Visions of Inequality

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Branko Milanovic charts 200 years of the fascinating history of the discourse on inequality through portraits of six key economists, from Quesnay to Kuznets

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Branko Milanovic charts 200 years of the fascinating history of the discourse on inequality through portraits of six key economists, from Quesnay to Kuznets

Image courtesy of interviewee. October 25, 2023

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This video discusses the evolution of economic thought regarding inequality, focusing on the contributions of various theorists, including the Physiocrats, Adam Smith, David Ricardo, and Karl Marx. It emphasizes how the understanding of social inequalities has shifted over time, particularly highlighting contemporary issues like racial discrimination and gender inequality, which have become more prominent than in earlier economic analyses.

The Physiocrats are credited with introducing a detailed class structure and the concept of surplus, which they believed was essential for societal function. Their work aimed at influencing French policies and described the social dynamics of their time.

Adam Smith's contribution was significant as he shifted the measure of societal wealth to focus on the welfare of the majority rather than just the elite. This video laid the groundwork for later discussions on income distribution. David Ricardo further refined these ideas, arguing that improving income distribution could lead to economic growth, contrasting with the view that efficiency and equity are always at odds.

Marx builds on Ricardo's foundations but offers a broader analysis that integrates history, philosophy, and economics. He posits that class relations in capitalist societies inherently affect income distribution, leading to inequalities. This video also examines the perspectives of economists like Pareto who argued for the invariability of income distribution across societies, suggesting a persistent elite regardless of political systems.

The contemporary analysis of inequality is framed as emphasizing sectors rather than classes, focusing on productivity differences between agriculture and manufacturing. The narrative underscores how recent events, like the global financial crisis, have revived discussions about class structure and systemic inequalities. Ultimately, it posits a more politically aware framework for analyzing inequality today, recognizing the importance of race, gender, and economic mobility in understanding social dynamics.

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Here are five key points from the video:

1. **Changing Perspectives on Inequality**: The understanding of inequality has shifted over time, with contemporary issues such as racial discrimination and gender inequality becoming more prominent compared to historical perspectives in the 19th century.

2. **Physiocrats' Contributions**: The Physiocrats introduced key concepts in economic analysis, including a detailed class structure and the idea of economic surplus, which became fundamental in understanding societal functioning and class dynamics in pre-revolutionary France.

3. **Smith and Ricardo's Class Structures**: Adam Smith highlighted that the wealth of a society should be measured by the welfare of the majority class, a departure from earlier views focused on the wealth of the elite. David Ricardo later offered a more defined structure of three classes (workers, capitalists, landlords) that a robust framework for analyzing income distribution.

4. **Marx's Critique of Capitalism**: Marx expanded on Ricardo's ideas, arguing that under capitalism, the relationships between production and distribution are inherently linked. He believed that class structure and wealth concentration would persist, with the potential for worsening inequalities as labor and capital dynamics evolve.

5. **Contemporary Issues of Class and Inequality**: The video discusses the resurgence of interest in class structures and inequalities following events like the global financial crisis, revealing systemic disparities that challenge the notion of meritocracy and illuminate political and economic inequalities based on race, gender, and class.

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Here are key quotes extracted from the video, centered around themes of inequality, class structure, and economic theory:

1. **On Inequality Across Time**:
- "So when we talk about inequality within our own societies, I think we now take a different attitude than, for example, Canadian or Smith or Marx. It is just that the issues today are different."

2. **Contributions of Physiocrats**:
- "The first one was the introduction of class structure in the analysis that was not present before."
- "They introduced the class structure for the first time in economics and defined the surplus."

3. **Economic Surplus**:
- "For the Physiocrats, that surplus is necessary for society to exist and function."

4. **Class Structure and Economic Change**:
- "His objective was let us sort of show the current situation of France and somewhat idealized, embellished situation that would exist if our recommendations were accepted."

5. **Wealth Measurement**:
- "One very important point that he made is... wealth of a society is measured by how well the class that is the most numerous and whose contribution to the welfare of the society is the largest. How that class is doing."

6. **Income Distribution and Economic Growth**:
- "If you have a bad income distribution where most of the income or money goes into the hands of landlords, you do not have an expanding economy."
- "He proposes to you, to me, to everybody... that distribution improvement... goes together with increased output."

