41. Capital’s share is given by α = r × β. In the long run, β = s / g, so α = s × r / g. It follows that α = r if r = g, and α > s if and only if r > g. See the online technical appendix.
42. The reasons why the golden rule establishes an upper limit are explained more precisely in the online technical appendix. The essential intuition is the following. Beyond the level of capital described by the golden rule, that is, where the return on capital sinks below the growth rate, capital’s long-run share is lower than the savings rate. This is absurd in social terms, since it would take more to maintain the capital stock at this level than the capital returns. This type of “dynamic inefficiency” can occur if individuals save without worrying about the return: for example, if they are saving for old age and their life expectancy is sufficiently long. In that case, the efficient policy is for the state to reduce the capital stock, for example, by issuing public debt (potentially in large amounts), thus de facto replacing a capitalized pension system by a PAYGO system. This interesting theoretical policy never seems to occur in practice, however: in all known societies, the average return on capital is always greater than the growth rate.
43. In practice, a tax on capital (or public ownership) can ensure that the portion of national income going to income on private capital (after taxes) is less than the savings rate without needing to accumulate so much. This was the postwar social-democratic ideal: profits should finance investment, not the high life of stockholders. As the German chancellor Helmut Schmidt said, “Today’s profits are tomorrow’s investments and the day after tomorrow’s jobs.” Capital and labor work hand in hand. But it is important to understand that this depends on institutions such as taxes and public ownership (unless we imagine unprecedented levels of accumulation).
44. In a sense, the Soviet interpretation of the golden rule simply transferred to the collectivity the unlimited desire for accumulation attributed to the capitalist. In chapters 16 and 24 of The General Theory of Employment, Interest, and Money (1936), where Keynes discusses “the euthanasia of the rentier,” he develops an idea close to that of “capital saturation”: the rentier will be euthanized by accumulating so much capital that his return will disappear. But Keynes is not clear about how much this is (he does not mention r = g) and does not explicitly discuss public accumulation.
45. The mathematical solution to this problem is presented in the online technical appendix. To summarize, everything depends on what is commonly called the concavity of the utility function (using the formula r = θ + γ × g, previously discussed in Chapter 10 and sometimes called the “modified golden rule”). With infinite concavity, one assumes that future generations will not need a hundredth additional iPhone, and one leaves them no capital. At the opposite extreme, one can go all the way to the golden rule, which may necessitate leaving them several dozen years of national income in capital. Infinite concavity is frequently associated with a Rawlsian social objective and may therefore seem tempting. The difficulty is that if one leaves no capital for the future, it is not at all certain that productivity growth will continue at the same pace. Because of this, the problem is largely undecidable, as perplexing for the economist as for the citizen.
46. In the most general sense, a “golden rule” is a moral imperative that defines people’s obligations to one another. It is often used in economics and politics to refer to simple rules defining the current population’s obligations to future generations. Unfortunately, there is no simple rule capable of definitively resolving this existential question, which must therefore be asked again and again.
47. These figures were retained in the new treaty signed in 2012, which added a further objective of maintaining a “structural” deficit of less than 0.5 percent of GDP (the structural deficit corrects for effects of the business cycle), along with automatic sanctions if these commitments were not respected. Note that all deficit figures in European treaties refer to the secondary deficit (interest on the debt is included in expenditures).
48. A deficit of 3 percent would allow a stable debt-to-GDP ratio of 60 percent if nominal GDP growth is 5 percent (e.g., 2 percent inflation and 3 percent real growth), in view of the formula β = s / g applied to the public debt. But the argument is not very convincing (in particular, there is no real justification for such a nominal growth rate). See the online technical appendix.
49. In the United States, the Supreme Court blocked several attempts to levy a federal income tax in the late nineteenth and early twentieth centuries and then blocked minimum wage legislation in the 1930s, while finding that slavery and, later, racial discrimination were perfectly compatible with basic constitutional rights for nearly two centuries. More recently, the French Constitutional Court has apparently come up with a theory of what maximum income tax rate is compatible with the Constitution: after a period of high-level legal deliberation known only to itself, the Court hesitated between 65 and 67 percent and wondered whether or not it should include the carbon tax.
50. The problem is similar to that posed by the return on PAYGO retirement systems. As long as growth is robust and the fiscal base is expanding at a pace equal (or nearly equal) to that of interest on the debt, it is relatively easy to reduce the size of the public debt as a percentage of national income. Things are different when growth is slow: the debt becomes a burden that is difficult to shake. If we average over the period 1970–2010, we find that interest payments on the debt are far larger than the average primary deficit, which is close to zero in many countries, and notably in Italy, where the average interest payment on the debt attained the astronomical level of 7 percent of GDP over this period. See the online technical appendix and Supplemental Table S16.1, available online.
51. If the issue is constitutionalized, however, it is not impossible that a solution such as a progressive tax on capital would be judged unconstitutional.
