This chapter offers an overview of the empirical and theoretical research on the long-run
evolution of wealth and inheritance. Wealth-income ratios, inherited wealth, and wealth
inequalities were high in the eighteenth to nineteenth centuries up until World War I, then
sharply dropped during the twentieth century following World War shocks, and have been rising
again in the late twentieth and early twenty-first centuries. We discuss the models that can
account for these facts. We show that over a wide range of models, the long-run magnitude and
concentration of wealth and inheritance are an increasing function of r--g where r- is the net-of-
tax rate of return on wealth and g is the economy's growth rate. This suggests that current trends
toward rising wealth-income ratios and wealth inequality might continue during the twenty-first
century, both because of the slowdown of population and productivity growth, and because of
rising international competition to attract capital.
Their focus is on how three interrelated ratios have changed over time and across countries
1 Private wealth to income ratio (Bt )
2 Ratio of wealth held by top 1 or top 10 percent
3 Share of wealth that is inherited
Trends in each of these can be explained by analysis of ¯r g, the difference between the after tax rate of
return on capital and the growth rate of the economy
Just what the wealth/income ratio telling us? Here are some thoughts:
1) When wealth/income spikes up, it's a potential danger sign of financial instability in the economy.
2) Wealth is typically much more concentrated than income, and so when the wealth/income ratio is
high, the political power of those holding lots of assets is probably stronger. The power of mega-rich
billionaires, not just in the U.S. and Europe, but also in China and across fast-growing economies of the
world, is large and growing.
3) The long-run data suggests that the wealth/income ratios observed from, say, 1940 up to about 1980,
were historically on the low side. Thus, it may be that the rise in wealth/income ratios in the last few
decades is a return to historical norms. (Piketty and Zucman make this case in more detail.)
4) As Picketty and Zucman write: "There’s nothing bad about the return of capital: k is useful; but it
raises new issues about k regulation & taxation." In general, as wealth becomes relatively more
important, it deserves a larger share of our social discussion and public policy attention.
Differences in the economic growth rate of nations often come down to
differences in inputs (factors of production) and differences in TFP—the
productivity of labor and capital resources. Higher productivity promotes faster
economic growth, and faster growth allows a nation to escape poverty. Factors
that can increase productivity (and growth) include institutions that provide
incentives for innovation and production. In some cases, government can play
an important part in the development of a nation's economy. Finally, increasing
access to international trade can provide markets for the goods produced by
less-developed countries and also increase productivity by increasing the access
to capital resources.
To develop a full picture of people’s economic resources, two concepts are particularly important –
income and wealth. Income is the flow of money that comes into a household from employers, owning a
business, state benefits, rents on properties, and so on. Wealth essentially represents people’s savings
and it’s typically higher – and spread out more unevenly – than income. Wealth matters but, in some
ways, income matters more. That’s because it’s usually a better indicator of people’s day-to-day
economic resources.
What is wealth? Most people have an instinctive feeling of what wealth means – money in the bank,
property and land, shareholdings, jewellery and art, pension rights and possibly life assurance, and so
on. But wealth has both a positive and a negative aspect. As well as assets, like our savings, we may also
have liabilities, such as loans and mortgages. Combine these assets and liabilities and we come up with a
picture of people’s net wealth. More from the OECD: How does your income compare with everyone
else’s? And how well do you understand how income is spread out across society? Get the answers with
the OECD’s Compare Your Income tool: http://www.oecd.org/statistics/compareyourincome.htm. 1.
WHAT ARE INCOME AND WEALTH? OECD Insights – INCOME INEQUALITY © OECD 2015 21 Wealth is
important for several reasons: It gives people a cushion if they lose their job or fall on hard times; it can
also provide a source of income, for example, through interest payments on bank deposits or dividends
on shares; and it allows people to make one-off or large-scale investments, such as in their education or
in property. Measuring wealth is a complex business, and not all countries do it the same way – for
example, some may include the value of a pension, others may not. For this reason, it’s important to
look at the fine print of any measure of wealth to see what’s included and what’s left out.
Thanks to the cumulative efforts of several dozen scholars, we have been able to collect a relatively
large historical database on the structure of national income and national wealth and the evolution of
income and wealth distributions, covering three centuries and over 20 countries.
