In the first part of CAPITAL in the Twenty-First Century, the central magnitude whose temporal evolution Piketty studies is the ratio of capital in a society to income. Since the first of these is a stock and the second is a flow [as economists say], he must convert one or the other in order to form a ratio of them, and he does this by studying the ratio of the capital in a society to the amount of income from all sources for one year, or annual national income. Piketty represents this ratio by the Greek capital letter β. Let us begin by making clear how Piketty is using these two terms. "In this book," he says, "capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market." [p. 46] "National income is defined as the sum of all income available to the residents of a given country in a given year, regardless of the legal classification of that income." [p. 43]
Right away, it is necessary to say something about these definitions, for they underpin everything in the book. First of all, note that the definition of "capital" deliberately excludes what economists, following Gary Becker, call "human capital." Picketty has some very unflattering things to say about Becker and those who follow him, justifiably in my judgment. Second, both of these terms are measured in monetary units -- dollars, or Euros, as Picketty prefers throughout the book. This is standard operating procedure for economists, of course, and makes it possible to use the vast array of statistical information gathered by governmental and non-governmental agencies, but it poses certain problems of which we need to be aware. A share of stock is a piece of capital, as is a building, a tool, a stockpile of coal, a warehouse full of automobile tires, an acre of land, a patent, an insurance policy, and even a logo or a trademark. Now, a major stock market drop, like the one that precipitated the Great Recession of 2008-9, immediately strips away billions or even trillions of dollars from the market value of certain assets. From an accounting perspective, this is no different from a war in which massive destruction is done to factories and roads and bridges Both count as losses of capital. But clearly there is a very great difference in reality. If a factory is bombed, it will take a good deal of labor and raw materials and planning and time to replace it, but a capital value equivalent to that of the factory may be lost and then regained in moments by a fluctuation in the price of shares in the corporation that owns the factory. Still and all, inasmuch as capital, on any construal, is a many-dimensional array of quite dissimilar things, how else can one examine its quantity and the movements in that quantity save by considering its value, which is to say its market value?
[At this point, as I begin to discuss the data Piketty presents and the conclusions he draws, I must issue a warning: There is a vast amount of important information in this book, and I cannot even make passing reference to more than a small selection from it. Please do not make the mistake of thinking that because I fail to mention something Piketty has failed to discuss it! The principal purpose of this multi-part discussion is to encourage you to read the book.]
When Piketty measures the value of β over the past three centuries, which is to say the ratio of national capital to national income, he finds that at the beginning of this period, in 1700, national capital in Britain or France was seven times the annual national income, [I confess that I have never been much for macroeconomics, and it took me a while to become comfortable with this way of thinking.] This ratio holds pretty much constant for a bit over two hundred years [during which time both capital and income increase, of course], although in the nineteenth century a significant portion of the 700% is accounted for by imperial holdings in Africa and Asia that bulk up the total. Then the onset of World War I, the interwar crash and inflation, and World War II produce a precipitous decline in the value of β, from 700% in 1910 to roughly 300% in 1950. From then on, the capital/income ratio recovers rapidly, so that after two generations or so it is back up to 650% in France and 600% in Britain.
Over this centuries-long period, there is a fundamental change in the composition of national capital. In 1700, the value of agricultural land in Britain is 400% of national income -- 57% of all capital -- and nearly 500% of national income in France, or 70% of all capital. This ratio drops steadily and ever faster as we come into the 19th century, so that by 2010, the end of Piketty's survey, the value of agricultural land is no more than a few percentage points of national annual income. The land has not become less valuable in human terms, of course -- we all still have to eat. But non-agricultural capital and housing -- residential dwellings, factories, mines, government bonds, shares of stock, and so forth -- take over from agricultural land as the principal components of national capital.
This U-shape characteristic of the β curve reappears again and again in the book as Piketty studies the evolution of national capital and national income and then studies the parallel evolution of capital and income in equality. This is a visual representation of one of the most interesting and important of Piketty's conclusions. Since this is, to my mind, the single most interesting thing I found in Piketty's book, I want to take some time setting it out and discussing it.
By taking so long an historical view, Piketty is able to show that the thirty-five year period of the two world wars and the intervening world economic crash was a world-historical anomaly that interrupted a long-term secular process of growth and persistent inequality in the capitalist world. The enormous explosion of growth in the thirty years following that anomaly can be seen, through Piketty's lens, not as the emergence of a new world order, more humane, more equal, less in thrall to inherited wealth, but as a quite natural recovery from the anomaly and re-establishment of a centuries-old pattern of extreme inequality in the ownership and control of society's capital resources and the income from them.
To be sure, a fundamental transformation has taken place over these two generations in the structure of inequality. The emergence of "supermanagers" and the [possibly temporary] appearance of a new somewhat propertied middle class for a time made income from wages and salaries more important than income from capital holdings as cause of inequality. But that change, significant as it is, is even now starting to give way to a reappearance of rentier capitalism, which is to say capitalism in which ownership of capital rather than the wage earnings from commanding positions in the structure of capitalism becomes the dominant source of wealth.
Now -- and this is, I think, brilliant of Piketty to recognize and document -- the period of the two wars and Les Trente Glorieuses or Post-War Boom -- just happens to coincide with the time when modern academic economists came into their own as the stars of the Academy and the oracles of modern Democracy, especially in America. Perhaps we should not be surprised that these distinguished gentlemen, many of whom were honored with the newly created Nobel Memorial Prize in Economic Sciences, took what was happening during their formative years as definitive, as a matter of pure theoretical necessity for all times and places. Finding themselves on the ascending side of a U-shaped curve, and more or less oblivious to the place of the U-shape in the larger historical picture, they quite naturally assumed that capitalism had solved the problem of crisis and inequality and was embarked on what they liked to describe as a balanced growth path. Or, as the old saying has it, they were born on third and thought they had hit a triple.
Those of you less enamored of Marx than we old loyalists may be forgiven for not recalling that the subtitle of CAPITAL is "Critique of Political Economy." Marx's book is both an anatomy of capitalist economy and society and a brilliant attack on the economists who preceded him. I think Piketty is quite conscious of engaging in an exactly similar two-pronged assault, both on the world of capital and income and inequality and growth, and on the world of academic economists. I think the single thing I like most about him is that after earning his doctorate at the age of 22, he went to teach at MIT, the Promised Land for young aspiring academic economists, but after two or three years got fed up and walked away from what would certainly have been a brilliant American academic career, to return to France. Mind you, he has been teaching at les grandes écoles, which rival the Ivy League in their exclusivity. But still!
Tomorrow I shall turn to the little mathematical inequality that is, for Piketty, the key to understand where the world is headed: r > g.