Menus Subscribe Search

Follow us


Inequality

microsoft-store

Bill Gates, the world's richest man, created his fortune over 40 years with Microsoft. But that was during a time where we valued income over wealth. (Photo: cleanfotos/Shutterstock)

The Dead Are Wealthier Than the Living: Capital in the 21st Century

• March 20, 2014 • 11:41 AM

Bill Gates, the world's richest man, created his fortune over 40 years with Microsoft. But that was during a time where we valued income over wealth. (Photo: cleanfotos/Shutterstock)

Patrimonial capitalism—and the landed or urban gentry living off of inherited wealth—was dealt a mortal blow by the Great Depression and World Wars. But it’s making a comeback, and the only way to stop it might be a worldwide tax on capital.

In Honoré de Balzac’s 1835 novel Père Goriot, a cynical observer of Parisian society under the reign of Louis-Philippe extends some career advice to a penniless young nobleman:

The Baron de Rastignac thinks of becoming an advocate, does he? There’s a nice prospect for you! Ten years of drudgery straight away. You are obliged to live at the rate of a thousand francs a month; you must have a library of law books, live in chambers, go into society, go down on your knees to ask a solicitor for briefs, lick the dust off the floor of the Palais de Justice. If this kind of business led to anything, I should not say no; but just give me the names of five advocates here in Paris who by the time that they are fifty are making fifty thousand francs a year! Bah! I would sooner turn pirate on the high seas than have my soul shrivel up inside me like that. How will you find the capital? There is but one way, marry a woman who has money.

It was much the same, the French economist Thomas Piketty tells us in his new book, Capital in the Twenty-First Century, two decades earlier in Jane Austen’s rural England, and it remained so five decades later on Henry James’ Washington Square. To belong to the landed or urban gentry of the 18th and 19th centuries—that is, to possess “books or musical instruments or jewelry or ball gowns”—you needed at least 20 to 30 times the income of the average person, and the most lucrative professions paid only half that. You needed capital, typically in the form of land. And you needed a lot of it—much more than could typically be amassed in the course of one lifetime. Consequently, “society” (i.e., the rich) consisted almost entirely of rentiers living off inherited wealth. It was much more true in Europe than in the United States, but it was true up to a point here, too, especially in the antebellum South.

This “patrimonial capitalism,” as Piketty calls it, was dealt a mortal blow a hundred years ago with the outbreak of World War I, which diverted financial resources, impeded shipping and trade, destroyed infrastructure, and killed members of the officer (i.e., upper) class disproportionately. Then the Great Depression and World War II put it out of its misery. In recent memory, the way to get rich has been to do it yourself. The world’s richest man, Bill Gates, is the opposite of a 19th-century society dandy—an almost comically unglamorous figure who parlayed an unexceptional upbringing in the upper middle class into a reported $76 billion fortune (according to Forbes). Plenty of others get rich through more questionable means (especially the manipulation of abstruse financial instruments), and a lively discussion has begun about how we should address the three-decade trend of growing income inequality. But it’s income that mostly interests us, not wealth, because income is the currency of the modern economy. Gone are the days when the only way to acquire an upper-class income was to marry into a family fortune.

“Yes, the U.S. enjoyed phenomenal economic growth for three decades after the war, but that was because its European and Japanese competitors were flat on their backs.”

Or are they? Piketty says patrimonial capitalism is coming back. Being born into or marrying wealth never stopped being the easiest path to acquiring a fortune; Piketty fears it may once again become the most common path as well. Even within a single generation, “the entrepreneur always tends to turn into a rentier.” Gates, for instance, started disentangling himself from Microsoft at the comparatively young age of 45 so he could shift attention to his charitable foundation. By contrast, J. Paul Getty, the world’s richest man when Gates was born, remained president of Getty Oil until he died at 83. A fanatical miser, Getty was ever-fearful that his fortune would dissipate. (The elaborate Los Angeles museum that bears his name wasn’t built until well after his death.)

Why is capital re-establishing dominance over income? Because, Piketty writes, r > g.

In plain English: The return on capital (r) almost always exceeds economic growth (g). Piketty calls r > g an “inequality” rather than a formula because it isn’t “an absolute logical necessity.” Rather, it’s “the result of a confluence of forces, each largely independent of the others.” These include demographics (a rapidly growing population boosts g); the extent to which a country’s economy has matured (China has much higher g than the U.S. and Western Europe because it’s still catching up); and various “technological, psychological, social, and cultural factors” (all of which can cause r to fall). Typically, r is four to five times g, but the ratio gets larger as capital accumulates across generations. The dead—though worse off in most obvious respects than the rest of us—are wealthier than the living. “The past,” Piketty writes, “tends to devour the future.”