7. **Marx's Perspective on Capital**:
- "He believed once you have defined the... endowments, you really have the distribution."

8. **Pareto's Law**:
- "The income distribution cannot be changed. In other words, income distribution is more or less invariable regardless of the type of society you have."

9. **Political Significance of Income Inequality**:
- "You have to have... a view of society, which is politically... transposable or actually politically salient to be sold to people."

10. **Optimism About Inequality Studies**:
- "I'm really optimistic for... the future... the fall of communist... opened up... the issue of class structure again."

These quotes illustrate various perspectives on economic structures, class dynamics, and the evolving conversation around inequality, drawing from traditional economic theories to contemporary issues.

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The authors that I mentioned and actually ourselves, look at in inequality,

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always in function or what we perceive at a given moment to

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be crucial for the determination, equality.

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So when we talk about inequality between within our own societies,

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I think we now take a different attitude than, for example,

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Canadian or Smit or Marx. It is just that the issues today are different.

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So in that sense, I think that the issues of racial discrimination,

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gender inequality, play much bigger role today than they played,

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in the 19th century. It's not that they didn't exist then,

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but they were overlooked because there were other issues.

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I think the Physiocrats had, in my opinion, two important contributions.

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Uh,

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the first one was the introduction of class structure in the analysis that was

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not present before.

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And they have a very detailed class structure and especially detailed and

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interesting class structure. At the top were, were three classes,

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clergy, aristocracy and government, share the surplus.

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So the second big contribution,

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which actually was something that marks highly sort of how should they

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say appreciated and pointed out,

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is the realization that the economic activity produces something which you can

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call surplus. In other words, for kne the, or the physiocrats,

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that surplus is necessary for the society to exist in the function.

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So there will be a class called it unproductive class like clergy,

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aristocracy and government that provide the service.

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But that pro service has to be paid from somebody and it's paid out of the

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service. The context of his time is pre-revolutionary France.

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The objective that physios had was to change French

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internal policies. That's why invented the terms less fair and less,

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which meant essentially less fair, like what it means, sorry, today.

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And CE passe was the abolition of the internal barriers and tariffs.

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So this was their sort of a political objective. And within that context,

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then they described the French society. And as I mentioned before,

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they introduced the class structure for the first time in economics and defined

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the surplus. So they had a very, how should I say, political objective.

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But in doing that,

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they did something much more than than simply influence politics.

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And actually they didn't influence that much.

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They did a little bit through Cold Colbert, but not really that much. Yes,

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his picture was generally static. And that's actually what distinguishes him,

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I believe, from, from Smith and Ricardo and Marx,

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is that actually he doesn't think about,

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he doesn't ask himself the following question,

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what would be the evolution of the,

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of the class structure and the incomes that they receive?

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What would be revolutional wages, rent, profits?

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And the reason I think why he was not concerned with that is because of the

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objective that I mentioned before.

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His objective was let us sort of show the current situation of

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France and somewhat idealized,

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embellished situation that would exist if our recommendations were accepted.

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So he didn't think very much about dynamic terms. He was really thinking in,

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in static terms,

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like what would be the image of France if our policy were accepted?

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'cause he was very influenced by Scottish development.

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And he says that several times because with the unification and with the

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sort of closer integration with England,

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that was of course ahead of the other countries at that time,

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Scottish economy also improved. So he clearly, I think,

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was influenced by the, improvements,

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economic improvements that he witnessed during his own time.

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It is interesting that that structure, which basically is structure of what,

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we call today, capitalists,

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which in Smith's time he called masters or employers,

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then workers and landlords. Uh,

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that structure was, as we know,

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all influenced very much by the English or Scottish conditions.

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It was not the structure that was so common elsewhere,

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because very often you had either a feudal structure where you had forced labor

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in, in which case, in, in, in the case of Smith,

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there was no forced labor or you had, the small holders.

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And, so the, the the,

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the three-part structure that he introduced reflected the conditions of the

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time,

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but then basically got accepted even for the description of societies.

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They were, that really did not have exactly that structure.

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So it became really part of economics. Although, as I said,

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it reflected the conditions of the time of England and Scotland.

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They had indirectly a view because they were concerned with the

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incomes.

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And Smith certainly was concerned with the incomes on the three largest classes.

