Inequality: the scourge of the twenty-first century

ABSTRACT

Rising inequality is a ubiquitous problem, encompassing every geographical region and nation in the world. Inequality can be contended to have replaced unemployment as our most vital economic issue. After nearly six decades of declining inequality from the time of the First World War, the process has reversed itself with a vengeance, and we may be about to surpass the very high levels of inequality that prevailed in 1914. The causes are multifarious, including accelerating globalisation, plutocratic politics, excessive emphasis on ‘meritocratic’ pay, declining public expenditure, and social protection combined with the high rates of return on ‘capital’ compared to the overall economy’s growth rate. Inequality between nation-states may be declining because of the rise of China, but within countries, inequalities are increasing everywhere. Excessive inequality prevents social mobility and contains the seeds of social conflict and even civil wars. Most crucially, excessive and rising inequality makes democratic politics and governance unsustainable. High inequality may be a causal factor behind the decline of democracy and the rise of autocracy and populism that we are witnessing globally. In the ultimate analysis, the reduction of inequality necessitates wealth taxes.

KEYWORDS:

• Global inequality
• group-based inequality
• democracy
• governance

Introduction

When Adam delved and Eve span; Who was then the gentleman?¹

Rising inequality is arguably the most pressing economic issue of our time. Hunger, homelessness, precarious work and child poverty are among the numerous manifestations of this dystopic phenomenon. We are currently living through a time when current generations often expect future generations to be poorer and more disadvantaged than themselves in terms of income, wealth and opportunity, at least in the traditionally more affluent nations on planet Earth. Therefore, ameliorating excessive inequality in the distribution of income and wealth has to be the sine qua non of economic and social policy. And furthermore, rising inequality is a ubiquitous problem, encompassing every geographical region and nation in the world. Inequality can be contended to have replaced unemployment as the most vital economic issue, as was the case for most of the short twentieth century.² After nearly six decades of declining inequality from the time of the First World War, the process has reversed itself with a vengeance, and we may be about to surpass the very high levels of inequality that prevailed in 1914. The causes are multifarious, including accelerating globalisation, plutocratic politics and excessive ‘meritocracy’, all manifesting themselves in the high rates of return on ‘capital’ compared to the rate of growth of the overall economy.

Our concern with excessive inequality is related to a number of factors. It is customary in economics to regard inequality as akin to cholesterol; there is both good and bad inequality. Inequality of outcome, as a reward for talent, risk-taking and effort, may be good, but the inequality arising from unequal opportunities and discrimination is not only unacceptable on equity grounds, but it is also economically inefficient. All over the world, there are many examples of systematic, categorical and enduring inequalities; see Roemer (1998) and Tilly (1998). Also, the emphasis on high rewards for talented individuals (extreme meritocracy), forms the basis for future inequality of opportunity via the wealth inherited by their benefactors and progeny; see Stiglitz (2012). This begs the question, does our economic system really favour hard work and talent over privilege and inheritance?

Inequality also contains within it the seeds of social conflict and even civil war when group inequalities become salient. Finally, and perhaps most crucially, excessive and rising inequality makes democratic politics and governance untenable. High inequality may be a causal factor behind the decline of democracy and the rise of autocracy and populism that we are witnessing globally at the moment. The plutocratic policies accompanying autocracy and populism further intensify inequality engendering incipient class war and further instability. This paper will examine all these issues, beginning with the causes and evolution of inequality, followed by a discussion on global inequality and group-based (horizontal) inequality, the consequences of inequality for democratic governance and finally, a brief concluding section on policies for tackling rising inequality.

Conceptual issues

Our living standards at both the individual or household level, and as a nation, emanate from income. Income is a flow of goods and services, derived from the stock of wealth consisting of land, labour (human capital), natural resources (natural capital comprising minerals, fuels, forests, waterways and fisheries) and physical capital (machines and infrastructure). We can collectively refer to this stock as wealth, assets or loosely ‘capital’.³

The most common measured metric of inequality is in terms of income. As noted above, the generation of income flows is dependent on the stock of wealth, which we can more imprecisely call ‘capital’. The first feature to note about the nature of inequality is that the ownership of wealth or capital is vastly more unequal and concentrated than the distribution of income. Broadly speaking, the functional distribution of income is traditionally made up of the national income shares of labour (wages and salaries) and income from ‘capital’ (rents,⁴ dividends and profits). There was a belief that this functional distribution of income was stable in the long-run at roughly a three-quarter labour share and a quarter capital income share, but these shares fluctuated over the business cycle, favouring labour during prosperous times. We are less sanguine about the long-run stability of these shares; see the discussion in Piketty (2014, chapter 15). The share of ‘capital’ in national income has been rising since 1980, particularly during the era of hyper-globalisation,⁵ after the turn of the millennium and Piketty points to earlier epochs when this was also the case.

While the flow of goods and services is produced by firms, the recipients of the income thus generated are individual households. It is, therefore, customary to measure inter-household inequality in terms of income, and less commonly in wealth, as data on income is more readily available. It readily follows from the discussion in the previous paragraph that the distribution of income from labour is unequal relative⁶ to the income generated from ‘capital’ due to the concentrated nature of the latter's ownership.

