The Undercover Economist

Vive la Différence

Are societies hard-wired to tolerate income inequality?

Bill Gates

“Life’s not fair,” my parents always used to say. Bill Gates and Mexican business magnate Carlos Slim each have fortunes of about $60 billion, according to the rich-list boffins at Forbes. A 10 percent return on that lot would produce a $6 billion income, or about $200 a second. That is, very roughly, about what an American makes in a day or an Ethiopian makes in nine months. Small wonder that income inequality is a hot topic.

But reliable numbers on inequality are hard to find. Even in the United States, there is no agreement about what is going on. Look across the globe, and the data problems are far more acute. The most commonly reported scare statistic compares the richest country with the poorest. But this method overlooks the fact that about 2.5 billion poor people live in rapidly growing India and China. A better, but more demanding approach summarizes inequality both across countries and within countries. Such efforts suggest no strong recent trends in global income inequality, either up or down.

Those efforts have been led by Branko Milanovic of the World Bank. But now—with fellow economists Peter Lindert and Jeffrey Williamson—he has produced a more surprising result. He has found that income distribution within a modern society is much the same as income distribution in imperial Rome or England and Wales at the time of the 17th-century Glorious Revolution. It’s not that there is no variation at all but that modern societies are as different from each other as from ancient societies.

For example, imperial Rome’s income distribution looks like that of the modern United States; China in 1880, like Sweden today, was rather equal; England in 1688 was more unequal than imperial Rome, but modern Brazil is worse still.

This is unexpected, not least because modern societies have the potential to be far more unequal than anything the Romans could have dreamed of. That’s because the richer a society is, the more unequal it could be without its working class starving to death. Prehistoric societies were, by necessity, fairly equal—there wasn’t enough societal wealth to make anybody very rich.

Modern Tanzania seems more equal than modern America, but Milanovic and his colleagues point out that it is as unequal as it could possibly be without mass starvation. The Democratic Republic of Congo is about as unequal as the United States, but that is far more than the country can stand—hence the enormous loss of life through war, malnutrition, and disease.

The United States, as the richest society in history, is therefore potentially the most unequal in history. The U.S. population could be kept alive for the cost of about $100 billion a year. If the elites had total control, that would leave another $13,800 billion (the rest of the U.S. GDP) a year to distribute among friends of the president—almost enough to give a sum equal to Bill Gates’ lifetime wealth to a new crony each working day.

But the United States is not remotely this exploitative, no matter what you may feel the next time you buy a copy of Windows. In the newly coined jargon, it has a low “inequality extraction ratio,” meaning that the poor have much more than it would take to keep them alive.

That is faint praise for the United States, perhaps. But 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?

One conclusion is less speculative. It is no coincidence that richer societies are less exploitative of their own citizens (have a lower “inequality extraction ratio”) than poorer ones. That is because severe exploitation guarantees poverty.