Free Capital in the Twenty-First Century by Thomas Piketty Page A

chapter,
     I will begin by presenting the concepts of domestic product and national income, capital
     and labor, and the capital/income ratio. Then I will look at how the global distribution
     of income has changed since the Industrial Revolution. In Chapter 2 , I will analyze the general evolution of growth rates over time. This will play a
     central role in the subsequent analysis.
    With these preliminaries out of the way, Part Two takes up the dynamics of the capital/income ratio and the capital-labor split, once
     again proceeding by stages. Chapter 3 will look at changes in the composition of capital and the capital/income ratio since
     the eighteenth century, beginning with Britain and France, about which we have the
     best long-run data. Chapter 4 introduces the German case and above all looks at the United States, which serves
     as a useful complement to the European prism. Finally, Chapters 5 and 6 attempt to extend the analysis to all the rich countries of the world and, insofar
     as possible, to the entire planet. I also attempt to draw conclusions relevant to
     the global dynamics of the capital/income ratio and capital-labor split in the twenty-first
     century.
The Idea of National Income
    It will be useful to begin with the concept of “national income,” to which I will
     frequently refer in what follows. National income is defined as the sum of all income
     available to the residents of a given country in a given year, regardless of the legal
     classification of that income.
    National income is closely related to the idea of GDP, which comes up often in public
     debate. There are, however, two important differences between GDP and national income.
     GDP measures the total of goods and services produced in a given year within the borders
     of a given country. In order to calculate national income, one must first subtract
     from GDP the depreciation of the capital that made this production possible: in other
     words, one must deduct wear and tear on buildings, infrastructure, machinery, vehicles,
     computers, and other items during the year in question. This depreciation is substantial,
     today on the order of 10 percent of GDP in most countries, and it does not correspond
     to anyone’s income: before wages are distributed to workers or dividends to stockholders,
     and before genuinely new investments are made, worn-out capital must be replaced or
     repaired. If this is not done, wealth is lost, resulting in negative income for the
     owners. When depreciation is subtracted from GDP, one obtains the “net domestic product,”
     which I will refer to more simply as “domestic output” or “domestic production,” which
     is typically 90 percent of GDP.
    Then one must add net income received from abroad (or subtract net income paid to
     foreigners, depending on each country’s situation). For example, a country whose firms
     and other capital assets are owned by foreigners may well have a high domestic product
     but a much lower national income, once profits and rents flowing abroad are deducted
     from the total. Conversely, a country that owns a large portion of the capital of
     other countries may enjoy a national income much higher than its domestic product.
    Later I will give examples of both of these situations, drawn from the history of
     capitalism as well as from today’s world. I should say at once that this type of international
     inequality can give rise to great political tension. It is not an insignificant thing
     when one country works for another and pays out a substantial share of its output
     as dividends and rent to foreigners over a long period of time. In many cases, such
     a system can survive (to a point) only if sustained by relations of political domination,
     as was the case in the colonial era, when Europe effectively owned much of the rest
     of the world. A key question of this research is the following: Under what conditions
     is this type of situation likely to recur in the