THOMAS PIKETTY DESERVES A LOT OF CREDIT FOR DRAWING ATTENTION to an important economic theme, the growth in inequality in many countries from about 1980 to 2008. With sales of over 1.5 million, his Capital in the Twenty-First Century pointed out the rise in inequality in most countries since the 1980s.1 According to him this is partly a result of Marxist inevitability as capital accumulates and partly because the wealthy fiddle the rules in their favour.
There are very few ideas that are so misconstrued as to be entirely wrong, and Piketty’s ideas are not completely wrong. But his popularity owes much to the suggestion that the problem of inequality is essentially the result of an old-fashioned conspiracy whereby the rich conspire to take advantage of the poor.
Would that it were largely so. If it were it would be quite an easy problem to solve. But actually it’s a whole lot more complicated than that.2 Piketty thinks that the rich always had the bargaining power to exploit the poor but before taxes came down to make it economically worthwhile and before it also gradually became socially acceptable for them to do so, they tended not to. The alternative explanations (see elsewhere in this book) are that inequality is much more rooted in economic factors such as globalisation and the impact of technological change and will increasingly be rooted in demographic factors as able parents marry each other and provide advantages for their offspring.
It is unfortunate for his case that, just as his book was being published, the growth in inequality which Piketty predicted would continue to rise inexorably largely plateaued and in many countries actually started to reverse. Chapter 5 of this book looks at the trends in more detail while Chapter 11 goes on to look at whether this is just a pause in an upward trend or whether the trend has reversed completely.
Piketty explains what I call Type 1 Inequality – growth in inequality caused by exploitation. This certainly exists and perhaps explains about a fifth of the rise in inequality in the past 30 years, less in the West and more in the wild East. The calculation that this explains about a fifth comes from one of the most detailed analyses ever of the change in labour income share published in the American Economic Review by some highly distinguished academics.3
The next chapter looks at other important explanations of the recent rise in inequality in the West in the period before the financial crash.
In the rest of this chapter I review some of the literature on inequality and try to explain the key theories as well as looking in more detail at some of the more recent writings on the subject.
Adam Smith
One of the early and in many ways most radical writers about inequality was Adam Smith.4
A highlight of former US President Barack Obama’s presidency was a high-profile December 2013 speech in which he claimed that great and growing economic inequality was ‘the defining challenge of our time’, a sentiment with which this book concurs.5 The former president made much of the thinking of a man who might appear an unlikely supporter to those who operate on stereotypes rather than knowledge – Adam Smith, the alleged founder of market economics and supporter of capitalism and greed. Of course anyone who actually knows the works of Adam Smith is aware that this stereotype is grossly misleading. He never once used the term ‘laissez-faire’ or even the term ‘capitalism’, and his two most important books – The Theory of Moral Sentiments6 and The Wealth of Nations7 – lament the ills of what he calls ‘commercial society’.
Both poverty and inequality were major concerns for Smith. Arguably he was the first Rawlsian,8 arguing that the true measure of a nation’s wealth was not that of its king or its rich people but instead the wages of ‘the labouring poor’. In the passage that President Obama quoted, Smith declared that it is a matter of simple ‘equity’ that ‘they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged.’
Most discussion of Smith’s views suggests that he was more concerned about poverty than inequality. He developed the concept of ‘trickle-down economics’ which has been widely criticised by many on the left (a review of the relevant evidence is in Chapter 7). Although his concept of economic justice was essentially Rawlsian,9 measuring the prosperity of a society by the position of the least well-off, he strongly believed that the wealthy contributed disproportionately through innovation and that their wealth improved the lot of ordinary people.
But he also believed that the rich behaved badly through conspicuous consumption, behaving with a gross degree of entitlement and with little attention to the implications for those worse off than themselves. He thought that they got away with this partly because their wealth fascinated observers who allowed them to get away with behaviour which was inappropriate. We have this today with some of the behaviour of so-called celebs who provide so much material for the tabloid newspapers.
Smith actually made a quite unusual critique of inequality, more on moral than economic grounds. Later in this book I make a case that those benefiting most from the fruits of a fairly liberal economic system have greater responsibilities than those benefiting least and need to ensure both that their behaviour is ethical and that they apply social and other sanctions to those among them whose behaviour is not.
