Summary of The Great Leveler

The “Four Horsemen”

In 2010, it took the combined wealth of 388 billionaires to match the holdings of the lower-half billions. By 2015, that had shifted: 62 megabillionaires owned as much wealth as the 3.5 billion people on the bottom half of the global income scale. The decades after World War II were a golden age for income equality. The economies of the developed world hit record levels of equality sometime in the 1970s or early 1980s. By the mid-1980s, wealth in North America, Europe and Asia had concentrated into fewer hands. Since 1983, equality has steadily declined. By 2012, the US economy was as unequal as it was in 1929.

“Across a wide range of societies and different levels of development, stability favored economic inequality. This was as true of Pharaonic Egypt as it was of Victorian England.”

A close study of history reveals that income inequality often follows desirable societal developments and economic advances. For instance, primitive hunter-gatherers had little wealth and thus little inequality. The emergence of agrarian societies and land ownership led to the evolution of cereal crops and accelerated the accumulation of wealth. Grains’ long shelf lives enabled landowners to amass riches.

“The overwhelming majority of wars in history were not conflicts of military mass mobilization across society.”

Rare episodes of flattening inequality resulted from large-scale disasters. These upheavals fall under the categories of the “Four Horsemen of Leveling”: The first horseman is “mass mobilization warfare” that levels cities and nations and mobilizes troops and factories. The second is “transformative revolution,” which purges a society’s elites and compels a redistribution of wealth. The third is “state failure” on the order of Somalia’s meltdown in recent decades. The final horseman is “lethal pandemic”: A deadly ailment like cancer can’t redistribute wealth, but a pandemic such as the Black Plague certainly did.

The Gini Coefficient

The Gini coefficient measures how widely the distribution of assets and wages diverges from perfect equality. A Gini score of 0 means everyone is equal. A coefficient of 1 means one person owns everything and everyone else owns nothing. Societies rarely reverse trends of greater and greater wealth concentration. Only catastrophic events undo inequality.

Total War Decimates the Elites

For centuries, wars were relatively isolated events. Professional soldiers’ primitive weapons limited civilian casualties. The 19th century brought the concept of total war, characterized by the mass conscription of civilians and the widespread destruction of the means of production. From 1914 to 1945, the income share of Japan’s richest 1% plummeted by two-thirds. In France, Denmark, Sweden, the UK and Finland, income shares at the top fell by half or more. The wealthiest Americans saw their relative incomes fall by one-third.

Japan

Japan serves as a “textbook case” of conflict that makes the wealthy poorer, while it boosts the fortunes of the poor. In 1937, Japan’s wealth was concentrated in the hands of a few influential families. But as it waged war on China and the United States, Japan invested heavily in its war machine, expanding its military by a factor of 20 from the mid-1930s to 1945. Japan transformed its economy from market-based to state-controlled. Toward the war’s end, the empire devoted 87% of GDP to military spending. To support the war effort, the government engaged in rent controls so that property owners made less from their investments. Japan doubled the top income tax rate as inflation surged. The government propped up war bonds at the expense of other investments.

“Reaching back to at least the ancient Babylonians, intensive economic growth, commercialization and urbanization…boosted inequality.”

The poor paid less for rent and gained from social welfare programs designed to support the war by staving off civil unrest. Japan lost 2.5 million troops on the battlefield, and US bombers killed 700,000 civilians. The destruction wiped out physical capital at the expense of the wealthy elite.

“Substantial reductions of the gap between rich and poor were bought at a high price – high in human suffering.”

In the postwar years, Japanese equality remained high, thanks to a unionization push during the US’s occupation. Unionization levels soared from 10% before the war to nearly 50% in 1949. Union members received generous wages, frequent raises, health coverage and retirement benefits. These developments fomented a broad redistribution of income. US overseers pushed land reform. The Gini coefficient in Japan’s small towns fell to 0.35 after the war, compared to 0.50 before the hostilities. The war made the Japanese economy fairer and more equal.

Economic Change

Germany, France, the United Kingdom and the United States spent huge amounts of money to deploy troops and build weapons in the 20th century. Germany’s history of printing money to pay for combat caused massive inflation. From 1913 to 1950, prices in Germany rose by a factor of 300, and in France, prices shot up 100 times. Wartime reduces income inequality because the wealthy – as bondholders and property owners – suffer during periods of hyperinflation.

War Taxes

War taxes equalize income. The wealthiest taxpayers bear the brunt of income tax increases during the conflicts. Progressive income taxes and estate taxes first emerged during World War I, as Britain, America and Canada sought to “soak the rich” for patriotic purposes. In the UK during WWI, for instance, top tax rates jumped from 6% to 30%. In the US, the top income tax rate touched 94% in 1944. From 1914 through 1945, inflation, poor returns and economic uncertainty ruled. The rich had more to lose and the poor had more to gain.

“Clean Slate”

After WWII, the world had a new start. War had wiped out the old elites and new opportunities arose. The dramatic increase in union membership leveled incomes. In the United Kingdom and the United States, union rolls soared during WWI, fell after the war, and skyrocketed again throughout WWII. Unions discouraged inequality by using wage protections and other means. For three decades after WWII, income inequality declined, a trend that reversed globally starting in 1983.

The US Civil War

Wars aren’t always wealth destroyers. The US Civil War qualifies as a mass mobilization with large-scale casualties, yet it did not make America’s economy more equal, at least not in the North. That’s partly because the federal government didn’t impose steep income taxes to fund the war effort. The Union’s income tax rate during the Civil War topped out at 5%. Industrialists JP Morgan, John D. Rockefeller and Andrew Carnegie started in business by supplying the military complex. In the Union states, war drove wealth concentration.

