If “capital is back” it’s in a different sense


If you want to measure the capital possessed by a nation, there are two ways of doing it. One is to travel the length and breadth of the country counting the houses, the bridges, the factories, shops and offices, and adding up their total value. The other is to knock on doors and ask people how rich they are. National statistics offices typically do both of these things, though not literally in this way.

The totals should be roughly equivalent, because however complex the chain of intermediation, it is the nation’s savings which fund the nation’s investment. The totals are not, however, exactly the same – for a few reasons.

For example, some national assets are owned by foreigners, and some household wealth is held overseas. But for large, developed countries the net effect of this is small because the two factors balance. The value of overseas assets owned by residents of Britain and of France is almost the same, in total, as the value of domestic assets held by overseas residents. Germany owns more than it owes, but the reverse is true of the US.

In addition, we do not treat government assets as part of our personal wealth, even if we attach value to the road network and the national gallery (and we certainly should). If, directly or indirectly, we hold government debt, we treat it as an asset, even though the future taxpayers who will have to pay it back do not report it as a liability.

Finally, some of what we regard as household wealth is a claim on future earnings. Apple has a market capitalisation of more than $500bn, but the corporation owns physical assets worth only about $15bn (and a $150bn mountain of cash). The bulk of the corporation’s value is anticipation of future profits. Similarly, pension rights are an important component of household wealth that may – or may not – be backed up by actual investments.

So there are two different concepts of national capital: physical assets and household wealth. Thomas Piketty’s widely cited study measures national capital using data derived from the UN system of statistical accounts (the only source that provides internationally comparable information). Professor Piketty has heroically attempted to reconstruct estimates for extended historical periods for Britain and France – to estimate what Lord Liverpool, Wellington’s prime minister, and Napoleon’s statisticians would have told their masters if they had appropriate data and knowledge of the UN system of accounts.

Prof Piketty’s figures are closer to the first concept (physical assets) than to the second (household wealth). But for his principal purposes – a review of inequality – it would seem that household wealth is more relevant. The wealth of Carlos Slim, Bill Gates or Warren Buffett is largely outside his data because the market value of América Móvil, Microsoft and Berkshire Hathaway far exceeds the tangible assets of these companies. And while the scale of these individuals’ wealth is unrepresentative even among the rich of today, they are wholly representative in the sources of their wealth.

If “capital is back”, as Prof Piketty contends, it is in a very different sense from the 19th-century view, in which the ownership of capital confers authority over the means of production. Messrs Slim, Gates and Buffett do control the means of production but not in the way described by Karl Marx. They did not acquire control of the means of production by virtue of their ownership of capital; rather they acquired capital from their control of the means of production, which they gained through political influence and success in the market.

The days when economic power was acquired by inheriting the mill are long gone. Mr Buffett began his business career as a mill owner, but closed the mills and went into insurance. That is the reality of capital in modern economics.


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