A History
Of Inequity
By Ian Morris
At an event in Beijing last November, I had the good fortune
to meet the French economist Thomas Piketty, who has sold 1.5 million copies of
his book, Capital in the Twenty-First Century, since it was first
published in 2013. Pacing up and down in front of a packed auditorium, Piketty
explained that because the rate of return on capital is now higher than the
growth rate of the global economy, the proportion of the world's wealth that is
owned by a small elite will likely keep increasing; in other words, we should
expect to see a divergence of wealth as the rich get much richer. As
his book says, "capitalism automatically generates arbitrary and
unsustainable inequalities that radically undermine the meritocratic values on
which democratic societies are based."
No strategic forecaster can afford to ignore this alarming
prediction — or the enthusiastic response it got from the audience in Beijing. In
the 20th century, the two world wars were the only force powerful enough to
reverse the concentration of wealth in the elite and the mounting class
conflict; in the 21st century, we seem to be falling back into a comparable
world of revolution, political extremism and mass violence.
It was hard to be sure whether the members of the audience
were enthusiastic because they thought Piketty was forecasting the collapse of
Western democratic economies or because they thought his words applied equally
well to their own society. After all, China could almost be the poster child
for the process Piketty described. When Mao Zedong died in 1976, post-tax and
-transfer income inequality stood at 0.31 on the Gini index. (The Gini
coefficient runs from 0, meaning everyone in a country has the same income, to
1, meaning one person earns all the country's income and everyone else earns
nothing.) By 2009, China's income inequality score had soared to 0.47, where it
stubbornly remains after peaking at 0.51 in 2003. Though Chinese tax returns are
too opaque to make reliable calculations regarding wealth inequality, or the
uneven distribution of assets as opposed to income, he is almost certainly
correct that this figure has risen even faster than the country's income
inequality.
When a group of us withdrew for lunch, though, our Chinese
hosts pushed back against Piketty's thesis: Hadn't Deng Xiaoping taught us that
getting rich is no sin? Isn't rising inequality just the price China must pay
to escape from poverty? Though Piketty would agree that there is
nothing inherently wrong in accumulating a lot of wealth, he would also insist
that it is very bad indeed if that accumulation results in too much inequality.
The big issue in our discussion — what I have come to think of as
"the lunch question" — is
whether the world is now crossing into an era of too much inequality.
We failed to reach a consensus as we ate, but after thinking
about the question for a few more months, I would like to use this column to
make some suggestions. I suspect that our biggest mistake during that lunch was
that we failed to analyze the question from a sufficiently long-term
perspective. Piketty's research looks back nearly 250 years, but to see the whole
picture we need to consider the last 15,000 years, going back to the age before
agriculture was invented. When we do, we begin to see that each age
seems to get the inequality it needs. To put it more precisely, different economic
systems function best with different levels of inequality, creating selective
pressures that reward groups moving toward the most effective level and punish
those moving away from it. It is also clear that transitions between systems
can be particularly traumatic, and it is possible that we are on the
verge of such a transition now.
A Brief History of Inequality
Let me take a moment to sketch what inequality has looked
like over the past 15,000 years. Before the dawn of agriculture, mankind was
made up of hunter-gatherers who captured the energy they needed to survive from
wild plants and animals. This economic system rewarded those who
lived in tiny bands and moved around constantly, and punished those who tried
to live in large groups and stay in one place (they simply starved). It
was very difficult to create permanent inequality because foraging bands had no
room for kings and aristocrats and little more for accumulated wealth. Consequently,
foragers tended to be desperately poor, but equally so. (Though the
comparison is rather misleading, British economist Angus Maddison suggested
that the typical hunter-gatherer had a daily income equivalent to $1.10 in 1990
U.S. values.) Anthropological studies of today's few remaining foraging
societies suggest that their Gini coefficients for both income and wealth
inequality averaged around 0.25 — well below Maoist China's score — and
archaeological evidence for prehistoric foragers seems consistent with this
figure.
