Inequality Without Class

https://portside.org/2024-06-12/inequality-without-class
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Author: Simon Torracinta
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Visions of Inequality
From the French Revolution to the End of the Cold War

Branko Milanovic
Belknap Press
ISBN: 9780674264144

An academic journal article on the technicalities of tax data is not usually cause for much excitement. Yet at the end of last year, one such publication in the Journal of Political Economy set #EconTwitter afire with debate, and prompted a full column in the Economist. The paper, by Gerald Auten and David Splinter, took aim at the famous studies on rising inequality conducted by Thomas Piketty, Emmanuel Saez, and Gabriel Zucman. If one employs different assumptions, Auten and Splinter argued, post-tax income inequality in the United States appears not to have risen much since the 1960s. While Piketty and his collaborators systematically challenged the findings, their detractors were quick to the draw. “The Piketty and Saez work is careless and politically motivated,” sniped James Heckman, a Nobel-winning Chicago School econometrician.

Whether it has risen in recent decades or merely plateaued, income and wealth inequality in the United States remains staggering. But the recent controversy illustrates the high stakes of empirical research on the subject, which burst into public view in 2014 with the publication of Piketty’s Capital in the Twenty-First Century. While it is hard to imagine the Biden administration’s announcement of a “new Washington consensus” centered on the “challenge of inequality” and its push for a global minimum tax without the shock wave of the 2016 election, Piketty’s high-profile work supplied a ready explanation for what had gone wrong.

The economist Branko Milanovic made his own major contribution to the study of inequality in 2016 with his breakout Global Inequality. His foremost finding was the “elephant curve”—a graph of income trends worldwide since 1988 that showed significant gains for the “emerging global middle class” as well as the rich, while incomes for the very poorest and the “lower middle class of the rich world” had stagnated. In a decade that saw one populist uprising after another among those left behind by globalization, the chart achieved totemic status.

In his latest book, Visions of Inequality, Milanovic steps back to question the study of inequality itself. Where does this work come from? Was inequality always so central a preoccupation for economists—or in politics at large? Ultimately, the book reveals the limits of a purely economic framing of these questions.

Born and educated in then-Yugoslavian Belgrade, an economist at the World Bank for almost twenty years, and now a senior scholar at the CUNY Graduate Center, Milanovic cuts an unusual figure in his field. His training in comparative economics and years in applied research have inculcated a distaste for the crystalline abstractions, theoretical aridity, and ideological policing of the neoclassical mainstream. His years of spadework in the World Bank trenches, alongside an erudition unusual in the profession, bring a refreshingly historical and cosmopolitan depth to Milanovic’s writing. Experience of the twilight of state socialism and the subsequent violent transition in Eastern Europe have likewise shaped his jaded political outlook, evident in the title of his previous book, Capitalism, Alone (2019). The stark lesson of 1989—“there is no alternative”—endures, but merely as a forlorn shrug.

All these qualities appear in Visions of Inequality, a breezy tour d’horizon of economic conceptions of inequality since the Enlightenment. Milanovic showcases six economists who, in his view, contributed most substantially to this domain: François Quesnay, Adam Smith, David Ricardo, Karl Marx, Vilfredo Pareto, and Simon Kuznets. Their work shares three important qualities: “a narrative of what drives inequality,” an “outline of the relationships between relevant variables,” and “empirical ‘verification’ of the theoretical and narrative claims.” Chapters on each thinker are followed by an extended rumination on this tradition’s fall into abeyance during the Cold War, and a very brief epilogue on its revival after 2008.

