Summary:
The spread of Internet has shined a light on the lives of wealthy putting income inequality front and center across the globe. Depending on a person's political beliefs, the response to income inequality has been one of 2 things - redistribute through taxation or social welfare spending (Left's idea) or increase economic growth so that it lifts everyone up (Right's idea). This book shows that throughout history income inequality has only come down appreciably for a sustained length of time through tragedy. The author focuses on history, steering clear from the various sociological aspects of income inequality - gender, race, ethnicity etc.,.
Analysis:
Income inequality has been growing by leaps and bounds in the last decade across the world - measured by the number of billionaires who owned half the private net wealth in the world, it has shrunk from 388 in 2010 to 85 in 2014 to 62 in 2015. This excludes offshore assets which, when included, would skew this even more. Income inequality has frequently shot up in every country across history. 2,000 years back, Roman empire had income inequality as bad as the present day. Before World War I, the richest 10% in United Kingdom owned 92% of all private net wealth in that country. While there are multitude of books that analyse the why and how of income inequality, this book addresses the factors that makes income inequality go down. In his analysis, the author uses Gini coefficient to track income inequality throughout history. Higher the value of Gini coefficient, higher the inequality and vice versa. Because income and wealth information (even if it is done through proxy data like ratio of land rents to wages, ratio of mean per capita GDP to wages) are required to calculate Gini coefficient, the author stresses the importance of factoring in a large error margin the farther we go back in time. Because there is more documentation on European societies throughout their history, they also feature the most in the economic analysis.
When humans were hunter gatherers, income inequality stayed at a low level primarily because of their mobile nature of their lives. Income inequality showed up among hunter gatherers from additional artifacts found in burial sites of rich people. Once humans took to herding and farming, income inequality began its inexorable rise. People had to come up with ways to distribute resources and labor for the benefit of the entire group. Wealth and income inequality in farmers and herders were usually caused by surplus resources, ownership rights to land and transmissibility of wealth to future generations. Because these factors were more abundant among farmers and herders compared to hunter gatherers, Gini coefficient increased as well. With the formation of States (or Kingdoms), power ended up in a hierarchy that skewed the distribution of access to income and wealth. The ability of farming and herding communities to come up with new forms of political and military organizations, while helpful for resolving conflicts within each community and defending it from external attacks, also ensured rising income and wealth inequality. With innovations (urbanization, commercialization, financial sector innovation, global trade, industrial revolution) that promoted economic development, came improvement in people's lives along with increase in income inequality between them. It created an environment where certain groups (military, administrative, clerical, commercial) became the ruling classes suppressing others around them. The surplus production from farming and herding (which was not an issue with hunter gatherers because surplus production was a serious detriment to their mobility) split the society into makers and takers. However, the same factors that assisted in the formation of elites also served as a check on the agglomeration of wealth among them. Other elites could always be counted on to push back against excessive skew in distribution of wealth (not because of altruism but because they wanted a cut from the surplus production). The ability of elites to gain and consolidate wealth has stayed remarkably similar across history - leverage political connections, exploit loopholes in regulations and take advantage of variability in market information (arbitrage). Examples of empires that are discussed in the book include Han Chinese Empire from 220 BCE -206 AD and Holy Roman Empire, primarily because of wealth of archaeological information about them. While corruption is usually considered as the prime culprit for the unequal distribution, addressing it did not reduce income inequality. The author identifies 4 factors that have been very effective across history in reducing income inequality - mass mobilization warfare (First and Second World Wars), transformative revolutions (Soviet Union and China), state failure (Somalia) and lethal pandemics (Black Death, Plague).
