Capital in the Twenty First Century

1. Wealth Distribution: A Political, Not Just Economic, Issue

The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms.

Politics shapes economics. The distribution of wealth isn't solely determined by market forces; political decisions and societal views on justice play a crucial role. Policies adopted after wars, especially regarding taxation and finance, significantly impact wealth distribution.

Historical context matters. The reduction of inequality between 1910 and 1950 was largely due to the shocks of war and subsequent policy responses, not a natural economic process. Similarly, the resurgence of inequality after 1980 is linked to political shifts, particularly in taxation and finance.

Collective choices define outcomes. The distribution of wealth is a joint product of economic, social, and political actors, reflecting their relative power and collective choices about what is considered just. Understanding these dynamics requires a broad, interdisciplinary approach.

2. Convergence vs. Divergence: The Push and Pull of Economic Forces

The dynamics of wealth distribution reveal powerful mechanisms pushing alternately toward convergence and divergence.

Knowledge diffusion drives convergence. The spread of knowledge, skills, and technology is a primary force for reducing inequality, both within and between countries. Emergent economies catch up by adopting advanced production methods and acquiring comparable skills.

Divergence forces persist. Despite convergence trends, powerful forces push toward greater inequality, even in efficient markets. These include:

• Top earners separating themselves by a wide margin
• Accumulation and concentration of wealth when growth is weak and the return on capital is high

Low growth exacerbates divergence. Low population and productivity growth can't adequately counterbalance the Marxist principle of infinite accumulation, leading to potentially destabilizing levels of wealth concentration.

3. The Fundamental Inequality: r > g

When the rate of return on capital significantly exceeds the growth rate of the economy...then it logically follows that inherited wealth grows faster than output and income.

r > g explained. The core concept is that when the rate of return on capital (r) exceeds the economic growth rate (g), wealth tends to concentrate. This means inherited wealth grows faster than income from labor, leading to increased inequality.

Historical precedent. This dynamic was prevalent in the 19th century and is likely to reemerge in the 21st, potentially undermining meritocratic values and democratic societies.

Implications for inherited wealth. When r > g, inherited wealth dominates wealth amassed from a lifetime's labor, leading to extreme capital concentration. This can create levels of inequality incompatible with democratic values and social justice.

4. Capital's Metamorphosis: From Land to Finance

The nature of capital itself has changed radically (from land and other real estate in the eighteenth century to industrial and financial capital in the twenty-first century).

Shifting asset composition. Capital has transformed from primarily agricultural land in the 18th century to a mix of real estate, industrial equipment, and financial instruments in the 21st century. This shift reflects the evolution of economies from agrarian to industrial and service-based.

Capital's enduring importance. Despite changes in its composition, capital remains a crucial factor in economic growth and social structure. The capital share of national income in the early 21st century is only slightly smaller than in the 18th or 19th centuries.

Slowing growth amplifies capital's role. The importance of capital in wealthy countries today is largely due to a slowing of both demographic and productivity growth, coupled with political regimes that favor private capital.

5. The Kuznets Curve Reversal: Rising Inequality in the 21st Century

The magical Kuznets curve theory was formulated in large part for the wrong reasons, and its empirical underpinnings were extremely fragile.

Kuznets's optimistic view. Simon Kuznets theorized that income inequality would automatically decrease in advanced capitalist development stages, a view that aligned with the post-World War II "Trente Glorieuses."

The U-shaped curve. Income inequality has significantly increased in rich countries since the 1970s, especially in the United States, challenging Kuznets's theory. This resurgence of inequality reflects political shifts, particularly in taxation and finance.

Distinct divergence processes. The U-shaped curve represents two distinct phenomena:

• The explosion of very high incomes from labor, particularly among top managers
• The accumulation and concentration of wealth when growth is weak and the return on capital is high

6. The Social State: A 20th-Century Innovation Under Threat

The reduction of in e qual ity 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.

The social state's rise. The 20th century saw the rise of the social state, characterized by increased government intervention in the economy and the provision of social services like education, healthcare, and pensions.

War's impact on the social state. The world wars and the Great Depression led to the creation of new regulatory and tax policies, reducing capital's share of income and paving the way for the social state.

Challenges to the social state. Since the 1980s, the social state has faced challenges from financial globalization, deregulation, and political shifts, leading to questions about its sustainability and effectiveness in the 21st century.

7. Progressive Taxation: A Tool for Regulation, Not Just Revenue

Taxation is not only a way of requiring all citizens to contribute to the financing of public expenditures and projects...it is also useful for establishing classifications and promoting knowledge as well as democratic transparency.

Taxation's dual role. Taxation serves not only to fund public expenditures but also to promote knowledge, democratic transparency, and social equity.

Progressive taxation's historical impact. The progressive income tax, a major 20th-century innovation, played a key role in reducing inequality. However, it's now threatened by international tax competition and a lack of clear understanding of its foundations.

Rethinking progressive taxation. A progressive tax on capital is needed to regulate globalized patrimonial capitalism, promote the general interest, and preserve economic openness.

8. Global Wealth Imbalances: A Looming Crisis?

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?

Global inequality's dimensions. Global inequality ranges from regions with per capita incomes of 150-250 euros per month to those with 2,500-3,000 euros per month, highlighting vast disparities.

Shifting economic power. From 1900 to 1980, Europe and America dominated global production, but their share has since declined, with Asia, particularly China, gaining prominence.

The question of ownership. The concentration of wealth raises concerns about who will own the world in the future, whether it be traders, top managers, oil-producing countries, or financial institutions.

9. The Illusion of Meritocracy: Inheritance Still Matters

In e qual ity is not necessarily bad in itself: the key question is to decide whether it is justifi ed, whether there are reasons for it.

Inheritance's enduring role. Despite beliefs in meritocracy, inherited wealth remains a significant factor in wealth accumulation, particularly in low-growth environments.

The return of inheritance. The likely decrease in population and economic growth in coming decades makes the trend of wealth accumulation more worrisome.

Inheritance vs. merit. The significance of wealth inequalities differs depending on whether they derive from inherited wealth or savings, influencing the structure of inequality and systems of justification.

10. The Need for Economic and Financial Transparency

Intellectual and po liti cal debate about the distribution of wealth has long been based on an abundance of prejudice and a paucity of fact.

Data-driven analysis. Intellectual and political debates about wealth distribution should be based on systematic and methodical research, using precisely defined sources, methods, and concepts.

Transparency as a prerequisite. Financial transparency and information sharing are essential for effective regulation of the globalized financial system and for promoting democratic governance.

The role of national accounts. National accounts are a social construct that reflects the preoccupations of the era when they were conceived, and they should be used with caution and in a critical spirit.

Last updated: March 1, 2025