widely depending on the nature of economic activity (hunting, herding, farming, etc.). See Monique Borgerhoff Mulder et al., "Intergenerational Wealth Transmission and the Dynamics of Inequality in Small-Scale Societies," Science 326, no. 5953 (October 2009): 682–88.
     34. See the online technical appendix.
     35. See Chapter 12.
 6. The Capital-Labor Split in the Twenty-First Century

     1. Interest on the public debt, which is not part of national income (because it is a pure transfer) and which remunerates capital that is not included in national capital (because public debt is an asset for private bondholders and a liability for the government), is not included in Figures 6.1–4. If it were included, capital's share of income would be a little higher, generally on the order of one to two percentage points (and up to four to five percentage points in periods of unusually high public debt). For the complete series, see the online technical appendix.
     2. One can either attribute to nonwage workers the same average labor income as wage workers, or one can attribute to the business capital used by nonwage workers the same average return as for other forms of capital. See the online technical appendix.
     3. In the rich countries, the share of individually owned businesses in domestic output fell from 30–40 percent in the 1950s (and from perhaps 50 percent in the nineteenth and early twentieth centuries) to around 10 percent in the 1980s (reflecting mainly the decline in the share of agriculture) and then stabilized at around that level, at times rising to about 12–15 percent in response to changing fiscal advantages and disadvantages. See the online technical appendix.
     4. The series depicted in Figures 6.1 and 6.2 are based on the historical work of Robert Allen for Britain and on my own work for France. All details on sources and methods are available in the online technical appendix.
     5. See also Supplemental Figures S6.1 and S6.2, available online, on which I have indicated upper and lower bounds for capital's share of income in Britain and France.
     6. See in particular Chapter 12.
     7. The interest rate on the public debt of Britain and France in the eighteenth and nineteenth centuries was typically on the order of 4–5 percent. It sometimes went as low as 3 percent (for example, during the economic slowdown of the late nineteenth century) Conversely, it rose to 5–6 percent or even higher during periods of high political tension, when there was doubt about the credibility of the government budget, for example, during the decades prior to and during the French Revolution. See F. Velde and D. Weir, "The Financial Market and Government Debt Policy in France 1746–1793," Journal of Economic History 52, no. 1 (March 1992): 1–39. See also K. Béguin, Financer la guerre au 17e siècle: La dette publique et les rentiers de l'absolutisme (Seyssel: Champ Vallon, 2012). See online appendix.
     8. The French "livret A" savings account paid a nominal interest of barely 2 percent in 2013, for a real return of close to zero.
     9. See the online technical appendix. In most countries, checking account deposits earn interest (but this is forbidden in France).
     10. For example, a nominal interest rate of 5 percent with an inflation rate of 10 percent corresponds to a real interest rate of −5 percent, whereas a nominal interest rate of 15 percent and an inflation rate of 5 percent corresponds to a real interest rate of +10 percent.
     11. Real estate assets alone account for roughly half of total assets, and among financial assets, real assets generally account for more than half of the total and often more than three-quarters. See the online technical appendix.
     12. As I explained in Chapter 5, however, this approach includes in the return of capital the structural capital gain due to capitalization of retained earnings as reflected in the stock price, which is an important component of the return on stocks over the long run.
     13. In other words, an increase of inflation from 0 to 2 percent in a society where the return on capital is initially 4 percent is certainly not equivalent to a 50 percent tax on income from capital, for the simple reason that the price of real estate and stocks will begin to increase at 2 percent a year, so that only a small proportion of the assets owned by households—broadly speaking, cash deposits and some nominal assets—will pay the inflation tax. I will return to this question in Chapter 12.
     14. See P. Hoffman, Gilles Postel-Vinay, and Jean-Laurent Rosenthal, Priceless Markets: The Political Economy of Credit in Paris 1660–1870 (Chicago: University of Chicago Press, 2000).
     15. In the extreme case of zero elasticity, the return on capital and therefore the capital share of income fall to zero if there is even a slight excess of capital.
     16. In the extreme case of infinite elasticity, the return on capital does not change, so that the capital share of income increases in the same proportion as the capital/income ratio.
     17. It can be shown that the Cobb-Douglas production function takes the mathematical form Y = F (K, L) = KαL1 − α, where Y is output, K is capital, and L is labor. There are other mathematical forms to represent the cases where the elasticity of substitution is greater than one or less than one. The case of infinite elasticity corresponds to a linear production function: output is given Y = F (K, L) = rK + vL (so that the return on capital r does not depend on the quantities of capital and labor involved, nor does the return on labor v, which is just the wage rate, also fixed in this example). See the online technical appendix.
     18. See Charles Cobb and Paul Douglas, "A Theory of Production," American Economic Review 18, no. 1 (March 1928): 139–65.
     19. According to Bowley's calculations, capital's share of national income throughout the period was about 37 percent and labor's share about 63 percent. See Arthur Bowley, The Change in the Distribution of National Income, 1880–1913 (Oxford: Clarendon Press, 1920). These estimates are consistent with my findings for this period. See the online technical appendix.
     20. See Jürgen Kuczynski, Labour Conditions in Western Europe 1820 to 1935 (London: Lawrence and Wishart, 1937). That same year, Bowley extended his work from 1920: see Arthur Bowley, Wages and Income in the United Kingdom since 1860 (Cambridge: Cambridge University Press, 193). See also Jürgen Kuczynski, Geschichte der Lage der Arbeiter unter dem Kapitalismus, 38 vols. (Berlin, 1960–72). Volumes 32, 33, and 34 are devoted to France. For a critical analysis of Kuczynski's series, which remain a valuable historical source despite their lacunae, see Thomas Piketty, Les hauts revenus en France au 20e siècle: Inégalités et redistribution 1901–1998 (Paris: Grasset, 2001), 677–681. See the online technical appendix for additional references.
     21. See Frederick Brown, "Labour and Wages," Economic History Review 9, no. 2 (May 1939): 215–17.
     22. See J.M. Keynes, "Relative Movement of Wages and Output," Economic Journal 49 (1939): 48. It is interesting to note that in those days the proponents of a stable capital-labor split were still unsure about the supposedly stable level of this split. In this instance Keynes insisted on the fact that the share of income going to "manual labor" (a category difficult to define over the long run) seemed stable at 40 percent of national income between 1920 and 1930.
     23. See the online technical appendix for a complete bibliography.
     24. See the online technical appendix.
     25. This might take the form of an increase in the exponent 1 − α in the Cobb-Douglas production function (and a corresponding decrease in α) or similar modifications to the more general production functions in which elasticities of substitution are greater or smaller than one. See the online technical appendix.
     26. See the online technical appendix.
     27. See Jean Bouvier, François Furet, and M. Gilet, Le mouvement du profit en France au 19e siècle: Matériaux et études (Paris: Mouton, 1965).
     28. See François Simiand, Le salaire, l'évolution sociale et la monnaie (Paris: Alcan,1932); Ernest Labrousse, Esquisse du mouvement des prix et des revenus en France au 18e siècle (Paris: Librairie Dalloz, 1933). The historical series assembled by Jeffrey Williamson and his colleagues on the long-term evolution of land rents and wages also suggest an increase in the share of national income going to land rent in the eighteenth and early nineteenth centuries. See the online technical appendix.
     29. See A. Chabert, Essai sur les mouvements des prix et des revenus en France de 1798 à 1820, 2 vols. (Paris: Librairie de Médicis, 1945–49). See also Gilles Postel-Vinay, "A la recherche de la révolution économique dans les campagnes (1789–1815)," Revue économique, 1989.
     30. A firm's "value added" is defined as the difference between what it earns by selling goods and services (called "sales revenue" in English) and what it pays other firms for its purchases (called "intermediate consumption"). As the name indicates, this sum measures the value the firm adds in the process of production. Wages are paid out of value added, and what is left over is by definition the firm's profit. The study of the capital-labor split is too often limited to the wage-profit split, which neglects rent.
     31. The notion of permanent and durable population growth was no clearer, and the truth is that it remains as confused and frightening today as it ever was, which is why the hypothesis of stabilization of the global population is generally accepted. See Chapter 2.
     32. The only case in which the return on capital does not tend toward zero is in a "robotized" economy with an infinite elasticity of substitution between capital and labor, so that production ultimately uses capital alone. See the online technical appendix.
     33. The most interesting tax data are presented in appendix 10 of book 1 of Capital. See the online technical appendix for an analysis of some of the calculations of profit shares and rates of exploitation based on the account books presented by Marx. In Wages, Price, and Profit (1865) Marx also used the accounts of a highly capitalistic factory in which profits attained 50 percent of value added (as large a proportion as wages). Although he does not say so explicitly, this seems to be the type of overall split he had in mind for an industrial economy.
     34. See Chapter 1.
     35. Some recent theoretical models attempt to make this intuition explicit. See the online technical appendix.
     36. To say nothing of the fact that some of the US economists (starting with Modigliani) argued that capital had totally changed its nature (so that it now stemmed from accumulation over the life cycle), while the British (starting with Kaldor) continued to see wealth in terms of inheritance, which was significantly less reassuring. I return to this crucial question in Part Three.
 7. Inequality and Concentration: Preliminary Bearings

     1. Honoré de Balzac, Le père Goriot (Paris: Livre de Poche, 1983), 123–35.
     2. See Balzac, Le père Goriot, 131. To measure income and wealth, Balzac usually used francs or livres tournois (which became equivalent once the franc "germinal" was in place) as well as écus (an écu was a silver coin worth 5 francs in the nineteenth century), and more rarely louis d'or (a louis was a gold coin worth 20 francs, which was already worth 20 livres under the Ancien Régime). Because inflation was nonexistent at the time, all these units were so stable that readers could move easily from one to another. See Chapter 2. I discuss the amounts mentioned by Balzac in greater detail in Chapter 11.
     3. See Balzac, Le père Goriot, 131.
     4. According to the press, the son of a former president of France, while studying law in Paris, recently married the heiress of the Darty chain of appliance stores, but he surely did not meet her at the Vauquer boardinghouse.
     5. I define deciles in terms of the adult population (minors generally earn no income) and, insofar as possible, at the individual level. The estimates in Tables 7.1–3 are based on this definition. For some countries, such as France and the United States, the historical data on income are available only at the household level (so that the incomes of both partners in a couple are added). This slightly modifies the shares of the various deciles but has little effect on the long-term evolutions that are of interest here. For wages, the historical data are generally available at the individual level. See the online technical appendix.
     6. See the online technical appendix and Supplemental Table S7.1, available online.
     7. The median is the level below which half the population lies. In practice, the median is always lower than the mean, or average, because real-world distributions always have long upper tails, which raises the mean but not the median. For incomes from labor, the median is typically around 80 percent of the mean (e.g., if the average wage is 2,000 euros a month, the median is around 1,600 euros). For wealth, the median can be extremely low, often less than 50 percent of mean wealth, or even zero if the poorer half of the population owns almost nothing.
     8. "What is the Third Estate? Everything. What has it been in the political order until now? Nothing. What does it want? To become something."
     9. As is customary, I have included replacement incomes (i.e., pensions and unemployment insurance intended to replace lost income from labor and financed by wage deductions) in primary income from labor. Had I not done this, inequality of adult income from labor would be noticeably—and to some extent artificially—greater than indicated in Tables 7.1 and 7.3 (given the large number of retirees and unemployed workers whose income from labor is zero). In Part Four I will come back to the question of redistribution by way of pensions and unemployment insurance, which for the time being I treat simply as "deferred wages."
     10. These basic calculations are detailed in Supplemental Table S7.1, available online.
     11. The top decile in the United States most likely owns something closer to 75 percent of all wealth.
     12. See the online technical appendix.
     13. It is difficult to say whether this criterion was met in the Soviet Union and other countries of the former Communist bloc, because the data are not available. In any case, the government owned most of the capital, a fact that considerably diminishes the interest of the question.
     14. Note that inequality remains high even in the "ideal society" described in Table 7.2. (The richest 10 percent own more capital than the poorest 50 percent, even though the latter group is 5 times larger; the average wealth of the richest 1 percent is 20 times greater than that of the poorest 50 percent.) There is nothing preventing us from aiming at more ambitious goals.
     15. Or 400,000 euros on average per couple.
     16. See Chapters 3–5. The exact figures are available in the online technical appendix.
     17. On durable goods, see Chapter 5 and the online technical appendix.
     18. Exactly 35/9 × 200,000 euros, or 777,778 euros. See Supplemental Table S7.2, available online.
     19. To get a clearer idea of what this means, we can continue the arithmetic exercise described above. With an average wealth of 200,000 euros, "very high" inequality of wealth as described in Table 7.2 meant an average wealth of 20,000 euros for the poorest 50 percent, 25,000 euros for the middle 40 percent, and 1.8 million euros for the richest 10 percent (with 890,000 for the 9 percent and 10 million for the top 1 percent). See the online technical appendix and Supplemental Tables S7.1–3, available online.
     20. If we look only at financial and business capital, that is, at control of firms and work-related tools, then the upper decile's share is 70–80 percent or more. Firm ownership remains a relatively abstract concept for the vast majority of the population.
     21. The increasing association of the two dimensions of inequality might, for example, be a consequence of the increase in university attendance. I will come back to this point later.
     22. These calculations slightly underestimate the true Gini coefficients, because they are based on the hypothesis of a finite number of social groups (those indicated in Tables 7.1–3), whereas the underlying reality is a continuous wealth distribution. See the online technical appendix and Supplemental Tables S7.4–6 for the detailed results obtained with different numbers of social groups.
     23. Other ratios such as P90/P50, P50/P10, P75/P25, etc. are also used. (P50 indicates the fiftieth percentile, that is, the median, while P25 and P75 refer to the twenty-fifth and seventy-fifth percentiles, respectively.
     24. Similarly, the decision whether to measure inequalities at the individual or household level can have a much larger—and especially more volatile—effect on interdecile ratios of the P90/P10 type (owing in particular to the fact that in many cases women do not work outside the home) than on the bottom half's share of total income.
     25. See in particular Joseph E. Stiglitz, Amartya Sen, and Jean-Paul Fitoussi, Report by the Commission on the Measurement of Economic Performance and Social Progress, 2009 (www.stiglitz-sen-fitoussi.fr)
     26. Social tables were similar, in spirit at least, to the famous Tableau économique that François Quesnay published in 1758, which provided the first synthetic picture of the economy and of exchanges between social groups. One can also find much older social tables from any number of countries from antiquity on. See the interesting tables described by B. Milanovic, P. Lindert, and J. Williamson in "Measuring Ancient Inequality," NBER Working Paper 13550 (October 2007). See also B. Milanovic, The Haves and the Have-Nots: A Brief and Idiosyncratic History of Global Inequality (New York: Basic Books, 2010). Unfortunately, the data in these early tables are not always satisfactory from the standpoint of homogeneity and comparability. See the online technical appendix.
 8. Two Worlds

     1. See Table 7.3.
     2. See Table 7.1 and the online technical appendix.
     3. For complete series for the various centiles and up to the top ten-thousandth, as well as a detailed analysis of the overall evolution, see Thomas Piketty, Les hauts revenus en France au 20e siècle: Inégalités et redistribution 1901–1998 (Paris: Grasset, 2001). Here I will confine myself to the broad outlines of the story, taking account of more recent research. The updated series are also available online in the WTID.
     4. The estimates shown in Figures 8.1 and 8.2 are based on declarations of income and wages (the general income tax was instituted in France in 1914, and the so-called cédulaire tax on wages was adopted in 1917, so we have separate annual measures of high incomes and high wages starting from those two dates) and on national accounts (which tell us about total national income and total wages paid), using a method initially introduced by Kuznets and described briefly in the introduction. The fiscal data begin only with income for 1915 (the first year in which the new tax was levied), and I have completed the series for 1910–1914 using estimates carried out before the war by the tax authorities and contemporary economists. See the online technical appendix.
     5. In Figure 8.3 (and subsequent figures of similar type) I have used the same notations as in Les hauts revenus en France and the WTID to designate the various "fractiles" of the income hierarchy: P90–95 includes everyone between the ninetieth and ninety-fifth percentile (the poorer half of the richest 10 percent), P95–99 includes those between the ninety-fifth and ninety-ninth percentile (the next higher 4 percent), P99–99.5 the next 0.5 percent (the poorer half of the top 1 percent), P99.5–99.9 the next 0.4 percent, P99.9–99.99 the next 0.09 percent, and P99.99–100 the riches 0.01 percent (the top ten-thousandth).
     6. As a reminder, the top centile in France in 2010 consists of 500,000 adults out of an adult population of 50 million.
     7. As is also the case for the nine-tenths of the population below the ninetieth percentile, but here compensation in the form of wages (or replacement pay in the form of retirement income or unemployment insurance) is lower.
     8. The pay scales for civil servants are among the pay hierarchies about which we have the most long-term data. In France in particular, we have detailed information from state budgets and legislative reports going back to the beginning of the nineteenth century. Private sector pay has to be divined from tax records, hence is little is known about the period prior to the creation of the income tax in 1914–1917. The data we have about civil service pay suggest that the wage hierarchy in the nineteenth century was roughly similar to what we see in the period 1910–2010 for both the top decile and the bottom half, although the top centile may have been slightly higher (without reliable private sector data we cannot be more precise). See the online technical appendix.
     9. In 2000–2010, the share of wages in the P99–99.5 and P99.5–99.9 fractiles (which constitute nine-tenths of the top centile) was 50–60 percent, compared with 20–30 percent for mixed incomes (see Figure 8.4). High salaried incomes dominated high mixed incomes to almost the same degree as in the interwar years (see Figure 8.3).
     10. As in Chapter 7, the euro figures cited here are deliberately rounded off and approximate, so they are no more than indications of orders of magnitude. The exact thresholds of each centile and thousandth are available in the online technical appendix, year by year.
     11. Note, however, that the data on which these boundaries are based are imperfect. As noted in Chapter 6, some entrepreneurial income may be disguised as dividends and therefore classed as income from capital. For a detailed, year-by-year analysis of the composition of the top centiles and thousandths of income in France since 1914, see Piketty, Les hauts revenus en France, 93–168.
     12. Income from capital seems to represent less than 10 percent of the income of "the 9 percent" in Figure 8.4, but that is solely a result of the fact that these figures, like the series on the shares of the top decile and centile, are based exclusively on self-declared income statements, which since 1960 have excluded so-called fictive rents (that is, the rental value of owner-occupied housing, which was previously part of taxable income). If we included nontaxable capital income (such as fictive rents), the share of income from capital among "the 9 percent" would reach and even slightly exceed 20 percent in 2000–2010. See the online technical appendix.
     13. See the online technical appendix.
     14. In particular, I always include all rents, interest, and dividends in income declarations, even when some of these types of income are not subject to the same tax schedule and may be covered by specific exemptions or reduced rates.
     15. See the online technical appendix.
     16. Note that throughout World War II, the French tax authorities carried on with their work of collecting income statements, recording them, and compiling statistics based on them as if nothing had changed. Indeed, it was a golden age of mechanical data processing: new technologies allowed for automated sorting of punched cards, which made it possible to do rapid cross-tabulations, a great advance over previous manual methods. Hence the statistical publications of the Ministry of Finance during the war years were richer than ever before.
     17. The share of the upper decile decreased from 47 to 29 percent of national income, and that of the upper centile from 21 to 7 percent. Details are available in the online technical appendix.
     18. For a detailed analysis of all these evolutions, year by year, see Les hauts revenus en France, esp. chaps. 2 and 3, pp. 93–229.
     19. In World War II, the compression of the wage hierarchy actually began before the war, in 1936, with the Matignon Accords.
     20. See Les hauts revenus en France, 201–2. The very sharp break in wage inequality that occurred in 1968 was recognized at the time. See in particular the meticulous work of Christian Baudelot and A. Lebeaupin, Les salaires de 1950 à 1975 (Paris: INSEE, 1979).
     21. See Figure 6.6.
     22. See esp. the work of Camille Landais, "Les hauts revenus en France (1998–2006): Une explosion des inégalités?" (Paris: Paris School of Economics, 2007), and Olivier G-dechot, "Is Finance Responsible for the Rise in Wage Inequality in France?" Socio-Economic Review 10, no. 3 (2012): 447–70.
     23. For the years 1910–1912 I completed the series by using various available data sources, and in particular various estimates carried out by the US government in anticipation of the creation of a federal income tax (just as I did in the case of France). See the online technical appendix.
     24. For the years 1913–1926, I used data on income level and categories of income to estimate the evolution of wage inequality. See the online technical appendix.
     25. Two recent books about the rise of inequality in the United States by well-known economists demonstrate the strength of the attachment to this relatively egalitarian period of US history: Paul Krugman, The Conscience of a Liberal (New York: Norton, 2007), and Joseph Stiglitz, The Price of Inequality (New York: Norton, 2012).
     26. The available data, though imperfect, suggest that the correction for understatement of capital income might add two to three points of national income. The uncorrected share of the upper decile was 49.7 percent in 1007 and 47.9 percent in 2010 (with a clear upward trend). See the online technical appendix.
     27. The series "with capital gains" naturally include capital gains in both the numerator (for the top income deciles and centiles) and the denominator (for total national income); the series "without capital gains" exclude them in both cases. See the online technical appendix.
     28. The only suspicious jump takes place around the time of the major Reagan tax reform of 1986, when a number of important firms changed their legal form in order to have their profits taxed as personal rather than corporate income. This transfer between fiscal bases had purely short-term effects (income that should have been realized a little later as capital gains was realized somewhat earlier) and played a secondary role in shaping the long-term trend. See the online technical appendix.
     29. The annual pretax incomes mentioned here correspond to household incomes (married income or single individual). Income inequality at the individual level increased by approximately the same proportion as inequality in terms of household income. See the online technical appendix.
     30. This visceral appreciation of the economy is sometimes particularly noticeable among economists teaching in US universities but born in foreign countries (generally poorer than the United States), an appreciation that is again quite comprehensible.
     31. All detailed series are available in the online technical appendix.
     32. This argument is more and more widely accepted. It is defended, for example, by Michael Kumhof and Romain Rancière, "Inequality, Leverage, and Crises," International Monetary Fund Working Paper (November 2010). See also Raghuram G. Rajan, Fault Lines (Princeton, NJ: Princeton University Press, 2010), which nevertheless underestimates the importance of the growing share of US national income claimed by the top of the income hierarchy.
     33. See Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez, "Top Incomes in the Long Run of History," Journal of Economic Literature 49, no. 1(2011): Table 1, p. 9.
     34. Remember that these figures all concern the distribution of primary income (before taxes and transfers). I examine the effects of taxes and transfers in Part Four. To put it in a nutshell, the progressivity of the tax system was significantly reduced in this period, which makes the numbers worse, while increases in some transfers to the poorest individuals slightly alleviate them.
     35. See Chapter 5, where the Japanese and Spanish bubbles are discussed.
     36. See Thomas Piketty and Emmanuel Saez, "Income Inequality in the United States, 1913–1998," Quarterly Journal of Economics 118, no. 1 (February 2003): 29–30. See also Claudia Goldin and R. Margo, "The Great Compression: The Wage Structure in the United States at Mid-Century," Quarterly Journal of Economics 107, no. 1 (February 1992): 1–34.
     37. Nor was it compensated by greater intergenerational mobility; quite the contrary. I come back to this point in Chapter 13.
     38. See Wojciech Kopczuk, Emmanuel Saez, and Jae Song, "Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937," Quarterly Journal of Economics 125, no. 1 (2010): 91–128.
     39. See Edward N. Wolff and Ajit Zacharias, "Household Wealth and the Measurement of Economic Well-Being in the U.S.," Journal of Economic Inequality 7, no. 2 (June 2009): 83–115. Wolff and Zacharias correctly remark that my initial article with Emmanuel Saez in 2003 overstated the degree to which the evolutions we observed could be explained by the substitution of "working rich" for "coupon-clipping rentiers," when in fact what one finds is rather a "cohabitation" of the two.
     40. See Supplemental Figures S8.1 and S8.2, available online.
     41. See Steven N. Kaplan and Joshua Rauh, "Wall Street and Main Street: What Contributes to the Rise of the Highest Incomes?" Review of Financial Studies 23, no. 3 (March 2009): 1004–1050.
     42. See Jon Bakija, Adam Cole, and Bradley T. Heim, "Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality: Evidence from U.S. Tax Return Data," Department of Economics Working Papers 2010–24, Department of Economics, Williams College, Table 1. Other important professional groups include doctors and lawyers (about 10 percent of the total) and real estate promoters (around 5 percent). These data should be used with caution, however: we do not know the origin of the fortunes involved (whether inherited or not), but income from capital accounts for more than half of all income at the level of the top thousandth if capital gains are included (see Figure 8.10) and about a quarter if they are excluded (see Supplemental Figure S8.2, available online).
     43. "Superentrepreneurs" of the Bill Gates type are so few in number that they are not relevant for the analysis of income and are best studied in the context of an analysis of fortunes and in particular the evolution of different classes of fortune. See Chapter 12.
     44. Concretely, if a manager is granted options that allow him to buy for $100 stock in the company valued at $200 when he exercises the option, then the difference between the two prices—in this case $100—is treated as a component of the manager's wage in the year in which the option is exercised. If he later sells the shares of stock for an even higher price, say $250, then the difference, $50, is recorded as a capital gain.
 9. Inequality of Labor Income

