“Medium-sized fortunes are outpaced by the growth of very large fortunes”

Lhe wealth inequality curve has experienced two peaks in Western countries, one at the end of the 19e century, the other today. In both cases, we have witnessed the constitution of very great family wealth. These are two periods of globalization that have allowed many companies to reach unthinkable sizes if they had been limited to a national perimeter. From 1914 to the 1990s, however, the period was much less favourable: international trade was restricted, as were the capital markets. Despite economic setbacks and wars, we are witnessing the creation of many medium-sized fortunes. These remain, but for three decades they have been outpaced by the growth of very large fortunes.

To possess large fortunes, one must own shares in large companies. Globalization has of course played a key role in this, but not only. In particular, interest rates in these two periods reached secular minima. Over the past forty years, the cost of capital has tended to fall. Economists claim that this decline favors the less wealthy, because they can thus borrow at a lower cost. But it has other consequences, which have more to do with inequalities… between the rich.

On the one hand, those who hold a rare asset and need capital to make it grow. Let’s call them entrepreneurs. On the other, investors and savers who want to invest their money. The part of the company’s income which must remunerate the lenders varies according to the interest rate, that is to say according to the cost of the loan. When the cost of capital is low, the share of income remaining to the entrepreneur is greater, and when the cost of capital is high this share is less.

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If the entrepreneur chooses to invest by selling part of the business – in the form of shares – rather than subtracting the same amount from income, low rates raise the financial value of the business. The entrepreneur will therefore have to sell fewer shares, and he will have a larger share left. It is this phenomenon that largely explains the constitution of very large fortunes in technology. The Jeff Bezos and other Elon Musks can build large global companies while retaining very large shares, and often all control.

Act on a very large scale

One might think that this link between the cost of capital and inequalities is a phenomenon from across the Atlantic linked to new technologies, and that it therefore does not concern Europe. It is not so. Anyone who owns a large share of a company benefits from low interest rates when the company raises funds to grow – even if this company is “traditional” and geared towards the luxury economy (François Pinault, Bernard Arnault …). The main shareholders of these companies profit just as much as those of high-tech from the possibility of acting on a very large scale with a global clientele, dispersed production sites and a very low cost of capital.

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