This relatively short chapter, entitled “The Metamorphoses of Capital,” begins Part Two of the book. Great Britain and France are the only countries discussed in any detail – and it felt a little weird not having the US come up. I know enough about England that it feels familiar to me (not that I’ve ever been there) but not nearly as much about France, which still feels decisively foreign to me. What Piketty wants to talk about in this chapter is how capital went from being mostly farm land to being mostly stuff other than farm land. Along the way, he’s got a couple of really choice quotes, but first, he writes some more about Balzac and Austen.
It occurs to me that I’m going to need to read Pere Goriot at some point soon, and also, probably, Mansfield Park, which Piketty references in his brief literary digression. Here, he is specifically concerned with how, in the novels of the early 19th century, the purpose of owning land was assumed to be to collect rents. “Capital is never quiet,” he writes, “it is always risk oriented and entrepreneurial…yet it always tends to transform itself into rents as it accumulates in large enough amounts–that is its vocation, its logical destination.” (p 115-6) This is, of course, not an especially widely appreciated part of modern American capitalism. We care very much property rights, but seldom do we think of ourselves as rentiers in the classic sense. We often call rentiers investors, or sometimes “job creators” – we emphasize the working aspect of it, rather than the entitled income aspect. In a Jane Austen novel, the characters all know very well that the point of owning property is to collect income. Working for a living is for peasents. “The advantage of owning things is that one can continue to consume and accumulate without having to work…” (p 121) We Americans tend to be uncomfortable with this view – it tells us something we’d rather not know.
Piketty points out two basic changes in capital over the last 300 years – one, that the capital/income ratio was close to 5 or 6 (i.e. the value of national wealth in Great Britain and France was roughly 5 or 6 times the value of national income) up until World War I, at which point it dropped precipitously to something like 2 or 3. Then, in the 1980s it climbed back, and is now close to where it was in the 19th century. Two, that wealth used to be largely comprised of land, but today is mostly buildings and other capital goods. “The nature of capital has changed: it once was mainly land but has become primarily housing plus industrial and financial assets.” (p 120)
There’s some really interesting history in here that I was previously unaware of – France, for example, basically declared bankrupcy back in 1797, during the Revolution, that happened to deal with the old regimes public debt. The British ran up enormous debts fighting Napoleon – but managed to remain solvent. They paid the debt off over the course of the 19th century, as the economy slowly grew. And it made the rich richer. (I imagine there’s a similar dynamic to American wealth today: the public debt of this country is essentially a way for banks to steadily accrue rents out of the system.) Then the Depression came, and a lot of wealth got wiped out. In particular, foreign incomes, which had grown considerably at the end of the 19th century, but disappeared by 1950. Agricultural land was huge part of wealth before 1900, but today is scarcely valued at all. Ricardian equivalence should be more familiar to me than it is, but I do like Piketty’s way of characterizing it: that public debt does not affect national capital accumulation (i.e. public investment doesn’t necessarily push out private investment). Keynes finally makes an appearance to explain why the “euthanasia of the rentiers” following World War I led him to recommend inflation as a way to reduce the burden of the public debt and thus constrain the influence of wealth in society. Modern American neoclassical economics, which arosesomewhat in response to Keynesianism, “…by totally avoiding the issue of inequality in the distribution of wealth and income, [representative agent] models often lead to extrene and unrealistic conclusions and are therefore a source of confusion rather than clarity.” (p 135) In the 1930s people had lost faith in the private economy – but this changed after the 1970s, and in the 1980s and 90s, France and Great Britain both saw large expansions of private wealth.
If inflation only works for awhile, then what? How is the government supposed to get anything done if it can’t borrow? Or maybe that’s the whole point? Certainly that feels like the point of capitalism sometimes: make democracy impossible, or at least pointless. Because if voting won’t get you a decent job with benefits and a reliable retirement package, then what good is it?
The book has a strange feeling for me here – it’s all very straightforward, and yet unusual in emphasis. That capitalism is about producing stocks of income-bearing assets is almost too obvious. The changes in the composition and size of those stocks over the last 300 years is really interesting, for sure, but the tone is not so familiar. And I like it.