Capital in the Twenty-First Century (2 page)

Nevertheless, the distribution question also deserves to be studied in a systematic
and methodical fashion. Without precisely defined sources, methods, and concepts,
it is possible to see everything and its opposite. Some people believe that inequality
is always increasing and that the world is by definition always becoming more unjust.
Others believe that inequality is naturally decreasing, or that harmony comes about
automatically, and that in any case nothing should be done that might risk disturbing
this happy equilibrium. Given this dialogue of the deaf, in which each camp justifies
its own intellectual laziness by pointing to the laziness of the other, there is a
role for research that is at least systematic and methodical if not fully scientific.
Expert analysis will never put an end to the violent political conflict that inequality
inevitably instigates. Social scientific research is and always will be tentative
and imperfect. It does not claim to transform economics, sociology, and history into
exact sciences. But by patiently searching for facts and patterns and calmly analyzing
the economic, social, and political mechanisms that might explain them, it can inform
democratic debate and focus attention on the right questions. It can help to redefine
the terms of debate, unmask certain preconceived or fraudulent notions, and subject
all positions to constant critical scrutiny. In my view, this is the role that intellectuals,
including social scientists, should play, as citizens like any other but with the
good fortune to have more time than others to devote themselves to study (and even
to be paid for it—a signal privilege).

There is no escaping the fact, however, that social science research on the distribution
of wealth was for a long time based on a relatively limited set of firmly established
facts together with a wide variety of purely theoretical speculations. Before turning
in greater detail to the sources I tried to assemble in preparation for writing this
book, I want to give a quick historical overview of previous thinking about these
issues.

When classical political economy was born in England and France in the late eighteenth
and early nineteenth century, the issue of distribution was already one of the key
questions. Everyone realized that radical transformations were under way, precipitated
by sustained demographic growth—a previously unknown phenomenon—coupled with a rural
exodus and the advent of the Industrial Revolution. How would these upheavals affect
the distribution of wealth, the social structure, and the political equilibrium of
European society?

For Thomas Malthus, who in 1798 published his
Essay on the Principle of Population,
there could be no doubt: the primary threat was overpopulation.
¹
Although his sources were thin, he made the best he could of them. One particularly
important influence was the travel diary published by Arthur Young, an English agronomist
who traveled extensively in France, from Calais to the Pyrenees and from Brittany
to Franche-Comté, in 1787–1788, on the eve of the Revolution. Young wrote of the poverty
of the French countryside.

His vivid essay was by no means totally inaccurate. France at that time was by far
the most populous country in Europe and therefore an ideal place to observe. The kingdom
could already boast of a population of 20 million in 1700, compared to only 8 million
for Great Britain (and 5 million for England alone). The French population increased
steadily throughout the eighteenth century, from the end of Louis XIV’s reign to the
demise of Louis XVI, and by 1780 was close to 30 million. There is every reason to
believe that this unprecedentedly rapid population growth contributed to a stagnation
of agricultural wages and an increase in land rents in the decades prior to the explosion
of 1789. Although this demographic shift was not the sole cause of the French Revolution,
it clearly contributed to the growing unpopularity of the aristocracy and the existing
political regime.

Nevertheless, Young’s account, published in 1792, also bears the traces of nationalist
prejudice and misleading comparison. The great agronomist found the inns in which
he stayed thoroughly disagreeable and disliked the manners of the women who waited
on him. Although many of his observations were banal and anecdotal, he believed he
could derive universal consequences from them. He was mainly worried that the mass
poverty he witnessed would lead to political upheaval. In particular, he was convinced
that only the English political system, with separate houses of Parliament for aristocrats
and commoners and veto power for the nobility, could allow for harmonious and peaceful
development led by responsible people. He was convinced that France was headed for
ruin when it decided in 1789–1790 to allow both aristocrats and commoners to sit in
a single legislative body. It is no exaggeration to say that his whole account was
overdetermined by his fear of revolution in France. Whenever one speaks about the
distribution of wealth, politics is never very far behind, and it is difficult for
anyone to escape contemporary class prejudices and interests.

When Reverend Malthus published his famous
Essay
in 1798, he reached conclusions even more radical than Young’s. Like his compatriot,
he was very afraid of the new political ideas emanating from France, and to reassure
himself that there would be no comparable upheaval in Great Britain he argued that
all welfare assistance to the poor must be halted at once and that reproduction by
the poor should be severely scrutinized lest the world succumb to overpopulation leading
to chaos and misery. It is impossible to understand Malthus’s exaggeratedly somber
predictions without recognizing the way fear gripped much of the European elite in
the 1790s.

In retrospect, it is obviously easy to make fun of these prophecies of doom. It is
important to realize, however, that the economic and social transformations of the
late eighteenth and early nineteenth centuries were objectively quite impressive,
not to say traumatic, for those who witnessed them. Indeed, most contemporary observers—and
not only Malthus and Young—shared relatively dark or even apocalyptic views of the
long-run evolution of the distribution of wealth and class structure of society. This
was true in particular of David Ricardo and Karl Marx, who were surely the two most
influential economists of the nineteenth century and who both believed that a small
social group—landowners for Ricardo, industrial capitalists for Marx—would inevitably
claim a steadily increasing share of output and income.
²

For Ricardo, who published his
Principles of Political Economy and Taxation
in 1817, the chief concern was the long-term evolution of land prices and land rents.
Like Malthus, he had virtually no genuine statistics at his disposal. He nevertheless
had intimate knowledge of the capitalism of his time. Born into a family of Jewish
financiers with Portuguese roots, he also seems to have had fewer political prejudices
than Malthus, Young, or Smith. He was influenced by the Malthusian model but pushed
the argument farther. He was above all interested in the following logical paradox.
Once both population and output begin to grow steadily, land tends to become increasingly
scarce relative to other goods. The law of supply and demand then implies that the
price of land will rise continuously, as will the rents paid to landlords. The landlords
will therefore claim a growing share of national income, as the share available to
the rest of the population decreases, thus upsetting the social equilibrium. For Ricardo,
the only logically and politically acceptable answer was to impose a steadily increasing
tax on land rents.

