In this interview, Branko Milanovic discusses what the writings of four classical economists reveal about their perceptions of income inequality.
Stone Center Senior Scholar Branko Milanovic is the author of several acclaimed books, including The Haves and the Have-nots, Global Inequality, and his most recent, Capitalism, Alone. He is currently at work on a new book that delves into the writings of François Quesnay, Adam Smith, David Ricardo, and Karl Marx.
What drew you to the question of how these four economists thought about income and wealth inequality?
Milanovic: These four writers are the founders of classical political economy. They’ve been studied for 200 years. They studied each other, too. Marx has pages and pages of notes on the three others. Ricardo’s writing was directly stimulated by what Adam Smith wrote in The Wealth of Nations. And Adam Smith knew Quesnay personally.
Obviously, many books and papers have been written about these authors (books on Smith and Marx alone would comfortably fill several libraries), so the question is: Why add to it? The reason is that, perhaps strangely, not much or nothing at all was written from the perspective that I’m taking, which is to look at how they perceived income and wealth inequality in their time, and how they thought it would evolve. How is income inequality or wealth inequality seen in their work? Where does it come from? What is the main reason for inequality? Will more advanced societies be more unequal or less? These are the topics I discuss.
I have to mention too that the book does not deal at all with normative topics, that is, what they (or other authors) thought about inequality, what types of inequalities were “just” or not. That rather empirical approach has also narrowed down the authors I consider in the book. Other than the four mentioned here, I discuss Vilfredo Pareto, Simon Kuznets, and Samir Amin. They all fit the framework that I mentioned. But others, like John Rawls, Amartya Sen, and Friedrich Hayek, who were all concerned about the ethics of inequality (and not with empirics), do not fit the framework. And, perhaps most famously, Rousseau does not fit the framework either. Or Plato, for that matter.
If I were to summarize it, I’d say that these four all saw inequality as essentially arising from differences in the amount of property that people owned. In Quesnay, it is obviously agricultural property and land which mattered the most because he was writing before the French Revolution. Land was the main asset of the rich.
By Adam Smith’s time, we see physical and financial capital playing much more of a role. In Ricardo, capital is really the most important element for growth. In Marx, land ownership gets subsumed under general capital ownership. In other words, they saw inequality as being derived from the ownership of assets.
This is actually what is important and interesting for us now: they were not concerned with interpersonal inequality, as such, because to them it seemed that interpersonal inequality was simply inequality that derives from having or not having assets. If you didn’t have assets, and had only labor power, then you were almost by definition poor or, at best, lower middle class. They were not really thinking of people as individuals. People were members of their classes.
Didn’t the definitions of the various classes evolve quite a bit during the time that the four were writing?
Milanovic: Yes, and the evolution was partly or maybe entirely driven by economic development. France was a less developed country than both England and Scotland. Except for Quesnay, the writers had either England or Scotland as a primary topic of investigation. So the definitions of class changed. In Quesnay’s time, class was a formal designation within the legal structure. You had nobility, you had clergy, and then you had what was called le tiers état (the third estate), which was basically everybody including the bourgeoisie, workers, poor people, and vagrants.
Of course, a hundred years later, when Marx is writing, there is legal equality among people in most European countries (after the Revolutions of 1848). So the definition of class did formally change, but economically, for all four, it was, as I mentioned before, really the ownership of assets that would distinguish those who were rich from those who were poor.
So in Quesnay’s time, classes were defined as legal categories. But you’ve mentioned that Smith was really the first to define classes. Is he seeing class in a different way than Quesnay?
Milanovic: Yes, Smith was the first to use the class terms that we still use now. The three major classes were landlords, capitalists (called by Smith “masters” or “employers” — the word “capitalist” was not yet invented), and workers, which includes peasants, of course, too. Workers work in industrial companies, enterprises which were being created then, or in small-scale shops, or on land. Smith was of course very much influenced by the type of social structure that existed in England and Scotland at the time. It was not a typical continental European (or Asian) class structure because tenant-farmers were much more present in England than elsewhere, but because of the influence of Smith and Ricardo, we have come to adopt this type of class structure in economics.
