Piketty: Inequality of Labor Income

After a look at the income of the top 10% and top 1% in France and the US, in Capital in the Twenty-First Century, Thomas Piketty now analyzes inequalities in labor income.  He wants to know "what caused the explosion of wage inequalities and the rise of the supermanager in the United States after 1980."

What is it that drives inequality?  First Piketty looks at the "widely accepted theory" of "a race between education and technology." It does not explain the rise of the supermanager, but it has its uses, resting on the two ideas that a worker's wage depends on his "marginal productivity" and the supply and demand for his "skill in a given society."

Naive as it is, this theory does point up the importance of two factors: "the state of the training [and/or education] system... and the state of technology".  New technology enables innovation, but if "the supply of skills does not increase at the same pace as the needs of technology, then groups whose training is not sufficiently advanced will earn less... and inequality... will increase."  It's up to the education system to remedy this deficit, "especially for the least well educated."

But what really happened in the last century?  In France, while the "average wage increased enormously" the inequalities remained because everyone moved up a notch, with the children of grade school graduates finishing high school etc.  That is not ideal, but if everyone had stayed where they were educationally, inequalities would have increased "substantially."  In the US, according to researchers, the wage gap between high school and college graduates "which decreased fairly regularly until the 1970s" suddenly began to increase after 1980.  This, in the view of the researchers, was "due to a failure to invest sufficiently in higher education."

So what's needed is to "invest in education" because output increased fivefold in the century in which skills were improved by universal education.  This would increase wages at the low end and cut the upper decile's income share.  However, "theoretical discussion of educational issues and meritocracy is often out of touch with reality."

The education-and-technology theory may explain the long term, but not the short term, for it fails to explain the rules and regulations that drive the labor market.  Wage compression in World War II was caused by government freezing wages for managers and thereafter by increases in the minimum wage (see chart).  For Piketty, the setting of a minimum wage and/or administratively establishing wage scales with union bargaining is the way to deal with inequalities at the low end of the income scale. Piketty does not discuss here the effect of welfare and labor market regulation on off-the-books economic activity.

The education-and-technology theory also cannot explain the explosion of upper centile labor income in the United States.  Increased productivity didn't do it, and doesn't explain why the "supermanager" income explosion is an Anglo-Saxon phenomenon and cannot be seen in Continental Europe and Japan (charts here and here).  Inequality has now reached, in the United States, the "record levels observed in 1910-1920".  But not in Europe and Japan, although inequality in the Belle Époque was higher in Europe than the US.

It was "concentration of capital" that caused the inequality a century ago in Europe, but why?  The answer lies in "low demographic growth".  That's how you get "greater accumulation and concentration of capital."

Piketty then looks at inequality in emerging economies.  The pattern is similar to the developed nations. Inequalities were high a century ago, declined in mid century, and have climbed since 1980.

But let's get back to the supermanagers in the United States!  Obviously their high compensation cannot be justified by "individual 'productivity'" and Piketty does some math to prove it.  So the high compensation must be the result of "hierarchical relationships" and the natural tendency of people "to treat themselves generously."  It's also a question of "social norms"; high compensation that is "shocking" in Europe and Japan is tolerated in Britain and the US, perhaps as a result of the "'conservative revolution' that gripped" the US and the UK in the Reagan/Thatcher era.  Or maybe it's a form of "meritocratic extremism" that wants to reward "winners".  Who knows where it might end?

Right at the end of the chapter, Piketty raises the question of marginal tax rates.  Maybe the "very large decrease in the top marginal income tax rate" in the US and UK may have encouraged top executives to shoot for higher pay.  You think?

Discussion

Thomas Piketty believes as an article of faith that it is the job of the ruling political class to ride herd on the ruling economic class and provide a guiding hand for the lesser mortals that work to create products and services.  Education must be provided; experts must tinker with minimum wages and wage schedules.  Corporate executives must be tamed and disciplined.  But what if the experts don't have a clue what they are doing?

Introduction

Part One: Income and Capital

Income and Output

Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt

Conclusion

Piketty: Two Worlds: France and the US

Thomas Piketty now takes a look at the fortunes of the top ten percent in two countries, France and the US, in Capital in the Twenty-First Century. First he looks at his native France.