52. On the way Stern and Nordhaus arrive at their preferred discount rates, see the online technical appendix. It is interesting that both men use the same “modified golden rule” I described earlier but reverse positions entirely when it comes to choosing the concavity of the social utility function. (Nordhaus makes a more Rawlsian choice than Stern in order to justify ascribing little weight to the preferences of future generations.) A logically more satisfactory procedure would introduce the fact that the substitutability of natural capital for other forms of wealth is far from infinite in the long run (as Roger Guesnerie and Thomas Sterner have done). In other words, if natural capital is destroyed, consuming fewer iPhones in the future will not be enough to repair the damage.
53. As noted, the current low interest rates on government debt are no doubt temporary and in any case somewhat misleading: some countries must pay very high rates, and it is unlikely that those that are borrowing today at under 1 percent will continue to enjoy such low rates for decades (analysis of the period 1970–2010 suggests that real interest rates on long-term public debt in the rich countries is around 3 percent; see the online technical appendix). Nevertheless, current low rates are a powerful economic argument in favor of public investment (at least as long as such rates last).
54. Over the last several decades, annual public investment (net of depreciation of public assets) in most rich countries has been about 1–1.5 percent of GDP. See the online technical appendix and Supplemental Table S16.1, available online.
55. Including tools such as the carbon tax, which increases the cost of energy consumption as a function of the associated emission of carbon dioxide (and not as a function of budget variations, which has generally been the logic of gasoline taxes). There is good reason to believe, however, that the price signal has less of an impact on emissions than public investment and changes to building codes (requiring thermal insulation, for example).
56. The idea that private property and the market allow (under certain conditions) for the coordination and efficient use of the talents and information possessed by millions of individuals is a classic that one find
s in the work of Adam Smith, Friedrich Hayek, and Kenneth Arrow and Claude Debreu. The idea that voting is another efficient way of aggregating information (and more generally ideas, reflections, etc.) is also very old: it goes back to Condorcet. For recent research on this constructivist approach to political institutions and electoral systems, see the online technical appendix.
57. For example, it is important to be able to study where political officials from various countries stand in the wealth and income hierarchies (see previous chapters). Still, statistical summaries might suffice for the purpose; detailed individual data are generally not needed. As for establishing trust when there is no other way to do so: one of the first actions of the revolutionary assemblies of 1789–1790 was to compile a “compendium of pensions” that listed by name and amount the sums paid by the royal government to various individuals (including debt repayments, pensions to former officials, and outright favors). This sixteen-hundred-page book contained 23,000 names and listed detailed amounts (multiple sources of income were combined into a single line for each individual), the ministry involved, the age of the person, the final year of payment, the reasons for the payment, etc. It was published in April 1790. On this interesting document, see the online technical appendix.
58. This is due mainly to the fact that wages are generally aggregated in a single line with other intermediate inputs (that is, with purchases from other firms, which also remunerate both labor and capital). Hence published accounts never reveal the split between profits and wages, nor do they allow us to uncover possible abuses of intermediate consumption (which can be a way of augmenting the income of executives and/or stockholders). For the example of the Lonmin accounts and the Marikana mine, see the online technical appendix.
59. The exigent attitude toward democracy of a philosopher such as Jacques Rancière is indispensable here. See in particular his La haine de la démocratie (Paris: La Fabrique, 2005).
Conclusion
1. Note, too, that it is perfectly logical to think that an increase in the growth rate g would lead to an increase in the return on capital r and would therefore not necessarily reduce the gap r − g. See Chapter 10.
2. When one reads philosophers such as Jean-Paul Sartre, Louis Althusser, and Alain Badiou on their Marxist and/or communist commitments, one sometimes has the impression that questions of capital and class inequality are of only moderate interest to them and serve mainly as a pretext for jousts of a different nature entirely.
Contents in Detail
Acknowledgments
Introduction
A Debate without Data?
Malthus, Young, and the French Revolution
Ricardo: The Principle of Scarcity
Marx: The Principle of Infinite Accumulation
From Marx to Kuznets, or Apocalypse to Fairy Tale
The Kuznets Curve: Good News in the Midst of the Cold War
Putting the Distributional Question Back at the Heart of Economic Analysis
The Sources Used in This Book
The Major Results of This Study
Forces of Convergence, Forces of Divergence
The Fundamental Force for Divergence: r > g
The Geographical and Historical Boundaries of This Study
The Theoretical and Conceptual Framework
Outline of the Book
Part One: Income and Capital
1. Income and Output
The Capital-Labor Split in the Long Run: Not So Stable
The Idea of National Income
What Is Capital?
Capital and Wealth
The Capital/Income Ratio
The First Fundamental Law of Capitalism: α = r × β
National Accounts: An Evolving Social Construct
The Global Distribution of Production
From Continental Blocs to Regional Blocs
Global Inequality: From 150 Euros per Month to 3,000 Euros per Month
The Global Distribution of Income Is More Unequal Than the Distribution of Output
What Forces Favor Convergence?
