The rich can’t get richer forever, can they?

Liaquat Ahamed

In 1831, Alexis de Tocqueville, at the age of twenty-five, was sent by France’s Ministry of Justice to study the American penal system. He spent ten months in the United States, dutifully visiting prisons and meeting hundreds of people, including President Andrew Jackson and his predecessor, John Quincy Adams. On his return to France, he wrote a book about his observations, Democracy in America, the first volume of which was published in 1835. Many of the observations have weathered well (he noted, for instance, how American individualism coexisted with conformism). Others have not. For example, Tocqueville, who was the youngest son of a count, was deeply impressed by how equal the economic conditions in the United States were.

It was, at the time, an accurate assessment. The United States was the world’s most egalitarian society. Wages in the young nation were higher than in Europe, and land in the West was abundant and cheap. There were rich people, but they weren’t super-rich, like European aristocrats. According to Unequal Gains: American Growth and Inequality Since 1700, by the economic historians Peter H. Lindert and Jeffrey G. Williamson, the share of national income going to the richest one per cent of the population was more than twenty per cent in Britain but below ten per cent in America. The prevailing ideology of the country favored equality (though, to be sure, only for whites); Americans were proud that there was a relatively small gap between rich and poor. ‘Can any condition of society be more desirable than this?’ Thomas Jefferson bragged to a friend.

Today, the top one per cent in this country gets about twenty per cent of the income, similar to the distribution found across the Atlantic in Tocqueville’s day. How did the United States go from being the most egalitarian country in the West to being one of the most unequal? The course from there to here, it turns out, isn’t a straight line. During the past two centuries, inequality in America has been on something of a roller-coaster ride.

An early systematic attempt to chart the evolution of inequality in this country was undertaken by Simon Kuznets, at that time a professor at Johns Hopkins, who, in 1955, published what turned out to be a seminal paper, ‘Economic Growth and Income Inequality.’ Drawing on years of assiduously collected data—for which he later won a Nobel Prize—he reached a surprising conclusion. Like most economists, he had assumed that the general trend, in a capitalist economy governed by private property, would be for the rich to get richer—for inequality to increase steadily over time. That had been true in the initial stages of industrialization, he found, but since then the United States, England, and Germany had experienced a narrowing of economic disparity. And, as more data about more countries became available, Kuznets found that in most advanced economies the poor were catching up with the rich. It was, he said, ‘a puzzle.’

The explanation appeared to involve two factors. First, there was the rise of mass education. Once countries had reached a certain level of industrialization, skills—human capital—became as important as physical capital in determining productivity, and a greater economic share accrued to those with more education, not just to those with money to invest. Second, politics took over from economics. The poor, with the weight of numbers on their side, realized that they could vote in favor of taxing the rich more heavily, redistributing the money to themselves in various ways.

Kuznets’s own life seemed to illustrate how education could raise the income of the poor. He was born in 1901, into a Jewish family, grew up in eastern Ukraine, and at the age of twenty-one, during the Russian civil war, fled to the United States. There he obtained a doctorate in economics from Columbia, and became the preëminent economic statistician in the country. The inverted-U-shaped relationship that he found between income and inequality—inequality rising in the early stages of development and then falling afterward—came to be called the Kuznets curve. As Kuznets determined, it was after the American Civil War that the gap between the rich and the poor began to widen. The concentration of incomes grew during the Gilded Age and eventually peaked during the Jazz Age, when the share of income going to the top one per cent reached twenty per cent. Then, during the next twenty-five years, inequality began to decline, until, by the time Kuznets was writing, it was back to the low levels of the early Republic.

Kuznets’s article came out at the height of the Cold War. The U.S. economy was booming. More and more people were going to college. White-collar work was taking over from blue-collar work, and, during the Great Depression, the government had introduced programs such as Social Security and unemployment insurance. Americans took comfort in the fact that their version of capitalism was not only the most dynamic and productive economic system in the world but one that was steadily becoming more equitable and fair. It seemed as if they had the problem of inequality licked; it was the era of what came to be called the Great Compression. By the seventies, America was as equal as any of the Scandinavian countries are today.

And then, starting sometime in the early eighties, inequality started to rise. The shape of the curve went from an inverted U to something more like an N: up, down, and up. Nor was this shift a temporary aberration. It has continued for nearly four decades. The jump in inequality has been most dramatic in the United States, where the share of income going to the top one per cent has soared from eight per cent in the early eighties to almost twenty per cent today. But inequality has also increased in Britain, Australia, Canada, large parts of Europe, and even Japan, suggesting that there is something systemic at work across the world. (At the same time, there have been some affluent countries—notably France and the Netherlands—where inequality has barely budged.)

Economists are still arguing about the reasons for this reversal. One important factor, they mainly agree, was the opening up of China, Eastern Europe, and other less advanced regions to world trade; another was the liberalization of capital markets. Rising import competition hurt employment in domestic manufacturing and held down wages. Most economists also agree that changes in technology have put unskilled workers at a stark disadvantage.

What they disagree about is the role of government policy. Rising inequality coincided with a profound shift in economic policy throughout much of the advanced world. In the nineteen-seventies, productivity growth in advanced economies stalled, unemployment rates jumped, and inflation rose and remained obstinately high. And so, in one country after another, political parties got elected by promising to cut tax rates, free up markets, and reduce government intervention in the economy. The change was most pronounced in Great Britain and the United States, after Margaret Thatcher and Ronald Reagan took office. But it also occurred to varying degrees in Continental Europe, Canada, Australia, and Japan.

The story of this transformation is the subject of Binyamin Appelbaum’s The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. It is a tale that has been told before, but Appelbaum adds flesh to the narrative by recounting it through the lives and careers of a small group of economists associated with the University of Chicago—including the Nobel Prize winners Milton Friedman, George Stigler, Gary Becker, and Robert Mundell—who were behind the shift.

Read the rest of this review at The New Yorker.