residential real estate
and natural resources in total capital.
It bears emphasizing that the law α = r × β does not tell us how each of these three variables is determined, or, in particular,
how the national capital/income ratio ( β ) is determined, the latter being in some sense a measure of how intensely capitalistic
the society in question is. To answer that question, we must introduce additional
ideas and relationships, in particular the savings and investment rates and the rate
of growth. This will lead us to the second fundamental law of capitalism: the higher
the savings rate and the lower the growth rate, the higher the capital/income ratio
( β ). This will be shown in the next few chapters; at this stage, the law α = r × β simply means that regardless of what economic, social, and political forces determine
the level of the capital/income ratio ( β ), capital’s share in income ( α ), and the rate of return on capital ( r ), these three variables are not independent of one another. Conceptually, there are
two degrees of freedom, not three.
National Accounts: An Evolving Social Construct
Now that the key concepts of output and income, capital and wealth, capital/income
ratio, and rate of return on capital have been explained, I will examine in greater
detail how these abstract quantities can be measured and what such measurements can
tell us about the historical evolution of the distribution of wealth in various countries.
I will briefly review the main stages in the history of national accounts and then
present a portrait in broad brushstrokes of how the global distribution of output
and income has changed since the eighteenth century, along with a discussion of how
demographic and economic growth rates have changed over the same period. These growth
rates will play an important part in the analysis.
As noted, the first attempts to measure national income and capital date back to the
late seventeenth and early eighteenth century. Around 1700, several isolated estimates
appeared in Britain and France (apparently independently of one another). I am speaking
primarily of the work of William Petty (1664) and Gregory King (1696) for England
and Pierre le Pesant, sieur de Boisguillebert (1695), and Sébastien Le Prestre de
Vauban (1707) for France. Their work focused on both the national stock of capital
and the annual flow of national income. One of their primary objectives was to calculate
the total value of land, by far the most important source of wealth in the agrarian
societies of the day, and then to relate the quantity of landed wealth to the level
of agricultural output and land rents.
It is worth noting that these authors often had a political objective in mind, generally
having to do with modernization of the tax system. By calculating the nation’s income
and wealth, they hoped to show the sovereign that it would be possible to raise tax
receipts considerably while keeping tax rates relatively low, provided that all property
and goods produced were subject to taxation and everyone was required to pay, including
landlords of both aristocratic and common descent. This objective is obvious in Vauban’s Projet de dîme royale (Plan for a Royal Tithe), but it is just as clear in the works of Boisguillebert
and King (though less so in Petty’s writing).
The late eighteenth century saw further attempts to measure income and wealth, especially
around the time of the French Revolution. Antoine Lavoisier published his estimates
for the year 1789 in his book La Richesse territoriale du Royaume de France (The Territorial Wealth of the Kingdom of France), published in 1791. The new tax
system established after the Revolution, which ended the privileges of the nobility
and imposed a tax on all property in land, was largely inspired by this work, which
was widely used to estimate expected receipts from new taxes.
It was above all in
and natural resources in total capital.
It bears emphasizing that the law α = r × β does not tell us how each of these three variables is determined, or, in particular,
how the national capital/income ratio ( β ) is determined, the latter being in some sense a measure of how intensely capitalistic
the society in question is. To answer that question, we must introduce additional
ideas and relationships, in particular the savings and investment rates and the rate
of growth. This will lead us to the second fundamental law of capitalism: the higher
the savings rate and the lower the growth rate, the higher the capital/income ratio
( β ). This will be shown in the next few chapters; at this stage, the law α = r × β simply means that regardless of what economic, social, and political forces determine
the level of the capital/income ratio ( β ), capital’s share in income ( α ), and the rate of return on capital ( r ), these three variables are not independent of one another. Conceptually, there are
two degrees of freedom, not three.
National Accounts: An Evolving Social Construct
Now that the key concepts of output and income, capital and wealth, capital/income
ratio, and rate of return on capital have been explained, I will examine in greater
detail how these abstract quantities can be measured and what such measurements can
tell us about the historical evolution of the distribution of wealth in various countries.
I will briefly review the main stages in the history of national accounts and then
present a portrait in broad brushstrokes of how the global distribution of output
and income has changed since the eighteenth century, along with a discussion of how
demographic and economic growth rates have changed over the same period. These growth
rates will play an important part in the analysis.
As noted, the first attempts to measure national income and capital date back to the
late seventeenth and early eighteenth century. Around 1700, several isolated estimates
appeared in Britain and France (apparently independently of one another). I am speaking
primarily of the work of William Petty (1664) and Gregory King (1696) for England
and Pierre le Pesant, sieur de Boisguillebert (1695), and Sébastien Le Prestre de
Vauban (1707) for France. Their work focused on both the national stock of capital
and the annual flow of national income. One of their primary objectives was to calculate
the total value of land, by far the most important source of wealth in the agrarian
societies of the day, and then to relate the quantity of landed wealth to the level
of agricultural output and land rents.
It is worth noting that these authors often had a political objective in mind, generally
having to do with modernization of the tax system. By calculating the nation’s income
and wealth, they hoped to show the sovereign that it would be possible to raise tax
receipts considerably while keeping tax rates relatively low, provided that all property
and goods produced were subject to taxation and everyone was required to pay, including
landlords of both aristocratic and common descent. This objective is obvious in Vauban’s Projet de dîme royale (Plan for a Royal Tithe), but it is just as clear in the works of Boisguillebert
and King (though less so in Petty’s writing).
The late eighteenth century saw further attempts to measure income and wealth, especially
around the time of the French Revolution. Antoine Lavoisier published his estimates
for the year 1789 in his book La Richesse territoriale du Royaume de France (The Territorial Wealth of the Kingdom of France), published in 1791. The new tax
system established after the Revolution, which ended the privileges of the nobility
and imposed a tax on all property in land, was largely inspired by this work, which
was widely used to estimate expected receipts from new taxes.
It was above all in
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