Was income inequality much larger 200 years ago?

Philip Greenspun's Weblog 2014-05-15

Thomas Piketty’s Capital in the Twenty-First Centurycontains a lot of historical data.

Piketty relies on the fact that there was tremendous stability in both prices and interest rates during the 18th and 19th centuries:

In the novels of Jane Austen and Honoré de Balzac, the fact that land (like government bonds) yields roughly 5 percent of the amount of capital invested (or, equivalently, that the value of capital corresponds to roughly twenty years of annual rent) is so taken for granted that it often goes unmentioned

the two measuring scales were used interchangeably, as if rent and capital were synonymous, or perfect equivalents in two different languages. Now, at the beginning of the twenty-first century, we find roughly the same return on real estate, 4–5 percent, sometimes a little less, especially where prices have risen rapidly without dragging rents upward at the same rate.

To back up a bit: the first crucial fact to bear in mind is that inflation is largely a twentieth-century phenomenon. Before that, up to World War I, inflation was zero or close to it. Prices sometimes rose or fell sharply for a period of several years or even decades, but these price movements generally balanced out in the end.

More precisely, if we look at average price increases over the periods 1700–1820 and 1820–1913, we find that inflation was insignificant in France, Britain, the United States, and Germany: at most 0.2–0.3 percent per year. We even find periods of slightly negative price movements: for example, Britain and the United States in the nineteenth century (−0.2 percent per year if we average the two cases between 1820 and 1913).

Piketty is therefore able to look at hard-coded numbers in novels for guidance as to what an average and comfortable standard of living would cost.

In Great Britain, the average income was on the order of 30 pounds a year in the early 1800s, when Jane Austen wrote her novels.30 The same average income could have been observed in 1720 or 1770. Hence these were very stable reference points, with which Austen had grown up. She knew that to live comfortably and elegantly, secure proper transportation and clothing, eat well, and find amusement and a necessary minimum of domestic servants, one needed—by her lights—at least twenty to thirty times that much. The characters in her novels consider themselves free from need only if they dispose of incomes of 500 to 1,000 pounds a year.

Balzac, like Austen, described a world in which it took twenty to thirty times that much to live decently

Let’s consider today’s numbers and see if things are more or less equal. The Census Bureau says that median household income is about $53,000 per year. What would it mean to live comfortably and elegantly today? A modern Hyundai is much more comfortable than a horse-drawn carriage. A JetBlue Airbus with extra room seats is certainly better than enduring a sea voyage by sail. Amusement in our major cities could cost $500 to $1000 per week for people who want to go to professional sporting events, live theater, etc. Domestic servants have mostly been replaced by contractors, e.g., the housecleaners who come once per week or the people who deliver food from restaurants for those who don’t want to cook. Could we say that a family with two medical doctors earning a total of $400,000 per year was “comfortable and elegant”? If so, that’s a pre-tax ratio of 8:1 and a post-tax ratio of perhaps 6:1? Thus income inequality today is less than it was in Austen/Balzac’s time.

[Separately, of course, Austen's upper class characters did not work so they had a lot more time to spend money and maybe that's why they needed 20-30X the average income.]

[The preface might make you wonder why we have inflation today if we didn't have it for most of human history. Piketty explains:

This world collapsed for good with World War I. To pay for this war of extraordinary violence and intensity, to pay for soldiers and for the ever more costly and sophisticated weapons they used, governments went deeply into debt. As early as August 1914, the principal belligerents ended the convertibility of their currency into gold. After the war, all countries resorted to one degree or another to the printing press to deal with their enormous public debts.

Between 1913 and 1950, inflation in France exceeded 13 percent per year (so that prices rose by a factor of 100), and inflation in Germany was 17 percent per year (so that prices rose by a factor of more than 300). In Britain and the United States, which suffered less damage and less political destabilization from the two wars, the rate of inflation was significantly lower: barely 3 percent per year in the period 1913–1950. Yet this still means that prices were multiplied by three, following two centuries in which prices had barely moved at all.

In addition to the question of relative prices, I will show that inflation per se—that is, a generalized increase of all prices—can also play a fundamental role in the dynamics of the wealth distribution. Indeed, it was essentially inflation that allowed the wealthy countries to get rid of the public debt they owed at the end of World War II. Inflation also led to various redistributions among social groups over the course of the twentieth century, often in a chaotic, uncontrolled manner. Conversely, the wealth-based society that flourished in the eighteenth and nineteenth centuries was inextricably linked to the very stable monetary conditions that persisted over this very long period.

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What do readers think? Does a family today still need 20-30X the median income of $53,000 per year in order to be “comfortable and elegant”?