Column: The only conquerors of inequality are the Four Horsemen of the Apocalypse
One of the most provocative — and most disturbing — of this year's economics books is "The Great Leveler." Its historian/author Walter Scheidel argues that economic inequality is not only inevitable, but that whenever inequality has been reduced, the reasons forcing inequality down have been nothing short of horrific. We interviewed Scheidel at his Stanford University office. We'll let him tell the rest of the grim story himself.
— Paul Solman, Economics Correspondent
The thesis of my book is that if you look at the very long run of history over hundreds of thousands of years, wherever there is documentation, you see that pretty high levels of income and wealth inequality used to be a default condition. For long periods of time, inequality tends to either go up or be stable at pretty high levels. But every single time we observe a major reduction in economic inequality, it is linked to some massive, violent shock — an upending of the established order. And that's true across history.
The levelers come in four flavors. For most of history, two predominated. One was the collapse of states. That wiped out elites — the rich and powerful — and narrowed the gap between rich and poor. The second was disease: massive epidemics that killed so many people that a scarcity of labor resulted. As a result, employers had to pay more for the relatively few workers left and the real income of the working population would go up. At the same time, the value of land and other forms of wealth owned by the rich would go down. That's because while the amount of land remains unchanged, there are fewer people to live on it, to pay rent for it, to buy the food it produces. So the value of land goes down. That too would reduce the gap between rich and poor.
In the 20th century, these two of what I call "the four horsemen of the apocalypse" — state collapse and epidemics — were effectively replaced by the third and fourth horsemen. The third horseman was mass mobilization warfare — war on an industrial scale as in World War I and World War II.
If you look at the world wars, a whole range of factors and forces reducing inequality come together. Investments across borders dry up. There's massive government intervention in the private sector that reduces income from capital and therefore the value of that capital. Governments tend to impose extremely high tax rates, especially on the rich — on income and inheritances — to pay for the war effort. There's full employment because of conscription and the booming war industry, and that again raises the demand for labor, especially unskilled labor. So the gap between skilled and unskilled workers is reduced.
In many countries, there is also inflation right after the war because governments have printed so much money to fund the fighting, and that hits people who have investment and assets. And of course in many countries, though not in the U.S., there was massive physical destruction, affecting people who owned factories, housing stock and the like.
Then there are the secondary effects of war. There is an increase in democracy, an extension of voting rights. Much stronger labor unions. A change in attitudes. More people expect their government to do more; expectations about what is fair and isn't. And if you tally up all these various forces, they lead to a massive compression of income and wealth.
The fourth horseman is revolution, such as in Russia and China, which transferred wealth forcibly from the top to the bottom. You have communist governments which expropriate the rich, often killing them in the process. They nationalize all assets, land, industry and so on. Effectively, there is no more private wealth. And they also create a planned economy where they set prices and wages. The government controls how much income inequality there is. It tends to be very low.
Now it is true that in the beginning of human history, inequality used to be very low. But that was because people didn't have much. For most of our history, we lived as hunter-gatherers, foragers in very small groups of 10, 20 or 30 people. They were very egalitarian for obvious reasons. The groups were mobile, as hunter-gatherers moved around all the time. They were unable to produce many material goods. As a consequence, they were expected to share evenly within those small groups. And there weren't any institutions to pass down what few assets they had from one generation to the next.
It was the shift to a sedentary lifestyle — to farming — that brought with it a surplus of food and gave people the time to produce more material goods. At the same time, as far as we can conjecture, there was the evolution of property rights. So it became possible for individuals or households to accumulate material possessions and then pass them onto future generations. Over time, this creates both inequality and economic growth.
State formation reinforced this trend. Look at Roman history 2,000 years ago. You see the rise of an empire that was tremendously powerful, lasted a very long time and caused a great increase in inequality. The ruling class became disproportionately rich. Their wealth grew much faster than the size of the economy or the number of people in the Roman empire. They owned a growing share of all assets and all the income, because they had investments all over the Mediterranean and Europe.
The elites benefited disproportionately from having a large exploitative empire in place. When it eventually fell apart in the 5th century A.D., that wiped out the wealthy elites —the people who had relied on political stability and their connections, those who held investments over a large geographical space. They lost their wealth as political structures unraveled. Then a plague ravaged the empire and reinforced the collapse. It took centuries for Europe to reestablish itself and prosper. As it did, inequality grew again.
And then comes another vivid historical example: the black death. This was the appearance of the bubonic plague in late medieval Europe in the 14th century. It kills at least a third of all people in Europe, half of all people in places like England. But of course it doesn't touch physical infrastructure. So everything remains the same except there are far fewer people. And as a result, the value of labor rises. Real [inflation-adjusted] wages go up by about 150 percent in places like England. Workers who lived at subsistence are now significantly better off. They eat better, they dress better, they have better housing. And rich people who used to own the land are now less rich, because there's less demand for land, again because there are fewer people to live on it. Wealth was chiefly in land, and landowners now have to pay workers better, while at the same time having to accept lower rents for the land that they rent out. It's a terrible time for the people who die, obviously, but it's good for the survivors.
