Capital in the Twenty-First Century

By Thomas Piketty

When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.

Indeed, the distribution of wealth is too important an issue to be left to economists, sociologists, historians, and philosophers. It is of interest to everyone, and that is a good thing. The concrete, physical reality of inequality is visible to the naked eye and naturally inspires sharp but contradictory political judgments. *

Will the world in 2050 or 2100 be owned by traders, top managers, and the superrich, or will it belong to the oil-producing countries or the Bank of China?

Or perhaps it will be owned by the tax havens in which many of these actors will have sought refuge. It would be absurd not to raise the question of who will own what and simply to assume from the outset that growth is naturally “balanced” in the long run.

The economists of the nineteenth century deserve immense credit for placing the distributional question at the heart of economic analysis and for seeking to study long-term trends. Their answers were not always satisfactory, but at least they were asking the right questions.

It is long since past the time when we should have put the question of inequality back at the center of economic analysis and begun asking questions first raised in the nineteenth century.

This book is based on sources of two main types, which together make it possible to study the historical dynamics of wealth distribution: sources dealing with the inequality and distribution of income, and sources dealing with the distribution of wealth and the relation of wealth to income.

The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms. In particular, the reduction of inequality that took place in most developed countries between 1910 and 1950 was above all a consequence of war and of policies adopted to cope with the shocks of war.

Similarly, the resurgence of inequality after 1980 is due largely to the political shifts of the past several decades, especially in regard to taxation and finance.

The dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence. Furthermore, there is no natural, spontaneous process to prevent destabilizing, inegalitarian forces from prevailing permanently. *

The main forces for convergence are the diffusion of knowledge and investment in training and skills.

Knowledge and skill diffusion is the key to overall productivity growth as well as the reduction of inequality both within and between countries. *

We see this at present in the advances made by a number of previously poor countries, led by China.

The technological convergence process may be abetted by open borders for trade, but it is fundamentally a process of the diffusion and sharing of knowledge—the public good par excellence—rather than a market mechanism. *

Over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills.

It is obvious that lack of adequate investment in training can exclude entire social groups from the benefits of economic growth.

Growth can harm some groups while benefiting others * .

I will show that this spectacular increase in inequality largely reflects an unprecedented explosion of very elevated incomes from labor, a veritable separation of the top managers of large firms from the rest of the population.

This phenomenon is seen mainly in the United States and to a lesser degree in Britain, and it may be possible to explain it in terms of the history of social and fiscal norms in those two countries over the past century.

If the rate of return [on capital] remains significantly above the growth rate for an extended period of time, then the risk of divergence in the distribution of wealth is very high.

In a sense, it sums up the overall logic of my conclusions.

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income.

Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels—levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.

To sum up what has been said thus far: the process by which wealth is accumulated and distributed contains powerful forces pushing toward divergence, or at any rate toward an extremely high level of inequality.

The likely decrease in the rate of growth of both the population and the economy in coming decades makes this trend all the more worrisome.

To put it bluntly, the discipline of economics has yet to get over its childish passion for mathematics and for purely theoretical and often highly ideological speculation, at the expense of historical research and collaboration with the other social sciences.

The truth is that economics should never have sought to divorce itself from the other social * sciences and can advance only in conjunction with them.

In my mind, this book is as much a work of history as of economics.

For those who own nothing but their labor power and who often live in humble conditions (not to say wretched conditions in the case of eighteenth-century peasants), it is difficult to accept that the owners of capital—some of whom have inherited at least part of their wealth—are able to appropriate so much of the wealth produced by their labor.

In an ideal society, how would one arrange the division between capital and labor? How should one think about the problem?

What exactly do we know about the evolution of the capital-labor split since the eighteenth century?

For one thing, the capital-labor split varied widely over the course of the twentieth century.

Briefly, the shocks that buffeted the economy in the period 1914–1945—World War I, the Bolshevik Revolution of 1917, the Great Depression, World War II, and the consequent advent of new regulatory and tax policies along with controls on capital—reduced capital’s share of income to historically low levels in the 1950s.

The growth of capital’s share accelerated with the victories of Margaret Thatcher in England in 1979 and Ronald Reagan in the United States in 1980, marking the beginning of a conservative revolution.

Then came the collapse of the Soviet bloc in 1989, followed by financial globalization and deregulation in the 1990s. All of these events marked a political turn in the opposite direction from that observed in the first half of the twentieth century. By 2010, and despite the crisis that began in 2007–2008, capital was prospering as it had not done since 1913.

