Exploring Economic History

with Palgrave Macmillan

The Evolution and Determinants of Wealth Inequality

Economic inequality increasingly dominates economic history and current policy as evidenced by the global preoccupation with the wealth and income shares of the top one percent.  Indeed, the concern with inequality receives further impetus as additional research also generates empirical links between economic inequality and social outcomes such as homicide rates and health status. Yet, ultimately any significant understanding of the long-term structure and evolution of inequality requires the methodical and consistent compilation of reliable long-term data in order to understand its determinants.

Wealth inequality can be defined as the disparity in the ownership of assets. Over the course of the last four centuries, the process of economic growth and industrialization has generally pushed wealth inequality upwards while an assortment of other economic factors, shocks and policy responses either reinforced the upward trend or mitigated inequality by pulling it back down. Wealth inequality is generally high but has declined over the long-term and unlike income inequality, has not experienced as pronounced of a rebound in the developed countries since the mid-twentieth century - with the notable exception of the United States. Indeed, the American experience with respect to rising wealth inequality is not only different from European countries but also with respect to its Atlantic Anglo-sphere compatriots of Canada and the United Kingdom.

Before 1750, wealth inequality was higher in the United Kingdom than the United States, but American inequality grew rapidly to match the United Kingdom by mid-nineteenth century. The preindustrial period was marked by lower wealth inequality in both the United States and the United Kingdom. The subsequent era of industrialization is marked in all three Anglosphere countries by rising wealth inequality. Wealth inequality declined in the twentieth century with redistribution away from the top one and ten percent. The decline in wealth inequality halted in the 1970s but with a rebound in American wealth inequality.

For the United Kingdom, the top 1 percent wealth share rose from an average of 25 percent in the pre-1850 period to 64 percent for the 1850 to 1900 period. More remarkably, the average share of wealth held by the top ten percent of the wealth distribution in the second half of the nineteenth century was just over 90 percent in the United Kingdom, approximately 72 percent in the United States and about 56 percent in Canada. By the early 21st century, Canada and the United Kingdom have their top ten percent with approximately 50 percent of wealth and the United States over 70 percent. Meanwhile the top one percent own just under 20 percent in Canada and the United Kingdom while in the United States the share is closer to 35 percent.

The twentieth century mitigation of wealth inequality correlates with several factors: rates of economic growth closer to the rate of return on capital, increased unionization rates, rising public spending on health and education, larger public sectors, increased home ownership rates, the onset of substantial estate taxation, more progressive income tax systems and in the case of the United Kingdom a housing policy that resulted in the disposition and dispersion of much public housing into private hands. A reduction in the strength of unions as measured by unionization rates as well as the end of estate taxation and less progressive income tax systems is associated with more economic inequality since the 1970s especially combined with lower economic growth rates relative to the return to capital.

Wealth inequality ultimately is driven by complex, interacting forces and not necessarily by simple inexorable laws. Moreover, changes in wealth inequality are also the outcome of economic change. Economic change via war, globalization, booms or technological change creates both winners and losers and it is the balance between these winners and losers that drives changes in inequality. For economic change to occur, it inevitably must cause some individuals to forge ahead in their wealth accumulation as they take advantage of new opportunities generating more wealth dispersion and inequality. If one wants changes in wealth distribution to stop, it can be ventured that one must also be prepared to limit economic change from forces such as technological progress and innovation.

If one thinks of wealth inequality as a batch of bread dough with a natural tendency to rise, then from time to time there are factors that operate to punch the bread dough back down. What is of greater concern is not the short-term effects of economic change on wealth inequality but whether the inequality arising from economic change becomes fossilized and entrenched. This is indeed the greater long-term policy problem and represents the challenge to not only to the North Atlantic Anglosphere but indeed all countries.

Livio Di Matteo is Professor of Economics at Lakehead University, Ontario, Canada, where he has served since 1990. He is the author of the forthcoming The Evolution and Determinants of Wealth Inequality in the North Atlantic Anglo-Sphere, 1668-2013 (Palgrave Macmillan, 2018). ​​​​​​​