Chapter 3, titled “The Metamorphoses of Capital,” examines how the nature of wealth has changed over the past couple of centuries.
I broke the chapter into two parts, where part 1 focuses on private wealth, while the second part focuses mainly on public wealth and debt.
When Horore de Balzac and Jane Austen wrote their novels at the beginning of the nineteenth century, the nature of wealth was relative clear to all readers. Wealth seemed to exist in order to produce rents, that is, dependable, regular payments to the owners of certain assets, which usually took the form of land or government bonds. (page 113)
Of course, Thomas Piketty acknowledged that even at that time there were businesspeople, as well as owners of overseas plantations (yes, including the slaves there) . But those were a definite minority.
Here’s the graph which really defines the chapter:
France follows a similar pattern.
Note that farmland has all-but disappeared as a form of wealth, but it has been mostly replaced by housing. Indeed, housing is about as large a share of total wealth as farmland was in 1800. Interesting to note that that the share of “other domestic capital” has changed minimally, part from being squeezed down starting around the time of World War One. And slowly bounding back.
While today the types have wealth have diversified, the principal of regular income remains valid. Indeed I teach my economics class that the value of a share of stock = the annual dividend payment / the interest rate. (Assuming both stay the same forever. In practice they are both subject to change, and stock values change rapidly with our predictions about the future. When a company pays no dividend with its profits and the stock price goes up (or in any case doesn’t go to zero) it is in the expectation that it will make even higher profits—and pay some dividends–in the future.)
Also observe that the capital/income ratio stayed right around 7 (in other words, total wealth = 7 years of total national income) from at least as far as back as 1700 right up until WW1. It crashed down to barely 3 by 1950, then has slowly climbed part of the way back. (France has an almost identical pattern, but its capital/income ratio has climbed back up to around 6 rather than 5.)
In the end, by 2010, the capital/income ratio had returned to its previous pre-World War I level—or even surpassed it if we divide the capital stock by disposable household income rather than national income (a dubious methodological choice, as will be shown alter.)…Broadly speaking, it was the wars of the twentieth century that wiped away the past to create the illusion that capitalism had been structurally transformed. (page 118)
This last sentence, which I bolded, is a core part of the thesis of the book, and it also aligns with Sam Pizzigati’s “The Rich Don’t Always Win.” The wars destroyed huge amounts of private wealth. I would add that they accomplished another effect that was equally important—more important in America: the wars, and the emerging Cold War, created a sense of national purpose and a deliberate choice to make things better for the average worker. Both from a desire to heighten unity, an acknowledgement that regular people had done a lot and deserved more, and a fear that fascism would reemerge if non/mismanagement of the economy led to another Great Depression.
Another aspect of the graph is the importance of foreign capital. Notice that by 1910, net foreign capital (British people owning assets overseas – foreigners owning British assets) was almost two years of income of about a quarter of total wealth! (In France it was a bit over one year of wealth). Foreign holdings of this magnitude are unknown to any major economy in the modern world. (We’ll put aside small oil-states such as Kuwait.) Thomas Pikeetty also points out that by 1910 these net foreign assets had 6 times the value of all farmland in Britain.
It is important to understand that these very large net positions in foreign assets allowed Britain and France to run structural trade deficits in the late nineteenth and early twentieth century. Between 1880 and 1914, both countries received significantly more in goods and services from the rest of the world than they exported themselves. (their trade deficits averages 1-2 percent of national income throughout this period). This posted no problem, because their income from foreign assets totaled more than 5 percent of national income. Their balance of payments was thus strongly positive, which enabled them to increase their holdings of foreign assets year after year. (page 121)
Another key principal of the book illustrated here: wealth can allow you to spend a certain amount of money while continuing to grow. While we are talking about nations here, the same logic applies to individuals.
Again, it was the World Wars that eliminated these large holdings of wealth. “Between 1950 and 2010, the net foreign asset holdings of France and Britain varied from slightly positive to slight negative while remaining quite close to zero, at least when compared with the levels observed previously.” (page 122)
While he touches on it later in the book it’s worth noting that these foreign assets were significant to Britain and France in way that they were not to the United States, were net foreign assets were close to zero, with both foreign ownership and ownership of foreign assets quite small and similar in magnitude. Different countries have different histories.