But what is capital? What are its limits? What forms does it take? How has its composition changed over time?

In this book, capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market.

Capital includes all forms of real property (including residential real estate) as well as financial and professional capital (plants, infrastructure, machinery, patents, and so on) used by firms and government agencies.

To summarize, I define “national wealth” or “national capital” as the total market value of everything owned by the residents and government of a given country at a given point in time, provided that it can be traded on some market.

National wealth = private wealth + public wealth

Public wealth in most developed countries is currently insignificant (or even negative, where the public debt exceeds public assets). As I will show, private wealth accounts for nearly all of national wealth almost everywhere.

One further point: total national wealth can always be broken down into domestic capital and foreign capital: National wealth = national capital = domestic capital + net foreign capital.

Globally, of course, all the net positions must add up to zero, so that total global wealth equals the “domestic” capital of the planet as a whole.

Income disparities are partly the result of unequal pay for work and partly of much larger inequalities in income from capital, which are themselves a consequence of the extreme concentration of wealth.

I can now present the first fundamental law of capitalism, which links the capital stock to the flow of income from capital.

The capital/income ratio 尾 is related in a simple way to the share of income from capital in national income, denoted 伪. The formula is 伪 = r 脳尾 where r is the rate of return on capital.

Now that the key concepts of output and income, capital and wealth, capital/income ratio, and rate of return on capital have been explained, I will examine in greater detail how these abstract quantities can be measured and what such measurements can tell us about the historical evolution of the distribution of wealth in various countries.

One conclusion stands out in this brief history of national accounting: national accounts are a social construct in perpetual evolution. They always reflect the preoccupations of the era when they were conceived.19 We should be careful not to make a fetish of the published figures.

National accounts represent the only consistent, systematic attempt to analyze a country’s economic activity. They should be regarded as a limited and imperfect research tool, a compilation and arrangement of data from highly disparate sources.

The other major limitation of official national accounts, apart from their lack of historical perspective, is that they are deliberately concerned only with aggregates and averages and not with distributions and inequalities.

National accounts thus constitute a crucial element of our analyses, but only when completed with additional historical and distributional data.

From 1900 to 1980, 70–80 percent of the global production of goods and services was concentrated in Europe and America, which incontestably dominated the rest of the world. By 2010, the European–American share had declined to roughly 50 percent, or approximately the same level as in 1860. In all probability, it will continue to fall and may go as low as 20–30 percent at some point in the twenty-first century.

To sum up, global inequality ranges from regions in which the per capita income is on the order of 150–250 euros per month (sub-Saharan Africa, India) to

regions where it is as high as 2,500–3,000 euros per month (Western Europe, North America, Japan), that is, ten to twenty times higher. The global average, which is roughly equal to the Chinese average, is around 600–800 euros per month.

Overall, the European powers in 1913 owned an estimated one-third to one-half of the domestic capital of Asia and Africa and more than three-quarters of their industrial capital.

Inequality of capital ownership is already difficult to accept and peacefully maintain within a single national community. Internationally, it is almost impossible to sustain without a colonial type of political domination.

To sum up, historical experience suggests that the principal mechanism for convergence at the international as well as the domestic level is the diffusion of knowledge. In other words, the poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming the property of the wealthy.

Above all, knowledge diffusion depends on a country’s ability to mobilize financing as well as institutions that encourage large-scale investment in education and training of the population while guaranteeing a stable legal framework that various economic actors can reliably count on. It is therefore closely associated with the achievement of legitimate and efficient government.

A global convergence process in which emerging countries are catching up with developed countries seems well under way today, even though substantial inequalities between rich and poor countries remain.

Beyond the central issue of convergence, however, the point I now want to stress is that the twenty-first century may see a return to a low-growth regime.

In 2013–2014, for example, global economic growth will probably exceed 3 percent, thanks to very rapid progress in the emerging countries. But global population is still growing at an annual rate close to 1 percent, so that global output per capita is actually growing at a rate barely above 2 percent.

According to the best available estimates, global output grew at an average annual rate of 1.6 percent between 1700 and 2012, 0.8 percent of which reflects population growth, while another 0.8 percent came from growth in output per head.

Concretely, the population of the world grew at an average annual rate of barely 0.8 percent between 1700 and 2012. Over three centuries, however, this meant that the global population increased more than tenfold.

A planet with about 600 million inhabitants in 1700 had more than 7 billion in 2012.

