In this magnificent piece of historical sociology, the Austrian Stanford historian, Walter Scheidel, answers the question under what circumstances income and wealth inequality decline. His fascinating answer is that only so-called violent shocks in the form of (1) mass mobilization warfare, (2) political revolution, (3) state failure, and (4) lethal pandemics can effectively reduce inequality (p.6), while peaceful mechanisms like (1) economic growth, (2) democracy and (3) limited land reform have done nothing or little to reduce income inequality (p.9).
The historical basis for the growth of inequality are threefold: (1) surplus extraction from defensible resources (which presupposes a beyond-subsistence economy, i.e. agriculture or industry based, but also includes elements of coercion, debt peonage, extortive taxation, land confiscation, privatization of wealth), (2) transfer of that surplus to one’s descendants, (3) a regime in which private property claims become legitimate. That part of his analysis shall not be so controversial, yet the four violent shocks or “horsemen” (from Albrecht Durer) are more controversial and deserve greater scrutiny.
Before we discuss the political implications of his findings it might be worthwhile explaining why these four horsemen can reduce inequality.
War costs a lot of money, destroys a lot of property and elevates the political power of the popular (poor) masses as they serve in the military assembly lines as well as fighting in the war. All of that tends to reduce both the political as well as the economic power of the very rich. War is a time period, when the country has to mobilize substantial resources to carry out the war, which comes at the expense of the private civilian economy. States then raise taxation on the wealthy, as it becomes difficult to raise taxes on the beleaguered middle class and impossible to draw more taxes from the poor. It is possible to also borrow money from rich people, and that can make some rich people even richer, as has been the case with the Rothschild banker family, which made its first fortune in the Napoleonic Wars. But this is quite exceptional.
The destruction of property comes at the expense of those who have the most to lose, i.e. the rich. Especially in the past, most of measurable wealth was not tied up in the stock market (which would tank anyway if companies are invested in the civilian sector as more resources get drafted for the war effort), but in real estate and land, and to the extent that such property can get harmed by bomb raids or enemy invasion will also contribute to the diminution of the wealth of the rich, and thus result in declining wealth inequality.
Finally, the popular masses are drafted into the war, and when they come back, they do expect certain benefits to come their way, whether it be Japanese samurais or Roman legions who received land, or US veterans getting the GI bill after World War II. One could scarcely imagine what would happen to the legitimacy of the government if these warriors would not be given handouts. There is no doubt that such enforced redistribution of wealth can also lower inequality.
Scheidel uses the example of post-war Japan from 1945 as an example for massive changes to the political economy after its humiliating defeat. The emperor Hirohito narrowly escaped punishment and kept the throne, albeit no longer as absolute but as constitutional monarch. But as far as social structures are concerned everything was fair game for the American occupiers. Their rationale was that in order to prevent a fascist military regime from rising up again, the central landholding among a few feudal lords had to end, thus the post-war constitution included a provision to parcel out the land to small farmers.
Any peacetime Japanese government would never have contemplated such an extreme step, but given that the Americans had full control over national policymaking, there was nobody that could hinder them. Ironically, the US would never have contemplated such a land reform in their own country, though they have hiked the taxes on the rich to pay for their own war effort. In addition, the Americans pushed for legislation that would strengthen organized labor, such that Japan developed labor unions, when it hitherto had none. There were also early elements of social legislation. Each of these measures worked to reduce income and wealth inequality, which albeit higher today is still below what can be found in many other industrialized countries.
On the other side, the absence of war and mass mobilization as was the case in Latin America (Centeno 2002) can prevent the build-up of progressive taxation and a strong welfare state. Latin America experienced noticeable decline in inequality only after the 1990s upon the conclusion of various military dictatorships. Though the rise of left-wing governments has played a positive role in reducing inequality, which suggests that democratic development can mitigate inequality.