Milanovic takes a mercenary approach to his chosen canon: after capsule summaries of each economist’s outlook and career, he narrowly focuses on their approach to income and wealth inequality, however marginal these ideas may be to their work overall. Still, Milanovic declares that “we cannot thus speak of inequality in general or abstract terms; we can only speak of specific features of each inequality.” While occasionally failing to live up to this maxim, he is a perceptive reader of past economists and the literature that surrounds them. He is unabashedly Whiggish, however, when it comes to the steady accumulation of better and greater income data for both past and present, and he uses this data to reconstruct prevailing levels of inequality in the lifetimes of his chosen thinkers. This context is enlightening and occasionally startling: England’s Gini coefficient in 1867, the year Marx published Volume One of Capital, was roughly that of modern Zambia, while today’s South Africa is more unequal still.

Reflections on the divide between rich and poor are as old as political thought itself. Yet systematic, empirical investigation of economic inequality only emerged in the eighteenth century. Breaking with the mercantilist emphasis on the wealth of the state, political economists beginning with the French physiocrats identified national prosperity with the population as a whole. Or as Adam Smith would later put it, in what Milanovic stresses was a Copernican shift in perspective: “The high price of labor is to be considered not merely as the proof of the general opulence of society which can afford to pay well all those whom it employs; it is to be regarded as what constitutes the very essence of public opulence, or as the very thing in which public opulence properly consists.” The wealth of a nation, in other words, ought to be measured in the incomes of its poorest members. With this theoretical turn came an empirical one: political economists began to construct income tables for all of society, as Quesnay did in 1758. Despite their meager data sources, Milanovic credits this work for closely matching more recent estimates of past income distribution.

The early political economists, however, were rarely interested in interpersonal income and wealth inequality as such. For much of the eighteenth century, the word “inequality” continued to evoke the inequality of status from birth characteristic of the ancien régime. The social classes of the period were closely associated with distinct types of income: labor, capital, and rent. In the century between Smith and Marx, economists derived the famous tripartite class structure of workers, capitalists, and landlords from these “factor shares” of production—even as they freely acknowledged many other intermediary classes. These categories formed the building blocks of their theories, with economic inequality figuring only as the functional outcome of this class structure.

Class also allowed political economists to extrapolate the long-term trend in inequality from a simple model. Adam Smith, for instance, argued that growth was positively correlated with high wages and low interest rates, and inversely correlated with the rate of profit: “The rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society,” he declared in the Wealth of Nations in 1776. “On the contrary, it is naturally low in rich, and high in poor countries, and it is always highest in the countries which are going fastest to ruin.” A flourishing commercial society would benefit workers and landlords at the expense of capitalists, whose profits would decline over time. By allying to prevent collusion or monopoly that would artificially inflate the profit rate, workers and rentiers could reduce overall inequality in the long run, even if a few mega-rich landowners remained.

Forty years later, writing at the crest of the industrial revolution, David Ricardo took a far more sanguine view of profits. (Milanovic estimates that, perhaps not incidentally, the wealth Ricardo accumulated on the stock market easily placed him in the top 1 percent of the English population and likely made him the single richest economist ever.) Profits generated savings and therefore investment, which made them central to growth. Tariffs on food imports under the English Corn Laws, which Ricardo fought for decades to overturn, served to raise food prices and so drive up the subsistence wage of workers, thereby driving down profits. If the Corn Laws were repealed, England could expect additional growth and lower inequality, marked by converging incomes from capital and rent; if they were maintained, England faced an increasingly stagnant and unequal economy, with rich landlords dominating impoverished capitalists. Yet even though he directly correlated growth with lower interpersonal inequality, Ricardo’s scenarios were hardly auspicious for workers, whose wages were fixed at subsistence levels by default in either case.

As the industrial working class swelled over the course of the nineteenth century, Ricardo’s prognosis looked increasingly bleak—which was hardly lost on his most incisive reader, Karl Marx. Yet contrary to popular perception, especially regarding the notorious thesis of “immiseration” embraced by some later Marxists, Marx’s model of inequality in Capital was, as Milanovic puts it, “much brighter than normally assumed.” Whatever its implications for capitalism’s long-term health, his famous theorization of the tendency of the rate of profit to fall (a view he shared with Smith) also implied decreasing inequality. Falling profits meant decreasing total income from both capital and rent, especially when placed alongside the potential of real wages to rise with growth. But against these tendencies ran many countervailing forces—such as the periodic crises and economic expansions that could drive up the rate of profit, or the “reserve army of labor” that depressed wages. The result, in Milanovic’s view, is a surprisingly flexible model that encompasses the wide varieties of capitalism we observe today.

