all the things





The Great Leveler

26 Feb 2018

Continuing in my reading trend of all things about inequality, The Great Leveler is a history book attempting to find causes for how income and wealth inequality have been reduced in the past. Ideally this would be some noble cause that leads to a policy recommendation for how we can address the current state of increasing inequality. But alas he finds that the only consistent causes of reduced inequality of any noticable scale were the result of violence. The more violent the compression.

I highly recommend reading both this book as well as Capital in the 21st Century with the latter being first. It is important to understand inequality both in income and wealth, both historically and currently, and across different countries before one asks how this has changed. Piketty's book will give you that foundation in the numbers based on the best currently available data. Whether you agree with him or not is irrelevant, the presentation of the data is all that is important for this particular book.

Summarizing this book is actually somewhat easy. First, one needs to understand that there is a limit to inequality dependent on how much surplus exists beyond the minimum amount of income required to keep people alive. Therefore looking at absolute inequality or the quality of life of people at the bottom over different periods in time can be misleading. Second, wealth and income are two different things and inequality can exist in both, one or the other, or neither within the same society. It is rare for them not to be somewhat linked, but it is feasible depending on a lot of different economic factors. Nonetheless the distinction is not all that important for the broad strokes of the argument.

With that out of the way, there have only been a handful of periods in history where societies have moved from high levels of inequality to low levels of inequality (where high and low are relative). All of those times have had an a precipitating event or events that was violent in nature. There have been periods where inequality has shifted peacefully but it has either been very minimal in degree or it was shortly reverted due to some violent backlash. Moreover, the extent of the violence goes hand in hand with the extent of the leveling.

There are four main sources of leveling in history: mass mobilization warfare, revolution, state collapse, and epidemics. Mass mobilization is speficied with war as typical war that does not involve the entire country mobilizing all of its resources to the effort has not had equalizing effects.

The downside to this observation is that nothing else has ever worked. Moreover we are moving towards increasing inequality. Hence, we are going to keep getting more unequal until something violent happens. The scale of that violence would have to be unprecedented because of the current structure of our modern economies.

He does go in to why we have inequality in the first place and to a limited degree discusses whether this is good or bad. First,

the concentration of resources in the hands of the few [come from] two principal factors: economic development and predatory behavior by those powerful enough to appropriate wealth well in excess of what their activities might earn them in competitive markets.

So inequality comes from actual economic progress but also from predatory behavior. The predatory behavior does not have to be obviously negative, but means basically rent taking in economic terms. This can manifest for example in CEO compensation growing beyond any reasonable link to economic development beyond their ability to extract that extra rent through whatever means they have available.

We have also seen that

assortative mating--more specifically, the growing economic similarity of marriage partners--has widened gaps between households and has been credited with causing some 25 percent to 30 percent of the overall increase in American earnings inequality between 1967 and 2005.

Along with the fact that

between 1913 and 2008, the development of top income shares closely tracked the degree of polarization but with a lag of about a decade: changes in the latter preceded changes in the former but generally moved in the same direction--first down, then up. ... Thus elite incomes in general and those in the finance sector in particular have been highly sensitive to the degree of legislative cohesion and have benefited from worsening gridlock.

The future does not look bright.

I found one line particularly fascinating

higher schooling premiums are associated with lower intergenerational earnings mobility

This means that if you live in a country where the return to an additional year of schooling is high, there is less likelihood for children to end up in different income brackets than their parents. This is the opposite of what one might naively expect. That is, a typical free market view that everyone is equal to earn what they work for would say that if I study and go to school and work hard then I have just as much chance to make money as anyone else who also does. The idea being that if I put more time into school so that I get paid more for my more schooling then children in lower economic classes just need to stay in school to move economic classes. But that is so blatently false based on the data and moreover in the US in particular where the schooling premium is quite high, the level intergenerational mobility is laughable to the point that anyone who believes America is an equal playing field is delusional.

Category: book