At this juncture, it is apposite to introduce the reader to Piketty’s (2014) mechanism for rising inequality in our time, but also in the past. This centre's upon a rising ratio of the value of the stock of wealth to the value of the flow of national income or domestic product at any given time. If this ratio – the stock of assets over national income – is increasing, inequality must rise. Furthermore, increases in this ratio can only occur if the overall rate of profit (hence the savings rate) exceeds the growth rate of income for the nation (see the appendix for technicalities). It is natural to expect the value of the stock of wealth to exceed the value of national income; Piketty points out that in countries like the UK or France, it was something like 6:1 during the extremely inegalitarian era during the eve of the First World War, but war, revolution and other social democratic imperatives caused this ratio to decline during the short twentieth century to 3:1 by the 1970s, but since 1980 it has been rising and could climb to alarming proportions if left unchecked.

Two points are noteworthy at this stage, arising out of the Piketty rising inequality mechanism. The first, is to delve into the causes for such a high-profit rate relative to the growth rate of the economy; here labour saving technical progress and political economy considerations giving rise to plutocracy replacing the post-war social democratic contract that particularly governed the ‘golden’ age of capitalism during the Bretton Woods era of 1945–1973 (see Marglin & Schorr, 1989) are plausible explanations.⁷ Secondly, as a corollary to the mechanism, the only manner in which rising inequality can be arrested is to increase the growth of the economy (this can also be achieved via a rising workforce or population through immigration) or discourage non-productive speculative financialisation through wealth taxes.

As far as metrics and indices of inter-household inequality are concerned, the most commonly utilised index is the GINI coefficient; see Deaton (1997), for example, for a definition. The index ranges from 0 to 1 (or 100), with 0 meaning perfect equality and 100 or 1 indicating that one individual or group has everything, so an increasing GINI coefficient implies greater inequality. The household population is divided into a number of equally sized groups (if 5 they are called quintiles, when 10 deciles, when 100, centiles) arrayed from top to bottom of the decision. The coefficient itself may be described as the sum of differences from the mean. In highly unequal societies, South Africa and Brazil, for example, the income GINI hovers from 50 to 60; in the most egalitarian countries, Finland and Sweden, for instance, it can be around 25.

Figure 1 presents the GINI coefficient for the UK from 1938 to 2020, in which income inequality sharply declined by almost twenty points (43–25) after the Second World War and remained stably egalitarian until the lurch to the right in the 1980s when the trend in inequality was once again upward. This decline in income inequality occurred in most other industrialised countries.

Figure 1. UK income inequality: Gini coefficient, 1938, 1949, 1954, 1955, 1960–2020. Data sources: 1938–1961 United Nations; 1962–1967 Institute for Fiscal Studies; 1968–2020 World Bank.

The data on incomes or wealth which forms the computational basis for any inequality measure is gathered from household surveys. These survey methods are becoming comparable across countries, but problems persist among which is the fact that in some countries expenditure data is used to proxy income. The greatest difficulty lies with the missing incomes of the world's super-rich, the top 1% (centile) of the global income distribution whose fabulous incomes are missing from household surveys. Fortunately, plausible adjustments have been proposed; see Anand and Segal (2015) on this.

Despite its widespread use as a metric of income inequality and as a measure of concentration, the GINI coefficient is overly concerned with deviations from the median or mean income (Cobham et al., 2016). Many scholars are more inclined to focus on the tails of the income distribution, not least because mid-ranging income shares tend to be stable over time (Palma, 2011). What can fluctuate are the income shares of the richest 10% of households and the bottom 40%; this ratio is known as the Palma ratio, and similar measures are reported in Piketty (2014). The advantage of reporting the income or wealth of income groups is that they are much more comprehensible for policy analysis and easier to relate to when trying to find one's individual place in the income distribution.

Table 1 illustrates the decomposition of inequality into labour and asset income in Europe (France, Germany and the UK) and America near the present and on the eve of the First World War when a sea change in inequality occurred in the developed countries of the world, which has been reversed post-1980. Several hugely important points stand out. First, the world was very unequal in 1910, and that was reversed by two world wars and revolutions after the European elite engaged in that stupendous, almost suicidal, act of self-harm by declaring war on each other in 1914. This trend continued up to at least the end of the Bretton Woods era, and nowadays, once more, the plutocrat has reared his ugly head. Thus, with economic growth and industrialisation, inequality may be following an ‘N’ shaped process it first rises, and then falls, only to rise again. In the United States, however, asset inequality was not as pronounced in 1910 relative to Europe. Secondly, observe that inequality from labour income is always lower than capital income; recall that labour income accounts for two-thirds to three-quarters of national income. Even in the high inequality USA the bottom 50% earn a quarter of total income. The overall picture of inequality, when we combine both capital and labour income, tends to be more closely related to inequality in labour incomes rather than capital income. Third, and most importantly, inequality in ‘capital’ or asset income is very pronounced, the bottom 50% derive barely 5% of total income from capital; even the middle classes obtain 25–35% of total capital income. The super-rich 1% or the top centile command 35% of total income. One difference between two high inequality eras, our present-day world and what prevailed up to 1914 is in the occupational status of the rich and super-rich: nowadays they also tend to be ‘employed’ and derive part of their wealth from ‘work’ and share options; whereas the rich in the past were pure rentiers.⁸ The extremely rich of the present tend to belong to a managerial class, and the passage of time has transformed the rentier into a manager. Additionally, the present world's super-rich are considerably richer in real terms than the super-rich of the past like the Carnegie and Rockefellers (Goda, 2014), implying a greater concentration of wealth at the top than ever before in human history.