But the drastically increased economic equality only lasts as long as the plague itself. When the disease finally subsides around 1500, the population begins to grows again, and as it recovers, the economic benefits to the poor gradually disappear. Real wages go down again; rents go up again. And 100 years later, in terms of inequality, you're back to where you were before the plague actually started.
In the Wall Street Journal, economic historian Greg Clark criticized my book and thesis, writing that "the period of mass conflict from 1910 to 1955," to which I attribute the rising equality from the 1930s to the 1970s in America and elsewhere, "also coincided with dramatic social movements driven by ideology. Thus Sweden, which was neutral in World War II," wrote Clark, "saw as great a decline in the income share of the top 1 percent as the U.S., a major combatant. And even now, the countries with the greatest equality are those with the highest tax rates, the greatest social spending and the largest degree of unionization, Denmark, Norway and Sweden."
There are several responses to this critique. One is that even a place like Sweden, or the Scandinavian countries more generally, are by no means immune to those shocks. They experienced fallout from World War I, the Great Depression and World War II. And even though Sweden did not technically participate in either one of the world wars, they were, especially in World War II, surrounded by Germans. They had full mobilization. Many of the things that happened in the combatant countries also happened in Sweden in terms of mass mobilization, very high tax rates, government intervention in the economy.
Another is that, even in the U.S., the rise in equality was concentrated in the first few years of the Great Depression: 1929, 1930, 1931. These are the years when so much wealth at the top was wiped out due to the stock market crash and the fall in industrial demand. That's significant because it's before the New Deal, it's before FDR was elected. It seems a purely economic effect rather than an effect of policy changes. What makes the next real difference is World War II, where you can really see inequality plummet because, again, capital loses value, extremely high tax rates are imposed. And the government essentially imposes a planned economy inn which wages have to be approved by a government board. There's enormous demand for labor because 10 percent of the population of the U.S. serve in the military at one point or another.
If you look carefully at what Greg Clark calls "social movements" during the 1930s, they are meaningfully rooted in those shocks. The wars served as a catalyst of social change, fiscal change, economic reform and so on. You would never have had such aggressive state intervention in the private economy without them. You would never have had the loss in capital value, massive inflation. I think it's impossible to disentangle those developments from the shocks that occurred in this particular period.
Another argument against my thesis is similar: that policies like those of New Deal America during and after the Great Depression of the 1930s — public infrastructure spending, higher taxes on the rich, more than 90 percent top marginal rate for several decades — would significantly reduce inequality today. And that's true. If all these things happened now, they would have similar results in reducing inequality. The question, though, is not whether such policies would work in theory. The question is whether they are feasible — whether it's possible to implement such reforms in the world we live in today. And here, historical context is critical, because when these policies were implemented, the environment was very different. The West had been buffeted by the Great Depression and World War II, and that really changed the playing field. It made it possible or even necessary for governments to move in the direction of redistribution very decisively.
It was also a far less integrated world. There was a long hiatus in globalization. So it was easier — even necessary — for countries to enact these reforms, thus overcoming any resistance to these measures.
In the world today, we don't have similarly powerful incentives. There is not a wrecked global economy; there is no big war. And it's a much more integrated global economy with a lot of competition with low-income countries, emerging economies, all the rest of it, flow of capital across borders, any number of things that didn't exist the same way as before. So there are a great many things that make it much more difficult to implement anything like the radical measures we saw in the past. What that leaves us with, when it comes to reducing inequality, are the four great levelers: state collapse, disease, war and violent revolution.
Looking to the future, there's good news: There's no real prospect of any of those four massive violent leveling forces returning any time soon. Even if there were going to be another war, it wouldn't be a mass mobilization war that lasts for years. There are currently no Bolsheviks trying to overthrow governments. States are much more stable in most parts of the world. Maybe not in sub-Saharan Africa and the Middle East, but in most parts of the world, governments are more resilient than they used to be, less likely to collapse. There could be a new plague tomorrow, [Paul Solman and Miles O'Brien happen to be producing a joint NewsHour series on the antibiotics crisis for air in July]. But we are much better prepared because of advances in genetics in terms of figuring out what's going on, taking countermeasures, advanced monitoring in the countries most likely affected and so on.
This is all to the good, but if we focus strictly on inequality, it raises the question of what other mechanisms could significantly reduce it. And here I tend to be rather pessimistic. Mine is not a counsel of despair, however, but a counsel of realism. Whenever we do come up with policy proposals for reducing economic inequality, it will help to be aware of the historical context. The past should teach us not to promise too much, to be realistic; that it might be much harder to effect real change than we think. It doesn't mean we should throw up our hands and surrender. It simply means we need to think hard and not just fall back on recipes that seem to have worked in the past, because they may no longer be feasible. And we don't want to stifle economic growth.
Many would say it's unfair, but it does seem inequality goes hand-in-hand with growth. And it may well be necessary for growth. If everybody's income were exactly the same, there wouldn't be much incentive for people to innovate, or even work hard. That's one of the problems that communist regimes have faced. The question is: how much inequality is needed? You have capitalist economies in Scandinavia with very low levels of inequality that work just fine. The real question is what level of inequality is pernicious. At what point does it become a real problem in terms of both discouraging economic growth due to widespread alienation and social and political stability?