The central thesis of this book is precisely that an apparently small gap between the return on capital and the rate of growth can in the long run have powerful and destabilizing effects on the structure and dynamics of social inequality.

Between 1970 and 1990, global population was still growing 1.8 percent annually, almost as high as the absolute historical record of 1.9 percent achieved in the period 1950–1970. For the period 1990–2012, the average rate is still 1.3 percent, which is extremely high.

Between 1990 and 2012, the population of Europe was virtually stagnant, and the population of several countries actually decreased.

Note, however, that if the rate of population growth observed from 1700 to 2012—0.8 percent per year—were to continue for the next three centuries, the world’s population would be on the order of 70 billion in 2300.

The most likely hypothesis is that the global population growth rate over the next several centuries will be significantly less than 0.8 percent.

Hence there is no doubt that economic growth led to a significant improvement in standard of living over the long run. The best available estimates suggest that global per capita income increased by a factor of more than 10 between 1700 and 2012 (from 70 euros to 760 euros per month) and by a factor of more than 20 in the wealthiest countries (from 100 to 2,500 euros per month).

Now to consider the future. Will the spectacular increase in per capita output I have just described inexorably slow in the twenty-first century? Are we headed toward the end of growth for technological or ecological reasons, or perhaps both at once?

The key point is that there is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5 percent over a lengthy period of time.

It is important to bear this reality in mind as I proceed, because many people think that growth ought to be at least 3 or 4 percent per year. As noted, both history and logic show this to be illusory.

The history of the past two centuries makes it highly unlikely that per capita output in the advanced countries will grow at a rate above 1.5 percent per year

This level of growth cannot be achieved, however, unless new sources of energy are developed to replace hydrocarbons, which are rapidly being depleted.23 This is only one scenario among many.

Economic growth is quite simply incapable of satisfying this democratic and meritocratic hope, which must create specific institutions for the purpose and not rely solely on market forces or technological progress.

To recapitulate, global growth over the past three centuries can be pictured as a bell curve with a very high peak. In regard to both population growth and per capita output growth, the pace gradually accelerated over the course of the eighteenth and nineteenth centuries, and especially the twentieth, and is now most likely returning to much lower levels for the remainder of the twenty-first century.

The nature of capital has changed: it once was mainly land but has become primarily housing plus industrial and financial assets. Yet it has lost none of its importance.

It was during the nineteenth century that British subjects began to accumulate considerable assets in the rest of the world, in amounts previously unknown and never surpassed to this day. By the eve of World War I, Britain had assembled the world’s preeminent colonial empire and owned foreign assets equivalent to nearly two years of national income, or 6 times the total value of British farmland (which at that point was worth only 30 percent of national income).

It is important to understand that these very large net positions in foreign assets allowed Britain and France to run structural trade deficits in the late nineteenth and early twentieth century.

In other words, the rest of the world worked to increase consumption by the colonial powers and at the same time became more and more indebted to those same powers.

In the wake of the cumulative shocks of two world wars, the Great Depression, and decolonization, these vast stocks of foreign assets would eventually evaporate. *

Regardless of the imperfections of measurement, the crucial fact here is that private wealth in 2010 accounts for virtually all of national wealth in both countries: more than 99 percent in Britain and roughly 95 percent in France, according to the latest available estimates. In any case, the true figure is certainly greater than 90 percent.

To a first approximation, public assets and liabilities, and a fortiori the difference between the two, have generally represented very limited amounts compared with the enormous mass of private wealth.

Hence it is not surprising that private wealth has always dominated public wealth. Conversely, neither country has ever amassed public debts sufficiently large to radically alter the magnitude of private wealth.

From the standpoint of people with the means to lend to the government, it is obviously far more advantageous to lend to the state and receive interest on the loan for decades than to pay taxes without compensation.

It enables us to understand why nineteenth-century socialists, beginning with Marx, were so wary of public debt, which they saw—not without a certain perspicacity—as a tool of private capital.

Nevertheless, German private wealth in 2010 was noticeably lower than private wealth in Britain and France:

Currently, in the early 2010s, the richest 10 percent own around 60 percent of national wealth in most European countries, and in particular in France,Germany, Britain, and Italy. The most striking fact is no doubt that in all these societies, half of the population own virtually nothing.

To my knowledge, no society has ever existed in which ownership of capital can reasonably be described as “mildly” inegalitarian, by which I mean a distribution in which the poorest half of society would own a significant share (say, one-fifth to one-quarter) of total wealth.