     1. Claudia Dale Goldin and Lawrence F. Katz, The Race between Education and Technology: The Evolution of U.S. Educational Wage Differentials, 1890–2005 (Cambridge, MA: Belknap Press, 2010).
     2. See Table 7.2.
     3. In the language of national accounting, expenditures on health and education are counted as consumption (a source of intrinsic well-being) and not investment. This is yet another reason why the expression "human capital" is problematic.
     4. There were of course multiple subepisodes within each phase: for instance, the minimum wage increased by about 10 percent between 1998 and 2002 in order to compensate for the reduction of the legal work week from 39 hours to 35 hours while preserving the same monthly wage.
     5. As in the case of the federal income tax, the minimum wage legislation resulted in a fierce battle between the executive branch and the Supreme Court, which overturned the first minimum wage law in 1935, but Roosevelt reintroduced it in 1938 and ultimately prevailed.
     6. In Figure 9.1, I have converted nominal minimum wages into 2013 euros and dollars. See Supplemental Figures S9.1–2, available online, for the nominal minimum wages.
     7. Some states have a higher minimum wage than the federal minimum in 2013: in California and Massachusetts, the minimum is $8 an hour; in Washington state it is $9.19.
     8. At an exchange rate of 1.30 euros per pound. In practice, the gap between the British and French minimum wages is larger because of the difference in employer social security payments (which are added to the gross wage). I come back to this point in Part Four.
     9. Important differences persist between countries: in Britain, for example, many prices and incomes (including rents, allowances, and some wages) are set by the week and not the month. On these questions, see Robert Castel, Les Métamorphoses de la question sociale: Une chronique du salariat (Paris: Fayard, 1995).
     10. See in particular David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton: Princeton University Press, 1995). Card and Krueger exploited numerous cases in which neighboring states had different minimum wages. The pure "monopsony" case is one in which a single employer can purchase labor in a given geographical area. (In pure monopoly, there is a single seller rather than a single buyer.) The employer then sets the wage as low as possible, and an increase in the minimum wage does not reduce the level of employment, because the employer's profit margin is so large as to make it possible to continue to hire all who seek employment. Employment may even increase, because more people will seek work, perhaps because at the higher wage they prefer work to illegal activities, which is a good thing, or because they prefer work to school, which may not be such a good thing. This is precisely what Card and Krueger observed.
     11. See in particular Figures 8.6–8.
     12. This fact is crucial but often neglected in US academic debate. In addition to the work of Goldin and Katz, Race between Education and Technology, see also the recent work of Rebecca Blank, Changing Inequality (Berkeley: University of California Press, 2011), which is almost entirely focused on the evolution of the wage difference associated with a college diploma (and on the evolution of family structures). Raghuram Rajan, Fault Lines (Princeton: Princeton University Press, 2010), also seems convinced that the evolution of inequality related to college is more significant than the explosion of the 1 percent (which is incorrect). The reason for this is probably that the data normally used by labor and education economists do not give the full measure of the overperformance of the top centile (one needs tax data to see what is happening). The survey data have the advantage of including more sociodemographic data (including data on education) than tax records do. But they are based on relatively small samples and also raise many problems having to do with respondents' self-characterization. Ideally, both types of sources should be used together. On these methodological issues, see the online technical appendix.
     13. Note that the curves in Figure 9.2 and subsequent figures do not take account of capital gains (which are not consistently measured across countries). Since capital gains are particularly large in the United States (making the top centile's share of national income more than 20 percent in the 2000s if we count capital gains), the gap is in fact wider than indicated in Figure 9.2. See, for example, Supplemental Figure S9.3, available online.
     14. New Zealand followed almost the same trajectory as Australia. See Supplemental Figure S9.4, available online. In order to keep the figures simple, I have presented only some of the countries and series available. Interested readers should consult the online technical appendix or the WTID for the complete series.
     15. Indeed, if we include capital gains, which were strong in Sweden in the period 1990–2010, the top centile's share reached 9 percent. See the online technical appendix.
     16. All the other European countries in the WTID, namely, the Netherlands, Switzerland, Norway, Finland, and Portugal, evolved in ways similar to those observed in other continental European countries. Note that we have fairly complete data for southern Europe. The series for Spain goes back to 1933, when an income tax was created, but there are several breaks. In Italy, the income tax was created in 1923, but complete data are not available until 1974. See the online technical appendix.
     17. The share of the top thousandth exceeded 8 percent in the United States in 2000–2010 if we omit capital gains and 12 percent if we include them. See the online technical appendix.
     18. The "0.1 percent" in France and Japan therefore increased from 15 to 25 times the national average income (that is, from 450,000 to 750,000 euros a year if the average is 30,000), while the top "0.1 percent" in the United States rose from 20 to 100 times the national average (that is, from $600,000 a year to $3 million). These orders of magnitude are approximate, but they give us a better sense of the phenomenon and relate shares to the salaries often quoted in the media.
     19. The income of "the 1 percent" is distinctly lower: a share of 10 percent of national income for the 1 percent means by definition that their average income is 10 times higher than the national average (a share of 20 percent would indicate an average 20 times higher than the national average, and so on). The Pareto coefficient, about which I will say more in Chapter 10, enables us to relate the shares of the top decile, top centile, and top thousandth: in relatively egalitarian countries (such as Sweden in the 1970s), the top 0.1 percent earned barely twice as much as the top 1 percent, so that the top thousandth's share of national income was barely one-fifth of the top centile's. In highly inegalitarian countries (such as the United States in the 2000s), the top thousandth earns 4 to 5 times what the top centile earns, and the top thousandth's share is 40 to 50 percent of the top centile's share.
     20. Depending on whether capital gains are included or not. See the online technical appendix for the complete series.
     21. See, in particular, Table 5.1.
     22. For Sweden and Denmark, in some years in the period 1900–1910, we find top centile shares of 25 percent of national income, higher than the levels seen in Britain, France, and Germany at that time (where the maximum was closer to 22 or 23 percent). Given the limitations of the available sources, it is not certain that these differences are truly significant, however. See the online technical appendix.
     23. For all the countries for which we have data on the composition of income at different levels, comparable to the data presented for France and the United States in the previous chapter (see Figures 8.3–4 and 8.9–10), we find the same reality.
     24. See Supplemental Figure S9.6, available online, for the same graph using annual series. Series for other countries are similar and available online.
     25. Figure 9.8 simply shows the arithmetic mean of the four European countries included in Figure 9.7. These four countries are quite representative of European diversity, and the curve would not look very different if we included other northern and southern European countries for which data are available, or if we weighted the average by the national income of each country. See the online technical appendix.
     26. Interested readers may wish to consult the case studies of twenty-three countries that Anthony Atkinson and I published in two volumes in 2007 and 2010: Top Incomes over the Twentieth Century: A Contrast Between Continental European and English-Speaking Countries (Oxford: Oxford University Press, 2007), and Top Incomes: A Global Perspective (Oxford: Oxford University Press, 2010).
     27. In China, strictly speaking, there was no income tax before 1980, so there is no way to study the evolution of income inequality for the entire twentieth century (the series presented here began in 1986). For Colombia, the tax records I have collected thus far go back only to 1993, but the income tax existed well before that, and it is entirely possible that we will ultimately find the earlier data (the archives of historical tax records are fairly poorly organized in a number of South American countries).
     28. The list of ongoing projects is available on the WTID site.
     29. When digital tax files are accessible, computerization naturally leads to improvement in our sources of information. But when the files are closed or poorly indexed (which often happens), then the absence of statistical data in paper form can impair our "historical memory" of income tax data.
     30. The closer the income tax is to being purely proportional, the less the need for detailed information about different income brackets. In Part Four I will discuss changes in taxation itself. The point for now is that such changes have an influence on our observational instruments.
     31. The information for the year 2010 in Figure 9.9 is based on very imperfect data concerning the remuneration of firm managers and should be taken as a first approximation. See the online technical appendix.
     32. See Abhijit Banerjee and Thomas Piketty, "Top Indian Incomes, 1922–2000," World Bank Economic Review 19, no. 1 (May 2005): 1–20. See also A. Banerjee and T. Piketty, "Are the Rich Growing Richer? Evidence from Indian Tax Data," in Angus Deaton and Valerie Kozel, eds., Data and Dogma: The Great Indian Poverty Debate (New Delhi: Macmillan India Ltd., 2005): 598–611. The "black hole" itself represents nearly half of total growth in India between 1990 and 2000: per capita income increased by nearly 4 percent a year according to national accounts data but by only 2 percent according to household survey data. The issue is therefore important.
     33. See the online technical appendix.
     34. In fact, the principal—and on the whole rather obvious—result of economic models of optimal experimentation in the presence of imperfect information is that it is never in the interest of the agents (in this case the firm) to seek complete information as long as experimentation is costly (and it is costly to try out a number of CFOs before making a final choice), especially when information has a public value greater than its private value to the agent. See the online technical appendix for bibliographic references.
     35. See Marianne Bertrand and Sendhil Mullainathan, "Are CEOs Rewarded for Luck? The Ones without Principals Are," Quarterly Journal of Economics 116, no. 3 (2001): 901–932. See also Lucian Bebchuk and Jesse Fried, Pay without Performance (Cambridge, MA: Harvard University Press, 2004).
 10. Inequality of Capital Ownership

     1. In particular, all the data on the composition of income by level of overall income corroborate this finding. The same is true of series beginning in the late nineteenth century (for Germany, Japan, and several Nordic countries). The available data for the poor and emergent countries are more fragmentary but suggest a similar pattern. See the online technical appendix.
     2. See esp. Table 7.2.
     3. The parallel series available for other countries give consistent results. For example, the evolutions we observe in Denmark and Norway since the nineteenth century are very close to the trajectory of Sweden. The data for Japan and Germany suggest a dynamic similar to that of France. A recent study of Australia yields results consistent with those obtained for the United States. See the online technical appendix.
     4. For a precise description of the various sources used, see Thomas Piketty, "On the Long-Run Evolution of Inheritance: France 1820–2050," Paris School of Economics, 2010 (a summary version appeared in the Quarterly Journal of Economics, 126, no. 3 [August 2011]: 1071–131). The individual statements were collected with Gilles Postel-Vinay and Jean-Laurent Rosenthal from Parisian archives. We also used statements previously collected for all of France under the auspices of the Enquête TRA project, thanks to the efforts of numerous other researchers, in particular Jérôme Bourdieu, Lionel Kesztenbaum, and Akiko Suwa-Eisenmann. See the online technical appendix.
     5. For a detailed analysis of these results, see Thomas Piketty, Gilles Postel-Vinay, and Jean-Laurent Rosenthal, "Wealth Concentration in a Developing Economy: Paris and France, 1807–1994," American Economic Review 96, no. 1 (February 2006): 236–56. The version presented here is an updated version of these series. Figure 10.1 and subsequent figures focus on means by decade in order to focus attention on long-term evolutions. All the annual series are available online.
     6. The shares of each decile and centile indicated in Figures 10.1 and following were calculated as percentages of total private wealth. But since private fortunes made up nearly all of national wealth, this makes little difference.
     7. This method, called the "mortality multiplier," involves a reweighting of each observation by the inverse of the mortality rate in each age cohort: a person who dies at age forty represents more living individuals than a person who dies at eighty (one must also take into account mortality differentials by level of wealth). The method was developed by French and British economists and statisticians (especially B. Mallet, M. J. Séaillès, H. C. Strutt, and J. C. Stamp) in 1900–1910 and used in all subsequent historical research. When we have data from wealth surveys or annual wealth taxes on the living (as in the Nordic countries, where such taxes have existed since the beginning of the twentieth century, or in France, with data from the wealth tax of 1990–2010), we can check the validity of this method and refine our hypotheses concerning mortality differentials. On these methodological issues, see the online technical appendix.
     8. See the online technical appendix. This percentage probably exceeded 50 prior to 1789.
     9. On this question, see also Jérôme Bourdieu, Gilles Postel-Vinay, and Akiko Suwa-Eisenmann, "Pourquoi la richesse ne s'est-elle pas diffusée avec la croissance? Le degré zéro de l'inégalité et son évolution en France: 1800–1940," Histoire et mesure 18, 1/2 (2003): 147–98.
     10. See for example the interesting data on the distribution of land in Roger S. Bagnall, "Landholding in Late Roman Egypt: The Distribution of Wealth," Journal of Roman Studies 82 (November 1992): 128–49. Other work of this type yields similar results. See the online technical appendix.
     11. Bibliographic and technical details can be found in the online technical appendix.
     12. Some estimates find that the top centile in the United States as a whole owned less than 15 percent of total national wealth around 1800, but that finding depends entirely on the decision to focus on free individuals only, which is obviously a controversial choice. The estimates that are reported here refer to the entire population (free and unfree). See the online technical appendix.
     13. See Willford I. King, The Wealth and Income of the People of the United States (New York: MacMillan, 1915). King, a professor of statistics and economics at the University of Wisconsin, relied on imperfect but suggestive data from several US states and compared them with European estimates, mainly based on Prussian tax statistics. He found the differences to be much smaller than he initially imagined.
     14. These levels, based on official Federal Reserve Bank surveys, may be somewhat low (given the difficult of estimate large fortunes), and the top centile's share may have reached 40 percent. See the online technical appendix.
     15. The European average in Figure 10.6 was calculated from the figures for France, Britain, and Sweden (which appear to have been representative). See the online technical appendix.
     16. For land rent, the earliest data available for antiquity and the Middle Ages suggest annual returns of around 5 percent. For interest on loans, we often find rates above 5 percent in earlier periods, typically on the order of 6–8 percent, even for loans with real estate collateral. See, for example, the data collected by S. Homer and R. Sylla, A History of Interest Rates (New Brunswick, NJ: Rutgers University Press, 1996).
     17. If the return on capital were greater than the time preference, everyone would prefer to reduce present consumption and save more (so that the capital stock would grow indefinitely, until the return on capital fell to the rate of time preference). In the opposite case, everyone would sell a portion of her capital stock in order to increase present consumption (and the capital stock would decrease until the return on capital rose to equal θ). In either case we are left with r = θ.
     18. The infinite horizon model implies an infinite elasticity of saving—and thus of the supply of capital—in the long run. It therefore assumes that tax policy cannot affect the supply of capital.
     19. Formally, in the standard infinite horizon model, the equilibrium rate of return is given by the formula r = θ + γ × g (where θ is the rate of time preference and γ measures the concavity of the utility function. It is generally estimated that γ lies between 1.5 and 2.5. For example, if θ = 5% and γ = 2, then r = 5% for g = 0% and r = 9% for g = 2%, so that the gap r − g rises from 5% to 7% when growth increases from 0% to 2%. See the online technical appendix.
     20. A third for parents with two children and a half for those with only one child.
     21. Note that in 1807 Napoleon introduced the majorat for his imperial nobility. This allowed an increased share of certain landed estates linked to titles of nobility to go the eldest males. Only a few thousand individuals were concerned. Moreover, Charles X tried to restore substitutions héréditaires for his own nobility in 1826. These throwbacks to the Ancien Régime affected only a small part of the population and were in any case definitively abolished in 1848.
     22. See Jens Beckert, Inherited Wealth (Princeton: Princeton University Press, 2008).
     23. In theory, women enjoyed the same rights as men when it came to dividing estates, according to the Civil Code. But a wife was not free to dispose of her property as she saw fit: this type of asymmetry, in regard to opening and managing bank accounts, selling property, etc., did not totally disappear until the 1970s. In practice, therefore, the new law favored (male) heads of families: younger sons acquired the same rights as elder sons, but daughters were left behind. See the online technical appendix.
     24. See Pierre Rosanvallon, La société des égaux (Paris: Le Seuil, 2011), 50.
     25. The equation relating the Pareto coefficient to r − g is given in the online technical appendix.
     26. Clearly, this does not imply that the r > g logic is necessarily the only force at work. The model and related calculations are obviously a simplification of reality and do not claim to identify the precise role played by each mechanism (various contradictory forces may balance each other). It does show, however, that the r > g logic is by itself sufficient to explain the observed level of concentration. See the online technical appendix.
     27. The Swedish case is interesting, because it combines several contradictory forces that seem to balance one another out: first, the capital/income ratio was lower than in France or Britain in the nineteenth and early twentieth centuries (the value of land was lower, and domestic capital was partly owned by foreigners—in this respect, Sweden was similar to Canada), and second, primogeniture was in force until the end of the nineteenth century, and some entails on large dynastic fortunes in Sweden persist to this day. In the end, wealth was less concentrated in Sweden in 1900–1910 than in Britain and close the French level. See Figures 10.1–4 and the work of Henry Ohlsson, Jesper Roine, and Daniel Waldenström.
     28. Recall that the estimates of the "pure" return on capital indicated in Figure 10.10 should be regarded as minimums and that the average observed return rose as high as 6–7 percent in Britain and France in the nineteenth century (see Chapter 6).
     29. Fortunately, Duchesse and her kittens ultimately meet Thomas O'Malley, an alley cat whose earthy ways they find more amusing than art classes (a little like Jack Dawson, who meets young Rose on the deck of Titanic two years later, in 1912).
     30. For an analysis of Pareto's data, see my Les hauts revenus en France au 20e siècle: Inégalités et redistribution 1901–1998 (Paris: Grasset, 2001), 527–30.
     31. For details, see the online technical appendix.
     32. The simplest way to think of Pareto coefficients is to use what are sometimes called "inverted coefficients," which in practice vary from 1.5 to 3.5. An inverted coefficient of 1.5 means that average income or wealth above a certain threshold is equal to 1.5 times the threshold level (individuals with more than a million euros of property own on average 1.5 million euros' worth, etc., for any given threshold), which is a relatively low level of inequality (there are few very wealthy individuals). By contrast, an inverted coefficient of 3.5 represents a very high level of inequality. Another way to think about power functions is the following: a coefficient around 1.5 means that the top 0.1 percent are barely twice as rich on average as the top 1 percent (and similarly for the top 0.01 percent within the top 0.1 percent, etc.). By contrast, a coefficient around 3.5 means that they are more than five times as rich. All of this is explained in the online technical appendix. For graphs representing the historical evolution of the Pareto coefficients throughout the twentieth century for the various countries in the WTID, see Anthony B. Atkinson, Thomas Piketty, and Emmanuel Saez, "Top Incomes in the Long Run of History," Journal of Economic Literature 49, no. 1 (2011): 3–71.
     33. That is, they had something like an income of 2–2.5 million euros a year in a society where the average wage was 24,000 euros a year (2,000 a month). See the online technical appendix.
     34. Paris real estate (which at the time consisted mainly of wholly owned buildings rather than apartments) was beyond the reach of the modestly wealthy, who were the only ones for whom provincial real estate, including especially farmland, still mattered. César Birotteau, who rejected his wife's advice to invest in some good farms near Chinon on the grounds that this was too staid an investment, saw himself as bold and forward-looking—unfortunately for him. See Table S10.4 (available online) for a more detailed version of Table 10.1 showing the very rapid growth of foreign assets between 1872 and 1912, especially in the largest portfolios.
     35. The national solidarity tax, instituted by the ordinance of August 15, 1945, was an exceptional levy on all wealth, estimated as of June 4, 1945, at rates up to 20 percent for the largest fortunes, together with an exceptional levy on all nominal increases of wealth between 1940 and 1945, at rates up to 100 percent for the largest increases. In practice, in view of the very high inflation rate during the war (prices more than tripled between 1940 and 1945), this levy amounted to a 100 percent tax on anyone who did not sufficiently suffer during the war, as André Philip, a Socialist member of General de Gaulle's provisional government, admitted, explaining that it was inevitable that the tax should weigh equally on "those who did not become wealthier and perhaps even those who, in monetary terms, became poorer, in the sense that their fortunes did not increase to the same degree as the general increase in prices, but who were able to preserve their overall fortunes at a time when so many people in France lost everything." See André Siegfried, L'Année Politique 1944–1945 (Paris: Editions du Grand Siècle, 1946), 159.
     36. See the online technical appendix.
     37. See in particular my Les hauts revenus en France, 396–403. See also Piketty, "Income Inequality in France, 1901–1998," Journal of Political Economy 111, no. 5 (2003): 1004–42.
     38. See the simulations by Fabien Dell, "L'allemagne inégale: Inégalités de revenus et de patrimoine en Allemagne, dynamique d'accumulation du capital et taxation de Bismarck à Schröder 1870–2005," Ph.D. thesis, Paris School of Economics, 2008. See also F. Dell, "Top Incomes in Germany and Switzerland Over over the Twentieth Century," Journal of the European Economic Association 3, no. 2/3 (2005): 412–21.
 11. Merit and Inheritance in the Long Run

     1. I exclude theft and pillage, although these are not totally without historical significance. Private appropriation of natural resources is discussed in the next chapter.
     2. In order to focus on long-term evolutions, I use averages by decade here. The annual series are available online. For more detail on techniques and methods, see Thomas Piketty, "On the Long-Run Evolution of Inheritance: France 1820–2050," Paris School of Economics, 2010; a summary version was published in the Quarterly Journal of Economics 126, no. 3 (August 2011): 1071–131. These documents are available in the online technical appendix.
     3. The discussion that follows is a little more technical than previous discussions (but necessary to understand what is behind the observed evolutions), and some readers may wish to skip a few pages and go directly to the implications and the discussion of what lies ahead in the twenty-first century, which can be found in the sections on Vautrin's lecture and Rastignac's dilemma.
     4. The term μ is corrected to take account of gifts (see below).
     5. In other words, one of every fifty adults dies each year. Since minors generally own very little capital, it is clearer to write the decomposition in terms of adult mortality (and to define μ in terms of adults alone). A small correction is then necessary to take account of the wealth of minors. See the online technical appendix.
     6. On this subject, see Jens Beckert, trans. Thomas Dunlop, Inherited Wealth (Princeton: Princeton University Press, 2008), 291.
     7. Becker never explicitly states the idea that the rise of human capital should eclipse the importance of inherited wealth, but it is often implicit in his work. In particular, he notes frequently that society has become "more meritocratic" owing to the increasing importance of education (without further detail). Becker has also proposed theoretical models in which parents can bequeath wealth to less gifted children, less well endowed with human capital, thereby reducing inequality. Given the extreme vertical concentration of inherited wealth (the top decile always owns more than 60 percent of the wealth available for inheritance, while the bottom half of the population owns nothing), this potential horizontal redistribution effect within groups of wealthy siblings (which, moreover, is not evident in the data, of which Becker makes almost no use) is hardly likely to predominate. See the online technical appendix.
     8. Apart from the bloodletting of the two world wars, which is masked in my data by the use of decennial averages. See the online technical appendix for the annual series.
     9. About 800,000 babies were born in France each year (actually between 750,000 and 850,000 with no trend up or down) from the late 1940s until the early 2010s, and according to official forecasts this will continue throughout the twenty-first century. In the nineteenth century there were about a million births per year, but the infant mortality rate was high, so the size of each adult cohort has varied little since the eighteenth century, except for the large losses due to war and the associated decline in births in the interwar years. See the online technical appendix.
     10. The theory of the "rate of estate devolution" was particularly popular in France in the period 1880–1910, thanks to the work of Albert de Foville, Clément Colson, and Pierre Emile Levasseur, who were pleased to discover that their estimates of national wealth (obtained through a census of assets) were approximately equal to 30 times the annual inheritance flow. This method, sometimes called the "estate multiplier," was also used in England, particularly by Giffen, even though British economists—who had access to limited estate tax statistics—generally used the capital income flows series coming from the scheduler income tax system.
     11. In practice, both types of wealth are often mixed in the same financial products (reflecting the mixed motives of savers). In France, life insurance contracts sometimes include a share of capital that can be passed on to children and another, generally smaller share payable as an annuity (which ends with the death of the policy holder). In Britain and the United States, retirement funds and pension plans increasingly include a transmissible component.
     12. To quote the usual proverb, public pensions are "the fortunes of those who have no fortune." I will come back to this in Chapter 13, when I analyze different pension systems.
     13. For detailed data on this subject, see Piketty, "On the Long-Run Evolution of Inheritance."
     14. Complete annual data are available online.
     15. To be clear, these estimates include a fairly large correction for differential mortality (that is, for the fact the wealthy individuals on average live longer). This is an important phenomenon, but it is not the explanation for the profile described here. See the online technical appendix.
     16. The annual growth rate of 1.7 percent is exactly the same as the average growth rate for 1980–2010. The estimate of net return on capital of 3 percent assumes that capital's share of national income will continue at its average level for 1980–2010 and that the current tax system will remain in place. See the online technical appendix.
     17. Other variants and scenarios are presented in the online technical appendix.
     18. "Savings rates increase with income and initial endowment": one can save more when one's income is higher or when one does not have to pay rent, and even more when both conditions are true. "Wide variations in individual behavior": some people like wealth, while others prefer automobiles or opera, for example.
     19. For example, at a given income level, childless individuals save as much as others.
     20. The growth of wages may drop even lower, if one subtracts the increasing proportion of national income that goes to finance pensions and health care.
     21. For a more precise technical description of these simulations, which aim primarily to reproduce the evolution of the wealth profile by age group (on the basis of macroeconomic and demographic data), see the online technical appendix.
     22. More precisely, one can show that μ × m approaches 1/H when growth decreases, regardless of the life expectancy. With a capital/income ratio β of 600–700 percent, one may see why the inheritance flow by tends to return to β/H, that is, about 20–25 percent. Thus the idea of a "rate of estate devolution" developed by nineteenth-century economists is approximately correct in a society where growth is low. See the online technical appendix.
     23. In reality, things are somewhat more complex, because we allow for the fact that some heirs consume a part of their inheritance. Conversely, we include in inherited wealth the cumulative income on wealth (within the limits of the heir's wealth: if one fully capitalized all of the bequest, including the income consumed by the inheritor, for example in the form of rent that the inheritor of an apartment does not have to pay, one would obviously exceed 100 percent of total wealth). See the online technical appendix for estimates using different definitions.
     24. In particular, when we say that the inheritance flow represents the equivalent of 20 percent of disposable income, this obviously does not mean that each individual receives 20 percent additional income every year in the form of a regular flow of bequests and gifts. It means rather that at certain points in a person's life (typically on the death of a parent and in some cases on the occasion of receipt of a gift), much larger sums may be transferred, sums equivalent to several years' income, and that all told these bequests and gifts represent the equivalent of 20 percent of the disposable income of all households.
     25. Replacement incomes (retirement pensions and unemployment benefits) are included in income from labor, as in Part Two.
     26. All resources were capitalized at the age of fifty, but if one uses the same rate of return to capitalize different resources, the choice of a reference age is not important for calculation the shares of inheritance and earned income in the total. The question of unequal returns on capital is examined in the next chapter.
     27. For a complete analysis of the relations between these different ratios, see the online technical appendix. The fact that the inheritance flow (20–25 percent of national income) and capital income (typically 25–35 percent of national income) are sometimes close should be regarded as a coincidence due to specific demographic and technological parameters (the equilibrium inheritance flow by = β/H depends on the capital/income ratio and the duration of a generation, whereas the equilibrium capital share α depends on the production function).
     28. As a general rule, the bottom 50 percent of the income hierarchy collectively received about 30 percent of total earned income (see Table 7.1), and therefore individually received about 60 percent of the average wage (or 40–50 percent of average national income per capita, allowing for the fact that income from labor generally accounts for 65–75 percent of national income). For example, in France today, the least well paid 50 percent have incomes that range between the minimum wage and 1.5 times the minimum wage, and earn on average 15,000 euros a year (1,250 euros a month), compared with 30,000 euros a year (2,500 a month) for average per capita national income.
     29. Recall that 6–7 percent of total wages for the top centile means that each member of that group earned on average 6–7 times the average wage, or 10–12 times the average wage of the least well paid 50 percent. See Chapters 7 and 8.
     30. Evolutions similar to those depicted in Figure 11.10 are obtained if one considers the top decile or top thousandth instead of the top centile (which I nevertheless believe is the most significant group to study). See Supplemental Figures S11.9–10, available online.
     31. By definition, 500,000 adult individuals in a society of 50 million adults, such as France today.
     32. The total value of inherited wealth is not far below its nineteenth-century level, but it has become rarer for individuals to inherit enough wealth to finance, without working, a lifestyle several dozen times the lower-class standard of living.
     33. Roughly 3 times larger in the eighteenth and nineteenth centuries as well as the twenty-first century (when income from labor accounted for approximately three-quarters of total resources and income from inherited wealth for roughly one-quarter) and nearly 10 times larger in the twentieth century (when income from labor accounted for nine-tenths of resources and income from inherited wealth one-tenth). See Figure 11.9.
     34. Roughly 3 times greater in the eighteenth and nineteenth centuries as well as the twenty-first century, and nearly 10 times larger in the twentieth century. The same would be true for the top 10 percent, the top 0.1 percent, etc.
     35. See the online technical appendix for an analysis of the mathematical conditions on the various distributions that imply that rentiers dominate managers (and vice versa).
     36. The top 1 percent of inherited fortunes enjoyed a standard of living 25–30 times higher than that of the bottom 50 percent in the nineteenth century (see Figure 11.10) or about 12–15 times the average per capita national income. The top 0.1 percent enjoyed a living standard approximately 5 times more opulent (see Chapter 10 on Pareto coefficients), or 60–75 times the average income. The threshold chosen by Balzac and Austen, 20–30 times average income, corresponds to the average income of the top 0.5 percent of the inheritance hierarchy (about 100,000 individuals out of an adult population of 20 million in France in 1820–1830, or 50,000 out of a population of 10 million British adults in 1800–1810). Both Balzac and Austen therefore had a vast range of characters to choose from.
     37. In the nineteenth century, the best paid 1 percent of jobs offered a standard of living about 10 times greater than that of the lower class (see Figure 11.10), or 5 times the average income. One can estimate that only the best paid 0.01 percent (2,000 people out of 20 million at most) earned on average 20–30 times the average income for the period. Vautrin was probably not far off when he said that there were no more than five lawyers in Paris who earned more than 50,000 francs a year (or 100 times the average income). See the online technical appendix.
     38. As in Chapter 2, the average incomes mentioned here are national per capita average incomes. In 1810–1820, the average income in France was 400–500 francs per year and probably a little more than 500 francs in Paris. The wages of domestic servants were one-third to one-half that.
     39. Recall that a pound sterling was worth 25 francs in the nineteenth century and as late as 1914. See Chapter 2.
     40. Had not an intimate of George III said to Barry Lyndon thirty years earlier, in the 1770s, that anyone with a capital of 30,000 pounds ought to be knighted? Redmond Barry had come quite a way since enlisting in the British army for barely 15 pounds a year (1 shilling a day), or barely half the average British income in 1750–1760. The fall was inevitable. Note that Stanley Kubrick, who took his inspiration from the celebrated nineteenth-century British novel, is just as precise about amounts as Jane Austen was.
     41. Jane Austen, Sense and Sensibility (Cambridge, MA: Belknap Press, 2013), 405.
     42. Austen, Sense and Sensibility, 135.
     43. His cynicism ultimately persuades Rastignac, who in La maison de Nucingen engages in business dealings with Delphine's husband in order to lay hands on a fortune of 400,000 francs.
     44. In October 1788, as he is about to leave Normandy, Young notes: "Europe is now so much assimilated, that if one goes to a house where the fortune is 15 or 20,000 livres a year, we shall find in the mode of living much more resemblance than a young traveller will ever be prepared to look for" (Arthur Young, Travels in 1787, 1788, 1789, pub. 1792, reprinted as Arthur Young's Travels in France [Cambridge: Cambridge University Press, 2012], 145). He is speaking of the livre tournois, equivalent to the franc germinal. This amount was equal to 700–900 pounds sterling, or the equivalent of 30–50 times the average French or British income of the day. Later on he is more specific: with this amount of income, one can afford "six men-servants, five maids, eight horses, a garden, and a regular table." By contrast, with only 6,000–8,000 livres tournois, one can barely afford "2 servants and 3 horses." Note that livestock was an important part of capital and expenses. In November 1789, Young sold his horse in Toulon for 600 livres tournois (or four years of annual wages for an "ordinary servant"). The price was typical for the time. See the online technical appendix.
     45. Michael Young expressed this fear in The Rise of Meritocracy (London: Thames and Hudson, 1958).
     46. The question of the salary scale for civil servants gave rise to many political conflicts in this period. In 1792, revolutionaries had tried to establish a restricted pay scale with a ratio of 8:1 (it was finally adopted in 1948 but was very quickly circumvented by a system of opaque bonuses for the highest civil servants that still exists today). Napoleon created a small number of highly paid posts, so few that Thiers in 1831 saw little reason to reduce their number ("with three million more or less given to or taken from the prefects, generals, magistrates, and ambassadors, we have the luxury of the Empire or American-style simplicity," he added in the same speech). The fact that the highest US civil servants at the time were paid much less than in France was also noted by Tocqueville, who saw it as a sure sign that the democratic spirit prevailed in the United States. Despite many ups and downs, this handful of very high salaries persisted in France until World War I (and thus to the fall of the rentier). On these evolutions, see the online technical appendix.
     47. See Piketty, Les hauts revenus en France, 530.
     48. This argument sets aside the logic of need in favor of a logic of disproportion and conspicuous consumption. Thorstein Veblen said much the same thing in The Theory of the Leisure Class (New York: Macmillan, 1899): the egalitarian US dream was already a distant memory.
     49. Michèle Lamont, Money, Morals and Manners: The Culture of the French and the American Upper-Middle Class (Chicago: University of Chicago Press, 1992). The individuals Lamont interviewed were no doubt closer to the ninetieth or ninety-fifth percentile of the income hierarchy (or in some cases the ninety-eighth or ninety-ninth percentile) than to the sixtieth or seventieth percentile. See also J. Naudet, Entrer dans l'élite: Parcours de réussite en France, aux États-Unis et en Inde (Paris: Presses Universitaires de France, 2012).
     50. In order to avoid painting too dark a picture, Figures 11.9–11 show only the results for the central scenario. The results for the alternative scenario are even more worrisome and are available online (Supplemental Figures S11.9–11). The evolution of the tax system explains why the share of inheritance in total resources may exceed its nineteenth-century level even if the inheritance flow as a proportion of national income does not. Labor incomes are taxed today at a substantial level (30 percent on average, excluding retirement and unemployment insurance contributions), whereas the average effective tax rate on inheritances is less than 5 percent (even though inheritance gives rise to the same rights as labor income in regard to access to transfers in kind—education, health, security, etc.—which are financed by taxes). The tax issues are examined in Part Four.
     51. The same is true of the landed estates worth 30,000 pounds of which Jane Austen speaks in a world where the average per capita income was around 30 pounds a year.
     52. A fortune hidden in the Bahamas also figures in season 4 of Desperate Housewives (Carlos Solis has to get back his $10 million, which leads to endless complications with his wife), even though the show is as saccharine as could be and not out to portray social inequalities in a worrisome light, unless, of course, it is a matter of cunning ecological terrorists who threaten the established order or mentally handicapped minorities engaged in a conspiracy.
     53. I will come back to this point in Chapter 13.
     54. If the alternative scenario is correct, this proportion may exceed 25 percent. See Supplemental Figure S11.11, available online.
     55. Compared with the socioeconomic theories of Modigliani, Becker, and Parsons, Durkheim's theory, formulated in De la division du travail social (1893), is primarily a political theory of the end of inheritance. Its prediction has proved no more accurate than those of the other theories, but it may be that the wars of the twentieth century merely postponed the problem to the twenty-first.
     56. Mario Draghi, Le Monde, July 22, 2012.
     57. I do not mean to underestimate the importance of the taxi problem. But I would not venture to suggest that this is the foremost problem faced by Europe or global capitalism in the twenty-first century.
     58. In France, fewer than 1 percent of adult males had the right to vote under the Restoration (90,000 voters out of 10 million); this proportion rose to 2 percent under the July Monarchy. Property requirements for holding office were even stricter: fewer than 0.2 percent of adult males met them. Universal male suffrage, briefly introduced in 1793, became the norm after 1848. Less than 2 percent of the British population could vote until 1831. Subsequent reforms in 1831 and especially 1867, 1884, and 1918 gradually put an end to property qualifications.
     59. The German data presented here were collected by Christoph Schinke, "Inheritance in Germany 1911 to 2009: A Mortality Multiplier Approach," Master's thesis, Paris School of Economics, 2012. See the online technical appendix.
     60. The British flows seem to have been slightly smaller (20–21 percent rather than 23–24 percent). Note, however, that this is based on an estimate of the fiscal flow and not the economic flow and is therefore likely to be slightly too low. The British data were collected by Anthony Atkinson, "Wealth and Inheritance in Britain from 1896 to the Present," London School of Economics, 2012.
     61. If this were to happen at the global level, the global return on capital might decrease, and greater life-cycle wealth might in part supplant transmissible wealth (because a lower return on capital discourages the second type of accumulation more than the first, which is not certain). I will come back to these questions in Chapter 12.
     62. On this subject see the remarkable book by Anne Gotman, Dilapidation et prodigalité (Paris: Nathan, 1995), based on interviews with individuals who squandered large fortunes.
     63. In particular, Modigliani quite simply failed to include capitalized incomes in inherited wealth. Kotlikoff and Summers, for their part, did take these into account without limit (even if the capitalized inheritance exceeded the wealth of the heir), which is also incorrect. See the online technical appendix for a detailed analysis of these questions.
 12. Global Inequality of Wealth in the Twenty-First Century

