Economics Can’t Explain Why Inequality Decreases

A problem with Piketty’s explanation

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By Peter Turchin

In September I went to an international conference in Vienna, Austria, The Haves and the Have Nots: Exploring the Global History of Wealth and Income Inequality. One thing I learned at the conference is that, apparently, economists don’t really know why inequality increases and decreases. Especially, why it decreases.

Let’s start with Thomas Piketty, since Capital in the Twenty First Century is currently the “bible” (or should I say “Das Kapital”?) of inequality scholars.

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Piketty provides a good explanation of why inequality increases. It’s good not in the sense that everybody agrees with it, but in the sense of being good science: a general mechanism that is supported by mathematics and by data.

So far so good. But how does Piketty explain the decline of inequality during the middle of the twentieth century? It was a result of unique circumstances—two destructive world wars and the Great Depression. In other words, and forgive me for crudeness, shit happens.

This is not a particularly satisfactory conclusion. Of course, it’s possible that the general trend of inequality is always up, except for random exogenous events that knock it down once in a while. So devastating wars destroy property, and by making the wealthy poorer reduce inequality. This is one of the inequality-reducing forces that Piketty mentions several times in his book.

To me such exogenous explanations are not satisfactory. My intuition (which I understand may not be shared by all) is that when inequality gets too high, there are forces that bring it down. In other words, to some degree it’s a regulatory process, and that’s why we don’t see truly extreme forms of inequality (when one person owns everything). In Piketty’s view, the only reason we don’t see such extremes is because some kind of random event always intervenes before we get to it.

In his talk Branko Milanovic addressed the question of what brings down inequality. As he must – if inequality indeed moves in cycles, as he proposed, then there has to be some endogenous process that is triggered when inequality gets too high, and brings it down. Periodic operation of such a mechanism is what would generate repeated cycles.

Branko admitted that “malign” forces that could bring down inequality are not well-studied. As to “benign” ones, he cited three that fall under the acronym TOP: technology, globalization, policy. The only one that makes sense to me is policy—indeed, governments can reduce inequality by taxing high income and wealth. As to the first two, technology and globalization, I think that they rather explain why inequality increases.

In a later talk, Walter Scheidel addressed the “malign” forces. Walter is working on a book with a tentative title The Great Leveler, in which he identified four forces that have reduced inequality in historical societies:

  • Mass mobilization warfare
  • Transformative revolution
  • State collapse
  • Pandemics

Note that all of them are “malign”, because they all involve violence. So violence is the great leveler. But of course some forms of violence result in increased inequality. Take war. Many conquest wars, for example those in which a band of warriors conquers egalitarian farmers, turns them into serfs, and sets the victors up as the ruling class — such wars obviously result in increased inequality.

This is why Walter focuses on mass-mobilization warfare. Societies that are forced to mobilize all citizens capable of bearing arms (or, at least, all males) are usually—always?—forced to reduce inequality. Same thing with revolutions—not all of them reduce inequality. Some simply exchange one set of oppressive elites for another. But others do level the wealth quite dramatically.

I think Walter is on to something, and his theory can be made endogenous. That is, when inequality becomes too high, the chance of a state collapse or transformative revolution increases. Alternatively, or additionally, hugely unequal societies are defeated by more equal ones, which either eliminates them, or forces them to reduce inequality to rise up to this existential challenge.

In my view, Walter’s theory captures something important, but it is incomplete in two ways. First, we need a better understanding of why violence in some situations increases inequality and in others decreases it. Second, I think there are mechanisms other than violence that can reduce inequality. However, I am not very sure of this. Perhaps it’s just the optimist in me that wants to believe it.

As a way of concluding, what does it tell us about economics’ capacity to explain the dynamics of inequality? In my opinion, economics is perfectly capable of explaining why inequality increases, but fails to do so for inequality decreases, because they are a result of extra-economic forces. So if we want to understand how historical societies reduced inequality, we need to go beyond economics and bring insights from history, sociology, and anthropology.

And I certainly hope that we can figure out how to reduce inequality without violence.

Originally published at Cliodynamica on 1 November 2015

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  • Reducing inequality without violence is relatively easy. Ensure that every person has a high basic standard of living by completely automating the production of a set of machines that can produce a copy of themselves and a basic ranges of goods and services. If it takes that first machine two weeks to make the second copy, then within two years, there are enough to give one to every person on the planet.
    There is ample land.
    If we make a choice to leave 50% of the land area as public access natural ecosystems, and allow humans to use the other half, that leaves about 2 acres per person. Allocate half that equally, and the other half by other means.
    It only takes about a tenth of an acre to feed a vegan. No reason to be short of food.
    Another 10th would give a reasonable level of solar power to everyone. There is ample energy.

    That leaves a lot. Most people like living in dense concentrations in cities – that uses very little land. Put all transport and service networks underground, and cities take on a very different appearance.