Table 1. Inequality decomposition based on the separation of labour and asset income.

	Income derived from labour Europe 2010	Income derived from labour USA 2010	Income Derived from Capital Europe 2010	Income Derived from Capital USA 2010	Income Derived from Capital Europe 1910
Share of the Top 10%	25%	35%	60%	70%	90%
Of which the top 1%	7%	12%	25%	35%	50%
And the next 9%	18%	23%	35%	35%	40%
Share of the next 40%: the middle class	45%	40%	35%	25%	5%
Share of the bottom 50%: below median class	35%	25%	5%	5%	5%
Corresponding GINI	26	36	67	73	85

Percentage and Gini Index.

Source: Authors’ compilation from Piketty (2014), chapter 7.

Finally, and most importantly we come to the most remarkable development since 1910, which, ultimately, has enabled the capitalist system to survive. Whereas in 1910 in Europe the wealthiest 10% of society obtained 90% of total capital income and the middle classes obtained only 5%, nowadays the middle classes have between 25 and 35% of total capital income. This trickle-down, mainly in the form of housing ownership, has expanded the capital-owning middle class and permitted capitalism to survive. The redistribution is from the rich to the middle class. But note that this trickle-down (the casting of morsels) was not as large as often thought, and could reverse itself via the (Piketty) mechanism described above in the absence of countervailing action.

Evolution of inequality

But murmurs arise!

Property is theft! That is the war-cry of’93! That is the signal of revolutions!. (Proudhon, 1840/2011, p. 71)

In discussions on inequality, especially global inequality scant mention is made of the origins of capital accumulation. Even after we understand and accept the fact that at the heart of rising inequality lies the rapid growth of income from assets (capital), it still begs the question about the origins of capital – the story of early capital accumulation receives scant attention from savants analysing inequality. The origins of pre-industrial revolution capital merit, at least, passing attention in this connection. Colonial trade, including the slave trade, the extraction of rents from the plantation system and monopolies in trade acquired (usually by force) by multinationals such as the British and Dutch East India Company played a major role in capital accumulation, which financed the nascent modern manufacturing centre setting the stage for high growth based on industrialisation and even more capital accumulation.

Colonial wars and trade-related warfare played a major part in this historical process from the sixteenth century to at least the end of the Napoleonic wars in 1815; on this, see Findlay and O’Rourke (2007). The tale of the British East India Company provides one of the best examples; see Robins (2006). Having achieved its commercial goal via the conquest of Bengal,⁹ it extracted the right to collect taxes in Bengal (the Diwani) from more than 10 million souls in 1765. This caused great excitement in London and the rest of Europe, causing its share prices to rise meteorically before an inevitable crash. The capital acquired from the right to tax the farmers of Bengal was capital acquired by force and conquest and was utilised to drain resources. The revenues were utilised to buy local textiles at prices which disadvantaged local textile merchants, eventually bankrupting them. Revenues were also utilised to export opium to China illegally in return for tea, which was re-exported to Britain and even the faraway shores of the British North American colonies. A similar story could be told about the transatlantic slave trade, and the triangular trade involving textiles from India, slaves from Africa and sugar (molasses) from the Americas is evidence of the role of colonial trade in early capital accumulation in the traditionally capital-rich parts of the world. Many of the gentlemen of leisure mentioned in nineteenth-century novels, such as those by Jane Austen, had made their fortunes in the East India trade. Cain and Hopkins (2016) coined the term ‘gentlemanly capitalism’ to describe the early financialisation of British economic imperialism, and the focus on finance capital, rather than manufacturing, helps accelerate the growth of the rate of profit, so key to the Piketty explanation for rising inequality.

Economic globalisation refers to the intensity of international trade in goods and services, as well as global financial flows. Increases in international trade nearly always have distributional consequences. After an expansion of trade, the factors of production employed in the exportable sector will witness a rise in their relative remuneration. This is because the exportable sectors of the economy expand, and the import-competing sectors contract, after increased international trade. Hence, greater globalisation produces winners and losers. Financial globalisation and open capital markets are regarded to be more harmful as they are believed to promote financial crises, particularly in developing countries.

Dabla-Norris et al. (2015) and Ostry et al. (2014) show that the recent growth experiences of a cross-section of developed and developing countries suggest that inequality is actually harmful to growth prospects, contrary to the received wisdom that inequality (by permitting the rich to save and invest more in productive capital) oiled the wheels of growth. This could be because greater inequality leaves economies more prone to financial crises, greater inequality discourages human capital accumulation (education) among the poorer segments of society, and because inequality contains within it the seeds of conflict, which is harmful to growth. Moreover, the financial markets of today are less invested in productive manufacturing and more in the casino capitalism of purely financial products. On the causes of recent rises in income inequality, Dabla-Norris et al. (2015) point out three phenomena. First, unskilled labour-saving technical progress, which first decimated manufacturing jobs, and latterly in services as well; secondly, financial globalisation (but not trade openness); thirdly, less regulation of labour markets, including the informalisation of work are the chief culprits.

Financial globalisation and the greater mobility of capital contribute to greater inequality by lowering the bargaining power of labour under the threat of economic activities located overseas (Furceri et al., 2017). Rodrik (2018) also maintains that greater mobile capital shifts the burden of adjustment to economic shocks more to labour. Highly mobile international capital also has the effect of lowering corporate taxes via tax competition and narrows the fiscal space and capacity of the state (see Rodrik, 2018 and references therein). Technical progress has been cited as a major cause of job destruction, the displacement of production line workers, the automation of services and the hollowing of the middle class by putting their traditional white-collar jobs at risk. But as Rodrik (2018) points out, it is much more difficult to disentangle the effects of technical progress on real wages and employment from globalisation effects causing the same movements.

