In order to illustrate the diff erence between short- term and long- term move-ments of the capital/income ratio, it is useful to examine the annual changes
The Capital/Income Ratio over the Long Run
observed in the wealthiest countries between 1970 and 2010, a period for which we have reliable and homogeneous data for a large number of coun-tries. To begin, here is a look at the ratio of private capital to national income, whose evolution is shown in Figure 5.3 for the eight richest countries in the world, in order of decreasing GDP: the United States, Japan, Germany, France, Britain, Italy, Canada, and Australia.
Compared with Figures 5.1 and 5.2, as well as with the fi gures that accom-panied previous chapters, which presented decennial averages in order to focus attention on long- term trends, Figure 5.3 displays annual series and shows that the capital/income ratio in all countries varied constantly in the very short run.
Th ese erratic changes are due to the fact that the prices of real estate (including housing and business real estate) and fi nancial assets (especially shares of stock) are notoriously volatile. It is always very diffi cult to set a price on capital, in part because it is objectively complex to foresee the future demand for the goods and ser vices generated by a fi rm or by real estate and therefore to predict the future fl ows of profi t, dividends, royalties, rents, and so on that the assets in question will yield, and in part because the present value of a building or corporation depends not only on these fundamental factors but also on the price at which
100%
200%
300%
400%
500%
600%
700%
800%
1970 1975 1980 1985 1990 1995 2000 2005 2010
Value of private capital (% national income)
United States Japan Germany France Britain Italy Canada Australia
Figure 5.3. Private capital in rich countries, 1970– 2010
Private capital is worth between two and 3.5 years of national income in rich countries in 1970, and between four and seven years of national income in 2010.
Sources and series: see piketty.pse.ens.fr/capital21c.
one can hope to sell these assets if the need arises (that is, on the anticipated capital gain or loss).
Indeed, these anticipated future prices themselves depend on the general enthusiasm for a given type of asset, which can give rise to so- called self- fulfi lling beliefs: as long as one can hope to sell an asset for more than one paid for it, it may be individually rational to pay a good deal more than the funda-mental value of that asset (especially since the fundafunda-mental value is itself uncer-tain), thus giving in to the general enthusiasm for that type of asset, even though it may be excessive. Th at is why speculative bubbles in real estate and stocks have existed as long as capital itself; they are consubstantial with its history.
As it happens, the most spectacular bubble in the period 1970– 2010 was surely the Japa nese bubble of 1990 (see Figure 5.3). During the 1980s, the value of private wealth shot up in Japan from slightly more than four years of na-tional income at the beginning of the de cade to nearly seven at the end.
Clearly, this enormous and extremely rapid increase was partly artifi cial: the value of private capital fell sharply in the early 1990s before stabilizing at around six years of national income from the mid- 1990s on.
I will not rehearse the history of the numerous real estate and stock mar-ket bubbles that infl ated and burst in the rich countries aft er 1970, nor will I attempt to predict future bubbles, which I am quite incapable of doing in any case. Note, however, the sharp correction in the Italian real estate market in 1994– 1995 and the bursting of the Internet bubble in 2000– 2001, which caused a particularly sharp drop in the capital/income ratio in the United States and Britain (though not as sharp as the drop in Japan ten years earlier).
Note, too, that the subsequent US real estate and stock market boom contin-ued until 2007, followed by a deep drop in the recession of 2008– 2009. In two years, US private fortunes shrank from fi ve to four years of national in-come, a drop of roughly the same size as the Japa nese correction of 1991– 1992.
In other countries, and particularly in Eu rope, the correction was less severe or even non ex is tent: in Britain, France, and Italy, the price of assets, especially in real estate, briefl y stabilized in 2008 before starting upward again in 2009–
2010, so that by the early 2010s private wealth had returned to the level at-tained in 2007, if not slightly higher.
Th e important point I want to emphasize is that beyond these erratic and unpredictable variations in short- term asset prices, variations whose ampli-tude seems to have increased in recent de cades (and we will see later that this
The Capital/Income Ratio over the Long Run
can be related to the increase in the potential capital/income ratio), there is indeed a long- term trend at work in all of the rich countries in the period 1970– 2010 (see Figure 5.3). At the beginning of the 1970s, the total value of private wealth (net of debt) stood between two and three and a half years of national income in all the rich countries, on all continents.6 Forty years later, in 2010, private wealth represented between four and seven years of national income in all the countries under study.7 Th e general evolution is clear: bub-bles aside, what we are witnessing is a strong comeback of private capital in the rich countries since 1970, or, to put it another way, the emergence of a new patrimonial capitalism.
Th is structural evolution is explained by three sets of factors, which com-plement and reinforce one another to give the phenomenon a very signifi cant amplitude. Th e most important factor in the long run is slower growth, espe-cially demographic growth, which, together with a high rate of saving, auto-matically gives rise to a structural increase in the long- run capital/income ra-tio, owing to the law β = s / g. Th is mechanism is the dominant force in the very long run but should not be allowed to obscure the two other factors that have substantially reinforced its eff ects over the last few de cades: fi rst, the grad-ual privatization and transfer of public wealth into private hands in the 1970s and 1980s, and second, a long- term catch- up phenomenon aff ecting real estate and stock market prices, which also accelerated in the 1980s and 1990s in a po liti cal context that was on the whole more favorable to private wealth than that of the immediate postwar de cades.