The process of financial intermediation (whereby individuals deposit money in bank, which then invests is everywhere) has become so complex that people are often unaware of who owns what nowadays.
Back in the nineteenth-century, the reenters that lived off the public debt were clearly identified. Is that still the case today? This mystery needs to be dispelled and studying the past can help us do so. Capital is never quite: it is always originated and entrepreneurial, at least at its inception, yet it always tends to transform itself into rents as it accumulates in large enough amounts ? that is its vocation, its logical destination. The Rise and Fall of Foreign Capital) It is important to understand that these very large net positions in foreign assets allowed Britain and France to run tutorial trade deficits in the late nineteenth and early twentieth century. It is essential to realize that the goal of accumulating assets abroad by way of commercial surpluses and colonial appropriations was precisely to be in a position later to run trade deficits. The advantage of owning things is that one can continue to consume and accumulate without having work, or at any rate continue to consume and accumulate more than one could produce on one’s own.
Between 1950 and 2010, the net foreign asset holdings of France and Britain varied from slightly positive to slightly negative while remaining quite lose to zero. When we compare the structure of national capital in the eighteenth century to its structure now, we find that net foreign assets play a negligible role in both periods, and that the real long-run structural changes is to be found in the gradual replacement of farmland by real estates and working capital, while the total capital stock has remained more or less unchanged relative to national income. Income and Wealth: Some Orders of Magnitude) The current per capita national income in Britain and France is on the order of 30,000 euros per year, and national capita is about 6 times cantonal income, or roughly 180,000 euros per head. In both countries, farmland is virtually worthless today, and national capita is broadly speaking divided into two nearly equal parts: on average, each citizen has about 90,000 euros in housing and about 90,000 euros worth of other domestic capital.
Our representative French or British citizen would then own around 120,000 euros worth Of Ian, 30,000 euros worth Of housing, and 30,000 euros in other domestic assets. Clearly, some of these people owned hundreds of hectares while many others owned nothing at all. But the averages give us somewhat ore concrete idea of the way the structure of national capital has been utterly transformed since the eighteenth century while preserving roughly the same value in terms of annual income.
By averaging over the entire population, which contained many people with no foreign assets at all and a small minority with substantial portfolios, we are able to measure the vast quantity of accumulated wealth in the rest of the world that French and British foreign asset holdings represented. (Public Wealth, Private Wealth) Public capital is the difference between the assets and liabilities of the state, ND private capital is of course the difference between the assets and liabilities of private individuals.
Whether public or private, capital is and what one owes (liabilities, or debts). Concretely, public assets take two forms, they can be nonofficial or financial. In practice, the boundary between financial and nonofficial assets need not be fixed. At present, the total value of public assets is estimated to be almost one year’s national income in Britain and a little less than 1 h times that amount in France. By contrast, it is not easy to set a precise market value on public buildings or transportation infrastructure nice these are not regularly sold.
Hence the figures should be taken as rough estimates, not mathematical certainties. (Public Wealth in Historical Perspective) The history of national capital to national income in France and Britain since the eighteenth century, has largely been the history between private capital and national income. The crucial fact is France and Britain have always been countries based on private property and never experimented Soviet-style communism. Hence it’s not surprising that private wealth has always dominated public wealth.
Even though public policy never went extremes in either country, it did have a negligible impact on the accumulation of private wealth at several points, and in different directions. At present, both countries are running large debts. (Who Profits From Public Debts? ) The difference between the nineteenth century and the twentieth century is fairly simple. In the nineteenth century, lenders were handsomely reimbursed, thereby increasing private wealth, in the twentieth century, debt was drowned by 2 inflation and repaid with money of decreasing value.
In practice, this allowed deficits to be financed by those who had lent money to the state, and taxes id not have to be raised by an equivalent amount. The mechanism Of redistribution via inflation is extremely powerful, and it played a crucial historical role in both Britain and France in the twentieth century. It nevertheless raised two major problems. First, relatively crude in its choice of targets: among people with some measure of wealth, those who owns governments no always the wealthiest.
Second, the inflation mechanism cannot work indefinitely. Once inflation becomes permanent, lenders will demand a higher nominal interest rate and the higher price will not have the desired effects. The up and Down of Arcadian Equivalence) “Arcadian Equivalence” formulated by David Richard in 1817, according to which, under certain conditions, public debt has no effect on the accumulation Of national capital. But the fact at the time had nothing worth to the Richard who had no access to historical time series or measurement of the type indicated.