There is now ample evidence that redistributive policies, including social protection expenditures, appear to no longer harm growth prospects (Ostry et al., 2014) in recent years. Traditionally, government expenditure, even for good causes, was felt to distort the economy away from efficient outcomes. Consequently, economic efficiency and equity considerations needed to be separated; moreover, there was an efficiency-equity trade-off (see Okun, 1975), empirical evidence for which seems to have weakened in recent years, linked among other phenomena to new forms of market failure and extreme inequality.

This leads us to the political economy considerations, as the choice and implementation of policies by the state are fundamentally the outcome of strategic interaction between different factions with different interests. Downs (1957) famous median voter theory suggests that the median voter's preferences prevail in a democracy. And the median voter may vote for redistributive policies.

Our present era, however, can be characterised by the steady loss of median voter power. The rise in inequality worldwide has meant that the average or mean income is rising faster than the median income. There has been a considerable shift in political clout away from the median voter to the policies that suit the super-rich, who compel the formulation of national policies to further the interests of the owners of internationally mobile capital and work skills. This manifests itself chiefly in the nation-state feeling compelled to follow policies of fiscal austerity and wage compression, lest national participation in the globalised economy is jeopardised. This also frays the domestic social contract and leads to the diminution of social protection. By contrast, during the era of more limited globalisation prior to the 1980s, the interests of the rich and the median income group did not necessarily conflict; it was an era of growing social protection, the provision of public services like education and health, employment rights, declining inequality and consensual democracy. The recent phenomenon of hyper-globalisation (Rodrik, 2017), defined to occur when the costs of further globalisation in terms of the increased inequality outweigh economic benefits, produces a democratic deficit and a nasty backlash in the form of populist politics.

Autor et al. (2008) pointed out that in the USA, there was a shift in the demand for labour away from middle-level clerical occupations towards greater demand for highly skilled and low-paid service sector jobs. These trends are being repeated elsewhere in the world and point to a hollowing out of the middle classes. Autor et al. (2013) indicate that, especially in manufacturing, import competition from China has disadvantaged (mainly production) workers in labour markets in the USA where import-competing sectors existed. This contributes to promoting spatial inequality. The important point is that these workers were not necessarily compensated retrained, nor did the elite do much to prevent deindustrialisation. Deindustrialisation also occurred in the UK in the 1980s under the stewardship of Margaret Thatcher, mainly via real exchange rate appreciation but also through the deliberate absence of national industrial policies.¹⁰ A healthy manufacturing sector was central to the emergence of twentieth-century social democracy and its concomitant welfare state. These have been rolled back aided by the decline of domestic manufacturing and hyper-globalisation. Manufacturing as a result of hyper-globalisation has mainly been located in China and East Asia; this has contributed to the hollowing out of the middle classes, disadvantaged production workers and the rise of populism and autocracy.

The growth in inequality is the result, and one way this is justified is the emphasis on meritocracy; the rich deserve their just deserts because they have been more hard-working and enterprising. As Segal (2022) points out, this has led to a change in attitudes towards inequality, from one where it was regarded to be an accident of birth or attributable to social class to one where poverty or low income is an individual's fault. Not that these attitudes did not exist in the past, but nowadays, they have become even more salient. An earlier critic of meritocracy was Tawney (1931). The important point to bear in mind is that in our present labour markets, small differences in talent command disproportionately huge earnings differentials, whereas the same differences in compensation were less significant in the past. Indeed, as Atkinson (2003) points out, the changes in the income distribution favouring top earners, and high performers cannot be attributed solely, or even mainly, to their higher marginal productivity but to changing social norms (perhaps permitting extreme forms of meritocracy) and the rise of the rate of return on capital (Piketty, 2014).

Global inequality

This concept compares and contrasts inequality in average incomes between countries (inter-national inequality) and also looks at inequality in the planet as a whole (global inequality). In their measurement a lot hinges on the unit of analysis, and it is the country when it comes to inter-national inequality, but households across the world when it comes to global inequality. In the former case, we take the average or per-capita income of a country as the metric for comparison. With the latter metric, the planet is treated as one country with households as the unit of analysis. If the country is the unit of analysis, measurement issues are more resolvable, as we have readily reliable data on per-capita incomes, whereas with the household method we need internationally comparable household surveys, which are not available prior to 1988. Even with the country-level analysis, which effectively treats everyone in the country as having its average income, there are two different methods. The first method, known as concept 1, is the inequality in average incomes across countries treating every country irrespective of population size as one equal unit, hence China and Antigua have the same weight. If we do apply population weights then we have concept 2 global inequality, and much of the changes in this metric are driven by what happens in the more populous states of the world, such as China and India. Both of these inequality measures decline when differences in cross-country average income decline, and we have closing per-capita gaps between rich and poor nations.

According to Milanovic (2016), Concept 1 international inequality (all countries given identical weights) kept creeping up until approximately 2000, when it started to decline because growth rates had recovered in all developing countries (compared to the 1980s and 1990s sub-Saharan African and Latin American nations fared poorly in their growth rates). For the first decade after 2000, growth rates in nearly all developing countries went ahead of the planet's richer nations. Concept 2, population-weighted international inequality has been steadily declining ever since China's growth resurgence in the 1980s, belatedly joined by India in the 1990s, as they collectively account for about 40% of the world's population.

