Inequality reaches new high
Marx’s prediction 150 years ago that capitalism would lead to greater concentration of wealth has been borne out, writes Michael Roberts
Eton boys: and the rich have got still richer
I have written many posts on the level and changes in inequality of wealth and incomes,1 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.2
There have also been various theoretical explanations provided for this change. The most famous is by Thomas Piketty in his magisterial book, Capital in the 21st century (Harvard 2014). This book won the award for the ‘most bought, least read’ book in 2014, surpassing A brief history of time by scientist Stephen Hawking (London 1989).
I and others have discussed the merits and faults of Piketty’s work extensively.3 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 Benoît Hamon on this).
Inequality remains the buzz word of liberal and leftist debate and analysis,4 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.5 The ratings agency, S&P Global Ratings, has cited the income gap as a long-term trend that threatens America’s economic growth.6 Even the major international agencies like the International Monetary Fund7 and the Organisation for Economic Cooperation and Development continually analyse movements in inequality to investigate whether more equality would be better for growth and a more stable capitalism.
Post-Keynesian economists like Engelbert Stockhammer and 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 in some depth.8
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, alongside 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 Milanovic9 - the Gini ratio reached over 55 in 1867.
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 “immiseration”, 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 the market, if not interfered with, would steadily bring forth a more equal society. The irony is that, just as Kuznets reached this conclusion,10 most major capitalist economies began to generate an increase in inequality in both income and wealth - as the graph shows.
But do not be fooled by the fact that the graph seems to show a huge jump in gross domestic product per capita in dollars from 1867 to now. That is 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, reaching levels not seen since the 1920s. Indeed, in a new analysis of the World Income Database11 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% of earners in America now take home about 20% of the country’s pre-tax national income, compared with less than 12% in 1978, according to economists at the National Bureau of Economic Research. Over the same time in China, the top 1% doubled their share of income, which rose from about 6% to 12%. America has experienced “a complete collapse of the bottom 50% income share in the US between 1978 to 2015”, the authors wrote. “In contrast, and in spite of a similar qualitative trend, the bottom 50% share remains higher than the top 1% share in 2015 in China.”
Meanwhile, economic growth in China has been so strong that - despite widening inequality - the incomes of the bottom 50% 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% from 1978 to 2015. For their American counterparts, income decreased 1%: “This is likely to make rising inequality much more acceptable” in China, they noted. “In contrast, in the US there was no growth left at all for the bottom 50% (-1%).”
The IMF and other agencies, such as 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 declined12 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 the second is that nearly all the decline has been in China due to its unprecedented economic growth under a state-controlled and directed economy - far from the market capitalism seen in 19th and 20th century that Piketty and others have analysed. In most low-income countries inequality has hardly changed from very high levels.
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 1% 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 parents or relatives.
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!13 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.14
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 l
Michael Roberts blogs at https://thenextrecession.wordpress.com.
2. See my book, Essay on inequality: on issues in modern economies Vol 1, London 2014.
3. For example, https://thenextrecession.wordpress.com/2014/04/28/reviewing-piketty-again.
4. See https://thenextrecession.wordpress.com/2014/08/13/inequality-the-mainstream-worry.
5. See https://thenextrecession.wordpress.com/2015/02/01/growth-inequality-and-davos.
10. See https://thenextrecession.wordpress.com/2015/12/14/kuznets-piketty-marx-and-human-development.
12. See https://thenextrecession.wordpress.com/2015/10/13/weve-never-had-it-so-good.