Farming began around 9600 B.C. in what we now call the Middle
East, appearing some 2,000 years later in Pakistan and China, another 1,000
years later in Mexico and Peru, and later still in several other parts of the
world. Living off domesticated plants and animals changed man's way of life
and provided far more energy than foraging had. Bigger stores of food
were able to sustain more people, for longer amounts of time, and
the global population shot up from 6 million in 10,000 B.C. to 250 million in 1
B.C. Large social collectives that stayed in one place working their
fields now flourished at the expense of smaller and less sedentary groups. (The
Roman Empire had about 60 million subjects, 1 million of whom lived in the city
of Rome itself.) Between 9600 B.C. and 1750 A.D., nearly all of the world's foraging
societies went extinct.
Although average incomes rose in agricultural communities
(reaching an average of about $1.50-$2.20 per day, by Maddison's calculations),
the economic structure also rewarded societies that became less equal. The age
of farming required much more complex divisions of labor than the foraging
world, and while free markets did make a certain amount of specialization possible,
laws
backed by state violence played an even larger role. Some people became
aristocrats or godlike kings, while others became peasants or slaves, and
economic inequality surged. The average Gini coefficient for income
inequality in agricultural societies was around 0.45, nearly twice as high as
in foraging societies. (remember low is equal and 1 is the highest inequality)
The Roman Empire's score probably lay between 0.42 and 0.44; in 1688 England,
it reached 0.47; and in France on the eve of the revolution, it was an
agonizing 0.59. Wealth inequality leaped higher still: Gini scores regularly topped
0.80, and one Roman plutocrat who died in 8 B.C. left in his will 7,200 oxen,
257,000 other animals, 4,116 slaves and enough cash to feed half a million
people for a year.
The
Industrial Revolution changed everything once again.
The awesome power of fossil fuels released a new flood of
energy as steam and electricity drove machines that vastly augmented human and
animal labor. New factories churned out previously unimaginable quantities of
goods and liberated people from much of the manual drudgery that characterized
the agricultural age. As when farming displaced foraging, our
ancestors converted part of their newfound energy into more people and part
into higher incomes. (In A.D. 1800 there were fewer than 1 billion
people in the world; now there are more than 7 billion. The global average
income also rose roughly tenfold over that period, reaching around $25 per day
in 1990 U.S. values.)
Exploiting fossil fuels effectively requires even more complex
divisions of labor than farming, and the failures of fascism and communism
suggest that societies in which the free market takes the lead rather than the
state tend to perform better. But this economic system produces its own
tension: On the one hand, specialists providing crucial services can convert
their expertise into political and economic power, which drives up inequality;
on the other hand, wealth in a market society depends on the existence of an affluent
middle class that can buy an abundance of goods and services. Too
much inequality carries the risk of killing the goose that laid the golden egg.
Like the farming and foraging civilizations before it, our fossil fuel
world has an equilibrium point — a "right" level of inequality — and
societies that move toward this optimum balance will flourish while those that
move away from it will not. The most successful governments often
recognize this, using progressive taxation and other fiscal transfers to push
economic inequality toward what they hope is the sweet spot. For example, the
member states of the Organization for Economic Cooperation and Development
drove post-tax income inequality down into hunter-gatherer territory by 1970,
reaching an average Gini coefficient of 0.26, but economic difficulties and
voters' rightward shift in the following decades suggest that this may have
been too low. By 2012, the bloc's average post-tax income inequality had drifted back
up to 0.31, and new waves of economic difficulty and public anger are now
suggesting that this level is too high.
A Question
With No Easy Answer
It is tempting to conclude from our historical overview that
we are in a position to answer the lunch question. It seems clear that the
governments of modern fossil fuel economies should aim to keep post-tax income
inequality between 0.25 and 0.35, and to keep wealth inequalities between 0.70
and 0.80. Today, many countries are at or above the upper bounds of these ranges,
suggesting that Piketty is right to see trouble ahead.
Still, long-term history also suggests that there is more to
the story. At least four additional forces will help shape the direction our
current society takes.
The first is increasing scale.