Since the ass’s, analyses of the public debt have suffered from the fact that economists have probably relied too much on so-called representative agent models, that is, model in which agent is assumed to earn the same income ND to be endowed with the same amount of wealth. This radical reinterpretation of Arcadian equivalence, fails to take account of the fact that the bulk of the public debt is in practice owned by a minority of the population, so that the debt is the vehicle of important internal redistribution when it is repaid as well as when it is not. FOUR] FROM OLD EUROPE TO THE NEW WORLD (Germany: Rhenium Capitalism and Social Ownership) TO say that the lower market values of German firms appear to reflect the character of what is sometimes called “Rhenium Capitalism” or “the stakeholder model”, that is, an economic model in which firms are owned not only by stakeholders but also by certain other interested parties known as “stakeholders”.
The point here is not to idealize this model of shared social ownership, which has its limit, but simply to note that it can be at least as efficient economically as Anglo-Saxon marker capitalism or “the shareholder model” and especially to observe that the stakeholder model inevitably implies a lower market valuation but not necessary a lower social valuation. 3 (Shocks to Capital in the Twentieth Century) First of all that this was a phenomenon that affected all European countries.
All available sources indicate that the changes observed in Britain, France, and Germany are representative of the entire continent: although interesting variations between countries do exist, the overall pattern is the same. To be sure, there was substantial physical destruction of capital, especially in France during World War II owing to massive bombing in 1944-1945. Although these loses were quite significant, the clearly explain only a fraction of the total drop. In fact, the budgetary and political shocks of two wars proved far more destructive to capital than combat itself.
I have already mentioned the importance of loses on foreign assets, especially in Britain, where net foreign capital dropped from two years of national income on the eve of World War I to a slightly negative level in the ass’s. (The New World and Foreign Capital) another key difference between the history of capital in America and Europe is that foreign capital never had more than a relatively limited importance in the US. Because the United States is the first colonized territory to have achieved independence, never became a colonial power itself.
With the two world wars, the net foreign asset session of the US reversed itself: it was negative in 1913 but turned slightly positive in the ass’s and remained so into the ass’s and ass’s. To sum up, the net foreign asset position of the US has at times been slightly negative, at other times slightly positive, but these positions were always relatively limited importance compared with the total stock of capital owned by CSS citizens. (Slave Capital and Human Capital) By definition, the value of national capital (excluding slaves) is equal to eight years of national income: this is the first fundamental law of capitalism (џ = air).
We also can apply the same law to slave capital. In any case, it is clear that this type Of calculation makes sense only in a slave society, where human capital can be sold on the market, permanently and irrevocably. In reality, this conclusion is perfectly obvious and would also have been true in the eighteenth century: whenever more than half of national income goes to labor and one chooses to capitalize the flow of labor income at the same or nearly the same rate as the flow of income to capital, then by definition the value of human capital is greater than the value of all other forms of capital.
FIVE] THE CAPITAL/INCOME RATIO OVER THE LONG RUN (The Second Fundamental Law of Capitalism:џ = s/g) This formula, reflects an obvious but important point: a country that saves a lot and grows slowly will over the long run 4 accumulate an enormous stock of capital (relative to its income), which can in turn have a significant effect on the social structure and distribution wealth. The basic point is that small variations in the rate of growth can have very large effects on the capital/income ratio over the long run.
This law allows us to give a good account of the historical evolution of the capital/income ratio. It enables us to explain why the capital/income ratio seems now and the exceptionally rapid growth phase of the second half of the twentieth century and also enables us to understand why Europe tends for structural reasons to accumulate more capital than the US. (A Long-Term Law) s/g is applicable only if certain crucial assumptions are satisfied.
First, this is an asymptotic law, meaning that it is valid only in the long run: if a country saves a proportion s of its income definitely, and if the rate of growth of its national income is g permanently, then its capital/income Asia will tend closer and closer to 13 = s/g and stabilized at that level. This won’t happen in a day. The first principal to bear in mind, in therefore, that the accumulation of wealth takes time. At the individual level, fortunes are sometimes amassed very quickly, but at the country level, the movement of the capital/income ratio described by the law џ ? s/g is a long-run phenomenon.
Second, the law [3 = s/g is valid only if one focuses on those forms of capital that human beings can accumulate. Finally, the law 13 = s/g is valid only if asset prices evolve on average in the same way as consumer prices. In general, all these motivations are present at once in proportions that vary with individual, the country, and the age. To sum up: the law џ = s/g does not explain the short-term shocks to who ICC the capital/income ratio is subject, any more than it explains the existence of world wars or the crisis of 1929. Beyond Bubbles: Low Growth, High Saving) Looking beyond the particular circumstance of this or that country, however, the results are overall quite consistent: it is possible to explain the main features if private capital accumulation in the rich countries between 1970 and 2010 in terms of the annuity of savings between those two dates without assuming a significant structural increase in the relative price of assets. In other words, movements in real estate and stock market prices always dominate in the short and even medium run but tend to balance out over the long run, where volume effects appear generally to be deceive. The Two Components of Private Savings) It is true that stock prices tend to rise more quickly than consumption price over the long run, but the reason for this is essentially that retained earnings allow firms to increase their size and capital. If retained earnings are 5 included in private savings, however the price effect largely disappears. The variation between countries with respect to the proportions of retained earnings in total private savings can be explained, moreover, largely by differences in legal and tax systems. Under these conditions.
