ABOUT THE SPEAKER

Thomas Piketty - Economist
Thomas Piketty is an economist and professor at the Paris School of Economics. His 2014 book, "Capital in the Twenty-first Century," caused a sensation upon publication.

Why you should listen

Is the global economy accelerating toward a future that’s incompatible with democracy? In this provocative talk about inequality and wealth, economist Thomas Piketty provides new context for his groundbreaking book, Capital in the Twenty-First Century.

More profile about the speaker
Thomas Piketty | Speaker | TED.com

TEDSalon Berlin 2014

Thomas Piketty: New thoughts on capital in the twenty-first century

Filmed: 2014-06-23

Readability: 4.4

1,557,059 views

French economist Thomas Piketty caused a sensation in early 2014 with his book on a simple, brutal formula explaining economic inequality: r > g (meaning that return on capital is generally higher than economic growth). Here, he talks through the massive data set that led him to conclude: Economic inequality is not new, but it is getting worse, with radical possible impacts.

Thomas Piketty - Economist
Thomas Piketty is an economist and professor at the Paris School of Economics. His 2014 book, "Capital in the Twenty-first Century," caused a sensation upon publication. Full bio

Double-click the English transcript below to play the video.

00:12

It's very nice to be here tonight.

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So I've been working on the history of income

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and wealth distribution for the past 15 years,

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and one of the interesting lessons

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coming from this historical evidence

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is indeed that, in the long run,

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there is a tendency for
the rate of return of capital

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to exceed the economy's growth rate,

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and this tends to lead to
high concentration of wealth.

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Not infinite concentration of wealth,

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but the higher the gap between r and g,

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the higher the level of inequality of wealth

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towards which society tends to converge.

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So this is a key force that
I'm going to talk about today,

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but let me say right away

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that this is not the only important force

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in the dynamics of income
and wealth distribution,

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and there are many other forces that play

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an important role in the long-run dynamics

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of income and wealth distribution.

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Also there is a lot of data

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that still needs to be collected.

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We know a little bit more today

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than we used to know,
but we still know too little,

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and certainly there are
many different processes —

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economic, social, political —

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that need to be studied more.

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And so I'm going to focus today on this simple force,

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but that doesn't mean that other important forces

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do not exist.

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So most of the data I'm going to present

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comes from this database

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that's available online:

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the World Top Incomes Database.

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So this is the largest existing

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historical database on inequality,

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and this comes from the effort

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of over 30 scholars from several dozen countries.

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So let me show you a couple of facts

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coming from this database,

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and then we'll return to r bigger than g.

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So fact number one is that there has been

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a big reversal in the ordering of income inequality

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between the United States and Europe

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over the past century.

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So back in 1900, 1910, income inequality was actually

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much higher in Europe than in the United States,

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whereas today, it is a lot higher in the United States.

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So let me be very clear:

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The main explanation for this is not r bigger than g.

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It has more to do with changing supply and demand

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for skill, the race between education and technology,

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globalization, probably more unequal access

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to skills in the U.S.,

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where you have very good, very top universities

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but where the bottom part of the educational system

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is not as good,

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so very unequal access to skills,

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and also an unprecedented rise

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of top managerial compensation of the United States,

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which is difficult to account for
just on the basis of education.

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So there is more going on here,

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but I'm not going to talk too much about this today,

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because I want to focus on wealth inequality.

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So let me just show you a very simple indicator

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about the income inequality part.

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So this is the share of total income

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going to the top 10 percent.

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So you can see that one century ago,

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it was between 45 and 50 percent in Europe

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and a little bit above 40 percent in the U.S.,

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so there was more inequality in Europe.

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Then there was a sharp decline

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during the first half of the 20th century,

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and in the recent decade, you can see that

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the U.S. has become more unequal than Europe,

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and this is the first fact I just talked about.

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Now, the second fact is more about wealth inequality,

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and here the central fact is that wealth inequality

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is always a lot higher than income inequality,

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and also that wealth inequality,

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although it has also increased in recent decades,

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is still less extreme today

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than what it was a century ago,

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although the total quantity of wealth

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relative to income has now recovered

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from the very large shocks

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caused by World War I, the Great Depression,

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World War II.

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So let me show you two graphs

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illustrating fact number two and fact number three.