A couple of figures here and here tell the story.  The top ten percent were doing fine from 1910 until the 1930s, taking about 40-45% of national income.  Then, starting in 1936 their share plummeted to 30%.  From 1945 to 1965 the top ten percent clawed their way back to a 37% share, but this dissipated back to 30% in 1968-83, only recovering to 25% gradually after the economic U-turn of the Mitterand presidency in 1983.

If you look at the 1% the trend is even more drastic.  The top 1% took about 20% of total income in 1920 and the share declined to about 17% by 1929.  Then its share declined to 15% in the 1930s and collapsed to 8% by 1945 due to war and invasion.  Basically its income share has been flat ever since.

This collapse is in capital income, because the top ten percent has been getting about 26-27% of wage income all along and the top 1% about 6-8% of wage income all along.  Piketty calls it the "fall of the rentier." (In France, government bonds are called rentes).

The decline in top 10% income came in a series of shocks during the interwar period "when social tensions ran very high."  The top 1% income "plummeted during the Depression" but for the managers in the lower tranche of the top 10% the deflation increased their share of income.  But when the Popular Front came to power in 1936 "workers' wages increased sharply" and franc devaluation and inflation decreased income shares for the top 10%.

After World War II the top 10% did well "in a context of rapid economic growth" but in the riots of 1968 economic policy was reversed and the minimum wage was increased and indexed.  The share of the top 10% declined until the U-turn of the socialist Mitterand government in 1983: "wages were frozen, and the policy of annual boosts to the minimum wage" terminated.  Profits "skyrocketed" and inequalities increased, including the "stunning new phenomenon" of very high top salaries for "top executives of the largest companies and financial firms".

The story of inequality in the United States since 1910 is different from France, and the charts here and here show.  Top 10% income starts at 40% and rises to 45% right through the Depression until World War II.  Then the top 10% share collapses to 33-35% by 1945 and stays there until 1980.  After 1980 the top 10% share steadily increases to 40% by 1990, 45% by 2000 and about 47% in 2010.  The main story is in the top 1%, which took about 17% of total income in 1910-1940 with a peak in the late 1920s boom.  Then the top 1% share dropped to 12% in the 1940s, and 10% in 1950-1970, and to 9% in the 1970s inflation.  But since 1980 top 1% income share has kept increasing, punctuated by troughs after market declines, settling at 20% in 2010.

What about the Crash of 2008?

In my view, there is absolutely no doubt that the increase of inequality in the United States contributed to the nation's financial instability.

You can blame it on the "virtual stagnation of the purchasing power of the lower and middle classes... which inevitably made it more likely that modest households would take on more debt" provided by "unscrupulous banks" that "offered credit on increasingly generous terms."  There is nothing in Piketty's analysis that recognizes the contribution of left-wing politics to the real-estate boom, forcing the financial system to issue mortgages to "sub-prime" borrowers.  But still, "a potentially more important cause of instability is the structural increase of the capital/income ratio... coupled with an enormous increase in aggregate international asset positions."

What about wages?  In the US wage inequality rose in the 1920s, was stable in the 1930s and experienced "severe compression during World War II" when the government "generally approved raises only for the lowest paid workers."  But from the mid 1970s onward, top salaries increased faster than the average wage.  This increase primarily reflects very high salaries and bonuses, including stock options, paid to "supermanagers" at top corporations and financial institutions.

Introduction

Part One: Income and Capital

Income and Output

End of Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt

Conclusion

Piketty: Inequality and Its Concentration

After discussing capital and income, and the share of capital income and labor income under modern capitalism Thomas Piketty now dives into the third part of Capital in the Twenty-First Century. He investigates The Structure of Inequality.  Piketty will show that, after recovering from the shocks of the world wars, the developed world has returned to the low-growth, high inequality society of the late 19th century.

In this third part of his narrative Piketty will show that the low inequalities of the mid 20th century issued from the world wars "and the public policies that followed from them," that the rise in inequality since the 1970s and 1980s again suggests "that institutional and political differences played a role."  He will also show the "rising importance of inherited wealth versus income from labor" in the 21st century.

But first a three part definition of the inequality that he will investigate:

1. Inequality in income from labor
2. Inequality in the ownership of capital and its income
3. Inequality in the interaction between labor and capital income

To dramatize the lesson to come, Piketty retails the convict "Vautrin's Lesson" to the penniless young noble Rastignac in Balzac's Père Goriot, published in 1835.  You wanna get ahead? says Vautrin. Forget getting ahead in your career; it's too hard and requires too much toadying and compromising. Marry a rich young heiress and kill anyone in the way.