For millions of people, “wealth” amounts to little more than a few weeks’ wages in a checking account or low-interest savings account, a car, and a few pieces of furniture.

The inescapable reality is this: wealth is so concentrated that a large segment of society is virtually unaware of its existence.

Housing is the favorite investment of the middle class and moderately well-to-do, but true wealth always consists primarily of financial and business assets.

And the poorer half of the population are as poor today as they were in the past, with barely 5 percent of total wealth in 2010, just as in 1910. Basically, all the middle class managed to get its hands on was a few crumbs: scarcely more than a third of Europe’s wealth and barely a quarter in the United States.

It is tempting to conclude that nothing has really changed: inequalities in the ownership of capital are still extreme

Nevertheless, the crumbs that the middle class has collected are important, and it would be wrong to underestimate the historical significance of the change.

Indeed, whether such extreme inequality is or is not sustainable depends not only on the effectiveness of the repressive apparatus but also, and perhaps primarily, on the effectiveness of the apparatus of justification. If inequalities are seen as justified, say because they seem to be a consequence of a choice by the rich to work harder or more efficiently than the poor, or because preventing the rich from earning more would inevitably harm the worst-off members of society, then it is perfectly possible for the concentration of income to set new historical records.

I want to insist on this point: the key issue is the justification of inequalities rather than their magnitude as such. That is why it is essential to analyze the structure of inequality.

The future could hold in store a new world of inequality more extreme than any that preceded it.

The increase in inequality since 1970 has not been the same everywhere, which again suggests that institutional and political factors played a key role.

There was no gradual, consensual, conflict-free evolution toward greater equality. In the twentieth century it was war, and not harmonious democratic or economic rationality, that erased the past and enabled society to begin anew with a clean slate.

Is it possible that the increase of inequality in the United States helped to trigger the financial crisis of 2008? Given the fact that the share of the upper decile in US national income peaked twice in the past century, once in 1928 (on the eve of the crash of 1929) and again in 2007 (on the eve of the crash of 2008), the question is difficult to avoid. In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation’s financial instability. The reason is simple: one consequence of increasing inequality was virtual stagnation of the purchasing power of the lower and middle classes in the United States, which inevitably made it more likely that modest households would take on debt, especially since unscrupulous banks and financial intermediaries, freed from regulation and eager to earn good yields on the enormous savings injected into the system by the well-to-do, offered credit on increasingly generous terms.

It is hard to imagine an economy and society that can continue functioning indefinitely with such extreme divergence between social groups.

Let me return now to the causes of rising inequality in the United States. The increase was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among top managers of large firms.

What caused the explosion of wage inequalities and the rise of the supermanager in the United States after 1980?

Increased wage inequality in the United States is due to a failure to invest sufficiently in higher education. More precisely, too many people failed to receive the necessary training, in part because families could not afford the high cost of tuition.

With respect to labor as well as to increase the average productivity of the labor force and the overall growth of the economy is surely to invest in education.

All signs are that the Scandinavian countries, where wage inequality is more moderate than elsewhere, owe this result in large part to the fact that their educational system is relatively egalitarian and inclusive.

It is striking to learn that in terms of purchasing power, the minimum wage reached its maximum level nearly half a century ago

Clearly, the minimum wage has an impact at the bottom of the distribution but much less influence at the top, where other forces are at work.

To sum up: the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills. Over the long run, minimum wages and wage schedules cannot multiply wages by factors of five or ten: to achieve that level of progress, education and technology are the decisive forces. Nevertheless, the rules of the labor market play a crucial role in wage setting during periods of time determined by the relative progress of education and technology.

The explosion of very high salaries occurred in some developed countries but not others. This suggests that institutional differences between countries played a central role.

The rise of the supermanager is largely an Anglo-Saxon phenomenon. Since 1980 the share of the upper centile in national income has risen significantly in the United States, Great Britain, Canada, and Australia

In all the English-speaking countries, the primary reason for increased income inequality in recent decades is the rise of the supermanager in both the financial and nonfinancial sectors.

If the rise of the supermanager were a purely technological phenomenon, it would be difficult to understand why such large differences exist between otherwise quite similar countries.

Furthermore, the higher one climbs in the income hierarchy, the more spectacular the raises. Even if the number of individuals benefiting from such salary increases is fairly limited, they are nevertheless quite visible, and this visibility naturally raises the question of what justifies such high levels of compensation.

In all the wealthy countries, including continental Europe and Japan, the top thousandth enjoyed spectacular increases in purchasing power in 1990–2010, while the average person’s purchasing power stagnated.

