Historic Origins of Inequality


[Guest author: Tanush Jagdish, Kalamazoo College ’18]

“Those who don’t know history are destined to repeat it,” Edmund Burke once famously said.  I thought this post might be a nice opportunity to think about what, historically, has caused the extreme wealth inequality we see today.  Of course, given the results Tobochnik et al’s models, a more appropriate question might be — what, historically, has the government failed to do that lead the national wealth distribution to its inevitably skewed form?

Thomas Piketty, a French economist, laid down a lengthy answer to this question in his book Capital in the Twenty-First Century.  In the March 2014 issue of the New Yorker, John Cassidy provided a brilliant summary of Piketty’s arguments.

Cassidy looks at four points:
1.    Inequality reached a high during the roaring twenties but dropped during the next four decades.  However, starting in the late eighties, inequality took a sharp upward turn, and we are back today wealth-distribution wise where we were in the 20’s!
2.    The top 1% hasn’t actually taken up a much greater share of income than it did in the 20’s.  Instead, much of the extra wealth for the super-rich comes from interests and dividends from pre-owned capital.  A self-sufficient cycle, in some sense.
3.    Rising inequality is not limited to the United States.  As shown in Tobochnik et al’s model, wealth inequality is an inexorable result in any random transaction-based system. Canada, Australia, India, Indonesia, South Africa…the gap between the rich and the poor continues to increase everywhere.
4.    Pure capitalism doesn’t work because, according to Piketty, capitalism tends to increase its agents’ profits at a faster rate than the general wage income.  Or, as Cassidy puts it, “when the rate of return on capital exceeds the rate of economic growth, inequality tends to rise”.

Cassidy’s explanation of Piketty’s rather complicated arguments are elegant and well organized.  Definitely worth multiple reads!