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Now, one very important point that he made is,

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his statement that wealth of a society is measured by how well

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the class that is the most numerous and whose contribution to the welfare of the

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society is the largest. How that class is doing.

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And that's a very crucial introduction because all the way until

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Smith, we are really thinking either when we speak of the success of a society,

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we either speak of the wealth of the top class,

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the king and the governors and so on,

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or we actually speak of the power military power of a

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nation. But for Smit for the first time,

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it's really welfare of the majority of people.

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And I think that introduction of the, how should I say? Well,

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for the majority of the people indirectly addresses the question of income

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distribution. Ricardo's model is the fact mathematical model,

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which is written in words. And the three

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Classes become so, strongly defined.

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Uh, while they, of course they were in Smith, but it was broader.

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In the case of Ricardo, practically,

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you have what maybe you can call economics called, economists called,

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later, the representative agents, the three classes, worker,

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worker, workers, capitalists,

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and landlords are practically sort of,

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caricatures in some sense because they are so narrowly defined. And then,

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but it becomes a very powerful machinery precisely for studying,

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for the study of income distribution because we have such sharply defined,

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social structure. If the corn laws continue and population increases,

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the cost of food would go, would go up,

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that would of course increase rents of landlords.

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But that would squeeze profits of capitalists because they would have to

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pay more workers.

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Workers would not be better off because they will still have the same quantity

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of food, but capitalists will be squeezed. If capitalists are squeezed,

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there is no money to invest and the economy comes to a standstill.

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So that's basically the structure.

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But I think what is important for our purpose,

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for the purpose of the book there,

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is that clearly income distribution is determining what happens to

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growth.

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If you have a bad income distribution where most of the income or money goes

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into the hands of landlords, you don't know, you do not have,

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and actually expanding economy. So that's the pa the main point in my opinion,

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why Ricardo for us is extremely important. He proposes to you,

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to me, to everybody,

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whoever was reading him that distribution improvement in the

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distribution, which means lower income for the landlords,

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goes together what with increased output. In other words,

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economists very often talk of a, so-called slow,

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where the efficiency and equity are basically trade-offs. In other words,

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you can have higher income, but only at the cost of towards distribution.

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But with Ricardo, it's the opposite. It's actually, you can have both,

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you can have better distribution, and you have have, you can have higher output.

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And I think in that sense, he's proposing to the reader really a windfall.

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If we improve the distribution, we would get all richer.

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The chapter is indeed the, I think, the longest, chapter.

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And, of course Marx is so rich in his writings, you know,

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to some extent, of course he builds totally on Ricardo. But on the other hand,

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there is a,

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a difference in partly because of course Ricardo unfortunately died

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very young. He was 51 when he died,

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but his writing is fairly limited in terms of the interest

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and the scope and even, pure number of pages.

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But on the other hand, with Mars,

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we have really a scope which goes from philosophy, history,

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obviously economics, and

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then even he had writings in mathematics,

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in geology and in many other things. So the scope is enormous. Um,

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and it was of course more,

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more difficult to write because although I was not concerned with other of his

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interests, I still had to mention them. And from time to time,

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they actually creep in, you know? Um, and his, the,

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the point of unity was really unity between the production and

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distribution in the following sense that he believed if you have a capitalist

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relations of production, you thereby define the,

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the distribution simply because you have people with different assets.

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In one case, it's labor power in the other case is, access to capital.

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And that determines the distribution. So he really could not see.

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What happened afterwards, I believe,

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is that the role of the state became really dominant and the role of the state

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was such to redistribute the incomes. And I think in, in March's time of,

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as you know, the role of the state was minimal, redistribution was minimal.

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And he believed once you have defined the, the, who owns what,

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in other words, the endowments, you really have the distribution.

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So the two things go together.

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The argument that he made about the unity between production distribution was in

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response to, to John Stewart Mill who said, and from our perspective,

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that seems a fairly, how should they say progressive view?

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He said, while production laws are determined by, actual,

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technological level of development,

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and they're really natural laws, in a sense,

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the distribution laws are social.

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So we can actually redesign distribution. And as I said before,

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mark didn't believe that because he believed once you have capitalism,

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you have also the distribution defined. Um,

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now his structure is of course very ardian,

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but in his writings where he's really writing as a

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historian, because he was discussing in the, the French,

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revolution, 1848,

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and then the Paris Commune and the revolution of 1871, his,

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view is much more nuanced. And why is it more nuanced?