So any young man on the make back then had to make a choice between work and inheritance.  But has anything changed since the early 19th century?  Has the importance of labor income vs. capital income improved since then?  And if it did, what happened and can it be reversed?

In discussing these inequalities, what mechanisms are at work?  For labor it would include supply and demand for skills, the education system, and rules and regulation of the labor market.  For capital it would include savings and investment behavior, gifting and inheritance, operation of the real-estate and financial markets.  Notice that Piketty will not include the effects of welfare state income redistribution, at least not yet.

Inequality in capital is always and everywhere much bigger that inequality in income, and this is not explained by life-cycle needs of saving against fluctuations in labor income or against retirement.  It is explained "mainly by the importance of inherited wealth and its cumulative effects".  Piketty shows three tables showing shares of income across four income classes: the 1%, the next 9%, the middle 40% and bottom 50%.  The top 10% in the US gets 35% of labor income against 20% in Scandinavia. The top 10% in the US gets 70% of capital income against 50% in Scandinavia.

But there is an upside to this: the creation of the "Patrimonial Middle Class" in the 20th century.  A century ago the middle class owned about 5% of the wealth; today it ranges from 25% in the US to 40% in Scandinavia.  But since labor income is about two-thirds of total income, the total income inequality picture isn't much different from the labor income inequality.

Piketty ends with a riff on whether "those at the bottom will accept the situation permanently."  It's not merely a question of the "repressive apparatus" but more important the "apparatus of justification."  The current justification, of course, is that the high labor earners sort of deserve it.  Instead of the "hyperpatrimonial society" of the 19th century we now have a "hypermeritocratic society" of "superstars" or "supermanagers."  The question is to what extent labor income inequality in the US really follows a "meritocratic logic".

Piketty also wants to tell us that he doesn't want to use the common measure of inequality, the GINI coefficient, because it's really not up to the task.  And most official reports on inequality decorously hide the incomes of the very rich behind a discreet veil.  Piketty's method puts more flesh and blood on the skeleton of inequality.

Introduction

Part One: Income and Capital

Income and Output

Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt

Conclusion

Piketty: Capital's Share of Income

We now return to Thomas Piketty's First Fundamental Law of Capitalism.  It is the equation that Piketty introduced in his chapter on Income and Output.

(Share of national income from capital) = (rate of return on capital) x (capital/income ratio)

The idea is to tease out the share of capital and labor in the national income.  The question is: how do you compute the rate of return on capital?

But first, Piketty wants us to look at the history of capital's share of national income in Britain since 1770 and France since 1820.  His chart of capital income in Britain shows a capital share of about 34% in 1800 that rises to a peak of 43% in 1850.  Then it declines to about 33 percent in 1890, before collapsing after World War I to 22%.  Since then capital income has jogged along between 20% and 30% of national income with a nadir in 1970 at 20% and highs in 1940 and 2000 at 27%.

In France, capital's share of national income starts at 30% in 1820, rises to a peak of 43% in 1850-60, and declines sharply to 26% in 1890 and bouncing to 34% in 1910.  Capital share declines to 29% after World War I and collapses to 13% in 1940.  Since then it has jogged along between 20% and 30% of national income with a nadir in 1980 at 20% and a high of 26% in 2010.

Piketty doesn't discuss it, but I find myself fascinated by the peak in capital income in the mid 19th century.  What was really going on then?  Was it railroads?  Here's my thought.  Railroads meant that small-scale farmers went to the wall.  Before railroads, when grain was transported by horse and cart, the cost of the grain would double with a single day's travel.  After railroads, midwestern US grain could compete with farmers everywhere, as Zola showed in La Terre.  So the farmers migrated off the land to the mines and the factories, and all they could earn was the Marxian subsistence wage --  until the migration eased and wages started to climb in the later 19th century.

But Piketty's calculation of capital's "share" of national income depends on a calculation of a national rate of return on capital.  He computed it by

adding various amounts of income from capital included in national accounts regardless of legal classification (rents, profits, dividends, interest, royalties, etc., excluding interest on public debt and before taxes) and then dividing this total by... the national capital stock (which gives the average rate of return on capital, denoted r).

In Britain the average rate of return on capital starts at about 5% in 1800, rises to a peak of 6.3% by 1860 and declines to 5% by 1890.  After World War I the rate of return climbed erratically up to a peak of 11% in 1950 before declining to about 5-6% after 1980.

