INTRODUCTION

Economists have long recognized that the magnitude and distribution of wealth play an important role in the distribution of income—both across factors of production (labor and capital) and across individuals.

In surveying the literature on these issues, we will focus the analysis on three inter­related ratios. The first is the aggregate wealth-to-income ratio, that is the ratio between marketable—nonhuman—wealth and national income. The second is the share of aggregate wealth held by the richest individuals, say the top 10% or top 1%. The last is the ratio between the stock of inherited wealth and aggregate wealth (or between the annual flow of bequests and national income). As we shall see, to properly analyze the concentration of wealth and its implications, it is critical to study top wealth shares jointly with the macroeconomic wealth-income and inheritance-wealth ratios. In so doing, this chapter attempts to build bridges between income distribution and macroeconomics.

The wealth-to-income ratio, top wealth shares, and the share of inheritance in the economy have all been the subject of considerable interest and controversy—but usually on the basis of limited data. For a long time, economics textbooks have presented the wealth-income ratio as stable over time—one of the Kaldor facts.^[20] There is, however, no strong theoretical reason why it should be so: With a flexible production function, any ratio can be a steady state. And until recently, we lacked comprehensive national bal­ance sheets with harmonized definitions for wealth that could be used to vindicate the constant-ratio thesis.

Following the Kuznets curve hypothesis, first formulated in the 1950s, another com­mon view among economists has been that income inequality—and possibly wealth inequality as well—should first rise and then decline with economic development, as a growing fraction of the population joins high-productivity sectors and benefits from industrial growth.^[21] However, following the rise in inequality that has occurred in most developed countries since the 1970s-1980s, this optimistic view has become less popular.^[22] As a consequence, most economists are now fairly skeptical about universal laws regarding the long-run evolution of inequality.

Last, regarding the inheritance share in total wealth accumulation, there seems to exist a general presumption that it should tend to decline over time. Although this is rarely formulated explicitly, one possible mechanism could be the rise of human capital (leading maybe to a rise of the labor share in income and saving), or the rise in life-cycle wealth accumulation (itself possibly due to the rise of life expectancy). Until recently, however, there was limited empirical evidence on the share of inherited wealth available to test these hypotheses. The 1980s saw a famous controversy between Modigliani (a life-cycle advocate, who argued that the share of inherited wealth was as little as 20-30% of U.S. aggregate wealth) and Kotlikoff-Summers (who instead argued that the inheritance share was as large as 80%, if not larger). Particularly confusing was the fact that both sides claimed to look at the same data, namely U.S. data from the 1960s-1970s.^[23]

Because many of the key predictions about wealth and inheritance were formulated a long time ago—often in the 1950s-1960s, or sometime in the 1970s-1980s—and usually on the basis of a relatively small amount of long-run evidence, it is high time to take a fresh look at them again on the basis of the more reliable evidence now available.

We begin by reviewing in Section 15.2 what we know about the historical evolution of the wealth-income ratio β. In most countries, this ratio has been following a U-shaped pattern over the 1910-2010 period, with a large decline between the 1910s and the 1950s, and a gradual recovery since the 1950s. The pattern is particularly spectacular in Europe, where the aggregate wealth-income ratio was as large as 600-700% during the eighteenth, nineteenth, and early twentieth centuries, then dropped to as little as 200-300% in the mid-twentieth century. It is now back to about 500-600% in the early twenty-first century. These same orders of magnitude also seem to apply toJapan, though the historical data is less complete than for Europe. The U-shaped pattern also exists—but is less marked—in the United States.

In Section 15.3, we turn to the long-run changes in wealth concentration. We also find a U-shaped pattern over the past century, but the dynamics have been quite different in Europe and in the United States. In Europe, the recent increase in wealth inequality appears to be more limited than the rise of the aggregate wealth-income ratio, so that European wealth seems to be significantly less concentrated in the early twenty-first cen­tury than a century ago. The top 10% wealth share used to be as large as 90%, whereas it is around 60-70% today (which is already quite large—and in particular a lot larger than the concentration of labor income). In the United States, by contrast, wealth concentration appears to have almost returned to its early twentieth century level. Although Europe was substantially more unequal than the United States until World War I, the situation has reversed over the course of the twentieth century. Whether the gap between both econ­omies will keep widening in the twenty-first century is an open issue.

In Section 15.4, we describe the existing evidence regarding the evolution of the share φ of inherited wealth in aggregate wealth.

We then discuss in Section 15.5 the theoretical mechanisms that can be used to account for the historical evidence and to analyze future prospects. Some of the evolu­tions documented in Sections 15.2-15.4 are due to shocks. In particular, the large U-shaped pattern of wealth-income and inheritance-income ratios observed over the 1910-2010 period is largely due to the wars (which hit Europe andJapan much more than the United States). Here the main theoretical lesson is simply that capital accumu­lation takes time, and that the world wars of the twentieth century have had a long-lasting impact on basic economic ratios. This, in a way, is not too surprising and follows from simple arithmetic. With a 10% saving rate and a fixed income, it takes 50 years to accu­mulate the equivalent of 5 years of income in capital stock. With income growth, the recovery process takes even more time.

The more interesting and difficult part of the story is to understand the forces that determine the new steady-state levels toward which each economy tends to converge once it has recovered from shocks.

Owing to data availability constraints, the historical evolutions analyzed in this chap­ter relate for the most part to today’s rich countries (Europe, North America, andJapan). However, to the extent that the theoretical mechanisms unveiled by the experience of rich countries also apply elsewhere, the findings presented here are also of interest for today’s emerging economies. In Section 15.5, we discuss the prospects for the global evo­lution of wealth-income ratios, wealth concentration, and the share of inherited wealth in the coming decades. Finally, Section 15.6 offers concluding comments and stresses the need for more research in this area.

15.2.