Finance History Inheritance Literature Mass Rentiers

A universal truth

It is a truth universally acknowledged that a single man in possession of a good fortune must be in want of a wife.

This is one of the most famous incipits in English literature: “Pride and Prejudice” by Jane Austen. We will focus on the fortune side of the equation, as money, that is unearned accumulated capital, plays a fundamental role in her books.

The novels by Jane Austen are set at the very beginning of the Industrial Revolution. In those times growth rate was around 0 percent and slowly accelerated to 1.5 percent during the 19th century. But compared to a rate of return of 5 percent, the gap between the rate of return and the growth rate did not change dramatically as compared to pre-industrial society.

Wealth was just perpetuated from one generation to the next generation, keeping the structure of society unchanged. There was always some sort of limited mobility – some people dilapidated the wealth or some people gained access to wealth through connections or other means.

This phenomenon has been explained with vast echo by French economist Thomas Piketty in his book “Capital in the Twenty-first Century.”

Piketty’s thesis is that when the rate of return on capital (r) is greater than the rate of economic growth (g) over the long term, the result is concentration of wealth, and this unequal distribution of wealth causes social and economic instability

Piketty argues that in the 20th century, very unusual shocks altered this logic. The succession of World War I, the Great Depression and World War II reduced the return to capital to a very low level because of capital destruction, inflation and taxation to finance the war, and so the rate of return to capital between 1940 and 1945 was not 4 or 5 percent anymore: it fell to 1 percent or very close to 0 percent.

Then the growth rate after World War II increased enormously: many countries experienced growth rates of 4 or 5 percent per year in the 1950s, 1960s and 1970s, in particular USA, Japan and Western Europe, that were largely due to the post-war recovery. Very high growth rates made it easier to accumulate wealth and, for the first time in history, there was really significantly higher upward mobility.

The unusually high level of upward mobility during the post-war period was greatly facilitated by the large growth rate of labour income during these decades. But starting around 1980, a growth slowdown was experienced due to the fact that the post-war recovery was over and productivity growth rate fell around 1 to 1.5 percent — closer to the pre-World War I productivity growth rate.

Growth rate in the economy is a function of the growth rates of productivity and population. So there are two ways to make GDP rise: higher productivity, higher population (more people working) or both. Historically both have been very important. Having more people who can work comes from immigration and fertility and life expectancy increasing. But this part of growth is now going down, because people are having fewer children.

There is still very substantial growth as compared to pre-industrial societies, but this is not enough to counteract the fact that the rate of return to capital earnings can typically be 4 or 5 percent. In Piketty’s view we are back to 19th century at least.

Chart adapted by The New Yorker from the original in Thomas Piketty’s “Capital in the Twenty-first Century.”

Piketty calls for action, but it is evident that these forces are beyond the control of individuals and even of political powers. In the foreseeable future, demographics will be negative in rich countries and productivity will not increase very fast. 

And so, what can we do? If we surrender to the logic that our wealth will be a function of productivity and demographics, i.e. forces that we can not influence in any way, we are set to be powerless and in the end victims of the economic system. And yet we can fight.

First of all, even the poorest worker in an advanced economy is a Mr Darcy compared to the average worker of a poor country. Piketty forgets this simple fact: we live in a globalised world, where a middle class Lebanese family can hire a Sudanese to take care of the house, and a Slovakian manager can pay a Filipino to assist his ageing parents. The world is the stage now, and many, who Piketty laments are getting poorer, are still on the wealthy side.

Second, we do not depend on land or paper to accumulate wealth. We have digitalized financial markets, we can own shares of companies, obligations and currencies with a common mobile phone and an internet connection. It is incredibly simple to manage an estate today, and, although it is not easy to save money working, we can all round up our income with some unearned income.

Jobs, that traditional economists like Piketty believe to be the only way to earn a living, may be the hardest path to affluency. The easiest one is to understand how to invest fruitfully the unearned capital we already possess, and then do a job that we love.

We must change our mentality: stop thinking as working class heroes, and act instead like decadent aristocrats who want to stay on top. Because that is what we are.