This somber prediction proved wrong: land rents did remain high for an extended period,
but in the end the value of farm land inexorably declined relative to other forms
of wealth as the share of agriculture in national income decreased. Writing in the
1810s, Ricardo had no way of anticipating the importance of technological progress
or industrial growth in the years ahead. Like Malthus and Young, he could not imagine
that humankind would ever be totally freed from the alimentary imperative.

His insight into the price of land is nevertheless interesting: the “scarcity principle”
on which he relied meant that certain prices might rise to very high levels over many
decades. This could well be enough to destabilize entire societies. The price system
plays a key role in coordinating the activities of millions of individuals—indeed,
today, billions of individuals in the new global economy. The problem is that the
price system knows neither limits nor morality.

It would be a serious mistake to neglect the importance of the scarcity principle
for understanding the global distribution of wealth in the twenty-first century. To
convince oneself of this, it is enough to replace the price of farmland in Ricardo’s
model by the price of urban real estate in major world capitals, or, alternatively,
by the price of oil. In both cases, if the trend over the period 1970–2010 is extrapolated
to the period 2010–2050 or 2010–2100, the result is economic, social, and political
disequilibria of considerable magnitude, not only between but within countries—disequilibria
that inevitably call to mind the Ricardian apocalypse.

To be sure, there exists in principle a quite simple economic mechanism that should
restore equilibrium to the process: the mechanism of supply and demand. If the supply
of any good is insufficient, and its price is too high, then demand for that good
should decrease, which should lead to a decline in its price. In other words, if real
estate and oil prices rise, then people should move to the country or take to traveling
about by bicycle (or both). Never mind that such adjustments might be unpleasant or
complicated; they might also take decades, during which landlords and oil well owners
might well accumulate claims on the rest of the population so extensive that they
could easily come to own everything that can be owned, including rural real estate
and bicycles, once and for all.
³
As always, the worst is never certain to arrive. It is much too soon to warn readers
that by 2050 they may be paying rent to the emir of Qatar. I will consider the matter
in due course, and my answer will be more nuanced, albeit only moderately reassuring.
But it is important for now to understand that the interplay of supply and demand
in no way rules out the possibility of a large and lasting divergence in the distribution
of wealth linked to extreme changes in certain relative prices. This is the principal
implication of Ricardo’s scarcity principle. But nothing obliges us to roll the dice.

By the time Marx published the first volume of
Capital
in 1867, exactly one-half century after the publication of Ricardo’s
Principles,
economic and social realities had changed profoundly: the question was no longer
whether farmers could feed a growing population or land prices would rise sky high
but rather how to understand the dynamics of industrial capitalism, now in full blossom.

The most striking fact of the day was the misery of the industrial proletariat. Despite
the growth of the economy, or perhaps in part because of it, and because, as well,
of the vast rural exodus owing to both population growth and increasing agricultural
productivity, workers crowded into urban slums. The working day was long, and wages
were very low. A new urban misery emerged, more visible, more shocking, and in some
respects even more extreme than the rural misery of the Old Regime.
Germinal, Oliver Twist,
and
Les Misérables
did not spring from the imaginations of their authors, any more than did laws limiting
child labor in factories to children older than eight (in France in 1841) or ten in
the mines (in Britain in 1842). Dr. Villermé’s
Tableau de l’état physique et moral des ouvriers employés dans les manufactures,
published in France in 1840 (leading to the passage of a timid new child labor law
in 1841), described the same sordid reality as
The Condition of the Working Class in England,
which Friedrich Engels published in 1845.
⁴

In fact, all the historical data at our disposal today indicate that it was not until
the second half—or even the final third—of the nineteenth century that a significant
rise in the purchasing power of wages occurred. From the first to the sixth decade
of the nineteenth century, workers’ wages stagnated at very low levels—close or even
inferior to the levels of the eighteenth and previous centuries. This long phase of
wage stagnation, which we observe in Britain as well as France, stands out all the
more because economic growth was accelerating in this period. The capital share of
national income—industrial profits, land rents, and building rents—insofar as can
be estimated with the imperfect sources available today, increased considerably in
both countries in the first half of the nineteenth century.
⁵
It would decrease slightly in the final decades of the nineteenth century, as wages
partly caught up with growth. The data we have assembled nevertheless reveal no structural
decrease in inequality prior to World War I. What we see in the period 1870–1914 is
at best a stabilization of inequality at an extremely high level, and in certain respects
an endless inegalitarian spiral, marked in particular by increasing concentration
of wealth. It is quite difficult to say where this trajectory would have led without
the major economic and political shocks initiated by the war. With the aid of historical
analysis and a little perspective, we can now see those shocks as the only forces
since the Industrial Revolution powerful enough to reduce inequality.