“As Piketty has argued, the entire reduction of the top 1% income share between 1914 and 1945 was due to losses in nonwage income, as capital was buffeted by combat, bankruptcies, rent control, nationalization and inflation.”

The Confederacy paid for the war by printing money. That unleashed hyperinflation that reached 9,000%. The abolition of slavery sapped wealthy Southerners of assets. Slaves made up 48% of private wealth in the South in 1860. Through the combination of war-driven inflation and the end of slavery, the Gini coefficient fell from as high as 0.61 in the South before the war to 0.46 afterward.

Russia’s Revolution

Ideological revolutions can devastate economies. Czarist Russia wasn’t especially unequal. In 1905, the top 1% of Russians collected about 15% of all income, less than the income shares of the top 1% in France, Germany and the United States. Incomes became more level after Lenin’s Bolshevik regime enacted land reform giving control of nearly 97% of farmland to previously landless peasants. Lenin attacked Russia’s kulaks, whom he called “bloodsuckers” and “rich men.” The kulaks were only a bit better off than their fellow farmers. Afraid of being killed, the kulaks raised fewer crops, destroyed their tools and killed their animals. Russian villagers grew poorer as agricultural output dropped. In 1930, under Josef Stalin, the Soviet Union embarked on collectivization. Relatively affluent peasants faced heavy taxes. The government forced the new breed of kulaks from their land and even murdered them. Russia arrested 1.8 million kulaks and starved millions more.

“The massive, violent shocks of modern mass mobilization warfare depressed inequality by a wide variety of means.”

Stalin’s purges forced Russians into gulags where they toiled for free. The campaign of mass imprisonment targeted the well-educated. Stalin achieved income equality by forcing those who could have commanded high wages in a market economy to labor for no pay. During the peak of Soviet power in the 1960s, the Gini coefficient was in the range of 0.2 to 0.3 – down from 0.36 before the revolution. Manual laborers made more than white-collar employees and technical workers. After the Soviet Union collapsed, inequality soared. Gini coefficients jumped from 0.28 in 1990 to 0.51 in 1995.

China’s Revolution

From 1947 to 1952, as many as two million Chinese died in a purge of so-called exploiters and class enemies. The government seized and redistributed the properties of millions of people. The Chinese Revolution undermined individual ambition and work ethic. Authorities claimed that poverty was “glorious,” while being a member of the bourgeoisie brought the risk of beatings and torture. This led many Chinese to shun accumulating wealth. As Mao’s regime sought more perfect equality, the Great Leap Forward of 1959 to 1961 claimed tens of millions of lives. As many as 40 million people starved to death. Some 20 million more died in state camps. Chinese Communist rule wiped out income inequality. The Gini coefficient in Chinese cities was just 0.16 in 1980. As China embraced free markets, inequality soared, reaching more than 0.5 in recent years.

Somalia and the Death of the “Vampire” State

While recent history offers myriad examples of war and revolution, total societal collapse is less common. The starkest example comes in Somalia, where the 1991 downfall of Mohamed Siad Barre threw the nation into chaos. Somalia was not a model society, even in the best of times. Siad Barre ruled as a dictator for more than two decades. Somalia is so dysfunctional, reliable economic statistics are hard to come by. However, its 1997 Gini coefficient is thought to be 0.4, lower than in other African nations. It seems obvious that the fall of Somalia’s power elite would spur equality. The collapse of Somalia’s vampire state, run by a predatory dictator, shows that a nation can lower income inequality even without a viable, functioning society.

The Power of Pestilence

The final horseman of wealth inequality is the pandemic, a devastating form of economic leveling. To understand disease theory, start with the principle put forth in 1798 by the Rev. Thomas Malthus. He argued that because human population growth tends to outstrip the availability of resources, checks on population are a healthy occurrence. The Black Plague that ravaged Europe for centuries was a major pandemic. The plague started in the Gobi Desert in the 1320s. Spread by rat fleas, the disease traveled to China, India, the Middle East, the Mediterranean and Europe.

“All of us who prize greater economic equality would do well to remember that with the rarest of exceptions, it was only ever brought forth in sorrow. Be careful what you wish for.”

The Black Plague offered a strange case study in leveling. The pandemic left physical infrastructure unharmed and tax policy untouched, but it decimated populations. The economies of Europe continued to function as usual, but the ranks of consumers and workers diminished to an extraordinary degree. As a result, average per capita output and incomes rose. Landlords saw rents decline, yet workers benefited from soaring wages. One 14th-century employer griped that workers were in such short supply, he couldn’t find laborers even by tripling their wages. In 1349, France tried to limit wages, but the government soon discovered that capping pay was no way to run an economy facing a shortage of workers. Prices of food and land fell during the Black Death, even as wages rose. The demand for luxury goods rose. In England, workers suddenly could afford meat and furs. Farmers in Norfolk, for instance, saw the share of meat in their diets jump from just 4% in the late 13th century to 30% a century later. Thus equality brought aspects of wealth to the lower classes.

Looking Ahead

The era of leveling wealth inequality through violence seems to have drawn to a close. Total war is distinctly out of fashion. With military power concentrated in fewer nations and weaponry growing more surgical and automated, a WWII-style conflict seems unlikely. Communist revolutions are a relic of yesteryear and not likely to recur. Russia and China abandoned their attempts at wealth redistribution, leaving hard-line stalwarts Cuba and North Korea as the rare and suffering holdouts. State collapse seems increasingly improbable as well. A few poor nations in the developing world are fragile enough to fail, but they are not major economic entities. Likewise, widespread pestilence seems a vestige of eras past. A breakout pandemic is always possible, but major advances in DNA sequencing and other scientific endeavors mean another Black Death is doubtful.