     1. Recall that global GDP, using purchasing power parity, was roughly $85 trillion (70 million euros) in 2012–2013, and according to my estimates total private wealth (real estate, business, and financial assets, net of liabilities) was around four years of global GDP, or about $340 trillion (280 million euros). See Chapters 1 and 6 and the online technical appendix.
     2. Inflation in this period averaged 2–2.5 percent a year (and was somewhat lower in euros than in dollars; see Chapter 1). All the detailed series are available in the online technical appendix.
     3. If one calculates these averages with respect to the total world population (including children as well as adults), which grew considerably less than the adult population in the period 1987–2013 (1.3 percent a year compared with 1.9 percent), all the growth rates increase, but the differences between them do not change. See Chapter 1 and the online technical appendix.
     4. See the online technical appendix, Supplemental Table S12.1, available online.
     5. For example, if we assume that the rate of divergence observed between 1987 and 2013 at the level of the top twenty-millionth will continue to apply in the future to the fractile consisting of the 1,400 billionaires included in the 2013 ranking (roughly the top three-millionths), the share of this fractile will increase from 1.5 percent of total global wealth in 2013 to 7.2 percent in 2050 and 59.6 percent in 2100.
     6. The national wealth rankings published by other magazines in the United States, France, Britain, and Germany reach a little lower in the wealth hierarchy than Forbes's global ranking, and the share of wealth covered in some cases is as high as 2 or 3 percent of the country's total private wealth. See the online technical appendix.
     7. In the media, the wealth of billionaires is sometimes expressed as a proportion of the annual flow of global output (or of the GDP of some country, which gives frightening results). This makes more sense than to express these large fortunes as a proportion of the global capital stock.
     8. These reports rely in particular on the innovative work of James B. Davies, Susanna Sandström, Anthony Shorrocks, and Edward N. Wolff, "The Level and Distribution of Global Household Wealth," Economic Journal 121, no. 551 (March 2011): 223–54, and on data of the type presented in Chapter 10. See the online technical appendix.
     9. Generally speaking, the sources used to estimate wealth distributions (separately for each country) pertain to years some distance in the past, updated almost exclusively with aggregate data taken from national accounts and similar sources. See the online technical appendix.
     10. For example, the French media, accustomed for years to describing a massive flight of large fortunes from France (without really trying to verify the information other than by anecdote), have been astonished to learn every fall since 2010 from the Crédit Suisse reports that France is apparently the European wealth leader: the country is systematically ranked number 3 worldwide (behind the United States and Japan and well ahead of Britain and Germany) in number of millionaire residents. In this case, the information seems to be correct (as far as it is possible to judge from available sources), even if the bank's methods tend to exaggerate the difference between France and Germany. See the online technical appendix.
     11. See the online technical appendix.
     12. In terms of the global income distribution, it seems that the sharp increase in the share of the top centile (which is not happening in all countries) has not prevented a decrease in the global Gini coefficient (although there are large uncertainties in the measurement of inequality in certain countries, especially China). Since the global wealth distribution is much more concentrated at the top of the distribution, it is quite possible that the increase in the share of the top centiles matters more. See the online technical appendix.
     13. The average fortune of the top ten-thousandth (450 adults out of 45 billion) is about 50 million euros, or nearly 1,000 times the global average wealth per adult, and their share of total global wealth is about 10 percent.
     14. Bill Gates was number one in the Forbes rankings from 1995 to 2007, before losing out to Warren Buffet in 2008–2009 and then to Carlos Slim in 2010–2013.
     15. The first dyes invented in 1907 were named "L'Auréale," after a hair style in vogue at the time and reminiscent of an aureole. Their invention led to the creation in 1909 of the French Company for Harmless Hair Dyes, which eventually, after the creation of many other brands (such as Monsavon in 1920) became L'Oréal in 1936. The similarity to the career of César Birotteau, whom Balzac depicts as having made his fortune by inventing "L'Eau Carminative" and "La Pâte des Sultanes" in the early nineteenth century, is striking.
     16. With a capital of 10 billion euros, a mere 0.1 percent is enough to finance annual consumption of 10 million euros. If the return on capital is 5 percent, 98 percent of it can be saved. If the return is 10 percent, 99 percent can be saved. In any case, consumption is insignificant.
     17. Honoré de Balzac, Le père Goriot (Paris: Livre de Poche, 1983), 105–9.
     18. In the case of Challenges, there seem to be too few fortunes in the 50–500 million euro range compared with the number of wealth tax declarations in the corresponding brackets (especially since a large part of business capital is not taxable under the wealth tax and therefore does not appear in the statistics). This may be because Challenges does not look at diversified fortunes. Indeed, both sources underestimate the actual number of large fortunes for opposite reasons: the Challenges source overvalues business capital, while the fiscal source underestimates it, and both rely on vague and shifting definitions. Citizens are left perplexed and made to feel that the subject of wealth is quite opaque. See the online technical appendix.
     19. Conceptually, moreover, it is no simple matter to define what a normal return on inherited wealth might be. In Chapter 11, I applied the same average return on capital to all fortunes, which no doubt leads to treating Liliane Bettencourt as a very partial heir (in view of the very high return on her capital), more partial than Steve Forbes himself, who nevertheless classifies her as a pure heiress, even though he counts himself among the "nurturers" of inherited wealth. See the online technical appendix.
     20. For some particularly strong assertions about the relative merits of Slim and Gates, unfortunately without any precise factual basis, see, for example, Daron Acemoglu and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity, and Poverty (New York: Crown Publishing, 2012), 34–41. The authors' harsh tone is all the more surprising in that they do not really discuss the ideal distribution of wealth. The book is built around a defense of the role of systems of property rights stemming from the British, American, and French revolutions in the development process (and little is said about more recent social institutions or systems of taxation).
     21. See, for example, the magazine Capital, no. 255, December 3, 2012: "180 million euros … a sum that pales in comparison to the value of the real estate that the head of the firm, Lakshmi Mittal, recently acquired in London for three times that amount. Indeed, the businessman recently purchased the former embassy of the Philippines (for 70 million pounds, or 86 million euros), supposedly for his daughter Vanisha. A short while earlier, his son Aditya was the recipient of the generous gift of a home worth 117 million pounds (144 million euros). The two properties are located on Kensington Palace Gardens, known as Billionaires' Row, not far from the paternal palace. Lakshmi Mittal's residence is said to be the ‘most expensive private home in the world' and is equipped with a Turkish bath, a jewel-encrusted swimming pool, marble from the same quarry as the Taj Mahal, and servants' quarters.… All told, these three homes cost 542 million euros, or 3 times the 180 million invested in Florange."
     22. The Forbes ranking uses an interesting criterion, but one that is hard to apply in any precise way: it excludes "despots" and indeed anyone whose fortune depends on "their political position" (like the Queen of England). But if an individual acquires his fortune before coming to power, he remains in the ranking: for example, the Georgia oligarch Bidzina Ivanishvili is still in the 2013 list, although he became prime minister in late 2012. He is credited with a fortune of $5 billion, or one-quarter of his country's GDP (between 5 percent and 10 percent of Georgia's national wealth).
     23. The total capital endowment of US universities is about 3 percent of GDP, and the annual income on this capital is about 0.2 percent of GDP, which is a little over 10 percent of total US expenditure on higher education. But this share is as high as 30 or 40 percent of the resources of the most richly endowed universities. Furthermore, these capital endowments play a role in the governance of these institutions that often outweighs their monetary importance. See the online technical appendix.
     24. The data used here come mainly from reports published by the National Association of College and University Business Officers, as well as from financial reports published by Harvard University, Yale University, Princeton University, and other institutions. See the online technical appendix.
     25. For results by subperiod, see the online technical appendix, Supplemental Table S12.2, available online.
     26. Note, however, that the main difference arises from the fact that most owners of private wealth must pay significant taxes: the average real return before taxes was around 5 percent in the United States in 1980–2010. See the online technical appendix.
     27. The numbers of universities in each category indicated in parentheses in Table 12.2 are based on 2010 endowments, but so as not to bias the results, the returns were calculated by ranking universities according to their endowment at the beginning of each decade. All the detailed results are available in the online technical appendix. See in particular Supplemental Table S12.2, available online.
     28. Real estate can be a very high yield investment if one identifies the right projects around the world. In practice, these include business and commercial as well as residential properties, often on a very large scale.
     29. This is confirmed by the fact that relative rankings do not change much over the thirty-year period 1980–2010. The hierarchy of university endowments remains more or less the same.
     30. To take Harvard University as an example, annual financial reports show that the endowment yielded an average real return of about 10 percent from 1990 to 2010, whereas new gifts added an average of about 2 percent a year to the endowment. Thus the total real income (from return on the endowment plus gifts) amounted to 12 percent of the endowment; a portion of this, amounting to 5 percent of the endowment, was used to pay current university expenses, while the other 7 percent was added to the endowment. This enabled the endowment to increase from $5 billion in 1990 to nearly $30 billion in 2010 while allowing the university to consume an annual flow of resources 2.5 times as great as it received in gifts.
     31. Note, however, that the historic rebound of asset prices appears to add no more than a point of additional annual return, which is fairly small compared with the level of return I have been discussing. See the online technical appendix.
     32. For example, because Bill Gates maintains effective control over the assets of the Bill and Melinda Gates Foundation, Forbes chooses to count those assets as part of Gates's personal fortune. Maintaining control seems incompatible with the idea of a disinterested gift.
     33. According to Bernard Arnault, the principal stockholder in LVMH, the world leader in luxury goods, the purpose of the Belgian foundation that holds his assets is neither charitable nor fiscal. Rather, it is primarily an estate vehicle. "Among my five children and two nephews, there is surely one who will prove capable of taking over after I am gone," he remarked. But he is afraid of disputes. By placing his assets in the foundation, he forces his heirs to vote "indissociably," which "ensures the survival of the group if I should die and my heirs should be unable to agree." See Le Monde, April 11, 2013.
     34. The work of Gabrielle Fack and Camille Landais, which is based on these types of reforms in the United States and France, speaks eloquently to this point. See the online technical appendix.
     35. For an incomplete estimate for the United States, see the online technical appendix.
     36. See Chapter 5.
     37. It was even worse in the nineteenth century, at least in the city, and especially in Paris, where before World War I most buildings were not chopped up into apartments. One therefore needed to be wealthy enough to buy an entire building.
     38. See Chapter 5.
     39. The nominal average return for 1998–2012 was only 5 percent a year. It is difficult to compare these returns with those on university endowments, however, in part because the period 1998–2012 was not as good as 1990–2010 or 1980–2010 (and unfortunately the Norwegian fund's statistics go back only as far as 1998), and because this relatively low return was due in part to appreciation of the Norwegian krone.
     40. According to the census of 2010, the United Arab Emirates (of which Abu Dhabi is the largest member state) have a native population of a little over 1 million (plus 7 million foreign workers). The native population of Kuwait is about the same size. Qatar has about 300,000 nationals and 1.5 million foreigners. Saudi Arabia alone employs nearly 10 million foreign workers (in addition to its native population of nearly 20 million).
     41. See the online technical appendix.
     42. One should also take into account public nonfinancial assets (public buildings, school, hospitals, etc.) as well as financial assets not formally included in sovereign wealth funds, and then subtract public debts. Net public wealth is currently less than 3 percent of private wealth in the rich countries, on average (in some cases net public wealth is negative), so this does not make much difference. See Chapters 3–5 and the online technical appendix.
     43. If we exclude real estate and unlisted business assets, financial assets in the narrow sense represented between a quarter and a third of global private wealth in 2010, that is, between a year and a year and a half of global GDP (and not four years). The sovereign wealth funds thus own 5 percent of global financial assets. Here I refer to net financial assets owned by households and governments. In view of the very substantial cross-holdings of financial and nonfinancial corporations within and between countries, gross financial assets amount to much more than three years of global GDP. See the online technical appendix.
     44. The rent on natural resources had already exceeded 5 percent of global GDP from the mid-1970s to the mid-1980s. See the online technical appendix.
     45. My hypotheses implicitly include the long-run savings rate in China (and elsewhere), counting both public and private saving. We cannot predict the future relationship between public property (notably in sovereign wealth funds) and private property in China.
     46. In any case, this transparent process of rent transformation (from oil rent to a diversified capital rent) illustrates the following point: capital has historically taken a variety of forms (land, oil, financial assets, business capital, real estate, etc.), but its underlying logic has not really changed, or at any rate has changed much less than people sometimes think.
     47. In a pay-as-you-go, the contributions to the pension fund by active workers are directly paid out to retirees without being invested. On these issues, see Chapter 13.
     48. Between one-quarter and one-half of European and US capital (or even more, depending on various assumptions). See the online technical appendix.
     49. The divergence of the petroleum exporters can be seen as an oligarchic divergence, moreover, because petroleum rents go to a small number of individuals, who may be able to sustain a high level of accumulation through sovereign wealth funds.
     50. The GDP of the European Union was close to 15 trillion euros in 2012–2013, compared with 10 trillion euros for China's GDP at purchasing power parity (or 6 trillion at current exchange rates, which may be better for comparing international financial assets). See Chapter 1. China's net foreign assets are growing rapidly, but not fast enough to overtake the total private wealth of the rich countries. See the online technical appendix.
     51. See Aurélie Sotura, "Les étrangers font-ils monter les prix de l'immobilier? Estimation à partir de la base de la chambre des Notaires de Paris, 1993–2008," Paris, Ecoles des Hautes Etudes en Sciences Social and Paris School of Economics, 2011.
     52. See in particular Figure 5.7.
     53. In Figure 12.6, the "wealthy countries" include Japan, Western Europe, and the United States. Adding Canada and Oceania would change little. See the online technical appendix.
     54. See Chapters 3–5.
     55. Or 7–8 percent of total net financial assets worldwide (see above).
     56. See the online technical appendix for a discussion of the high estimate made in 2012 by James Henry for the Tax Justice Network, and the intermediate 2010 estimate by Ronen Palan, Richard Murphy, and Christian Chavagneux.
     57. The data in Figure 12.6 are from Gabriel Zucman, "The Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors?," Quarterly Journal of Economics 128, no. 3 (2013): 1321–64.
     58. According to an estimate by Roine and Waldenström, accounting for assets held abroad (estimated from inconsistencies in the Swedish balance of payments) can, under certain assumptions, lead to the conclusion that the top centile in Sweden is close to the same level of wealth as the top centile in the United States (which probably should also be increased). See the online technical appendix.
 13. A Social State for the Twenty-First Century

     1. As is customary, I take tax revenues to include all taxes, fees, social contributions, and other payments that citizens must pay under penalty of law. The distinctions between different types of payments, especially taxes and social insurance contributions, are not always very clear and do not mean the same thing in different countries. For the purpose of historical and international comparisons, it is important to consider all sums paid to the government, whether the central government or states or cities or other public agencies (such as social security, etc.). To simplify the discussion, I will sometimes use the word "taxes," but unless otherwise indicated I always include other compulsory charges as well. See the online technical appendix.
     2. Military expenditures generally amount to at least 2–3 percent of national income and can go much higher in a country that is unusually active militarily (like the United States, which currently devotes more than 4 percent of its national income to the military) or that feels its security and property threatened (Saudi Arabia and the Gulf states spend more than 10 percent of national income on the military).
     3. Health and education budgets were generally below 1–2 percent of national income in the nineteenth century. For a historical view of the slow development of social spending since the eighteenth century and the acceleration in the twentieth century, see P. Lindert, Growing Public: Social Spending and Economic Growth since the Eighteenth Century (Cambridge: Cambridge University Press, 2004).
     4. Note that the share of compulsory payments is expressed here as a proportion of national income (which is generally around 90 percent of GDP after deduction of about 10 percent for depreciation of capital). This seems to me the right thing to do, in that depreciation is not anyone's income (see Chapter 1). If payments are expressed as a percentage of GDP, then the shares obtained are by definition 10 percent smaller (for example, 45 percent of GDP instead of 50 percent of national income).
     5. Gaps of a few points may be due to purely statistical differences, but gaps of 5–10 points are real and substantial indicators of the role played by the government in each country.
     6. In Britain, taxes fell by several points in the 1980s, which marked the Thatcherite phase of government disengagement, but then climbed again in 1990–2000, as new governments reinvested in public services. In France, the state share rose somewhat later than elsewhere, continued to rise strongly in 1970–1980, and did not begin to stabilize until 1985–1990. See the online technical appendix.
     7. In order to focus on long-term trends, I have once again used decennial averages. The annual series of tax rates often include all sorts of minor cyclical variations, which are transitory and not very significant. See the online technical appendix.
     8. Japan is slightly above the United States (32–33 percent of national income). Canada, Australia, and New Zealand are closer to Britain (35–40 percent).
     9. The term "social state" captures the nature and variety of the state's missions better than the more restrictive term "welfare state," in my view.
     10. See Supplemental Table S13.2, available online, for a complete breakdown of public spending in France, Germany, Britain, and the United States in 2000–2010.
     11. Typically 5–6 percent for education and 8–9 percent for health. See the online technical appendix.
     12. The National Health Service, established in 1948, is such an integral part of British national identity that its creation was dramatized in the opening ceremonies of the 2012 Olympic games, along with the Industrial Revolution and the rock groups of the 1960s.
     13. If one adds the cost of private insurance, the US health care system is by far the most expensive in the world (nearly 20 percent of national income, compared with 10–12 percent in Europe), even though a large part of the population is not covered and health indicators are not as good as in Europe. There is no doubt that universal public health insurance systems, in spite of their defects, offer a better cost-benefit ratio than the US system.
     14. By contrast, social spending on education and health reduces the (monetary) disposable income of households, which explains why the amount of the latter decreased from 90 percent of national income at the turn of the twentieth century to 70–80 percent today. See Chapter 5.
     15. Pensions systems with capped payments are usually called, after the architect of Britain's social state, "Beveridgian" (with the extreme case a flat pension amount for everyone, as in Britain), in contrast to "Bismarckian," "Scandinavian," or "Latin" systems, in which pensions are almost proportional to wages for the vast majority of the population (nearly everyone in France, where the ceiling is exceptionally high: eight times the average wage, compared with two to three times in most countries).
     16. In France, which stands out for the extreme complexity of its social benefits and the proliferation of rules and agencies, fewer than half of the people who were supposed to benefit from one welfare-to-work program (the so-called active solidarity income, a supplement to very low part-time wages) applied for it.
     17. One important difference between Europe and the United States is that income support programs in the United States have always been reserved for people with children. For childless individuals, the carceral state sometimes does the job of the welfare state (especially for young black males). About 1 percent of the adult US population was behind bars in 2013. This is the highest rate of incarceration in the world (slightly ahead of Russia and far ahead of China). The incarceration rate is more than 5 percent for adult black males (of all ages). See the online technical appendix. Another US peculiarity is the use of food stamps (whose purpose is to ensure that welfare recipients spend their benefits on food rather than on drink or other vices), which is inconsistent with the liberal worldview often attributed to US citizens. It is a sign of US prejudices in regard to the poor, which seem to be more extreme than European prejudices, perhaps because they are reinforced by racial prejudices.
     18. With variations between countries described above.
     19. "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain inalienable Rights, that among these are Life, Liberty and the pursuit of Happiness; that to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed."
     20. The notion of "common utility" has been the subject of endless debate, and to examine this would go far beyond the framework of this book. What is certain is that the drafters of the 1789 Declaration did not share the utilitarian spirit that has animated any number of economists since John Stuart Mill: a mathematical sum of individual utilities (together with the assumption that the utility function is "concave," meaning that its rate of increase decreases with increasing income, so that redistribution of income from the rich to the poor increases total utility). This mathematical representation of the desirability of redistribution bears little apparent relation to the way most people think about the question. The idea of rights seems more pertinent.
     21. It seems reasonable to define "the most disadvantaged" as those individuals who have to cope with the most unfavorable factors beyond their control. To the extent that inequality of conditions is due, at least in part, to factors beyond the control of individuals, such as the existence of unequal family endowments (in terms of inheritances, cultural capital, etc.) or good fortune (special talents, luck, etc.), it is just for government to seek to reduce these inequalities as much as possible. The boundary between equalization of opportunities and conditions is often rather porous (education, health, and income are both opportunities and conditions). The Rawlsian notion of fundamental goods is a way of moving beyond this artificial opposition.
     22. "Social and economic inequalities … are just only if they result in compensating benefits for everyone, and in particular for the least advantaged members of society" (John Rawls, A Theory of Justice [Cambridge, MA: Belknap Press, 15]). This 1971 formulation was repeated in Political Liberalism, published in 1993.
     23. These theoretical approaches have recently been extended by Marc Fleurbaey and John Roemer, with some tentative empirical applications. See the online technical appendix.
     24. Despite the consensus in Europe there is still considerable variation. The wealthiest and most productive countries have the highest taxes (50–60 percent of the national income in Sweden and Denmark), and the poorest, least developed countries have the lowest taxes (barely 30 percent of national income in Bulgaria and Romania). See the online appendix. In the United States there is less of a consensus. Certain substantial minority factions radically challenge the legitimacy of all federal social programs or indeed of social programs of any kind. Once again, racial prejudice seems to have something to do with this (as exemplified by the debates over the health care reform adopted by the Obama administration).
     25. In the United States and Britain, the social state also grew rapidly even though economic growth was significantly lower, which may have fostered a powerful sense of loss reinforced by a belief that other countries were catching up, as discussed earlier (see Chapter 2 in particular).
     26. According to the work of Anders Bjorklund and Arnaud Lefranc on Sweden and France, respectively, it seems that the intergenerational correlation decreased slightly for cohorts born in 1940–1950 compared with those born in 1920–1930, then increased again for cohorts born in 1960–1970. See the online technical appendix.
     27. It is possible to measure mobility for cohorts born in the twentieth century (with uneven precision and imperfect comparability across countries), but it is almost impossible to measure intergenerational mobility in the nineteenth century except in terms of inheritance (see Chapter 11). But this is a different issue from skill and earned income mobility, which is what is of interest here and is the focal point of these measurements of intergenerational mobility. The data used in these works do not allow us to isolate mobility of capital income.
     28. The correlation coefficient ranges from 0.2–0.3 in Sweden and Finland to 0.5–0.6 in the United States. Britain (0.4–0.5) is closer to the United States but not so far from Germany or France (0.4). Concerning international comparisons of intergenerational correlation coefficients of earned income (which are also confirmed by twin studies), see the work of Markus Jantti. See the online technical appendix.
     29. The cost of an undergraduate year at Harvard in 2012–2013 was $54,000, including room and board and various other fees (tuition in the strict sense was $38,000). Some other universities are even more expensive than Harvard, which enjoys a high income on its endowment (see Chapter 12).
     30. See G. Duncan and R. Murnane, Whither Opportunity? Rising Inequality, Schools, and Children's Life Chances (New York: Russell Sage Foundation, 2011), esp. chap. 6. See the online technical appendix.
     31. See Jonathan Meer and Harvey S. Rosen, "Altruism and the Child Cycle of Alumni Donations," American Economic Journal: Economic Policy 1, no. 1 (2009): 258–86.
     32. This does not mean that Harvard recruits its students exclusively from among the wealthiest 2 percent of the nation. It simply means that recruitment below that level is sufficiently rare, and that recruitment among the wealthiest 2 percent is sufficiently frequent, that the average is what it is. See the online technical appendix.
     33. Statistics as basic as the average income or wealth of parents of students at various US universities are very difficult to obtain and not much studied.
     34. The highest tuition fee British universities may charge was increased to £1,000 in 1998, £3,000 in 2004, and £9,000 in 2012. The share of tuition fees in total resources of British universities in 2010 is almost as high as in the 1920s and close to the US level. See the interesting series of historical studies by Vincent Carpentier, "Public-Private Substitution in Higher Education," Higher Education Quarterly 66, no. 4 (October 2012): 363–90.
     35. Bavaria and Lower Saxony decided in early 2013 to eliminate the university tuition of 500 euros per semester and offer free higher education like the rest of Germany. In the Nordic countries, tuition is never more than a few hundred euros, as in France.
     36. One finds the same redistribution from bottom to top in primary and secondary education: students at the most disadvantaged schools and high schools are assigned the least experienced and least trained teachers and therefore receive less public money per child than students at more advantaged schools and high schools. This is all the more regrettable because a better distribution of resources at the primary level would greatly reduce inequalities of educational opportunity. See Thomas Piketty and M. Valdenaire, L'impact de la taille des classes sur la réussite scolaire dans les écoles, collèges et lycées français (Paris: Ministère de l'Education Nationale, 2006).
     37. As in the case of Harvard, this average income does not mean that Sciences Po recruits solely among the wealthiest 10 percent of families. See the online technical appendix for the complete income distribution of parents of Sciences Po students in 2011–2012.
     38. According to the well-known Shanghai rankings, 53 of the 100 best universities in the world in 2012–2013 were in the United States, compared with 31 in Europe (9 of which were in Britain). The order is reversed, however, when we look at the 500 best universities (150 for the United States and 202 for Europe, of which 38 are in Britain). This reflects significant inequalities among the 800 US universities (see Chapter 12).
     39. Note, however, that compared with other expenses (such as pensions), it would be relatively easy to raise spending on higher education from the lowest levels (barely 1 percent of national income in France) to the highest (2–3 percent in Sweden and the United States).
     40. For example, tuition at Sciences Po currently ranges from zero for parents with the least income to 10,000 euros a year for parents with incomes above 200,000 euros. This system is useful for producing data on parental income (which unfortunately has been little studied). Compared with Scandinavian-style public financing, however, such a system amounts to a privatization of the progressive income tax: the additional sums paid by wealthy parents go to their own children and not to the children of other people. This is evidently in their own interest, not in the public interest.
     41. Australia and Britain offer "income-contingent loans" to students of modest background. These are not repaid until the graduates achieve a certain level of income. This is tantamount to a supplementary income tax on students of modest background, while students from wealthier backgrounds received (usually untaxed) gifts from their parents.
     42. Emile Boutmy, Quelques idées sur la création d'une Faculté libre d'enseignement supérieur (Paris, 1871). See also P. Favre, "Les sciences d'Etat entre déterminisme et libéralisme: Emile Boutmy (1835–1906) et la création de l'Ecole libre des sciences politiques," Revue française de sociologie 22 (1981).
     43. For an analysis and defense of the "multi-solidarity" model, see André Masson, Des liens et des transferts entre générations (Paris: Editions de l'EHESS, 2009.
     44. See Figures 10.9–11.
     45. Recall that this volatility is the reason why PAYGO was introduced after World War II: people who had saved for retirement by investing in financial markets in 1920–1930 found themselves ruined, and no one wished to try the experiment again by imposing a compulsory capitalized pension system of the sort that any number of countries had tried before the war (for example, in France under the laws of 1910 and 1928).
     46. This was largely achieved by the Swedish reform of the 1990s. The Swedish system could be improved and adapted to other countries. See for example Antoine Bozio and Thomas Piketty, Pour un nouveau système de retraite: Des comptes individuels de cotisations financés par répartition (Paris: Editions rue d'Ulm, 2008).
     47. It is also possible to imagine a unified retirement scheme that would offer, in addition to a PAYGO plan, an opportunity to earn a guaranteed return on modest savings. As I showed in the previous chapter, it is often quite difficult for people of modest means to achieve the average return on capital (or even just a positive return). In some respects, this what the Swedish system offers in the (small) part that it devotes to capitalized funding.
     48. Here I am summarizing the main results of Julia Cagé and Lucie Gadenne, "The Fiscal Cost of Trade Liberalization," Harvard University and Paris School of Economics Working Paper no. 2012–27 (see esp. figure 1).
     49. Some of the problems of health and education the poor countries face today are specific to their situation and cannot really be addressed by drawing on the past experience of today's developed countries (think of the problem of AIDS, for example). Hence new experiments, perhaps in the form of randomized controlled trials, may be justified. See, for example, Abhijit Banerjee and Esther Duflo, Poor Economics (New York: Public Affairs, 2012). As a general rule, however, I think that development economics tends to neglect actual historical experience, which, in the context of this discussion, means that too little attention is paid to the difficulty of developing an effective social state with paltry tax revenues. One important difficulty is obviously the colonial past (and therefore randomized controlled trials may offer a more neutral terrain).
     50. See Thomas Piketty and Nancy Qian, "Income Inequality and Progressive Income Taxation in China and India: 1986–2015," American Economic Journal: Applied Economics 1, no. 2 (April 2009): 53–63. The difference between the two countries is closely related to the greater prevalence of wage labor in China. History shows that the construction of a fiscal and social state and of a wage-earner status often go together.
 14. Rethinking the Progressive Income Tax

