Is wealth inequality just getting back to normal?

Yesterday’s Guardian led with the headline “Britain’s five richest families worth more than poorest 20%“. The story came from this Oxfam report which said:

The richest 5 families in Britain are wealthier than the bottom 20 percent of the population in the UK (with a wealth of £28.2 billion and £28.1 billion respectively).

The basis of the calculation:

Oxfam used the latest list of billionaires from Forbes released on March 4, 2014 to calculate the accumulated wealth of the richest families in Britain and data from Credit Suisse Global WealthDatabook to calculate the wealth of the bottom 10 and 20 percent of the population.

Oxfam don’t say what they mean by a family or how many people they have included in each one but even if they mean an extended family of 100 people, that would still be 500 people with the same wealth as the bottom 20 percent.

At first this sounds crazy but they are not talking about income here, they are talking about accumulated wealth. The poorest, of course, have very few assets and spend most of their income. The total accumulated wealth of the poorest 20 percent probably consists of the houses belonging to the minority and a few pension investments. Could it really be that the wealth of a handful of people exceeds that of the bottom 12 million or so? 

Someone else with more time than me can pick away at Oxfam’s sources if they want. Chances are, though, that even if five families don’t already own more wealth than the bottom 20 percent, they soon will.

Last week, the English version of Capital in the Twenty-First Century came out. It was written by Thomas Piketty, professor at the Paris School of Economics and the man behind the World Top Incomes Database that I have referred to in a number of posts. In his new book, he argues that the concentration of wealth is a process that was interrupted by high growth and the wars of the twentieth century. Now all that is over, the accumulation of wealth by the few has resumed. As a result, inequality is rising again.

Given that it only appeared last week I haven’t read it but even the reviews are fascinating.

This one on Amazon gives a succinct summary:

The major conclusion can be summarized very briefly: Piketty has found that, over the long run, the return on capital is higher than the growth rate of the overall economy. In other words, accumulated and inherited wealth becomes a larger fraction of the economic pie over time. This happens more or less automatically, and there is no reason to believe this trend will change or reverse course.

Piketty argues that the reduction in inequality in developed countries after World War II was a “one-off” that was driven entirely by political choices and policies. It did not happen automatically. Those policies have now been largely reversed, especially in the United States. As a result the drive toward increased inequality is likely to be relentless.

As the Economist says:

It is, first and foremost, a very detailed look at 200 years’ worth of data on the distribution of income and wealth across the rich world (with some figures for large emerging markets also included). This mountain of data allows Mr Piketty to tell a simple and compelling story. Wealth as a share of income held steady at very high levels in the 18th and 19th centuries, contributing to stark inequalities in wealth and income. Rising worker wages in the late 19th and early 20th centuries stabilised growth in wealth concentrations but did nothing to reduce inequalities, which were only eliminated by the great shocks of the period from 1914 to 1950. Economists tricked themselves into thinking that the resulting compression in the income and wealth distribution was a natural feature of the maturation of capitalist economies. But as the shocks receded wealth began to accumulate again and growth in income inequality resumed. From the perspective of 2014, concentration of wealth and income begins to look like the natural state of capitalism rather than an exception.

So we were duped by the upheavals of the twentieth century, and the resulting government policies, into thinking that the trend towards greater equality was normal and would continue.

In Mr Piketty’s narrative, rapid growth—from large productivity gains or a growing population—is a force for economic convergence. Prior wealth casts less of an economic and political shadow over the new income generated each year. And population growth is a critical component of economic growth, accounting for about half of average global GDP growth between 1700 and 2012. America’s breakneck population and GDP growth in the 19th century eroded the power of old fortunes while throwing up a steady supply of new ones.

In other words, high economic growth reduces Old Money’s share of wealth and allows the plebs to even things up a bit, at least, for a while.

Tumbling rates of population growth are pushing wealth concentrations back toward Victorian levels, in Mr Piketty’s estimation.

It’s that demographic dividend again. We’ve already spent it.

The New York Times ran a Q&A piece with Thomas Piketty last week. In the author’s own words:

In the very long run, the most powerful force pushing in the direction of rising inequality is the tendency of the rate of return to capital r to exceed the rate of output growth g. That is, when rexceeds g, as it did in the 19th century and seems quite likely to do again in the 21st, initial wealth inequalities tend to amplify and to converge towards extreme levels. The top few percents of the wealth hierarchy tend to appropriate a very large share of national wealth, at the expense of the middle and lower classes. This is what happened in the past, and this could well happen again in the future.