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So first, if you look at the level of wealth inequality,

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this is the share of total wealth

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going to the top 10 percent of wealth holders,

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so you can see the same kind of reversal

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between the U.S. and Europe that we had before

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for income inequality.

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So wealth concentration was higher

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in Europe than in the U.S. a century ago,

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and now it is the opposite.

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But you can also show two things:

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First, the general level of wealth inequality

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is always higher than income inequality.

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So remember, for income inequality,

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the share going to the top 10 percent

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was between 30 and 50 percent of total income,

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whereas for wealth, the share is always

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between 60 and 90 percent.

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Okay, so that's fact number one,

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and that's very important for what follows.

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Wealth concentration is always

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a lot higher than income concentration.

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Fact number two is that the rise

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in wealth inequality in recent decades

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is still not enough to get us back to 1910.

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So the big difference today,

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wealth inequality is still very large,

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with 60, 70 percent of total wealth for the top 10,

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but the good news is that it's actually

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better than one century ago,

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where you had 90 percent in
Europe going to the top 10.

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So today what you have

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is what I call the middle 40 percent,

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the people who are not in the top 10

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and who are not in the bottom 50,

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and what you can view as the wealth middle class

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that owns 20 to 30 percent

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of total wealth, national wealth,

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whereas they used to be poor, a century ago,

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when there was basically no wealth middle class.

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So this is an important change,

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and it's interesting to see that wealth inequality

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has not fully recovered to pre-World War I levels,

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although the total quantity of wealth has recovered.

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Okay? So this is the total value

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of wealth relative to income,

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and you can see that in particular in Europe,

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we are almost back to the pre-World War I level.

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So there are really two

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different parts of the story here.

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One has to do with

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the total quantity of wealth that we accumulate,

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and there is nothing bad per se, of course,

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in accumulating a lot of wealth,

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and in particular if it is more diffuse

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and less concentrated.

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So what we really want to focus on

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is the long-run evolution of wealth inequality,

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and what's going to happen in the future.

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How can we account for the fact that

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until World War I, wealth inequality was so high

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and, if anything, was rising to even higher levels,

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and how can we think about the future?

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So let me come to some of the explanations

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and speculations about the future.

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Let me first say that

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probably the best model to explain

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why wealth is so much

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more concentrated than income

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is a dynamic, dynastic model

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where individuals have a long horizon

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and accumulate wealth for all sorts of reasons.

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If people were accumulating wealth

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only for life cycle reasons,

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you know, to be able to consume

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when they are old,

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then the level of wealth inequality

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should be more or less in line

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with the level of income inequality.

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But it will be very difficult to explain

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why you have so much more wealth inequality

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than income inequality

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with a pure life cycle model,

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so you need a story

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where people also care

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about wealth accumulation for other reasons.

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So typically, they want to transmit

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wealth to the next generation, to their children,

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or sometimes they want to accumulate wealth

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because of the prestige, the
power that goes with wealth.

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So there must be other reasons

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for accumulating wealth than just life cycle

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to explain what we see in the data.

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Now, in a large class of dynamic models

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of wealth accumulation

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with such dynastic motive for accumulating wealth,

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you will have all sorts of random,

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multiplicative shocks.

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So for instance, some families

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have a very large number of children,

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so the wealth will be divided.

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Some families have fewer children.

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You also have shocks to rates of return.

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Some families make huge capital gains.

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Some made bad investments.

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So you will always have some mobility

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in the wealth process.

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Some people will move up,
some people will move down.

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The important point is that,

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in any such model,

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for a given variance of such shocks,

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the equilibrium level of wealth inequality

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will be a steeply rising function of r minus g.

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And intuitively, the reason why the difference

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between the rate of return to wealth

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and the growth rate is important

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is that initial wealth inequalities

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will be amplified at a faster pace

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with a bigger r minus g.

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So take a simple example,

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with r equals five percent and g equals one percent,

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wealth holders only need to reinvest

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one fifth of their capital income to ensure

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that their wealth rises as fast

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as the size of the economy.

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So this makes it easier

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to build and perpetuate large fortunes

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because you can consume four fifths,

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assuming zero tax,

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and you can just reinvest one fifth.