Another important contribution of Adam Smith was his invention of the concept of the ‘invisible hand’. The invisible hand consists of the income-generating and redistributing effects of diverse individuals’ self-interested actions. As long as there is competition and trade, the invisible hand normally ensures that economic activity for self-interested purposes creates positive net economic benefits. My attempts to make myself better off generates wealth for other people provided that they trade freely with me as suppliers or customers.
John Maynard Keynes
Keynes’s approach was in many ways similar to that taken in this book. He did not assume that the capitalist system was self-balancing and he was sympathetic to government intervention. But he did not believe that private property should be abolished and considered that a degree of inequality was necessary as an incentive ‘for valuable human activity’. He argued however that if an excessive proportion of income accrued to the rich, this might lead to underconsumption because of the lower propensity of the rich to consume. He distinguished carefully between entrepreneurs and the rentier class. The latter he considered essentially parasitic, but thought that society could benefit from the ‘intelligence and determination and executive skill’ of business people, which could be ‘harnessed on reasonable terms of reward’ under a system of progressive taxation.
Apart from Keynes, the nearest to an economics superstar between the wars was Friedrich Hayek. Hayek was more traditionally minded. He argued strongly for equality before the law but made the case that because people are unequal, this must inevitably lead to inequality of outcome. Perhaps partly because he had emigrated from what was soon to become Nazi Europe, Hayek was concerned about the dangers of over-mighty governments and of the resultant coercion.
In other writings Hayek argued that inequality was necessary for economic progress, pointing out in The Constitution of Liberty, ‘New knowledge and its benefits can spread only gradually, and the ambitions of the many will always be determined by what is as yet accessible only to the few …. This means that there will always be people who already benefit from new achievements that have not yet reached others.’10
Hayek’s basic point is simple: before many social advancements become common, they first exist as luxuries. ‘The new things will often become available to the greater part of the people only because for some time they have been the luxuries of the few.’ This is remarkably similar to Adam Smith’s argument that innovation requires rich people who can take the risk to experiment.
Hayek’s final major work was the three-part Law, Legislation and Liberty (1973-79), a critique of efforts to redistribute incomes in the name of ‘social justice’.
Simon Kuznets
In the pre-Piketty period the high priest in economics of understanding inequality was Simon Kuznets who received the 1971 Nobel Economics Prize ‘for his empirically founded interpretation of economic growth which has led to new and deepened insight into the economic and social structure and process of development’.
In his 1955 Presidential address to the American Economics Association, he developed the concept of the Kuznets curve.11 He postulated that industrialisation might initially increase income inequality but that as industrialisation matured over time (based on his observations) inequality tended to diminish again. He gave a number of tentative reasons for the diminishing inequality that he had observed, of which the shift to the service sector and the importance of new technology were probably the most important at the time. While both of these factors in Kuznets’ time probably worked in the way he suggested, in the modern world they may well have the opposite effects.
In my view Kuznets gave insufficient weight to the importance of the spread of education in the 20th century in reducing inequality in advanced economies. One of the effects of the spread of education in those pre-globalisation times was to create a shortage of those who were prepared to do manual jobs. There is a London joke about an employee in the financial services sector in the City of London who needs a plumber quickly. The plumber comes and fixes the problem in about ten minutes and says, ‘That will be £500, sir.’ The City employee responds, ‘£500 for ten minutes! I work in the City and don’t get that much.’ To which the plumber replies, ‘Yes, I didn’t get that much either when I worked in the City!’
