It seems that Piketty offers one stylized fact about inequality, which is that it rose during the long 19th century, fell during the period of the World Wars and their aftermath, and has risen since. What might explain this?
I would offer a theory in the spirit of Adam Smith: the division of labor is limited by the extent of the market.
My theory is that the more division of labor, the greater the inequality within a nation. Of course, from a world perspective, inequality may go up or down, and in recent decades it has gone way down.
The long 19th century was an era of globalization. World War I interrupted that, and there was little recovery of international trade between the wars. After World War II, trade also was limited. We had the cold war, which isolated the East from the West. We had economic policies in many countries that were anti-trade (remember import substitution?). Finally, in the 1980s, we began to see liberalization in the West, and then greater liberalization in China, India, and some of the former Soviet bloc. Then we had the Internet, which opened up new opportunities for specialization and trade.
This unleashed a new round of globalization, and the “extent of the market” became greater. The business opportunities this created helped to increase inequality within nations. At the same time, incomes increased in India, China, and several other poor countries, so that world inequality fell.
This theory won’t give me a best-selling book. But I think it has merit.
Is inequality something that can be fully explained rationally? I don’t think so. Certain rules and institutions evolve, and elites inevitably take advantage. That part is easy to understand. However, the other side of the equation is the tolerance level of the masses, and how that plays out cannot be explained through rational analysis.
Why do the masses respect the power of the church, or the divine right of kings? I have no idea, but they seem to. And why is it that every once in a while that respect breaks down? I don’t know. But statistics and rational analysis is never going to explain the state of this tension and where and when it frays.
With all respects, no. I think there’s a story to be told — a splendid story! — about the rise of wealth around the world since WW 2, how liberalized trade has benefited nations and their citizens and increased global equality.
But that’s a separate story from the increasing inequality within capitalistic nations, which seems to have begun at different times (circa 1970 in the US) and seems — from the charts I’ve seen — to have proceeded independently of global affairs. I mean, it makes some sense that as an American my income and number of possessions should decrease relatively to persons in China or India or Brazil as trade flows to those nations. But it doesn’t make sense that my income should fall relative to Bill Gates or Donald Trump because of increased international trade — there’s got to be some other factor at work.
If I’m a CEO and I move a factory over to China, I think I’ve accomplished both at once.
Right?
You don’t have to move a factory to China – you just have to build one there. In a world where the markets are global rather than merely national, the top of the pyramid can make more money without the bottom of the pyramid suffering at all.
By the way, when production is “moved” to China, it rarely actually is a US company opening a factory, but instead a US firm closing its factory and becoming an importer.
This decision is often forced, i.e. a competitor finds a Chinese supplier and thus the low price competition forced the US factory to also import.
Some portion of this is also due to the regulatory burden of operating a factory vs. outsourcing those headaches to some company in China.
I just think too many people imagine CEO’s actually moving factories while gleefully rubbing their hands. They often have little choice, and flying to China all the time is not much fun.
A greater division of labor should result in greater wealth, but how that wealth is divided is something different. I am fairly sure France became much more equal after the revolution even without a change in division of labor.
Thought question: if we had no income tax, and no data on income, would anyone feel “inequality” was a real problem?
I doubt it.
Think about what you are saying: “if we had no income tax, and no data on income”; this describes the entire world prior to the 20th century. Do you seriously think that no one noticed inequality during the Roman empire, or the French monarchy?
So after the globalizing 19th century, we got WWI. Looks like an epic fail.
And we had limited Int’l trade from WWI to 1980 — an era of epic tech change. Since 1980, not so much. Better graphics, but mostly doing old stuff faster. And we lost supersonic travel and the manned space program.