The reduction in inequality was mostly due to the capital shocks of the 1914-1945 period (destruction, inflation, crises) and to the new fiscal and social institutions that were set up in the aftermath of the World Wars and of the Great Depression. There was no natural tendency toward a decline in inequality prior to World War I. During the 20th century, rates of return were severely reduced by capital shocks and taxation, and growth rates were exceptionally high in the reconstruction period. This largely explains why inequality remained low in the 1950-1980 period.

This graphic and commentary comes from the New York Times review of the book. 


Income inequality and returns to capital are increasing worldwide. The figures for France are interesting, given that it’s often depicted in the British and American media as some kind of socialist throwback. They explain why the French left is so keen on wealth taxes.

Inequality is rising in most OECD countries. A series of studies by the OECD (see previous post for links) found that, while inequality between countries is falling, inequality within countries is rising. Around the world, there is that same tendency for wealth to accumulate  and concentrate in the hands of fewer people.

As the wealth and income of the richest 1 percent has pulled away from that of everyone else, even those adjacent to them in the income hierarchy have started to notice. If Thomas Piketty is right, and there is strong evidence to suggest that he might be, this is going to get worse. Or, if you are one of the lucky few, better.

It’s another shattering of post-war assumptions though. After the war, and certainly after the 1960s, most of us thought that society would become more equal. The rises in inequality during the Thatcher/Reagan era were, at first, regarded as a blip, especially by those on the left. A temporary setback after which things would ‘get back to normal’ once the postwar egalitarian consensus was restored. Now, though, it’s starting to look as though it’s the postwar period, with its rapid growth, rising share of wealth going to labour and falling inequality that was the aberration. ‘Back to normal’ is a world where, once again, a large share of national wealth goes to a very small group of people.

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14 Responses to Is wealth inequality just getting back to normal?

  1. TickyW says:

    Good post.

    Perhaps one response would be to un-tax returns to labour and to introduce highly progressive rates of taxation on returns to capital and on unearned income generally. A Land Value Tax may also be appropriate.

    These proposals are set out in the following link:

  2. Jackart says:

    You’re ignoring the net present value of state pensions, and for the very poor, their benefits, which are mostly paid for by the top 10%. But that wouldn’t allow lefties to bleat “inequality, WAAAAA!”. So the “inequality” we have now is very different from that in 1900. Why are lefties so dishonest in their persistent attempts to prove inequality is terrible and rising?

    • Rick says:

      Taxes and transfers, at least in the UK, are just about mitigating the rise in income inequality since the 80s (though not the inequality in accumulated wealth). Probably not for much longer if benefit and pension entitlements are cut.

      That the top 1% are getting an ever increasing share of the wealth is well documented. There is nothing ‘dishonest’ about it.

      Why do you assume inequality is only of concern to ‘lefties’?

  3. Not sure it’s fair to say “back to normal” – in my opinion it may be more accurate to say that the 2 world wars were disruptive and that did increase social mobility but that worked itself out over time and a different normal started in the early 80’s. Might be worth dispensing with the concept of “normal” from the start as we have complex and dynamic societies and there’s always a disrupting influence coming along.

    We are in a different place to the late C19th though – think it was the Economist’s Daniel Knowles who made the point on the Oxfam report that the fact that the poorest 20% at least had some assets was a change to the long term historical trend. Scant consolation if you believed the post-war social democratic consensus had embedded some fairer structures in society.

    What Piketty does say though is that inequality is not inevitable and is a result of the social and political decisions we make. In essence we can have the normal we want to have.

    That’s the positive slant – to be more depressed you could take Noah Smith’s view that our capitalist overlords will suppress people power with drone armies

    • Rick says:

      OK, ‘back to normal’ was a cheap headline because I couldn’t think of a better one. You are right (and, in this sense, so is Jackart above) that this won’t take us ‘back’ to 1900 for all sorts of reasons. History doesn’t really repeat itself but it does have some recurring themes.

      This probably needs another blog post.

  4. SK says:

    Time to reduce income taxes and increase wealth taxes..
    Reward work and tax severely Land/BTL.

