Capital in the Twenty-First Century

Marx totally neglected the possibility of durable technological progress and steadily increasing productivity, which is a force that can to some extent serve as a counterweight to the process of accumulation and concentration of private capital.

One should be wary of any economic determinism in regard to inequalities of wealth and income. The history of the distribution of wealth has always been deeply political, and it cannot be reduced to purely economic mechanisms.

The history of inequality is shaped by the way economic, social, and political actors view what is just and what is not, as well as by the relative power of those actors and the collective choices that result. It is the joint product of all relevant actors combined.

The main forces for convergence are the diffusion of knowledge and investment in training and skills.

Over a long period of time, the main force in favor of greater equality has been the diffusion of knowledge and skills.

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.

GDP measures the total of goods and services produced in a given year within the borders of a given country.

When depreciation is subtracted from GDP, one obtains the “net domestic product,” which I will refer to more simply as “domestic output” or “domestic production,” which is typically 90 percent of GDP.

To sum up, a country’s national income may be greater or smaller than its domestic product, depending on whether net income from abroad is positive or negative. National income = domestic output + net income from abroad6 At the global level, income received from abroad and paid abroad must balance, so that income is by definition equal to output: Global income = global output7

In this book, capital is defined as the sum total of nonhuman assets that can be owned and exchanged on some market. Capital includes all forms of real property (including residential real estate) as well as financial and professional capital (plants, infrastructure, machinery, patents, and so on) used by firms and government agencies.

The most natural and useful way to measure the capital stock in a particular country is to divide that stock by the annual flow of income. This gives us the capital / income ratio, which I denote by the Greek letter β. For example, if a country’s total capital stock is the equivalent of six years of national income, we write β = 6 (or β = 600%). In the developed countries today, the capital / income ratio generally varies between 5 and 6, and the capital stock consists almost entirely of private capital.

The First Fundamental Law of Capitalism: α = r × β I can now present the first fundamental law of capitalism, which links the capital stock to the flow of income from capital. The capital / income ratio β is related in a simple way to the share of income from capital in national income, denoted α. The formula is α = r × β where r is the rate of return on capital. For example, if β = 600% and r = 5%, then α = r × β = 30%.13 In other words, if national wealth represents the equivalent of six years of national income, and if the rate of return on capital is 5 percent per year, then capital’s share in national income is 30 percent.

The three most important concepts for analyzing the capitalist system: the capital / income ratio, the share of capital in income, and the rate of return on capital.

The poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill, and education, not by becoming the property of the wealthy. The diffusion of knowledge is not like manna from heaven: it is often hastened by international openness and trade (autarky does not encourage technological transfer). Above all, knowledge diffusion depends on a country’s ability to mobilize financing as well as institutions that encourage large-scale investment in education and training of the population while guaranteeing a stable legal framework that various economic actors can reliably count on. It is therefore closely associated with the achievement of legitimate and efficient government.