It is better to treat retained earnings as savings realized on behalf the firm’s owners and therefore as a component of private savings. By definition, only net savings can increase the capital stock. (Durable Goods and Valuables) Estimates of the value of durable goods are generally around 30-50 percent of national income for both the nineteenth ND twentieth centuries. The amount of wealth represented by valuables and precious objects seems to have decreased over the long run, however, from 10-15 percent of national income in the late nineteenth and twentieth century to 5-10 percent nowadays.
In all cases, these are relatively limited amounts compared to total accumulated wealth in Britain of around seven years of national income, primarily in the form of farmland, dwellings, and other capital goods. (The Prevarication of Wealth in the Rich Countries) Prevarication, as noted, the proportion of public capital in national capital has dropped hardly in recent decades, where net public wealth represented as much as a quarter or even third on total national wealth in the period 1950-1970, whereas today just a few percent.
To be sure, the increase in private capital in all countries was greater than the decrease in public capital, so national capital did indeed increase. In all the rich countries, public diseasing and the consequent decrease in public wealth accounted for a significant portion of the increase in private wealth. It wasn’t the primary reason for the increase in private wealth, but it shouldn’t be neglected. Its important to note that these ranchers of public sector wealth to the private sector weren’t limited to rich countries after 1970. The same general pattern exists on all continents.
At the global level, the most extensive prevarication in recent decades, and indeed in the entire history of capital, obviously took place in the countries of the former Soviet bloc. To sum up the very considerable growth of private wealth in Russia and Eastern Europe between the late ass’s and the present, which led in some cases to the spectacularly rapid enrichment of certain individuals, obviously had nothing to do with saving of the dynamic law = s/g. It was purely and simply the result of a transfer of ownership of capital from the government to private individuals. The Historic Rebound of Asset Prices) The last factor explaining the increase in the capital/income ratio over the past few decades is the historic rebound of asset prices. If we 6 look at the whole period 1910-2010, or 1870-2010, we find that the global evolution of the capital/income ratio is very well explained by the dynamic law p = s/g. The fact that the capital/income ratio is structurally higher over the long run in Europe than in the United States is perfectly consistent with the preference in the saving rate and especially the growth rate over the past century.
The low point of the ass’s was lower than the simple logic of accumulation summed up by the law = s/g would have predicted. The market value of a company listed on the stock exchange is its stock market capitalization. For companies not so listed, either because they are too small or because they choose not to finance themselves via the stock market, the market value is calculated for national accounting purposes with reference to observed stock prices for listed firms as similar as possible.
The market value f the firm, that is, its stock market capitalization, may be significantly lower or higher, depending on whether financial markets have suddenly become more optimistic or pessimistic about the firm’s ability to use its investments to generate new business and profits. Conversely, if the stockholders of a company do not have full control, because they have to compromise in a long-term relationship with other "stakeholders”.
Leaving aside these interesting international variations, which reflect the fact that the price of capital always depends on national rules and institutions, one can note a mineral tendency to increase in the rich countries since 1970. (National Capital and Net Foreign Asset in the Rich Countries) The sharp increase in the level of national capital in the rich countries reflects mainly the increase of domestic capital, and to first approximation foreign asset would seem to have played only a relatively minor role.
At this stage, the logic of the law 13 = s/g can automatically give rise to very large international capital imbalances. In passing, note how useful it is to represent the historical evolution of the capital/income ratio in this way and thus to exploit stocks ND flows in the national accounts. One should also note that the small net positions may hide enormous goes positions.
Broadly speaking, the ass’s and 1 sass witnessed an extensive "familiarization” of the global economy, which altered the structure of wealth in the same that the total amount of financial asset and liabilities held by various sector increased more rapidly than net wealth. (The Mystery of Land Value) The principle issue today is urban land: farmland is worth less than 10 percent of national income in both France and Britain. In other words, the rise in the capital/income ratio cannot e explained in terms of an increase in the value of pure urban land. Two further points are worth mentioning.