This is an easy one and Scheidel only devotes 44 pages to it. Essentially, communist revolutions are about the eradication of private property, the collectivization of the means of production and the forced leveling of economic resources, which has been the experience in the Soviet Union, China and other communist sphere countries. Scheidel does point to the enormous destruction of livestock that went along with Soviet collectivization of agriculture and much unneeded suffering
If the state collapses, then social organization is hurled back to a less complex and more primitive state. There is less division of labor, less civilization and less cultural output. Such a development hurts the rich more than the poor, because the rich depend on revenue streams that become legitimated via the government. The government has the levers to redistribute income from the popular classes to the rich. Libertarians will now claim that if we had no government, then the rich would no longer be able to derive income via crony capitalism, but would have to work for it. Yet in a more primitive society without provisions for private property, it is not so clear how one could become rich. Most capitalist enterprises require strict provisions for private property, public security (i.e. no war), an educated and healthy workforce, and a public infrastructure, and these resources need to be mobilized by the state.
Scheidel uses the example of Somalia to show that the descent into anarchy after the toppling of the dictator was associated with a reduction in inequality, because there no longer were any corrupt elites who could appropriate national resources for their own benefit. That people had to suffer from a lack of development is another cost that had to be borne by the population, but it seems to be that the poor do not have much to lose regardless under which regime they live in.
A huge disease, which wipes out a substantial share of the population can reduce inequality in two ways: (1) the death of the old elite creates vacancies that can be filled by survivors resulting in upward social mobility; (2) the death of many more poor people results in a labor shortage, which raises the cost of maintaining serfs or laborers. Many more lords are facing ever fewer serfs. A lord is not a God-given title, but merely reflects the existing power balance in society. To the extent that serfs are fewer in number, they can easily switch their lord, and to keep the serfs on the land the lord had to lower rent or raise payment, each of which reduced the profit of the lord. This process results in less inequality. The key example is the Bubonic Plague in the 1350s, which some say has created the conditions by which the Enlightenment era and the Renaissance began. In any case, inequality was sharply reduced after the Plague and has crept back up again until the war-related upheavals of the 20th century.
While the Malthusian trap has been much maligned among some circles, it contains some validity, as a rising population is associated with more people being crowded in limited space, which then empowers the landlords, who tend to be few in number and can keep a tight leash on the toiling masses, who barely have enough land to sustain themselves. The Qing empire oversaw substantial population increases amid scarce land, such that people did not see any real wage gains even as more and more Chinese trekked overseas (including my ancestors) to escape the crowded conditions at home.
It should be noted that Europe still had regional variation in the relative power of the serfs. Western Europe generally granted more freedom to serfs to move around and find a better place to live, while Eastern Europe used force and suppression to ensure that serfs could not move, and under those circumstances inequality was not reduced.
So why is inequality increasing today? Scheidel does not offer unique answers in his conclusion except to restate the argument among economists. The most important claim comes from Thomas Piketty, who along with colleagues has been using cross-national tax data to show the extent to which income inequality has been rising over the last 150 years, and in most western countries since the 1970s. The 1940s were an exceptional period immediately after the end of World War II, where the aforementioned social and political forces leveled the income distribution with the creation of a permanent welfare state financed by progressive income taxes.
But the exceptional period has been ending with the rise of neoliberalism, which is essentially about allowing what Piketty considers to be the natural forces of capitalism to take hold and increase inequality. The natural forces of capitalism are summarized in the formula that r>g, where r is the rate of return on capital and g is economic growth. The postwar period is exceptional to the extent that economic growth was larger than the return on capital, which was undergirded by Keynesian investment policy, progressive taxation, labor-friendly policies, the expansion of the welfare state, national capital controls and stringent financial regulation. Neoliberalism is about removing these barriers to capital, thus returning us to the world of r>g.
To some extent, this rather clinical formula obscures the social relationship that Piketty undoubtedly intended to convey. r is controlled by the capital owners, i.e. the rich, while g is a diffuse force, but has the potential to benefit everybody especially in the form of employment creation, rising wages and social benefits. Thus, if r>g then income and wealth inequality are bound to increase.