Chancel and Piketty (2021, Table 3) present us with a historical snapshot of inequality over time, but more interestingly regional shares of world per-capita income. First of all they estimate a per-capita income for the world as a whole at different points in time from 1820 to 2020, and then report their estimates of regional average percentages of this per-capita income. Thus, for example, East Asia's income per-capita was 84% of the global average in 1820, declining steadily to 29% by 1950, but recovering to 123% by 2020. For South and South-East Asia this figure was 62% in 1820, declining to 25% in 1950, and recovering to 47% by 2020. In sub-Saharan Africa the figures are 62%, 56% and 23% respectively; for Latin America the corresponding numbers are 113%, 113% and 90% respectively. There is clearly colonial stagnation in income in Asia leading to greater inter-national inequality, and economic mismanagement in sub-Saharan Africa and Latin America in recent decades.

Next, we have the concept of ‘global’ inequality, based upon the inequalities in household income across the planet. Global inequality may have declined by about 2 percentage GINI points between 1988 and 2008 to around 70.5 (Milanovic, 2016), but this finding, as the author points out, may mask the serious underestimation of the income of the top decile in the income distribution, who are often missed out in household surveys. In recent years the greatest beneficiaries of changes in the global income distribution have been the world's super-rich (the top 1% in the income distribution), along with the middle classes in emerging market economies, chiefly in China and India; the greatest losers have been the lower middle and low income groups in developed countries, the traditional working class blue collar household, and more recently the hollowing out of the middle class in some rich countries.

Global inequality can be further decomposed into the sum of inequality within nation-states, as well as the inequality between countries based on their average incomes. The inequality within nations has been rising everywhere, despite a short brake on inequality during the tenure of progressive regimes in Latin America between 2000 and 2010. The other component of global inequality is the inequality between nations, and here we can focus on the population weighted differences in per-capita income between nations. We would expect global inequality to fall as the average income in the most populous developing countries (China and India) catches up with rich countries, and indeed this has been the case. But when we combine the two factors that make up global inequality, most of present-day global inequality still continues to be attributable to between-country inequality, that is, the inequality which stems from differences in average income between rich and poor nations. How rich or poor an individual is depending on their position in the hierarchy of occupational incomes, but is more attributable to where they reside and work. A bus-driver may be poor because of his disadvantaged place in the wage league table, but more importantly it depends on where he is a bus-driver (a rich or poor country). Thus, according to Milanovic (2016) there is a citizenship rent, and consequently we may describe it as the global inequality of opportunity. Across the world, Milanovic (2016, figure 1.8) demonstrates that the share of billionaires’ wealth relative to global GDP was under 3% in 1987; this had increased to more than 6% by 2013. Accompanying this, the national income share of the middle class (defined as having an Income in the range of 25% above and 25% below median national income) declined over this time period in nearly all Western democracies, with the United States exhibiting the lowest middle-class share, and the UK not far behind with the fourth lowest share (Milanovic, 2016, figure 4.8).

As Milanovic (2022) points out that the between-country component in global inequality has been steadily rising since 1820 up to the year 2000 with a slight decline during the inter-war period (1919–1939). After the year 2000, there was a sharp decline in between-country inequality because of the decline of the poor population in China. The pattern of the evolution of within-country inequality is, however, different. Within-country inequality steadily rose up to 1914, when it starts to decline in developed countries as well as in socialist nations (USSR, China) up to the 1980s, when it starts to rise again. The present trend is rising within-country inequality and falling between-country inequality.

We do not have internationally comparable post-pandemic household surveys yet, but we have forecasts for growth in per-capita income, as well as COVID-19 induced national income changes for 2020. This allowed Deaton (2021) to investigate the impact of the pandemic on concept 1 and 2 global inequalities. First, Deaton notes that there were more reported COVID-19 fatalities in richer countries, and secondly GDP growth forecasts for 2021 by the international financial institutions is negatively related to COVID-19 mortality. China, both in terms of the reduction in its GDP, as well as COVID-19 deaths did better than most countries; whereas, India fared badly in both respects. Taken together, all of these stylised facts point to a fall in concept 1 (population unweighted) global inequality because the poorer economies of the world appear to have suffered less national income compression. Concept 2 (population weighted) global inequality, however, increases slightly. This, Deaton (2021) argues, is because China came out better than other countries, and as an upper-middle income country, increases in its relative per-capita income pushes up concept 2 global inequality. Given that the within-country income inequalities are set to rise as well, we may safely conjecture that global inequality has risen.

Horizontal or group-based inequality

For whosoever hath, to him shall be given, and he shall have more abundance: but whosoever hath not, from him shall be taken away even that he hath. Matthew 13:12¹¹

Another type of inequality merits our attention, that is the inequalities between various groups, be it based on ethnic, linguistic, religious or other markers of difference. This is because, inequalities can also pertain to differences between groups, and these differences in attainment can be major cause of internal conflict and civil war; see Murshed (2010) and Cederman, Gleditsch and Buhaug (2014). The term horizontal inequality (Stewart, 2000) is utilised to describe between group inequalities and is salient to the explanation of civil war and internal conflict.