First, the fact that total capital, especially in real estate, in the rich countries can be explained fairly well in terms of the accumulation of 7 flows of saving and investment obviously does not preclude the existence of large local capital gains linked to the concentration of population in particular area, such as a major capital. Second, the fact that the increase in the value of pure land does not seem to explain much of the historic rebound of the capital/income ratio in the rich countries in no way implies that this will intention to be true in the future. SIX] THE CAPITAL-LABOR SPLIT IN THE IDENTIFIERS CENTURY (Flows: More Difficult to Estimate Than Stocks) Another important caveat concerns the income of nonage workers, which may include remuneration of capital that is difficult to distinguish from other income. This problem is less important now than in the past because most private economic activity today is organized around corporations or, more generally, joint-stock companies, so a firm’s accounts are clearly separate from the accounts of the individuals who supply the capital.
Partnership and sole proprietorship are efferent: the accounts of the business are sometimes mingled with the personal accounts of the firm head, who is often both the owner and operator. Around 10 percent of domestic production in rich countries is due to nonage workers in individual owned business, which is roughly equal to the proportion of nonage workers in the active population. Nonage workers are mostly found in a small business and in the professions. The income of nonage workers is “mixed” because it combines income from labor with income from capital, this is also referred to as “entrepreneurial income?’.
For the eighteenth and nineteenth centuries, estimates of the value of the capital stock are probably more accurate than estimates of the value of the capital stock are probably more accurate than estimates of the flows of income from labor and capital. (The Nation of the pure Return in Capital) The cost of managing capital and of “formal” financial intermediation is obviously taken into account and deducted from the income on capital in calculating the average rate of return.
But this is not the case with “informal” financial intermediation: every investor spend time managing his own portfolio and affairs and determining which investments are likely to be the most profitable. This effort can in certain cases be compared to genuine entrepreneurial labor or to a form business activity. It is of course quite difficult and to some extent arbitrary to calculate the value of this informal labor in any precise way, which explains why it is omitted from national accounts. It is likely that such high returns also include a non-negligible portion Of remuneration for informal entrepreneurial labor.
The pure rates Of returns obtained in this way are generally on the order 8 of one or two percentage points lower than the observed returns and should robbery be regarded as minimum values. (The Return on Capital in Historical Perspective) We cannot rule out the possibility that the pure return on capital will rise to higher levels over the next few decades, especially in view of the growing international competition for capital and the equally increasing sophistication of financial markets and institutions in generating high yields from complex, diversified portfolios.
In order to put these figures in perspective, recall first of all that the traditional rate of conversion from capital to rent in the eighteenth and nineteenth entities, for the most common and least risky forms of capital and public was generally on the order of 5 percent a year: the value of a capital asset was estimated to be equal to twenty years of the annual income yielded by that asset. (Real and Nominal Asset) It would be a serious mistake to try to deduce the rate of inflation from these yields.
The reason is simple and was touched on earlier: the lion’s share of household wealth consist of “real assets” rather than “nominal assets. Nominal assets is a subject to a substantial risk. In any case, the inflation rate must be deducted from the interest rate if one wants o know the real return on nominal asset. With real assets, everything is different the crucial point is that real asset are far more representative than nominal asset. To be sure there may have been large capital gains or losses for a given category of asset.
Under these condition the most reasonable approach is to take the view that the average return on capital indicated by the stock of the capital, thus neglecting capital gain and capital losses, is a good estimate of the average return on capital over the long run. (What is Capital used For? ) The rate of return on capital depends on the relative arraigning power of the various parties involved. Depending on the situation, it may be higher or lower than the marginal productivity of capital.
In any case, the rate of return on capital is determined by the following two forces: first, technology and second, the abundance of the capital stock. Historically, the earliest forms of capital accumulation involved both tools and improvements to land. (Too Much Capital Kills the Returns of Capital) Too much capital kills the return on capital: whatever the rules and institutions that structure the capital-labor split maybe, it is natural to expect that the marginal productivity Of capital decrease as the stock Of capital increases.
If the elasticity Of substitution is infinite, the marginal productivity of capital is totally independent of the available quantity of capital and labor. In particular, the return on capital 9 is fixed and does not depend on the quantity of capital. Neither of these two extreme cases is really relevant: the first sins by want Of imagination and the second by excess of technological optimism. (Traditional Agricultural Societies: An Elasticity Less Than One) If capital is to serve as a ready substitute for labor, then it must exist in different forms.
For NY given form, it is inevitable that beyond a certain point, the price effect will outweigh the volume effect. (Capital’s Comeback in a Low-Growth Regime) First, the return to a historic regime of low growth, and in particular zero or even negative demographic growth, leads logically to the return of capital. At the global level, it is entirely possible that the capital/income ratio will attain or even surpass this level during the Nonentity-first century. It is also possible that technological changes over the very long run will slightly favor human labor over capital, thus lowering the return on capital and the capital share.