Hi there. In the last video, we looked at the fragmentation of society along religious lines. We examined the limitations in the sources, and we also looked at the degree of religiosity. In this video, we're going to turn our attention to the question of income and wealth inequality. Intellectually the issue of income and wealth inequality has been on the political agenda ever since Karl Marx was writing in the middle of the 19th century. In 1950, Simon Kuznets, one of the pioneers in GDP calculation, placed it firmly on the historians agenda. He argued that income inequality increases in the early stages of development but that once a certain level of income has been reached it starts to decline. Now, in the 1950s, we didn't know much about levels of income in earlier periods let alone its distribution. So economic historians started work on reconstructing national accounts. And what we found seemed to confirm Kuznets' income and equality beliefs. It increases until the eve of the First World War, or the 1920s in the United States, but then the trend was reversed. Now I haven't traced exactly when incoming equality made the transition from academic and policy-making circles to the general public. But nothing prepared me for the public reception of an almost 700-page book published in English in March 2014. In the United States, it spends several weeks at the top of the US non-fiction best sellers list. Thomas Piketty's book Capital in the Twenty-first Century says nothing that was not known before. Nor is it true that before Piketty arrived on the scene, and I quote him, no one has ever systematically pursued Kuznets' work. No doubt in part because historical and statistical study of tax records falls into a sort of no man's land, too historical for economists, and too economistic for historians. You can look it up on page 17. Well Mr. Piketty, when I took up my Chair at the Free University Amsterdam in 1980, my colleague Jan Dameere was already publishing his results on wealth distribution in 17th and 18th century Holland based on tax records and on wills. I'm glad to get out of my chest, I hate this kind of pretentious academic arrogant, so let's get back to capital in the 21st century. Quite clearly struck a chord in a public ready to hear its message. Having spent five years struggling to climb out of a recession caused by failures in the financial sector. Citizens in Western societies are obviously now beginning to turn their attention to the winners of the capitalist system. Now before we look at income and wealth inequality, we have to ask ourselves how do we measure it. Now, when data is particularly fragile and one doesn't have a full range of data across the whole population, you can work with the top or the bottom segments. Sometimes this might be called quintiles when the population is divided into five equal parts, or deciles when it is divided into ten. So this could lead to statements like, in 1910 the United States top decile received 40% of the total national income, to site Piketty. Occasionally, one might find the two measures being combined, the proportion owed by the top and the proportion owed by the bottom. In this case, we have what is called a quintile or decile income ratio depending upon the size of the segment chosen. A far more sophisticated measure of inequality is what is known as a Gini Index. It juxtaposes the cumulative percentage of total incomes earned, or wealth held, by the population. And the cumulative percentages of people earning that income or holding that wealth. The horizontal axis measures the cumulative percentage of people from the lowest to the highest incomes. The vertical axis measures the cumulative percentage of income and wealth held, with 100 at the apex and naught at the other. Now, if one plots a line at 45 degrees, one obtains a line of complete equality, anything less than complete equality produces a curve below the equality line and this is know as the Lorenz Curve. Now the Gini Area is obtained by diving total area above the Lorenz Curve, area A by the total area all together, A plus B. And the result will be within a range of zero and one. The closer the distribution is to equality, the closer the index will be at zero. Now before we examine Thomas Piketty's argument, what is it that he measures? Well for incomes, he takes what we call primary incomes. These are incomes before taxes. And they also exclude state-funded payments like unemployment pay, disability payments and state-funded pensions. Now these are all transfers that favor the lower income groups. Piketty himself, around pages 246 to 250, suggests that if we were to take this into account, the share of total incomes of the lowest 50% in the United States would rise from 12% of the total to between 17 and 18%. Now for wealth, he takes personal wealth. Now this wealth is inheritable and transferable. But it has the effect of excluding wealth locked up in collected pension schemes. In Switzerland and in the Netherlands, the sums involved in these are quite considerable. But then neither of these countries are included in Piketty's analysis. The differences in tax regimes, Social Security, and payments and pensions regimes, will all affect comparisons between countries and differences over time, particularly between the start of the 20th century and the start of the 21st century. I'm not saying that you shouldn't produce these sort of statistical series, but you should always and continuously refer to this bias in analyzing the results. Okay, what is it that Thomas Piketty suggests? Well, first he focuses not on the Gini Index or even the top decial, but on the very top 1%. In the United States in 2010, these control 20% of the income. The top 10% together controlled 50%. The comparable figures for Europe were 10% and 35% respectively. Now these figures for the United States put it right back to where it was in 1900. Not so for the European countries he analyzes, but they are heading in the same direction. Once again, this is nothing new. Joseph Stiglitz was saying the same thing. He also focused on the top 1% in his book, The Price of Inequality, published in 2012. Second, Piketty seems to argue that the United States is exceptional in the degree of its income and equality. And that might be true among the few advanced Western countries he examines, but the index for the United States is 0.45. But data, especially from low and medium income countries, shows an even more skewed distribution. The latest research in China, for example, suggests that the figure there is 0.55. Thirdly, Piketty projects a series forward, and here he's more speculative. He argues that most of the increase in inequality comes from ownership in wealth, rather than returns for labor. He foresees the return of capital continuing to outstrip the growth of output, and the problem continuing to grow, but plenty of others do not agree with this analysis. They suggest that the absurd fluctuations in capital reflect changes in its market value rather than changes in its volume. I know, okay. So for economists among you, let me say this, the problem is that Piketty uses wealth and capital interchangeably. Now for inequality, you're dealing with wealth and you're interested in its market value because it measures claim on resources. But for output growth, you're talking about capital output ratios and this requires a constant price calculation. Finally, Piketty's gloomy world view stems from the fact that he's focusing on 'in-country' inequality and only on a handful of larger high-income Western countries. Yet thanks to the strong growth of the BRICS, Brazil, Russia, India, China and South Africa and other non-Western economies, inequality on a global scale has probably declined. So let's sum up now. In this video, we confronted the question of income and wealth inequality. We saw how it could be measured. And because it made such an impact, we've tended to focus exclusively on the published book by Thomas Piketty. In the next video, we'll look at the possible impact of being highly divided or highly diverse in a society. Meanwhile, we've constructed a visualization of incoming wealth and equality, and we invite you to look at it next.