     1. The British economist Nicholas Kaldor proposed such a tax, and I say more about it later, but for Kaldor it was a complement to progressive income and estate taxes, in order to ensure that they were not circumvented. It was not meant as a substitute for these taxes, as some have argued.
     2. For example, in 1990, when some social contributions in France were extended to revenue streams other than employment income (including capital income and retiree income) to create what was called the "generalized social contribution," (contribution sociale généralisée, or CSG), the corresponding receipts were reclassified as an income tax under international norms.
     3. The poll tax, which was adopted in 1988 and abolished in 1991, was a local tax that required the same payment of every adult no matter what his or her income or wealth might be, so its rate was lower for the rich.
     4. See Camille Landais, Thomas Piketty, and Emmanuel Saez, Pour une révolution fiscale: Un impôt sur le revenu pour le 21e siècle (Paris: Le Seuil, 2010), pp. 48–53. Also available at www.revolution-fiscale.fr.
     5. In particular, the estimate fails to account for income hidden in tax havens (which, as indicated in Chapter 12, is quite a lot) and assumes that "tax shelters" are equally common at all levels of income and wealth (which probably leads to an overestimate of the real rate of taxation at the top of the hierarchy). Note, too, that the French tax system is exceptionally complex, with many special categories and overlapping taxes. (For example, France is the only developed country that does not withhold income tax at the source, even though social contributions have always been withheld at the source.) This complexity makes the system even more regressive and difficult to understand (just as the pension system is difficult to understand).
     6. Only income from inherited capital is taxed under the progressive income tax (along with other capital income) and not inherited capital itself.
     7. In France, for example, the average tax on estates and gifts is barely 5 percent; even for the top centile of inheritances, it is just 20 percent. See the online technical appendix.
     8. See Figures 11.9–11 and the online technical appendix.
     9. For example, instead of taxing the bottom 50 percent at a rate of 40–45 percent and the next 40 percent at a rate of 45–50 percent, one could tax the bottom group at 30–35 percent and the second group at 50–55 percent.
     10. Given the low rate of intergenerational mobility, this would also be more just (in terms of the criteria of justice discussed in Chapter 13). See the online technical appendix.
     11. The "general tax on income" (impôt général sur le revenu, or IGR) this law created is a progressive tax on total income. It was the forerunner of today's income tax. It was modified by the law of July 31, 1917, creating what was called the cédulaire tax (which taxed different categories of income, such as corporate profits and wages, differently). This law was the forerunner of today's corporate income tax. For details of the turbulent history of the income tax in France since the fundamental reforms of 1914–1917, see Thomas Piketty, Les hauts revenus en France au 20e siècle: Inégalités et redistribution 1901–1998 (Paris: Grasset, 2001), 233–334.
     12. The progressive income tax was aimed primarily at top capital incomes (which everyone at the time knew dominated the income hierarchy), and it never would have occurred to anyone in any country to grant special exemptions to capital income.
     13. For example, the many works the US economist Edwin Seligman published between 1890 and 1910 in praise of the progressive income tax were translated into many languages and stirred passionate debate. On this period and these debates, see Pierre Rosanvallon, La société des égaux (Paris: Le Seuil, 2011), 227–33. See also Nicolas Delalande, Les batailles de l'impôt: Consentement et résistances de 1789 à nos jours (Paris: Le Seuil, 2011).
     14. The top tax rate is generally a "marginal" rate, in the sense that it applies only to the "margin," or portion of income above a certain threshold. The top rate generally applies to less than 1 percent of the population (in some cases less than 0.1 percent). To have a comprehensive view of progressivity, it is better to look at the effective rates paid by different centiles of the income distribution (which can be much lower). The evolution of the top rate is nevertheless interesting, and by definition it gives an upper bound on the effective rate paid by the wealthiest individuals.
     15. The top tax rates shown in Figure 14.1 do not include the increases of 25 percent introduced in 1920 for unmarried taxpayers without children and married taxpayers "who after two years of marriage still have no child." (If we included them, the top rate would be 62 percent in 1920 and 90 percent in 1925.) This interesting provision of the law, which attests to the French obsession with the birthrate as well as to the limitless imagination of legislators when it comes to expressing a country's hopes and fears through the tax rate, would later be rebaptized, from 1939 to 1944, the "family compensation tax," which was extended from 1945 to 1951 through the family quotient system (under which married couples without a child, normally endowed with 2 shares, were decreased to 1.5 shares if they still had no child "after three years of marriage"). Note that the Constituent Assembly of 1945 increased by one year the grace period set in 1920 by the National Bloc. See Les hauts revenus en France, 233–334.
     16. A progressive tax on total income had earlier been tried in Britain between the Napoleonic wars, as well as in the United States during the Civil War, but in both cases the taxes were repealed shortly after hostilities ended.
     17. See Mirelle Touzery, L'invention de l'impôt sur le revenu: La taille tarifée 1715–1789 (Paris: Comité pour l'histoire économique et financière, 1994).
     18. Business inventory and capital were subject to a separate tax, the patente. On the system of the quatre vieilles (the four direct taxes, which, along with the estate tax, formed the heart of the tax system created in 1791–1792), see Les hauts revenus en France, 234–239.
     19. One of the many parliamentary committees to consider a progressive estate tax in the nineteenth century had this to say: "When a son succeeds his father, there is strictly speaking no transmission of property but merely continued enjoyment, according to the authors of the Civil Code. If this doctrine is taken to be absolute, then any tax on direct bequests is ruled out. In any case, extreme moderation in setting the rate of taxation is imperative." See ibid., 245.
     20. A professor at the Ecole Libre des Sciences Politiques and the Collège de France from 1880 to 1916 and outspoken champion of colonization among the conservative economists of the day, Leroy-Beaulieu was also the editor of L'économiste français, an influential weekly magazine roughly equivalent to the Economist today, especially in its limitless and often undiscerning zeal to defend the powerful interests of its time.
     21. For instance, he noted with satisfaction that the number of indigents receiving assistance in France increased by only 40 percent from 1837 to 1860, whereas the number of assistance offices had nearly doubled. Apart from the fact that one would have to be very optimistic to deduce from these figures that the actual number of indigents had decreased (which Leroy-Beaulieu did not hesitate to do), a decrease in the absolute number of the poor in a context of economic growth would obviously tell us nothing about the evolution of income inequality. See ibid., 522–31.
     22. At times one has the thought that he might have been responsible for the advertisements that HSBC plastered all over airport walls a few years ago: "We see a world of opportunities. Do you?"
     23. Another classic argument of the time was that the "inquisitorial" procedure of requiring taxpayers to declare their income might suit an "authoritarian" country like Germany but would immediately be rejected by a "free people" like the French. See Les hauts revenus en France, 481.
     24. For instance, Joseph Caillaux, minister of finance at the time: "We have been led to believe and to say that France was a country of small fortunes, of infinitely fragmented and dispersed capital. The statistics with which the new estate tax regime provides us force us to retreat from this position.… Gentlemen, I cannot hide from you the fact that these figures have altered some of my preconceived ideas. The fact is that a small number of people possess the bulk of this country's wealth." See Joseph Caillaux, L'impôt sur le revenu (Paris: Berger, 1910), 530–32.
     25. On the German debates, see Jens Beckert, tr. Thomas Dunlap, Inherited Wealth, (Princeton: Princeton University Press, 2008), 220–35. The rates shown in Figure 14.2 concern transmissions in the direct line (from parents to children). The rates on other bequests were always higher in France and Germany. In the United States and Britain, rates generally do not depend on the identity of the heir.
     26. On the role of war in changing attitudes toward the estate tax, see Kenneth Scheve and David Stasavage, "Democracy, War, and Wealth: Evidence of Two Centuries of Inheritance Taxation," American Political Science Review 106, no. 1 (February 2012): 81–102.
     27. To take an extreme example, the Soviet Union never needed a confiscatory tax on excessive incomes or fortunes because its economic systems imposed direct controls on the distribution of primary incomes and almost totally outlawed private property (admittedly in ways that were much less respectful of the law). The Soviet Union did have an income tax at times, but it was relatively insignificant, with very low top rates. The same is true in China. I come back to this in the next chapter.
     28. Pace Leroy-Beaulieu, King put France in the same league as Britain and Prussia, which was substantially correct.
     29. See Irving Fisher, "Economists in Public Service: Annual Address of the President," American Economic Review 9, no. 1 (March 1919): 5–21. Fisher took his inspiration mainly from the Italian economist Eugenio Rignano. See G. Erreygers and G. Di Bartolomeo, "The Debates on Eugenio Rignano's Inheritance Tax Proposals," History of Political Economy 39, no. 4 (Winter 2007): 605–38. The idea of taxing wealth that had been accumulated in the previous generation less heavily than older wealth that had been passed down through several generations is very interesting, in the sense that there is a stronger sense of double taxation in the former case than in the latter, even if different generations and therefore different individuals are involved in both cases. It is nevertheless difficult to formalize and implement this idea in practice (because estates often follow complex trajectories), which is probably why it has never been tried.
     30. To this federal tax one should also add state income tax (which is generally 5–10 percent).
     31. The top Japanese income tax rate rose to 85 percent in 1947–1949, when it was set by the US occupier, and then fell immediately to 55 percent in 1950 after Japan regained its fiscal sovereignty. See the online technical appendix.
     32. These rates applied in the direct line of inheritance. The rates applied to brothers, sisters, cousins, and nonrelatives were sometimes higher in France and Germany. In France today, for example, the rate for bequests to nonrelatives is 60 percent. But rates never reached the 70–80 percent levels applied to children in the United States and Britain.
     33. The record level of 98 percent was in force in Britain from 1941 to 1952 and again from 1974 to 1978. See the online technical appendix for the complete series. During the 1972 US presidential campaign, George McGovern, the Democratic candidate, went so far as to propose a top rate of 100 percent for the largest inheritances (the rate was then 77 percent) as part of his plan to introduce a guaranteed minimum income. McGovern's crushing defeat by Nixon marked the beginning of the end of the United States' enthusiasm for redistribution. See Beckert, Inherited Wealth, 196.
     34. For example, when the top rate on capital income in Britain was 98 percent from 1974 to 1978, the top rate on labor income was 83 percent. See Supplemental Figure S14.1, available online.
     35. British thinkers such as John Stuart Mill were already reflecting on inheritances in the nineteenth century. The reflection intensified in the interwar years as more sophisticated probate data became available. It continued after the war in the work of James Meade and Anthony Atkinson, which I cited previously. It is also worth mentioning that Nicholas Kaldor's interesting proposal of a progressive tax on consumption (actually on luxury consumption) was directly inspired by his desire to require more of idle rentiers, whom he suspected of evading the progressive taxes on both estates and income through the use of trust funds, unlike university professors such as himself, who paid the income tax as required. See Nicholas Kaldor, An Expenditure Tax (London: Allen and Unwin, 1955).
     36. See Josiah Wedgwood, The Economics of Inheritance (Harmondsworth, England: Pelican Books, 1929; new ed. 1939). Wedgwood meticulously analyzed the various forces at work. For example, he showed that charitable giving was of little consequence. His analysis led him to the conclusion that only a tax could achieve the equalization he desired. He also showed that French estates were nearly as concentrated as British ones in 1910, from which he concluded that egalitarian division of estates, as in France, though desirable, was clearly not enough to bring about social equality.
     37. For France, I have included the generalized social contribution or CSG (currently 8 percent) in the income tax, which makes the current top rate 53 percent. See the online technical appendix for the complete series.
     38. This is true not only of the United States and Britain (in the first group) and Germany, France, and Japan (in the second group) but also for all of the eighteen OECD countries for which we have data in the WTID that allow us to study the question. See Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities," American Economic Journal: Economic Policy, forthcoming (fig. 3). See also the online technical appendix.
     39. See Piketty et al., "Optimal Taxation of Top Labor Incomes," figs. 3 and A1 and table 2. These results, which cover eighteen countries, are also available in the online technical appendix. This conclusion does not depend on the choice of starting and ending years. In all cases, there is no statistically significant relationship between the decrease in the top marginal tax rate and the rate of growth. In particular, starting in 1980 rather than 1960 or 1970 does not change the results. For growth rates in the wealth countries over the period 1970–2010, see also Table 5.1 here.
     40. We can rule out an elasticity of labor supply greater than 0.1–0.2 and justify the optimal marginal income tax rate described below. All the details of the theoretical argument and results are available in Piketty et al., "Optimal Taxation of Top Labor Incomes," and are summarized in the online technical appendix.
     41. It is important to average over fairly long periods (of at least ten to twenty years) to have meaningful growth comparisons. Over shorter periods, growth rates vary for all sorts of reasons, and it is impossible to draw any valid conclusions.
     42. The difference in per capita GDP stems from the fact that US citizens work more hours than Europeans. According to standard international data, GDP per hour worked is approximately the same in the United States as in the wealthiest countries of the European continent (but significantly lower in Britain: see the online technical appendix).
     43. See in particular Figure 2.3.
     44. Per capita GDP in the United States grew at 2.3 percent a year from 1950 to 1970, 2.2 percent between 1970 and 1990, and 1.4 percent from 1990 to 2012. See Figure 2.3.
     45. The idea that the United States has innovated for the rest of the world was recently proposed by Daron Acemoglu, James Robinson, and Thierry Verdier, "Can't We All Be More Like Scandinavians? Asymmetric Growth and Institutions in an Interdependent World," (MIT Department of Economics Working Paper no. 12–22, August 20, 2012). This is an essentially theoretical article, whose principal factual basis is that the number of patents per capita is higher in the United States than in Europe. This is interesting, but it seems to be at least partly a consequences of distinct legal practices, and in any case it should allow the innovative country to retain significantly higher productivity (or greater national income).
     46. See Piketty et al., "Optimal Taxation of Top Labor Incomes," fig. 5, tables 3–4. The results summarized here are based on detailed data concerning nearly three thousand firms in fourteen countries.
     47. Xavier Gabaix and Augustin Landier argued that skyrocketing executive pay is a mechanical consequence of increased firm size (which supposedly increases the productivity of the most "talented" managers). See "Why Has CEO Pay Increased So Much?" Quarterly Journal of Economics 123, no. 1 (2008): 49–100. The problem is that this theory is based entirely on the marginal productivity model and cannot explain the large international variations observed in the data (company size increased in similar proportions nearly everywhere, but pay did not). The authors rely solely on US data, which unfortunately limits the possibilities for empirical testing.
     48. Many economists defend the idea that greater competition can reduce inequality. See, for example, Raghuram G. Rajan and Luigi Zingales, Saving Capitalism from the Capitalists (New York: Crown Business, 2003), and L. Zingales, A Capitalism for the People (New York: Basic Books, 2012), or Acemoglu, Robinson, and Verdier, "Can't We All Be More Like Scandinavians." Some sociologists also take this line: see David B. Grusky, "Forum: What to Do about Inequality?" Boston Review, March 21, 2012.
     49. Contrary to an idea that is often taught but rarely verified, there is no evidence that executives in the period 1950–1980 made up for low pay with compensation in kind, such as private planes, sumptuous offices, etc. On the contrary, all the evidence suggests that such benefits in kind have increased since 1980.
     50. To be precise, 82 percent. See Piketty et al., "Optimal Taxation of Top Labor Incomes," table 5.
     51. Note that the progressive tax plays two very distinct roles in this theoretical model (as well as in the history of progressive taxation): confiscatory rates (on the order of 80–90 percent on the top 0.5 or 1 percent of the distribution) would end indecent and useless compensation, while high but nonconfiscatory rates (of 50–60 percent on the top 5 or 10 percent) would raise revenues to finance the social state above the revenues coming from the bottom 90 percent of the distribution.
     52. See Jacob Hacker and Paul Pierson, Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned its Back on the Middle Class (New York: Simon and Schuster, 2010); K. Schlozman, Sidney Verba, and H. Brady, The Unheavenly Chorus: Unequal Political Voice and the Broken Promise of American Democracy (Princeton: Princeton University Press, 2012); Timothy Noah, The Great Divergence (New York: Bloomsbury Press, 2012).
     53. See Claudia Goldin and Lawrence F. Katz, The Race between Education and Technology: The Evolution of U.S. Educational Wage Differentials, 1890–2005 (Cambridge, MA: Belknap Press and NBER, 2010), Rebecca M. Blank, Changing Inequality (Berkeley: University of California Press, 2011) and Raghuram G. Rajan, Fault Lines (Princeton: Princeton University Press, 2010).
     54. The pay of academic economists is driven up by the salaries offered in the private sector, especially the financial sector, for similar skills. See Chapter 8.
     55. For example, by using abstruse theoretical models designed to prove that the richest people should pay zero taxes or even receive subsidies. For a brief bibliography of such models, see the online technical appendix.
 15. A Global Tax on Capital

     1. The additional revenue could be used to reduce existing taxes or to pay for additional services (such as foreign aid or debt reduction; I will have more to say about this later).
     2. Every continent has specialized financial institutions that act as central repositories (custodian banks or clearing houses), whose purpose is to record ownership of various types of assets. But the function of these private institutions is to provide a service to the companies issuing the securities in question, not to record all the assets owned by a particular individual. On these institutions, see Gabriel Zucman, "The Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors?" Quarterly Journal of Economics 128, no. 3 (2013): 1321–64.
     3. For instance, the fall of the Roman Empire ended the imperial tax on land and therefore the land titles and cadastre that went with it. According to Peter Temin, this contributed to economic chaos in the early Middle Ages. See Peter Temin, The Roman Market Economy (Princeton: Princeton University Press, 2012), 149–51.
     4. For this reason, it would be useful to institute a low-rate tax on net corporate capital together with a higher-rate tax on private wealth. Governments would then be forced to set accounting standards, a task currently left to associations of private accountants. On this subject, see Nicolas Véron, Matthieu Autrer, and Alfred Galichon, L'information financière en crise: Comptabilité et capitalisme (Paris: Odile Jacob, 2004).
     5. Concretely, the authorities do what is called a "hedonic" regression to calculate the market price as a function of various characteristics of the property. Transactional data are available in all developed countries for this purpose (and are used to calculate real estate price indices).
     6. This temptation is a problem in all systems based on self-reporting by taxpayers, such as the wealth tax system in France, where there is always an abnormally large number of reports of wealth just slightly below the taxable threshold. There is clearly a tendency to slightly understate the value of real estate, typically by 10 or 20 percent. A precomputed statement issued by the government would provide an objective figure based on public data and a clear methodology and would thus put an end to such behavior.
     7. Oddly enough, the French government once again turned to this archaic method in 2013 to obtain information about the assets of its own ministers, officially for the purpose of restoring confidence after one of them was caught in a lie about evading taxes on his wealth.
     8. For example, the Channel Islands, Liechtenstein, Monaco, etc.
     9. It is difficult to estimate the extent of such losses, but in a country like Luxembourg or Switzerland they might amount to as much as 10–20 percent of national income, which would have a substantial impact on their standard of living. (The same is true of a financial enclave like the City of London.) In the more exotic tax havens and microstates, the loss might be as high as 50 percent or more of national income, indeed as high as 80–90 percent in territories that function solely as domiciles for fictitious corporations.
     10. Social insurance contributions are a type of income tax (and are included in the income tax in some countries; see Chapter 13).
     11. See in particular Table 12.1.
     12. Recall the classic definition of income in the economic sense, given by the British economist John Hicks: "The income of a person or collectivity is the value of the maximum that could be consumed during the period while remaining as wealthy at the end of the period as at the beginning."
     13. Even with a return on capital of 2 percent (much lower than the actual return on the Bettencourt fortune in the period 1987–2013), the economic income on 30 billion euros would amount to 600 million euros, not 5 million.
     14. In the case of the Bettencourt fortune, the largest in France, there was an additional problem: the family trust was managed by the wife of the minister of the budget, who was also the treasurer of a political party that had received large donations from Bettencourt. Since the same party had reduced the wealth tax by two-thirds during its time in power, the story naturally stirred up a considerable reaction in France. The United States is not the only country where the wealthy wield considerable political influence, as I showed in the previous chapter. Note, too, that the minister of the budget in question was succeeded by another who had to resign when it was revealed that he had a secret bank account in Switzerland. In France, too, the political influence of the wealthy transcends political boundaries.
     15. In practice, the Dutch system is not completely satisfactory: many categories of assets are exempt (particularly those held in family trusts), and the assumed return is 4 percent for all assets, which may be too high for some fortunes and too low for others.
     16. The most logical approach is to measure this insufficiency on the basis of average rates of return observed for fortunes of each category so as to make the income tax schedule consistent with the capital tax schedule. One might also consider minimum and maximum taxes as a function of capital income. See the online technical appendix.
     17. The incentive argument is central to Maurice Allais's tendentious L'impôt sur le capital et la réforme monétaire (Paris: Editions Hermann, 1977), in which Allais went so far as to advocate complete elimination of the income tax and all other taxes in favor of a tax on capital. This is an extravagant idea and not very sensible, given the amounts of money involved. On Allais's argument and current extensions of it, see the online technical appendix. Broadly speaking, discussions of a tax on capital often push people into extreme positions (so that they either reject the idea out of hand or embrace it as the one and only tax, destined to replace all others). The same is true of the estate tax (either they shouldn't be taxed at all or should be taxed at 100 percent). In my view, it is urgent to lower the temperature of the debate and give each argument and each type of tax its due. A capital tax is useful, but it cannot replace all other taxes.
     18. The same is true of an unemployed worker who has to continue paying a high property tax (especially when mortgage payments are not deductible). The consequences for overindebted households can be dramatic.
     19. This compromise depends on the respective importance of individual incentives and random shocks in determining the return on capital. In some cases it may be preferable to tax capital income less heavily than labor income (and to rely primarily on a tax on the capital stock), while in others it might make sense to tax capital income more heavily (as was the case in Britain and the United States before 1980, no doubt because capital income was seen as particularly arbitrary). See Thomas Piketty and Emmanuel Saez, A Theory of Optimal Capital Taxation, NBER Working Paper 17989 (April 2012); a shorter version is available as "A Theory of Optimal Inheritance Taxation," Econometrica 81, no. 5 (September 2013): 1851–86.
     20. This is because the capitalized value of the inheritance over the lifetime of the recipient is not known at the moment of transmission. When a Paris apartment worth 100,000 francs in 1972 passed to an heir, no one knew that the property would be worth a million euros in 2013 and afford a saving on rent of more than 40,000 euros a year. Rather than tax the inheritance heavily in 1972, it is more efficient to assess a smaller inheritance tax but to requirement payment of an annual property tax, a tax on rent, and perhaps a wealth tax as the value of the property and its return increase over time.
     21. See Piketty and Saez, "Theory of Optimal Capital Taxation"; see also the online technical appendix.
     22. See Figure 14.2
     23. For example, on real estate worth 500,000 euros, the annual tax would be between 2,500 and 5,000 euros, and the rental value of the property would be about 20,000 euros a year. By construction, a 4–5 percent annual tax on all capital would consume nearly all of capital's share of national income, which seems neither just nor realistic, particularly since there are already taxes on capital income.
     24. About 2.5 percent of the adult population of Europe possessed fortunes above 1 million euros in 2013, and about 0.2 percent above 5 million. The annual revenue from the proposed tax would be about 300 billion euros on a GDP of nearly 15 trillion. See the online technical appendix and Supplemental Table S5.1, available online, for a detailed estimate and a simple simulator with which one can estimate the number of taxpayers and the amount of revenue associated with other possible tax schedules.
     25. The top centile currently owns about 25 percent of total wealth, or about 125 percent of European GDP. The wealthiest 2.5 percent own nearly 40 percent of total wealth, or about 200 percent of European GDP. Hence it is no surprise that a tax with marginal rates of 1 or 2 percent would bring in about two points of GDP. Revenues would be even higher if these rates applied to all wealth and not just to the fractions over the thresholds.
     26. The French wealth tax, called the "solidarity tax on wealth," (impôt de solidarité sur la fortune, or ISF), applies today to taxable wealth above 1.3 million euros (after a deduction of 30 percent on the primary residence), with rates ranging from 0.7 to 1.5 percent on the highest bracket (over 10 million euros). Allowing for deductions and exemptions, the tax generates revenues worth less than 0.5 percent of GDP. In theory, an asset is called a business asset if the owner is active in the associated business. In practice, this condition is rather vague and easily circumvented, especially since additional exemptions have been added over the years (such as "stockholder agreements," which allow for partial or total exemptions if a group of stockholders agrees to maintain its investment for a certain period of time). According to the available data, the wealthiest individuals in France largely avoid paying the wealth tax. The tax authorities publish very few detailed statistics for each tax bracket (much fewer, for example, than in the case of the inheritance tax from the early twentieth century to the 1950s); this makes the whole operation even more opaque. See the online technical appendix.
     27. See esp. Chapter 5, Figures 5.4 and following.
     28. The progressive capital tax would then bring in 3–4 percent of GDP, of which 1 or 2 points would come from the property tax replacement. See the online technical appendix.
     29. For example, to justify the recent decrease of the top wealth tax rate in France from 1.8 to 1.5 percent.
     30. See P. Judet de la Combe, "Le jour où Solon a aboli la dette des Athéniens," Libération, May 31, 2010.
     31. In fact, as I have shown, capital in the form of land included improvements to the land, increasingly so over the years, so that in the long run landed capital was not very different from other forms of accumulable capital. Still, accumulation of landed capital was subject to certain natural limits, and its predominance implied that the economy could only grow very slowly.
     32. This does not mean that other "stakeholders" (including workers, collectivities, associations, etc.) should be denied the means to influence investment decisions by granting them appropriate voting rights. Here, financial transparency can play a key role. I come back to this in the next chapter.
     33. The optimal rate of the capital tax will of course depend on the gap between the return on capital, r, and the growth rate, g, with an eye to limiting the effect of r > g. For example, under certain hypotheses, the optimal inheritance tax rate is given by the formula t = 1 − G/R, where G is the generational growth rate and R the generational return on capital (so that the tax approaches 100 percent when growth is extremely small relative to return on capital, and approaches 0 percent when the growth rate is close to the return on capital). In general, however, things are more complex, because the ideal system requires a progressive annual tax on capital. The principal optimal tax formulas are presented and explained in the online technical appendix (but only in order to clarify the terms of debate, not to provide ready-made solutions, since many forces are at work and it is difficult to evaluate the effect of each with any precision).
     34. Thomas Paine, in his pamphlet Agrarian Justice (1795), proposed a 10 percent inheritance tax (which in his view corresponded to the "unaccumulated" portion of the estate, whereas the "accumulated" portion was not to be taxed at all, even if it dated back several generations). Certain "national heredity tax" proposals during the French Revolution were more radical. After much debate, however, the tax on direct line transmissions was set at no more than 2 percent. On these debates and proposals, see the online technical appendix.
     35. Despite much discussion and numerous proposals in the United States and Britain, especially in the 1960s and again in the early 2000s. See the online technical appendix.
     36. This design flaw stemmed from the fact that these capital taxes originated in the nineteenth century, when inflation was insignificant or nonexistent and it was deemed sufficient to reassess asset values every ten or fifteen years (for real estate) or to base values on actual transactions (which was often done for financial assets). This system of assessment was profoundly disrupted by the inflation of 1914–1945 and was never made to work properly in a world of substantial permanent inflation.
     37. On the history of the German capital tax, from its creation in Prussia to its suspension in 1997 (the law was not formally repealed), see Fabien Dell, L'Allemagne inégale, PhD diss., Paris School of Economics, 2008. On the Swedish capital tax, created in 1947 (but which actually existed as a supplementary tax on capital income since the 1910s) and abolished in 2007, see the previously cited work of Ohlsson and Waldenström and the references given in the appendix. The rates of these taxes generally remained under 1.5–2 percent on the largest fortunes, with a peak in Sweden of 4 percent in 1983 (which applied only to assessed values largely unrelated to market values). Apart from the degeneration of the tax base, which also affected the estate tax in both countries, the perception of fiscal competition also played a role in Sweden, where the estate tax was abolished in 2005. This episode, at odds with Sweden's egalitarian values, is a good example of the growing inability of smaller countries to maintain an independent fiscal policy.
     38. The wealth tax (on large fortunes) was introduced in France in 1981, abolished in 1986, and then reintroduced in 1988 as the "solidarity tax on wealth." Market values can change abruptly, and this can seem to introduce an element of arbitrariness into the wealth tax, but they are the only objective and universally acceptable basis for such a tax. Nevertheless, rates and tax brackets must be adjusted regularly, and care must be taken not to allow receipts to rise automatically with real estate prices, for this can provoke tax revolts, as illustrated by the famous Proposition 13 adopted in California in 1978 to limit rising property taxes.
     39. The Spanish tax is assessed on fortunes greater than 700,000 euros in taxable assets (with a deduction of 300,000 euros for the principal residence), and the highest rate is 2.5 percent (2.75 percent in Catalonia). There is also an annual capital tax in Switzerland, with relatively low rates (less than 1 percent) due to competition among cantons.
     40. Or to prevent a foreign competitor from developing (the destruction of the nascent Indian textile industry by the British colonizer in the early nineteenth century is etched into the memory of Indians). This can have lasting consequences.
     41. This is all the more astonishing given that the rare estimates of the economic gains due to financial integration suggest a rather modest global gain (without even allowing for the negative effects on inequality and instability, which these studies ignore). See Pierre-Olivier Gourinchas and Olivier Jeanne, "The Elusive Gains from International Financial Integration," Review of Economic Studies 73, no. 3 (2006): 715–41. Note that the IMF's position on automatic transmission of information has been vague and variable: the principle is approved, the better to torpedo its concrete application on the basis of rather unconvincing technical arguments.
     42. The comparison that one sees most often in the press sets the average wealth of the 535 members of the US House of Representatives (based on statements collected by the Center for Responsible Politics) against the average wealth of the seventy richest members of the Chinese People's Assembly. The average net worth of the US House members is "only" $15 million, compared with more than $1 billion for the People's Assembly members (according to the Hurun Report 2012, a Forbes-style ranking of Chinese fortunes based on a methodology that is not very clear). Given the relative population of the two countries, it would be more reasonable to compare the average wealth of all three thousand members of the Chinese Assembly (for which no estimate seems to be available). In any case, it appears that being elected to the Chinese Assembly is mainly an honorific post for these billionaires (who do not function as legislators). Perhaps it would be better to compare them to the seventy wealthiest US political donors.
     43. See N. Qian and Thomas Piketty, "Income Inequality and Progressive Income Taxation in China and India: 1986–2015," American Economic Journal: Applied Economics 1, no. 2 (April 2009): 53–63.
     44. For a very long-run perspective, arguing that Europe long derived an advantage from its political fragmentation (because interstate competition spurred innovation, especially in military technology) before it become a handicap with respect to China, see Jean-Laurent Rosenthal and R. Bin Wong, Before and Beyond Divergence: The Politics of Economic Change in China and Europe (Cambridge, MA: Harvard University Press, 2011).
     45. See the online technical appendix.
     46. In the period 2000–2010, the rate of permanent integration (expressed as a percentage of the population of the receiving country) attained 0.6–0.7 percent a year in several European countries (Italy, Spain, Sweden, and Britain), compared with 0.4 percent in the United States and 0.2–0.3 percent in France and Germany. See the online technical appendix. Since the crisis, some of these flows have already begun to turn around, especially between southern Europe and Germany. Taken as a whole, permanent immigration in Europe was fairly close to North American levels in 2000–2010. The birthrate remains considerably higher in North America, however.
 16. The Question of the Public Debt