France shows a similar pattern only more abrupt.  Rate of return on capital starts at 6% in 1820 and rises to 7.5% in 1850, declining abruptly after 1870 to a little over 4%.  Rate of return peaks at 10% in 1920, troughs at 6.4% in 1940, peaks again at nearly 11% in 1950 before declining to under 5% by 2010.

Piketty thinks that his numbers are pretty solid: he refers back to Jane Austen and Balzac.  Back then the rentier class more or less assumed a 5% return on land or on government debt.  But I am not so sure.

A middling sort of capitalist like me does not compute rate of return from income and dividends.  He computes it from comparing net worth last year with this year.  In Piketty's terms, this means combining income from capital with savings.  In my terms it means combining interest and dividends with the capital gain from a stock rising in price.  Why does a stock rise in price?  Because, e.g., Apple just came out with a new iPhone that every consumer wants to buy and does buy.  On this basis, I suspect, the share of income from capital appreciation over the last 200 years would dwarf the income from interest and dividends.

Picketty now embarks on a discussion of the marginal productivity of capital, "defined by the value of the additional production due to one additional unit of capital."  Of course, when capital becomes abundant the "marginal productivity of capital decreases as the stock of capital increases."  The question is by how much, and "everything depends on the vagaries of technology" and the ability to substitute capital for labor and vice versa.  But this leaves out the basic fact of every decision to change production.  Every decision is a bet on the future which might, or might not work out.

Economists have been arguing over the question of the capital income share since World War II.  In mid century economists thought that the capital share would remain about constant, but in the last 40 years it has been going up.  That, according to Piketty is because the substitution of capital from labor tends to increase capital's share of income, a trend that also reflects capital's "increase in bargaining power vis-à-vis labor".

But what about "human capital", the notion that knowledge and skills represent a growing share of wealth creation that has crowded out capital? For Piketty this represents "mindless optimism: capital... is still useful"!

And what about Marx's prediction that the bourgeoisie would "dig its own grave" as capital accumulated and the rate of profit fell, according to Marx's analysis?  Piketty applies his two Fundamental Laws of Capitalism and finds a logical contradiction, with a positive savings rate accumulating more and more capital.  If growth is zero then the capital/income ratio tends towards infinity. But this is rubbish, and shows the weakness of using the "savings" notion.  If growth is zero it means that the increase in wealth is zero and therefore the savings, the increase in wealth from year to year is zero, and that capital investments don't add to wealth.  Is is possible that Piketty's Second Fundamental Law of Capitalism is meaningless?

But economists have been arguing over this.  In Britain economists argued that growth was "entirely determined by the savings rate" while in the US economists argued that the savings rate and the capital/income ratio could adjust to each other.  But if you reject the accumulationist theory and argue that growth comes from innovation and surprise then the argument is all about counting angels on the head of a pin.  And you say that savings is a result of an increase in wealth.

Piketty wants us to think that a return to low growth, economic and/or demographic, means a "return of capital."  For, "in stagnant societies, wealth accumulated in the past naturally takes on considerable importance."

Or maybe in a stagnant society the upper crust keep spending and mortgaging themselves until the whole thing collapses.  As often happens in 19th century novels.

One last point at the end of the chapter. One should not think that technology will save us.

If one truly wishes to found a more just and rational social order based on common utility, is not not enough to count on the caprices of technology.

But the problem is that the lefty answer to that is to count instead on the caprices of political power -- in the right hands, of course.

Introduction

Part One: Income and Capital

Income and Output

Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt

Conclusion

Piketty: Capital/income Ratio in the Long Run

In his comparison of Europe and North America Thomas Picketty showed that there were differences between the Old World and the New World in the pricing of capital.  For one thing, the capital/income ratio has tended to be lower in the United States and Canada.  That's because North America has seen a huge increase in population over the modern era and people don't show up at Ellis Island with lots of capital.

But why has the capital/income ratio returned to its 19th century level in Europe after a collapse in the wars and turmoil of the early-to-mid 20th century, and why should the ratio in the United States always be lower?

To answer the question, Piketty introduces a "Second Fundamental Law of Capitalism."  It is this:

Capital/income ratio = (savings rate) / (growth rate)

What does that mean, exactly?  Here is Piketty's explanation:

[I]f a country saves 12 percent of its national income every year, and the rate of growth of its national income is 2 percent per year, then in the long run the capital/income ratio will be equal to 600 percent[.] 