There are two types of inequality, which are arguably central to producing internal conflict. Both produce horizontal inequality and/or relative deprivation. The first type refers to the durable inequalities mentioned by Tilly (1998), and these are the inequalities bred by the unequal distribution of economic assets (not necessarily current income), education and health status. These inequalities are both notoriously difficult to redress, and even then affirmative action takes a long period to bear fruit. The second type refers to inequality of opportunity (Roemer, 1998) which pertains to discrimination. Certain groups may be systematically disadvantaged in terms of employment or educational opportunities because of their racial or ethnic characteristics, despite being otherwise as well qualified as members of other groups. Furthermore, the individual does not exist in a socio-economic vacuum, and group identity and the relative positioning of his group may also be important to him. The economics of identity (Akerlof & Kranton, 2000) falls into the innovative field of behavioural economics embracing many psycho-social features. Behaviour extends beyond methodological individualism (or the narrow individual cost–benefit calculus); group norms and positioning can also shape individual decisions (Bourdieu et al., 1990; Breen & Goldthorpe, 2002).¹² For some disadvantaged groups, solidarity with the group cause individuals to self-organise in order to revolt against a state that persecutes them; see Murshed (2011) on this point.

It has been suggested that reducing horizontal inequalities is central to lowering the risk of civil war; see Murshed (2010) and Cederman, Gleditsch and Buhaug (2013) for example. Segal (2022), however, importantly points out that the reduction of horizontal inequality without lowering overall, inter-personal or vertical, inequality will increase inequality within groups. This is because inequality can be decomposed into the sum of between-group and within-group inequalities. If we were to reduce one component of the sum (between group inequality), while holding the sum total constant (total vertical inequality), the other component in the sum (within-group inequality) must necessarily rise. Hence, conflict risk reducing policies cannot focus solely on horizontal inequality; vertical inequality must also be lowered for a truly positive peace.

Thus, for example, in South Africa, bridging the black–white inequality gap may reduce political tensions, but unless overall (vertical) is also reduced, it will increase inequality within the black African group as a whole. In the Western world while male-female earnings differentials have diminished, inequalities in earnings among women may have risen. Inequalities in the distribution of billionaires across nations may have fallen. We have Chinese, Indian, Mexican, Bangladeshi and other non-traditional country billionaires at present, but within-country inequalities tend to ferociously increase.

Inequality and democratic governance

The growth in inequality in the last four decades poses a menacing challenge to liberal-democratic governance. There is a rising wave of autocracy (VDEM Report, 2021), especially in developing countries, accompanied by a rise in ‘populism’ in the context of democratic electoral processes, chiefly, but not exclusively, in developed countries. All of this occurs in the background of a highly globalised international economy, which helps to alter the domestic social contract in favour of the rich. The forces behind highly internationally mobile capital in a globalised context forces promote plutocratic policies and declining social protection in order to maintain international ‘competitiveness’. Greater and rising inequality is the product of accelerating globalisation, and trade favours the highly skilled owners of footloose capital. There are indications, however, of diminishing emphasis on policies favouring multilateral globalisation; see Goldberg and Reed (2023) and Aiyar et al. (2023).

In the traditional Western democracies where the traditional working class, and in some instances even the lower-middle income groups have become pauperised and left bereft of hope there is a political backlash resulting in a vacuum which seemingly only populists can fill. In some cases the below median income voter, who has become economically deprived may vote for a populist who is a closet plutocrat, but appeals to the disadvantaged voter's nationalist sentiments, and the populist promises to punish the ‘other’ who is scapegoated for the economic plight of the below median voter (Murshed, 2020). Rodrik (2018) suggests that the rise in populism coincides with hyper-globalisation. The vote share of populist parties since 2000 in selected European and Latin American nations has exceeded 10% (Rodrik, 2018, figure 1). The crucial mechanism in the middle which helps transform increased globalisation into populist political success is inequality. Examples of recent populist victories include the United States in 2016, the UK in 2019 (along with the Brexit referendum¹³ in 2016), Brazil in 2018 and in India in 2019. These populists are elected with nationalistic agendas, but do little to lessen inequality, while promoting illiberal and intolerant tendencies. This is the curious admixture of populism and plutocracy (Pierson, 2017). It has been pointed out by Autor et al. (2017) that trade shocks disadvantaging unskilled labour and production workers had a major part to play in garnering Republican Party votes electing Donald Trump in 2016. The austerity and cutbacks to the welfare state by the mainly Conservative government in the UK contributed to the Brexit referendum result in the UK in the same year (Fetzer, 2019). Wage compression, de-industrialization and cuts to the welfare state all help the rise of populism and autocracy.

In recent times, liberalism and democracy have become strange bedfellows. The majority can always tyrannise the minority in purely elective democracies unless constrained by liberal institutions and precepts. Rising inequality, not only contains within it the seeds of conflict, it can also undermine the liberal aspects of democracy in settings where the electoral engine of democracy still appears to function as smoothly as ever.

Conclusion: what is to be done¹⁴

Growing inequality is probably the most central economic issue confronting the world economy and nation states. Piketty (2014) has cogently argued that the mechanism underlying this is the high profitability attached to asset income (‘capital’) which exceeds the growth rate of the economy. Curiously, however, in the past two decades global inequality is declining because of the high growth rates of China, but this does not detract from the fact that within country inequality continues to grow. Additionally, in addition to inter-personal or vertical inequality, inequality between groups or horizontal inequality is a potent risk factor for the emergence or exacerbation of internal conflict within nation states. Rising inequality has also been demonstrated to be a major threat to liberal democracy.