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Going back to original question about adverse meat and tripartite structure,

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because the French, social structure at the time was more nuanced.

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You had small holders, you have lots of self-employed people,

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almost like I think,

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or 40 or 50% of people actually including land small

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landholders, were self-employed.

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So then you really do not have this very sharp structure. Like in Ricardo,

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when you have three classes there, you have actually many more classes.

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And that's why it becomes,

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becomes much more nuanced than only three large classes. Yes,

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the law of the Ential fall is, Marxist argument, which,

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which is really common even today when we think, think in,

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in slightly different terms of the rate of profit going down in, in,

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in Mar's view, you have an increased,

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capital intensity of production in,

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in his terminology is increasing the organic composition of capital.

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It was simply that there are more machines per worker,

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and I think that's kind of, if you want to call it today,

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you can have greater artificial intelligence per unit of physical labor

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that we put in. And he believed when this happens,

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the all as the only producer or surplus value is labor.

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You would have less surplus per the total unit,

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the total amount of capital that you have invested.

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So that's where the potential decline in the rate of profit comes.

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You have simply a lot of capital, lots of machines, let's call it like that.

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And on the other hand,

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you have fewer laborers for all that amount of capital.

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And since the only surplus value comes from labor,

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you will have lower ratio between the surplus value and that amount of

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machinery that you have in, in the, in the society or the economy.

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Capitalist as a class would have lower return on their assets,

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and yet some of them would have the advantage because Mark says

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also that the larger capital has always an advantage compared to a small

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capital. So what would happen in his one interpretation,

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and I say that's one there actually two, I mean,

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there are three address that I proposed, but in one interpretation,

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that would mean that there will be fewer of rich capitalists and

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there will be concentration of incomes and they will be higher inequality.

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In other words, let me just sort of make it clear.

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If the total mass of surplus value,

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which means the total mass of profit is

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less per unit of machinery, you would have an increasing,

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also increasing concentration among capitalists,

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which would make the whole inequality worse or actually greater inequality than

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before. So the law that potential,

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fall in the rate of profit had this double function in some sense,

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it shows that capitalism becomes kind of less,

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less productive or surplus value. And on the other hand,

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it's the concentration of the, of incomes. Pareto is of course a very important,

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for the study, maybe for two reasons. One that was so-called,

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Pareto's Law. And the, that law had also,

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the law basically says according to Pareto,

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that the income distribution cannot be changed. In other words,

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income distribution is more or less invariable regardless of the type of society

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you have. It was done actually the original idea,

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and it fitted very well with, Pareto's political views.

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It was done as a rebuttal of Marx, the facto, it, it, what it said,

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Pareto actually believed he was writing at the turn of the 20th century in,

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he was living in Switzerland,

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but he's an Italian economist and writing in French.

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And he saw socialism or socialist as the dominant force.

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And actually he believed that socialism will win, but he didn't like that fact.

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So then when he discovered that the data that he had,

15:30.125 --> 15:35.005
fiscal data showed more or less the same distribution in large,

15:35.245 --> 15:40.005
I mean not large number of cities or small,

15:40.385 --> 15:44.965
states in Germany, he actually argued, okay, I'm simplifying slightly,

15:45.265 --> 15:48.325
but he said, okay, maybe your socialist will come to power,

15:48.825 --> 15:53.205
but the only thing would be that you will have a different top different people

15:53.625 --> 15:57.325
at the top, but you will not change the laws of income distribution.

15:57.585 --> 16:00.725
So instead of capitalist being rich, it'll be bureaucrats will be rich.

16:01.105 --> 16:04.685
It validated that view that he,

16:06.045 --> 16:10.365
I believe probably implicitly held before that,

16:10.615 --> 16:15.125
there will be always an elite in a society. And he drawn Machiavelli on that.

16:15.385 --> 16:19.925
And he actually distinguished, following Machiavelli, two different elites,

16:19.925 --> 16:24.885
the elites that are so-called foxes that use persuasion and cunning

16:24.905 --> 16:26.325
to rule and alliance.