Wars have to be of a certain nature to be effective at reducing income inequality by a sizable amount over long periods of time. Mass mobilization warfare involves the entire society and mobilizes it on a massive scale (which was the case in the case of both World wars). This definition excludes wars between states that were unimaginably brutal (example would be Iran Iraq War in the 1980's) but that did not reduce income inequality among the participating states. Mass mobilization warfare tends to cause widespread physical destruction, onerous taxation (to pay for the war expenses), inflation, breakdown in trade. Using the world wars as examples is also made easy by the amount of evidence available for analysis - the farther we go back in time, the less reliable sources are and more erroneous analyses tend to become. With respect to Europe, income inequality has crashed every time one of these 4 factors has reared its head. Beyond Europe, records from cities within Ottoman Empire show increasing inequality that tracks with income inequality within Europe at the same time. In South America, the Spanish Conquest in 16th Century and subsequent wars of independence of the different countries in 19th Century reduced income inequality significantly. In America, Second World War and Great Depression represented the one instance when income inequality came crashing down. American War of Independence reduced income inequality within America but it was a minor blip compared to the effect of Second World War and Great Depression. American Civil War's impact on income inequality was even lesser than American War of Independence because the Civil War succeeded in shifting wealth of the elite in the South of the US to the North. To analyze the impact of War on Income inequality, the author uses Japan during Second World War as an example. The income shares of the top 1% in that country fell from 20% before the war to 6% after the war. Prior to the 2 World Wars, Japan had embarked on a westernization drive after its humiliation at the hands of Western powers in the middle of 19th century. With the surrender of Japan after Second World War, America took over the country and put in place strict re-distributive policies that were designed to punish Japanese elites for dragging the country into war. The flattening of income inequality during Second World War was achieved in different ways in different countries - UK, US and Canada taxed their rich at higher rates whereas Germany, Russia and Austria Hungary printed money (inflation) or borrowed massive amounts of money (debt) for the war. In either case, the outcome was similar - the rich lost more while poor did not lose as much (mainly because they did not have enough to begin with). After the conclusion of Second World War, capitalist countries put in place the modern welfare state system to extend the beneficial effects of low income inequality over a longer time period.
Transformative revolution is a side effect of mass mobilization warfare. Since they are internal in nature, they do not reduce income inequality across multiple countries but the violent expropriation and redistribution ensures a drastic reduction in income inequality. When the revolutions were less violent (example would be French Revolution), the effect on income inequality is correspondingly lesser. Communist revolution in Soviet Union reduced Income Inequality after World War I. The forced expropriation and redistribution of wealth and assets made the rich poorer but did not lead to any appreciable improvement in the condition of the poor. Given the massive income inequality before World War I under Tsar, Communist actions drastically brought down the income inequality in Russia. Communists were quite explicit in abolishing private ownership of land which is where wealthy had most of their assets. Soviet Union was the first major demonstration of the depravity of Communism. Following the lead of his mentors in Soviet Union, Mao took China through hell with his exceptionally cruel 'Great Leap Forward'. A conservative estimate of count of people killed from 1959 - 1961 includes 20 - 40 million people who died of starvation due to the breakneck industrialization under Mao in addition to the 6 - 10 million killed or driven to suicide by the Chinese state(whenever Indian defeat at the hands of China in 1962 India China war is discussed, it is good to remember that China at that time was led by a psychotic dictator, setting aside the strategic mistakes of Indian government). Communist revolutions in Cuba and Nicaragua managed to drastically cut income inequality in their respective countries without resorting to the blood thirsty orgy of murder of the Chinese or the Soviets.
State failure involves violence on a massive scale within a country and is very effective at reducing income inequality. States (or Kingdoms) provide stability and security so economic activities can proceed unhindered. Without the state protection, the wealthy, who are the primary beneficiaries of state protection, are in a position to lose more than the poor (who did not have enough wealth to begin with). The author uses Tang dynasty in China between 618 - 881 CE and Western Roman Empire (based in Rome in contrast to Eastern Roman Empire or Byzantium based out of Constantinople that lasted much longer). With respect to Tang dynasty, the state collapse was so widespread that the powerful ruling class completely disappeared from the historical record.
