Inequality after 150 years of Capital

by Michael Roberts

I have written many posts on the level and changes in inequality of wealth and incomes, both globally and within countries.  There has been a ‘wealth’ of empirical studies showing rising inequality in incomes and wealth in most capitalist economies in the last century.

There have been various theoretical explanations provided for this change.  The most famous is by Thomas Piketty in his magisterial book, Capital in the 21st Century.  This book won the award for the most bought, least read book in 2014, surpassing A brief history of time by scientist Stephen Hawking.

I and others have discussed the merits and faults of Piketty’s work in many places.  Please read these to get a picture.  Suffice it to say that, although Piketty repeats the title of Marx’s book, published exactly 150 years ago, he dismisses Marx’s analysis of capitalism based on the law of value and the tendency of the rate of profit to fall and adopts the mainstream theories of marginal productivity and/or market ‘imperfections’ like ‘rent-seeking’.  This leads to the view that capitalism could be ‘reformed’ and inequality reduced by such measures as a global financial tax or progressive inheritance taxes or more recently a universal basic income (Piketty is now advising French socialist presidential candidate Hamon on this now).

Inequality remains the buzz word of liberal and leftist debate and analysis, not crisis and slump.  Widening inequality has been called “one of the key challenges of our time” by the World Economic Forum, the think-tank of the elite. The ratings agency S&P Global Ratings has cited the income gap as a long-term trend that threatens America’s economic growth. Even the major international agencies like the IMF or the OECD continually analyse movements in inequality to see if more equality would be better for growth and a more stable capitalism.

Post-Keynesian economists like Engelbert Stockhammer or more radical mainstreamers like Joseph Stiglitz reckon rising inequality is the main cause of crises, not falling profitability or the inherent instability of capital as a money-making machine. Again I have discussed these arguments here.

But whatever the causes and processes concerned with inequality of incomes and wealth in the major economies, there is no doubt that it has reached levels not seen since Marx published Capital.  Indeed, here is an interesting chart that tries to gauge the level of inequality reached in the UK back in 1867.  The gini coefficient is the most common measure of inequality of income or wealth.  And in this graph, provided by the global inequality expert, Branco Milanovic, the gini ratio reached over 55 in 1867.

uk-per-cap

According to the graph, that was the peak of inequality and it fell back over the next 100 years, thus appearing to refute Marx’s view that the working class would suffer ‘amiseration’ as capital took a growing share of value produced by labour.  Instead, it would appear to confirm the mainstream view of Simon Kuznets written in the 1960s that once capitalism got going and started delivering economic growth, the forces of market, if not interfered with, would steadily bring forth a more equal society.  The irony is that just as Kuznets reached this conclusion, most major capitalist economies began to generate an increase in inequality in both income and wealth – as the graph shows.

But don’t be fooled by the graph that it seems to show a huge jump in GDP per capita in dollars from 1867 to now.  It’s misleading.  It does not show whether the jump is due to faster economic growth or just slowing population growth in the UK (actually it is the latter).  And of course, it does not show the huge downturns in GDP caused by recurring and regular crises under capitalism in Britain and elsewhere.

The graph does reveal, however, that inequality has been worsening in England to levels not seen since the 1920s.  Indeed, in a new analysis of the World Income Database Piketty and colleagues from the Paris School of Economics and UC Berkeley, describe a “collapse” of the share of US national wealth claimed by the bottom 50% of the country — down to 12% from 20% in 1978 — along with an (unsurprising) drop in income for the poorest half of America. About 117 million American adults are living on income that has stagnated at about $16,200 per year before taxes and transfer payments, Piketty, Saez and Zucman found in research published last year.

And that makes an important point.  The top 1 percent of earners in America now take home about 20 percent of the country’s pretax national income, compared with less than 12 percent in 1978, according to the research the economists published at the National Bureau of Economic Research. Over the same time in China, the top 1 percent doubled their share of income, rising from about 6 percent to 12 percent. America has experienced “a complete collapse of the bottom 50 percent income share in the U.S. between 1978 to 2015,” the authors wrote. “In contrast, and in spite of a similar qualitative trend, the bottom 50 percent share remains higher than the top 1 percent share in 2015 in China.”

Meanwhile, economic growth in China has been so strong that — despite widening inequality — the incomes of the bottom 50 percent have also “grown markedly”, the economists wrote. Their analysis found that the poorest half of Chinese workers saw their average income grow more than 400 percent from 1978 to 20015. For their American counterparts, income decreased 1 percent.“This is likely to make rising inequality much more acceptable” in China, they noted. “In contrast, in the U.S. there was no growth left at all for the bottom 50 percent (-1 percent).”

The IMF and other agencies like the World Bank like to argue that economic growth has picked up so much under capitalism that millions have been taken out of poverty. But economic experts in the field of poverty and global inequality reveal from their figures that official ‘poverty’ has declined for just two reasons.  The first is that the definition of poverty of those living on less than$1 a day is out of date; and second because nearly all the decline has been in China due to its unprecedented economic growth under a state-controlled and directed economy, still far from market capitalism seen in 19th and 20th century capitalism that Piketty and others have analysed.  In most low income countries inequality has hardly changed from very high levels.

growth-and-poverty

And the main reason is the control of wealth.  A very small elite owns the means of production and finance and that is how they usurp the lion’s share and more of the wealth and income.  The US Economic Policy Institute found that the top one percent of society derives an increasing portion of income gains from existing capital and wealth.  It is not because they are smarter or better educated. It is because they are lucky (like Donald Trump) and inherited their wealth from the parents or relatives.

concentration-of-wealth

A recent study by two economists at the Bank of Italy found that the wealthiest families in Florence today are descended from the wealthiest families of Florence nearly 600 years ago!  So the rise of merchant capitalism in the city states of Italy and then the expansion of industrial capitalism and now finance capital made little or no difference to who owned the wealth. And the work of Emmanuel Saez and Gabriel Zucman has shown that in the US, wealth has become increasingly concentrated in the hands of the super-rich.

extremely-wealthy

So Marx’s prediction 150 years ago that capitalism would lead to greater concentration and centralisation of wealth, in particular in the means of production and finance, has been borne out.  Contrary to the optimism and apologia of the mainstream economists, poverty for billions around the world remains the norm with little sign of improvement, while inequality within the major capitalist economies increases as capital is accumulated and concentrated in ever smaller groups.

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