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So of course some families
will consume more than that,

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some will consume less, so there will be

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some mobility in the distribution,

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but on average, they only need to reinvest one fifth,

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so this allows high wealth inequalities to be sustained.

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Now, you should not be surprised

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by the statement that r can be bigger than g forever,

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because, in fact, this is what happened

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during most of the history of mankind.

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And this was in a way very obvious to everybody

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for a simple reason, which is that growth

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was close to zero percent

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during most of the history of mankind.

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Growth was maybe 0.1, 0.2, 0.3 percent,

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but very slow growth of population

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and output per capita,

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whereas the rate of return on capital

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of course was not zero percent.

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It was, for land assets, which was

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the traditional form

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of assets in preindustrial societies,

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it was typically five percent.

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Any reader of Jane Austen would know that.

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If you want an annual income of 1,000 pounds,

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you should have a capital value

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of 20,000 pounds so that

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five percent of 20,000 is 1,000.

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And in a way, this was

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the very foundation of society,

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because r bigger than g

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was what allowed holders of wealth and assets

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to live off their capital income

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and to do something else in life

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than just to care about their own survival.

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Now, one important conclusion

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of my historical research is that

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modern industrial growth did not change

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this basic fact as much as one might have expected.

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Of course, the growth rate

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following the Industrial Revolution

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rose, typically from zero to one to two percent,

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but at the same time, the rate of return

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to capital also rose

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so that the gap between the two

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did not really change.

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So during the 20th century,

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you had a very unique combination of events.

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First, a very low rate of return

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due to the 1914 and 1945 war shocks,

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destruction of wealth, inflation,

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bankruptcy during the Great Depression,

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and all of this reduced

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the private rate of return to wealth

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to unusually low levels

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between 1914 and 1945.

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And then, in the postwar period,

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you had unusually high growth rate,

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partly due to the reconstruction.

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You know, in Germany, in France, in Japan,

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you had five percent growth rate

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between 1950 and 1980

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largely due to reconstruction,

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and also due to very large demographic growth,

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the Baby Boom Cohort effect.

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Now, apparently that's not going to last for very long,

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or at least the population growth

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is supposed to decline in the future,

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and the best projections we have is that

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the long-run growth is going to be closer

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to one to two percent

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rather than four to five percent.

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So if you look at this,

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these are the best estimates we have

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of world GDP growth

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and rate of return on capital,

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average rates of return on capital,

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so you can see that during most

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of the history of mankind,

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11:58

the growth rate was very small,

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1613

12:00

much lower than the rate of return,

299

708558

1834

12:02

and then during the 20th century,

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2362

12:04

it is really the population growth,

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2171

12:06

very high in the postwar period,

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2272

12:09

and the reconstruction process

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717197

1600

12:10

that brought growth

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718797

1573

12:12

to a smaller gap with the rate of return.

305

720370

3071

12:15

Here I use the United Nations population projections,

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723441

3523

12:18

so of course they are uncertain.

307

726964

2476

12:21

It could be that we all start

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1391

12:22

having a lot of children in the future,

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2106

12:24

and the growth rates are going to be higher,

310

732937

2765

12:27

but from now on,

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1249

12:28

these are the best projections we have,

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736951

2802

12:31

and this will make global growth

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739753

1934

12:33

decline and the gap between

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2756

12:36

the rate of return go up.

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744443

2003

12:38

Now, the other unusual event

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2862

12:41

during the 20th century

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1671

12:42

was, as I said,

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1329

12:44

destruction, taxation of capital,

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2316

12:46

so this is the pre-tax rate of return.

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754624

2735

12:49

This is the after-tax rate of return,

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2979

12:52

and after destruction,

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1566

12:53

and this is what brought

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1777

12:55

the average rate of return

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1688

12:57

after tax, after destruction,

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1789

12:59

below the growth rate during a long time period.

326

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2420

13:01

But without the destruction,

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1674

13:03

without the taxation, this
would not have happened.

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2475

13:05

So let me say that the balance between

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3243

13:08

returns on capital and growth

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2356

13:11

depends on many different factors

331

779326

1862

13:13

that are very difficult to predict:

332

781188

2085

13:15

technology and the development

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783273

2115

13:17

of capital-intensive techniques.