16:26.425 --> 16:29.845
That's the another elite which actually uses force to rule.

16:30.545 --> 16:31.885
But in both cases,

16:32.455 --> 16:35.805
there is an elite which rule societies,

16:36.385 --> 16:39.005
and consequently of course because is richer as well.

16:39.625 --> 16:42.365
And that means if you really believe that,

16:42.945 --> 16:45.645
and he argued that it actually was true throughout history,

16:45.955 --> 16:50.925
that essentially means that you cannot change the fundamental features

16:50.985 --> 16:54.965
of income distribution through social revolution because this is important

16:54.965 --> 16:59.005
because he now introduces something which was different.

16:59.665 --> 17:03.805
We are talking so far, as we were just doing it now,

17:03.955 --> 17:08.645
talking of social classes first, and we are talking about the elite now,

17:09.005 --> 17:12.645
OzNet also I think reflecting the American conditions where the class structure

17:13.185 --> 17:16.165
was less, sharp,

17:16.225 --> 17:20.645
or it actually believed that it was really on a, on a,

17:21.265 --> 17:25.925
on a wane actually disappearing. He, for him, the,

17:26.065 --> 17:27.285
the key markers,

17:27.625 --> 17:31.765
the key cleavages are between agriculture and manufacturing.

17:31.985 --> 17:34.605
So in both cases, these are the workers, but in one case,

17:34.605 --> 17:37.325
they are actually working as farmers. In the other case,

17:37.445 --> 17:39.685
they're working as workers in manufacturing,

17:40.345 --> 17:43.325
and a distinction between the rural areas and the urban areas.

17:43.705 --> 17:47.005
So we have really a different take on inequality.

17:47.135 --> 17:49.405
Inequality is no longer a matter of classes.

17:49.745 --> 17:54.165
It is a matter of bas basically whether you are working

17:54.665 --> 17:59.125
in a more productive, industries or you are actually staying,

17:59.545 --> 18:01.805
in, in less productive rural areas.

18:02.065 --> 18:07.045
So it's really the interplay between the earnings or productivity in

18:07.045 --> 18:09.085
one sector of the economy versus another.

18:09.345 --> 18:12.365
And you notice we are no longer talking of classes as such.

18:12.465 --> 18:16.485
We are really talking essentially of differences in productivity,

18:17.065 --> 18:19.005
and we have a possibility,

18:19.075 --> 18:23.845
easy possibility of a farmer to move into the town and to earn more.

18:24.265 --> 18:28.125
So you don't have, you know, you don't have in Ricardo, sorry,

18:28.235 --> 18:32.765
workers who become capitalists, it's kind of not considered,

18:32.785 --> 18:35.245
but with snes, the whole method,

18:35.385 --> 18:40.285
the whole development of inequality is the result of labor force moving from one

18:40.485 --> 18:41.318
activity to another.

18:41.565 --> 18:45.685
I open the chapter with the discussion of income distribution in socialist

18:46.245 --> 18:49.925
countries and in two types of socialism. One with,

18:49.925 --> 18:52.085
which of course I'm familiar from my own background,

18:52.085 --> 18:56.885
which was self-manage or actually market socialism of the Yugoslav type

18:57.465 --> 19:00.845
or, and the centrally planned socialism. Why that part I think,

19:00.845 --> 19:05.165
is important to come first is because the claim

19:05.705 --> 19:09.765
of class in those societies and the

19:09.905 --> 19:14.005
attractiveness of the, of not having a class,

19:14.135 --> 19:18.285
influenced the view of economists in capitalist countries as well.

19:18.825 --> 19:20.525
And I think the class structure,

19:21.225 --> 19:25.245
partly because also in ness ness telling of the story,

19:25.635 --> 19:29.725
that class structure disappears. It actually, the, the,

19:29.725 --> 19:33.525
the claim is if the Soviet Union doesn't have classes,

19:34.065 --> 19:36.125
we too in the United States don't have classes.

19:36.505 --> 19:40.645
We don't have it because everybody can is free to do whatever he or she wants,

19:41.265 --> 19:44.405
and the classes disappear, cleavages disappear,

19:44.825 --> 19:49.805
all individuals become basically interchangeable. There is no a any anymore,

19:50.185 --> 19:54.605
accent being put on ownership of different types of assets.