     1. See in particular Table 3.1.
     2. If we count assets owned by European households in tax havens, then Europe's net asset position vis-à-vis the rest of the world becomes significantly positive: European households own the equivalent of all that there is to own in Europe plus a part of the rest of the world. See Figure 12.6.
     3. Together with the proceeds of the sale of public financial assets (which no longer amount to much compared with nonfinancial assets). See Chapters 3–5 and the online technical appendix.
     4. The elimination of interest payments on the debt would make it possible to reduce taxes and/or finance new investments, especially in education (see below).
     5. For the equivalence to be complete, wealth would have to be taxed in a manner consistent with the location of real estate and financial assets (including sovereign bonds issued in Europe) and not simply based on the residence of the owners. I will come back to this point later.
     6. I will come back later to the question of the optimal level of long-term public debt, which cannot be resolved independently of the question of the level of public and private capital accumulation.
     7. Other tax schedules can be simulated with the aid of Supplemental Table S15.1, available online.
     8. See Chapter 10.
     9. On the redemption fund, see German Council of Economic Experts, Annual Report 2011 (November 2011); The European Redemption Pact: Questions and Answers (January 2012). Technically, the two ideas can be perfectly complementary. Politically and symbolically, however, it is possible that the notion of "redemptions" (which connotes long and shared suffering by the entire population) may not sit well with the progressive capital tax, and the word "redemption" may be ill chosen.
     10. In addition to debt reduction through inflation, a major part of Germany's debt was simply canceled by the Allies after World War II. (More precisely, repayment was postponed until an eventual German reunification, but it has not been repaid now that reunification has occurred.) According to calculations by the German historian Albrecht Ritschl, the amounts would be quite substantial if recapitalized at a reasonable rate. Some of this debt reflects occupation fees levied on Greece during the German occupation, which has led to endless and largely irreconcilable controversy. This further complicates today's attempts to impose a pure logic of austerity and debt repayment. See Albrecht Ritschl, "Does Germany Owe Greece a Debt? The European Debt Crisis in Historical Perspective," paper given at the OeNB 40th Economics Conference, Vienna (London School of Economics, 2012).
     11. If GDP grows 2 percent a year and debt 1 percent a year (assuming that one starts with a debt close to GDP), then the debt-to-GDP ratio will decrease by about 1 percent a year.
     12. The special one-time or ten-year tax on capital described above might be thought of as a way of applying primary surplus to debt reduction. The difference is that the tax would be a new resource that would not burden the majority of the population and not interfere with the rest of the government's budget. In practice, there is a continuum of points involving various proportions of each solution (capital tax, inflation, austerity): everything depends on the dosage and the way the burdens of adjustment are shared among different social groups. The capital tax puts most of the burden on the very wealthy, whereas austerity policies generally aim to spare them.
     13. Savings from the 1920s were essentially wiped out by the stock market crash. Still, the inflation of 1945–1948 was an additional shock. The response was the "old-age minimum" (created in 1956) and the advent of a PAYGO pension system (which was created in 1945 but further developed subsequently).
     14. There are theoretical models based on this idea. See the online technical appendix.
     15. See in particular the results presented in Chapter 12.
     16. The same would be true in case of a breakup of the Eurozone. It is always possible to reduce public debt by printing money and generating inflation, but it is hard to control the distributive consequences of such a crisis, whether with the euro, the franc, the mark, or the lira.
     17. An often-cited historical example is the slight deflation (decrease of prices and wages) seen in the industrialized countries in the late nineteenth century. This deflation was resented by both employers and workers, who seemed to want to wait until other prices and wages fell before accepting decreases in the prices and wages that affected them directly. This resistance to wage and price adjustments is sometimes referred to as "nominal rigidity." The most important argument in favor of low but positive inflation (typically 2 percent) is that it allows for easier adjustment of relative wages and prices than zero or negative inflation.
     18. The classic theory of Spanish decline blames gold and silver for a certain laxity of governance.
     19. Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1857–1960 (Princeton: Princeton University Press, 1963).
     20. Note that there is no such thing as a "money printing press" in the following sense: when a central bank creates money in order to lend it to the government, the loan is recorded on the books of the central bank. This happens even in the most chaotic of times, as in France in 1944–1948. The money is not simply given as a gift. Again, everything depends on what happens next: if the money creation increases inflation, substantial redistribution of wealth can occur (for instance, the real value of the public debt can be reduced dramatically, to the detriment of private nominal assets). The overall effect on national income and capital depends on the impact of policy on the country's overall level of economic activity. It can in theory be either positive or negative, just as loans to private actors can be. Central banks redistribute monetary wealth, but they do not have the ability to create new wealth directly.
     21. Conversely, the interest rates demanded of countries deemed less solid rose to extremely high levels in 2011–2012 (6–7 percent in Italy and Spain and 15 percent in Greece). This is an indication that investors are skittish and uncertain about the immediate future.
     22. The sum of gross financial assets and liabilities is even higher, since it amounts to ten to twenty years of GDP in most of the developed countries (see Chapter 5). The central banks thus hold only a few percent of the total assets and liabilities of the rich countries. The balance sheets of the various central banks are published online on a weekly or monthly basis. The amount of each type of asset and liability on the balance sheet is known in aggregate (but is not broken down by recipient of central bank loans). Notes and specie represent only a small part of the balance sheet (generally about 2 percent of GDP), and most of the rest consists purely of bookkeeping entries, as is the case for the bank accounts of households, corporations, and governments. In the past, central bank balance sheets were sometimes as large as 90–100 percent of GDP (for example, in France in 1944–1945, after which the balance sheet was reduced to nothing by inflation). In the summer of 2013, the balance sheet of the Bank of Japan was close to 40 percent of GDP. For historical series of the balance sheets of the main central banks, see the online technical appendix. Examination of these balance sheets is instructive and shows that they are still a long way from the record levels of the past. Furthermore, inflation depends on many other forces, especially international wage and price competition, which is currently damping down inflationary tendencies while driving asset prices higher.
     23. As noted in the previous chapter, discussions about possible changes to European rules governing the sharing of bank data have only just begun in 2013 and are a long way from bearing fruit.
     24. In particular, a steeply progressive tax requires information on all assets held by a single individual in different accounts and at different banks (ideally not just in Cyprus but throughout the European Union). The advantage of a less progressive tax was that it could be applied to each bank individually.
     25. In France, the two hundred largest shareholders in the Banque de France were statutorily entitled to a central role in the governance of the bank from 1803 to 1936 and thus were empowered to determine the monetary policy of France. The Popular Front challenged this status quo by changing the rules to allow the government to name bank governors and subgovernors who were not shareholders. In 1945 the bank was nationalized. Since then, the Banque de France no longer has private shareholders and is a purely public institution, like most other central banks throughout the world.
     26. A key moment in the Greek crisis was the ECB's announcement in December 2009 that it would no longer accept Greek bonds as collateral if Greece was downgraded by the bond rating agencies (even though nothing in its statutes obliged it to do so).
     27. Another, more technical limitation of the "redemption fund" is that given the magnitude of the "rollover" (much of the outstanding debt comes due within a few years and must be rolled over regularly, especially in Italy), the limit of 60 percent of GDP will be reached within a few years, hence eventually all public debt will have to be mutualized.
     28. The budgetary parliament might consist of fifty or so members from each of the large Eurozone countries, prorated by population. Members might be chosen from the financial and social affairs committees of the national parliaments or in some other fashion. The new European treaty adopted in 2012 provides for a "conference of national parliaments," but this is a purely consultative body with no power of its own and a fortiori no common debt.
     29. The official version is that the virtually flat tax on deposits was adopted at the request of the Cypriot president, who allegedly wanted to tax small depositors heavily in order to prevent large depositors from fleeing. No doubt there is some truth to this: the crisis illustrates the predicament that small countries face in a globalized economy: to carve out a niche for themselves, they may be prepared to engage in ruthless tax competition in order to attract capital, even from the most disreputable sources. The problem is that we will never know the whole truth, since all the negotiations took place behind closed doors.
     30. The usual explanation is that French leaders remain traumatized by their defeat in the 2005 referendum on the European Constitutional Treaty. The argument is not totally convincing, because that treaty, whose main provisions were later adopted without approval by referendum, contained no important democratic innovation and gave all power to the council of heads of state and ministers, which simply ratifies Europe's current state of impotence. It may be that France's presidential political culture explains why reflection about European political union is less advanced in France than in Germany or Italy.
     31. Under François Hollande, the French government has been rhetorically in favor of mutualizing European debts but has made no specific proposal, pretending to believe that every country can continue to decide on its own how much debt it wishes to take on, which is impossible. Mutualization implies that there needs to be a vote on the total size of the debt. Each country could maintain its own debt, but its size would need to be modest, like state and municipal debts in the United States. Logically, the president of the Bundesbank regularly issues statements to the media that a credit card cannot be shared without agreement about how much can be spent in total.
     32. Progressive income and capital taxes are more satisfactory than corporate income taxes because they allow adjustment of the tax rate in accordance with the income or capital of each taxpayer, whereas the corporate tax is levied on all corporate profits at the same level, affecting large and small shareholders alike.
     33. To believe the statements of the managers of companies like Google, their reasoning is more or less as follows: "We contribute far more wealth to society than our profits and salaries suggest, so it is perfectly reasonable for us to pay low taxes." Indeed, if a company or individual contributes marginal well-being to the rest of the economy greater than the price it charges for its products, then it is perfectly legitimate for it to pay less in tax or even to receive a subsidy (economists refer to this as a positive externality). The problem, obviously, is that it is in everyone's interest to claim that he or she contributes a large positive externality to the rest of the world. Google has not of course offered the slightest evidence to prove that it actually does make such a contribution. In any case, it is obvious that it is not easy to manage a society in which each individual can set his or her own tax rate in this way.
     34. There was a recent proposal to pay international organizations the proceeds of a global wealth tax. Such a tax would become independent of nationality and could become a way to protect the right to multinationality. See Patrick Weil, "Let Them Eat Less Cake: An International Tax on the Wealthiest Citizens of the World," Policy Network, May 26, 2011.
     35. This conclusion is similar to that of Dani Rodrik, who argues that the nation-state, democracy, and globalization are an unstable trio (one of the three must give way before the other two, at least to a certain extent). See Dani Rodrik, The Globalization Paradox: Democracy and the Future of the World Economy (New York: Norton, 2011).
     36. The system of "allowance for corporate equity" adopted in Belgium in 2006 authorizes the deduction from taxable corporate profits of an amount equal to the "normal" return on equity. This deduction is said to be the equivalent of the deduction of interest on corporate debt and is supposed to equalize the tax status of debt and equity. But Germany and more recently France have taken a different take: limiting interest deductions. Some participants in this debate, such as the IMF and to a certain extent the European Commission, claim that the two solutions are equivalent, although in fact they are not: if one deducts the "normal" return on both debt and equity, it is highly likely that the corporate tax will simply disappear.
     37. In particular, taxing different types of consumption goods at different rates allows for only crude targeting of the consumption tax by income class. The main reason why European governments are currently so fond of value-added taxes is that this type of tax allows for de facto taxation of imported goods and small-scale competitive devaluations. This is of course a zero-sum game: the competitive advantage vanishes if other countries do the same. It is one symptom of a monetary union with a low level of international cooperation. The other standard justification of a consumption tax relies on the idea of encouraging investment, but the conceptual basis of this approach is not clear (especially in periods when the capital/income ratio is relatively high).
     38. The purpose of the fiscal transactions tax is to decrease the number of very high-frequency financial transactions, which is no doubt a good thing. By definition, however, the tax will not raise much revenue, because its purpose is to dry up its source. Estimates of potential revenues are often optimistic. They cannot be much more than 0.5 percent of GDP, which is a good thing, because the tax cannot target different levels of individual incomes or wealth. See the online technical appendix.
     39. See Figures 10.9–11. To evaluate the golden rule, one must use the pretax rate of return on capital (supposed to be equal to the marginal productivity of capital).
     40. The original article, written with a certain ironic distance in the form of a fable, is worth rereading: Edmund Phelps, "The Golden Rule of Accumulation: A Fable for Growthmen," American Economic Review 51, no. 4 (September 1961): 638–43. A similar idea, expressed less clearly and without allusion to the golden rule, can be found in Maurice Allais's Economie et intérêt (Paris: Librairie des Publications Officielles, 1947) and in articles by Von Neumann (1945) and Malinvaud (1953). Note that all this work (including Phelps's article) is purely theoretical and does not discuss what level of accumulation would be required to make r equal to g. See the online technical appendix.
     41. Capital's share is given by α = r × β. In the long run, β = s / g, so α = s × r / g. It follows that α = r if r = g, and α > s if and only if r > g. See the online technical appendix.
     42. The reasons why the golden rule establishes an upper limit are explained more precisely in the online technical appendix. The essential intuition is the following. Beyond the level of capital described by the golden rule, that is, where the return on capital sinks below the growth rate, capital's long-run share is lower than the savings rate. This is absurd in social terms, since it would take more to maintain the capital stock at this level than the capital returns. This type of "dynamic inefficiency" can occur if individuals save without worrying about the return: for example, if they are saving for old age and their life expectancy is sufficiently long. In that case, the efficient policy is for the state to reduce the capital stock, for example, by issuing public debt (potentially in large amounts), thus de facto replacing a capitalized pension system by a PAYGO system. This interesting theoretical policy never seems to occur in practice, however: in all known societies, the average return on capital is always greater than the growth rate.
     43. In practice, a tax on capital (or public ownership) can ensure that the portion of national income going to income on private capital (after taxes) is less than the savings rate without needing to accumulate so much. This was the postwar social-democratic ideal: profits should finance investment, not the high life of stockholders. As the German chancellor Helmut Schmidt said, "Today's profits are tomorrow's investments and the day after tomorrow's jobs." Capital and labor work hand in hand. But it is important to understand that this depends on institutions such as taxes and public ownership (unless we imagine unprecedented levels of accumulation).
     44. In a sense, the Soviet interpretation of the golden rule simply transferred to the collectivity the unlimited desire for accumulation attributed to the capitalist. In chapters 16 and 24 of The General Theory of Employment, Interest, and Money (1936), where Keynes discusses "the euthanasia of the rentier," he develops an idea close to that of "capital saturation": the rentier will be euthanized by accumulating so much capital that his return will disappear. But Keynes is not clear about how much this is (he does not mention r = g) and does not explicitly discuss public accumulation.
     45. The mathematical solution to this problem is presented in the online technical appendix. To summarize, everything depends on what is commonly called the concavity of the utility function (using the formula r = θ + γ × g, previously discussed in Chapter 10 and sometimes called the "modified golden rule"). With infinite concavity, one assumes that future generations will not need a hundredth additional iPhone, and one leaves them no capital. At the opposite extreme, one can go all the way to the golden rule, which may necessitate leaving them several dozen years of national income in capital. Infinite concavity is frequently associated with a Rawlsian social objective and may therefore seem tempting. The difficulty is that if one leaves no capital for the future, it is not at all certain that productivity growth will continue at the same pace. Because of this, the problem is largely undecidable, as perplexing for the economist as for the citizen.
     46. In the most general sense, a "golden rule" is a moral imperative that defines people's obligations to one another. It is often used in economics and politics to refer to simple rules defining the current population's obligations to future generations. Unfortunately, there is no simple rule capable of definitively resolving this existential question, which must therefore be asked again and again.
     47. These figures were retained in the new treaty signed in 2012, which added a further objective of maintaining a "structural" deficit of less than 0.5 percent of GDP (the structural deficit corrects for effects of the business cycle), along with automatic sanctions if these commitments were not respected. Note that all deficit figures in European treaties refer to the secondary deficit (interest on the debt is included in expenditures).
     48. A deficit of 3 percent would allow a stable debt-to-GDP ratio of 60 percent if nominal GDP growth is 5 percent (e.g., 2 percent inflation and 3 percent real growth), in view of the formula β = s / g applied to the public debt. But the argument is not very convincing (in particular, there is no real justification for such a nominal growth rate). See the online technical appendix.
     49. In the United States, the Supreme Court blocked several attempts to levy a federal income tax in the late nineteenth and early twentieth centuries and then blocked minimum wage legislation in the 1930s, while finding that slavery and, later, racial discrimination were perfectly compatible with basic constitutional rights for nearly two centuries. More recently, the French Constitutional Court has apparently come up with a theory of what maximum income tax rate is compatible with the Constitution: after a period of high-level legal deliberation known only to itself, the Court hesitated between 65 and 67 percent and wondered whether or not it should include the carbon tax.
     50. The problem is similar to that posed by the return on PAYGO retirement systems. As long as growth is robust and the fiscal base is expanding at a pace equal (or nearly equal) to that of interest on the debt, it is relatively easy to reduce the size of the public debt as a percentage of national income. Things are different when growth is slow: the debt becomes a burden that is difficult to shake. If we average over the period 1970–2010, we find that interest payments on the debt are far larger than the average primary deficit, which is close to zero in many countries, and notably in Italy, where the average interest payment on the debt attained the astronomical level of 7 percent of GDP over this period. See the online technical appendix and Supplemental Table S16.1, available online.
     51. If the issue is constitutionalized, however, it is not impossible that a solution such as a progressive tax on capital would be judged unconstitutional.
     52. On the way Stern and Nordhaus arrive at their preferred discount rates, see the online technical appendix. It is interesting that both men use the same "modified golden rule" I described earlier but reverse positions entirely when it comes to choosing the concavity of the social utility function. (Nordhaus makes a more Rawlsian choice than Stern in order to justify ascribing little weight to the preferences of future generations.) A logically more satisfactory procedure would introduce the fact that the substitutability of natural capital for other forms of wealth is far from infinite in the long run (as Roger Guesnerie and Thomas Sterner have done). In other words, if natural capital is destroyed, consuming fewer iPhones in the future will not be enough to repair the damage.
     53. As noted, the current low interest rates on government debt are no doubt temporary and in any case somewhat misleading: some countries must pay very high rates, and it is unlikely that those that are borrowing today at under 1 percent will continue to enjoy such low rates for decades (analysis of the period 1970–2010 suggests that real interest rates on long-term public debt in the rich countries is around 3 percent; see the online technical appendix). Nevertheless, current low rates are a powerful economic argument in favor of public investment (at least as long as such rates last).
     54. Over the last several decades, annual public investment (net of depreciation of public assets) in most rich countries has been about 1–1.5 percent of GDP. See the online technical appendix and Supplemental Table S16.1, available online.
     55. Including tools such as the carbon tax, which increases the cost of energy consumption as a function of the associated emission of carbon dioxide (and not as a function of budget variations, which has generally been the logic of gasoline taxes). There is good reason to believe, however, that the price signal has less of an impact on emissions than public investment and changes to building codes (requiring thermal insulation, for example).
     56. The idea that private property and the market allow (under certain conditions) for the coordination and efficient use of the talents and information possessed by millions of individuals is a classic that one finds in the work of Adam Smith, Friedrich Hayek, and Kenneth Arrow and Claude Debreu. The idea that voting is another efficient way of aggregating information (and more generally ideas, reflections, etc.) is also very old: it goes back to Condorcet. For recent research on this constructivist approach to political institutions and electoral systems, see the online technical appendix.
     57. For example, it is important to be able to study where political officials from various countries stand in the wealth and income hierarchies (see previous chapters). Still, statistical summaries might suffice for the purpose; detailed individual data are generally not needed. As for establishing trust when there is no other way to do so: one of the first actions of the revolutionary assemblies of 1789–1790 was to compile a "compendium of pensions" that listed by name and amount the sums paid by the royal government to various individuals (including debt repayments, pensions to former officials, and outright favors). This sixteen-hundred-page book contained 23,000 names and listed detailed amounts (multiple sources of income were combined into a single line for each individual), the ministry involved, the age of the person, the final year of payment, the reasons for the payment, etc. It was published in April 1790. On this interesting document, see the online technical appendix.
     58. This is due mainly to the fact that wages are generally aggregated in a single line with other intermediate inputs (that is, with purchases from other firms, which also remunerate both labor and capital). Hence published accounts never reveal the split between profits and wages, nor do they allow us to uncover possible abuses of intermediate consumption (which can be a way of augmenting the income of executives and/or stockholders). For the example of the Lonmin accounts and the Marikana mine, see the online technical appendix.
     59. The exigent attitude toward democracy of a philosopher such as Jacques Rancière is indispensable here. See in particular his La haine de la démocratie (Paris: La Fabrique, 2005).
 Conclusion

     1. Note, too, that it is perfectly logical to think that an increase in the growth rate g would lead to an increase in the return on capital r and would therefore not necessarily reduce the gap r − g. See Chapter 10.
     2. When one reads philosophers such as Jean-Paul Sartre, Louis Althusser, and Alain Badiou on their Marxist and/or communist commitments, one sometimes has the impression that questions of capital and class inequality are of only moderate interest to them and serve mainly as a pretext for jousts of a different nature entirely.

