Lecture 14: Wealth Inequality in Europe and the USA, 1810-2010.


In this lecture we are returning to the question of wealth inequality.

This is the inequality that arises from the ownership of capital. Global wealth today is estimated at approximately $262 trillion. 44% of this is owned by 0.7% of the world’s population.

In lecture 12 we concluded that the only reason why income inequality declined in the 20th century was because the income arising from capital ownership declined i.e. the fall in income inequality in Europe was almost entirely explained by the fall in the capital-income.

It is therefore essential that we understand how this compression in the inequality of wealth came about, and why it is rising again.


Remember, Table 7.2 shows that in all known societies the poorest half of the population own virtually nothing (generally 5% of wealth). The world of 2016 is no different to the world of the 19th century in this sense.


The top decile have generally owned between 60-90% of wealth. The middle classes have generally owned between 5-35%. It was the emergence of a property owning (housing) middle class transformed wealth distribution in the 20th century.

Let’s take a look at these empirical trends in Europe and the USA overtime.


Figure 10.1 depicts trends in wealth inequalities in France from 1810-2010. What we observe is that the top decile owned between 80-90% of wealth from 1810-1910, which has declined to about 60-65% today.

This longitudinal data is available because of the introduction of an estate tax in 1791 on all forms of wealth: property, assets, bonds, savings, land.

Looking at these trends in capital ownership it is interesting to ask what would have happened had there been no war? The shocks of the two world wars disrupted the dynamics of wealth because it ushered in the era of capital taxes.

Inequality of capital ownership remained stable at an extremely high level throughout the 18th and 19th century. The top decile owned 80-90% whereas the top centile owned 50-60%. The French revolution had very little impact on this.

France was a patrimonial society characterized by a hyper-concentration of wealth.

The decline in the upper deciles share of wealth in the 20th century went exclusively to the middle 40 percent of the population.

The poorest 50 percent owned nothing in the 19th and 21st century. This has not changed.

Britain and Sweden 

Figure 10.3 and 10.4 show that the same extreme concentration of capital ownership and wealth existed in Britain and Sweden. The same applies to Germany. We can infer that it was a European wide phenomenon.

In Britain, the top decile owned 80-90 percent of total wealth in 1910, which has declined to about 70 percent today.

In 1910, Sweden was just as unequal. It was nothing like the egalitarian country it became during the 1970’s.

The essential difference today is that there is a property owning middle class, who own about one third of national wealth, and most of which is bound up in housing capital.

Much like in France, the wealthiest 10 percent lost to the middle 40 percent during the period of strong growth in the 20th century (the period of democratic capitalism).

Nothing went to the poorest half of the population.


Figure 10.5 shows that in the USA the top 10 percent owned 80% of total wealth in 1910, and which has remained more stable, and equates to about 75 percent today.

We are accustomed to the fact that the US is more unequal that Europe, and that public opinion in the US is more tolerant of inequalities, primarily because these inequalities are considered an outcome of entrepreneurial dynamism.

But this was not always the case. A century ago, the US prided itself on the fact that it was more egalitarian than Europe.

From 1910-1930 the US pioneered a progressive income and wealth tax to limit growing inequalities, which were deemed incompatible with the democratic values of the free-world.

Perceptions and attitudes toward inequality, redistribution and national values have changed a great deal over the 20th century.


Figure 10.6 compares capital ownership and wealth inequality in Europe and the USA.

The decline in Europe during the 20th century created a perception that capital had been tamed, and that the role of the state was to guarantee social rights, and that wealth mattered less than hard work and merit.

The assumption was that economic inequalities and a sharply divided class society had been relegated to the past.

The Mechanism of Divergence: R>G

What explains the hyper-concentration of wealth and capital up until ww1, it’s decline, and rise again?

For Piketty, the fundamental macro-social driving force is the inequality R>G.

These were low-growth societies (G), where rate of return on capital (R) was markedly higher than economic growth. Capital income outstripped labour income.

If G=1% and R=5% then fortunes grow faster than the economy. Capital accumulates and concentrates. This is an ideal condition for an ‘inheritance society’.

Most wealth during the 18th and 19th century came from inheritance. This is what Piketty calls ‘Patrimonial Capitalism’. He also think this is the future of the 21st century.


It is important to note that the inequality R>G is a historical-empirical observation and not a logical necessity. It can always be otherwise. Figure 10.9 illustrates the point. The rate of return on capital (pre-tax) has always been higher than the world growth rate.