Piketty comes to this ghoulish conclusion after more than a decade spent meticulously compiling statistical data about wealth and income all over the world, often with Berkeley economist Emanuel Saez. (Together, the two economists wrote what is without question the most influential U.S. inequality study in a generation, which found that the top one percent had doubled its income share since 1979. Occupy Wall Street’s vocabulary came directly from Piketty and Saez.) France, Piketty observes patriotically, has the most precise records, dating to the French Revolution, when new taxes were imposed on nobles and clergy who’d been exempt from levies under the Ancien Regime. Much of Capital’s analysis, consequently, concerns France. But Piketty also provides extensive historical data from Great Britain, Germany, and the United States. Most of the pleasure in reading Capital lies in following the elaborate wealth and income patterns that Piketty traces through the centuries, blending economic, literary, and historical research. The clearest such pattern is that r really was, at most points in history, greater than g, if only because g was seldom much to write home about, especially back when economies were primarily agricultural. (Inflation, I learned from reading this book, didn’t really exist before the 20th century.)

Why, then, is it news to contemporary readers that r > g? Because for most of the 20th century that wasn’t true: Economic growth surpassed capital accumulation. That happy outcome, Piketty argues, was mainly because of the turmoil that began during the summer of 1914 and didn’t end until the summer of 1945. From the 1930s through the 1970s (and in some instances into the 1980s) the advanced industrial democracies saw their incomes grow more equal, even as the economy took off in the 1950s and 1960s. This is a trend many of us would like to find a way to recreate. But Piketty says it was brought to you by the Kaiser and the Führer, with an assist from some maladroit bankers—circumstances only a lunatic would wish to resurrect.

Piketty isn’t the first to argue that the post-World War II period of widely shared prosperity was the flukish consequence of world war and global economic calamity. (The journalist Robert Samuelson, for instance, made a similar case in his 1995 book, The Good Life and Its Discontents.) Usually, though, the argument is made in specific reference to the United States. It goes something like this: “Yes, the U.S. enjoyed phenomenal economic growth for three decades after the war, but that was because its European and Japanese competitors were flat on their backs.” The logical difficulty here is that (thanks in part to the Marshall Plan), America’s economic competitors actually recovered very quickly.

capital-21Piketty is making a different argument. He’s saying “Yes, the developed world enjoyed phenomenal economic growth for three decades after the war, but that was because patrimonial capitalism was flat on its back.” Again, this was truer in Europe than in the U.S., where inherited wealth had never flowered to anything like the same extent. France’s Belle Époque (1871-1914), for instance, lasted longer than our Gilded Age (1873-1900), and the inequalities it generated were larger. But today all of Europe is more egalitarian than the U.S., not less, and inequality is growing there at a much slower pace.

The big driver of income inequality, Piketty says, isn’t labor income. It’s capital. A series of charts demonstrates this by comparing the extremely high inequality in the U.S. circa 2010 with the extremely low inequality in Scandinavia circa 1970-1990. If you just look at labor income, then income share for the middle class (defined as the middle 40 percent) differs by only five percentage points. Only when you add in capital income does the gap widen to 15 percentage points. Thus far, that probably doesn’t reflect inheritance so much as the tendency of America’s one percent—really, the 0.01 percent, a cohort Piketty dubs “supermanagers”—to receive much of its remuneration in the form of stock options and other capital holdings. Still, the relative consistency of the middle class’ share of labor income was news to me. (It’s still getting smaller, though.)

Like most public-policy books, Capital is more satisfying in its diagnoses than in its prescriptions. Mainly, what Piketty would like to do is levy an international tax on capital—an idea even that he concedes is utopian. In general, Piketty’s approach toward policy strikes me as overly fatalistic (dare one say Gallic?). Although he notes repeatedly that income and capital distribution don’t just happen—they are shaped by what governments do—he tends to present those government actions as being determined by events. Thus when Piketty argues that World War I devastated private capital, he doesn’t just mean that that it exacted a high price in blood and treasure. He also means that the war made it politically possible to jack up income taxes on the rich in Europe and the U.S. The notion that this might have occurred under less dire circumstances, or at least different circumstances, is not one he chooses to consider. In an incisive review of Piketty’s book for the Huffington Post, economist Dean Baker points out that “a very large share, perhaps a majority, of corporate profit hinges on rules and regulations that could in principle be altered.” He then cites a few: drug patent rules, weak oversight of telecom monopolies, untaxed financial transactions, and corporate governance of executive pay. Baker also suggests that the tendency for large amounts of capital to realize a higher return isn’t solely attributable to the superior financial instruments they have access to; it may also have something to do with rampant insider trading, which could be policed more closely.

It’s always dangerous to project current trends into the future, but here’s one extrapolation I’ll subscribe to: predictions about the future will usually prove wrong. With regard to r > g, lets remember that most of Piketty’s evidence comes from the pre-industrial economy. The industrial and post-industrial economies are only about 150 years old, and for nearly half that time g was greater than r. That almost certainly means we lack sufficient data to determine how, or whether, capital accumulation goes haywire in the coming years.

Timothy Noah
Timothy Noah is a writer at MSNBC.com and the author of The Great Divergence: America's Growing Inequality Crisis and What We Can Do About It (Bloomsbury Press).

More From Timothy Noah

A weekly roundup of the best of Pacific Standard and PSmag.com, delivered straight to your inbox.

Recent Posts

October 24 • 7:13 AM

There Is No Surge in Illegal Immigration

The overall rate of illegal immigration has actually decreased significantly in the last 10 years. The time is ripe for immigration reform.