    Contents in Detail

     Acknowledgments
     Introduction
     A Debate without Data?
     Malthus, Young, and the French Revolution
     Ricardo: The Principle of Scarcity
     Marx: The Principle of Infinite Accumulation
     From Marx to Kuznets, or Apocalypse to Fairy Tale
     The Kuznets Curve: Good News in the Midst of the Cold War
     Putting the Distributional Question Back at the Heart of Economic Analysis
     The Sources Used in This Book
     The Major Results of This Study
     Forces of Convergence, Forces of Divergence
     The Fundamental Force for Divergence: r > g
     The Geographical and Historical Boundaries of This Study
     The Theoretical and Conceptual Framework
     Outline of the Book
     Part One: Income and Capital

        1. Income and Output
     The Capital-Labor Split in the Long Run: Not So Stable
     The Idea of National Income
     What Is Capital?
     Capital and Wealth
     The Capital/Income Ratio
     The First Fundamental Law of Capitalism: α = r × β
     National Accounts: An Evolving Social Construct
     The Global Distribution of Production
     From Continental Blocs to Regional Blocs
     Global Inequality: From 150 Euros per Month to 3,000 Euros per Month
     The Global Distribution of Income Is More Unequal Than the Distribution of Output
     What Forces Favor Convergence?
        2. Growth: Illusions and Realities
     Growth over the Very Long Run
     The Law of Cumulative Growth
     The Stages of Demographic Growth
     Negative Demographic Growth?
     Growth as a Factor for Equalization
     The Stages of Economic Growth
     What Does a Tenfold Increase in Purchasing Power Mean?
     Growth: A Diversification of Lifestyles
     The End of Growth?
     An Annual Growth of 1 Percent Implies Major Social Change
     The Posterity of the Postwar Period: Entangled Transatlantic Destinies
     The Double Bell Curve of Global Growth
     The Question of Inflation
     The Great Monetary Stability of the Eighteenth and Nineteenth Centuries
     The Meaning of Money in Literary Classics
     The Loss of Monetary Bearings in the Twentieth Century
     Part Two: The Dynamics of the Capital/Income Ratio

        3. The Metamorphoses of Capital
     The Nature of Wealth: From Literature to Reality
     The Metamorphoses of Capital in Britain and France
     The Rise and Fall of Foreign Capital
     Income and Wealth: Some Orders of Magnitude
     Public Wealth, Private Wealth
     Public Wealth in Historical Perspective
     Great Britain: Public Debt and the Reinforcement of Private Capital
     Who Profits from Public Debt?
     The Ups and Downs of Ricardian Equivalence
     France: A Capitalism without Capitalists in the Postwar Period
        4. From Old Europe to the New World
     Germany: Rhenish Capitalism and Social Ownership
     Shocks to Capital in the Twentieth Century
     Capital in America: More Stable Than in Europe
     The New World and Foreign Capital
     Canada: Long Owned by the Crown
     New World and Old World: The Importance of Slavery
     Slave Capital and Human Capital
        5. The Capital/Income Ratio over the Long Run
     The Second Fundamental Law of Capitalism: β = s/g
     A Long-Term Law
     Capital's Comeback in Rich Countries since the 1970s
     Beyond Bubbles: Low Growth, High Saving
     The Two Components of Private Saving
     Durable Goods and Valuables
     Private Capital Expressed in Years of Disposable Income
     The Question of Foundations and Other Holders of Capital
     The Privatization of Wealth in the Rich Countries
     The Historic Rebound of Asset Prices
     National Capital and Net Foreign Assets in the Rich Countries
     What Will the Capital/Income Ratio Be in the Twenty-First Century?
     The Mystery of Land Values
        6. The Capital-Labor Split in the Twenty-First Century
     From the Capital/Income Ratio to the Capital-Labor Split
     Flows: More Difficult to Estimate Than Stocks
     The Notion of the Pure Return on Capital
     The Return on Capital in Historical Perspective
     The Return on Capital in the Early Twenty-First Century
     Real and Nominal Assets
     What Is Capital Used For?
     The Notion of Marginal Productivity of Capital
     Too Much Capital Kills the Return on Capital
     Beyond Cobb-Douglas: The Question of the Stability of the Capital-Labor Split
     Capital-Labor Substitution in the Twenty-First Century: An Elasticity Greater Than One
     Traditional Agricultural Societies: An Elasticity Less Than One
     Is Human Capital Illusory?
     Medium-Term Changes in the Capital-Labor Split
     Back to Marx and the Falling Rate of Profit
     Beyond the "Two Cambridges"
     Capital's Comeback in a Low-Growth Regime
     The Caprices of Technology
     Part Three: The Structure of Inequality

        7. Inequality and Concentration: Preliminary Bearings
     Vautrin's Lesson
     The Key Question: Work or Inheritance?
     Inequalities with Respect to Labor and Capital
     Capital: Always More Unequally Distributed Than Labor
     Inequalities and Concentration: Some Orders of Magnitude
     Lower, Middle, and Upper Classes
     Class Struggle or Centile Struggle?
     Inequalities with Respect to Labor: Moderate Inequality?
     Inequalities with Respect to Capital: Extreme Inequality
     A Major Innovation: The Patrimonial Middle Class
     Inequality of Total Income: Two Worlds
     Problems of Synthetic Indices
     The Chaste Veil of Official Publications
     Back to "Social Tables" and Political Arithmetic
        8. Two Worlds
     A Simple Case: The Reduction of Inequality in France in the Twentieth Century
     The History of Inequality: A Chaotic Political History
     From a "Society of Rentiers" to a "Society of Managers"
     The Different Worlds of the Top Decile
     The Limits of Income Tax Returns
     The Chaos of the Interwar Years
     The Clash of Temporalities
     The Increase of Inequality in France since the 1980s
     A More Complex Case: The Transformation of Inequality in the United States
     The Explosion of US Inequality after 1980
     Did the Increase of Inequality Cause the Financial Crisis?
     The Rise of Supersalaries
     Cohabitation in the Upper Centile
        9. Inequality of Labor Income
     Wage Inequality: A Race between Education and Technology?
     The Limits of the Theoretical Model: The Role of Institutions
     Wage Scales and the Minimum Wage
     How to Explain the Explosion of Inequality in the United States?
     The Rise of the Supermanager: An Anglo-Saxon Phenomenon
     Europe: More Inegalitarian Than the New World in 1900–1910
     Inequalities in Emerging Economies: Lower Than in the United States?
     The Illusion of Marginal Productivity
     The Takeoff of the Supermanagers: A Powerful Force for Divergence
     10. Inequality of Capital Ownership
     Hyperconcentrated Wealth: Europe and America
     France: An Observatory of Private Wealth
     The Metamorphoses of a Patrimonial Society
     Inequality of Capital in Belle Époque Europe
     The Emergence of the Patrimonial Middle Class
     Inequality of Wealth in America
     The Mechanism of Wealth Divergence: r versus g in History
     Why Is the Return on Capital Greater Than the Growth Rate?
     The Question of Time Preference
     Is There an Equilibrium Distribution?
     The Civil Code and the Illusion of the French Revolution
     Pareto and the Illusion of Stable Inequality
     Why Inequality of Wealth Has Not Returned to the Levels of the Past
     Some Partial Explanations: Time, Taxes, and Growth
     The Twenty-First Century: Even More Inegalitarian Than the Nineteenth?
     11. Merit and Inheritance in the Long Run
     Inheritance Flows over the Long Run
     Fiscal Flow and Economic Flow
     The Three Forces: The Illusion of an End of Inheritance
     Mortality over the Long Run
     Wealth Ages with Population: The μ × m Effect
     Wealth of the Dead, Wealth of the Living
     The Fifties and the Eighties: Age and Fortune in the Belle Époque
     The Rejuvenation of Wealth Owing to War
     How Will Inheritance Flows Evolve in the Twenty-First Century?
     From the Annual Inheritance Flow to the Stock of Inherited Wealth
     Back to Vautrin's Lecture
     Rastignac's Dilemma
     The Basic Arithmetic of Rentiers and Managers
     The Classic Patrimonial Society: The World of Balzac and Austen
     Extreme Inequality of Wealth: A Condition of Civilization in a Poor Society?
     Meritocratic Extremism in Wealthy Societies
     The Society of Petits Rentiers
     The Rentier, Enemy of Democracy
     The Return of Inherited Wealth: A European or Global Phenomenon?
     12. Global Inequality of Wealth in the Twenty-First Century
     The Inequality of Returns on Capital
     The Evolution of Global Wealth Rankings
     From Rankings of Billionaires to "Global Wealth Reports"
     Heirs and Entrepreneurs in the Wealth Rankings
     The Moral Hierarchy of Wealth
     The Pure Return on University Endowments
     What Is the Effect of Inflation on Inequality of Returns to Capital?
     The Return on Sovereign Wealth Funds: Capital and Politics
     Will Sovereign Wealth Funds Own the World?
     Will China Own the World?
     International Divergence, Oligarchic Divergence
     Are the Rich Countries Really Poor?
     Part Four: Regulating Capital in the Twenty-First Century

     13. A Social State for the Twenty-First Century
     The Crisis of 2008 and the Return of the State
     The Growth of the Social State in the Twentieth Century
     Modern Redistribution: A Logic of Rights
     Modernizing Rather Than Dismantling the Social State
     Do Educational Institutions Foster Social Mobility?
     The Future of Retirement: Pay-As-You-Go and Low Growth
     The Social State in Poor and Emerging Countries
     14. Rethinking the Progressive Income Tax
     The Question of Progressive Taxation
     The Progressive Tax in the Twentieth Century: An Ephemeral Product of Chaos
     The Progressive Tax in the Third Republic
     Confiscatory Taxation of Excessive Incomes: An American Invention
     The Explosion of Executive Salaries: The Role of Taxation
     Rethinking the Question of the Top Marginal Rate
     15. A Global Tax on Capital
     A Global Tax on Capital: A Useful Utopia
     Democratic and Financial Transparency
     A Simple Solution: Automatic Transmission of Banking Information
     What Is the Purpose of a Tax on Capital?
     A Blueprint for a European Wealth Tax
     Capital Taxation in Historical Perspective
     Alternative Forms of Regulation: Protectionism and Capital Controls
     The Mystery of Chinese Capital Regulation
     The Redistribution of Petroleum Rents
     Redistribution through Immigration
     16. The Question of the Public Debt
     Reducing Public Debt: Tax on Capital, Inflation, and Austerity
     Does Inflation Redistribute Wealth?
     What Do Central Banks Do?
     The Cyprus Crisis: When the Capital Tax and Banking Regulation Come Together
     The Euro: A Stateless Currency for the Twenty-First Century?
     The Question of European Unification
     Government and Capital Accumulation in the Twenty-First Century
     Law and Politics
     Climate Change and Public Capital
     Economic Transparency and Democratic Control of Capital
     Conclusion
     The Central Contradiction of Capitalism: r > g
     For a Political and Historical Economics
     The Interests of the Least Well-Off
     Notes
     Contents in Detail
     List of Tables and Illustrations
     Index

    Tables and Illustrations

     Tables

     Table 1.1.  Distribution of world GDP, 2012
     Table 2.1.  World growth since the Industrial Revolution
     Table 2.2.  The law of cumulated growth
     Table 2.3.  Demographic growth since the Industrial Revolution
     Table 2.4.  Employment by sector in France and the United States, 1800–2012
     Table 2.5.  Per capita output growth since the Industrial Revolution
     Table 3.1.  Public wealth and private wealth in France in 2012
     Table 5.1.  Growth rates and saving rates in rich countries, 1970–2010
     Table 5.2.  Private saving in rich countries, 1970–2010
     Table 5.3.  Gross and net saving in rich countries, 1970–2010
     Table 5.4.  Private and public saving in rich countries, 1970–2010
     Table 7.1.  Inequality of labor income across time and space
     Table 7.2.  Inequality of capital ownership across time and space
     Table 7.3.  Inequality of total income (labor and capital) across time and space
     Table 10.1.  The composition of Parisian portfolios, 1872–1912
     Table 11.1.  The age-wealth profile in France, 1820–2010
     Table 12.1.  The growth rate of top global wealth, 1987–2013
     Table 12.2.  The return on the capital endowments of US universities, 1980–2010
     Illustrations

     Figure I.1.  Income inequality in the United States, 1910–2010
     Figure I.2.  The capital/income ratio in Europe, 1870–2010
     Figure 1.1.  The distribution of world output, 1700–2012
     Figure 1.2.  The distribution of world population, 1700–2012
     Figure 1.3.  Global inequality 1700–2012: divergence then convergence?
     Figure 1.4.  Exchange rate and purchasing power parity: euro/dollar
     Figure 1.5.  Exchange rate and purchasing power parity: euro/yuan
     Figure 2.1.  The growth of world population, 1700–2012
     Figure 2.2.  The growth rate of world population from Antiquity to 2100
     Figure 2.3.  The growth rate of per capita output since the Industrial Revolution
     Figure 2.4.  The growth rate of world per capita output from Antiquity to 2100
     Figure 2.5.  The growth rate of world output from Antiquity to 2100
     Figure 2.6.  Inflation since the Industrial Revolution
     Figure 3.1.  Capital in Britain, 1700–2010
     Figure 3.2.  Capital in France, 1700–2010
     Figure 3.3.  Public wealth in Britain, 1700–2010
     Figure 3.4.  Public wealth in France, 1700–2010
     Figure 3.5.  Private and public capital in Britain, 1700–2010
     Figure 3.6.  Private and public capital in France, 1700–2010
     Figure 4.1.  Capital in Germany, 1870–2010
     Figure 4.2.  Public wealth in Germany, 1870–2010
     Figure 4.3.  Private and public capital in Germany, 1870–2010
     Figure 4.4.  Private and public capital in Europe, 1870–2010
     Figure 4.5.  National capital in Europe, 1870–2010
     Figure 4.6.  Capital in the United States, 1770–2010
     Figure 4.7.  Public wealth in the United States, 1770–2010
     Figure 4.8.  Private and public capital in the United States, 1770–2010
     Figure 4.9.  Capital in Canada, 1860–2010
     Figure 4.10.  Capital and slavery in the United States
     Figure 4.11.  Capital around 1770–1810: Old and New World
     Figure 5.1.  Private and public capital: Europe and America, 1870–2010
     Figure 5.2.  National capital in Europe and America, 1870–2010
     Figure 5.3.  Private capital in rich countries, 1970–2010
     Figure 5.4.  Private capital measured in years of disposable income
     Figure 5.5.  Private and public capital in rich countries, 1970–2010
     Figure 5.6.  Market value and book value of corporations
     Figure 5.7.  National capital in rich countries, 1970–2010
     Figure 5.8.  The world capital/income ratio, 1870–2100
     Figure 6.1.  The capital-labor split in Britain, 1770–2010
     Figure 6.2.  The capital-labor split in France, 1820–2010
     Figure 6.3.  The pure rate of return on capital in Britain, 1770–2010
     Figure 6.4.  The pure rate of return on capital in France, 1820–2010
     Figure 6.5.  The capital share in rich countries, 1975–2010
     Figure 6.6.  The profit share in the value added of corporations in France, 1900–2010
     Figure 6.7.  The share of housing rent in national income in France, 1900–2010
     Figure 6.8.  The capital share in national income in France, 1900–2010
     Figure 8.1.  Income inequality in France, 1910–2010
     Figure 8.2.  The fall of rentiers in France, 1910–2010
     Figure 8.3.  The composition of top incomes in France in 1932
     Figure 8.4.  The composition of top incomes in France in 2005
     Figure 8.5.  Income inequality in the United States, 1910–2010
     Figure 8.6.  Decomposition of the top decile, United States, 1910–2010
     Figure 8.7.  High incomes and high wages in the United States, 1910–2010
     Figure 8.8.  The transformation of the top 1 percent in the United States
     Figure 8.9.  The composition of top incomes in the United States in 1929
     Figure 8.10.  The composition of top incomes in the United States, 2007
     Figure 9.1.  Minimum wage in France and the United States, 1950–2013
     Figure 9.2.  Income inequality in Anglo-Saxon countries, 1910–2010
     Figure 9.3.  Income inequality in Continental Europe and Japan, 1910–2010
     Figure 9.4.  Income inequality in Northern and Southern Europe, 1910–2010
     Figure 9.5.  The top decile income share in Anglo-Saxon countries, 1910–2010
     Figure 9.6.  The top decile income share in Continental Europe and Japan, 1910–2010
     Figure 9.7.  The top decile income share in Europe and the United States, 1900–2010
     Figure 9.8.  Income inequality in Europe versus the United States, 1900–2010
     Figure 9.9.  Income inequality in emerging countries, 1910–2010
     Figure 10.1.  Wealth inequality in France, 1810–2010
     Figure 10.2.  Wealth inequality in Paris versus France, 1810–2010
     Figure 10.3.  Wealth inequality in Britain, 1810–2010
     Figure 10.4.  Wealth inequality in Sweden, 1810–2010
     Figure 10.5.  Wealth inequality in the United States, 1810–2010
     Figure 10.6.  Wealth inequality in Europe versus the United States, 1810–2010
     Figure 10.7.  Return to capital and growth: France, 1820–1913
     Figure 10.8.  Capital share and saving rate: France, 1820–1913
     Figure 10.9.  Rate of return versus growth rate at the world level, from Antiquity until 2100
     Figure 10.10.  After tax rate of return versus growth rate at the world level, from Antiquity until 2100
     Figure 10.11.  After tax rate of return versus growth rate at the world level, from Antiquity until 2200
     Figure 11.1.  The annual inheritance flow as a fraction of national income, France, 1820–2010
     Figure 11.2.  The mortality rate in France, 1820–2100
     Figure 11.3.  Average age of decedents and inheritors: France, 1820–2100
     Figure 11.4.  Inheritance flow versus mortality rate: France, 1820–2010
     Figure 11.5.  The ratio between average wealth at death and average wealth of the living: France, 1820–2010
     Figure 11.6.  Observed and simulated inheritance flow: France, 1820–2100
     Figure 11.7.  The share of inherited wealth in total wealth: France, 1850–2100
     Figure 11.8.  The annual inheritance flow as a fraction of household disposable income: France, 1820–2010
     Figure 11.9.  The share of inheritance in the total resources (inheritance and work) of cohorts born in 1790–2030
     Figure 11.10.  The dilemma of Rastignac for cohorts born in 1790–2030
     Figure 11.11.  Which fraction of a cohort receives in inheritance the equivalent of a lifetime labor income?
     Figure 11.12.  The inheritance flow in Europe, 1900–2010
     Figure 12.1.  The world's billionaires according to Forbes, 1987–2013
     Figure 12.2.  Billionaires as a fraction of global population and wealth, 1987–2013
     Figure 12.3.  The share of top wealth fractiles in world wealth, 1987–2013
     Figure 12.4.  The world capital/income ratio, 1870–2100
     Figure 12.5.  The distribution of world capital, 1870–2100
     Figure 12.6.  The net foreign asset position of rich countries
     Figure 13.1.  Tax revenues in rich countries, 1870–2010
     Figure 14.1.  Top income tax rates, 1900–2013
     Figure 14.2.  Top inheritance tax rates, 1900–2013