Piketty is remarkably uncomplimentary about the Kuznets Curve: ‘Nevertheless, the magical Kuznets Curve Theory was formulated in large part for the wrong reasons, and its empirical underpinnings were extremely fragile. The sharp reduction in income inequality that we observe in almost all the rich countries between 1913 and 1945 was due above all to the world wars and the violent economic and political shocks they entailed (especially for people with large fortunes). It had little to do with the tranquil process of intersectoral mobility described by Kuznets.’12
Sir Anthony Atkinson (see below) has a rather greater facility with language which enables him to be much more measured: ‘The famous study in the mid-1950s by Simon Kuznets, the Nobel Prize–winning Harvard economist, of the evolution of income inequality over a period of time was based on a handful of data points for a small range of countries.’13
But the information now available (much of it compiled by Piketty and his followers) indicates falling income inequality in the Western world from some time in the late 19th century (and on some measures the early 19th century) to some point between 1970 and 1980. Moreover, the fall was on a dramatic scale. It runs contrary to the evidence (and even Piketty’s own evidence) to try to imply as he does that the phenomenon only lasted from 1913 to 1945 and is simply a product of two world wars and the Great Depression. The increased data now available is more supportive of Kuznets’ theory than of those of his critics.
But whether Kuznets was right or not about the period to around 1980, there is general agreement that there was an increase in inequality on most measures in most countries (though much more in Anglo-Saxon economies) from 1980 until the financial crisis of 2007/08. This would not be explained by the Kuznets curve.
I have relied here mainly on a good description of Friedman’s views by Julio Cole in the Journal of Markets and Morality.14 He writes: ‘There is a certain tension in Milton Friedman’s views on the issue of freedom versus equality, which was much more nuanced than is commonly assumed. On the one hand, he argued that economic policy should focus on freedom as a primary value; stressing equality per se could lead to economic inefficiency as well as jeopardizing freedom itself. On the other hand, he famously advocated government-sponsored poverty alleviation by way of the negative income tax, a form of income redistribution that is inconsistent with his general theory of the free-market economy. His justification for this policy, however, was not on egalitarian grounds. Rather, his main motivation seems to have been compassion.’
Milton Friedman’s best known statement on inequality is this: ‘A society that puts equality – in the sense of equality of outcome – ahead of freedom will end up with neither equality nor freedom. The use of force to achieve equality will destroy freedom, and the force, introduced for good purposes, will end up in the hands of people who use it to promote their own interests.’15 It is best to see this more as a statement about freedom than a statement about inequality. Indeed this book is about the dangers of focussing on the wrong solutions for the inequality problem which could even, if we make big enough mistakes, cause the collapse of the relatively liberal economic order with limited compulsion and lead to the growth of dictatorial tendencies.
Friedman is seen by some as a proponent of ‘supply-side economics’. In fact supply-side economics long predated Friedman and any sensible economist would understand that regardless of one’s views about demand management (I am unashamedly Keynesian about this) it would be foolish to neglect the supply side of the economy. Demand and supply are not alternative issues – they are complementary.
Friedman’s case for a negative income tax16 is quite difficult to square with his normal suspicion of government intervention. Julio Cole’s conclusion is that his motivation is a mix of economic efficiency and compassion. This book puts forward a similar proposal, for a universal basic income, on the ground that this is needed to cushion the impact of the likely very rapid introduction of technology in the coming years.
One of Friedman’s insights is explicitly debated with in this book. In 1953 he argued that monopoly didn’t in fact do much damage to an economy.17 That may well have been true when he said it, though he was writing at a time when the US economy was still receiving the benefits of Teddy Roosevelt’s great antitrust activity and corporates were restraining their potentially oligopolistic tendencies for fear of renewed antitrust action (something of which I was well aware when I worked for IBM). Today the facts are different. Corporates show less self-restraint and in my view abuse monopolistic powers to a much greater extent. The intrinsic economies of scale in the information age and the existence of network effects give more power to entrenched incumbents, even if the pace of technological progress operates in the opposite direction. I suspect that had Friedman been still alive he would have reconsidered.
Economics and Equality, edited by the Rt Hon Aubrey Jones18
The British Association for the Advancement of Science held a meeting in 1975 that focussed on economics and equality. The proceedings were edited by the chairman, the Rt Hon Aubrey Jones, who had headed the then Labour Government’s Prices and Incomes Board in the 1960s. I have a copy of the proceedings in my library, given to me by my friend Sir Samuel Brittan, and it makes interesting reading as an historical document. The book contains ten articles covering a wide range of issues.
The issue in vogue at the time was incomes policy, which was then an approach used to bring down inflation while sustaining demand. It fell into disuse after 1979, though the alternatives, of persistent high unemployment and then highly deregulated labour markets leaving substantial power in the hands of employers also have their downsides.
