The level of wealth inequality has also been rising since the 1980s. Figure 1.7, drawn from Piketty’s Capital in the 21st Century, reveals that wealth inequality was extremely high in the beginning of the twentieth century – even higher in Europe than in the United States. For reasons we will explore in this book, the level of wealth inequality was brought down in the United States during the interwar years and continued to decline in Europe until the 1970s. In other words, the post-war Golden Age of capitalism was the most egalitarian period in human history in terms of both income and wealth distribution. The period from the 1930s to the 1970s saw the emergence of what Piketty calls the ‘patrimonial middle class’ – ‘the principal structural transformation of the distribution of wealth in the developed countries in the twentieth century’: the wealth share of the middle 40 per cent reached 35 per cent in the 1970s in the United States and as much as 40 per cent in several European countries. Since the end of the 1970s, the share of the middle classes has been declining, while the share of the top 10 per cent – and especially of the top 1 per cent – has been rising in the United States and, to a lesser extent, in other advanced capitalist countries. One of the central objectives of this book is to explain what happened during this unique period of democratic capitalism, why this egalitarian period came to a halt in the course of the 1970s, and why a less egalitarian period has followed ever since.
Figure 1.7 Wealth shares of top 10 per cent in Europe and the United States, 1810–2010
Source: Piketty 2014
The central thesis in Piketty’s book is that wealth inequality in the United States and Europe is set to rise because, historically, the net rate of return to capital (r) exceeds the growth rate of output (g): if we assume that the annual increase in medium wages reflects the growth rate of output (GDP), the relationship r > g basically means that the annual growth of the capital income of the medium capital owner will be higher than the annual growth of the wage income of the medium worker. However, the relationship r > g is not a natural or deterministic feature of the capitalist economy but is deeply influenced by public policies, institutions and regulations. As we will see in the next section, a political economy perspective deviates fundamentally from a neoclassical interpretation by making the analysis of these policies, institutions and regulations central to the explanation of past and future patterns of income and wealth inequality.
Neoclassical interpretations of rising inequality in advanced capitalism
Two interlinked explanations are usually put forward by neoclassical economists to explain the re-widening of income gaps. The prevailing interpretation is SBTC: innovation in technology, especially the increasing use of computers, has increased demand for skilled labour relative to that for unskilled labour, and hence pushed up the wages of highly educated employees with university degrees relative to those of poorly educated workers who merely have high school diplomas (or less). This explanation is first and foremost based on the neoclassical view that a worker’s wage should be equal to the marginal product of labour – that is, his or her individual contribution to the output and profitability of the firm he or she works for. In this regard, high-skilled workers are