Explaning inequality

This week’s Economist special report on the rich includes an article on social inequality. It starts with the observation that inequality has widened considerably over the past 30 years after narrowing from the 1930s to the late 1970s. But it reviews competing explanations for the recent widening without coming decisively down in favour of any one in particular:

• Technology. The problem with this argument is the tech-savvy Nordic countries are generally egalitarian.

• The abolition of ultra-high tax rates. But inequalities are just as marked in pre-tax and post-tax incomes.

• The demise of trade unionism. Seen as being a possible factor lower down the income scale.

• Globalisation. The emergence of a global market for talent.

For me the explanation most likely lies in the political defeat of organised labour represented by the rise of free market economics and the end of the Cold War. In addition, the rich benefitted from the surge in the volume and price of financial assets over the past three decades.

However, the recent economic crisis has, in some respects at least, hit the rich harder than the poor. “Although they [the poor] may lose their jobs and default on their loans, they will not be troubled by collapsing asset prices because they do not own assets”.

Clearly the poor live closer to the margin of subsistence than the rich so any loss will be felt particularly hard by those closer to the bottom of the income scale. But the rich have, as would be expected, lost more in absolute terms (in dollars or pounds) and may well have lost more relative to their incomes too.

The idea of “popular capitalism” – with the mass of the population having a substantial financial stake in the market economy – was always a myth.