One of the key topics in a world of incomes policies was what levels of differential pay between different groups of employees were appropriate. It is interesting that few contributors to the discussion were in favour of compressing differentials (even George Woodcock, the then recently retired General Secretary of the Trades Union Congress).
Sir Anthony Atkinson
In the years between Kuznets and Piketty the economist who focussed most on inequality was the late Sir Anthony Atkinson.19 Atkinson, who in his early work seems to have inspired Piketty, collaborated with him in various articles including ‘Top Incomes in the Long Run of History’ which brought the subject of income inequality to the attention of an academic audience.20
Sir Anthony’s final work summarising his thinking is Inequality: What Can be Done?21 A major virtue of this book is the attention it pays to the argument that labour-saving technological change is likely to become one of the key drivers of growing inequality (as discussed in Chapter 11 of this book). Atkinson combines his analysis with Piketty’s theory of the concentration of wealth to argue that there will be a doubling up of the impacts of technology on inequality because not only will incomes be increasingly maldistributed but in addition wealth (which of course becomes even more maldistributed when incomes are so) will increasingly be in the form of robots which will force further growth in the maldistribution of wealth. His conclusion is one with which I have considerable sympathy.
Perhaps the greatest contribution of this book, however, lies in its detailed analysis of data sources and their varying implications. Atkinson shares some conclusions with those in this book. But his main policy proposals also betray a lack of realism, not entirely surprising for someone who has spent his life among the ivory towers.
The remoteness from real life can be seen in Atkinson’s key conclusions, which I summarise below:
Proposal 1. Government should push innovation in a direction that enhances the employability of workers.
Proposal 2. Government should aim at a proper balance of power between stakeholders etc.
Proposal 3. Government should secure full employment by offering guaranteed public employment at the minimum wage.
Proposal 4. There should be a national pay policy consisting of two elements – a statutory minimum wage set at the living wage and a code of practice for all other pay.
Proposal 5. Government should offer a guaranteed positive real rate of interest for all savers.
Proposal 6. There should be a capital endowment paid to all adults.
Proposal 7. A public investment authority should be created to buy up companies and property.
What he is driving at is life being heavily controlled by the state, with pay levels, investment, all research and development, rates of interest and jobs organised by the government. This is, of course, the logical consequence if you believe that capitalism is failing completely and driving unacceptable outcomes. But there is no analysis to suggest that some babies might be thrown away with this capitalism bathwater, from incentives to drivers of innovation.
Having worked in the real world as well as having seen the public sector at firsthand, I cannot see how proposals such as Sir Anthony’s could ever have a chance of working. How could governments control the nature of innovation, for example? The drive for innovation in the modern world seems to emerge from the decentralisation of creativity, something that would be hard to replicate if the government controlled all research. Indeed, my slightly heterodox view is that it was the emergence of this need for decentralisation with the technology revolution in the 1980s that really killed off the old-style communism in the Soviet Union.
Goldin and Katz: The Race between Education and Technology22
This book is named after a phrase coined by the Dutch Nobel Prize–winner Jan Tinbergen. He argued that how inequality moves depends on how technology and education interplay. Technological changes raise the demand for the more skilled workers, and to stop inequality rising the supply of such workers has to rise equivalently. The balance between the two determines the direction of movement of technology.
Goldin and Katz argue that in the past 40 years three additional factors have become important – technology has been much more biased towards skilled workers, globalisation has come into play, and in the US at least education, which had improved sharply for more than a century (thus being the main cause of the decline in inequality observed over the period), has started to deteriorate.
Autor, Dorn, Katz, Patterson and Van Reenen: ‘Concentrating on the Fall of the Labor Share’23
This is a seminal paper arguing that a ‘superstar firm’ explanation of rising concentration in a sector will lead to a fall in its labour share through increased ‘exploitation’ or Type 1 Inequality. The paper argues that technology has made this possible. However, the calculations show that this accounts for only a fifth of the total fall in the labour share of total incomes.