It seems surprising that Marx doesn’t talk about interpersonal inequality.
Milanovic: It’s very rare that “inequality” appears in his writing. Moreover, and this is more of a philosophical issue, in Marx’s critique of capitalism, inequality is not the main or even an important reason for the critique.
His critique is based on differences in access to the means of production and the ability to hire people whose portion of labor you appropriate. In Marx, the injustice of capitalism is built into its setup. Capitalism cannot become more just if income is redistributed and a little bit more is given to workers. That is actually what is the difficulty with Marx for many leftists today: injustice is built into the system as soon as I, with some capital, show up and hire you to do work for me. You produce the surplus value which I appropriate. I can give you a better salary. I can give you better working conditions and all that. Of course, you’re going to fight for that and I will eventually give it to you. But the inequity of the system is still there regardless of the level of the wage rate. For sure, Marx thought that wages were unlikely to be high (even if he admitted that they can increase with development), but technically, even with high wages, you do have exploitation. Exploitation disappears only if profits are zero, at which point capitalism pretty much disappears too. So reducing inequality, while technically important, does not solve, according to Marx, the fundamental inequity of capitalism, which is the ability of owners of means of production to exploit laborers.
You’ve discussed how Quesnay believed that the wealth of the poor classes was an indication of the wealth of the country as a whole. That seems like a very modern idea.
Milanovic: That’s quite true and important, and we might not realize today how revolutionary it was at the time. When Quesnay was writing, the dominant view was that economics is a technique for maximizing the wealth of the top class, projecting a country’s power abroad, or amassing lots of gold or silver. It was really the power of the state or the monarch that was the center of interest in economics. It was not the welfare of the poor or workers or the middle class.
When Quesnay says that the wealth of the country is reflected in the wealth of ordinary people, it totally changes the objective of economics. That, of course, continues and gets amplified with Smith.
But Ricardo was the first to see the distribution of wealth as important for a country’s growth?
Milanovic: Ricardo sees capitalists as the only active agent of development. His book On the Principles of Political Economy and Taxation is based on the idea that if more of the net income goes to landlords, less of it will go to capitalists. If less of it goes to capitalists, there will be fewer investments and the growth rate will go down. It’s a very simple but very powerful model.
Marx continues this thinking of capitalists as the active element that is needed for growth. He, like Ricardo, believed that if the rate of profit goes down to zero, you basically have the end of capitalism. You cannot have capitalism, if capitalists earn nothing. Why should they invest, then?
With Ricardo, the role of the capitalist is crucial, because capitalists invest. If capitalists were like feudal landlords, they would consume that money, and that would be the end of the story. But capitalists invest, and investment drives capitalism forward. As Marx says as well, accumulation and investment is the definition of capitalism.
And what about what you call the Ricardian windfall — that lowering inequality is a tool for higher growth?
Milanovic: This is something that I don’t think has been noticed before. In Ricardo’s view, capitalists need to win in order for the economy to grow. But if capitalists win, not only will the economy grow, but inequality will be reduced because capitalists would win against the landlords who are by far the richest class. So with capitalists winning we have, according to Ricardo, to some extent the “middle class” getting better off and the top (we would likely call it today “the top 1 percent”) losing. For workers, whether capitalists win or lose is a matter of indifference, because in Ricardo’s simple model, they are paid a subsistence wage anyway. But, as you can see, improvement in the distribution is a condition for sustained growth. This is something new, and I think not sufficiently appreciated. There is no tradeoff between equality and growth in Ricardo.
What is interesting, and has never been pointed out in Ricardo’s writing before, is that the reduction of inequality is a condition for faster growth. I don’t think that he himself saw it like that, because he really was interested in capitalists winning not because of inequality, but because they needed to have money to invest and have the economy grow.
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