We can't just walk away from inequality. (Credit: erllre/Bigstock)
We can't just walk away from inequality. (Credit: erllre/Bigstock) (via: bit.ly)

Income and wealth inequalities in most countries – in the West, the former communist economies, and in the developing world – have been on the rise in the last three decades with some notable exceptions. Inequalities in the nineteenth century were much higher than before the Industrial Revolution. Following the rise of workers’ movements in the West and the 1917 Bolshevik revolution, the growth of inequalities in the previous century were reversed for over half a century up until the 1980s, as the threat of the spread of communism inspired welfarist and redistributive reforms, giving capitalism a more human face. Such checks and balances have been greatly weakened in recent decades, even though improved economic performance in many developing countries, including sub-Saharan Africa in the last decade, has contributed to some convergence of incomes between rich and poor countries.

1. Growing Inequalities Within Countries

The long-term trends suggest increasing inequality from ancient times that reached an all-time peak in the early twentieth century (Table 1, Figure 1), and then started to decline after World War One and the 1917 Russian revolution.

Table 1

Gini coefficients around particular CE years in some Western countries (%)

Years

14

1000

1290

1550

1700

1750

1800

2000

Rome

39

Byzantine

41

Holland

56

63

57

30.9

England

36.7

55.6

52.2

59.3

37.4

Old Castille/Spain

52.5

34.7

Kingdom of Naples/Italy

28.1

35.9

France

55

33

Source: Milanovic et al. (2007); data for 2000 are sometimes from the World Development Indicators database

Fig. 1

Income shares of top 10, 5, 1, 0.5 and 0.1 percent, unweighted average for 22 countries European countries: Denmark, France, Germany, the Netherlands, Switzerland, the United Kingdom, Ireland, Norway, Sweden, Finland, Portugal, Spain, Italy; North America: The United States and Canada; Australia and New Zealand; Latin American country – Argentina; Asian countries – Japan, India, China, Singapore, Indonesia; SubSaharan Africa, Mauritius, TanzaniaOverall about half of the population of the world Source: Alvaredo, Facundo, Anthony B Atkinson, Thomas Piketty and Emmanuel Saez, ‘The World Top Income Database’, http://g-mond.parisschoolofeconomics.eu/topincomes, 25 April 2012

The destruction of communal and collectivist institutions, first carried out in European countries in the sixteenth to nineteenth centuries (e.g., the enclosure movement in England) and extended beyond by colonialism, has been accompanied by increasing wealth and income inequality in most societies. Available data suggest that in the eighteenth century in England, Holland, and Spain, the Gini coefficient of income distribution was around 50 to 60 percent (Table 1) – an extremely high level by today’s standards, and probably by the standards of the distant past (around 40 percent in Rome in the first century CE and in Byzantium in the eleventh century). In England and Wales, the Gini coefficient increased from about 46 percent in 1688 to around 53 percent in the 1860s (Saito, 2009). In Denmark, a country with very good statistical records of individual incomes, the share of total income of the top 10 percent in the period 1870-1920 was always over 40 percent (reaching 54 percent in 1917), while the Gini coefficient for this period was always higher than 40 percent, even exceeding 70 percent in 1917 (Atkinson and Søgaard, 2013)! Data for Britain and the United States (US), based on reconstruction of social tables for the pre-modern period, provide a similar picture of increasing inequality before the 1860s and then a decline from the 1930s to the 1980s (Figure 2).

Fig. 2

Inequality in the United States and the United Kingdom over the long run, Gini coefficients (%) Source: The Gini coefficients were computed by Milanovic from social tables before the twentieth century and from household survey and tax returns afterwards (Milanovic et al.,2007; Milanovic, 2011), and personal correspondence with Milanovic. N.B.: Comparable data for the 1867–1929 period are not available

In the United States in the late eighteenth century, income and wealth inequalities were initially probably lower than in Europe, due to the absence of large accumulated fortunes in the New World and the availability of abundant ‘free land’. In the late eighteenth century, the top 10 percent of wealth holders accounted for only 45 percent of total wealth in the US, compared to 64 percent in Scotland and 46-80 percent in Finland, Norway, Sweden, and Denmark (Soltow, 1989).