    While building such a system is a big project, it is probably about the life-cycle cost of a single Nimitz class aircraft carrier and the US currently has 10 of those. So it is quite achievable.

    The big problem, is that doing something like that will break the economic system.
    Markets require scarcity to function.
    Allow everyone to make whatever they need using their own robotic production plant, and there is no need to exchange anything.
    Anything universally abundant has no market value, however valuable it is to people. If you doubt that, just consider oxygen in the air, arguably the single most important thing to any of us, yet of no market value.

    The thought that money will be worthless will “freak out” a lot of people who are heavily invested in markets, exchange values and money as concepts.

    The real issue is not the technical development, that is trivial compared to changing mindsets to allow people to see something like this as a real possibility. That is much more difficult than actually building the machines.

    • Excellent solution, but please don’t give Wealthy Capitalists the idea of commoditizing oxygen. They’ve already figured out how to profit from free water, land, natural resources. For the Bible Thumpers, God provides abundance.

      Americans, and many around the world are asleep. They are more like animals than human. As animals, they can be easily manipulated. The only thing capitalists need are consumers.

      As you point out, if we eliminate the relationship between consumer and capitalist, we don’t need money since there is no marketplace.

      • Do those at the top of the competitive heap really want to live in a world populated only by those as competitive as themselves?

        Do they really want to be that insecure?

        Do they really want to face that sort of risk, continuously, just to survive?

        Do they really think that they are likely to be the one?

        Are they really that committed to the tontine that seems to running currently?

        Could anyone really be that stupid? (No – don’t answer that. 😉 )

        People do wake up, sometimes in the most unlikely times and places.

  • How do you measure whether inequality increases or decreases? We all live better than Kings did 500 years ago…in some ways.

    There is a lot that goes into this equation: standard of living, quality of life, freedom from stress, etc. I am not trying to be cute, just saying.

    However, lets focus on the basic math and accept that the world is a zero-sum game (which it isn’t). A decrease in inequality can be explained as an increase in the National Debt. AKA, the Keynesian trick of putting more money into the marketplace so that everybody has ‘more.’ That masks inequality is growing between the top and the bottom because the entire ladder is shifting upward. The poor appear to be rising, but they are rising last fast against the top, and long term only inflation is winning. The new arrivals of the next generation will be even further behind, which is why we have seen an explosion in student debt, etc. On the one hand, they are consuming a more expensive commodity (education) and more people are going to college, so it appears that they have been rising (compared to the 1920’s – 1960’s), but by falling into debt, it actually increases the distance from the top to the bottom. More mobility from one class to the other is just an example of the problem with volatility, not a positive thing. Only equality is stable.

    Violence can’t fix anything because it substitutes blame for analysis.

    • Thinkers are obsessed with thinking, just saying…

  • Troy Camplin

    Nothing an understanding of network theory — especially the differences between aristocratic and egalitarian scale free network processes — wouldn’t solve.

  • marc

    Incredible to see that some are living upon a cloud without any contact with real people,with workers . Today if you are wealthy you can without any problem at all pay not a lot of taxes ,or no taxe at all (

    tax loopholes,

    tax heavens,secret accounts …) If not you only have to threaten to leave the country . We see then ,like “blessed times” before French Revolution ,Nobility,sorry Wealthies more and more rich and the burden shared only by the poor . Pourvu que cela dure ,

    As long as it lasts ……. “Let them eat cake” is the traditional translation of the French phrase “Qu’ils mangent de la brioche”, supposedly spoken by Marie Antoinette upon learning that people had no bread. Since brioche was a luxury bread enriched with butter and eggs, the quote would reflect the princess’s disregard for people. Is that different today ? Wages are low,purchase power is down,retirement is far away and lowered,unemployement is hight . Firms don’t give higher wages because people don’t spend . People don’t spend because they haven’t enought money . It’s the story of the snake who bite his own tail? You don’t have to be a rocket scientist , you don’t have to be a genius to understand that it’s not a a temporary problem but a STRUCTURAL MATTER . So it is imperative to resolve this structural problem as quickly as possible or to see thing becoming even worse for all of us : i.e rising criminality,terrorism,social unrest,revolts,revolution,chaos ……………………………….

  • Pingback: Inequality | Ted Howard NZ's Blog()

  • Duncan Cairncross

    You are trying to find historical patterns in a world that is changing,
    There has only been one industrial revolution

    The fact is that the world keeps changing – before we have finished perfecting anything it is replaced by a new model

    the result is that looking backwards is just silly – there may be patterns that will help us but the mechanisms designed to steer a horse-drawn carriage are not appropriate to steer a Jag at 100mph

  • jothwu

    Inequality decreased during and after WWII because the wealthy felt an existential threat from Nazism and fascism and allowed themselves to be taxed at a high rate (90 plus percent). Reinstitute a sufficiently progressive tax code and inequality will decrease.