October 24 • 6:15 AM

Politicians Really Aren’t Better Decision Makers

Politicians took part in a classic choice experiment but failed to do better than the rest of us.


October 24 • 5:00 AM

Why We Gossip: It’s Really All About Ourselves

New research from the Netherlands finds stories we hear about others help us determine how we’re doing.


October 24 • 2:00 AM

Congratulations, Your City Is Dying!

Don’t take population numbers at face value.


October 23 • 4:00 PM

Of Course Marijuana Addiction Exists

The polarized legalization debate leads to exaggerated claims and denials about pot’s potential harms. The truth lies somewhere in between.


October 23 • 2:00 PM

American Companies Are Getting Way Too Cozy With the National Security Agency

Newly released documents describe “contractual relationships” between the NSA and U.S. companies, as well as undercover operatives.


October 23 • 12:00 PM

The Man Who’s Quantifying New York City

Noah Davis talks to the proprietor of I Quant NY. His methodology: a little something called “addition.”


October 23 • 11:02 AM

Earliest High-Altitude Settlements Found in Peru

Discovery suggests humans adapted to high altitude faster than previously thought.


October 23 • 10:00 AM

The Psychology of Bribery and Corruption

An FBI agent offered up confidential information about a political operative’s enemy in exchange for cash—and they both got caught. What were they thinking?


October 23 • 8:00 AM

Ebola News Gives Me a Guilty Thrill. Am I Crazy?

What it means to feel a little excited about the prospect of a horrific event.


October 23 • 7:04 AM

Why Don’t Men Read Romance Novels?

A lot of men just don’t read fiction, and if they do, structural misogyny drives them away from the genre.


October 23 • 6:00 AM

Why Do Americans Pray?

It depends on how you ask.


October 23 • 4:00 AM

Musicians Are Better Multitaskers

New research from Canada finds trained musicians more efficiently switch from one mental task to another.


October 22 • 4:00 PM

The Last Thing the Women’s Movement Needs Is a Heroic Male Takeover

Is the United Nations’ #HeForShe campaign helping feminism?


October 22 • 2:00 PM

Turning Public Education Into Private Profits

Baker Mitchell is a politically connected North Carolina businessman who celebrates the power of the free market. Every year, millions of public education dollars flow through Mitchell’s chain of four non-profit charter schools to for-profit companies he controls.


October 22 • 12:00 PM

Will the End of a Tax Loophole Kill Off Irish Business and Force Google and Apple to Pay Up?

U.S. technology giants have constructed international offices in Dublin in order to take advantage of favorable tax policies that are now changing. But Ireland might have enough other draws to keep them there even when costs climb.


October 22 • 10:00 AM

Veterans in the Ivory Tower

Why there aren’t enough veterans at America’s top schools—and what some people are trying to do to change that.


October 22 • 8:00 AM

Our Language Prejudices Don’t Make No Sense

We should embrace the fact that there’s no single recipe for English. Making fun of people for replacing “ask” with “aks,” or for frequently using double negatives just makes you look like the unsophisticated one.


October 22 • 7:04 AM

My Politicians Are Better Looking Than Yours

A new study finds we judge the cover by the book—or at least the party.


October 22 • 6:00 AM

How We Form Our Routines

Whether it’s a morning cup of coffee or a glass of warm milk before bed, we all have our habitual processions. The way they become engrained, though, varies from person to person.


October 22 • 4:00 AM

For Preschoolers, Spite and Smarts Go Together

New research from Germany finds greater cognitive skills are associated with more spiteful behavior in children.


October 21 • 4:00 PM

Why the Number of Reported Sexual Offenses Is Skyrocketing at Occidental College

When you make it easier to report assault, people will come forward.


October 21 • 2:00 PM

Private Donors Are Supplying Spy Gear to Cops Across the Country Without Any Oversight

There’s little public scrutiny when private donors pay to give police controversial technology and weapons. Sometimes, companies are donors to the same foundations that purchase their products for police.


October 21 • 12:00 PM

How Clever Do You Think Your Dog Is?

Maybe as smart as a four-year-old child?


October 21 • 10:00 AM

Converting the Climate Change Non-Believers

When hard science isn’t enough, what can be done?


Follow us


Politicians Really Aren’t Better Decision Makers

Politicians took part in a classic choice experiment but failed to do better than the rest of us.

Earliest High-Altitude Settlements Found in Peru

Discovery suggests humans adapted to high altitude faster than previously thought.

My Politicians Are Better Looking Than Yours

A new study finds we judge the cover by the book—or at least the party.

That Cigarette Would Make a Great Water Filter

Clean out the ashtray, add some aluminum oxide, and you've (almost) got yourself a low-cost way to remove arsenic from drinking water.

Love and Hate in Israel and Palestine

Psychologists find that parties to a conflict think they're motivated by love while their enemies are motivated by hate.

The Big One

One company, Amazon, controls 67 percent of the e-book market in the United States—down from 90 percent five years ago. September/October 2014 new-big-one-5

Copyright © 2014 by Pacific Standard and The Miller-McCune Center for Research, Media, and Public Policy. All Rights Reserved.