Pandemics like Plague, Smallpox and Measles have killed millions of people across the globe and their spread has halted economic growth in its tracks. With large number of deaths comes a reduction in labor force that increases the wages for the remaining labor force. Its effect on land prices (which is the source of riches for the wealthy) is negative because of the slowdown in economic activity. Because of this, the rich came down a notch while the poor went up in income. The author uses Plague in Europe, Middle East and Asia during the second half of the 14th century and Spanish Conquest of Aztecs during the 16th Century to illustrate the devastating impact pandemics had on successful empires. The first smallpox pandemic among Aztecs erupted in 1519 (around the same time Hernan Cortes was waging his brutal war on them) and carried away millions. Because Aztecs did not have immunity to smallpox and Spanish did (having been exposed to repeated outbreaks of diseases in Europe for a long time), Aztecs died in large numbers in contrast to miniscule number of deaths among the Spanish. It further confirmed Aztecs' belief that Spaniards were gods prophesied in Aztec mythology. In comparison to pandemics, famines kill a lot of people but its impact on income inequality is very small. Famines are usually concentrated among the poor and are, more often than not, the result of terrible policies followed by a state (example would be the famines in Colonial India under British rule).
The author goes through other factors that have been pitched as solutions to income inequality (Land reform, macro economic crises, democracy, education, economic development) and comes to the conclusion that they do not reduce income inequality (some factors like democracy increase income inequality) over long periods of time as the 4 factors identified above. The effect of land reforms in income inequality is limited because elites usually take control of the reforms after the initial shock wears off as a result of which income inequality either goes back to where it was before the land reforms were implemented or gets more worse. Debt relief is another solution but the prospect of debt relief usually increases interest rates on loans thereby locking out the very people whose lives it is supposed to improve. Emancipation of slaves provided them with freedom and a slightly better standard of living but also provided compensation to the erstwhile slave owners for their trouble in losing those slaves, the result of which was to make the income inequality worse. Macroeconomic crises cause a drop in income inequality but the drop is short lived and income inequality comes roaring back once economy starts improving. Democracy plays into the hands of elites who can capture political power and further improve their economic prospects. Education and technology have also been identified as other factors to reduce income inequality but they have been shown to increase income inequality instead of decreasing it.
The spread of Internet has shined a light on the lives of wealthy putting income inequality front and center across the globe. Depending on a person's political beliefs, the response to income inequality has been one of 2 things - redistribute through taxation or social welfare spending (Left's idea) or increase economic growth so that it lifts everyone up (Right's idea). This book shows that throughout history income inequality has only come down appreciably for a sustained length of time through tragedy. The author focuses on history, steering clear from the various sociological aspects of income inequality - gender, race, ethnicity etc.,.
Analysis:
Income inequality has been growing by leaps and bounds in the last decade across the world - measured by the number of billionaires who owned half the private net wealth in the world, it has shrunk from 388 in 2010 to 85 in 2014 to 62 in 2015. This excludes offshore assets which, when included, would skew this even more. Income inequality has frequently shot up in every country across history. 2,000 years back, Roman empire had income inequality as bad as the present day. Before World War I, the richest 10% in United Kingdom owned 92% of all private net wealth in that country. While there are multitude of books that analyse the why and how of income inequality, this book addresses the factors that makes income inequality go down. In his analysis, the author uses Gini coefficient to track income inequality throughout history. Higher the value of Gini coefficient, higher the inequality and vice versa. Because income and wealth information (even if it is done through proxy data like ratio of land rents to wages, ratio of mean per capita GDP to wages) are required to calculate Gini coefficient, the author stresses the importance of factoring in a large error margin the farther we go back in time. Because there is more documentation on European societies throughout their history, they also feature the most in the economic analysis.
