Capital in the Twenty-First Century

The capital/income ratio, according to Piketty, is determined by the rate of saving divided by the rate of growth. He writes:

These two macrosocial parameters themselves depend on millions of individual decisions influenced by any number of social, economic, cultural, psychological, and demographic factors which vary considerably from period to period and country to country. (249)

As such, it may seem difficult to draw any concrete conclusions from Piketty’s “law.” The rate of saving, in any society at a given moment, for one, seems especially hard to predict. Piketty does observe that, “the countries that save the most are often those whose population is stagnant and aging” (217). This is because they may need to save more for their own retirement, rather than relying on support from children. Still, as he also says, “the relation is far from systematic” (217). And many other contingent, and shifting, cultural norms play a large role. Some cultures may regard saving as virtuous and debt shameful, whereas others may see immediate consumption as more important.

The same is true of population growth. Presently, the US population is growing, although the rate has been falling since the 1990s, from almost one point five percent to half a percent per year. Europe’s population growth is almost static, and Japan’s has been negative since 2010. There does seem to be a downward trend in the developed nations. Given the complexity of possible explanations, from global warming concerns to greater female participation in the workplace to more freedom in lifestyle choices, it seems hard to predict the future. What is more certain is that per capita economic growth is likely to slow. Indeed, economist Robert Gordon has predicted that the rate will be as low as zero-point five percent between 2050 and 2100. This is because any future waves of technological innovation will have smaller and smaller effects on the overall productivity of the economy.

At any rate, technological change is unlikely to provide long run growth of much greater than one percent. This is particularly true if the full costs of a warming environment and ecological degradation are factored in. As such, based on Piketty’s law, the capital/income ratio in the long run looks likely to grow. In fact, by 2100, it may even surpass the European historic high of 6 and 7:1 at the start of the 20th century. Nor is there any automatic economic mechanism to prevent this. As he says, “There is no natural force that inevitably reduces the importance of capital and of income flowing from ownership of capital over the course of history” (293). Even diminishing returns on capital will not achieve this because “the decrease in the rate of return will be smaller than the increase in the capital/income ratio” (293). In other words, any drop off from the return of capital will be more than compensated for by the greater quantity of capital yielding returns, meaning capital can still grow.

That said, there may be political factors limiting growth. More benignly, an excessive capital/income ratio may lead to democratic demands for reform. This could mean a reversal of the “privatization and transfer of public wealth into private hands” (215) that occurred in the 1970s and 1980s. It might mean a reaction against the neo-liberal consensus still dominant in the West. This could entail a return to greater regulation, taxation, and public ownership of overly dominant private wealth.

If calls for reform are ignored, however, revolutionary movements may step into the void. They may argue for the seizure of private capital rather than its reform. Likewise, extreme nationalism might re-emerge as a response. Such nationalism could also be encouraged by elites to fend off change. In these circumstances, combined with stress on resources caused by ecological crisis, conflicts between major powers may recur. Indeed, they may lead to a new global conflagration on a scale similar to previous world wars. In this case, new “shocks” will be created. These will thus have the effect of reducing the capital/income ratio in a more violent fashion.