The transfer of income to “the 1 percent” involves only two to three points of national income in continental Europe and Japan compared with 10 to 15 points in the United States—5 to 7 times greater.

It may be excessive to accuse senior executives of having their “hands in the till,” but the metaphor is probably more apt than Adam Smith’s metaphor of the market’s “invisible hand.” In practice, the invisible hand does not exist, any more than “pure and perfect” competition does, and the market is always embodied in specific institutions such as corporate hierarchies and compensation committees.

Simply put, wage inequalities increased rapidly in the United States and Britain because US and British corporations became much more tolerant of extremely generous pay packages after 1970.

It has not always been this way—far from it: recall that in the 1950s and 1960s the United States was more egalitarian than France, especially in regard to the wage hierarchy. But it has been this way since 1980, and all signs are that this change in senior management compensation has played a key role in the evolution of wage inequalities around the world.

Of course changes in tax laws are themselves linked to changes in social norms pertaining to inequality, but once set in motion they proceed according to a logic of their own.

The decrease in the top marginal income tax rate led to an explosion of very high incomes, which then increased the political influence of the beneficiaries of the change in the tax laws, who had an interest in keeping top tax rates low or even decreasing them further and who could use their windfall to finance political parties, pressure groups, and think tanks.

Let me turn now to the question of inequality of wealth and its historical evolution.

The question is all the more important because capital ownership is apparently becoming increasingly concentrated once again today, as the capital/income ratio rises and growth slows. The possibility of a widening wealth gap raises many questions as to its long-term consequences. In some respects it is even more worrisome than the widening income gap between supermanagers and others, which to date remains a geographically limited phenomenon.

In all known societies, at all times, the least wealthy half of the population own virtually, nothing the top decile of the wealth hierarchy own a clear majority of what there is to own and the remainder of the population own from 5 to 35 percent of all wealth.

Why were inequalities of wealth so extreme, and increasing, before World War I? And why is the concentration of wealth today significantly below its historical record high? Finally, is this state of affairs irreversible?

There is no doubt that inequality of wealth today stands significantly below its level of a century ago. The essential difference is that there is now a patrimonial middle class, which owns about a third of national wealth—a not insignificant amount.

In every case, we find that what the wealthiest 10 percent lost mainly benefited the “patrimonial middle class” and did not go to the poorest half of the population, whose share of total wealth has always been minuscule

The major structural transformation was the emergence of a middle group, representing nearly half the population, consisting of individuals who managed to acquire some capital of their own—enough so that collectively they came to own one-quarter to one-third of the nation’s total wealth.

The differences between the European and US experiences are clear. In Europe, the twentieth century witnessed a total transformation of society:

This is part of the explanation for the great wave of enthusiasm that swept over Europe in the period 1945–1975. People felt that capitalism had been overcome and that inequality and class society had been relegated to the past.

It also explains why Europeans had a hard time accepting that this seemingly ineluctable social progress ground to a halt after 1980, and why they are still wondering when the evil genie of capitalism will be put back in its bottle.

Throughout most of human history, the inescapable fact is that the rate of return capital was always at least 10 to 20 times greater than the rate of growth of output (and income). Indeed, this fact is to a large extent the very foundation of society itself: it is what allowed a class of owners to devote themselves to something other than their own subsistence.

The pure rate of return on capital—generally 4–5 percent—has throughout history always been distinctly greater than the global growth rate, but the gap between the two shrank significantly during the twentieth century, especially in the second half of the century, when the global economy grew at a rate of 3.5–4 percent a year. In all likelihood, the gap will widen again in the twenty-first century as growth (especially demographic growth) slows.

Ultimately, we find that in the twentieth century, both fiscal and nonfiscal shocks created a situation in which, for the first time in history, the net return on capital was less than the growth rate.

Concatenation of circumstances (wartime destruction, progressive tax policies made possible by the shocks of 1914–1945, and exceptional growth during the three decades following the end of World War II) thus created a historically unprecedented situation, which lasted for nearly a century. All signs are, however, that it is about to end.

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

To sum up: the fact that wealth is noticeably less concentrated in Europe today than it was in the Belle Époque is largely a consequence of accidental events (the shocks of 1914–1945) and specific institutions such as taxation of capital and its income. If those institutions were ultimately destroyed, there would be a high risk of seeing inequalities of wealth close to those observed in the past or, under certain conditions, even higher.