But it appears that inequalities increased greatly in the nineteenth century and in the early twentieth century, reaching a peak between the two world wars. Soltow (1989) finds some decrease in income inequality in the 1798-1850/60 period in the US, and little or no increase in wealth inequality over the same period. However, the ratio of the largest fortunes to the median wealth of households (Figure 3; Phillips, 2002) suggests a different story. This ratio increased from 1000 in 1790 (Elias Derby’s wealth was estimated to be worth $1 million) to 1,250,000 in 1912 (John D. Rockefeller’s fortune of $1 billion), falling to 60,000 in 1982 (Daniel Ludwig’s fortune of ‘only’ $2 billion), before increasing again to 1,416,000 in 1999 (Bill Gates’ $85 billion fortune)!

Fig. 3

Largest fortunes in the United States in million dollars and as a multiple of the median wealth of households, log scale Source: Phillips (2002)

Only during Hobsbawm’s ‘short twentieth century’ was the trend towards increased income and wealth inequalities temporarily interrupted, probably because of the greater egalitarianism of the socialist countries, with lower levels of inequalities (with Ginis between 25 percent and 30 percent on average), and the checks to rising inequalities from the growth of socialist and other egalitarian movements (fig 3).

A comparison of the wealth of the richest tycoons in different countries in different epochs (Figure 4) gives different numbers (for average income, not average household wealth), but points to a similar conclusion – compared to the average income in the US, Bill Gates was relatively richer than Carnegie and Crassus (though not richer than Rockefeller), whereas Russian tycoon Mikhail Khodorkovsky was relatively richer in 2003 (compared to the average income in Russia) than all of them! The world may not have reached the highest level of inequality yet, but may still be moving to the greatest level of inequality ever observed in human history.

Fig. 4

Incomes of the richest as a multiple of average national income Source: Milanovic (2011)

The recent period has seen greater income inequality in most, though not all societies. In recent decades, there has also been a general decline in social provisioning in many societies. This is not only true of many so-called welfare states, but also of postcolonial societies featuring some tax-financed social provisioning. Such social provisioning has declined in China, Russia, and many other ‘economies in transition’. As a consequence, the welfare of individuals and families depends much more on what they can afford based on their wealth and incomes. The era of economic liberalisation has witnessed not only increasing income inequality at the national level (Figure 1), but also a growing concentration of income and wealth at the world level (Figure 5).

Fig. 5

Global Gini coefficients for income inequality, 19882005, calculated with new and old PPPs Source: Milanovic (2012)

The increase of income inequalities within countries since the 1980s has been especially pronounced. The income shares of the richest one, five, or ten percent of the population have been growing for over 30 years. In many countries, inequality has been approaching the levels of before World War Two, which led to the emergence of the socialist bloc and the dramatic decline in inequalities in most countries. To give one example, in the United States, the share of the nation’s total income held by the top (richest) ten percent of the population was 40–45 percent in the 1920s and 1930s, fell to 30–35 percent from the 1940s to the 1970s, and started to increase again from the early 1980s, reaching 45 percent in 2005.

The recent rise in inequality has paralleled an increasing rate of profit. During the post-war Golden Age, typically, when profits were high, capital’s success was shared with other social groups. In the 1950s and 1960s, for instance, wages, salaries, and social security benefits grew together with rising profit margins. But since the early 1980s, profit margins have increased hand in hand with rising inequalities.

It is not clear where the trend in income inequalities will lead. Simon Kuznets (1955) hypothesised that there is an inverted U-shaped relationship between economic growth and inequality, with inequality increasing at the industrialisation stage, when the urban-rural income gap rises, and declining later with the rise of the welfare state. However, empirical research does not unequivocally support the Kuznets curve hypothesis.

In Capital in the 21st Century, Thomas Piketty (2014) argued that the recent trend of rising national-level inequality is permanent because the profit rate is higher than the economic growth rate. For him, rising inequality is a long-term trend due to the increased wealth (capital) to output ratio (K/Y) under ‘patrimonial capitalism’, leading to the rising share of capital in national income. He believes this trend will continue into the future and was only temporarily interrupted in the twentieth century due to the destruction of capital during the two world wars and for other reasons. By this logic, it is not clear why the sustained increase in capital (versus labour) has not induced a decline in the rate of profit, offsetting the effect of the growth of capital (Milanovic, 2014).