When humans were hunter gatherers, income inequality stayed at a low level primarily because of their mobile nature of their lives. Income inequality showed up among hunter gatherers from additional artifacts found in burial sites of rich people. Once humans took to herding and farming, income inequality began its inexorable rise. People had to come up with ways to distribute resources and labor for the benefit of the entire group. Wealth and income inequality in farmers and herders were usually caused by surplus resources, ownership rights to land and transmissibility of wealth to future generations. Because these factors were more abundant among farmers and herders compared to hunter gatherers, Gini coefficient increased as well. With the formation of States (or Kingdoms), power ended up in a hierarchy that skewed the distribution of access to income and wealth. The ability of farming and herding communities to come up with new forms of political and military organizations, while helpful for resolving conflicts within each community and defending it from external attacks, also ensured rising income and wealth inequality. With innovations (urbanization, commercialization, financial sector innovation, global trade, industrial revolution) that promoted economic development, came improvement in people's lives along with increase in income inequality between them. It created an environment where certain groups (military, administrative, clerical, commercial) became the ruling classes suppressing others around them. The surplus production from farming and herding (which was not an issue with hunter gatherers because surplus production was a serious detriment to their mobility) split the society into makers and takers. However, the same factors that assisted in the formation of elites also served as a check on the agglomeration of wealth among them. Other elites could always be counted on to push back against excessive skew in distribution of wealth (not because of altruism but because they wanted a cut from the surplus production). The ability of elites to gain and consolidate wealth has stayed remarkably similar across history - leverage political connections, exploit loopholes in regulations and take advantage of variability in market information (arbitrage). Examples of empires that are discussed in the book include Han Chinese Empire from 220 BCE -206 AD and Holy Roman Empire, primarily because of wealth of archaeological information about them. While corruption is usually considered as the prime culprit for the unequal distribution, addressing it did not reduce income inequality. The author identifies 4 factors that have been very effective across history in reducing income inequality - mass mobilization warfare (First and Second World Wars), transformative revolutions (Soviet Union and China), state failure (Somalia) and lethal pandemics (Black Death, Plague).
Wars have to be of a certain nature to be effective at reducing income inequality by a sizable amount over long periods of time. Mass mobilization warfare involves the entire society and mobilizes it on a massive scale (which was the case in the case of both World wars). This definition excludes wars between states that were unimaginably brutal (example would be Iran Iraq War in the 1980's) but that did not reduce income inequality among the participating states. Mass mobilization warfare tends to cause widespread physical destruction, onerous taxation (to pay for the war expenses), inflation, breakdown in trade. Using the world wars as examples is also made easy by the amount of evidence available for analysis - the farther we go back in time, the less reliable sources are and more erroneous analyses tend to become. With respect to Europe, income inequality has crashed every time one of these 4 factors has reared its head. Beyond Europe, records from cities within Ottoman Empire show increasing inequality that tracks with income inequality within Europe at the same time. In South America, the Spanish Conquest in 16th Century and subsequent wars of independence of the different countries in 19th Century reduced income inequality significantly. In America, Second World War and Great Depression represented the one instance when income inequality came crashing down. American War of Independence reduced income inequality within America but it was a minor blip compared to the effect of Second World War and Great Depression. American Civil War's impact on income inequality was even lesser than American War of Independence because the Civil War succeeded in shifting wealth of the elite in the South of the US to the North. To analyze the impact of War on Income inequality, the author uses Japan during Second World War as an example. The income shares of the top 1% in that country fell from 20% before the war to 6% after the war. Prior to the 2 World Wars, Japan had embarked on a westernization drive after its humiliation at the hands of Western powers in the middle of 19th century. With the surrender of Japan after Second World War, America took over the country and put in place strict re-distributive policies that were designed to punish Japanese elites for dragging the country into war. The flattening of income inequality during Second World War was achieved in different ways in different countries - UK, US and Canada taxed their rich at higher rates whereas Germany, Russia and Austria Hungary printed money (inflation) or borrowed massive amounts of money (debt) for the war. In either case, the outcome was similar - the rich lost more while poor did not lose as much (mainly because they did not have enough to begin with). After the conclusion of Second World War, capitalist countries put in place the modern welfare state system to extend the beneficial effects of low income inequality over a longer time period.
