Capital in the 21st century
Thomas Piketty
Paris School of Economics
March 2014• This presentation is based upon Capital in the 21st century(Harvard University Press, March 2014)• This book studies the global dynamics of income and wealthdistribution since 18c in 20+ countries; I use historical datacollected over the past 15 years together with Atkinson, Saez,Postel-Vinay, Rosenthal, Alvaredo, Zucman, and 30+ others.
• The book includes four parts:
Part 1. Income and capitalPart 2. The dynamics of the capital/income ratio
Part 3. The structure of inequalities
Part 4. Regulating capital in the 21st century• In this presentation I will present some results from Parts 2 & 3,
focusing upon the long-run evolution of capital/income ratios andwealth concentration(all graphs and series are available on line:
see http://piketty.pse.ens.fr/capital21c )This presentation: three points• 1. The return of a patrimonial (or wealth-based) society in theOld World (Europe, Japan). Wealth-income ratios seem to be
returning to very high levels in low growth countries.
Intuition: in a slow-growth society, wealth accumulated in thepast can naturally become very important. In the very long run,this can be relevant for the entire world.
• 2. The future of wealth concentration: with high r - g during 21c(r = net-of-tax rate of return, g = growth rate), then wealthinequality might reach or surpass 19c oligarchic levels;
conversely, suitable institutions can allow to democratize wealth.
• 3. Inequality in America: is the New World developing a new
inequality model that is based upon extreme labor income
inequality more than upon wealth inequality? Is it more meritbased, or can it become the worst of all worlds?

1. The return of a wealth-based society• Wealth = capital K = everything we own and that can be sold on amarket (net of all debts) (excludes human K, except in slave societies)• In textbooks, wealth-income & capital-ouput ratios are supposed tobe constant. But the so-called « Kaldor facts » actually rely on little
historical evidence.
• In fact, we observe in Europe & Japan a large recovery of β=K/Y inrecent decades:
β=200-300% in 1950-60s → β=500-600% in 2000-10s(i.e. average wealth K was about 2-3 years of average income Y around 1950-1960;
it is about 5-6 years in 2000-2010)(with β≈600%, if Y≈30 000€ per capita, then K≈180 000€ per capita)(currently, K ≈ half real estate, half financial assets)

Are we heading back to the β=600-700% observed in thewealth-based societies of 18c-19c ? Or even more?

• The simplest way to think about this is the following: in thelong-run, β=s/g with s = (net-of-depreciation) saving rate
and g = economy’s growth rate (population + productivity)
With s=10%, g=3%, β≈300%; but if s=10%, g=1,5%, β≈600%= in slow-growth societies, the total stock of wealthaccumulated in the past can naturally be very important→ capital is back because low growth is back(in particular because population growth↓0)→ in the long run, this can be relevant for the entire planet
Note: β=s/g = pure stock-flow accounting identity; it is true whatever
the combination of saving motives• Will the rise of capital income-ratio β also lead to a rise of the capitalshare α in national income?
• If the capital stock equals β=6 years of income and the average return tocapital is equal r=5% per year, then the share of capital income (rent,dividends, interest, profits, etc.) in national income equals α = r x β = 30%• Technically, whether a rise in β also leads to a rise in capital share α = r βdepends on the elasticity of substitution σ between capital K and labor L
in the production function Y=F(K,L)• Intuition: σ measures the extent to which workers can be replaced bymachines (e.g. Amazon’s drones)• Standard assumption: Cobb-Douglas production function (σ=1) = as thestock β↑, the return r↓ exactly in the same proportions, so that α = r x β
remains unchanged, like by magic = a stable world where the capital-labor
split is entirely set by technology• But if σ>1, then the return to capital r↓ falls less than the volume ofcapital β↑, so that the product α = r x β ↑• Exactly what happened since the 1970s-80s: both the ratio β and thecapital share α have increased• With a large rise in β, one can get large rise in α with aproduction function F(K,L) that is just a little bit more
substituable than in the standard Cobb-Douglas model(say if σ=1,5 instead of 1)• Maybe it is natural to expect σ↑over the course of history:
more and more diversified uses for capital;
extreme case: pure robot-economy (σ=infinity)• Less extreme case: there are many possible uses for capital(machines can replace cashiers, drones can replace Amazon’s
delivery workers, etc.), so that the capital share α↑
continuously; there’s no natural corrective mechanism for this• The rise of β and α can be a good thing (we could all devote
more time to culture, education, health…, rather than to ourown subsistance), assuming one can answer the following
question: who owns the robots?

