What kills inequality – Part 1

Inequality abounds across the world, but there are also issues about what kills inequality, as espoused here.

Redistribution’s violent History: World War II devastated the economic infrastructure of Germany and Japan. It flattened their factories, reduced their rail yards to rubble, and eviscerated their harbors.

But in the decades that followed, something puzzling happened: the economies of Germany and Japan grew faster than those of the United States, the United Kingdom, and France. Why did the vanquished outperform the victorious?

In his 1982 book, The Rise and decline of Nations, the economist, Mancur Olson, answered that question by arguing that rather than handicapping the economies of the Axis powers, catastrophic defeat actually benefited them, by opening up space for competition and innovation.

In both Germany and Japan, he observed, the war destroyed special-interest groups, including economic cartels, labour unions, and professional associations. Gone were Germany’s partisan unions and Japan’s family-controlled conglomerates; the U.S. Teamsters, the United Kingdom’s Society of Engineers, and France’s Federation of Building Industries all survived.

A generation after the war, only a quarter of West Germany’s professional associations dated back to the prewar era, whereas, a full half of the United Kingdom’s did. Olson’s findings had a disturbing implication: in politically stable countries, narrow coalitions of business lobbies hold back economic growth through self-serving policies, and only a major military defeat or a grisly revolution can overcome the resulting inefficiencies.

Back when Olson was writing, few economists cared about economic inequality in advanced countries; unemployment and sluggish investment were the problems of the day. To the extent that experts did focus on inequality within countries, they did so with respect to the late industrializers, where migration from poor villages to richer cities was accentuating income disparities. Even there, however, inequality was considered a temporary side effect of development; the economist Simon Kuznets argued that it dissipated with modernization.

Had Olson considered inequality, he might have noticed that World War II had two other curious economic consequences. First, the devastation reduced inequality—not just in the defeated countries but also in the victorious countries, and even in neutral ones. Second, these reductions proved temporary. Around the 1970s, developed economies started becoming less and less equal, defying Kuznets’ celebrated hypothesis.

Such puzzles lie at the heart of The Great Leveler, an impressive new book by the historian Walter Scheidel. Scheidel proposes that ever since foraging gave way to agriculture, high and rising inequality has been the norm in politically stable and economically functional countries. And the only thing that has reduced it, he argues, has been some sort of violent shock—a major conflict such as World War II or else a revolution, state collapse, or a pandemic. After each such shock, he writes, “the gap between the haves and the have-nots had shrunk, sometimes dramatically.” Alas, the effect was invariably short lived, and the restoration of stability initiated a new period of rising inequality.

Today, the risk of violent shocks has fallen considerably. Nuclear deterrence has made great-power war unthinkable, the decline of communism has rendered wealth-leveling revolutions unlikely, powerful government institutions have staved off the risk of state collapse in the developed world, and modern medicine has kept pandemics at bay.

However welcome such changes may be, Scheidel says, they cast “serious doubt on the feasibility of future leveling.” Indeed, he expects economic inequality to keep rising for the foreseeable future.

The Great Leveler should set off loud alarm bells. Scheidel is right to call on the world’s elites to find ways to equalize opportunities, and to do so before driverless cars, automated stores, and other technological advances complicate the task. A humanoid robot works side by side with employees in the assembly line at a factory in Kazo, north of Tokyo, Japan. The bloody history he recounts suggests that reducing inequality will be difficult, even in the best of circumstances. But he also exaggerates his case; there are reasons to believe that societies can reform without an instigating catastrophe.

The march of inequality
Jumping across civilizations and eras, The Great Leveler finds example after example of periods of rising inequality punctuated by cataclysmic events that suddenly flattened distributions of income and wealth.

The range of evidence is breathtaking. Scheidel tracks the distribution of wealth between 6000 BC and 4000 BC through indications of physical well-being, such as skeletal height and the incidence of dental lesions; signs of conspicuous consumption, such as lavish burials; and evidence of entrenched hierarchies, such as temples.

He estimates inequality in the Roman Empire by looking at the assets of top officials and influential families, as reported in censuses. He measures Ottoman inequality by turning to records of estate settlements and official expropriations. For premodern China, fluctuations over time in the number of tomb epitaphs, which only the rich could afford, serve as a proxy for the shifting concentration of wealth. Specialists in particular eras and regions will undoubtedly quibble with some of Scheidel’s assumptions, inferences, and computations. But no reasonable reader will fail to be convinced that inequality has waxed and waned across time and space.

Scheidel also seeks to explain what causes inequality. Thomas Piketty, in his best-selling Capital in the Twenty-first Century; answered the question by arguing that the rate of return on investment generally exceeds the rate of economic growth, causing people with capital to get even wealthier than everyone else. Scheidel accepts this mechanism but adds others.

The most basic one involves predation. Until recently, the only way to become fabulously rich was to prey on the fruits of others’ labor. Cunning people grabbed power and then accumulated wealth through taxation, expropriation, enslavement, and conquest. They also monopolized lucrative economic sectors, largely for the benefit of themselves and their relatives and cronies. Exercising all this power—and holding on to it—required maintaining a military capable of overpowering challengers, which itself served as an instrument of further predation.

In ancient Rome, Scheidel writes, “commanders enjoyed complete authority over war booty and decided how to divide it among their soldiers, their officers and aides who had been drawn from the elite class, the state treasury, and themselves.”

In the modern world, too, authoritarian states with ruling cliques preserve political power and acquire immense wealth through violence; consider China, Egypt, Russia, and Saudi Arabia. Where these differ from premodern states is that they share power with giant private companies. Premodern China had no equivalent of the e-commerce company Alibaba, nor did premodern Egypt have anything like the Bank of Alexandria, one of the country’s largest financial institutions.

The owners of such companies include billionaires who have become wealthy without relying on violence (or at least without relying on violence directly, since they may support it indirectly by paying taxes to repressive states). But Scheidel downplays the role that private companies play in creating and perpetuating inequality in modern autocracies, an error that leads him to make unduly pessimistic forecasts about the future.

We would be continuing this discourse in the next article. For further details call on me for in-depth discussions, business advisory services and training – send a message via WhatsApp or SMS.

• Nwaodu Lawrence Chukwuemeka (Ideas Exchange Consulting, Lagos).
• Nwaodu.lawrence@hotmail.co.uk (07066375847).