It was precisely as inequality reached new heights and socialist parties emerged in Europe that economists moved away from class analysis of inequality. The coup de grâce came from the Italian economist Vilfredo Pareto, a mathematically inclined engineer implacably opposed to the rising tide of socialism. Building on the reams of granular data produced by the spread of mass taxation, Pareto reconceptualized inequality as an interpersonal (or, more precisely, inter-household) phenomenon. Ever since, economists studying inequality have foregone class structures in favor of income distribution alone.

Equally significantly, Pareto claimed to have detected a regular pattern underlying this distribution. The curve of the distribution, he suggested, is governed by the same coefficient across all times and places. Milanovic points out that all of Pareto’s chosen examples—including German states, Swiss cantons, and Italian cities—shared a similar political and institutional framework, and that Pareto’s own data was far more variable than he implied. A simple glance at modern country data, Milanovic adds, discredits any claim for immutability. Yet Pareto was unequivocal, pronouncing in 1896 that “we find ourselves here in the presence of a natural law.” On this account, unequal income distribution was a built-in property of all societies, attributable to some feature of human nature, and any socialist takeover would merely swap out one elite for another.

The dramatic inequality of the Belle Époque seemed to augur a final confrontation over the “social question.” But by the mid-twentieth century, a world-historical reversal appeared to be underway. In the United States, income inequality, which had plateaued at an all-time high in the 1860s, began to decrease by the 1930s—a trend that began even earlier in Western Europe. What happened?

With the history of the United States firmly in mind, the wide-ranging economist Simon Kuznets—a pioneer of the national income accounts now used to calculate GDP—put forward a “hypothesis” on inequality in 1955: “widening in the early phases of economic growth when the transition from the pre-industrial civilization was most rapid; becoming stabilized for a while; and then narrowing in the later phases.” In this model, rising inequality characterized early industrialization as a gap opened between urban and rural incomes, followed by more stratified urban incomes. Over time, the same processes would work to moderate inequality by reducing rural employment, narrowing differences in the productivity of agricultural and non-agricultural sectors, lowering the rate of return due to greater capital abundance, and increasing the use of social surpluses to fund redistributive programs. Plotted over time, the measure of inequality resembled an inverted U. The Kuznets curve implied a universal trajectory for all societies. It resonated deeply with the linear narratives of modernization popular in the postwar period, gaining wide acceptance despite serious doubts about how well it fit the data.

For Milanovic, Kuznets’s work marked the end of a centuries-long dialogue within economics. The “Cold War economics” that subsequently dominated the profession in the second half of the twentieth century, he charges, fell pathetically short of what came before. The Cold War itself was premised on fierce ideological clashes over the basic structure of society, yet it was precisely then that substantial study of inequality suddenly disappeared. How can this be? Several explanations are advanced in the longest and most probing chapter of the book.

In the capitalist world, Milanovic argues, trends in income distribution made economists complacent about decreasing inequality, while ideological confrontation militated against emphasis on the significance of class in the West. Additionally, the neoclassical paradigm centered on analysis of equilibrium conditions between diverse economic agents whose unequal “endowments”—of capital, resources, skills—were simply taken as given; discussion of that original divergence was a priori out of scope. As Milanovic dismissively concludes, neoclassical models of distribution related “to life on Earth about as much as the theories that astrobiologists have developed about life on Mars.” This retreat from inequality was equally visible in macroeconomics: while the classical political economists were convinced that returns to labor and capital changed over time, from the 1960s economists swept away such claims altogether with the largely arbitrary assumption that “factor shares” did not change over the long run—which implied a mostly static income distribution. Even in development economics, where attention to differing wage levels came with the territory, the Kuznets hypothesis instilled the basic idea that growth would take care of inequality.