19:54.945 --> 19:59.525
We are all owners of something, you know, the assets become sort of technically,

19:59.985 --> 20:04.965
undistinguishable you have as A, B, and C, and I have as DEF.

20:05.465 --> 20:09.965
And that's why I think that we come with a representative agent,

20:09.965 --> 20:13.565
which become, which is really by definition homogeneous.

20:14.335 --> 20:19.195
We don't have heterogeneity. And once we don't have a heterogeneity,

20:19.195 --> 20:22.235
whether it is of gender or race of assets or whatever,

20:22.495 --> 20:26.435
we don't have income distribution anymore. We might generate a number,

20:26.615 --> 20:30.315
the genetic coefficient, this or that, but it doesn't have political salience.

20:30.735 --> 20:35.275
If I say that the genetic coefficient, whatever is such and such number,

20:35.905 --> 20:36.995
okay, that's important.

20:37.335 --> 20:42.035
But if I tell you that there is a systemic or systematic,

20:42.335 --> 20:45.595
racial discrimination, or if I tell you, well,

20:45.595 --> 20:50.085
there is inability of workers to acquire sufficient capital to become

20:50.085 --> 20:55.085
capitalists, I'm thereby creating a political story. It's an important,

20:55.155 --> 21:00.085
it's a salient story. It's much more powerful than simply saying, well,

21:00.165 --> 21:03.885
I have a genetic coefficient of 45. Uh, so the,

21:03.885 --> 21:08.245
the knowledge about the gene coefficient is necessary, but you have to have,

21:08.265 --> 21:12.445
as I call it, a narrative. You have to have a, a view of society,

21:12.775 --> 21:15.325
which is politically,

21:15.365 --> 21:20.085
transposable or actually politically salient to be, to be sold to,

21:20.145 --> 21:21.965
to people basically. This was,

21:22.085 --> 21:25.845
I think this is AU hugely important development. You know,

21:25.905 --> 21:29.045
I'm not by nature extremely, optimistic person,

21:29.185 --> 21:33.485
but when it comes to income distribution studies, I'm really optimistic for,

21:33.705 --> 21:38.165
for the future. The reason is the following first step, the, the, the,

21:38.165 --> 21:42.845
the fall of communist. And, the Soviet Union meant, as I was saying before,

21:43.265 --> 21:46.445
and it opened up, in the,

21:46.445 --> 21:50.045
we in the capitalist side, western side,

21:50.545 --> 21:55.525
opened up the issue of class structure again. Then it came as, the,

21:55.535 --> 21:59.125
which I think a very important event of the global financial crisis,

21:59.655 --> 22:04.285
which showed that inequality and sys systemic inequality

22:04.435 --> 22:07.805
increased. And a lot of that was covered up by ability,

22:07.805 --> 22:12.485
especially in the United States of easing, borrowing. And then of course,

22:12.485 --> 22:14.525
you had eventually to repay these loans.

22:14.525 --> 22:16.645
And then you realize your incomes have not really,

22:16.645 --> 22:19.485
your wage has not risen that far, that much.

22:20.145 --> 22:21.765
So th these events,

22:22.045 --> 22:25.285
I think brought to the attention of the public,

22:26.265 --> 22:28.125
the top 1%, of course,

22:28.325 --> 22:31.685
PKT contributed significantly to the knowledge of that,

22:31.745 --> 22:35.645
the empirical part as I mentioned. But he had also a story, a narrative,

22:36.025 --> 22:38.285
and that's why his book was very important.

22:38.905 --> 22:43.765
And then suddenly now you do have this conception or the idea that

22:43.765 --> 22:45.365
there is a certain elite,

22:45.755 --> 22:50.325
that meritocracy is also used as a way to justify the existence of this

22:50.415 --> 22:51.248
elite.

22:51.265 --> 22:56.165
And we really now have reintroduction of the salient features

22:56.225 --> 23:00.125
of cleavages in societies. And on top of that, you entered the, the,

23:00.325 --> 23:02.885
I mean you had gender and, race.

23:03.425 --> 23:07.725
So we really have an entirely political structure now that we didn't have

23:08.285 --> 23:12.245
actually before. It's not that didn't exist, it's just that we were not,

23:12.735 --> 23:16.245
aware of that structure as much as we are aware now.

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