The overall importance of capital today, as noted, is not very different from what it was in the eighteenth century. Only its form has changed: capital was once mainly land but is now industrial, financial, and real estate. We also know that the concentration of wealth remains high, although it is noticeably less extreme than it was a century ago. The poorest half of the population still owns nothing, but there is now a patrimonial middle class that owns between a quarter and a third of total wealth, and the wealthiest 10 percent now own only two-thirds of what there is to own rather than nine-tenths.

In all likelihood, inheritance will again play a significant role in the twenty-first century, comparable to its role in the past.

In all societies, there are two main ways of accumulating wealth: through work or inheritance. How common is each of these in the top centiles and deciles of the wealth hierarchy? This is the key question.

In this respect, it was indeed the two world wars that wiped the slate clean in the twentieth century and created the illusion that capitalism had been overcome.

The crucial fact, however, is that this situation did not last long. By 1960, the profile observed in 1947 was already a memory.

In view of the rapid increase of inheritance flows in recent decades, it is natural to ask if this increase is likely to continue.

This could happen, for instance, if all taxes on capital and capital income, including the corporate income tax, were eliminated, or if such taxes were reduced.

It is important to realize two things: first, the nature of capital effectively changed in the postwar period, and second, we are just emerging from this exceptional period.

Nevertheless, we are now clearly out of it: the share of inherited wealth in total wealth has * grown steadily since the 1970s.

To be sure, inequality was not eradicated in the three decades after World War II, but it was viewed primarily from the optimistic angle of wage inequalities

But there was a fundamental unity to this society, in which everyone participated in the communion of labor and honored the meritocratic ideal. People believed that the arbitrary inequalities of inherited wealth were a thing of the past.

For the cohorts born in the 1970s, and even more for those born later, things are quite different.

Nineteenth-century novelists describe a world in which inequality was to a certain extent necessary: if there had not been a sufficiently wealthy minority, no one would have been able to worry about anything other than survival. This view of inequality deserves credit for not describing itself as meritocratic

Modern meritocratic society, especially in the United States, is much harder on the losers, because it seeks to justify domination on the grounds of justice, virtue, and merit, to say nothing of the insufficient productivity of those at the bottom.

justified in terms of merit and productivity (claims with very little factual basis, as noted). Meritocratic extremism can thus lead to a race between supermanagers and rentiers, to the detriment of those who are neither.

We have moved from a society with a small number of very wealthy rentiers to one with a much larger number of less wealthy rentiers: a society of petits rentiers if you will. *

This is nevertheless a fairly disturbing form of inequality, which is in the process of attaining historically unprecedented heights. It is also more difficult to represent artistically or to correct politically, because it is a commonplace inequality opposing broad segments of the population rather than pitting a small elite against the rest of society.

There is no guarantee that the distribution of inherited capital will not ultimately become as inegalitarian in the twenty-first century as it was in the nineteenth. If this were to happen, I believe that it would lead to significant political upheaval.

In a democracy, the professed equality of rights of all citizens contrasts sharply with the very real inequality of living conditions, and in order to overcome this contradiction it is vital to make sure that social inequalities derive from rational and universal principles rather than arbitrary contingencies.

Economic and technological rationality at times has nothing to do with democratic rationality. The former stems from the Enlightenment, and people have all too commonly assumed that the latter would somehow naturally derive from it, as if by magic. But real democracy and social justice require specific institutions of their own, not just those of the market, and not just parliaments and other formal democratic institutions.

The idea that unrestricted competition will put an end to inheritance and move toward a more meritocratic world is a dangerous illusion.

The advent of universal suffrage ended the legal domination of politics by the wealthy.58 But it did not abolish the economic forces capable of producing a society of rentiers.

The question of international inequality of wealth concerns the future above all.

Is there a danger that the forces of financial globalization will lead to an even greater concentration of capital in the future than ever before? Has this not perhaps already happened?

If the fortunes of the top decile or top centile of the global wealth hierarchy grow faster for structural reasons than the fortunes of the lower deciles, then inequality of wealth will of course tend to increase without limit. This inegalitarian process may take on unprecedented proportions in the new global economy.

In the long run, unequal wealth within nations is surely more worrisome than unequal wealth between nations.

The information at our disposal suggests, however, that the forces of divergence at the top of the global wealth hierarchy are already very powerful.

If the top thousandth enjoy a 6 percent rate of return on their wealth, while average global wealth grows at only 2 percent a year, then after thirty years the top thousandth’s share of global capital will have more than tripled. The top thousandth would then own 60 percent of global wealth.

