A brief history of modern inequality

The Berkeley economist Barry Eichengreen recently gave a talk in Lisbon about inequality that demonstrated one of the virtues of being a scholar of economic history. Eichengreen, like me, glories in the complexities of every situation, avoiding oversimplification in the pursuit of conceptual clarity. This disposition stays the impulse to try to explain more about the world than we can possibly know with one simple model.

For his part, with respect to inequality, Eichengreen has identified six first-order processes at work over the past 250 years.

The first is the widening of Britain’s income distribution between 1750 and 1850, as the gains from the British Industrial Revolution went to the urban and rural middle class, but not to the urban and rural poor.

Second, between 1750 and 1975, income distribution also widened globally, as some parts of the world realized gains from industrial and post-industrial technologies, while others did not. For example, in 1800, American purchasing power parity was twice that of China; by 1975 it was 30 times that of China.

The third process is what is known as the First Age of Globalization, between 1850 and 1914, when living standards and labor productivity levels converged in the global north. During this time, 50 million people left an overcrowded agricultural Europe for resource-rich new settlements. They brought their institutions, technologies, and capital with them, and the wage differential between Europe and these new economies shrank from roughly 100% to 25%.

This mostly coincided with the Gilded Age between 1870 and 1914, when domestic inequality rose in the global north as entrepreneurship, industrialization, and financial manipulation channeled new gains mostly to the wealthiest families.

Gilded Age inequality was significantly reversed during the period of social democracy in the global north, between 1930 and 1980, when higher taxes on the wealthy helped pay for new government benefits and programs. But the subsequent and last stage brings us to the current moment, when economic policy choices have again resulted in a widening of the distribution of gains in the global north, ushering in a new Gilded Age.

Eichengreen’s six processes affecting inequality are a good starting point. But I would go further and add six more.

First, there is the stubborn persistence of absolute poverty in some places, despite the extraordinary overall reduction since 1980. As the UCLA scholar Ananya Roy points out, people in absolute poverty are deprived of both the opportunities and the means to change their status. They lack what the philosopher Isaiah Berlin called “positive liberty” – empowerment for self-actualization – as well as “negative liberty,” or freedom from obstacles in one’s path of action. Seen in this light, inequality is an uneven distribution not only of wealth, but also of liberty.

Second is the abolition of slavery in many parts of the world during the nineteenth century, followed by, third, the global loosening over time of other caste constraints – race, ethnicity, gender – which deprived even some people with wealth of the opportunities to use it.

The fourth process consists of two recent high-growth generations in China and one high-growth generation in India, which has been a significant factor underlying global wealth convergence since 1975.

Fifth is the dynamic of compound interest, which through favorable political arrangements allows the wealthy to profit from the economy without actually creating any new wealth. As the French economist Thomas Piketty has observed, this process may have played some role in our past, and will surely play an even bigger role in our future.

At this point, it should be clear why I began by noting the complexity of economic history. This complexity implies that any adjustments to our political economy should be based on sound social science and directed by elected leaders who are genuinely acting in the interest of the people.

Emphasizing complexity brings me to a final factor affecting inequality – perhaps the most important of all: populist mobilizations. Democracies are prone to populist uprisings, especially when inequality is on the rise. But the track record of such uprisings should give us pause.

In France, populist mobilizations installed an emperor – Napoleon III, who led a coup in 1851 – and overthrew democratically elected governments during the Third Republic. In the United States, they underpinned discrimination against immigrants and sustained the Jim Crow era of legal racial segregation.

In Central Europe, populist mobilizations have driven imperial conquests under the banner of proletarian internationalism. In the Soviet Union, they helped Vladimir Lenin consolidate power, with disastrous consequences that were surpassed only by the horrors of Nazism, which also came to power on a populist wave.

Constructive populist responses to inequality are fewer, but they should certainly be mentioned. In some cases, populism has helped in extending the franchise; enacting a progressive income tax and social insurance; building physical and human capital; opening economies; prioritizing full employment; and encouraging migration.

History teaches us that these latter responses to inequality have made the world a better place. Unfortunately – and at the risk of oversimplification – we usually fail to heed history’s lessons.