New thoughts on capital in the twenty-first century

Okay, so it's very nice to be here tonight.

So I've been working on the history of income

and wealth distribution for the past 15 years,

and one of the interesting lessons

coming from this historical evidence

is indeed that, in the long run,

there is a tendency for the rate of return of capital

to exceed the economy's growth rate,

and this tends to lead to high concentration of wealth,

not infinite concentration of wealth,

but the idea of the gap between r and g

and the idea of the level of inequality of wealth

towards society tends to converge.

So this is a key force that
I'm going to talk about today,

but let me say right away

that this is not the only important force

in the dynamics of income and wealth distribution,

and there are many other forces that play

an important role in the long run dynamics

of income and wealth distribution.

Also, you know, there is a lot of data

that still needs to be collected,

so, you know, we know a little bit more today

than we used to know, but we still know too little,

and, you know, certain there
are many different processes

— economic, social, political —

that need to be studied more.

And so I'm going to focus today on this simple force,

but that doesn't mean that other important forces

do not exist.

So most of the data I'm going to present

comes from this database

that's available online:

the World Top Incomes Database.

So this is the largest existing

historical database on equality,

and this comes from the effort

of over 30 scholars from several dozen countries.

So let me show you a couple of facts

coming from this database,

and then we'll return to r is bigger than g.

So fact number one is that there has been

a big reversal in the ordering of income inequality

between the United States and Europe

over the past century.

So back in 1900, 1910, income inequality was actually

much higher in Europe than in the United States,

whereas today, it is a lot higher in the United States.

So let me be very clear:

the main explanation for this is not r bigger than g.

It has more to do with changing supply and demand

for skill, the race between education and technology,

globalization, probably more unequal access

to skills in the U.S.,

where you have very top universities

but where the bottom part of the educational system

is not as good,

so very unequal access to skills,

and also an unprecedented rise

of top managerial compensation of the United States,

which is difficult to account for
just on the basis of education.

So there is more going on here,

but I'm not going to talk too much about this today,

because I want to focus on wealth inequality.

So let me just show you a very simple indicator

about the income inequality part.

So this is the share of total income

going to the top 10 percent.

So you can see that one century ago,

it was between 45 and 50 percent in Europe

and a little bit over 40 percent in the U.S.,

so there was more inequality in Europe.

Then there was a sharp decline

during the first half of the 20th century,

and in the recent decade, you can see that

the U.S. has become more unequal than Europe,

and this is the first fact I just talked about.

Now, the second fact is more about wealth inequality,

and here the central fact is that wealth inequality

is always a lot higher than income inequality,

and also wealth inequality,

although it has also increased in recent decades,

is still less extreme today

than what it was a century ago,

although the total quantity of wealth

relative to income has now recovered

from the very large shocks

caused by World War I, the Great Depression,

World War II.

So let me show you two graphs

illustrating fact number two and fact number three.

So first, if you look at the level of wealth inequality,

so this is the share of total wealth

going to top 10 percent wealthholders,

so you can see the same kind of reversal

between the U.S. and Europe that we had before

for income inequality.

So wealth concentration was higher

in Europe than in the U.S. a century ago,

and now it is the opposite.

But you can also show two things:

first, the general level of wealth inequality

are always higher than income inequality.

So remember, for income inequality,

the share going to the top 10 percent

was between 30 and 50 percent of total income,

whereas for wealth, the share are always

between 60 and 90 percent.

Okay, so that's fact number one,

and that's very important for what follows.

Wealth concentration is always

a lot higher than income concentration.

Fact number two is that the rise

in wealth inequality in recent decades

is still not enough to get us back to 1910.

So the big difference today,

wealth inequality is still very large,

with 60, 70 percent of total wealth for the top 10,

but the good news is that it's actually

better than one century ago,

where you had 90 percent in
Europe going to the top 10.

So today what you have

is what I call the middle 40 percent,

the people who are not in the top 10

and who are not in the bottom 50,

and what you can view as the wealth middle class

that owns 20 to 30 percent

of total wealth, national wealth,

whereas they used to be as poor, a century ago,

when there was basically no wealth middle class.

So this is an important change,

and it's interesting to see that wealth inequality

has not fully recovered to pre-World War I levels,

although the total quantity of wealth has recovered.

Okay? So this is the total value

of wealth relative to income,

and you can see that in particular in Europe,

we are almost back to the pre-World War I level.

So these are, there are really two

different parts of the story here.

One has to do with

the total quantity of wealth that will accumulate,

and there is nothing bad per se of course

in accumulating a lot of wealth,

and in particular if it is more diffuse

and less concentrated.

So what we really want to focus on

is the long-run evolution of wealth inequality,

and what's going to happen in the future.

How can we account for the fact that

until World War I, wealth inequality was so high

and if anything was rising to even higher levels,

and how can we think about the future?

So let me come to some of the explanations

and speculations about the future.

Let me first say that, you know,

probably the best model to explain

why wealth is so much

more concentrated than income

is dynamic, dynastic models

where individuals have long horizon

and accumulate wealth for all sorts of reasons.

If people were accumulating wealth

only for life cycle reasons,

you know, to be able to consume

when they are old,

then the level of wealth inequality

should be more or less in line

with the level of income inequality.

But it will be very difficult to explain

why you have so much more wealth inequality

than income inequality

with a pure a life cycle model,

so you need a story

where people also care

about wealth accumulation for other reasons.

So typically, they want to transmit

wealth to the next generation, to their children,

or sometimes they want to accumulate wealth

because of the prestige, the
power that goes with wealth.

So there must be other reasons

for accumulating wealth than just life cycle

to explain what we see in the data.