334

785388

2584

13:19

So right now, the most capital-intensive sectors

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3019

13:22

in the economy are the real estate sector, housing,

336

790991

3376

13:26

the energy sector, but it could be in the future

337

794367

2862

13:29

that we have a lot more robots in a number of sectors

338

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3712

13:32

and that this would be a bigger share

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800941

1889

13:34

of the total capital stock that it is today.

340

802830

1910

13:36

Well, we are very far from this,

341

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1994

13:38

and from now, what's going on

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1766

13:40

in the real estate sector, the energy sector,

343

808500

1789

13:42

is much more important for the total capital stock

344

810289

2126

13:44

and capital share.

345

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1134

13:45

The other important issue

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813549

2033

13:47

is that there are scale effects
in portfolio management,

347

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2150

13:49

together with financial complexity,

348

817732

2419

13:52

financial deregulation,

349

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1450

13:53

that make it easier to get higher rates of return

350

821601

2709

13:56

for a large portfolio,

351

824310

1627

13:57

and this seems to be particularly strong

352

825937

2663

14:00

for billionaires, large capital endowments.

353

828600

1982

14:02

Just to give you one example,

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830582

2290

14:04

this comes from the Forbes billionaire rankings

355

832872

3333

14:08

over the 1987-2013 period,

356

836205

3330

14:11

and you can see the very top wealth holders

357

839535

2788

14:14

have been going up at six, seven percent per year

358

842323

3117

14:17

in real terms above inflation,

359

845440

2391

14:19

whereas average income in the world,

360

847831

2372

14:22

average wealth in the world,

361

850203

1363

14:23

have increased at only two percent per year.

362

851566

3383

14:26

And you find the same

363

854949

1729

14:28

for large university endowments —

364

856678

1276

14:29

the bigger the initial endowments,

365

857954

2268

14:32

the bigger the rate of return.

366

860222

2068

14:34

Now, what could be done?

367

862290

1678

14:35

The first thing is that I think we need

368

863968

2396

14:38

more financial transparency.

369

866364

2115

14:40

We know too little about global wealth dynamics,

370

868479

3841

14:44

so we need international transmission

371

872320

1900

14:46

of bank information.

372

874220

1262

14:47

We need a global registry of financial assets,

373

875482

2686

14:50

more coordination on wealth taxation,

374

878168

2491

14:52

and even wealth tax with a small tax rate

375

880659

3112

14:55

will be a way to produce information

376

883771

2216

14:57

so that then we can adapt our policies

377

885987

2682

15:00

to whatever we observe.

378

888669

1836

15:02

And to some extent, the fight

379

890505

1838

15:04

against tax havens

380

892343

1481

15:05

and automatic transmission of information

381

893824

1815

15:07

is pushing us in this direction.

382

895639

1851

15:09

Now, there are other ways to redistribute wealth,

383

897490

2324

15:11

which it can be tempting to use.

384

899814

2957

15:14

Inflation:

385

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1356

15:16

it's much easier to print money

386

904127

1699

15:17

than to write a tax code, so that's very tempting,

387

905826

2155

15:19

but sometimes you don't know
what you do with the money.

388

907981

2120

15:22

This is a problem.

389

910101

1647

15:23

Expropriation is very tempting.

390

911748

1863

15:25

Just when you feel some people get too wealthy,

391

913611

2261

15:27

you just expropriate them.

392

915872

1294

15:29

But this is not a very efficient way

393

917166

1712

15:30

to organize a regulation of wealth dynamics.

394

918878

2833

15:33

So war is an even less efficient way,

395

921711

2479

15:36

so I tend to prefer progressive taxation,

396

924190

2336

15:38

but of course, history — (Laughter) —

397

926526

2574

15:41

history will invent its own best ways,

398

929100

1735

15:42

and it will probably involve

399

930835

1698

15:44

a combination of all of these.

400

932533

1734

15:46

Thank you.

401

934267

1866

15:48

(Applause)

402

936133

2137

15:50

Bruno Giussani: Thomas Piketty. Thank you.