Dao, Das, Koczan and Lian: ‘Routinisation, Globalisation, and the Fall in Labour’s Share of Income’24
If increased exploitation accounts for only a fifth of the increase in inequality, what accounts for the rest? This paper from the IMF argues that the culprit is not automation or offshoring alone, but the interaction between the two. The authors point out that the labour share has been falling not just in rich nations, but in developing countries as well.
Dao and her co-authors argue that when poor countries are isolated from the global economy, they tend to specialise in things that rely on cheap labour – farming, low-end services and simple labour-intensive manufacturing. Local landlords and other capital owners do well, but don’t invest heavily because they would be undercut by cheap labour.
But when trade opens up, the rich countries start offshoring manufacturing jobs to the poor countries. These jobs offer better opportunities for workers, but much better opportunities for capitalists. While capitalists in the US or Japan or France get rich cutting labour costs by shipping jobs to China, Chinese capitalists get rich because they can invest and build up business empires.
The IMF economists also predict that global financial integration should help alleviate the pressure on labour in poor countries. If American, European, Japanese and Taiwanese companies are able to invest in a developing country such as China, the inflow of foreign money will boost incomes for local workers and compete down the profits of local capital owners.
They argue that in rich countries automation and globalisation are working together – companies in rich countries can ship labour-intensive manufacturing jobs in electronics assembly, toys and clothing to China and Bangladesh, while buying advanced machine tools and robots to do more high-end manufacturing of things such as microprocessors and airplanes. As a result, workers in rich countries where routine jobs are most common have been hit hardest by both free trade and the advent of cheap automation. This paper seems to provide powerful empirical support for the approach to inequality that is taken by this book and seems to contradict the approach taken by Piketty.
Acemoğlu and Robinson: Why Nations Fail: The Origins of Power, Prosperity, and Poverty25
This is an essentially political book that tries to explain economic progress in terms of equality of political power. It argues that failing societies have tensions between an included group, essentially of rich people who control decision-making, and excluded groups. It argues that societies split in this way do not generate prosperity for their people.
The model used in the analysis is a fairly simple one, dividing the world into a small rich elite and a large group who form the masses. Most people today would use a more general model with a higher degree of granularity that fitted modern life better. A more serious problem is that there is little distinction between the impact of the elite using their power for advantages that benefit the whole group and using their power in ways that only benefit individuals. In the former case, much of the negative impact can be diminished by different companies competing for markets and for labour, whereas in the latter case monopolistic profits increase inequality by both providing excessive rewards for the rich and reducing living standards for the poor.26
Boldrin, Levine and Modica: Review of Why Nations Fail27
This review of the Acemoğlu and Robinson book makes a similar assessment to the analysis above but in rather more detail. It points out that the key test of the thesis in the book is whether China can keep on growing. My view is that it can, partly based on my experience of observing Singapore over many years. Martin Jacques’s seminal When China Rules the World28 agrees and sets out a range of reasons why. Acemoğlu and Robinson think not.
L.M. Bartels: Unequal Democracy29
L.M. Bartels’ Unequal Democracy is about one aspect of the inequality problem, which is the way in which powerful people and corporations abuse their influence, especially in the US. Some of its thinking is reflected in this book in its commentary on Goldman Sachs and the tech giants.
Where this book disagrees is that it does not see the promotion of the corporate sector in itself as necessarily a bad thing. One of the difficulties with democracy is that it tends to work in favour of individuals who consume and against the companies who produce who, naturally, do not have votes themselves.30 Of course the corporate sector does fight back by lobbying and using its financial muscle to influence politics, so the competition is less one-sided than a simple observation of democratic rules might lead one to think – it is the abuse of this lobbying power which is the subject not only of the Bartels book but also this one. The important distinction that needs to be drawn is between measures that benefit the corporate sector as a whole where any excess that accrues to the corporate sector can be competed away provided that the sector is sufficiently competitive (hence the focus on competition policy in this book), and measures that benefit individual sectors or companies where there is less opportunity for the benefits of special privileges to be competed away. Chapter 13 contains a section that explains the distinction in more detail.
Of course, the ultimate purpose of production is consumption so there is no case to favour production at the expense of consumption. But often the long-term interests of consumption are against the short-term interests, so that measures that damage the corporate sector also damage the economy.