Notwithstanding the abovementioned mechanism attributing rising inequality to the profit rate exceeding the growth rate of the economy there are other social and political forces buttressing this mechanism. The crucial social force underlying this are changing social norms justifying inequality is the ‘meritocracy’ phenomenon discussed earlier (see, Atkinson, 2003; Segal, 2022). This permits inequality as just deserts related to talent and effort and not related to class background and unequal initial opportunities. The meritocracy justification is undermined by the fact that we live in societies where relatively small differences in ability attract disproportionately huge rents, as is evidenced by the compensation packages of the very wealthy who unlike in the past are not just rentiers but super-managers. Differences in talent and performance are not just ‘God-given’ but relate to initial opportunities. Wealth permits its owners to hoard opportunities for their progeny as pointed out by Tilly (1998), and earlier by Tawney (1931) who argued that the disadvantaged would be unable to take up the (insincere) invitation of the rich to compete with the privileged for economic and other opportunities. The inequality of today can produce inequalities of opportunity in the future, as the rich enhance the opportunity set of their heirs through superior education. The retreat of the welfare state, particularly the earlier measures to guarantee access to quality higher education, which characterised the post-war golden age of capitalism, have made these inequalities of opportunity more salient in the post-1980 world.

Political changes that subjugate the earlier post-war welfare and redistributive social contract to wealth creation, utilising the rhetoric of the globalisation categorical imperative, an imperative embraced by governments both left and right of centre, have nurtured the incipient and actual plutocracies, so widespread in our present world. Indeed, it can be argued that the United States is a plutocracy (Mahbubabni, 2022), and recent developments in the UK suggest a similar process.

Globalisation is widely believed to be the driver of rising inequality. Indeed, the Piketty mechanism of the high profitability of capital relative to economic growth may be driven by the near perfect mobility of capital in our globalised era, something which was not the case during the earlier golden age of capitalism, which broadly coincided with the Bretton Woods era of 1945–1973. Rodrik (2017) mentions the globalisation trilemma whereby it is impossible to simultaneously maintain democracy, national sovereignty and complete international economic integration. Something has to give, if domestic social contracts that militate against excessive inequality are to be sustained.

Indeed, there are developments suggesting a retreat from globalisation at least in the rhetoric of populists such as Trump and the British Brexiteers, but also among environmental groups. Aiyar et al. (2023) and Goldberg and Reed (2023) point to the fragmentation and regionalisation of the multilateral trade regime, chiefly evidenced by trade wars between China and the United States, but also declining exposure to international trade in countries such as India and China. Trade wars risk descent to actual wars. There are geostrategic or geoeconomic reasons for these trade wars and the advocacy of regionalisation in international trade, but restricting international trade as a means to lower inequality is fraught with danger as it can make the disadvantaged below median income earning worker worse off worldwide through higher prices or job losses. As far as labour markets are concerned, Goodhart and Pradhan (2020) and Autor et al. (2023) point out that the abundance of unskilled workers is no longer as pervasive as it was before the recent pandemic; there are low paid service sector job shortages and inflation is on the rise. The boost to global unskilled labour supplies caused by China's entry into the world economic stage and also Eastern Europe's integration into the labour market is now over. There could even be inflationary distributional clashes, as in the 1970s. Thus, labour markets are showing some early, if weak, signs of inequality reversal, but that is not a solution, as it is capital that needs to be taxed.

Historically, wars and revolutions have been the forces that lower inequality. Using a Biblical, analogy Scheidel (2017) speaks of ‘four horsemen’ of the apocalypse which have acted as the great (economic) levellers throughout history: total war necessitating mass mobilisation, state collapse, pandemics and political revolutions. All of these phenomena are in reality, inter-related and endogenous to each other. There is little doubt that in the twentieth century, the two world wars and the socialist revolutions beginning with the Russian revolution of 1917 engendered a decline in inequality and a decline in the wealth-to-national income ratio in capitalist economies by making redistributive policies, state intervention and the welfare a necessity for systemic survival in the Western capitalist economies during the golden age of capitalism. Indeed, as Piketty (2022) in his more sanguinary work points out, the march of history in the past two centuries is one of declining inequality, chief among which is the high rate of social mobility in the three decades of social democracy following the Second World War, and the gradual expansion of the property-owning middle classes.

There needs to be a tax on capital, in order to truly and meaningfully lower inequality in our present world as advocated by Piketty (2014, chapter 15). This proposal is akin to the land tax favoured by Ricardo (1817/2001). As Piketty argues, this cannot be done solely at the national level but could be implemented at a regional level as in Europe, requiring international or regional cooperation in banking and financial information. The tax needs to be a flat tax (say 5%) on an estimate of the income stream generated from the value of total wealth, not merely on income reported from wealth, as income from assets is notoriously untransparent because of a host of mechanisms such as trusts and reinvestment instruments. In this way, a wealthy individual's total income can be subjected to the existing progressive tax system. In this way the runaway profit rate on asset income can be reduced. These proposals are not just a pipedream, but need serious consideration, if there is to be even the prospect of a social democratic alternative to the dystopia of a plutocratic world with its inexorable descent towards a populist-autocratic Hades.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Notes on contributors