403

938270

5559

15:55

Thomas, I want to ask you two or three questions,

404

943829

1879

15:57

because it's impressive how you're
in command of your data, of course,

405

945708

3859

16:01

but basically what you suggest is

406

949567

3794

16:05

growing wealth concentration is kind of

407

953361

1573

16:06

a natural tendency of capitalism,

408

954934

1924

16:08

and if we leave it to its own devices,

409

956858

3538

16:12

it may threaten the system itself,

410

960396

2240

16:14

so you're suggesting that we need to act

411

962636

1726

16:16

to implement policies that redistribute wealth,

412

964362

3038

16:19

including the ones we just saw:

413

967400

1721

16:21

progressive taxation, etc.

414

969121

1471

16:22

In the current political context,

415

970592

2139

16:24

how realistic are those?

416

972731

1991

16:26

How likely do you think that it is

417

974722

1811

16:28

that they will be implemented?

418

976533

1744

16:30

Thomas Piketty: Well, you know, I think

419

978277

1211

16:31

if you look back through time,

420

979488

1781

16:33

the history of income, wealth and taxation

421

981269

2651

16:35

is full of surprise.

422

983920

1602

16:37

So I am not terribly impressed

423

985522

2605

16:40

by those who know in advance

424

988127

1568

16:41

what will or will not happen.

425

989695

1631

16:43

I think one century ago,

426

991326

1704

16:45

many people would have said

427

993030

1569

16:46

that progressive income taxation would never happen

428

994599

2138

16:48

and then it happened.

429

996737

1520

16:50

And even five years ago,

430

998257

1989

16:52

many people would have said that bank secrecy

431

1000246

2352

16:54

will be with us forever in Switzerland,

432

1002598

2025

16:56

that Switzerland was too powerful

433

1004623

1788

16:58

for the rest of the world,

434

1006411

1489

16:59

and then suddenly it took a few U.S. sanctions

435

1007900

2961

17:02

against Swiss banks for a big change to happen,

436

1010861

2622

17:05

and now we are moving toward

437

1013483

1703

17:07

more financial transparency.

438

1015186

1676

17:08

So I think it's not that difficult

439

1016862

4281

17:13

to better coordinate politically.

440

1021143

2469

17:15

We are going to have a treaty

441

1023612

2058

17:17

with half of the world GDP around the table

442

1025670

3049

17:20

with the U.S. and the European Union,

443

1028719

2002

17:22

so if half of the world GDP is not enough

444

1030721

2126

17:24

to make progress on financial transparency

445

1032847

2666

17:27

and minimal tax for multinational corporate profits,

446

1035513

4084

17:31

what does it take?

447

1039597

1664

17:33

So I think these are not technical difficulties.

448

1041261

3623

17:36

I think we can make progress

449

1044884

1924

17:38

if we have a more pragmatic
approach to these questions

450

1046808

2587

17:41

and we have the proper sanctions

451

1049395

1901

17:43

on those who benefit from financial opacity.

452

1051296

2991

17:46

BG: One of the arguments

453

1054287

1653

17:47

against your point of view

454

1055940

1433

17:49

is that economic inequality

455

1057373

1442

17:50

is not only a feature of capitalism
but is actually one of its engines.

456

1058815

3637

17:54

So we take measures to lower inequality,

457

1062452

2801

17:57

and at the same time we lower growth, potentially.

458

1065253

2407

17:59

What do you answer to that?

459

1067660

1560

18:01

TP: Yeah, I think inequality

460

1069220

1729

18:02

is not a problem per se.

461

1070949

1889

18:04

I think inequality up to a point

462

1072838

2040

18:06

can actually be useful for innovation and growth.

463

1074878

2652

18:09

The problem is, it's a question of degree.

464

1077530

2193

18:11

When inequality gets too extreme,

465

1079723

2544

18:14

then it becomes useless for growth

466

1082267

2889

18:17

and it can even become bad

467

1085156

1462

18:18

because it tends to lead to high perpetuation

468

1086618

3057

18:21

of inequality over time

469

1089675

1636

18:23

and low mobility.

470

1091311

1866

18:25

And for instance, the kind of wealth concentrations

471

1093177

3286

18:28

that we had in the 19th century

472

1096463

2877

18:31

and pretty much until World War I

473

1099340

1925

18:33

in every European country

474

1101265

1765

18:35

was, I think, not useful for growth.

475

1103030

2094

18:37

This was destroyed by a combination

476

1105124

2102

18:39

of tragic events and policy changes,

477

1107226

2341

18:41

and this did not prevent growth from happening.

