The Rate of Return on Everything, 1870-2015


This paper answers fundamental questions that have preoccupied modern economic thought since the 18th century. 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? We answer these questions on the basis of a new and comprehensive dataset for all major asset classes, including—for the first time—total returns to the largest, but oft ignored, component of household wealth, housing. The annual data on total returns for equity, housing, bonds, and bills cover 16 advanced economies from 1870 to 2015, and our new evidence reveals many new insights and puzzles.

1. Introduction

What is the rate of return in an economy? This important question is as old as the economics profession itself. David Ricardo and John Stuart Mill devoted much of their time to the study of interest and profits, while Karl Marx famously built his political economy in Das Kapital on the idea that the profit rate tends to fall over time. Today, in our most fundamental economic theories, the real risk-adjusted returns on different asset classes reflect equilibrium resource allocations given society’s investment and consumption choices over time. Yet much more can be said beyond this observation. Current debates on inequality, secular stagnation, risk premiums, and the natural rate, to name a few, are all informed by conjectures about the trends and cycles in rates of return.

For all the abundance of theorizing, however, evidence has remained scant. Keen as we are to empirically evaluate many of these theories and hypotheses, to do so with precision and reliability obviously requires long spans of data. Our paper introduces, for the first time, a large annual dataset on total rates of return on all major asset classes in the advanced economies since 1870—including for the first-time total returns to the largest but oft ignored component of household wealth, housing. Housing wealth is on average roughly one half of national wealth in a typical economy, and can fluctuate significantly over time (Piketty, 2014) . But there is no previous rate of return database which contains any information on housing returns. Here we build on prior work on house prices (Knoll, Schularick, and Steger, 2017) and new data on rents (Knoll, 2016) to offer an augmented database to track returns on this very important component of the national capital stock.

Thus, our first main contribution is to document our new and extensive data collection effort in the main text and in far more detail in an extensive companion appendix.


Read the full paper here.