An alternative view, consistent with the trends noted above, is that the reversal of growing inequality followed the 1917 Bolshevik revolution in Russia,[1] the emergence of the USSR and other socialist countries, the strengthening of socialist and populist movements, the growth of the welfare state, and other changes associated with Karl Polanyi’s Great Transformation. Education and health care access not determined by personal and family means, and the strength of robust and egalitarian alternatives, have constrained and checked economic inequalities, especially as long as socialism was relatively dynamic and seemed to be catching up with the West. When socialism lost its dynamism from the 1960s and posed less of a threat, income inequalities started to grow again.

[1] Turchin (2013) associated the decline in inequality after 1917 with the rise of the workers’ movement in the US and ‘the lure of Bolshevism’.

2. Capital versus labour

If income earning producers are mainly wage earners, income distribution will be influenced by the nature of wage determination and wage contracts. Where unemployment is high and incomes are low, workers are usually more willing to accept wages close to subsistence. But where labour is better organised for collective bargaining and working conditions are regulated, wages are more likely to rise with productivity increases. For instance, for several decades, living standards in China did not rise as fast as productivity, but in recent years, living standards have risen faster as employers experienced labour shortages and expected greater skills and productivity from their workers. Moreover, with greater social protection and provisioning (public health, education, and housing), the ‘social wage’ may increase much more than suggested by the money or real wages workers receive. However, in many countries the ‘social wage’ has not risen faster than profits since the 1980s.

To put the issue in historical perspective, the 2008-2009 crisis does not yet seem to be a turning point in the long run, comparable to the Great Depression of the 1930s (Eichengreen and O’Rourke, 2009). The 2008-2009 crisis was not unique in terms of recent collapses of stock indices; between October 1972 and July 1974, and again between January 2000 and July 2002, the S&P index fell by almost half – as happened between October 2007 and March 2009 (Figure 6). The collapse of world output (by 3.4 percent in 2009) was the largest decline in 60 years – much greater than the 1.4 percent reduction in 1982, the 0.4 percent reduction in 1974, and the 0.8 percent reduction in 1975 (Figure 7). US profit margins and the rate of profit reached their lowest post-war levels in 1974, 1980, and 2002 (Figure 8). The US unemployment rate reached its post-war peak of 9.7 percent in 1982, just ahead of the 9.6 percent in 2009 (Figure 9). Meanwhile, real wages in the US are well below their early 1970s’ level, while profits remain high.[1]

[1] If Kondratieff long waves exist, the lowest point of the long cycle should come in the 2020s or 2030s, not now; the previous troughs were in the 1870s, 1930s, and 1970s-1980s.

Fig. 6

The US S&P stock price index since 1950, log scale Source: Yahoo finance

The collapse of world output (by 3.4 percent in 2009) was the largest decline in 60 years – much greater than the 1.4 percent reduction in 1982, the 0.4 percent reduction in 1974 and the 0.8 percent reduction in 1975 (Figure 7). US profit margins and the rate of profit reached their lowest post-war levels in 1974, 1980 and 2002 (Figure 8). The US unemployment rate reached its post-war peak of 9.7 percent in 1982, just ahead of the 9.6 percent in 2009 (Figure 9). Meanwhile, real wages in the US are well below their early 1970s’ level, while profits remain high.2

Fig. 7

World, US GDP per capita growth rates, 1960–2013 (%) Source: World Development Indicators database, World Bank

Fig. 8

US domestic non-financial corporations’ profit margins (share of profits in sales), 19602012 (%) Source: Bureau of Economic Affairs

Fig. 9

US unemployment rate long-term trends (%) Source: 1890–1930 data from Romer (1986); 1930–1940 data from Coen (1973); 1940–2011 data from the US Bureau of Labor Statistics; http://en.wikipedia.org/wiki/File:US_Unemployment_1890–2009.gif

There were high, even double-digit inflation rates and economic slowdowns in major Western countries in the 1970s following the two oil price shocks of 1973-1974 and 1978-1979. This unexpected combination was dubbed a period of ‘stagflation’ and seemed unresponsive to traditional Keynesian fiscal and monetary policies. The first oil price shock followed the Arab-Israeli War of 1973, while the 1979 Iranian Revolution accompanied the second one. The 1974 Portuguese Red Carnation revolution, the subsequent collapse of the last colonial empire, US military defeat and withdrawal from Indochina in 1975, and other contemporary developments, seemed to promise the prospect of major transformations.