Jeffery Sachs: The Price of Civilization31
Jeffery Sachs is quoted in this book because of his penetrating analysis of the effect of cronyism in Russia. His books on inequality more generally seem less penetrating. His analysis is very similar to Piketty’s though he doesn’t include the same weight of evidence as Piketty manages to amass.
Perhaps not surprisingly for someone who has spent a lot of time in the emerging Eastern Europe, he sees inequality mainly from the perspective of crony capitalism and does not pay much attention to the impacts of either globalisation or technology. He also fails to see the distinction between tax cuts that help the corporate sector as a whole, many of the redistributive effects of which can be competed away to the benefit of consumers or employees or both provided there is an adequate competition policy, and tax privileges that help individual companies and sectors. His take on the subject seems to focus mainly on the US and does not really come to grips with the international dimension, which is crucial.
Sachs’ analysis is surprisingly political for an economist. He draws attention to the lobbying power of major corporations. Oddly he doesn’t seem to pay the same attention to the lobbying powers of other groups.
Joseph Stiglitz: The Price of Inequality: How Today’s Divided Society Endangers Our Future32
I remember Jo Stiglitz from M.Phil seminars at Oxford. He was undoubtedly clever but seemed just a little too self-assured to be a proper academic. Since then he has gathered many honours and a Nobel Prize. So I guess I got that one wrong!
However, his book on inequality seems remarkably political and derivative for someone from whom we have been led to expect great insights.33 He is clearly incensed (and rightly so) at the strength of lobbying of the top companies in finance and tech and how they manipulate governments to their advantage. That criticism we share. As someone who perhaps understands running a business better than Stiglitz, however, I don’t think one ought to deal with the monopoly power of the big banks and tech companies by beating up the whole corporate sector. The sensible way to do it is to break or regulate the monopolies. The golden age for the US economy followed Teddy Roosevelt’s doing just that.
Stiglitz’s other weakness is an argument that The Economist suggested ‘would benefit … from a better sense of history and geography’.34
Stiglitz has written other books on the subject, notably Globalisation and Its Discontents. They all add to the subject, without fully expunging my view that a year managing a business would have helped him understand economics more than a lifetime in academia.
Paul Krugman: The Return of Depression Economics35 and End This Depression Now!36
My company Cebr has operationalised Paul Krugman’s brilliant insights into locational economics into a series of models for examining the impact of transport on the relative economic development of different regions and I have a lot of sympathy for his microeconomic insights. He fully deserved his Nobel Prize.
Many of his takes on inequality – for example in his New York Review of Books review of Robert Reich’s Saving Capitalism37 draw attention to the dangers of oligopoly, a theme repeated in this book. However, his macroeconomic views are powerful attacks on the mainstream view that expansionary economic policies need not be constrained by concerns about debt. Had unemployment returned to the levels of the 1930s I would have made the same judgement. But with the US unemployment rate at 4.1% (much the same as the pre-depression rate in the 1920s) compared with as high as 25% in 1933, I believe that policy has to balance the need for full employment with the need to manage indebtedness, a balance that Krugman does not seem to appreciate.
Another of Krugman’s weaknesses is his seeming inability to distinguish between greater and lesser causes of economic developments and of changing causes over time. One example is his complete refusal to accept that technology can affect inequality, a key theme in his review of Robert Reich. The theme of this book is that technology has been a minor cause affecting rising inequality in the immediate past but that this is likely to change in the future as the speed of technological change accelerates and the impact of globalisation wanes.
Katz and Murphy: ‘Changes in Relative Wages’38
Katz and Autor: ‘Changes in Wage Structure and Earning Inequality’39
These papers essentially provide the statistical background for the claim that technology is the key factor driving increased inequality.
Robert Reich: The Work of Nations40
I was a contemporary of Robert Reich’s at Oxford. His book, The Work of Nations, made the case for internationalism and the changing nature of the multinational company. He argued that changing technology and globalisation were leading to inequality, an analysis that has some resonance with that in this book. His work helped get him appointed Secretary of Labour when Bill Clinton (another Oxford contemporary) became President.