Syed Mansoob Murshed

Syed Mansoob Murshed is Professor of the Economics of Peace and Conflict at the International Institute of Social Studies (ISS), Erasmus University in the Netherlands and the Centre for Trust, Peace and Social Relations (CTPSR), Coventry University in the UK. His research interests are in the economics of conflict, resource abundance, aid conditionality, political economy, macroeconomics and international economics. He was the first holder of the rotating Prince Claus Chair in Development and Equity in 2003. He was a Research Fellow at UNU/WIDER in Helsinki, where he ran projects on Globalisation and Vulnerable Economies and Why Some Countries Avoid Conflict While Others Fail. He also ran a project on The Two Economies of Ireland, financed by the International Fund for Ireland at the Northern Ireland Economic Research Centre (NIERC), Belfast. He is the author of ten books and over 170 refereed journal papers and book chapters.

Blas Regnault

Blas Regnault is a sociologist (Universidad Católica Andrés Bello, Caracas, Venezuela) with a master’s in public policies from Université Laval (Quebec, Canada) and PhD in Erasmus University of Rotterdam (The Netherlands). His dissertation focuses on the oil price trends and fluctuations determinants, developing an alternative explanation to the standard economics of oil approach; he focuses on monetary costs, institutional factors and business cycles. He also studies the impacts of oil rents on social inequalities and the performance of oil-exporting economies. His research interests also include the sociology of education and public education policies in Venezuela and Latin America.

Notes

1 This statement is attributed to Priest John Ball in his sermon addressing the rebels of the Peasant's Revolts in England in 1381, a few decades after the Black Death (Magna Pestilencia) of 1346.

2 The term short twentieth century was popularised by the historian Eric Hobsbawm (1995). The pertinent dates are 1914 (First World War) to 1991 (dissolution of the Soviet Union) in the common era. The short twentieth century was preceded by the long nineteenth century, from 1789 (the French Revolution) to 1914.

3 We will utilise the term ‘capital’, with short quotation marks to denote the non-labour share of national income, the capitalists’ share.

4 This definition of ‘capital’ includes land or property ownership.

5 A term coined by Dani Rodrik (2017).

6 Relative, because income from work is nowadays becoming very unequal as anyone paying attention to CEO compensation knows.

7 In France, known as ‘Les Trente Glorieuses’, or the thirty glorious years (1945–1975).

8 This is not to deny that the wealth of the rich and super-rich of today also have many characteristics of rentier income.

9 Coincides with present-day Bangladesh and the Indian states of West Bengal, Bihar and Orissa.

10 For a discussion on deindustrialisation in the UK, see Singh (1977) and Cowling and Sugden (1994). For a detailed periodisation of the UK industrial policy and its deindustrialisation effects, see Coyle and Muhtar (2021) and Norris and Adam (2017).

11 King James version of the Holly Bible, http://www.holybooks.com/download-bible/.

12 For instance, schooling is a source of inequalities’ reproduction, but it is not a primary (original) source of inequalities (see Bourdieu et al., 1990. Breen & Goldthorpe, 2002). Banning private education as public policy could avoid creating additional reproduction sources of inequalities, e.g. wealthy people in private exclusive schools. Schooling also can help to mitigate income inequalities. However, schooling is not a ‘primary’ (original) source of inequalities due to wealth.

13 On Brexit see Bailey et al. (2023).

14 With apologies to Vladimir Ilyich Ulyanov better known as Lenin.

Appendix

Piketty (2014, chapter 1) posits the following stock flow equation: (A1) $\text{β}={\displaystyle \frac{A}{Y}}$(A1) Where A is the value of the stock of wealth, and Y is the (flow) value of total national income (GDP), both in any given year. He goes on to the state that the share of capital or wealth (A) in national income is also given by the following identity, where r is the profit rate or the rate of return on financial and physical capital: (A2) $\text{β}r$(A2)

For example, if the ratio of wealth to national income in (A1) is 6, and the rate of profit is 5%, then the ‘capital’ share of national income is 30%; something that corresponds to contemporary stylized facts.

Piketty (2014, chapter 5) further posits a long-run steady state condition for the accumulation of produced capital (inclusive of financial capital) (A3) $\text{β}={\displaystyle \frac{s}{g}}$(A3) Where s = saving rate and g is the annual growth rate of the economy.

Hence, if s > g, the ratio of wealth to national income must be rising in (A1) and the share of ‘capital’ in national income in (A2).

This begs the question as to why this is so? It could be because r > g, the return on assets is greater than the growth rate of the economy. Here, growth can be caused by a rise in productivity, as well as an increase in the labour force (population) or both. We propose a simple Kalecki (1954) mark-up equation for profit taking in an imperfectly competitive marketplace for goods and services, where for analytical tractability we ignore capital and other intermediate inputs: (A4) $PY=\left(1+r\right)W{\displaystyle \frac{L}{Y}}$(A4) Where P indicates the supply price, W stands for money wages, L/Y is the labour-output ratio or the inverse of labour productivity and r is the mark-up or profit rate corresponding to r in (A2). Improvements in labour productivity or labour-saving technical progress (a fall in L/Y) for a given supply price, means greater wages or profit. If workers are rewarded less than proportionately to the productivity improvement, ‘capital’ will gain more than proportionately, which is a plausible candidate for recent developments in the global economy involving labour-saving technical progress and may help explain why r > g in the lead-up to the global financial crisis of 2008, when the return on investment was so high.