Such an impoverishment of the middle class would very likely trigger a violent political reaction.

As we will see, only a progressive tax on capital can effectively impede such a dynamic.

Between 1990 and 2010, the fortune of Bill Gates increased from $4 billion to $50 billion.

Once a fortune is established, the capital grows according to a dynamic of its own, and it can continue to grow at a rapid pace for decades simply because of its size.

Fortunes can grow and perpetuate themselves beyond all reasonable limits and beyond any possible rational justification in terms of social utility, in some cases multiplied more than tenfold in twenty years.

This is the main justification for a progressive annual tax on the largest fortunes worldwide. Such a tax is the only way of democratically controlling this potentially explosive process while preserving entrepreneurial dynamism and international economic openness.

All the ingredients are in place for the top centile and thousandth of the global wealth distribution to pull farther and farther ahead of the rest.

The idea that European households own 20 times as much capital as China is rather hard to grasp, especially since this wealth is private and cannot be mobilized by governments for public purposes.

The fact is that it is very difficult for any single government to regulate or tax capital and the income it generates. The main reason for the feeling of dispossession that grips the rich countries today is this loss of democratic sovereignty. This is especially true in Europe.

Oligarchic divergence is not only more probable than international divergence, it is also much more difficult to combat.

Another point that needs to be emphasized is that a substantial fraction of global financial assets is already hidden away in various tax havens.

If one adds up the financial statistics for the various countries of the world, one finds that the world as a whole is in a substantially negative situation. It seems, in other words, that Earth must be owned by Mars

By comparing all the available sources the most plausible reason all the evidence indicates that the vast majority (at least three-quarters) of the financial assets held in tax havens belongs to residents of the rich countries.

All the evidence indicates that the vast majority (at least three-quarters) of the financial assets held in tax havens belongs to residents of the rich countries.

I must now try to draw lessons for the future. One major lesson is already clear: it was the wars of the twentieth century that, to a large extent, wiped away the past and transformed the structure of inequality. Today, in the second decade of the twenty-first century, inequalities of wealth that had supposedly disappeared are close to regaining or even surpassing their historical highs.

On the basis of the history I have brought to light here, can we imagine political institutions that might regulate today’s global patrimonial capitalism justly as well as efficiently?

The ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a progressive global tax on capital.

The global financial crisis that began in 2007–2008 is generally described as the most serious crisis of capitalism since the crash of 1929.

The main reason why the crisis of 2008 did not trigger a crash as serious as the Great Depression is that this time the governments and central banks of the wealthy countries did not allow the financial system to collapse.

The crisis of 2008 was the first crisis of the globalized patrimonial capitalism of the twenty-first century. It is unlikely to be the last.

A progressive tax on capital is a more suitable instrument for responding to the challenges of the twenty-first century than a progressive income tax, which was designed for the twentieth century.

Both the antimarket and antistate camps are partly correct: new instruments are needed to regain control over a financial capitalism that has run amok

To clarify all this, I must first take a look how taxation and government spending have evolved in the rich countries since the nineteenth century.

Taxes consumed less than 10 percent of national income during the nineteenth century and up to World War I.

Between 1920 and 1980, the share of national income that the wealthy countries chose to devote to social spending increased considerably.

All the rich countries, without exception, went in the twentieth century from an equilibrium in which less than a tenth of their national income was consumed by taxes to a new equilibrium in which the figure rose to between a third and a half.

Taxes today claim nearly half of national income in most European countries, and no one seriously envisions an increase in the future comparable to that which occurred between 1930 and 1980.

The state’s great leap forward has already taken place: there will be no second leap—not like the first one, in any event.

Modern redistribution, as exemplified by the social states constructed by the wealthy countries in the twentieth century, is based on a set of fundamental social rights: to education, health, and retirement.

Taxation is neither good nor bad in itself. Everything depends on how taxes are collected and what they are used for.

All told, education and health account for 20 percent of employment and GDP in the developed economies, which is more than all sectors of industry combined.

This way of organizing production is durable and universal.

If we do not constantly ask how to adapt our social services to the public’s needs, the consensus supporting high levels of taxation and therefore the social state may not last forever.

In all countries, on all continents, one of the main objectives of public spending for education is to promote social mobility.

The available data shows no trend toward greater mobility over the long run, and in recent years mobility may even have decreased.

Parents’ income has become an almost perfect predictor of university access.

Unequal access to higher education is one of the most important problems that social states everywhere must face in the twenty-first century.