Just to be clear, the "First Fundamental Law of Capitalism" introduced in the chapter on Income and Output was that:

Capital/income ratio = (share of income from capital) / (rate of return on capital)

I've shuffled the equation around a bit, but here is Piketty's explanation of his First Law:

[I]f national wealth represents the equivalent of six years of national income, and if the rate of return on capital is 5 percent per year, then capital's share in national income is 30 percent.

So my first question is: where does this "savings rate" come from?  How can you even measure such a thing.  The closest I can come to an explanation is on page 28 of the Technical Appendix (pdf), where Piketty writes that the Second Law "stems directly from the basic mathematical equation describing wealth accumulation."

In a model without price effect, and where wealth entirely comes from accumulation (no natural resources), wealth in year t+1 W_t+1 simply equals the sum of wealth in year t W_t and savings [in year t] S_t[.]

Oy!  Deirdre McCloskey says: capitalism is not about "accumulation"; it is about innovation.  George Gilder says that capitalism is "surprise."  For instance Apple Computer.  At the end of 2008 AAPL stock price was about $85 per share.  At the end of 2009 AAPL was about $211.  Assuming about 900 million shares, that's an increase in wealth from $76 billion to $190 billion.  You call that savings? Give me a break.  Instead, what we see is the capitalization of an unanticipated future income stream from an amazing innovation, a Steve Jobs surprise, called the iPhone.

Anyway, Piketty goes off into a long riff about what happens if a nation starts with zero and "saves 12 percent of its national income for a year.  It will take 50 years to "save the equivalent of six years of income" and then, of course, the national income will be bigger.  Accumulation takes time.

No!  Here's how the world works.  Carnegie creates cheap steel and bingo, the economy rockets into the stratosphere as steel rails allow much heavier railroad trains. Ditto Rockefeller and oil; Ford and autos.  That's not accumulation; that's a quantum leap.

Anyway, Piketty explains the increase in the capital/income ratio since World War II by his accumulation theory.  The return of a high capital/income ratio means "the emergence of a new patrimonial capitalism."  What we are seeing is low growth and high savings, he says. (Yes, but how exactly is he computing "savings"?)

But what about the future?  Using his Second Law, Piketty estimates that the world capital/income ratio will slowly rise to about 6 to 7 times national income by the end of the 21st century, "approximately the level observed in Europe from the eighteenth century to the Belle Époque.  And we know what that means.

Discussion

Piketty gives us the accumulationist narrative.  Here's the Austrian/innovation/surprise narrative.  After a big war, when lots of things and people have been destroyed, only the most urgent production and capital projects make sense.  The future is heavily discounted; what matters is to work and rebuild now; you get the French Trente Glorieuses.  Interest rates are high and therefore capital is priced low.  But as the emergency passes the national wealth increases; interest rates go down and people get more relaxed about the future.  Capital values go up and less urgent projects start to make sense.  Meanwhile, all the time, crazy kids keep turning up with crazy ideas that turn into Texas Instruments, Microsofts, Qualcomms, Apples, Facebooks: literally creating huge wealth out of nothing.

Introduction

Part One: Income and Capital

Income and Output

Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt

Conclusion

Piketty: New World Capital and Slavery

From a survey of capital in Britain and France Thomas Piketty in Capitalism in the Twenty-First Century moves on to Germany and the United States.

While capital in Germany in the late 19th century represented about six to seven times annual national income and crashed to two times national income in the wars of the 20th century, it hasn't climbed back quite as far as in Britain and France.  Housing isn't as big a factor because of the cheap houses from East Germany and "stricter rent control."  Domestic capital in businesses is lower because the stock market valuation of German firms is lower because of "the stakeholder model" that lets German workers sit on the boards of German corporations.

But the collapse in the value of capital in the mid 20th century was not just due to the destruction of war but to the "budgetary and political shocks".  In addition savings was low and the "postwar political context" of nationalization and regulation reduced private wealth.

The United States did not see a collapse in private wealth in the mid 20th century.  Nor did it experience the high capital to income ratios of 600% to 700% common in Europe in the 19th century.  The capital to income ratio was about three in 1800 and rose to five by 1910.  It sank to four by 1950 and since then has risen back to about 4.5.