2. Growth: Illusions and Realities
Growth over the Very Long Run
The Law of Cumulative Growth
The Stages of Demographic Growth
Negative Demographic Growth?
Growth as a Factor for Equalization
The Stages of Economic Growth
What Does a Tenfold Increase in Purchasing Power Mean?
Growth: A Diversification of Lifestyles
The End of Growth?
An Annual Growth of 1 Percent Implies Major Social Change
The Posterity of the Postwar Period: Entangled Transatlantic Destinies
The Double Bell Curve of Global Growth
The Question of Inflation
The Great Monetary Stability of the Eighteenth and Nineteenth Centuries
The Meaning of Money in Literary Classics
The Loss of Monetary Bearings in the Twentieth Century
Part Two: The Dynamics of the Capital/Income Ratio
3. The Metamorphoses of Capital
The Nature of Wealth: From Literature to Reality
The Metamorphoses of Capital in Britain and France
The Rise and Fall of Foreign Capital
Income and Wealth: Some Orders of Magnitude
Public Wealth, Private Wealth
Public Wealth in Historical Perspective
Great Britain: Public Debt and the Reinforcement of Private Capital
Who Profits from Public Debt?
The Ups and Downs of Ricardian Equivalence
France: A Capitalism without Capitalists in the Postwar Period
4. From Old Europe to the New World
Germany: Rhenish Capitalism and Social Ownership
Shocks to Capital in the Twentieth Century
Capital in America: More Stable Than in Europe
The New World and Foreign Capital
Canada: Long Owned by the Crown
New World and Old World: The Importance of Slavery
Slave Capital and Human Capital
5. The Capital/Income Ratio over the Long Run
The Second Fundamental Law of Capitalism: β = s/g
A Long-Term Law
Capital’s Comeback in Rich Countries since the 1970s
Beyond Bubbles: Low Growth, High Saving
The Two Components of Private Saving
Durable Goods and Valuables
Private Capital Expressed in Years of Disposable Income
The Question of Foundations and Other Holders of Capital
The Privatization of Wealth in the Rich Countries
The Historic Rebound of Asset Prices
National Capital and Net Foreign Assets in the Rich Countries
What Will the Capital/Income Ratio Be in the Twenty-First Century?
The Mystery of Land Values
6. The Capital-Labor Split in the Twenty-First Century
From the Capital/Income Ratio to the Capital-Labor Split
Flows: More Difficult to Estimate Than Stocks
The Notion of the Pure Return on Capital
The Return on Capital in Historical Perspective
The Return on Capital in the Early Twenty-First Century
Real and Nominal Assets
What Is Capital Used For?
The Notion of Marginal Productivity of Capital
Too Much Capital Kills the Return on Capital
Beyond Cobb-Douglas: The Question of the Stability of the Capital-Labor Split
Capital-Labor Substitution in the Twenty-First Century: An Elasticity Greater Than One
Traditional Agricultural Societies: An Elasticity Less Than One
Is Human Capital Illusory?
Medium-Term Changes in the Capital-Labor Split
Back to Marx and the Falling Rate of Profit
Beyond the “Two Cambridges”
Capital’s Comeback in a Low-Growth Regime
The Caprices of Technology
&
nbsp; Part Three: The Structure of Inequality
7. Inequality and Concentration: Preliminary Bearings
Vautrin’s Lesson
The Key Question: Work or Inheritance?
Inequalities with Respect to Labor and Capital
Capital: Always More Unequally Distributed Than Labor
Inequalities and Concentration: Some Orders of Magnitude
Lower, Middle, and Upper Classes
Class Struggle or Centile Struggle?
Inequalities with Respect to Labor: Moderate Inequality?
Inequalities with Respect to Capital: Extreme Inequality
A Major Innovation: The Patrimonial Middle Class
Inequality of Total Income: Two Worlds
Problems of Synthetic Indices
The Chaste Veil of Official Publications
Back to “Social Tables” and Political Arithmetic
8. Two Worlds
A Simple Case: The Reduction of Inequality in France in the Twentieth Century
The History of Inequality: A Chaotic Political History
From a “Society of Rentiers” to a “Society of Managers”
The Different Worlds of the Top Decile
The Limits of Income Tax Returns
The Chaos of the Interwar Years
The Clash of Temporalities
The Increase of Inequality in France since the 1980s
A More Complex Case: The Transformation of Inequality in the United States
The Explosion of US Inequality after 1980
Did the Increase of Inequality Cause the Financial Crisis?
The Rise of Supersalaries
Cohabitation in the Upper Centile
9. Inequality of Labor Income
Wage Inequality: A Race between Education and Technology?
The Limits of the Theoretical Model: The Role of Institutions
Wage Scales and the Minimum Wage
How to Explain the Explosion of Inequality in the United States?
The Rise of the Supermanager: An Anglo-Saxon Phenomenon
Europe: More Inegalitarian Than the New World in 1900–1910
Inequalities in Emerging Economies: Lower Than in the United States?
Capital in the Twenty-First Century Page 81
