Two weeks ago, I described two ways of looking at the capital of a modern economy.  We can measure the value of physical assets, or the total of household wealth.  These aggregates are similar but not identical. The widely cited work of Piketty relates primarily to the value of physical assets.

   The quality of available data on the value of physical assets, even in the modern era, is not very high.  We have good information about current investment in various categories of asset – plant and machinery, vehicles, offices, shops and warehouses, roads and cables – but not about their current value.  National accounts figures for these assets are mainly estimated using a ‘perpetual inventory’ method, in which an allowance is made each year for depreciation and revaluation of the existing total, new investment is added. The resulting figure carried on to the next year’s calculation. Think of the solera, a cask of mature sherry to which Spanish wine producers add each year’s new wine, and from which they draw off a proportion of the old.

         The calculations are sensitive to the assumptions made about depreciation and the price of capital goods.  More fundamentally, it is not ever clear what one is trying to measure when one asks ‘what is the value of the London Underground?’

But with these caveats we can look, as Piketty did, at the long term development of the physical assets of countries – like Britain and France – with a long documented economic history.  Two centuries ago, agricultural estates were the principal component of capital, and hereditary ownership of such estates the principal determinant of wealth, and its inequality.  But agriculture is today a much diminished share of total output, and farm values in Britain and France were diminished by the opening of territories in North America and other parts of the world.  Stately homes are today liabilities, not assets, and modern dukes make ends meet by serving tea to visitors.

These visitors are the new owners of capital.  In both Britain and France, more than half of the value of physical assets is represented by residential property.  In turn, owner-occupation accounts for 60% – 70% of the number of houses in Britain and France and a much higher proportion of their value.  Even after deducting outstanding mortgages – around one third of property values – owner occupied housing is the largest component of personal wealth.  

         The main factor behind the phenomenon that ‘Capital is Back’ is the increased value of urban land.   This is a very different explanation from the claim that the growth of capital, and the inequality of its distribution, is driven by an ineluctable historical tendency for the rate of return on capital to exceed the underlying rate of economic growth, and leads to indefinite capital accumulation.  Far from being accumulated, the return from owner occupation is consumed on an annual basis through the act of living in a house. The fortunes of Warren Buffett, Bill Gates and Carlos Slim are explained by the inequality r>g, but that is because their personal r is way above average.

The rise in house prices does have a very significant effect on the distribution of income and wealth: in particular, on the transmission of inequality between generations.  The ability of young people today to benefit from future house price appreciation depends in large part on the ability of their parents to pass on the benefits of past house price appreciation to them. But that injustice  is different in nature and cause from the inequality that concerns Occupy Wall Street, or the purchasers of Piketty’s book.

The growth of housing equity and the value of pension rights has done a lot to distribute wealth more broadly.  What has happened to incomes is a very different matter.