Increasing Economic Inequality Not Inevitable

By Vladimir Popov and Jomo Kwame Sundaram Reprint | | Print |

Vladimir Popov was Senior Economic Affairs Officer in the United Nations Department of Economic and Social Affairs. Jomo Kwame Sundaram was an Assistant Secretary General for Economic Development in the United Nations system during 2005-2015 and received the 2007 Wassily Leontief Prize for Advancing the Frontiers of Economic Thought.

KUALA LUMPUR, Malaysia, May 13 2016 (IPS) - Since the 1980s, the world has been moving once again to the greatest level of national level income inequalities observed in recorded human history. A study by the Credit Suisse Research Institute suggested that the income share of the rich has increased at the expense of the ‘middle class’ in most of the world.

Although economic inequality within societies has been with us for a very long time, inequalities among regions are more recent. According to the late economic historian Angus Maddison, such inequalities increased from about half a millennium ago, before accelerating greatly about two centuries ago with the Industrial Revolution.

With colonialism abroad, new forms of economic hegemony accelerated wealth and income inequalities among and within many societies. In England, Holland and Spain in the eighteenth century, the Gini measure of income inequality was around 50 to 60 percent — much higher than today.

Modern Western inequalities
Traditional communal, cooperative and collectivist institutions in Europe were eroded during the sixteenth to nineteenth centuries, e.g. by the ‘enclosure movement’ in England.

Economic inequality in the United States at the time of American independence in the late 18th century (excluding slaves) was initially lower than in Europe due to the absence of large inherited fortunes and the availability of abundant land at low cost in the New World. But inequalities increased greatly after the mid-19th century despite the end of slavery, peaking during the Gilded Age in the 1920s.

In the US, the ratio of the largest fortunes to the median wealth of households increased from about 1000 in 1790 to 1,250,000 in 1912 (John D. Rockefeller’s fortune of $1 billion), falling to 60,000 in 1982, before rising again to 1,416,000 in 1999 (Bill Gates’ $85 billion fortune)!

Comparison of the wealth of the richest men in various countries in different epochs gives different numbers, but points to a similar conclusion: compared to the average income in the US, Bill Gates was relatively richer than Carnegie and Rockefeller. However, Russian tycoon Mikhail Khodorkovsky was relatively richer in 2003 — compared to Russian average income — than all of them, including Gates!

Short 20th century
National inequalities peaked in Western societies in the early 20th century, before declining from the 1920s to the 1970s, during historian Eric Hobsbawm’s ‘short 20th century’, before rising again since. This reversal was probably due to the greater egalitarianism of the socialist countries, with Gini inequality measures averaging 25-30%, following the Bolshevik Revolution, the checks to increasing inequalities with the rise of labour, socialist and other egalitarian movements, as well as the growth of the welfare state, wealth and income taxation as well as other reforms and changes discussed by Karl Polanyi.

Counter-revolution
But as Soviet ‘socialism’ lost its dynamism from the 1970s and posed less of a threat, a conservative ‘counter-revolution’ ensued — first in the Anglophone West, led by Margaret Thatcher and Ronald Reagan in the 1980s — weakening workers’ movements, undermining state capacities and legitimacy, and strengthening the rich and powerful’s claims to more and new types of income.

The income shares accruing to capital and property increased, at the expense of labour, with rentier incomes, including those accruing to finance or ‘intellectual property’, growing much more than the real economy.

The collapse of the Berlin Wall in 1989 and the USSR in 1991 were among the high points of this ‘counter-revolution’, also resulting in the de-legitimization of Keynesian and development economics.

Government expenditure, especially social spending, stopped growing, with many social programs cut, as unemployment rose to levels not seen since the 1930s. Meanwhile, trade unions were defeated in critical industrial actions (coal miners in the UK, air traffic controllers in the US), causing union strength and membership to decline in the aftermath. The top income tax rates, higher than 50% in the US, UK, Germany and France during 1940-80, have dropped significantly since.

Generally, high profit periods enabled some income and other transfers, lowering earlier inequalities during the 1950s and 1960s. However, the increase in the share of profits in national income since the 1980s has contributed to the rising inequality of recent decades.

The conservative Thatcher-Reagan counterrevolution was undoubtedly successful on a global scale. Today, capitalism is the only ‘show in town’, with communist parties involved in managing capitalism to gain national advantage. The main choice for national regimes today is among varieties of capitalism, with the nature of state involvement being the subject of fierce debates.

Reference: Jomo Kwame Sundaram and Vladimir Popov. Income Inequalities in Perspective. ESS Document No. 46, Initiative For Policy Dialogue (IPD), Columbia University, International Labour Office, Geneva, April 2015.