Capital in the Twenty-First Century

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.

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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.