Asset returns occupy a special place in the history of economic thinking. From John Stuart Mill (1848) to Karl Marx (1872), the profession’s most influential thinkers have devoted much of their time to the study of interest and profits. Karl Marx famously built his political economy on the idea of the tendency of the profit rate to fall, which he introduced in chapter 3 of Capital.
Today, the accumulation of capital, the expansion of capital’s share in income, and the growth rate of the economy relative to the rate of return to capital play a central role in the current debate sparked by Thomas Piketty (2014) on the accumulation of wealth, growth, and inequality. Asset returns encapsulate fundamental features about an economy’s dynamics, such as attitudes toward risk and preferences over future consumption, demographic shifts in the share of borrowers versus savers, and the ebb and flow of inequality in societies. Understanding such features is critical in designing economic policy.
But what is the aggregate real rate of return in the economy? Is it higher than the growth rate of the economy and, if so, by how much? Is there a tendency for returns to fall in the long-run? Which particular assets have the highest long-run returns?
The latest release of the INET-sponsored Jordà-Schularick-Taylor Macrohistory Database (www.macrohistory.net/data) presents answers to these questions and opens up new avenues for research on wealth inequality, asset pricing, financial stability, and secular stagnation. The new database covers total returns for all important assets classes—equity, housing, bonds, and bills—across 16 advanced economies from 1870 to 2015.
The data and some key insights are presented in the paper “The Rate of Return on Everything” (Jordà, Knoll, Kuvshinov, Schularick, and Taylor 2019). For the first time the paper presents historical returns on the largest but oft ignored component of household wealth, housing. The database also documents annual equity, bond, and bill returns.
Computed from original sources, the data confirm that returns on wealth are higher than the rate of growth of the economy. Comparing returns on wealth to growth, or “r minus g” in Piketty’s vernacular, the data show that in fact “r >> g” for more countries, more years, and more dramatically than Piketty himself reported. The only exceptions to “r>>g” happen in very special periods: the years in or right around wartime.
Another important insight is that total returns on residential real estate are on a par with the returns to equities—on average about 7% per annum—but they are far less volatile. In some countries and some periods, equities have performed slightly better than housing, but only at the cost of much higher volatility and higher synchronicity with the business cycle.
The data also show that the real returns on safe assets have been very volatile over the long-run—surprisingly, more so than risky returns. Each of the world wars was a moment of very low real safe rates, well below zero. So was the 1970s inflation and growth crises. The peaks in the real safe rate occurred during gold standard times, in the interwar period, and in the mid-1980s fight against inflation. Real safe returns have been low on average, in the 1%–3% range for peacetime periods. This combination of low returns and high volatility has offered a poor risk-return trade-off to investors, and has been a boon to government finances.
The data set out a rich agenda for future research. Many issues remain to be explored, in particular the fundamental determinants that drive the returns on each of the asset class in typical economies. The introduction of this new universe of asset return data can provide a basis for new explorations of fundamental economic questions in years to come.
Other than data on returns, the Macrohistory Database also comprised a wide range of macroeconomic and financial data (including data for credit, interest rates, and public debt) spanning the years 1870 to today on an annual basis. Supported by INET, the database has been constructed over the past decade. All data are available free of charge online at www.macrohistory.net/data.
Jordà, Òscar, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. The Rate of Return on Everything, 1870–2015. The Quarterly Journal of Economics.
Marx, Karl. 1872. Das Kapital. London: Lawrence and Wishart.
Mill, John Stuart. 1848. Principles of Political Economy, with Some of their Applications to Social Philosophy. London: Parker.
Piketty, Thomas. 2014. Capital in the Twenty-First Century. Cambridge, Mass.: Harvard University Press.