Thus, by the 1970s, the hegemony of Western capitalism seemed under threat from within and without. The conservative reaction in the Anglophone West soon followed, led by Thatcher and Reagan in the 1980s, weakening workers’ movements. Government spending, including social spending, stopped growing, many social security programmes were curtailed, and unemployment rose to highs not seen since the 1930s, as trade unions were defeated in their industrial actions (coal miners in the UK, air traffic controllers in the US), causing union membership to decline. The top income tax rates, higher than 50 percent in the United States, United Kingdom, Germany, and France during 1940-1980, dropped to below 50 percent by 2010 (Figure 10). Not surprisingly, income and wealth inequalities have risen in most countries since (Figure 1).

Fig. 10

Top income tax rates, 19002013. The top marginal tax rate of the income tax (applying to the highest incomes) in the U.S. dropped from 70% in 1980 to 28% in 1988 Sources and series: see http://piketty.pse.ens.fr/capitaI21c

The collapse of the Berlin Wall (1989) and the USSR (1991) were among the high points of this resurgence, reflected in the counter-revolution against Keynesian and development economics. The income share accruing to capital increased, at the expense of labour, with rentier shares (e.g., accruing to finance or intellectual property rights) growing much more than the real economy.

Generally high profit margins allowed expansion of welfare programmes, which contributed to relatively low inequalities, as in the 1950s and 1960s. But since the 1980s, trade union and worker movements in Western countries have been experiencing decline. The increase in profit margins since 1990 has gone hand in hand with the rise in income inequalities (Figure 11). In this sense, the Thatcher-Reagan counterrevolution was successful on a global scale. Today, capitalism is the ‘only show in town’, and the main choice and debate is among varieties of capitalism, rather than between capitalism and some systemic alternative.

Fig. 11

Share of profit in net corporate income (left scale) and share of top 10 percent individuals in total income (right scale) (%) Source: Alvaredo et al. (2012)

Footnotes

1

Turchin (2013) associated the decline in inequality after 1917 with the rise of the workers’ movement in the US and ‘ the lure of Bolshevism’.

2

If Kondratieff long waves exist, the lowest point of the long cycle should come in the 2020s or 2030s, not now; the previous troughs were in the 1870s, 1930s and 1970s–1980s.

Acknowledgements

This article is a shorter version of ‘Whither Income Inequalities?’, MPRA Paper No. 52154, December 2013 (http://mpra.ub.uni-muenchen.de/52154/). The authors appreciate the comments received from Ron Findlay, Branko Milanovic, Victor Polterovich and Beverly Silver on the earlier version, but implicate none of them in this version.

 

Published: Development (2015) 58(2–3), 196–205 © 2016 Society for International Development 1011-6370/16

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Former UN Assistant Secretary General for Economic Development at UNDESA, MY

Jomo Kwame Sundaram was an economics professor until 2004 and Assistant Secretary General for Economic Development at UNDESA from 2005 to 2012. He received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.
Vladimir Popov

Research Director in Economics & Political sciences, DOC Research Institute, RU

Vladimir Popov is a Principal Researcher in the Central Economics and Mathematics Institute of the Russian Academy of Sciences. He is also a professor emeritus at the New Economic School in Moscow, and an adjunct research professor at the Institute of European and Russian Studies at Carleton University in Ottawa. In 2009-15 he worked in DESA, UN, as a Senior Economic Affairs Officer and Inter-regional Adviser. He has published extensively on world economy and development issues (he is the editor of three books, and author of ten books and hundreds of articles, including in the Journal of Comparative Economics, World Development, Comparative Economic Studies, Cambridge Journal of Economics, New Left Review, as well as essays in the media). His books and articles have been published in Chinese, English, French, German, Italian, Japanese, Korean, Norwegian, Portuguese, Russian, Spanish, and Turkish. His most recent book is “Mixed Fortunes: An Economic History of China, Russia, and the West” (Oxford University Press, 2014). He graduated from the Economics Department of the Moscow State University in 1976, and holds PhDs (Candidate of Science, 1980; and Doctor of Science, 1990) from the Institute for US and Canadian Studies of the Academy of Sciences of the USSR. More info can be found at his website: http://www.nes.ru/~vpopov