Over the historic period, my view is that he exaggerates the extent to which technology was responsible and underplays the impact of globalisation. But looking forward, it is hard to argue with his view that technology will become a major driving force for inequality.
Mishel, Shierholz and Schmitt: ‘Don’t Blame the Robots: Assessing the Job Polarization Explanation of Growing Wage Inequality’41
This is a very powerful analysis of detailed US statistics that is claiming to debunk the theory of skills-biased technical progress (SBTP). Its statistical basis is very detailed and the analysis supports my theory that in fact because (1) change has been relatively slow and (2) machines have been made by people rather than by other machines until now, technology so far has not been a major driver of rising inequality. But looking forward it is likely that the role of technology will change. Probably the most important theorist of inequality, Sir Anthony Atkinson, took the view (which I share) that from now on technology is likely to be the most important driver of inequality as the importance of technological change in destroying existing jobs and creating different ones rises.
Simon Johnson and James Kwak: 13 Bankers42
This book is by Simon Johnson, the former chief economist of the IMF, and James Kwak. It shows how the banking industry used the bank bailouts during the financial crisis to buttress their own banks’ positions at the expense of the public interest. This is a powerful book. Some of its conclusions are echoed in criticisms of the banking sector (and one bank in particular) in Chapter 9 of this book.
Sir Angus Deaton: The Great Escape, Health, Wealth and the Origins of Inequality43
Deaton’s book, by yet another Nobel Prize-winner, is a welcome antidote to the pessimism of some of the others. He starts by pointing out the international dimension of the equality issue in a very similar way to this book. Deaton points out that in recent years abject poverty has been falling and life expectancy growing. He rightly points out that the decline in poverty in the world has had some similar causes to those that have increased inequality in the US – again a conclusion shared with this book.
The Great Escape of the title is the escape, for most people in the world, from the evils of deprivation and early death. Deaton comes from a medical background and has spent a good deal of time investigating the growth of health inequality in the US among so-called middle-class (what Europeans would call working-class) Americans. His analysis is considered in more detail in Chapter 4 of this book.
Branko Milanovic: Global Inequality: A New Approach for the Age of Globalisation44
Obviously I think my own book is worth reading, but if I were to recommend any one other book on inequality, it would be this one. Milanovic coined the concept of ‘the elephant graph’ and I use it in this book to look forward as the elephant mutates into a camel and then either a cobra or a spitting cobra.
Milanovic goes into great detail about how the impact of globalisation transforms not just the emerging economies but also the advanced economies. His analysis is at the core of this book, although I look more at other explanations of inequality, at the future and at policy issues.
Martin Wolf: Why Globalisation Works45
Martin Wolf is a respected journalist for the London Financial Times. This mighty work describes the impact of globalisation in a very accessible way, and the book is certainly worth reading for its description of globalisation alone. He was probably the first to try to make the case that globalisation had reduced inequality in total on a global basis, though the data supporting his argument has been queried. He has also kept on the case with a series of articles in the Financial Times, most notably recently, where his conclusions have some parallels with those in this book.46
Duttagupta, Fabrizio, Furceri and Saxena: ‘Growth That Reaches Everyone: Facts, Factors, Tools’47
This blog by IMF authors is based on briefing for the July 2017 G-20 meeting by the IMF. Its claim that inequality is bad for growth is in line with the academic consensus, although my analysis in this book suggests a range of different relationships in different circumstances.
Many of the policy recommendations are fairly standard – more training, more education, redistribution – and are in line with those made here. One interesting angle is the suggestion that infrastructural spending on roads and airports would reduce inequality. This is unexpected since the poorest are clearly not those who would benefit directly from roads and airports, and bears further investigation (see Chapter 14).
Kohler et al.: ‘Greater Post-Neolithic Wealth Disparities in Eurasia than in North America and Mesoamerica’48
This article (and I am grateful to Tim Worstall of the Adam Smith Institute for a brief summary in CapX49) says that productivity improvements in agriculture in this period seem to have been spread unevenly and that the areas with the greatest productivity improvements had the greatest inequality. This runs slightly counter to the conventional wisdom that suggests a small negative correlation between inequality and growth, but it is in line with the ‘stylised facts’ in Chapter 7 of this book which looks at the complex relationship between inequality and growth.