    Index

     Abu Dhabi Investment Authority, 456–­457
     Accounting: national, 55–­59, 92, 230, 269; corporate, 203
     Accumulation of wealth. See Wealth accumulation
     Accumulation principle, infinite, 7–­11, 228
     Acemoglu, Daron, 624n20, 639nn45,48
     Africa: production in, 60–­61; income and, 63–­64, 66, 68–­69, 586nn33,34; growth in, 75, 78–­79, 94, 388; capital/income ratio in, 195, 461–­462; taxes and, 491; capital outflow from, 539. See also North Africa; South Africa; Sub-­Saharan Africa
     Age-­wealth profile, 393–­399
     Agricultural land: in Britain and France, 117, 119; in Germany, 141; in America, 151–­152; elasticity of substitution and, 222–­223
     Albert, Michel, 592n5
     Allais, Maurice, 642n17, 641n40
     Allen, Robert, 224–­225, 580n5, 598n4
     Alternative investments, 449–­450, 454, 456
     Althusser, Louis, 655n2
     Alvaredo, Facundo, 17
     America: income and, 63, 68; birth rate and, 79; growth in, 93; capital in, 140, 150–­158; structure of in­e­qual­ity in, 152. See also North America
     "American exceptionalism," 484
     American Revolution, 30, 493
     Ancien Régime, 104, 106; public debt and,
127, ­129, 183; in­e­qual­ity and, 251, 263–­264, 341–­342, 480; taxation and, 493, 501
     Anderson, Gosta Esping, 587n5
     Andrieu, Claire, 591n18
     "Annuitized wealth," 384, 391–­392
     Aristocats, The (cartoon), 365–­366
     Arnault, Bernard, 626n33
     Arrow, Kenneth, 654n56
     Asia: income and, 63, 66, 68, 585n24, 586n34; investment in, 70–­71; growth in, 78–­79, 82, 94, 99; capital/income ratio in, 195; financial crisis in, 535
     Assets: public, 135–­139; prices of, 169–­172, 187–­191, 452–­453, 626n31; financial, 209, 627n43; real and nominal, 209–­212, 598n11; size effects of, 453–­454; taxation of, 518. See also Net asset positions; Wealth
     Asset structure, twenty-­first vs. eigh­teenth century, 118–­120, 122–­123
     Atkinson, Anthony, 17, 18, 343, 581nn21,23, 582n36, 606n33, 610n26, 614n32, 622n60, 638n35
     Austen, Jane, fiction of, 2, 53–­54, 105–­106, 241, 411–­412, 415–­516, 619n36, 620n40, 621n52; Sense and Sensibility, 113, 362, 413–­414; Mansfield Park, 115, 120–­121, 207; Persuasion, 362
     Austerity, public debt and, 541, 545–­546
     Australia, 174, 177–­178
     Autrer, Matthieu, 641n4
     Badiou, Alain, 655n2
     Bagnall, Roger S., 612n10
     Bakija, Jon, 607n42
     Balassa-­Samuelson model, 586n28
     Balzac, Honoré de, fiction of, 2, 53–­54, 207, 411, 415–­416, 601n2, 619n36; Père Goriot, 104, 106, 113–­115, 238–­240, 343, 412, 440, 590n3, 620n43; César Birotteau, 115, 207, 214, 412–­413, 590nn2,3, 615n34, 624n15
     Banerjeee, Abhijit, 17, 611n32, 634n49
     Banking information: automatic transmission of, 516, 520, 521–­524, 529; Cyprus crisis and, 554–­555
     Bank of En­gland, 551–­552, 557
     Bank of Japan, 551, 557, 649n22
     Banks, central. See Central banks
     Banque de France, 649n25
     Barro, Robert, 135
     Barry, Redmond, 620n40
     Baudelot, Christian, 605n20
     Bebchuk, Lucian, 611n35
     Becker, Gary, 385, 616n7, 621n55
     Beckert, Jens, 614n22, 616n6, 637n25, 638n33
     Béguin, K., 598n7
     Belle Époque, 106, 127, 132; capital/income ratio and, 148, 152, 154, 196; income in­e­qual­ity in, 263–­264, 266–­267, 272, 282, 322; in­e­qual­ity of capital own­ership in, 339, 342–­345, 369–­370; age and fortune in, 393–­396
     Bernstein, Eduard, 219
     Bettencourt, Liliane, 440–­441, 525, 642n14
     Bill and Melinda Gates Foundation, 626n32
     Billionaires, 433–­434, 444–­446, 458–­459, 463, 623n7, 624n13
     Birth rates, 78–­83, 587n4, 588n7
     Bjorklund, Anders, 631n26
     Blank, Rebecca, 608n12, 640n53
     Boisguillebert, Pierre le Pesant sieur de, 56, 590n1
     Book vs. market value, 189–­191
     Borgerhoff Mulder, Monique, 597n33
     Bourdieu, Jérôme, 612nn4,9
     Bourdieu, Pierre, 486
     Bourguignon, François, 585n20
     Boutmy, Emile, 487
     Bouvier, Jean, 225, 582n34
     Bowley, Arthur, 219, 599nn19, 20
     Bozio, Antoine, 633n46
     Brady, H., 640n52
     Britain: data from, 28, 56–­57; national income and, 68–­69; growth in, 98–­99, 174–­175, 510–­511; monetary system of, 105, 589–­590nn28,29; per capita income in, 106, 122, 590–­591n8,9; inflation in, 107, 133, 142, 149; capital in, 116–­127, 148–­149; foreign capital/assets and, 117–­119, 148, 191–­192, 590n7; public debt of, 124–­126, 127, 129–­131, 133, 591n10, 591n12; public assets in, 136, 138; Canada and, 157–­158; savings in, 177–­178; capital-­labor split in, 200–­201, 204, 205, 206–­208, 216, 224–­225, 229; taxation and, 338, 498–­499, 501, 505, 507–­512, 636n16, 638nn33,34,35; wealth distribution in, 343–­344, 346; inheritances in, 426–­427; taxes as share of national income in, 475–­476, 629n6; social state in, 477–­478, 629n12, 631n25
     Brown, Frederick, 219–­220
     Bubbles, 172, 193, 596n27, 597n30; beyond, 173–­183
     Buffet, Warren, 624n14
     Bush, George W., 309
     Cagé, Julia, 633n48
     Caillaux, Joseph, 637n24
     Campion, H., 591n19
     Canada, 66; in US-­Canada bloc, 62–­63; capital in, 140, 157–­158; foreign capital/assets in, 157–­158; growth rate of, 174; savings in, 177–­178
     "Capabilities" approach, 480
     Capital: human and nonhuman, 21–­22, 42, 46–­47; types of, 42, 46; depreciation and, 43–­44; defined, 45–­47, 123; private vs. public, 46–­47; and wealth, 47–­50; economic functions of, 48; domestic vs. foreign, 49, 118–­119; immaterial, 49; residential vs. productive, 51–­52; rents and, 423–­424; reproduction of itself, 440. See also Foreign capital/assets; National wealth/capital; Private wealth/capital; Public wealth/capital; Rate of return on capital
     Capital (Marx), 9, 225, 229
     Capital, income from, 18, 21, 53; reduction in, 271–­275, 336–­337; in twenty-­first century, 277–­278, 301–­302; top decile and, 279–­281, 290, 295, 301, 604–­605n12; underestimation of, 281–­284, 294, 606n26; taxation on, 507–­508. See also In­e­qual­ity of capital own­ership
     Capital, metamorphoses of: nature of wealth and, 113–­116; in Britain and France, 113–­139; asset structure (private) and, 116–­120, 122–­123; foreign capital and, 120–­123; public and private wealth and, 123–­129; public debt and, 129–­134; Ricardian equivalence and, 134–­135; public assets and, 135–­139; in Germany, 140–­146; twentieth century shocks and, 146–­150; in the United States, 150–­156, 158–­163; in Canada, 157–­158
     Capital accumulation, golden rule of, 563–­567
     Capital controls, 515–­516, 534–­536
     Capital gains: treatment of, 283, 295, 609n13; United States and, 293, 295, 296
     Capital/income ratio, 19, 25–­26, 164–­199; evolution of, 42; defined, 50–­52; fundamental laws of capitalism and, 52–­55, 166–­170; in Britain and France, 117–­118, 126; collapse and recovery of, 146–­150, 275; in the United States, 150–­155; capital's comeback and, 170–­173, 290; beyond bubbles and, 173–­183; privatization and, 183–­187; rebound of asset prices and, 187–­191; national capital and net foreign assets and, 191–­194; land values and, 196–­198; capital-­labor split and, 199–­203, 232–­233; falling rate of profit and, 229; flow of inheritances and, 383–­384; world, 460–­461
     Capitalism, 1; misery of, 7–­8, 446–­447; Marx on, 7–­11, 227–­230, 565; author's view of, 31; first fundamental law of, 52–­55, 199; second fundamental law of, 55, 166–­170; financial, 58, 515; key aspects of, 116–­118; without capitalists, 135–­139; Rhenish, 140–­146, 191, 511; patrimonial, 154–­155, 173, 237, 471; illusion of end of, 350, 381, 397; crisis of 2008 and, 472–­474; control of, 518, 523, 532–­537, 562, 570; central contradiction of, 571–­573
     Capital-­labor split, 8, 39–­45, 199–­234; capital/income ratio and, 199–­203, 232–­233; return on capital and, 199–­217; flows and, 203–­204; real and nominal assets and, 209–­212; marginal productivity of capital and, 212–­217; elasticity of substitution and, 216–­224; stability of, 217–­220, 231–­232; human capital and, 223–­224; medium-­term changes in, 224–­227, 288; falling rate of profit and, 227–­230; "two Cambridges" and, 230–­232; capital's comeback and, 232–­233, 290–­291; technology and, 234
     Capital stock, 50–­51, 113, 119; first fundamental law of capitalism and, 52–­55, 199; accumulation of, 166–­170; too much, 212, 215–­217, 223, 227–­230; inherited wealth and, 401–­404, 410
     Capital tax. See Global tax on capital; Taxation, on capital
     Carbon tax, 654n55
     Carpentier, Vincent, 632n34
     Card, David, 313, 608n10
     Castel, Robert, 608n9
     Categorical or schedular tax, 501
     Centile, upper/top, 251, 252–­254, 259–­264, 267, 301; in twentieth century, 272, 275, 284–­286; in twenty-­first century, 277–­278; world of, 278–­281; underestimation of, 281–­284; wages and, 290–­292, 296, 298–­300, 314–­315, 618n29; cohabitation in, 300–­303; evolution of by country and region, 315–­322, 326–­327, 329, 609–­610nn13,14,15,16,17,18,19, 610nn22,23,25; wealth distribution and, 339–­346, 348–­349, 365–­366, 438–­439, 509, 643n25; work vs. inheritance and, 408–­411; return on capital and, 431; oligarchic divergence and, 463; taxation and, 496
     Centiles, mea­sure­ment and, 252–­255, 269–­270, 286
     Central banks, 472–­473, 648n20, 649n22; Cyprus crisis and, 519, 553–­556; financial stability and, 547–­553, 555–­556
     César Birotteau (Balzac), 115, 207, 214, 412–­413
     Chabert, A., 600n29
     Challenges wealth rankings, 442, 624n18
     Charles X, 613n21
     Chavagneux, Christian, 628n56
     China: income and, 62–­64, 66; growth in, 82, 99, 329, 429; income in­e­qual­ity in, 326–­327, 610n27, 646n42; assets of, 463, 627–­628n50; taxes in, 491, 492; regulation in, 535–­536
     Civil Code, 362–­366, 614n23
     Clark, Gregory, 591n15
     Class designations, 250–­252
     Climate change, 567–­569
     Clinton, Bill, 309
     Cobb, Charles, 599n18
     Cobb-­Douglas production function, 217–­220, 599n17, 600n25
     Cole, Adam, 607n42
     Colonial empires, 120–­121
     Colonial era, 44–­45
     Colqhoun, Patrick, 230
     Colson, Clément, 57, 591n19, 617n10
     Columbia, 327, 329
     "Common utility," 480, 630n20
     Communist Manifesto, The (Marx), 8–­9, 225
     Communist movements, 8, 10
     Competition: pure and perfect, 30, 212, 214, 312–­313, 332, 639–­640n48; fiscal, 208, 221, 355–­356, 373, 375, 422, 496, 562; inheritance and unrestricted, 423–­424
     Concentration effects vs. volume effects, 410
     Condorcet, marquis de, 363, 654n56
     Confiscatory tax rates, 473; executive income and, 505–­508; fiscal progressivity and, 512–­514
     Conservative revolution, 98, 138–­139, 333, 511, 549
     Consumption taxes, 494, 496, 651n37
     Continental blocs, 59–­61, 68
     Contributive justification, 524–­525
     Convergence, 21–­22, 27, 571; forces favoring, 69–­71; global, 72
     Corporations, 156, 203, 332; taxation on profits of, 560–­561, 650–­651n33, 651n36
     Creative accounting, 214
     Crédit Suisse, 437, 623n10
     Cross-­investments, 194
     Crouzet, François, 591n11
     Cumulative growth, law of, 74–­77
     Cumulative returns, law of, 75, 77
     Cyprus banking crisis, 519, 553–­556
     Damages (TV series), 419
     Data: importance of, 2–­3; national income as, 11–­13, 56–­59, 584n18; on income, 16–­17; on wealth, 17–­20; geo­graph­i­cal and historical boundaries of, 27–­30; developing countries and, 58–­59
     Daumond, Adeline, 582n33
     Davies, James B., 638n8
     Debreu, Claude, 654n56
     Debt. See Public debt
     Decile, upper/top, 251–­253, 256–­260, 261–­264; in twentieth century, 271–­273, 275–­276, 284–­286, 288; world of, 278–­281; underestimation of, 281–­284, 294–­295; wages and, 290–­294, 296–­299, 314–­315; wealth distribution and, 322–­324, 339–­346, 348–­349, 365–­366, 438–­439; return on capital and, 431
     Deciles, mea­sure­ment and, 251–­255, 601n5, 602n20; interdecile ratios and, 267–­269, 603nn23,24
     Declaration of In­de­pen­dence (US) (1776), 479
     Declaration of the Rights of Man and the Citizen (1789), 479–­480
     Defensive nationalism, 539
     Deflation, 285
     De Foville, Alfred, 57, 617n10
     De Gaulle, Charles, 289
     Delalande, Nicolas, 635n13
     Dell, Fabien, 17, 615n38, 645n37
     Democracy: challenge to, 21, 26–­27; rentiers and, 422–­424; transparency and, 518–­521; control of capital and, 569–­570, 573
     Demographic growth, 72–­75, 174; stages of, 77–­80; negative, 80–­83; bell curve of global, 99, 589n24; decreased, 166–­168
     Demographic transition, 3–­4, 29–­30, 78–­79, 81–­82
     Denmark, 495
     Depreciation, 43, 178
     Deregulation movement, 138–­139
     Di Bartolomeo, G., 637n26
     "Difference principle" (Rawls), 480
     Dirty Sexy Money (TV series), 419
     Disposable income, 180–­182
     Distribution, equilibrium, 361–­366
     Distribution of wealth: factorial vs. individual, 40, 583n3; national accounting and, 55–­59; global, 59–­69; regional blocs and, 61–­64; upper centiles and deciles and, 322–­324, 339–­346, 348–­349, 365–­366; in France, 337–­343, 346, 364–­366; in Britain, 343–­344, 346; in Eu­rope, 343–­345, 350; in Sweden, 344–­345, 346–­347; in the United States, 347–­350; return on capital and unequal, 361, 571–­572. See also Global in­e­qual­ity of wealth; Inheritance, dynamics of
     Distribution of wealth debate: data and, 2–­3, 11–­13, 16–­19, 27–­30; classical po­liti­cal economy and, 3–­5; scarcity principle and, 5–­7; infinite accumulation principle and, 7–­11; postwar optimism and, 11–­15; in economic analysis, 15–­16; historical sources and, 19–­20; results of current study in, 20–­22; forces of convergence and divergence and, 22–­27; theoretical and conceptual framework and, 30–­33
     Distribution tables, 267, 269–­270
     Divergence, 22–­27, 424, 571; Eu­rope and North America and, 59–­61; supermanagers and, 333–­335; mechanism of wealth, 350–­353, 431; global, 438–­439, 461–­463; oligarchic, 463–­465, 627n49
     Divisia, François, 591n19
     Django Unchained (film), 163
     Domar, Evsey, 230–­231
     Domestic capital, 49; in Britain and France, 117–­119; in Germany, 141, 143; in the United States, 150–­151, 155; in Canada, 157; slavery and, 158–­163, 593n16
     Domestic output/production, 44–­45, 598n3
     Douglas, Paul, 599n18
     Dowries, 392, 418
     Duflo, Esther, 634n49
     Duncan, G., 632n30
     Dunoyer, Charles, 85
     Dupin, Jean, 591n19
     Durable goods and valuables, 179–­180, 594n13
     Durkheim, Emile, 422, 621n55
     Duval, Guillaume, 592n6
     Earned and unearned income: inheritances and, 377–­379, 390; taxation and, 507–­508
     Eastern bloc countries, privatization in, 186–­187
     ECB (Eu­ro­pe­an Central Bank), 530, 545, 550–­552, 553, 557–­558, 649n26
     "Ecological stimulus," 568
     Economic determinism, 20
     Economic flows, 381–­383
     Economic growth, 72–­74, 84, 93–­94; stages of, 86–­87; in postwar period, 96; social order and, 96. See also Per capita output growth
     Economics, 3, 10, 32–­33, 573–­577
     Economies of scale, portfolio management and, 431, 440, 450–­451
     Educational system: convergence and, 22, 71; technology and, 304–­307; in­e­qual­ity and, 313, 314–­315, 419–­420, 608–­609n12, 632n36; public spending in, 477, 482, 629n14; social mobility and, 484–­487
     Egypt, 538
     Elasticity of substitution, 216–­224, 600n32
     Emerging economies: in­e­qual­ity of labor income and, 326–­330; inheritances in, 428–­429; social state in, 490–­492, 633n49
     Engels, Friedrich, 9, 579n4
     En­glish Revolution, 30
     Entails, 362–­363, 451
     Entrepreneurial income, 204
     Entrepreneurial labor, 41
     Entrepreneurs in wealth rankings, 439–­443
     Equalization and growth, 83–­85. See also Convergence
     Equations: r > g, 25–­27, 353–­358, 361, 365–­366, 375–­376, 395–­396, 424, 563–­564, 571–­572, 614n26; β = s / g, 33, 50–­55, 166–­170, 187, 228, 230–­232; α = r × β, 33, 52–­55, 168–­169, 199, 213, 216–­217; g = s / β, 230–­231; r − g, 364–­366, 431, 451; by = μ × m × β, 383; r = g, 563; α = s and α > s, 563–­564
     Equilibrium distribution, 361–­366
     Equipartition, 362–­363, 365
     Erreygers, G., 637n29
     Estate devolution, rate of, 389, 617n10
     Estate tax, 337–­339, 355, 497; returns as source of data, 18–­19; accumulation of wealth and, 374–­375; progressive, 502–­505, 507
     Eu­ro­pe­an Aeronautic, Defense, and Space Co. (EADS), 445
     Eu­ro­pe­an Central Bank. See ECB (Eu­ro­pe­an Central Bank)
     Eu­ro­pe­an Commission, 553
     Eu­ro­pe­an Constitutional Treaty, 650n30
     Eu­ro­pe­an Parliament, 559
     Eu­ro­pe­an wealth tax, 527–­530
     Eu­rope/Eu­ro­pe­an ­Union: global production and, 59–­61; as regional bloc, 61–­66, 68–­69, 585n22; demographic growth in, 78–­79, 81–­82; economic growth of, 86–­87, 93–­95, 96–­98, 99, 174, 595n20; inequalities in capital own­ership in, 243–­345; income inequalities in, 247–­250, 255, 321–­323; wealth distribution in, 343–­345, 350, 643nn24,25; inheritances and, 424–­427; net assets of, 463–­464, 627n50; taxes in, 475–­476, 490; social state in, 477–­478, 630n17; social model of, 481; directive on foreign savings of, 522–­524; public debt and, 556–­562; bud­getary parliament for, 559–­560, 650n28; mutualizing public debt in, 650n31. See also Belle Époque
     Eurozone, 108, 544–­545, 554–­562; deficits debate in, 565–­567, 653n47
     Exchange rates, 64–­67, 585–­586n25
     Executives: compensation of, 331–­335, 639n47, 640n49; confiscatory tax on income of, 505–­512. See also Managers
     Fack, Gabrielle, 626n34
     Factorial distribution, 40, 583n3
     Family fortunes: shocks and, 362, 364, 369; taxation and, 374; desire to perpetuate, 391–­392, 400
     Farmland, as capital: in Britain and France, 117, 119, 122–­123, 590n1; in Germany, 141; in America, 150–­152, 155; pure value of, 197
     Favre, P., 633n42
     Federal Reserve, 474, 548–­552, 557
     Fertility. See Birth rates
     Financial assets, 209, 627n43; prices of, 171–­172, 187–­191, 452–­453
     Financial crisis (2008), 296–­298, 472–­474, 549–­550, 558
     Financial globalization, 193–­194, 355, 430
     Financial intermediation, 205, 214, 233, 430–­431, 453, 541
     Financial legal structures, 451–­452
     Financial markets, 49, 58, 476
     Financial professions, 303
     Fiscal flows, 381–­382
     Fiscal pressure, 208
     Fiscal transactions tax, 651n38
     Fisher, Irving, 506
     Fitoussi, Jean-­Paul, 603n25
     Flat tax, 495, 500–­501
     Fleurbaey, Marc, 631n23
     Flows: capital-­labor split and, 203–­204; of annual inheritances, 379–­382
     Fogel, Robert, 159
     Forbes, Steve, 442, 624n19
     Forbes wealth rankings, 432–­434, 439–­443, 458, 518, 625n23
     Foreign Account Tax Compliance Act (FATCA), 522–­524
     Foreign capital/assets, 49–­50; convergence and, 69–­71; in Britain and France, 117–­119, 148, 590n7; rise and fall of, 120–­123, 369–­370; in Germany, 141–­142, 596n25; in the United States, 151, 155–­156; New World and, 155–­157; in Canada, 157–­158; national capital and, 191–­194; convergence and, 587n36
     Foundations, as private wealth/capital, 182–­183, 451–­452, 626nn32,33
     Fourquet, François, 585n19
     France: growth in, 4, 81–­82, 98, 174; estate tax in, 18–­19, 337–­339; data from, 28–­30, 56–­57, 604n8; national income and, 68–­69; purchasing power and, 88–­89; employment by sector in, 91; monetary system of, 104, 589n27, 590n29; per capita income in, 106, 122, 590n31, 590–­591n8,9; inflation in, 107–­108, 133, 149, 545, 546; capital in, 116–­127, 148–­149; foreign capital/assets and, 117–­119, 148, 191–­192, 590n7, 596n29; public debt of, 124–­126, 127, 129, 132–­133, 591nn13,14, 592n8; taxation in, 129, 275, 365, 370, 496, 498–­505, 507, 605n16, 634n5, 635–­636n15, 635n11; capitalism without capitalists in, 135–­139; public assets in, 136–­139, 184; savings in, 177–­178; capital-­labor split in, 201, 204, 205, 206–­208, 216, 225–­227; in­e­qual­ity in, 271–­281, 284–­291; wealth distribution in, 337–­343, 346, 364–­366; inheritances in, 379–­382, 385–­396, 399, 402–­409, 418, 420–­421, 427; mortality rate in, 385–­388, 616n9; voting rights in, 424, 622n58; taxes as share of national income in, 475–­476, 629n6; social state and, 478, 495, 630n16; wealth tax in, 533, 643–­644n26, 645n38
     France Telecom, 139
     French Revolution: data and, 29–­30, 56; inflation and, 104; wealth distribution and, 341–­342, 362–­363; Civil Code and, 364–­366; progressivity and, 532
     Fried, Jesse, 611n35
     Friedman, Milton, 548–­549
     Furet, François, 225, 575–­576, 582n34
     Gabaix, Xavier, 639n47
     Gadenne, Lucie, 633n48
     Galichon, Alfred, 641n4
     Gates, Bill, 440–­441, 444–­445, 624nn14,20, 626n32
     GDP, defined, 43
     Generational warfare, 22, 246
     Germany: national income and, 68–­69; inflation in, 107–­108, 142, 149, 545, 546; capital in, 140–­146; foreign capital/assets and, 141–­142, 192, 596n25; public debt in, 647n10, 142; growth and, 174; savings in, 177–­178; public wealth and, 184; between the two wars, 324–­325; inheritances in, 425–­426, 427; taxation and, 476, 498–­500, 504–­505, 507
     Giffen, Robert, 56–­57, 584n17
     Gifts, inheritance flows and, 392–­393, 425–­427
     Gilded Age, 348–­350, 506
     Gilet, M., 582n34, 600n27
     Gini coefficient, 243, 266–­267, 286, 603n22, 623n12
     Global distribution of production, 59–­61; regional blocs and, 61–­64; in­e­qual­ity and, 64–­69
     Global in­e­qual­ity of wealth, 59–­69, 430–­467; return on capital and, 430–­432; wealth rankings and, 432–­436; "Global Wealth Reports" and, 436–­439; divergence and, 438–­439, 463–­464; heirs and entrepreneurs and, 439–­443; moral hierarchy and, 443–­447; university endowments and, 447–­452; inflation and, 452–­455; sovereign wealth funds and, 455–­460; China and, 460–­463; rich and poor countries and, 465–­467; transparency and, 518–­521
     Globalization, first and second periods of, 28
     Global tax on capital, 515–­539, 572–­573; as useful Utopia, 515–­518; banking information and, 516, 521–­524; transparency and, 516, 518–­521; purpose of, 518, 520, 524–­527; Eu­ro­pe­an wealth tax and, 527–­530; historical perspective on, 530–­534; regulation and, 534–­536; petroleum rents and, 537–­538; immigration and, 538–­539; Eurozone and, 560–­561; vs. corporate income taxes, 650n32
     "Global Wealth Reports," 436–­439
     G-dechot, Olivier, 605n22
     Gold, 595n14
     Golden rule of capital accumulation, 563–­565, 651–­652n40, 652n42; deficit debates and, 565–­567
     Goldin, Claudia, 306, 314–­315, 606n36, 608n12, 640n53
     Goldsmith, Raymond, 19, 159, 597n33
     Gold standard, 107, 547–­548, 589n28
     Google, 650n33
     Gordon, Robert, 94–­95, 586n35
     Gotman, Anne, 622n62
     Gourinchas, Pierre-­Olivier, 597n31, 645n41
     Government and security ser­vice sector, 91
     Government bonds: as capital, 114, 130–­133; public debt and, 544
     Great Depression: faith in capitalism and, 136–­137; reduction in in­e­qual­ity and, 275; managers and, 285; in the United States, 293–­294, 506–­507; policy and, 473; central banks in, 548–­549
     Great Recession, 472–­474, 553–­554
     Greece, debt crisis in, 542, 554, 649n26, 650n29
     Grenelle Accords, 289
     Growth, 72–­109; per capita output, 72–­74; population, 72–­75; law of cumulative, 74–­77; demographic, 77–­83, 587n4; equalization and, 83–­85; economic, 86–­87, 375, 588n11; purchasing power and, 87–­90; diversification of lifestyles and, 90–­93; end of, 93–­95; implications of 1 percent, 95–­96; in postwar period, 96–­99; double bell curve of global, 99–­102; inflation and, 102–­103; monetary systems and, 103–­109; from 1970 to 2010, 173–­183; modern, 308; return on capital and, 351, 353–­361, 364–­366, 430–­431, 571–­572; wealth rankings and, 432–­436; social spending and, 481–­482. See also Slow growth
     Grusky, David B., 639n48
     Guesnerie, Roger, 654n52
     Hacker, Jacob, 640n52
     Harrison, Anne, 18, 343, 582n36
     Harrod, Roy, 230–­231
     Harvard University, 447–­450, 485, 626n30, 632n29, 632n32
     Hayek, Friedrich, 654n56
     Health and education ser­vice sector, 90–­92, 477, 482, 629n14
     Health insurance, public, 477, 486, 629nn12,13
     Heim, Bradley T., 607n42
     Heirs in wealth rankings, 439–­443
     Henry, James, 28n56
     Hicks, John, 641n12
     Higher education access, 485–­486
     Historical sources, 10, 19–­20, 27–­30
     Hoffman, P., 599n14
     Hollande, François, 650n31
     Homer, S., 613n16
     Hoover, Herbert, 472–­473
     House­hold surveys, 329–­330
     Housing, as capital: in Britain and France, 117, 119–­120, 122–­123; in Germany, 141, 145; in America, 151, 155; rental value of, 209, 213; middle class and, 260
     Human capital, 21–­22, 42, 46, 586–­587n35; convergence and, 70–­71; slavery and, 162–­163, 593n18; capital-­labor split, 223–­224, 234; transmission of, 420; accounting and, 608n3
     Hypermeritocratic society, 264–­265
     Hyperpatrimonial society, 264
     Ibiscus (Tolstoy), 446–­447
     Identity politics, 539
     IMF (International Monetary Fund), 220, 465, 519, 534, 553–­554, 646n41
     Immigration, 78, 82, 83–­84; redistribution through, 538–­539, 646n46
     Incentive justification, 524, 526–­527
     Income: per capita, 106, 122, 590n31, 590n31, 590–­591n8,9; disposable, 180–­182; mixed, 204; from wages, 242; total, 254–­255, 263–­265; transfers of, 297–­298; earned and unearned, 377–­379, 390, 507; replacement, 602n9. See also Capital, income from; Labor, income from; National income
     Income and output: capital-­labor split and, 39–­43; capital and wealth and, 45–­50; capital/income ratio and, 50–­52; laws of capitalism and, 52–­55; national accounting and, 55–­59; global distribution of production and, 59–­61; regional blocs and, 61–­64; convergence and, 69–­71
     Income in­e­qual­ity, 15, 242–­243; compression of, 12–­13, 271–­275, 284–­286, 293–­294, 298; global, 61–­69; inherited wealth and, 238–­242; labor and capital and, 242–­246, 254–­255, 255–­260; order of magnitude of, 246–­250; class designations and, 250–­252; deciles/centiles in mea­sur­ing of, 252–­255; total income and, 254–­255, 263–­265; women and, 256; synthetic indices and, 266–­267; distribution tables and, 267, 269–­270; official publications and, 267–­268. See also by country; In­e­qual­ity of capital own­ership; In­e­qual­ity of labor income
     Income sources, 17–­18
     Income tax, 494, 527; returns as source of data, 12, 16–­18, 281–­284, 292, 326, 328–­329; twentieth century evolution of, 275, 292, 498–­502; exemptions and, 282; rise of progressive, 374; Great Depression and, 472; Obama administration and, 473
     India: income in, 62–­64; growth in, 82, 329, 611n32; taxes in, 491, 492
     "Indicial" tax system, 501
     Individual distribution, 583n3
     Industrial Revolution, 3, 10, 59–­61; world growth since, 73–­74, 79, 87–­89
     In­e­qual­ity: subjective dimension of, 2; po­liti­cal nature of, 20; natural, 85. See also Convergence; Divergence; Global in­e­qual­ity of wealth; Income in­e­qual­ity
     In­e­qual­ity, concentration and, 237–­270; work vs. inheritance and, 238–­242; labor vs. capital, 242–­246, 254, 255–­260; orders of magnitude of, 246–­250; class designations and, 250–­252; deciles/centiles in mea­sur­ing of, 252–­255; total income and, 254, 263–­265; patrimonial middle class and, 260–­262; justification of, 264; synthetic indices and, 266–­267; distribution tables and, 267, 269–­270; official publications and, 267–­269
     In­e­qual­ity, evolution of, 271–­303; twentieth century French reduction of, 271–­274; chaotic po­liti­cal history and, 274–­276; rentiers to managers and, 276–­278; top decile and, 278–­281; income tax returns and, 281–­284; interwar years and, 284–­286; clash of temporalities and, 286–­290; increases in post 1980s France of, 290–­291; in the United States, 291–­303; financial crisis and, 297–­298; supersalaries and, 298–­300; upper centile and, 300–­303
     In­e­qual­ity, structures of, 19, 77, 83, 234, 237–­238; patrimonial society and, 260–­262, 264, 346–­347, 373, 411–­414; hypermeritocratic society and, 264–­265; social tables and, 270; taxation and, 373–­374, 495; change in global, 377–­378; "natural," 411
     In­e­qual­ity of capital own­ership, 238–­244, 254, 300–­303, 336–­376; return of capital and growth rate and, 264, 353–­361; decline of hyperconcentrated wealth and, 336–­337, 350, 368–­372, 611–­612n3; estate taxes and mea­sure­ment of, 337–­339; Belle Époque Eu­rope and, 339, 342–­345, 369–­370, 372; wealth distribution and, 339–­343; patrimonial society and, 346–­347; in the United States, 347–­350; mechanism of wealth divergence and, 350–­353; time preference and, 358–­361; equilibrium distribution and, 361–­364; Civil Code and French Revolution and, 362–­366; Pareto law and, 366–­368; failure to return to past levels of, 368–­375; in the twenty-­first century, 375–­376. See also Global in­e­qual­ity of wealth; Inheritance, dynamics of
     In­e­qual­ity of labor income, 238–­244, 254, 263, 300, 304–­335; in twenty-­first century, 277–­278; top decile and, 279–­281, 290–­293, 295–­299; in the United States, 291–­296, 314–­315; supersalaries and, 298–­300; wages and, 304–­307, 310–­313; marginal productivity and, 304–­308, 311, 314–­315, 330–­333; role of institutions and, 307–­310; supermanagers and, 315–­321, 333–­335; Eu­rope and, 321–­325, 609n16; emerging economies and, 326–­330
