Inequality is bad for economies in the very long-run. Here's a new paper:
In countries with higher levels of inequality in the 1700s and 1800s, businesses today are more likely to die young and create fewer jobs.
This could be because inequality means more people are credit-constrained and so cannot set up their own businesses, which in turn generates anti-entrepreneurial attitudes which are transmitted down the generations.
I don't say this to provide another reason to worry about today's inequality; it would be odd to reduce inequality now on the grounds that doing so will benefit people in the year 2300. I do so instead because this is yet more evidence that our social and economic attitudes are shaped by quite distant historical circumstances. To take a few examples:
- Areas of Australia which saw men greatly outnumber women in the 18th and 19th centuries because of England's transportation of criminals have more sexist attitudes and gender discrimination today.
- Areas of Germany which saw anti-Jewish pogroms after the Black Death tended (pdf) to be more supportive of the Nazi party in the 1930s.
- British people's attitudes to immigration today are "significantly (pdf) more positive when the respondents live in a constituency that was home to a medieval Jewish immigrant community."
- "The (pdf) descendants of societies that traditionally practiced plough agriculture today have less equal gender norms, measured using reported gender-role attitudes and female participation in the workplace, politics, and entrepreneurial activities.
- Stanley Engerman and Kenneth Sokoloff show (pdf) that one reason why south America grew more slowly than the north is that their higher inequality entrenched the power of the rich which allowed them to block economic development.
- Nathan Nunn has found "a robust[in Africa] negative relationship between the number of slaves exported from a country and current economic performance." This could be because the slave trade heightened mutual distrust and led to weak and corrupt states.
The precise mechanisms in these stories differ. Sometimes, the transmission from past to present operates via institutions, sometimes via culture - though of course the two interact. You can read Greg Clark's work (pdf) showing that wealth persists through the generations as individual-level evidence for the latter.
All this suggests that, contrary to simple-minded neoclassical economics and Randian libertarianism, individuals are not and cannot be self-made men. We are instead creations of history. History is not simply a list of the misdeeds of irrelevant has-beens; it is a story of how we were made. Burke was right: society is "a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born."
One radical implication of all this is Herbert Simon's:
When we compare the poorest with the richest nations, it is hard to conclude that social capital can produce less than about 90 percent of income in wealthy societies like those of the United States or Northwestern Europe. On moral grounds, then, we could argue for a flat income tax of 90 percent to return that wealth to its real owners.