One of the most important reforms the twenty-first-century social state needs to make is to establish a unified retirement scheme based on individual accounts with equal rights for everyone, no matter how complex one’s career path.

Does the kind of social state that emerged in the developed countries in the twentieth century have a universal vocation? Will we see a similar development in the poor and emerging countries? Nothing could be less certain.

The question of what kind of fiscal and social state will emerge in the developing world is of the utmost importance for the future of the planet.

The major twentieth-century innovation in taxation was the creation and development of the progressive income tax. This institution, which played a key role in the reduction of inequality in the last century, is today seriously threatened by international tax competition.

Taxation is not a technical matter. It is preeminently a political and philosophical issue, perhaps the most important of all political issues. Without taxes, society has no common destiny, and collective action is impossible. This has always been true.

How can sovereign citizens democratically decide how much of their resources they wish to devote to common goals such as education, health, retirement, inequality reduction, employment, sustainable development, and so on?

If the modern social state is to continue to exist, it is therefore essential that the underlying tax system retain a minimum of progressivity, or at any rate that it not become overtly regressive at the top. *

The progressive tax is indispensable for making sure that everyone benefits from globalization, and the increasingly glaring absence of progressive taxation may ultimately undermine support for a globalized economy.

Tax rates remained extremely low prior to World War I. It was only after the war, in a radically different political and financial context, that the top rate was raised to “modern” levels.

The progressive tax is thus a relatively liberal method for reducing inequality, in the sense that free competition and private property are respected while private incentives are modified in potentially radical ways, but always according to rules thrashed out in democratic debate. The progressive tax thus represents an ideal compromise between social justice and individual freedom.

After experiencing a great passion for equality from the 1930s through the 1970s, the United States and Britain veered off with equal enthusiasm in the opposite direction.

What were the consequences of this great shift in attitudes in the United States and Britain?

In contrast to what many people in Britain and the United States believe, the true figures on growth (as best one can judge from official national accounts data) show that Britain and the United States have not grown any more rapidly since 1980 than Germany, France, Japan, Denmark, or Sweden.

The history of the progressive tax over the course of the twentieth century suggests that the risk of a drift toward oligarchy is real and gives little reason for optimism about where the United States is headed.

The egalitarian pioneer ideal has faded into oblivion, and the New World may be on the verge of becoming the Old Europe of the twenty-first century’s globalized economy.

But if democracy is to regain control over the globalized financial capitalism of this century, it must also invent new tools, adapted to today’s challenges. The ideal tool would be a progressive global tax on capital, coupled with a very high level of international financial transparency

Many people will reject the global tax on capital as a dangerous illusion, just as the income tax was rejected in its time, a little more than a century ago. When looked at closely, however, this solution turns out to be far less dangerous than the alternatives.

The primary purpose of the capital tax is not to finance the social state but to regulate capitalism. The goal is first to stop the indefinite increase of inequality of wealth, and second to impose effective regulation on the financial and banking system in order to avoid crises. To achieve these two ends, the capital tax must first promote democratic and financial transparency: there should be clarity about who owns what assets around the world.

The benefit to democracy would be considerable: it is very difficult to have a rational debate about the great challenges facing the world today—the future of the social state, the cost of the transition to new sources of energy, state-building in the developing world, and so on—because the global distribution of wealth remains so opaque.

I have also discovered some objectively disturbing trends: without a global tax on capital or some similar policy, there is a substantial risk that the top centile’s share of global wealth will continue to grow indefinitely—and this should worry everyone. In any case, truly democratic debate cannot proceed without reliable statistics.

It is important to understand that a tax is always more than just a tax: it is also a way of defining norms and categories and imposing a legal framework on economic activity.

It is not right for individuals to grow wealthy from free trade and economic integration only to rake off the profits at the expense of their neighbors. That is outright theft.

Note, moreover, that in this realm there is often a chasm between the triumphant declarations of political leaders and the reality of what they accomplish. This is extremely worrisome for the future equilibrium of our democratic societies.

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.

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.

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.

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.

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.

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.

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. *

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.

One solution would be to privatize all public assets.

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.

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.

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.

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.

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 “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.

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.

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.

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.

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.

In an ideal society, what level of public debt is desirable?

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? *

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.

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 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.

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.

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.

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.

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.

Without real accounting and financial transparency and sharing of information, there can be no economic democracy.

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.

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.

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. The problem is enormous, and there is no simple solution.

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.

The difficulty is that this solution, the progressive tax on capital, requires a high level of international cooperation and regional political integration.

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.

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.

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