Between the foraging
and the farming ages, the typical size of economically integrated populations
grew from a few dozen people to a few million, and integrated territories grew
from a few hundred square kilometers to a few hundred thousand. Since the
Industrial Revolution, integrated populations have expanded into the billions
and integrated territory is beginning to encompass the entire planet. This
means that within-nation inequality, which has long drawn economists'
attention, is no longer the main story. Now we must pay at least as much
attention to global inequality, where the picture looks very different.
Between 1820 and 1950, a handful of nations in Europe and
North America transitioned from farming to fossil fuel economies, pulling far
ahead of the rest of the world. According to economist Branko Milanovic, global
income inequality nearly quadrupled during this period to reach a Gini score of
0.55. After 1945, as the Industrial Revolution spread to the rest of the world,
the global Gini coefficient leveled off and has even dropped since 2000 as
Brazil, Russia, India and China have taken off. The rich are getting richer,
but the poor are getting richer faster. Piketty is clearly correct that
within-nation inequality has risen since the 1970s, but if present trends
continue, by 2050 the Gini score for between-nation income inequality will be
heading back toward the 0.25-0.35 range, where fossil fuel economies work best.
The second force is effective demand.
Fossil fuel economies depend on having affluent middle classes that are
able to pay for vast amounts of goods and services, and rising inequality
threatens that. Although rich countries have seen only sluggish GDP
growth and their populations' richest 1 percent has captured the bulk of the
profits over the past four decades, their citizens have generally seen
stagnating rather than declining incomes. European and U.S. demand
remain enormous, and 2 billion Asians are quickly joining the global market.
Inequality is uncomfortably high, but if effective demand grows rapidly enough
to absorb the world's output, we can reasonably hope that the 21st century will
escape some of Piketty's darker predictions.
The third force involves new class structures.
Since the rise of the first states 5,000 years ago, small
political and economic units have been constantly absorbed into larger ones,
creating dramatic consequences for local elites. When a tribe was taken over by
a larger empire, its chief might find himself impaled or perhaps just
marginalized, unable to compete in a bigger, more sophisticated and often more
vicious struggle. Then again, he also might suddenly find a larger stage for
his ambitions, on which he could rise to become the governor of a rich
province, or perhaps a senator at the imperial capital, or even an adviser to
the emperor himself. Similarly, a poor man might find himself
ground down into debt bondage or slavery, or he might find new options as a
merchant, mercenary or migrant in a wider world. There have always been winners
and losers.
In the 21st century, we are working from the same script. For
some, the globalization of the fossil fuel economy has presented extraordinary
opportunities to join an international, Anglophone, tech-savvy elite, or at
least to move from rural poverty to a better-paid factory job. For
others, downward mobility has become a danger (at times, even a reality) as the
number of qualified applicants for slots in the global elite and middle class
expands at a faster rate than the number of available positions. As Jay Ogilvy
put it in his recent Global Affairs column, alarming numbers of people are
being "left behind."
The fourth
force
and potentially the most important of all, is the
possibility that we could be on the verge of leaving the age of fossil fuels
altogether. New energy sources, technologies that erode the boundaries between mind
and machine, and shifts toward living in virtual rather than physical spaces
may all threaten — or promise — to make the 21st century the biggest rupture in
human history, dwarfing the agricultural and industrial revolutions. A
century from now, trying to find the right level of inequality for a fossil
fuel society might seem as irrelevant as determining the right level of
inequality for Neanderthals does today.
All things considered, long-term history suggests that answering
"the lunch question" will not be as easy as I initially thought.
Each economic system of energy capture has an ideal level of inequality, and
perhaps we can even specify that in the fossil fuel world it is a Gini
coefficient of 0.25-0.35 for income and 0.70-0.80 for wealth. However, running
the numbers and looking for ways to stay in the right range is only the
beginning.
The real problem, as history
shows, is that everything is connected to everything else. Tensions between
those who are making it and those being left behind could easily exacerbate the
"arbitrary and unsustainable inequalities" that Piketty identifies.
Then again, a shift from regional economies to a global market coupled with the
ongoing expansion of effective demand could soothe them. Or perhaps in a post-fossil
fuel and partly post-human world, inequalities far beyond those Piketty
imagined might start to seem entirely reasonable.