This is certainly a strike against the liberal dream enunciated by Simon Kuznets, whose Kuznets curve conveys the S-shaped movement from low inequality- low development to high inequality-high development to lowinequality-high development. The first move is explained by the lack of political institutions to address inequality as development takes off. Think of Deng Xiaoping’s “let some get rich first” statement. Specifically, rural people move into the cities and work in factories enabled by greater technological inputs. Labor competition pushes down wages and guarantees higher profits for the owners. The second move follows as democratic capitalism matures and institutionalizes ways in which wealth gets more evenly distributed. This can happen via the welfare state or via the economists’ beloved market forces: more people accumulate human capital via education and can earn overall higher incomes, which compresses the income distribution.
The Kuznets curve has been soundly refuted, because Piketty notes that Kuznets made his pronouncements on inequality in the 1950s, precisely the moment when inequality in the most developed world had been lowered via changes in regulatory policy. The erroneous assumption is that the 1950s form the end of history. Secondly, Kuznets data analysis was overly focused on Latin America as opposed to other parts of the world, thus reducing the validity of his findings across different contexts. (For the cited literature on criticisms of the Kuznets curve read Wikipedia).
With respect to education, reducing inequality via the provision of more education is the economists’ pipe dream, which the historian Scheidel does not miss out on pointing out. “[T]he strong rise in top incomes is particularly hard to explain with reference to education.” Moreover if education were so important and people are not getting enough of it, we should have an under-educated population. Instead, there is “a growing mismatch in the United States between education and employment in that workers are increasingly overqualified for the work they do” (p.413). Yet education is the panacea that some economists and many politicians tout as if it would make a dent in inequality. As if education would right the wrong-headed ship of lower corporate and top income taxes, labor deregulation, automation and outsourcing of work, lower economic growth and quantitative easing for the banks.
The reason why education is touted as a solution to inequality is that such promotion transfers the responsibility of reducing inequality from the state to the individual, which is more strongly the case in the Anglican countries that addressed deindustrialization of the labor force with rising college attendance and student debt, while countries like Germany or Sweden still stick to the collectivization of education investments in the young generation. But education also does not require larger scale state interventions to mitigate the scale of inequality and retains the myth that meritocracy only breeds success as opposed to plain inheritance and the exploitation of the laboring class.
Returning back to Scheidel: does he have a credible case for the Four Horsemen? I think he has and the implications of that are rather disturbing. Bourgeois reformers will insist, however, that democratic elections and more economic development will ultimately mitigate inequality. But there is no strong evidence for this claim. The major point of neoliberalism, a term that is admittedly overused by its critics and not acknowledged by its supporters (e.g. Dunn 2016), is that it does not matter really which political party is in power as there is only one game in town, which has been especially depressing for the center-left, social democratic parties, who drew clientele from the beneficiaries of the expansive welfare state and the working class. They pass the same neoliberal policies that exacerbate inequality, each time with the reference to some outside force like globalization, technology or international competition that is tying their hands. Why would we want to tax the rich, who have their wealth in tax-shelter islands when they can escape us so easily (aside from the fact that these small island nations can easily be forced to submit tax records to other countries)?
In the very developed world, further economic growth becomes more and more difficult. China is still the world’s most dynamic economy, which can still accommodate many workers with substantial wage gains, yet the accelerated pace and pressure to complete the foreign infrastructure projects (One Belt, One Road) to export capital abroad, the diminishing returns on domestic infrastructure projects, the build-up of debt in local and provincial governments, as well as mounting political crackdowns on internal opposition shows that even China will have to recognize limits to its growth model. In the US, a growth that is made possible by the automation of work ensures that productivity gains are absorbed by Silicon Valley and its distant cousin on Wall Street (think of non-American equivalents in other parts of the world).