Over time this complacent neglect curdled into outright hostility to the study of inequality. As late as 2004, Nobel laureate economist Robert Lucas Jr. declared that “of the tendencies that are harmful to sound economics, the most seductive, and . . . the most poisonous, is to focus on questions of distribution.” Attention to inequality was relegated to the margins, surviving in the pure empirics of econometrics, for instance, and in dependency theorists’ scrutiny of inequality between the core and periphery of the world-system.

The field was equally barren to the east. The state-socialist emphasis on the supposed abolition of class and tight official control over economic data made the empirical study of income distribution difficult—so much so that retrospective estimates remain challenging to this day. In Milanovic’s view, what little data is available suggests a surprising degree of inequality in countries like the Soviet Union (albeit lower than in the capitalist world), since levels of the party hierarchy were strongly correlated with income in both cash and kind. “All conditions being the same,” Milanovic writes, “the more hierarchical the planned economy, the greater the overall interpersonal inequality,” with the Stalinist economy of the 1930s standing as the starkest example. In any case, interpersonal inequality mattered little within the official Marxist line: income differentials were perfectly compatible with a classless society that had eliminated private property.

In a second reversal during the 1980s, income inequality began to climb once again across the West, defying the Kuznets curve. This unexpected development pushed economists to apply new theoretical frameworks to a wealth of data from household surveys and tax authorities, alongside more sophisticated reconstructions of incomes in the distant past. It also laid the basis for a revolution in the study of economic inequality.

The field has found a massive audience in the aftermath of the global financial crisis, catapulting its stylized facts (“We are the 99 percent!”) into the political arena. Yet Visions of Inequality, perhaps despite itself, also reveals what remains lost. For all their differences, both Smith and Marx insisted on the fundamental role of power in the determination of inequality. It could not be otherwise when income shares were tightly bound to the hierarchical structure of society itself. Contemporary scholars of inequality, by contrast, rightly point to the unprecedented convergence of high labor and capital incomes in the very same individuals (what Milanovic calls “homoploutia”). But far from making class irrelevant, such developments transform class, in ways yet to be fully analyzed or understood. As the global class structure has been remade by the growth of a cosmopolitan elite, low-wage service work in the Global North, and the massive informal sectors of the Global South, economists have had strikingly little to contribute beyond the merely observational.

The major contribution of Milanovic’s Global Inequality was to revise the Kuznets hypothesis to account for rising inequality since the 1980s. Whereas Piketty concluded that the more equal mid-twentieth century may simply have been a world-historical aberration, Milanovic suggested that, seen in the longue durée, there may be no single U-curve at all, but only wavelike oscillations of rising and falling inequality. Fundamental technological and economic developments—industrialization, globalization, the rise of services—push up economic inequality at key junctures, but these trends intersect with dramatic historical turning points (war, revolution), as well as more gradual institutional transformations in reaction to inequality itself. It is therefore the “interplay between, on the one hand . . . apparently determinative economic forces, and, on the other hand, political and social forces, that shapes the movement of Kuznets waves.”

Milanovic’s revision, which evokes the perpetual seesawing between market and society in Karl Polanyi’s The Great Transformation, rescues the Kuznets hypothesis from its obvious incompatibility with the empirical record. But it only does so by introducing a fundamental indeterminacy to the very heart of the model. The vagueness of Milanovic’s formulations about “political and social forces” gestures to a missing theory of power and politics—a problem that inspired Piketty’s assay of institutional and ideological legitimations of inequality in Capital and Ideology (2020). To grasp where inequality is headed—much less to change it—we will need to go beyond the economic altogether.


Simon Torracinta is a lecturer in history of science at Harvard University and a contributing editor at the Boston Review.


Source URL: https://portside.org/2024-06-12/inequality-without-class