Capital in the 21st Century Review: Chapter 4 (part 3 of 3)

slaveryIn the late 18th through the mid-19th Centuries, what distinguished the United States economically from the European powers was the prominence of human slavery.






In 1800, slavery represented nearly 20% of the population of the United States:  roughly 1 million slaves out of a total population of 5 million.  In the South, where nearly all slaves were held, the proportion reached 40%:  1 million slaves and 1.5 million whites for a total population of 2.5 million…By 180s, the overall proportion of slaves in the overall population had fallen to around 15% (about 4 million slaves in a total population of 30 million), owing to rapid population growth in the North and West.  In the South, however, the proportion remained at 40%. (Page 159)


figure 4.10

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Capital in the 21st Century Review: Chapter 4 (part 2 of 3)

Chapter is titled “From Old Europe to the New World.”  It covers the same ground as chapter 3, but looks at major economies other than those of Britain and France.  The first part focused on Germany, which then led to discussion of the collapse of European Capital/Income ratios due to the World Wars.

Part two looks at the United States, Canada, and touches on Net Foreign Capital.


figure 4.6

Thomas Piketty points out two things here.  One is that the Capital/Income ratio c. 1800 is far smaller in the United States than in Europe:  around 3 rather than 6 or 7.  — and that much of this difference is explained by the smaller value of agricultural land (around 1x annual income in the United States vs. at least 3x annual income in Britain and France.)  An irony here is the land was so abundant in the United States compared to the Old World that it was dirt cheap, suggesting that real price and value are two different things.

(In economics, we call this the diamond-water paradox, that  something of extremely low value to society can be so highly priced while something essential for life itself can be extremely cheap.)

Thomas Piketty adds that housing and business capital also were lower.  In short, immigrants did not arrive with houses or often even large tools, and it took time to build these up.

The other major difference is that the Capital/Income ratio has been much more stable than it was in Europe.  In Britain and France it stated the 20th Century at 7, fell to under 3, then climbed back up to over 6  Meanwhile, in the United States it started around 5, fell to around 3.8, and climbed back up to a bit above 4.  Quite simply, our country was far less affected by the World Wars, measured as either economic impact of % of the population killed.

WW2 casualties

Note that 5 of the top 6 countries (Belarus, Ukraine, Latvia, Lithuania, “Rest of the USSR”), were all part of the USSR during the decades around World War Two.

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Capital in the 21st Century Review: Chapter 4 (part 1 of 3)

Chapter 4 is titled “From Old Europe to the New World.”  It essentially covers the same ground as Chapter 3, which covered Great Britain and France, but looks at three other countries:  Germany, the United States, and Canada.  By examining more than two countries it was easier to grasp which patters are universal versus in which ways have countries genuinely different from one another.

I broke this chapter into two parts.  Each part covers a country and then a new aspect of the capital/income ratio.

Part 1)  Germany and details of the mid-20th Century “shocks” which collapsed the capital/income ratio.

Part 2)  The United States and Canada, plus human slavery and how it affected the capital/income ratio, particularly in the United States.


Thomas Piketty Starts by looking at Germany. germany3 (Note:  the graph starts in 1870 rather than 1700 because 1870 is the date of German unification.)

C21c 4.1

The first thing to notice is that the overall evolution is similar (to Britain & France):  first, agricultural land gave way  in the long run to residential and commercial real estate and industrial and financial capital, and second, the capital/income ratio has grown steadily since World War II and appears to be on its way to regaining the level it had attained prior to the shocks of 1914-1945. (page 141)

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Capital in the 21st Century Review: Chapter 3 (part 2 of 2)

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 part 2 focuses mainly on public wealth and debt.

Thomas Piketty starts off by defining public wealth as falling into two categories:  assets which are owned by the government and used by itself or the public (buildings, roads), and “financial” assets of the type that individuals also often own (for example, partial ownership in private corporations, or foreign assets).  The line between these categories is blurry, as government-owned firms can be privatized.  Similarly, it can be extremely difficult to precisely price a road or a park.

However, Thomas Piketty’s key point is that net public wealth (assets – debts) is very small compared with private wealth.  “At present, the total value of public assets (both financial and non-financial) is estimated to be almost one year’s national income in Britain and a little less than 1.5 times that amount in France.  Since the public debt of both countries amounts to about one year’s national income, net public wealth (or capital) is close to zero.” (page 124)

Table 3.1

Since as the table above shows, net private wealth is almost 6 years national income,  “Regardless of the imperfections of measurement, the crucial fact here is that private wealth in 2010 accounts for virtually all national wealth in both countries:  more than 99% in Britain and roughly 95% in France, according to the latest available estimates.  In any case, the true figure is greater than 90%.”

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Capital in the 21st Century Review: Chapter 3 (part 1 of 2)

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:

Figure 3.1

France follows a similar pattern.

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Capital In the 21st Century Review: Chapter 2 (part 3 of 3)

The final part of chapter 2 itself breaks into two parts.  First is an appreciation for what even a seemingly modest amount of economic growth can do.

“In my view, the most important point…is that a per-capita output growth rate on the order of 1% is in fact extremely rapid, much more rapid then people think.” (page 95)

Following this is a bit of math, which invoves putting 1.01 or 1.015 to some power like 30 or 50 and get something really large.  1.0130 = around 1.35, or a 35% increase.  1.01550 = around 2.1, or a more-than-doubling.