Transformative revolution is a side effect of mass mobilization warfare. Since they are internal in nature, they do not reduce income inequality across multiple countries but the violent expropriation and redistribution ensures a drastic reduction in income inequality. When the revolutions were less violent (example would be French Revolution), the effect on income inequality is correspondingly lesser. Communist revolution in Soviet Union reduced Income Inequality after World War I. The forced expropriation and redistribution of wealth and assets made the rich poorer but did not lead to any appreciable improvement in the condition of the poor. Given the massive income inequality before World War I under Tsar, Communist actions drastically brought down the income inequality in Russia. Communists were quite explicit in abolishing private ownership of land which is where wealthy had most of their assets. Soviet Union was the first major demonstration of the depravity of Communism. Following the lead of his mentors in Soviet Union, Mao took China through hell with his exceptionally cruel 'Great Leap Forward'. A conservative estimate of count of people killed from 1959 - 1961 includes 20 - 40 million people who died of starvation due to the breakneck industrialization under Mao in addition to the 6 - 10 million killed or driven to suicide by the Chinese state(whenever Indian defeat at the hands of China in 1962 India China war is discussed, it is good to remember that China at that time was led by a psychotic dictator, setting aside the strategic mistakes of Indian government). Communist revolutions in Cuba and Nicaragua managed to drastically cut income inequality in their respective countries without resorting to the blood thirsty orgy of murder of the Chinese or the Soviets.
State failure involves violence on a massive scale within a country and is very effective at reducing income inequality. States (or Kingdoms) provide stability and security so economic activities can proceed unhindered. Without the state protection, the wealthy, who are the primary beneficiaries of state protection, are in a position to lose more than the poor (who did not have enough wealth to begin with). The author uses Tang dynasty in China between 618 - 881 CE and Western Roman Empire (based in Rome in contrast to Eastern Roman Empire or Byzantium based out of Constantinople that lasted much longer). With respect to Tang dynasty, the state collapse was so widespread that the powerful ruling class completely disappeared from the historical record.
Pandemics like Plague, Smallpox and Measles have killed millions of people across the globe and their spread has halted economic growth in its tracks. With large number of deaths comes a reduction in labor force that increases the wages for the remaining labor force. Its effect on land prices (which is the source of riches for the wealthy) is negative because of the slowdown in economic activity. Because of this, the rich came down a notch while the poor went up in income. The author uses Plague in Europe, Middle East and Asia during the second half of the 14th century and Spanish Conquest of Aztecs during the 16th Century to illustrate the devastating impact pandemics had on successful empires. The first smallpox pandemic among Aztecs erupted in 1519 (around the same time Hernan Cortes was waging his brutal war on them) and carried away millions. Because Aztecs did not have immunity to smallpox and Spanish did (having been exposed to repeated outbreaks of diseases in Europe for a long time), Aztecs died in large numbers in contrast to miniscule number of deaths among the Spanish. It further confirmed Aztecs' belief that Spaniards were gods prophesied in Aztec mythology. In comparison to pandemics, famines kill a lot of people but its impact on income inequality is very small. Famines are usually concentrated among the poor and are, more often than not, the result of terrible policies followed by a state (example would be the famines in Colonial India under British rule).
The author goes through other factors that have been pitched as solutions to income inequality (Land reform, macro economic crises, democracy, education, economic development) and comes to the conclusion that they do not reduce income inequality (some factors like democracy increase income inequality) over long periods of time as the 4 factors identified above. The effect of land reforms in income inequality is limited because elites usually take control of the reforms after the initial shock wears off as a result of which income inequality either goes back to where it was before the land reforms were implemented or gets more worse. Debt relief is another solution but the prospect of debt relief usually increases interest rates on loans thereby locking out the very people whose lives it is supposed to improve. Emancipation of slaves provided them with freedom and a slightly better standard of living but also provided compensation to the erstwhile slave owners for their trouble in losing those slaves, the result of which was to make the income inequality worse. Macroeconomic crises cause a drop in income inequality but the drop is short lived and income inequality comes roaring back once economy starts improving. Democracy plays into the hands of elites who can capture political power and further improve their economic prospects. Education and technology have also been identified as other factors to reduce income inequality but they have been shown to increase income inequality instead of decreasing it.
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