Throughout human history the rate of return on capital has generally been 10-20 times greater than economic growth (and income). The gap narrowed in the 20th century because of politics, and public policies that were explicitly aimed at reducing class inequalities. Absent political intervention it will rise again.

Global growth is set to slowdown, as successive IMF reports suggest. This correlates with a rapid rise in wealth inequality, documented in this recent Oxfam report. In a context of slow growth, high-capital returns and rising wealth inequalities, it is easy to see why Piketty proposes new taxes on wealth/capital to reduce the R-G inequality.

The argument against this fiscal policy proposal is that increasing taxes on wealth and capital discourages economic and income growth/investment. But does it?

Taxes and growth

Before WW1 taxes on capital, profits and property were very low. This changed after WW1.

Since 1980, and with heightened international competition for capital investment, they have become very low again.

Piketty hypothesises that the logical end goal of corporate tax competition between nation-states is a 0% capital tax regime.

Figure 10.10 and figure 10.11 hypothesise what will happen if taxes on capital continue to decrease  (intensified capital tax competition) into the 21st century. R>G will return.

What the data suggests is that the after-tax return to capital fell from 1913-1950 (higher capital taxes) and continued to decline from 1950-2010 (stronger economic growth).

During the 20th century, and for the first time in history, the net return on capital was less than the income-growth rate. It was better to work that rely on inheritance.

The social state

This was the period during which the social state, committed to providing certain public services and income protection, as a social right, was born.

Democracy gave birth to ‘social’ rights not the capitalist market.

The social state is now under increasing strain because of growing international market constraints to both increase public expenditure and cut taxes.

It is a crisis of fiscal democracy i.e. who is going to pick up the bill to pay for democratically enshrined social rights and electorally demanding services?

The role of politics 

Figures 10.10 and 10.11 rely on the assumption that there will be no political intervention to alter the trajectory of financial globalisation over the coming century.

But is this plausible? Will democracies accept rising wealth-income inequalities?

The R>G inequality is not a natural law (although it is a logical outcome of free and competitive capital markets); rather it is shaped by public policies, politics and institutions.

To reverse the R>G inequality, economic growth would need to exceed 2 percent over the coming decades and/or taxes on capital would need to reduce the net return to below 3 percent. Absent this, capital/income ratios will continue to grow.

There is no equilibrium distribution of wealth. Left to its own devises, the market will ensure that the inequality in capital ownership and wealth will grow indefinitely.

The freer the capital-market, the greater the inequality of wealth.

Impact of war

We still need to explain why wealth inequalities have not returned to 19th century levels?

One of the most important reasons was that WW1 and WW2 brought an end to inheritance.

A new generation did not have the luxury of inheriting fortunes that would enable them to live as their grandparents had, which in some cases was +100 times the average.

The rich/elite lost a lot of their capital assets (not least in their foreign colonies).

Governments defaulted on the sovereign debt owned to wealthy individuals.

Industrial firms were closed or nationalized.

This meant that those at very top of the wealth distribution (the top centile) were disproportionately affected.


Total private wealth has (measured in capital/income ratios) regained the level it attained on the eve of WW1 in the 21st century.

The reason why it is has not become as unequally distributed is because governments now tax capital (and capital income) at significant rates. Corporate tax is 35% in the USA.

Up until WW1 there was no tax on corporate profits. If capital grows at 5% and the average capital tax rate is 30% then the net after tax return to capital will be around 3.5%.

Taxes on capital do not modify the accumulation of wealth. Rather they affect the distribution of wealth.


Wealth inequalities grew throughout the 18th-19th century because of the inequality R>G. The birth of the democratic nation-state put an end to this.

the 18th-19th century was a period of ‘patrimonial capitalism’. In the 20th century, post-war societies in Europe and the USA instituted a new regime of democratic capitalism. Many suggest that this regime came to an end with financial globalisation from the 1980’s onwards.

Wealth inequalities declined in the 20th century because of the shocks war and the creation the social state, in addition to the emergence of a property owning middle class.

Piketty suggests wealth inequality will increase to 19th century levels again because of:

  • The return of the inequality R>G (slower growth)
  • Increased tax competition among nation-states in a global financial market.

On this basis, it should be obvious why Piketty proposes a global wealth tax. He considers this the only option to defend democracy against wealth inequalities.

Question/discussion: is the R>G inequality plausible as an explanation for wealth inequalities? How does he measure the rate of return on capital? Does this adequately address the comparative differences we observe between countries? Is it an institutional explanation?

Class discussion: do societies trust the state to raise new taxes and deliver services?

Slides: Lecture 14


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