Concretely, per-capita output growth in Europe, North America, and Japan over the past thirty years has ranged between 1 and 1.5 percent, and people’s lives have been subjected to major changes.  In 1980 there was no Internet or cell phone network, most people did not travel by air, most of the advanced medical technologies in common use today did not exist, and only a minority attended college.   (page 95)


world per capita output growth

Thomas Piketty points out that the relatively rapid change we see today stands in contrast with most of history.  “A society in which growth is 0.1% to 0.2% replicates itself with little or no change from one generation to the next.” (page 96)   That said, the relation between growth and inequality is a very complicated one.  Thomas Piketty points out that growth can create new inequality as new sectors can make certain people very wealthy very quickly.  (Bill Gates and other tech billionaires are great examples of this.)  Meanwhile, growth also can make inherited fortunes less important, thereby reducing inequality.
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Capital in the 21st Century Review: Chapter 2 (part 2 of 3)

Part 2 of Chapter 2 looks at the growth, first acknowledging that worldwide economic growth has been absolutely incredible over the past two centuries, with worldwide per capita income up more than tenfold since 1700.  He adds some qualifiers,

“Basically, the eighteenth century suffered from the same economic stagnation as previous centuries.  The nineteenth century witnessed the first sustained growth in per capita output, although large segments of the population derived little benefit from this, at least until the last three decades of the century.  It was not until the twentieth century that economic growth became a tangible, unmistakeable reality for everyone.” (pag e86-87)

Here is a four minute long video by Hans Reisling which makes much the same point in a rather impressive way!


That said, Thomas Piketty makes an excellent point about growth:

Economic development beings with the diversification of ways of life and types of goods and services produced and consumed.  It is thus a multidimensional process whose very nature makes it impossible to sum up properly with a single monetary index. (page 86)

In economics class I contrast our life to that of a Pharoah thousands of years ago.  We can hear any song we want whenever we want with the press of a button.  A pharaoh might be able to summon any musicians to his palace, but if they were elsewhere it might take over a week before they could return to Cairo and play the requested song.  Other modern products, from computers to telephones to cars to antibiotics to chocolate, where known in the Ancient World.  By contrast, certain things were relatively cheap, or at least cheaper, in the Ancient World:  land, servants, wood from huge old-growth trees.

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Capital in the 21st Century Review: Chapter 2 (Part 1 of 3)

Chapter 2, titled “Growth:  Illusions and Realities,” consists of 3 parts:

– Part 1 defines economic growth, and looks at the “very long run” – literally the past couple of thousand years.  It ends with an intriguing question about what effect growth has on inequality.

– Part 2 looks at the past couple of centuries, looking at per capita productivity growth by sector, and what it implies, and asks if rapid economic growth is coming to an end.

– Part 3 looks at other aspects of growth, and focuses on the 20th Century as a possible anomaly.


Parts 2 and 3 will show up in 2 weeks or so.

Growth rates can be measured an terms of total output, population, and output per capita.  Or, if you wish, size of the economy, number of people, and people’s incomes respectively. One good equation to keep in mind is that, measured as percentages:

(output per capita growth) + (population growth) = (total output growth)  
(You can do algebra to solve for any one of these three variables.  For example, total growth – pop. growth = output per capita growth)

Chapter 2 starts off by pointing out that both population and income per capita growth between year zero and 1700 AD was, on average, extremely close to zero.  (Thomas Malthus estimated 0.06% population growth and 0.02% per capita output growth.)

The reason is quite simple:  higher growth rates would imply, implausibly, that the world’s population at the beginning of the Common Era was miniscule, or else that the standard of living was very substantially below commonly accepted levels of subsistence.  For the same reason, growth in the centuries to come is likely to return to very low levels, at least insofar as the demographic ( = population ) component is concerned. (page 74)

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Capital in the 21st Century Review: Chapter 1 (Part 3 of 3)

The last part of Chapter 1 discusses measuring national income and wealth, and differences among nations.

Thomas Piketty points out that measuring income and wealth was a political act.

The first attempts to measure national income and capital date back to the late seventeenth and early eighteenth century…It is worth noting that (the authors of these measurements) often had a political objective in mind, generally having to do with modernization of the tax system.  By calculating the nation’s income, they hoped to show the sovereign that it would be possible to raise tax receipts considerably while keeping tax rates relatively low, provided that all property and goods produced were subject to taxation and everyone was required to pay, including landlords of both aristocratic and common descent. (Page 56)

TroisordresA cartoon from the time of the French Revolution.  The nobility and the clergy were exempt from taxation, so the entire cost of supporting the state was borne by the common people, leading to an enfeebled state and larger-scale poverty than there otherwise would have been.  The rough translation is “One can hope I’ll be done soon,” spoken by the commoner.




In my view, academia is inherently political, by virtue of what we choose to measure and consider “serious” versus frivolous.

I see it also as notable how these debates continue to this day, with “progressives” wanting to strengthen the state by providing it with resources to do more, while others claim poverty.  It echoes how often we are told that “America can’t afford” something at a time when we are richer than we have ever been.

Go below the fold for a graph and a table!
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Capital in the 21st Century Review: Chapter 1 (part 2 of 3)

Thomas Piketty describes the importance of the capital / income ratio, β.  “The capital/income ratio for a country as a whole tells is nothing about the inequalities within a country, but β does measure the overall importance of capital in a society, so analyzing this ratio is a necessary first step in the study of inequality.” (Page 51).


Note that income is measured in dollars (or euros) per year, while capital is measured in dollars.  (As an economist would say, income is a “flow” while capital is a “stock.”)

In most of Europe, β is between 5 and 6 these days.  It is a bit under 5 in the United States, and a bit over 6 in Japan and Italy.  (We’ll see later in the book that this ratio is heavily influenced by population growth.  Thus, the faster-growing United States has a lower ratio, while Italy and Japan have among the lowest birthrates.)

The First Fundamental Law of Capitalism:  α = r × β 

α is the share of the nation’s income that comes from capital (a.k.a. property), as opposed to from labor.

r is the average rate of return on capital.

β is the Capital / Income ratio.

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