One of the objectives of Thomas Piketty’s economics bestseller, Capital in the Twenty-First Century, is to estimate the evolution of the capital-income ratio of an economy. According to Piketty, “a country that saves a lot and grows slowly will over the long run accumulate an enormous stock of capital (relative to its income), which can in turn have a significant effect on the social structure and distribution of wealth” (p. 166).
Piketty defines capital—which he calls “national capital” or “national wealth”—as “the sum total of nonhuman assets that can be owned and exchanged on some market” (p. 46). Capital therefore includes all forms of real property (including residential real estate) as well as financial and industrial capital (plants, infrastructure, machinery, patents, and so on) used by firms and government agencies. But capital also includes farmland and natural resources, such as fossil fuels, minerals, forests and any other similar natural capital that can also be bought and sold on markets. In sum,
national capital = farmland + marketed natural resources + housing + other domestic capital + net foreign capital
Piketty conventionally defines income as national income. The latter is gross domestic product (GDP), which measures the total of goods and services produced by a country in a given year, less any depreciation of capital that occurs through production, plus any net income from investments abroad. That is,
national income = total goods and services produced domestically (GDP) – capital depreciation + net income from abroad
Piketty estimates the capital-income ratios from 1970 to 2010 for eight high-income countries—the United States, Japan, Germany, France, Britain, Italy, Canada and Australia—using their national accounts data. He denotes this capital-income ratio as β. As depicted in Figure 5.7 of his book, the capital-income ratio for each country has increased steadily over 1970 to 2010. In the graph below, I use Piketty’s data to replicate this trend in β averaged for the eight countries. In 1970, their average capital-income ratio was around 340% (i.e., more than 3 years) of national income, and has risen steadily to reach 525% (more than five years) of national income in 2010.
The eight countries are the United States, Japan, Germany, France, United Kingdom, Italy, Canada and Australia.
β is the capital/income ratio averaged for these eight countries, based on the data in Table S5.3 of Piketty’s online technical appendix, which is the series used for Figure 5.7 of his book.
s*/g*is based on the adjusted net savings series from the World Development Indicators. The measure of s* is annual national savings net of capital depreciation and natural resource depletion as a % of income; g* is the average annual growth rate (2.4%) of national income net of natural resource depletion over 1970-2010.
s*/g* Avg 1970-2010 is 291%, which is based on the average s* for the eight countries over 1970 to 2010 of 7.0% and g* of 2.4% over this period.
Although Piketty includes marketed natural resources, such as fossil fuels, minerals and forests, in his estimate of a country’s capital, his measures of national income and savings appear to adjust only for depreciation of buildings, equipment, and other conventional forms of domestic capital. In national accounts, such capital depreciation is referred to as consumption of fixed capital, which represents the replacement value of capital used up in the process of production. Omitting natural capital depreciation is therefore surprising: if we use up more of energy, mineral and forest resources to produce more economic output today, then we have less natural capital for production tomorrow. Clearly, this natural capital depreciation must also be accounted for.
Let g* denote the percentage growth rate in national income, net of any natural capital depreciation. Also, let s* be the annual savings rate of a country, which is savings net of both consumption of fixed capital and natural resource depletion, as a percentage of national income. It follows that the ratio s*/g* measures the annual change in wealth (net of natural capital depreciation) relative to the annual change in national income.
Thanks to the efforts of Kirk Hamilton and his colleagues at the World Bank, the World Development Indicators estimates for most countries since 1970 adjustments to national income, income growth and savings that allow for natural capital depletion, which is the sum of valuations of net forest depletion, energy depletion and mineral depletion. Two of these indicators allow measurement of s*/g*. The first is the annual national savings net of capital depreciation and natural resource depletion as a percentage of income, which is s*. The second is the annual growth rate of national income (as defined above) but net of natural resource depletion, which is g*.
Using these two indicators, the above figure shows my estimates of s*/g* for the same eight countries over 1970 to 2012. It indicates a distinctly downward trend in annual additions of capital relative to changes in income for these countries when natural capital depreciation is taken into account. In 1970, s*/g* was around 510%, which suggests that annual additions to capital (including natural capital) was more than 5 times the increase in national income. But by 2012 this ratio had fallen to 146%, which suggests that the additions to wealth each year were only one-and-a-half times the increases in income. On average over 1970-2012, s*/g* is 291%, i.e. wealth is increased annually over this period almost 3 times more than income.
Piketty may be right about the long-run evolution of the capital-income ratio β. Since 1970, the slow growth relative to savings in rich countries may have led to substantial accumulation of capital relative to income. But as my estimates for the trend in s*/g* show, this wealth has been amassed over the past 40 years through considerable depreciation of valuable energy, mineral and forest resources. In a sense, these economies have traded one form of capital—the earth’s riches—for another—human riches.
Piketty appears to be aware of this problem. Towards the end of his book, he warns that the current debate over the size of the public debt may be misplaced, as “the more urgent need is to increase our educational capital and prevent the degradation of our natural capital” (p. 568).
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