Historical effects of shocks on inequality: the great leveler revisited

Fresh of the research press : Looks Milanovic didn’t disaggregate enough ?

nature.com     17/4/2021   Historical effects of shocks on inequality: the great leveler revisited – Bas van Bavel , Marten Scheffer

Abstract – Inequality of wealth and its associated power has varied greatly over human history. It is often thought that the main levelers of inequality were natural disasters such as epidemics or earthquakes, and social turmoil such as wars and revolutions. Here we critically review evidence of the effects of such events on inequality from medieval times till the present. We show that in spite of the marked differences in character and direct impact of the shocks we consider, most historical disasters were rather followed by a widening of wealth gaps. This can be understood from the wealth distribution and institutional outlay of these societies at the moment of the shock, which to a large extent shaped both the impact and the institutional measures chosen in response to the crisis. As most societies were characterized by economic and political skewness, the result mostly was a further widening of disparities. Over the centuries, exceptions to this rule have occurred in situations where the ordinary people had strong leverage in shaping the response to the crisis through organizations such as guilds, fraternities, trade unions, cooperatives, and political movements. Our results provide empirical support for the view that in nations where such leverage of ordinary people is weak, the responses to novel crises such as the COVID-19 pandemic may boost inequality.

Introduction: the great leveler? – It is often thought that big shocks to society offer a kind of clean sheet helping to reduce societal and material inequalities. A prominent argument for this idea is made by Walter Scheidel, who argues that inequality can be reduced only as a result of catastrophic events, including pandemics and, most particularly, massive warfare (Scheidel, 2017; Scheve and Stasavage, 2012). The ‘Great Leveler’ argument is echoed by Thomas Piketty, who stresses how the two world wars resulted in a substantial reduction in wealth inequality through the nationalization of foreign assets, the destruction of capital goods, and the installation of progressive taxes for covering the costs of war (Piketty, 2014).

Earlier periods in history have also been used to make the argument of disasters as levelers. The most salient case used is the Black Death of 1347–1352, a large-scale pandemic that killed up to half of the Eurasian population. The suggested logic behind its equitable effect is the decimation of people while capital remained intact, thereby shifting the economic balance in favor of labor. According to this supply-and-demand line of reasoning, voiced by M.M. Postan and other Malthusian-inspired historians in the 1960s and 1970s, the gap between elites such as aristocrats and non-elites such as peasants and laborers was narrowed by the demographic collapse. More specifically, it was argued that the fall of landlords’ incomes in conjunction with higher wages, easier mobility, reduced extra-economic impositions, and greater opportunity to acquire property for peasants and laborers made post-pandemic societies more equal (Hatcher and Bailey, 2001). Quantitative research in recent years has indeed found many cases where wealth disparities were reduced after the Black Death, as most notably in Italy by Guido Alfani, or where real wages of ordinary people rose (Pamuk, 2007; Alfani and Ammannati, 2017). Building on these results, Scheidel and others in recent years have furthered their argument of the Black Death and other catastrophes as levelers (Scheidel, 2017). In line with such thinking, one of the eminent scholars of inequality, Branko Milanovic, suggests that the rise and decline of inequality in pre-industrial economies, in the absence of endogenous forces of economic development, is driven by accidental or exogenous events and that “declines in inequality in the pre-industrial era […] were most often caused by cataclysmic events such as wars, epidemics, or natural catastrophes.” (Milanovic, 2016).

Our approach – Here we argue that—even if some disasters may have reduced inequality—the great leveler hypothesis puts us on the wrong footing. Instead, in most cases, disasters have worked to boost inequality. We unravel the mechanisms responsible for this effect, as well as the explanations for the more exceptional instances when crises ‘made the ball roll the other way’ and equalized societies. The main point we make in this paper is that when explaining the effects of a disaster on equality, we need to distinguish between the immediate impact, the medium-term effects of the institutional measures taken in response to the disaster, and the indirect outcomes in the long run. Shocks did not hit one, uniform type of society with uniform effects, but hit societies that markedly differed in organization, thus leading to different outcomes in terms of equality. More specifically, these outcomes are formed during the three stages mentioned. First, there is the combination of the nature of the shock and the pre-disaster distribution of wealth and institutional outlay of that society, which shape the impact of the shock and the direct effects for different groups within that society. Second, there are the differences in disaster responses, which in their turn are shaped by the pre-disaster configuration of that society. Third, these responses, jointly with the pre-existing configuration, contribute to set society on a further developmental path shaping the indirect long-term effects on inequality.

For such an approach, which requires us to follow the trajectory of societies over the long term, historical research is vital. Opportunities for this have greatly increased in recent years. Alongside the more traditional descriptions of historical disasters and the large narratives, which easily capture the imagination, increasingly large historical datasets are constructed, enabling quantitative analyses (Pamuk, 2007; Alfani, 2010; Alfani and Ammannati, 2017). Further, the study of history is now increasingly using comparative analysis of selected cases, holding as many variables constant as possible to identify crucial factors, particularly by investigating separate disasters and analyzing how they each affected different localities or societies (Van Bavel and Curtis, 2016; ERC, 2014; Van Bavel et al., 2020; Soens, 2018; Van Bavel et al., 2018). Taking this approach, a recent large-scale research program on disasters in pre-industrial Europe has tested several hypotheses on the effect of disasters, including the hypothesis that disasters typically function as levelers (ERC, 2014; Van Bavel et al., 2020). Here, we will build on this research and the growing number of studies by historians and economists now working on historical disasters and discuss some of the main cases, in order to assess main mechanisms of direct impact, medium-term institutional responses, and long-run effects on inequality. We will use these as components of a unifying framework which is presented in the last part of this paper.