David Smith50
David Smith is one of the senior economics correspondents in the UK and has written eloquently on inequality both in his columns in the Times and Sunday Times and on his own blog page. His most recent article on the subject concludes that people are relaxed about rising inequality as long as their own position is improving but when (as recently) they believe that their own position is deteriorating they assume that inequality is rising (when in fact in the UK case it has actually been falling over the same period) and blame inequality for their own problems.51 This is a perceptive insight.
Hauner, Milanovic and Naidu, ‘Inequality, Foreign Investment, and Imperialism’52
Written up by Branko Milanovic in the blog of the Stigler Center at the University of Chicago Booth School of Business, 3 January 2018.53
Did rising inequality cause the First World War? When I was taught politics at university a standard essay question related the cause of the First World War to imperialism and the set reading was a book by Hobson54 relating imperialism to underconsumption at home caused by inequality and to the need to raise demand by developing captive markets overseas. Lenin and Rosa Luxembourg had similar theses.
The authors here use recent data to show that: (1) inequality was at historical highs in all the advanced belligerent countries at the turn of the century, (2) rich wealth holders invested more of their assets abroad, (3) risk-adjusted foreign returns were higher than risk-adjusted domestic returns, (4) establishing direct political control decreased the riskiness of foreign assets, (5) increased inequality was associated with higher share of foreign assets in GDP and (6) increased share of foreign assets was correlated with higher levels of military mobilization. Together, these facts suggest that the classic theory of imperialism may have some empirical support.55
They make a powerful case which is hard to ignore, although most of the direct evidence on decision-making at the time does not seem to be as supportive. And arguably if the capitalist class caused the First World War, they were clearly affected by the law of unintended consequences: as Piketty points out, their position was badly eroded by effects of the war, with revolution in Russia, falling profit shares and shares of income of the rich in most countries, and also high taxes in many other countries in the aftermath.
Bloom, Guvenen, Smith, Song and von Wachter: ‘Inequality and the Disappearing Large Firm Wage Premium’56
This is an interesting article because rather than explain the rise in inequality in the US it actually attempts to explain a factor that has prevented inequality from rising further. It argues that traditionally workers in larger firms have been paid more than those in smaller firms. But the US economy has restructured since the 1960s and smaller firms have become more important. At the same time the additional pay from working for larger firms has largely disappeared. The research suggests that this is not to do with changing relative skill sets. But my real-life experience suggests that employees in smaller firms tend to have to be more entrepreneurial, a skill that is hard to measure and which probably does not get taken into account in this analysis.
Oxfam Annual Reports on Wealth Inequality57
The campaigning charity Oxfam produces an annual assessment of wealth inequality typically organised to coincide with the annual Davos meeting. The data is based on the Forbes data on billionaires and on the Credit Suisse Global Wealth Report.58 The headlines for the 2017 report claimed that eight people owned as much wealth as half the world.59 The next year this figure was revised to 61 for 2017 and 42 for 2018.60 But the data is derivative. Not surprisingly (given that the organisation collecting the data is mainly concerned with investment banking and managing the wealth of the relatively rich) the Credit Suisse data does not include much of the relevant data for poor people – it does not include the data of the 800 million poorest people (Credit Suisse claims to have data for ‘4.8 billion adults across the globe’ whereas the total number is 5.6 billion61), and one suspects that its data on non-investment assets is less comprehensive than its data on those forms of assets in which investment can take place. This is probably not the best data to use to compare the positions of the rich and poor.
Interestingly, Oxfam accepts the data on poverty that shows the massive decline in poverty that is referred to in this book. But it also claims that 200 million more people would be out of poverty if wealth were redistributed, making the assumption that total wealth would remain unchanged.
Conclusion
From this chapter it is possible to see that there is a wide range of different views on inequality and its causes. This is one of the reasons that the next chapter draws attention to different types and causes of inequality.
In this book I also draw attention to how the causes of inequality can change over time and, following Sir Anthony Atkinson, my analysis suggests a major role in the future for technologically based inequality. Many of the suggestions for mitigating the growth in inequality in Part IV of this book are based on trying to cope with some of the implications of technologically caused inequality.