     Infinite accumulation principle, 7–­11, 228
     "Infinite horizon" model, 360, 613nn18–­19
     Inflation: and growth, 102–­103; French Revolution and, 104; twentieth century, 106–­109, 142, 149; redistribution via, 133–­134; assets and, 210–­212, 599n13; return on capital and, 452–­455; public debt and, 541, 544–­547, 648nn13,17
     Inheritance, dynamics of, 377–­429; flows and, 379–­382; three forces in, 383–­385; life expectancy and, 385–­390; age-­wealth profile and, 390–­396; impact of war on, 396–­398; in the twenty-­first century, 398–­401, 418–­421, 610nn32,34; stock of inherited wealth and, 401–­404; Vautrin's lecture and, 404–­406; Rastignac's dilemma and, 407–­409; rentiers and managers and, 410–­411, 418–­424; patrimonial society and, 411–­414, 619nn36–­37; as condition of civilization, 415–­416; meritocratic model and, 416–­420; global and Eu­ro­pe­an, 424–­429
     Inheritance society, 351–­353
     Inherited wealth, 18–­19, 26, 29; demographics and, 83–­84; income from, 238–­242, 246; sharp decrease in, 262; renewed importance of, 290; return on capital and, 351–­353; taxation and, 493, 497, 502–­503, 508, 525–­526, 637–­638n32
     Intellectual property, 49
     Interdecile ratios, 267–­269, 603nn23,24
     Interest, efforts to prohibit, 530–­531
     Interest rates, 52–­53, 210, 584n15, 589n10
     Intergenerational mobility, 420, 484, 631nn26,27
     Intergenerational warfare, 246
     International Comparison Program (ICP), 64
     International divergence, 463–­465
     International Monetary Fund. See IMF (International Monetary Fund)
     Internet bubble, 172
     Investments: in­e­qual­ity of, 430–­432, 452–­455; wealth rankings and, 432–­443; university endowments and, 447–­452; alternative, 449–­450, 454, 456; petroleum and, 455–­460, 462; sovereign wealth funds and, 455–­460
     Iraq, 537–­538
     Italy: growth rate of, 174, 445; savings in, 177–­178, 185; public wealth in, 184–­185; wealth tax in, 528–­529, 533
     Ivanishvili, Bidzina, 625n22
     James, Henry, fiction of, 152, 414
     Jantt, Markus, 631n28
     Japan: national income and, 63–­64, 66, 68; growth in, 86, 93, 95, 174–­176, 588n10; savings in, 177–­178; foreign assets in, 192–­194; capital/income ratio in, 195; in­e­qual­ity in, 322, 445; taxation and, 490, 498, 637n31
     Japa­nese bubble, 172, 597n30
     Jeanne, Olivier, 645n41
     Jefferson, Thomas, 158, 363
     Jobs, Steve, 440–­441
     Joint stock companies, 203
     Jones, Alice Hanson, 159, 347
     Jones, Charles I., 586n35
     Judet de la Combe, P., 644n30
     Judicial conservatism, 566, 653n49
     Justification of in­e­qual­ity, 264
     Kaldor, Nicholas, 231, 601n36, 634n1,
638n35
     Kaplan, Steven N., 607n41
     Katz, Lawrence, 306, 314–­315, 608n12,
640n53
     Kennickell, Arthur, 347
     Kesztenbaum, Lionel, 612n4
     Keynes, John Maynard, 135, 220, 231–­232, 600n22, 652n44
     King, Gregory, 56, 180, 590n1, 637n28
     King, Willford, 348, 506, 613n13
     Knowledge and skill diffusion, 21, 71, 313
     Kopczuk, Wojciech, 607n38
     Kotlikoff-­Summers thesis, 428, 622n63
     Krueger, Alan, 313, 608n10
     Krugman, Paul, 294
     Kubrick, Stanley, 620n40
     Kuczynski, Jürgen, 219–­220, 599n20
     Kumhof, Michael, 606n32
     Kuwait, 537
     Kuznets, Simon, 11–­17, 20, 23, 580nn9,11,14, 581nn15–­16, 582n36, 603n4
     Kuznets Curve, 13–­15, 237, 274, 336, 580n14
     Labor. See Capital-­labor split
     Labor, income from, 18, 21, 53. See also In­e­qual­ity of labor income
     Labrousse, Ernest, 582n34, 600n28
     Lagardère, Arnaud, 445
     Laissez faire doctrine, 136
     Lamont, Michèle, 417–­418, 621n49
     Lampman, Robert, 18, 582n27
     Land: price of, 5–­6, 151; rate of return on, 53–­54, 613n16; accounting and, 56; values, capital/income ratio and, 196–­198, 596n33
     Land, as capital, 47, 644n31; in Britain and France, 114, 117–­119, 122–­123; in Germany, 141; in America, 150–­151, 155; rural vs. urban, 197–­198
     Landais, Camille, 605n20, 626n34, 634n4
     Landier, Augustin, 639n47
     Landowners, Ricardo and, 5–­6
     Latin America, 62–­63, 195, 491
     Laval, Pierre, 285
     Lavoisier, Antoine, 56
     Law of cumulative growth, 74–­77
     Law of cumulative returns, 75, 77
     Laws of capitalism: first fundamental, 52–­55; second fundamental, 55, 166–­170
     Lebeaupin, A., 605n20
     Le Bras, Hervé, 587n5, 589n20
     Lefranc, Arnaud, 631n26
     Le mouvement du profit en France au 19e siècle (Bouvier, Furet, and Gillet), 575, 576, 582n34, 600n27
     Leroy-­Beaulieu, Paul, 30, 417, 503–­504, 506, 636nn20,21,22, 637n28
     Le Van, L., 591n18
     Levasseur, Pierre Emile, 617n10
     Liberalization, economic, 98–­99, 138–­139, 492
     "Life-­cycle theory of wealth," 384, 391–­392, 428
     Life expectancy, inheritance and, 385–­390, 400
     Limited liability corporations, 203
     Linder, Peter, 343
     Lindert, P., 603n26, 628n3
     Liquidity, 472, 548, 551
     Lonmin, Inc., 39–­40, 570
     L'Oréal, 440, 624n15
     Lower class, 250–­251
     Low growth. See Slow growth
     Lyndon, Barry, 620n40
     Maastricht Treaty, 556, 565–­566
     Maddison, Angus, 28, 59, 66, 74, 585nn20–­21, 586n30, 588n10
     Mad Men (TV series), 156
     Mahfouz, Naguib, 109
     Malinvaud, Edmond, 651n40
     Mallet, B., 612n7
     Malthus, Thomas, 4–­5, 579n1, 580n8
     Managers: super, 265, 291, 302–­303, 315–­321, 333–­335; society of, 276–­279, 373; Great Depression and, 285; compensation of, 331–­335, 505–­512, 639n47; basic arithmetic of, 410–­411
     Mansfield Park (Austen), 115, 120–­121, 207
     Marginal productivity: of capital, 69; theory of, 304–­308, 311, 314–­315, 330–­335; top marginal tax rates and, 509–­512
     Margo, R., 606n36
     Marikana tragedy, 39–­40, 68, 583n2
     Market(s): imperfections of, 27m 312, 423–­424; financial, 49, 58, 476; perfect capital, 214; collective decisions and, 569, 654n56
     Market vs. book value, 189–­191
     Marx, Karl, 5, 7–­11, 27, 531, 565, 579n4, 580nn6,78; falling rate of profit and, 52, 227–­230, 600n33; public debt and, 131–­132
     Marxists, 52, 219, 576, 655n2
     Masson, André, 633n43
     McGovern, George, 638n33
     Meade, James, 582n36, 638n35
     Meer, Jonathan, 632n31
     Meritocratic model: challenge to, 21, 26–­27; extremism and, 334, 416–­418, 620n46; belief and hope in, 419–­422; education and, 485–­487
     Middle class, 250–­251; patrimonial, 260–­262, 346–­347, 350
     Middle East, 537–­538
     Milanovic, Branko, 585n20, 603n26
     Military expenditures, 628n2
     Mill, John Stuart, 638n35
     Minimum wage, 308–­313, 608n5, 608nn5,6,7,8,9,10
     Mittal, Lakshmi, 445, 625n21
     Mixed economies, 136–­137, 140, 483
     Mixed incomes, 204
     Mobility: social, 84–­85, 484–­487; wage, 299–­300
     Modigliani, Franco, 232, 245, 384, 391, 396, 400, 428, 601n36, 621n55, 622n63
     Monetary History of the: United States (Friedman and Schwartz), 548–­549
     Monetary policy, 548–­553
     Monetary systems: stability of, 103–­105; growth and, 103–­109; in France, 104, 589n27, 590n29; in Britain, 105, 589–­590nn28,29; in Eurozone, 108; confidence in US dollar and, 156; in Eurozone, 544–­545, 554–­562, 565–­567, 653n47
     Money: meaning of, in literature, 105–­106, 109; twentieth century inflation and, 106–­109; gold standard and, 107, 547–­548, 589n28
     Monopoly, 214, 444
     Monopsony, 214, 312, 608n10
     Moral hierarchy of wealth, 443–­447
     Mortality, differential, 617n15
     Mortality multiplier, 612n7
     Mortality rate, 383–­388
     Mullainathan, Sendhil, 611n35
     Multinational corporations, 156
     Murnane, R., 632n30
     Murphy, Richard, 628n56
     Mutualization of Eu­ro­pe­an debt, 650n31
     Napoleon I, 162, 417, 620n46; Civil Code of, 362–­366, 613n21, 614n23
     National accounting, 55–­59, 92, 230, 269
     "National Bloc" majority, 499–­500
     National Health Ser­vice (Britain), 629n12
     National income: concept of, 43–­45, 583n7; growth of, 50–­51, 173–­183, 595n20; per capita, 53, 584n13; domestic product and, 68; over the long term, 164; top decile and, 322–­323
     Nationalization, 138–­139, 370
     National savings, 149–­150, 153; accumulation of wealth and, 166–­170, 173; negative, 185–­186, 595n18; China and, 462. See also Savings, private
     National solidarity tax, 370, 615n35
     National War Labor Board, 298, 308
     National wealth/capital, 19, 48–­49, 118–­119, 123, 197, 583n8; slavery and, 162–­163; in Eu­rope vs. United States, 164–­166; net foreign assets and, 191–­194; desirable level of, 562–­565
     Natural inequalities, 85
     Natural resources: as capital, 47; private appropriation of, 446; rent on, 459, 537–­539, 627n44; climate change and, 567–­569
     Naudet, J., 621n49
     Net asset positions, 49–­50, 191, 194; of rich countries, 465–­467, 541
     Net domestic product, 43
     Net foreign capital/assets, 49–­50; in America, 155–­156; rich countries and, 191–­194, 466
     Netherlands, 642n15
     New Deal, views of, 549
     New World. See America
     Nixon, Richard, 638n33
     Noah, Timothy, 640n52
     Nonwage workers, 203–­204
     Nordhaus, William, 568, 654n52
     North Africa, 62–­63, 491
     North America, 59–­61, 64; growth in, 81, 86, 93, 95, 97, 588n10; capital in, 140. See also Canada; United States
     North Iowa Community College, 447
     Norwegian sovereign wealth fund, 455, 626–­627n39
     Obama, Barack, 310, 313, 473
     Obiang, Teodorin, 446
     Occupy Wall Street movement, 254
     OECD (Or­ga­ni­za­tion for Economic Cooperation and Development) reports and statistics, 220, 267–­268
     Ohlsson, Henry, 614n27, 645n37
     Oil prices, 6–­7, 459. See also Petroleum
     Oligarchic divergence, 463–­465, 514, 627n49
     Output. See Income and output; Per capita output growth
     Paine, Thomas, 197, 644n34
     Palan, Ronen, 628n56
     Pamuk, Orhan, 109
     Pareto, Vilfredo, theory of, 364–­368, 610n19, 614nn25,30,32
     Parsons, Talcott, 384, 621n55
     Partnerships, 203
     Pasinetti, Luigi, 231
     Passeron, Jean-­Claude, 486
     Patrimonial capitalism, 173, 237, 473
     Patrimonial society: middle class and, 260–­262, 346–­347, 373; metamorphoses of, 339–­343; classic, 411–­414
     "Pay for luck," 335
     PAYGO systems, 487–­490, 633n45, 648n13, 652n42, 653n50
     Pension funds, 391–­392, 478, 487–­490, 627n47, 630n15
     Per capita income, 106, 122, 590n31, 590–­591n8,9
     Per capita output growth, 72–­74, 97, 510; stages of, 86–­87; purchasing power and, 87–­90; diversification of lifestyles and, 90–­93; end of, 93–­95; social change implications of 1 percent, 95–­96; in postwar period, 96–­99; bell curve of global, 99–­102; inflation and, 102–­103; monetary systems and, 103–­109
     Père Goriot (Balzac), 104, 106, 113–­115, 238–­240, 343, 412, 440
     Perfect capital market, 214
     Persuasion (Austen), 362
     Petroleum: investments and, 455–­460, 462, 627n49; rents, redistribution of, 537–­538
     Petty, William, 56, 590n1
     Phelps, Edmund, 651n40
     Philip, André, 615n35
     Pierson, Paul, 640n52
     P90/P10 ratio, 267–­269
     Po­liti­cal economy, 3–­5, 574
     Poll tax, 495, 634n3
     Pop­u­lar Front, 286, 649n25
     Population. See Demographic growth; Demographic transition
     Postel-­Vinay, Gilles, 18, 582n28, 599n14, 612nn4,5,9
     Power laws, 367–­368
     Prices: inflation and, 102–­103; monetary stability and, 103–­104; effects of vs. volume effects, 176–­177
     Price system, 5–­7
     Primogeniture, 362–­363, 365
     Prince­ton University, 447–­449
     Private wealth/capital, 50–­51, 57, 170–­183, 541; abolition of, 10; slavery and, 46, 158–­163, 593n16; defined, 46–­49, 123; and public wealth/capital, 123–­131, 142–­145, 153–­154, 183–­187, 569; in Eu­rope vs. United States, 164–­166; as disposable income, 180–­182; foundations and, 182–­183, 451–­452; world distribution of, 461–­462; public debt and, 541–­542, 567, 646–­647n2. See also Capital, metamorphoses of; In­e­qual­ity of capital own­ership; Inheritance, dynamics of
     Privatization, 136, 138–­139, 476; capital/income ratio and, 173, 183–­187
     Production: wages and profits and, 39; global distribution of, 59–­61; regional blocs and, 61–­64; global per capita output of, 62
     Production function, 216–­220
     Productive capital, 51–­52
     Productivity: knowledge and skill diffusion in, 21; slavery and, 163. See also Marginal productivity
     Productivity growth: purchasing power and, 86, 88, 90; structural growth and, 228; in twenty-­first century, 375; in the United States, 511
     Profits: nineteenth century, 8; vs. wages, 39–­40; rate of, 52, 227–­230, 584n15
     Progressive taxation: on capital, 1, 355, 370, 471, 473, 532, 615n35; on income, 12, 493; rise of, 153, 374, 498, 532–­533; vs. regressive taxation, 255, 355, 374, 395–­397; confiscatory tax rates and, 273, 505–­508, 512; justification for, 444, 497, 505, 524–­527, 640n51; on inheritance, 493, 497, 502–­503, 505, 508, 527, 637–­638n32; vs. proportional ("flat tax"), 495, 500–­501; structure of in­e­qual­ity and, 495–­496; on estates, 502–­505, 507; public debt and, 543–­544; Cyprus crisis and, 555–­556. See also Global tax on capital
     Progressive taxation, rethinking, 493–­514; question of, 493–­497; twentieth century evolution of, 498–­502; in the Third Republic, 502–­505; confiscatory tax rates and, 505–­508, 512; executive salary explosion and, 508–­512; top marginal rates and, 508–­514, 635n14. See also Global tax on capital
     Proletariat, misery of, 7–­8
     Property, 47, 49, 70, 569
     Property rights: varying views of, 70, 483, 535–­536; division of, 123; French estate tax and, 338, 374; revolutions and, 481
     Property taxes, 501, 517, 520, 529, 532–­533. See also Estate tax
     Prost, Antoine, 591n18
     Protectionism, 515–­516, 523, 534
     Proudhon, Pierre-­Joseph, 580n7
     Public debt, 114, 118, 540–­570; World War I and, 106–­107; public wealth and, 123–­127, 127–­129, 142, 153; reinforcement of private capital and, 129–­131; profit from, 131–­134; nineteenth vs. twentieth century, 132–­133; Ricardian equivalence and, 134–­135; reducing, 541–­544; default on, 542–­543; inflation and, 544–­547; central banks and, 547–­553; Cyprus crisis and, 553–­556; euro and Eurozone and, 556–­562, 650n32; government and capital accumulation and, 562–­565; deficits debate and, 565–­567, 653n47; climate change and, 567–­569; transparency and, 569–­570; interest rate on, 597–­598n1, 598n7; mutualizing Eu­ro­pe­an, 650n31; slow growth and, 653n50
     Public sector, or­ga­ni­za­tion of, 482–­483
     Public wealth/capital: defined, 46–­49, 123; privatization and, 46–­49, 123, 183–­187; public debt and, 123–­135, 142, 153, 541–­544; financial and nonfinancial, 124; historical perspective on, 126–­129; assets and, 135–­139, 143, 541–­542; desirable level of, 562–­565
     Purchasing power: parity in, 64–­67, 586nn26,27,28; increase in, 86–­90; inheritance and, 415–­416
     Qatar, 537
     Qian, Nancy, 17, 634n50, 646n43
     Quesnay, François, 603n26
     Rajan, Raghuram G., 606n32, 608n12, 639n48, 640n53
     Rancière, Jacques, 655n59
     Rancière, Romain, 606n32
     Rastignac's dilemma, 238–­242, 379, 407–­409, 412, 497
     Rate of interest, 52–­53, 210, 584n15, 598n10
     Rate of profit, 52, 227–­230, 584n14
     Rate of return on capital: in­e­qual­ity and, 1, 23, 25–­27, 84; first fundamental law of capitalism and, 52–­55; average long-­run, 53; determination of, 199–­212; pure, 201, 205–­206, 208–­209, 353–­355; historical perspective on, 206–­208; in twenty-­first century, 208–­209, 375; uses of capital and, 212–­213; marginal productivity of capital and, 213–­215; too much capital and, 215–­217, 223, 227–­230; capital's comeback and, 232–­233; growth rate and, 232–­233, 351, 353–­361, 364–­366, 431, 571–­572; time preference and stability of, 258–­361; inheritance and, 377–­378; inflation and, 452–­455; pensions and, 488–­489
     Rate of return on land, 53–­54
     Rauh, Joshua, 607n41
     Rawls, John, 480, 630n21, 631n22, 652n45
     Reagan, Ronald, 42, 98, 309
     Real estate: urban, 6, 197–­198; as capital/assets, 48, 55, 122, 164, 179, 210, 598n11; return on, 53–­54, 626n28; pricing of, 57–­58, 144–­145, 149–­150, 171–­173, 176, 187–­188, 191; rental value of, 209; own­ership of by centile, 260; size effects and, 454; taxes, 501, 517
     Recession (2008–­2009), 472–­474, 553–­554
     "Reconstruction capitalism," 397
     Redemption fund proposal, 544, 559, 647n9, 649n27
     Redistribution: inflation and, 133–­134, 544–­547; social state and, 479–­481; of petroleum rents, 537–­538; through immigration, 538–­539; central banks and, 547–­553; United States and, 638n33
     Regional blocs, 61–­64
     Regressive taxation, 255, 355, 374, 495–­497
     Regulation: transparency and, 519; global tax on capital and, 534–­536; of central banks, 548, 552–­553, 557–­558
     Renault, Louis, 137
     Renault Company, 137, 139
     Rent control, 149, 153
     Rentiers: society of, 264, 276–­278, 293, 370, 372–­373; fall of, 274, 369; basic arithmetic of, 410–­411; petits, 418–­421; as enemy of democracy, 422–­424
     Rent(s): land, 5–­6, 39, 53–­54, 56; capital and, 113, 115–­116; meaning of, 422–­424; on natural resources, 459, 537–­539, 627n44
     Rent-­seeking, 115–­116
     Replacement incomes, 477–­479, 602n9
     Residence and taxation, 562
     Residential capital, 48, 51–­52
     Retail ser­vice sector, 91
     Retained earnings, 176–­178
     Retirement: pension funds and, 391–­392, 478, 627n47; future of, 487–­490, 633n47
     Retirement, life-­cycle theory and, 384, 391–­392
     Return on capital. See Rate of return on capital; Rate of return on land
     Revell, J., 591n19
     Rey, Hélène, 597n31
     "Rhenish capitalism," 140–­146
     Ricardo, David, 5–­6, 9, 579n1, 580n8, 591n15; Ricardian equivalence and, 134–­135
     Rights-­based approach, 479–­481
     Rignano, Eugenio, 637n29
     "Rising human capital hypothesis," 21–­22
     Risk, 115–­116, 431
     Ritschl, Albrecht, 647n10
     Robinson, James A., 624n20, 639nn45,48
     Robinson, Joan, 231
     Rodrik, Dani, 651n35
     Roemer, John, 631n23
     Roine, Jesper, 18, 344, 614n27, 628n58
     Romer, Paul M., 586n35
     Roo­se­velt, Franklin D., 153, 286, 472–­473, 506–­507
     Rosanvallon, Pierre, 588n8, 614n24, 635n13
     Rosen, Harvey S., 632n31
     Rosenthal, Jean-­Laurent, 18, 599n14, 612nn4,5, 646n44
     Roy, René, 591n19
     Rus­sia, 186–­187, 554
     Rus­sia-­Ukraine bloc, 62–­63, 585n22
     Saez, Emmanuel, 17, 511, 581nn22,23, 606nn33,36, 607nn38,39, 613n32, 634n4, 638n38, 642n19, 643n21
     Samuelson, Paul, 137, 218, 231–­232
     Sandström, Susanna, 623n8
     Sartre, Jean-­Paul, 655n2
     Saudi Arabia, 538
     Saudi Arabia sovereign wealth fund, 457–­458
     Savings, private: rate of, 26, 174–­175, 177, 186; components of, 176–­178; durable goods and, 179–­180; middle class and, 260; concentration of wealth and, 351–­353, 377–­378, 617n18; retirement and, 384, 391–­392; in twenty-­first century, 400–­401. See also National savings
     Say, Jean-­Baptiste, 9, 579n2
     Scandinavian countries: income in­e­qual­ity in, 246–­250, 253, 255–­256; Gini coefficient and, 266
     Scarcity principle, 5–­7, 9, 27
     Scheve, Kenneth, 637n26
     Schinke, Christoph, 622n59
     Schlozman, K., 640n52
     Schmidt, Helmut, 652n43
     Schueller, Eugène, 440
     Schumpeter, Joseph, 137
     Schwartz, Anna, 548–­549
     Sciences Po, 486–­487, 632n37, 633n40
     Séaillès, M. J., 612n7
     Seligman, Edwin, 635n13
     Sen, Amartya, 480, 603n25
     Sense and Sensibility (Austen), 113, 362, 413–­414
     Ser­vice sector, 88, 90–­93
     Shareholder model, 145–­146
     Shares of Upper Income Groups in Income and Saving (Kuznets), 11–­13
     Shocks: in­e­qual­ity and, 8, 13–­15, 25, 271–­276, 293–­294, 323; growth and, 107, 109; capital and, 117, 121, 139, 141, 146–­150, 152–­153, 284; capital/income ratio and, 164, 167, 168, 170, 191, 206, 368–­369; short-­term, 244–­245, 311; concentration of wealth and, 346, 349, 350, 356; family fortunes and, 362, 364, 369; inheritance flows and, 380–­381, 396–­398
     Shorrocks, Anthony, 623n8
     Short-­termism, 214
     Siegfried, André, 615n35
     Simiand, François, 582n34, 600n28
     Size effects of assets, 453–­454
     Skills: and knowledge diffusion, 21, 71, 313; supply and demand of, 305–­308; in­e­qual­ity and, 419–­420
     Slavery, capital and, 46, 158–­163, 593n16
     Slim, Carlos, 444–­445, 624nn14,20
     Slow growth: in­e­qual­ity and, 25–­27, 42, 84, 166, 351–­358; return to, 72–­74, 84, 93–­95, 232–­233; beyond bubbles, 173–­183; inheritance and, 378, 400, 411; public debt and, 653n50
     Smith, Adam, 9, 579nn1,2, 654n56
     Social insurance contributions, 494–­495, 496, 641n10
     Socialism, capital and, 531
     Socialist movements, 8
     Social justice: democracy and, 26, 424, 571; meaning of, 31, 480; in­e­qual­ity and, 241, 287, 310, 350, 417, 537
     Social mobility: growth and, 84–­85; education and, 484–­487
     Social norms, executive compensation and, 332–­335
     Social own­ership, 145–­146
     Social scientists, 574–­575
     Social spending, 477–­479, 481–­483, 629n14; education and, 484–­487; retirement and, 487–­490
     Social state, 471–­492, 629n9; crisis of 2008 and, 472–­474; growth of, 474–­479; modern redistribution and, 479–­481; modernizing of, 481–­483; education and, 484–­487; retirement and, 487–­490; in poor and emerging countries, 490–­492; US view of, 549
     Social tables, 269–­270, 603n26
     Sole proprietorships, 203
     Solidarity tax on wealth. See France, wealth tax in
     Solow, Robert, 11, 15, 231–­232, 580n10, 586n35
     Soltow, Lee, 347
     Song, Jae, 607n38
     Sotura, Aurélie, 628n51
     South Africa, 161, 326–­328, 330; Marikana tragedy in, 39–­40, 68, 583n2
     South America. See Latin America
     South Asia, 491
     Sovereign wealth funds, 455–­460
     Soviet ­Union, 531–­532, 565, 637n27, 652n44
     Spain, wealth tax in, 533, 645n39
     Spanish bubble, 193, 596n27, 597n30
     "Specific investments" argument, 312
     Stagflation, 134, 138, 557
     Stakeholder model, 145–­146, 312
     Stamp, J. C., 612n7
     Stantcheva, Stefanie, 511
     Stasavage, David, 637n26
     State, economic role of, 136, 180–­181, 474, 476
     State, social. See Social state
     State interventionism, 98–­99, 136–­137, 473–­474
     Stern, Nicholas, 567–­569, 654n52
     Sterner, Thomas, 654n52
     Stiglitz, Joseph E., 603n25, 605n25
     Stock: capital as, 50; in postwar period, 149–­150, 153
     Stock market: capitalization of corporations and, 49, 54; Great Depression and, 150; prices, 171–­173, 187–­191
     Stone, Richard, 585n19
     Structural growth, 228
     Structures of in­e­qual­ity. See In­e­qual­ity, structures of
     Strutt, H. C., 612n7
     Sub-­Saharan Africa, 62–­64, 86, 491, 588n9
     Substitution, elasticity of, 216–­224, 600n32
     Superentrepreneurs, 607n43
     Supermanagers, 265, 291, 302–­303; in­e­qual­ity of labor income and, 315–­321, 333–­335; meritocratic beliefs and, 417
     Supersalaries, rise of, 298–­300
     Supply and demand: extreme changes in prices and, 6–­7, 579n3; convergence and, 21; of skills, 305–­308
     Suwa-­Eisenmann, Akiko, 612nn4,9
     Sweden, 344–­345, 346–­347, 475–­476, 498, 614n27
     Sylla, R., 613n16
     Taxation, 12, 493–­495; as source of data, 12, 16–­18; on capital, 208, 355–­356, 370, 373, 464, 471, 494, 525–­527, 652n43; progressive vs. regressive, 255, 355, 374, 495–­497; on wealth, 424, 524, 527–­530; confiscatory tax rates and, 473, 505–­508, 512; relative to national income, 474–­476; transparency and, 481; on inheritances, 493, 502–­503, 505, 508, 527, 637–­638n32; on consumption ("indirect"), 494, 496, 651n37; social insurance contributions and, 494–­495, 496, 641n10; progressive vs. proportional ("flat tax"), 495, 500–­501; categorical or schedular, 501; on property, 501, 517, 520, 529, 532–­533; on earned and unearned income, 507–­508; top marginal rates of, 508–­514; defining norms through, 520; public debt and, 541–­542; on Eurozone corporate profits, 560–­561; residence and, 562. See also Competition, fiscal; Estate tax; Global tax on capital; Income tax; Progressive taxation
     Tax havens, 465–­466, 521–­524, 641n9
     Tea Party, 474
     Technological progress, durable, 10
     Technology: return on capital and, 212–­213, 216; capital-­labor split and, 223–­224; caprices of, 234; educational system and, 304–­307
     Temin, Peter, 641n3
     Thatcher, Margaret, 42, 98
     Thiers, Adolphe, 417, 620n46
     Third Republic, 339, 344, 501–­505
     Time preference theory, 258–­361, 613n17
     Titanic (film), 152
     Tobin's Q, 190–­191
     Tocqueville, Alexis de, 152, 620n46
     Todd, Emmanuel, 587n5, 589n20
     Tolstoy, Alexei, Ibiscus, 446–­447
     Top marginal tax rates, 508–­514, 635n14
     Total income, 254–­255, 263–­265
     Touzery, Mirelle, 636n17
     Training: investment in, 22, 71; system, state of, 305–­307; in­e­qual­ity and, 419–­420
     Transfers in kind, 182, 477
     Transfers payments, 297–­298, 477–­479
     Transparency: taxation and, 12, 481, 504; lack of, 328–­329, 437, 473, 485, 487; progressive income tax and, 455; global tax on capital and, 515, 516, 518–­521; banking information and, 521–­524; public debt and, 569–­570
     Trea­sury bonds (US), 457
     Trente Glorieuses, 11, 15, 96–­99, 411, 589n20
     Troika, 553–­555
     Trusts, family, 451–­452
     Two Cambridges Debate, 230–­232
     "Two-­thirds bankruptcy," 129, 133
     U-curve: of capital/income ratio, 23, 25, 154, 195; of capital share of income, 200, 216; of inheritances, 385, 403, 425
     Unemployment insurance, 478
     United States: income in­e­qual­ity in, 12–­13, 23–­25, 247–­250, 256–­258, 264–­265; national income and, 61, 64, 66, 68; growth in, 78, 81, 96–­99, 174–­175, 510–­511, 595n20, 639n44; employment by sector in, 91; inflation in, 107; capital in, 140, 149, 150–­156; foreign capital/assets and, 151, 155–­156, 194, 596–­597n29, 597nn31,32; public debt of, 153; slavery in, 158–­163; savings in, 177–­178; explosion of in­e­qual­ity in, 291–­296, 314–­315, 323, 330–­333; taxation and, 292, 473, 498–­500, 505–­512, 636n16; estate taxes in, 338, 349; wealth distribution in, 347–­350; meritocratic beliefs in, 417; inheritances and, 427–­428; universities in, 447–­452, 485; taxes as share of national income, 475–­476, 490; social state in, 477–­479, 629n13, 630n17, 631n25. See also North America
     Universities: endowments of US, 447–­452, 625n23; cost of, 485–­486, 631–­632n29, 632nn34,35,37,38, 633nn40,41
     Upper class, 250–­251
     Usury, prohibition of, 530–­531
     Valdenaire, M. 632n36
     Valuables, 179–­180
     "Value added," 331, 584n16, 600n30
     Vanoli, André, 585n19
     Vauban, Sébastien Le Prestre de, 56, 501,
590n1
     Vautrin's lesson, 238–­242, 379, 404–­407, 410, 412, 619n37
     Veblen, Thorstein, 621n48
     Velde, F., 598n7
     Verba, Sidney, 640n52
     Verdier, Thierry, 639nn45,48
     Véron, Nicolas, 641n4
     Victory Tax Act, 507
     Volkswagen, 143
     Volume effects: vs. prices effects, 176–­177, 221; vs. concentration effects, 410
     Von Neumann, John, 651n40
     Voting: in France, 424, 622n58; collective decisions and, 569, 654n56
     Wage in­e­qual­ity, 272–­274, 287–­300, 605n19; education and, 304–­307; institutions and, 307–­310; wage scales and minimum wage and, 310–­313; in­e­qual­ity explosion and, 330–­333; meritocratic beliefs and, 416–­418
     Wages: nineteenth century, 7–­8, 9–­10, 580n5; vs. profits, 39–­40; income from, 242; mean and, 257, 289; mobility of, 299–­300; minimum, 308–­313, 608nn5,6,7,8,9,10
     Waldenström, Daniel, 18, 344, 614n27, 628n58, 645n37
     Washington Square (James), 414
     Wealth: capital and, 47–­50. See also Distribution of wealth; Distribution of wealth debate; Global in­e­qual­ity of wealth; In­e­qual­ity of capital own­ership; Inheritance, dynamics of; Inherited wealth; National wealth/capital; Private wealth/capital; Public wealth/capital
     Wealth accumulation, 166–­170; as divergent force, 23; arbitrariness of, 446; golden rule of, 563–­567. See also In­e­qual­ity of capital own­ership
     Wealth-­age profile, 393–­399
     Wealth gap. See In­e­qual­ity of capital own­ership
     Wealth rankings, 432–­443, 623n6
     Wealth tax, 424, 524, 527–­530, 533, 643–­644n26, 645nn38,39
     Wedgwood, Josiah, 508, 638n36
     Weil, Patrick, 651n34
     Weir, D., 598n7
     Welfare, stigma of, 478–­479
     Welles, Orson, 414
     Wilkins, Mira, 592n13
     Williamson, Jeffrey, 600n28, 603n26
     Wolff, Edward, 301, 347, 607n39,
623n8
     Wong, R. Bin, 646n44
     World Bank, 534
     World Wars I and II, 106–­107, 147–­149, 153, 275, 396–­398. See also Shocks
     WTID (World Top Incomes Database), 17–­18, 28, 268, 283, 581n25
     Yale University, 447–­450
     Young, Arthur, 4, 225, 416, 620n44
     Young, Michael, 620n45
     Zacharias, Ajit, 301, 607n39
     Zingales, Luigi, 639n48
     Zucman, Gabriel, 19, 466, 582n31, 628n57,
640n2