December 1, 2007 / New York TIMES
As Always, an Unequal Pie
By DAN MITCHELL
The distribution of wealth lies at the heart of political economics. Nations and empires have risen and fallen, and millions have died, as a result of humanity's struggle to decide how (or whether) to divide wealth.
But for all that, the level of wealth inequality has remained remarkably consistent over the last 2,000 years, according to a recent study by Branko Milanovic, a researcher with the World Bank, and two economics professors, Peter H. Lindert of the University of California, Davis, and Jeffrey G. Williamson of Harvard University.
While "human civilization has advanced by leaps and bounds over the past two millennia, income inequality has stayed relatively the same," Zubin Jelveh of Portfolio.com wrote about the study.
The "inequality extraction ratio" is basically the share of the wealth difference taken by "elites." Since the United States is the wealthiest nation in history, the potential for elites taking a bigger share of the wealth (without allowing mass starvation) is greater.
initial comment: This does not follow logically. Just because total wealth production is larger (making "the U.S. the wealthiest nation in history") does not mean that the rich have the ability to take a larger share. Just because the pie is larger does not mean that the rich automatically have the ability to grab a bigger percentage of that pie.
The way this can make sense is if the "total wealth" is defined by the amount of wealth produced beyond a given subsistence level and the "share" going to the rich is defined as a fraction of total production (including the subsistence level). That is, as the pie grows relative to the minimum size of the pie needed for human survival, there is more room for the rich to grab a bigger piece of the total without cutting into that minimum subsistence part of the pie. The rich can gain while the non-rich do better than subsistence.
[In math: let "total wealth" produced per person be equal to W, the rich elite's per-person part of that total be R, and the production necessary to produce a subsistence living standard for one person be M (standing for "minimum"). The rich elite's percentage share -- also known as the "inequality extraction ratio" -- would equal R/W. Assume that M is constant. Having W be below M would have dire consequences (starvation, plague, revolution, etc.)
As W rises, there is a greater "surplus" above subsistence (S = W - M). Some of this broadly-defined surplus is received by the workers and peasants (call this extra per person income E). Ignoring the rich elite's attainment of subsistence, the total per-person income of the lower classes would be E + M.
On the other hand, the total surplus S would equal the total above-subsistence incomes of both classes, R + E. As S/W rises, there is more room for both a bigger share of total wealth production to go to the rich (R/W rising) and for the above-subsistence incomes of workers to represent a larger piece of the total pie (E/W rising).
Alternatively, note that by definition, total production W = R + E + M. Dividing through by W, this means that (the share of the rich, R/W) plus (the share of above-subsistence wages, E/W) plus (the share of subsistence income, M/W) equals unity. The rise in the surplus relative to W means that M/W falls. So both R/W and E/W can rise.]
In prose (whew!), if a country is at or near the subsistence level, there's no room for the rich to skim the cream. But if the country is far above subsistence, the rich can do so without empoverishing the rest, i.e., pushing them toward or below subsistence.
The role of subsistence is not discussed in the NYT. But this issue does appear in the original article: for example, the authors say that "As hunter-gathers slowly evolved into ancient agricultural settlements with surpluses above subsistence, income inequality must have risen."
This is very revealing. I can't claim to have read the whole (88 page) article which the basis for the pontifications of Mitchell and others, but it seems that "subsistence" is defined according to the standard of living of hunter-gatherers. Then, as we get further and further from producing at that level, the rich have more room to rob. The fact that they have not taken more is then used to praise them for being wise, moderate, or generous (see below). The share of total wealth production going to the rich has not risen, so the workers and peasants have seen their standards of living rise relative to subsistence.
[In math, R/W has been (roughly) constant. So the rising surplus as a percentage of total production (S/W) has been translated into a rising share of above-subsistence incomes of the workers and peasants in total production (E/W).)]
But what if the subsistence is not constant? The rise of civilization (as we know it) has been associated with an increase in all sorts of needs. (Needs, in my book, refer to the costs that must be paid to be a human living in society.) Nowadays, I "need" to have a car to get to work (because I live in Los Angeles), while I "need" to have indoor plumbing (by law). I cannot communicate with others without a telephone or some other electronic system. Living in an alienated society, I must have Prozac or some other drug. Etc. The costs of being a human being always seems to be rising. (It was relatively easy to be a hunter-gatherer.)
Rising subsistence means that the cost of maintaining the workers and peasants has been rising over time. The production of an economic surplus -- which is the source of the income for the rich -- likely has not increased as quickly as total production. The fact that the share going to the rich has not risen may not be a sign of their generosity or moderation at all. It might be the result of a rising subsistence level. As noted below, it might also be the result of efforts by the lower classes to resist the power grab by the rich.
The article continues:
But they have not done so. "Thus," the researchers write, "the social consequences of increased inequality may not entail as much relative impoverishment, or as much perceived injustice, as might appear."
Tim Harford of Slate.com, writing about the same report, called this"faint praise for the United States, perhaps." But, he added: "It is interesting to observe that while modern societies are rich enough to be much more unequal than their predecessors, they show similar patterns of income inequality. Perhaps — I am speculating wildly —human societies have some hard-wired tolerance for inequality?"
Or perhaps, no matter how wealthy a society, there will always be income inequality, whether or not we are "hard wired" for it.
final comment: Or perhaps every time the working and poor classes start raising the share of the product they receive, the "elite" calls in the big guns (General Pinochet and his ilk) to suppress them? And every time the rich elite gets too greedy, it leads to a 1929-33 type collapse, a massive upsurge in class struggle from below, or something similar? But the time scale of this data does not allow anyone to conclude anything at all about the causes of the stability of the numbers. In any event, we cannot assume that society is "hard wired" in any way.
There are also more measurement problems than one can shake A Sunday New York TIMES at. How, for example, is the product of a self-sufficient peasant measured? it may be possible nowadays, but what about for one 1000 years ago? In the original article, the authors quote the SRPE winning economist, Simon Kuznets: “Do you really think you can get good conclusions from bad data?” The question is still apt.