Opposite effects of shocks – Perhaps surprisingly, studies across cases reveal that the direct and indirect effects on inequality can hugely vary per society even with the same type of shock, depending on the social context at the moment the shock happens. This can clearly be seen with the Black Death, which killed a similar share of the population in many societies and in the short run resulted in reduced wealth inequality yet in the longer run had divergent effects, as a result of the different characteristics of these societies and in combination with the endogenous dynamism and associated inequality outcomes generated by these societal characteristics themselves.  …

Particularly illustrative is the well-studied case of Italy subject to subsequent episodes of the plague that haunted Europe on-and-off throughout the 14th to 17th centuries. In the first part of this period, that of the Black Death, the high numbers of deaths tended to enhance wealth equity. Contrarily, in 1630 a mortality event of a similar extent did not have an inequality-reducing effect anymore. Instead, as empirically demonstrated by Alfani and noted by Scheidel, it was followed by a further rise in wealth inequality (Scheidel, 2017; Alfani, 2010, 2017, 2020). An important factor explaining this difference was the changing nature of inheritance rules. The initially prevailing systems of partible inheritance had facilitated a leveling effect of the Black Death. By contrast, in seventeenth-century Italy wealthy urban elites had come to rule supreme and introduced new institutions, including fiduciary entails, in order to keep their properties intact and undivided (Alfani and Ammannati, 2017). This was related to a broader, more fundamental change that had taken place in Italy in the intermediate centuries. Urban elites had seized the opportunities offered by emerging markets for production factors such as land, labor, and capital, amassing enormous wealth, which they subsequently used to acquire political leverage (Van Bavel, 2016). Using this position, they developed the rules that protected their material wealth. …

The cases of the Black Death and the Italian pandemics point to two key factors that determine whether crises will reduce or amplify inequality: the distributions of pre-existing wealth and of decision-making leverage. …

In summary, the response to a disaster tends to be shaped by those who have the material means (wealth) and the political leverage. As in most societies, those were unequally distributed, disasters generally enlarged inequities, but exceptions did clearly exist. …

Our reanalysis of dynamics from medieval times until now leads us to hypothesize that shocks in most cases tended to catalyze inequality, as a result of both pre-existing inequalities in wealth distribution which were reinforced by the shock and the institutional responses to the shock, as these were mostly shaped in a context of skewed leverage. However, exceptions to this tendency occurred in periods when the self-organization of ordinary people and associated institutions had grown and empowered these people to overrule this pattern. In such settings, shocks have been windows of opportunity for setting new rules that ‘made the ball roll the other way’, towards more equity (Fig. 3, panel C).Carryover effects to the next shock

The usual situation is a slow drift towards more concentrated wealth in the hands of a small elite (panel B). If a wealthy elite has the most leverage to set the rules upon a crisis (arrow I) a crisis may be used to accelerate the trend of wealth concentration (panel A). By contrast, if ordinary people have more leverage (arrow II) the rules may be adapted to change the stability landscape of wealth dynamics and reverse the trend in the direction of reduced inequality (panel C).

… our simple framework captures the essence of the pattern we find throughout most of history, where economic and political leverage typically was skewed. Crises in these contexts tended to boost wealth concentration into the existing elite while at the same time enlarging the fraction of have-nots in societies. Apart from the direct impact, a leveling effect of shocks, in the long run, may only be expected if there happen to be strong pre-existing institutions that give ordinary people leverage to shape the rules of response to the disaster. …

These insights also hold relevance when thinking, more speculatively, about the fall-out of the COVID 19-crisis. The social and economic context at present is much more similar to that during the 2008 crisis than that during the twentieth-century disasters. If anything, existing inequalities have deepened since 2008. The skewness in the wealth distribution has further increased, in Western and non-Western countries alike, and also at the global level, with many households having no economic buffers, while a few hold vast resources (Piketty, 2014; Goda, 2018). Moreover, the COVID 19-crisis especially hits labor, while the reliance of people on IT infrastructure and its wealthy owner’s increases. The direct impact is therefore likely to enlarge material inequalities. Also, the overlap between economic wealth and political power has further grown, with political decision-making mostly aligned with the interests of large wealth owners, as a result of lobbying and financing campaigns, even in Western democracies (Gilens and Page, 2014), while in some countries governments themselves have become closely aligned to the group of very wealthy or have become composed of them. In these latter cases, it, therefore, seems likely that institutional responses to this crisis, including fiscal ones, will be shaped in such a way that inequalities may be further sharpened, as was the case after the 2008 crisis. Other countries, however, where these tendencies have been less outspoken, are in a position where the outcome may shift either way. Sense-making of the kind we do comes at an important moment for such countries, as it could help swing the balance allowing restructuring of rules that makes the ball roll the other way.”                       read whole article here

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John Rapley

is a political economist at the University of Cambridge, as well as a senior fellow at the Johannesburg Institute for Advanced Study. His latest book is Twilight of the Money Gods: Economics as a Religion and How it all Went Wrong (2017). He lives in London and Johannesburg.