Editor’s Note: In an effort to center New Economic Thinking in the discussion of the COVID-19 crisis, we’ve curated a list of Evonomics articles relevant to this moment—including this one. Check out the full list here.
2016 June 27
Oxfam’s latest report claims that income inequality has reached a new global extreme, exceeding even its predictions from the previous year. The figures behind this claim are striking – just 62 individuals now hold the same wealth as the bottom half of humanity, compared to 80 in 2014 and 388 in 2010. It appears not only has the financial crisis been weathered by the global elite, but that their fortunes have collectively improved.
Our objections to inequality, the report notes, are not driven simply by a desire to improve our own material standard of living. Rising inequality is one of the surest signs of the failure of economic growth to make things better for us all. The accompanying decline in the income shares of the bottom 50% since 2010 suggests that although governments across the world have been quick to tout their role in bringing about a global “recovery”, its rewards have been very selectively spread.
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It would be foolish to pretend that wealth inequality is a product of the liberal capitalism of the past couple of hundred years. Peppered throughout recorded history are examples of exceptional wealth deriving from the spoils of empire and warfare – the Roman emperor Caesar Augustus is thought to have controlled the equivalent of $4.6 trillion – one fifth of the total wealth of the empire. The richest man in history, according to Time magazine was Mansa Musa, the king of Timbuktu – who ruled from 1280 to 1337 when his kingdom was the biggest producer of gold in the world. His wealth, says Time, is beyond calculation: “richer than anyone could describe”.
Historical figures show how important military and legal force was for wealth accumulation, from the lands of Genghis Khan in the 13th century (once the largest empire in history), to Chinese emperor Shenzong, who possessed up to 30% of global GDP at the height of his power in the 11th century.
Wealth accumulation in non-capitalistic societies was often predicated on forced seizure – a process known as “primitive accumulation”. The most famous instance was the English enclosure movement of the 18th and 19th centuries, which paved the way for the expansion of many great landed estates.
But is inequality inevitable in human society? In the late 19th century, evolutionary anthropologists such as Henry Maine and Lewis Morgan suggested that the human societies of their time may have evolved from less complex forms of clan-based societies, into more complex class-based societies. And in 2009, Elinor Ostrom was awarded the Nobel Prize for her work on “common-pool” systems – societies in which resources were pooled for the good of the community, often at odds with our modern conception of private property.
Ostrom’s work demonstrated that, where conditions were favourable, these systems, such as fisheries, irrigation systems, common grazing and forests, thrived – perhaps better than similar systems maintained through top-down organisation. Discussion continues today as to whether these forms of social organisation were widespread throughout much of human history and whether our more “unequal” forms of modern society may have evolved from this egalitarian base.
The jury is also very much out on the question of whether human societies have always been capitalist. While many argue that certain features of capitalist societies were present throughout all of human history (Adam Smith’s famous statement on the human propensity to “truck, barter, and trade”) the institutions which together make up modern capitalism were not.
In feudal societies of the Middle Ages for example, the ability of any individual to accumulate material wealth was largely constrained by the amount of “things” they could reasonably possess. While there were forms of credit and developed money systems, there were nonetheless some “absolute” limits on what one could physically amass (usually depending on direct coercion).
Today, the accumulation of wealth does not depend solely on material goods, or claims on real assets such as property, means of production such as industrial plant and infrastructure – or indeed people (in the US during slave-owning days the possession of slaves constituted a sizeable portion of one’s capital).
Economist Thomas Piketty points out that much wealth in classical literature seems to derive from rent-generating property in the hands of a limited number of people. But today, our fractional reserve banking systems mean that much of our money supply does not exist in physical form. Paper money is just a small portion of a bank’s balance sheet, with liabilities in the form of debt constituting much of the remainder.
One of the chief innovations of the last century, and indeed one of the key culprits involved in rising inequality identified by Oxfam, is the growth of an industry of tradable intangible assets in the form of financial instruments. Indeed, deregulation of the financial industry has been one of the most significant processes feeding into rising inequality in recent years.
The years after the great depression of the 1930s were also ones of regulatory reform. The US Glass-Steagall Act of 1933 kept commercial and investment banking largely separate, while tight controls were maintained on foreign transactions in many European countries.
But much of this was swept away during the late 20th century. Before the financial crisis, the repackaging of high-risk mortgages and their subsequent trading on financial markets, offered an ideal opportunity for capital-endowed investors to make sizeable profits while ultimately hedging the immediate risk onto homeowners. Little is today beyond the reach of investment markets, from mortgages to carbon emissions, to speculation on the future performances of companies. Whether or not the world has ever been as unequal before, we can at least say that the opportunities for wealth accumulation today are radically different from those of the past.
Time to take back control?
Part of the problem in establishing precisely whether the world has ever been as unequal is that we simply lack the data. The best estimates derive from the World Top Incomes study, the earliest of which for the UK dates to 1918. On this basis at least – where data can be compared between countries and where methods of calculation are standardised – we can say that things have scarcely been this unequal since before World War II.
But we should not compare on the basis of value alone. After all, we can scarcely argue that life under the direct coercion of feudalism, or wealth generated through the exploitation of natural resources by colonising empires was much preferable. But a backward glance through human history does confront some common myths about the society we inhabit today. Ours is not the only historical form of social organisation, nor is the current economic order beyond our control.
If we can clearly identify how decisions taken by governments around taxation or financial regulation, for example, have facilitated rising wealth inequality, then we can be ever more certain that society has the potential to change this. Knowing the factors that continue to drive inequality today – and the myths which claim the world must inevitably be this way – means we can also challenge it.
Originally published at the Conversation.