2. The future of wealth concentration• In all European countries (UK, France, Sweden…), wealthconcentration was extremely high in 18c-19c & until WW1:
about 90% of aggregate wealth for top 10% wealth holders
about 60% of aggregate wealth for top 1% wealth-holders= the classic patrimonial (wealth-based) society: a minority lives off
its wealth, while the rest of the populaton works (Austen, Balzac)• Today wealth concentration is still very high, but less extreme:
about 60-70% for top 10%; about 20-30% for top 1%
the bottom 50% still owns almost nothing (<5%)
but the middle 40% now owns 20-30% of aggregate wealth= the rise of a patrimonial middle class• How did it happen, and will it last? Will the patrimonial middle
class expend, or will it shrink?

• Key finding: there was no decline in wealth concentration
prior to World War shocks; was it just due to shocks?
• Q.: Apart from shocks, what forces determine the long-run
level of wealth concentration?
• A.: In any dynamic, multiplicative wealth accumulation modelwith random individual shocks (tastes, demographic,returns,wages,..), the steady-state level of wealth concentration is anincreasing function of r - g(with r = net-of-tax rate of return and g = growth rate)• With growth slowdown and rising tax competition to attract
capital, r - g might well rise in the 21c → back to 19c levels• Future values of r also depend on technology (σ>1?)• Under plausible assumptions, wealth concentration mightreach or surpass 19c record levels: see global wealth rankings3. Inequality in America• Inequality in America = a different structure as inEurope: more egalitarian in some ways, moreinegalitarian in some other dimensions• The New World in the 19th century: the land ofopportunity (capital accumulated in the past matteredmuch less than in Europe; perpetual demographic
growth as a way to reduce the level of inherited wealthand wealth concentration)… and also the land of slavery• Northern US were in many ways more egalitarian thanOld Europe; but Southern US were more inegalitarian• We still have the same ambiguous relationship ofAmerica with inequality today: in some ways moremerit-based; in other ways more violent (prisons)• The US distribution of income has become moreunequal than in Europe over the course of the 20thcentury; it is now as unequal as pre-WW1 Europe• But the structure of inequality is different: US 2013
has less wealth inequality than Europe 1913, buthigher inequality of labor income• Higher inequality of labor income in the US could reflect
higher inequality in education investment; but it also reflects
a huge rise of top executive compensation that it very hard
to explain with education and productivity reasonning alone• In the US, this is sometime described as more merit-based:
the rise of top labor incomes makes it possible to becomerich with no inheritance (≈Napoleonic prefets)• Pb = this can be the worst of all worlds for those who areneither top income earners nor top successors: they arepoor, and they are depicted as dump & undeserving (at least,nobody was trying to depict Ancien Regime inequality as fair)• It is unclear whether rise of top incomes has a lot to do withmerit or productivity: sharp decline in top tax rates & rise of
CEO bargaining power are more convincing explanations;chaotic US history of social norms regarding inequality

Conclusions• The history of income and wealth inequality is always political,
chaotic and unpredictable; it involves national identities andsharp reversals; nobody can predict the reversals of the future• Marx: with g=0, β↑∞, r→0 : revolution, war• My conclusions are less apocalyptic: with g>0, at least we have asteady-state β=s/g• But with g>0 & small, this steady-state can be rather gloomy: it caninvolve a very large capital-income ratio β and capital share α, aswell as extreme wealth concentration due to high r-g• This has nothing to do with a market imperfection: the more
perfect the capital market, the higher r-g• The ideal solution: progressive wealth tax at the global scale,based upon automatic exchange of bank information• Other solutions involve authoritarian political & capital controls(China, Russia..), or perpetual population growth (US), or inflation,or some mixture of all