Piketty reckons that the difference is that there was much less established wealth in the US.  People "did not cross the Atlantic with their capital of homes or tools or machinery".  They had to create it and that takes time.  We are to understand that this means there was less inequality in the US.  Also the US never had the colonial empires and foreign capital that the Europeans enjoyed.  Foreigners have tended to invest more in the US than vice versa.  In Canada this effect was magnified.  Foreign investment in Canada in 1900 was about 100% of national income; in the US it has never exceeded a few percent.

Now we come to slavery.  Earlier, Piketty rejected the idea of including intangible wealth in knowledge and workers in the capital total, but now he wants to include the value of slaves in his capital accounts.  If the value of the slaves was about 100% of national income then the capital to income ratio in the United States stood at about 4.5 to five. He writes:

[I]t is clear that [counting the capital value of workers] makes sense only in a slave society, where human capital can be sold on the market, permanently and irrevocably.

Then he goes on to criticize "some economists" for wanting to capitalize the "value of the income flow from [free] labor."  They find to their "amazement that human capital is the leading form of capital in the enchanted world of the twenty-first century."

But is it? It seems pretty obvious that it was their human capital that enabled the Europeans to rebuild their nations so rapidly after World War II.  So why not count it?  Probably because it would cause problems for Piketty's goal, which is to call for taxes on the rich to curb inequality.  On the other hand there might be a problem with double counting, because human capital is probably already included in the capitalization of private corporations (and probably also slave plantations).

Introduction

Part One: Income and Capital

Income and Output

Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt

Conclusion

Piketty: Changes in Capital

Thomas Piketty is going to want us to agree that the idle rich should be taxed.  So he reserves a chapter where he particularly wants us to look at the metamorphoses in rentier capitalism.

Strictly speaking, "rentier" means a holder of French government bonds, traditionally called rentes.  When Keynes talked about the "euthanasia of the rentier" he meant the obliteration of government bond-holders in the inflations after World War I.

But first he shows us the change in the composition of capital in charts of the value of national capital as a percent of national income.  In both France and Britain, capital in 1700 was mostly farmland.  One-third of the rest was housing, and the rest "other domestic capital" meaning everything else, including "building used for business and the associated land, infrastructure, machinery, computers, patents, etc."

But three centuries later, the value of farmland is almost zero.  Its share of capital has been replaced by housing.  Meanwhile, in the nineteenth century both France and Britain saw a substantial rise and fall in "net foreign capital."  The World Wars of the 20th century also dug a hole in overall capital value: "commensurate with the violent military, political, and economic conflicts" of the times.

But what about public debt?  This nets out to zero, because it is owed by the government and owned by the private sector.  But the size of the debt is significant because debt service can take up a huge share of government revenue.  After the Napoleonic Wars Britain had a national debt over 200 percent of GDP; that's a lot of interest going to the wealthy rentiers.  But in France the government repudiated its debt, with less government revenue going to rentiers.

Piketty almost, but not quite, suggests that a large public debt is a way of redistributing government revenue to the rich.  Conversely the 20th century inflations were a way of despoiling the rich by devaluing their fortunes in government debt.  He suggests, but doesn't quite say, that debt or no debt doesn't make a difference on the bottom line.  For instance Britain had a national debt over 200 percent GDP in 1945 and France essentially cancelled public debts.  Yet both countries grew out of the devastation of World War II, and both featured a lot of government ownership in the economy.  In France the growth was particularly robust, when the government owned a lot of the economy including auto manufacturer Renault, so much so that the period 1950-1980 was called the "Trente Glorieuses", or glorious thirty years.

The lesson seems to be that nations can transform their national capital, or at least their national debt, and yet nothing seems to change.  The world goes on.

Introduction

Part One: Income and Capital

Income and Output

Growth

Part Two: The Dynamics of the Capital/Income Ratio

Changes in Capital

New World Capital and Slavery

Capital/income Ratio in the Long Run

Capital's Share of Income

Part Three: The Structure of Inequality

Inequality and Its Concentration

Two Worlds: France and the US

Inequality of Labor Income

Inequality of Capital Ownership

Merit and Inheritance in the Long Run

Global Inequality of Wealth in the 21st Century

Part Four: Regulating Capital in the Twenty-First Century

A Social State for the 21st Century

Rethinking the Progressive Income Tax

A Global Tax on Capital

The Question of the Public Debt

Conclusion