478

1109567

2272

18:43

And also, extreme inequality can be bad

479

1111839

3443

18:47

for our democratic institutions

480

1115282

2198

18:49

if it creates very unequal access to political voice,

481

1117480

2383

18:51

and the influence of private money

482

1119863

1865

18:53

in U.S. politics, I think,

483

1121728

2002

18:55

is a matter of concern right now.

484

1123730

2540

18:58

So we don't want to return to that kind of extreme,

485

1126270

3076

19:01

pre-World War I inequality.

486

1129346

2090

19:03

Having a decent share of the national wealth

487

1131436

3674

19:07

for the middle class is not bad for growth.

488

1135110

3390

19:10

It is actually useful

489

1138500

1281

19:11

both for equity and efficiency reasons.

490

1139781

3084

19:14

BG: I said at the beginning

491

1142865

1665

19:16

that your book has been criticized.

492

1144530

2109

19:18

Some of your data has been criticized.

493

1146639

1241

19:19

Some of your choice of data sets has been criticized.

494

1147880

2466

19:22

You have been accused of cherry-picking data

495

1150346

1876

19:24

to make your case. What do you answer to that?

496

1152222

2737

19:26

TP: Well, I answer that I am very happy

497

1154959

1927

19:28

that this book is stimulating debate.

498

1156886

2467

19:31

This is part of what it is intended for.

499

1159353

2481

19:33

Look, the reason why I put all the data online

500

1161834

3294

19:37

with all of the detailed computation

501

1165128

1846

19:38

is so that we can have
an open and transparent

502

1166974

2334

19:41

debate about this.

503

1169308

1669

19:42

So I have responded point by point

504

1170977

1766

19:44

to every concern.

505

1172743

1792

19:46

Let me say that if I was to rewrite the book today,

506

1174535

3113

19:49

I would actually conclude

507

1177648

1541

19:51

that the rise in wealth inequality,

508

1179189

2194

19:53

particularly in the United States,

509

1181383

1927

19:55

has been actually higher
than what I report in my book.

510

1183310

2373

19:57

There is a recent study by Saez and Zucman

511

1185683

3245

20:00

showing, with new data

512

1188928

1592

20:02

which I didn't have at the time of the book,

513

1190520

1777

20:04

that wealth concentration in the U.S. has risen

514

1192297

2527

20:06

even more than what I report.

515

1194824

1936

20:08

And there will be other data in the future.

516

1196760

2031

20:10

Some of it will go in different directions.

517

1198791

2151

20:12

Look, we put online almost every week

518

1200942

4099

20:17

new, updated series on the
World Top Income Database

519

1205041

2934

20:19

and we will keep doing so in the future,

520

1207975

1900

20:21

in particular in emerging countries,

521

1209875

2306

20:24

and I welcome all of those who want to contribute

522

1212181

2929

20:27

to this data collection process.

523

1215110

2346

20:29

In fact, I certainly agree

524

1217456

2808

20:32

that there is not enough

525

1220264

1614

20:33

transparency about wealth dynamics,

526

1221878

1878

20:35

and a good way to have better data

527

1223756

1915

20:37

would be to have a wealth tax

528

1225671

1865

20:39

with a small tax rate to begin with

529

1227536

1571

20:41

so that we can all agree

530

1229107

2339

20:43

about this important evolution

531

1231446

1564

20:45

and adapt our policies to whatever we observe.

532

1233010

3327

20:48

So taxation is a source of knowledge,

533

1236337

2062

20:50

and that's what we need the most right now.

534

1238399

2936

20:53

BG: Thomas Piketty, merci beaucoup.

535

1241335

1815

20:55

Thank you.
TP: Thank you. (Applause)

536

1243150

4000

ABOUT THE SPEAKER

Thomas Piketty - Economist
Thomas Piketty is an economist and professor at the Paris School of Economics. His 2014 book, "Capital in the Twenty-first Century," caused a sensation upon publication.

Why you should listen

Is the global economy accelerating toward a future that’s incompatible with democracy? In this provocative talk about inequality and wealth, economist Thomas Piketty provides new context for his groundbreaking book, Capital in the Twenty-First Century.

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Thomas Piketty | Speaker | TED.com

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Thomas Piketty: New thoughts on capital in the twenty-first century | TED Talk | TED.com