In developed countries the major concern is no longer how to generate additional economic growth, but how to find ways to redistribute these gains more broadly (while for instance countries in Africa need substantial economic growth simply because their populations are growing so rapidly). Our tech overlords, including Mark Zuckerberg and Elon Musk, think that there will have to be a basic income, and we cannot dismiss their views as naive. Countless hours of productive labor have been shifted onto the social media platform, which generates billions and billions of dollars in real revenues for the social media platform without returning any material compensation for the users. We get to have social validation via likes and comments on the stupid cat videos we post, and that would suffice to motivate us to continue posting on the site, yet it does not mitigate the injustice of having one platform monopolize our time and monetize our action for their own benefit.
Tesla’s self-driving cars are not only targeting the driving industry (taxi, bus, rail, truck), but also the manufacturing of cars, which is the most robot intensive industry. The potential benefit of cheaper cars may be more than offset by the lack of employment creation in other sectors of the economy.
One area that is fabulously proliferating are the contract-based temp jobs, which are made feasible by the online marketplace (Uber, Airbnb, Mechanical Turk etc.). Given that there are so many workers looking for employment and that it is so easy to find some kind of work online, wages are kept continuously low, and politicians still feel little pressure to expand protective legislation on these online workers. Even if they found it worthwhile to improve the protection for these workers, in the absence of some major revolution I doubt that inequality can be tackled.
And that raises the final question: If we are to believe Scheidel in that we need a catastrophic event to sharply reduce inequality, should we hope for a war or pandemic to break out, for a genuine political revolution to happen (not of the Bernie Sanders type) to overthrow and reinvent the institutions of the state? Scheidel wisely does not answer this question, and he reserves his conclusion section to discuss commonsense middle of the road economic policy (e.g. progressive taxation, expansion of the welfare state). He does acknowledge, however, that “[r]eforms at the margins are unlikely to have a significant effect on current trends in the distribution of market income and wealth” (p.436). He then goes on to also refute the notion that we can have mass mobilization warfare, as advanced technology, especially nuclear weapons, deter mutually assured destruction, and the proliferating use of drones in warfare make personnel mobilization less desirable. But without mass mobilization there is no reason for leaders to involve their population and level the wealth distribution.
He also thinks that revolutions are unlikely to happen and state collapse is restricted to sub-Saharan Africa and some countries in the Middle East (e.g. Syria). Pandemics will only affect the less developed nations as the more developed nations will quickly work to isolate disease. In each case (no war, no disease, no revolution, no state failure), our life can remain relatively unperturbed by violent shocks, yet we are bound to see more headlines of increasing income and wealth inequality. I remember reading the first Oxfam study a few years ago, when 400 individuals own as much as half the world population, and now we are down to 8 people. There no longer is any shock effect with these numbers, but we know that wealth is getting more concentrated. The poorest people may not necessarily be getting worse off, but the wealthy are just making most of the gains, and there just aren’t any global institutions that can halt this trend.
It is this psychological pessimism and not the empirical accuracy which forms the greatest weakness in Scheidel’s work. I have previously reviewed works by Wolfgang Streeck (2014; 2017) and Claus Offe (2015), each of them brilliant welfare state/ capitalism/ political economy scholars in their own right. What the Germanic writers (Scheidel is Austrian) all seem to have in common is their Hegelian vision of the totality and the structuralist vision in their analyses. The captivating part about reading Karl Marx Capital was not the many British factory reports that he quoted, which demonstrated the plight of the working class toiling in the factories in the mid 19th century, but the exposition of the logic of the capitalist system as a whole.
While Scheidel’s scope of work is not nearly as ambitious as that of the other German theorists, he does attempt to answer big questions pertaining to inquiry in historical sociology and historically-grounded political economy. But as a Germanic structuralist, the activist reader feels like he/she has no agency and cannot do much to mitigate inequality. Even the moderate policy prescriptions that Scheidel advocates for may be considered tinkering around the margins. Inequality cannot be resolved easily, but the irony is that such condition justifies the advocacy of socialism, because there is no need for socialism in a very egalitarian society.