  5. Lucky Godot says:

    If the forecast is correct and we may well have greater levels of inequality, it is interesting to speculate what may happen to the progress to greater life expectancy and overall health. Inequality is cited as a causal factor in poor health outcomes for both indirect and direct reasons. Indirectly, by the distortions it may impose on healthcare systems. This is demonstrated most obviously in the USA where there has been an exponential growth in expensive specialised care (treating relatively small numbers for increasingly marginal benefit) and relatively little investment into good public health and programmes for general primary and secondary prevention (which would target much larger numbers with potentially significant health gains). Directly, inequality has its own health costs. Thus, public health researchers identify poverty as an independent risk factor reducing the quality of health outcomes (after adjusting for diet and lifestyle etc.). More controversially authors such as Wilkinson (‘The Spirit Level’) and Marmot (‘The Status Syndrome’) demonstrate unequal societies are likely to be less healthy overall than those more equal. Both factors are cited as explanations for the longevity of the populations of Scandinavian countries and most obviously Japan. Thus, Muennig (2010) showed USA female life expectancy going from 5th best in the world to 46th by 2010.

    Although populations will continue to get healthier and live longer the progress may become less and less rapid. And if calls to move away from universal coverage gain momentum progress at a population level may become almost static.

    • Rick says:

      You’ve hit on something interesting here. The effects of inequality on demography deserves another post too.

      • Jackart says:

        Inequality’s effects on health are not causal they’re co-incident.

        • Lucky Godot says:

          The empirical evidence suggests otherwise. There is a mass of evidence that poverty is an independent risk factor for health outcomes (for example Admittedly this is a casual relation on poverty and not inequality, but the most unequal societies appear to have a significantly greater number of those living in poverty. The Wilkinson and Marmot research does appear to support a view that inequality is a causal factor in poorer health outcomes. (This has been recently revisited by the authors of ‘The Spirit Level’, ( But the conclusions of such research is disputed, as are the measures required to reduce inequality. But the balance of evidence suggests we may be heading for relatively ‘sicker’ societies, at least sicker than they may be.

  6. Andrew Regan says:

    “where […] a large share of national wealth goes to a very small group of people.”

    Wealth isn’t just pieces of a national pie being shared out (unjustly), it belongs to who it belongs to. If the bottom 20% would _like_ someone else’s piece, they can of course ask… And as Jackart suggests, the whole point of the welfare state is to break the link between wealth and ‘quality of life’, so you can’t support that system then turn around and claim that those without wealth are destitute.

  7. Dave Timoney says:

    We should be careful of any claim that the 1945-73 period was “unique” or “anomalous”, as that serves the ideological argument that great wealth concentrations and inequality are the natural order of things. In fact, the period 1890-1913 stands comparison with the post-WW2 era in terms of rapid growth (see Robert Brenner’s ‘The Economics of Global Turbulence’ for a summary).

    Piketty is careful to say that “There was no natural tendency toward a decline in inequality prior to World War I”, while the Economist suggests that “the late 19th and early 20th centuries stabilised growth in wealth concentrations but did nothing to reduce inequalities”. In other words, capital successfully resisted the pro-equality consequences of that period of rapid growth, largely because it had the whip-hand over labour (anti-union laws, limited franchise, nationalist diversions etc – the “Eton mess” of the current cabinet is a farcical echo of Edwardian politics). In contrast, the post-WW2 era led to falling inequality due to the increased market power of labour, which was exemplified as much in taxes on wealth (death duties, supertax, rates etc) as in growing wages for the majority.

    The post-73 period has seen a turn towards relatively weak growth and increased capital profitability (Piketty’s r/g ratio). There is now ample evidence that these are inter-dependent; in other words, growth-restraining policies (e.g. austerity) are necessary to preserve profitability and capital concentration. I think many people now recognise that what we need is not necessarily Keynesian demand stimulus (though this may have tactical merits) but a strategic shift in the tax regime from consumption (income tax, NICs, VAT etc) to capital (CGT, dividends, land value tax etc).

    The current course, if continued, will produce not just greater inequality but eventually a turn to repression. The gradual evisceration of democracy since the 80s is hardly accidental.

  8. Pingback: British Politics and Policy at LSE – ‘Britain is different’, endogenous money creation, and keeping quiet about productivity: Top 5 blogs you might have missed this week

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