We can also imagine mechanisms that would imply an inequality of wealth comparable in magnitude to the inequality of income from labor. Specifically, if wealth is accumulated primarily for life-cycle reasons (saving for retirement, say), as Modigliani reasoned, then everyone would be expected to accumulate a stock of capital more or less proportional to his or her wage level in order to maintain approximately the same standard of living (or the same proportion thereof) after retirement. In that case, inequality of wealth would be a simple translation in time of inequality of income from labor and would as such have only limited importance, since the only real source of social inequality would be inequality with respect to labor.
Once again, such a mechanism is theoretically plausible, and its real-world role is of some significance, especially in aging societies. In quantitative terms, however, it is not the primary mechanism at work. Life-cycle saving cannot explain the very highly concentrated ownership of capital we observe in practice, any more than precautionary saving can. To be sure, older individuals are certainly richer on average than younger ones. But the concentration of wealth is actually nearly as great within each age cohort as it is for the population as a whole. In other words, and contrary to a widespread belief, intergenerational warfare has not replaced class warfare. The very high concentration of capital is explained mainly by the importance of inherited wealth and its cumulative effects: for example, it is easier to save if you inherit an apartment and do not have to pay rent. The fact that the return on capital often takes on extreme values also plays a significant role in this dynamic process. In the remainder of Part Three, I examine these various mechanisms in greater detail and consider how their relative importance has evolved in time and space. At this stage, I note simply that the magnitude of inequality of wealth, both in absolute terms and relative to inequality of income from labor—points toward certain mechanisms rather than others.
Inequalities and Concentration: Some Orders of Magnitude
Before analyzing the historical evolutions that can be observed in different countries, it will be useful to give a more precise account of the characteristic orders of magnitude of inequality with respect to labor and capital. The goal is to familiarize the reader with numbers and notions such as deciles, centiles, and the like, which may seem somewhat technical and even distasteful to some but are actually quite useful for analyzing and understanding changes in the structure of inequality in different societies—provided we use them correctly.
To that end, I have charted in Tables 7.1–3 the distributions actually observed in various countries at various times. The figures indicated are approximate and deliberately rounded off but at least give us a preliminary idea of what the terms “low,” “medium,” and “high” inequality mean today and have meant in the past, with respect to both income from labor and ownership of capital, and finally with respect to total income (the sum of income from labor and income from capital).
For example, with respect to inequality of income from labor, we find that in the most egalitarian societies, such as the Scandinavian countries in the 1970s and 1980s (inequalities have increased in northern Europe since then, but these countries nevertheless remain the least inegalitarian), the distribution is roughly as follows. Looking at the entire adult population, we see that the 10 percent receiving the highest incomes from labor claim a little more than 20 percent of the total income from labor (and in practice this means essentially wages); the least well paid 50 percent get about 35 percent of the total; and the 40 percent in the middle therefore receive roughly 45 percent of the total (see Table 7.1).5 This is not perfect equality, for in that case each group should receive the equivalent of its share of the population (the best paid 10 percent should get exactly 10 percent of the income, and the worst paid 50 percent should get 50 percent). But the inequality we see here is not too extreme, at least in comparison to what we observe in other countries or at other times, and it is not too extreme especially when compared with what we find almost everywhere for the ownership of capital, even in the Scandinavian countries.
In order to have a clear idea of what these figures really mean, we need to relate distributions expressed as percentages of total income to the paychecks that flesh-and-blood workers actually receive as well as to the fortunes in real estate and financial assets owned by the people who actually make up these wealth hierarchies.
Concretely, if the best paid 10 percent receive 20 percent of total wages, then it follows mathematically that each person in this group earns on average twice the average pay in the country in question. Similarly, if the least well paid 50 percent receive 35 percent of total wages, it follows that each person in this group earns on average 70 percent of the average wage. And if the middle 40 percent receive 45 percent of the total wage, this means that the average wage of this group is slightly higher than the average pay for society as a whole (45/40 of the average, to be precise).
For example, if the average pay in a country is 2,000 euros per month, then this distribution implies that the top 10 percent earn 4,000 euros a month on average, the bottom 50 percent 1,400 euros a month, and the middle 40 percent 2,250 a month.6 This intermediate group may be regarded as a vast “middle class” whose standard of living is determined by the average wage of the society in question.
Lower, Middle, and Upper Classes
To be clear, the designations “lower class” (defined as the bottom 50 percent), “middle class” (the middle 40 percent), and “upper class” (top 10 percent) that I use in Tables 7.1–3 are quite obviously arbitrary and open to challenge. I introduce these terms purely for illustrative purposes, to pin down my ideas, but in fact they play virtually no role in the analysis, and I might just as well have called them “Class A,” “Class B,” and “Class C.” In political debate, however, such terminological issues are generally far from innocent. The way the population is divided up usually reflects an implicit or explicit position concerning the justice and legitimacy of the amount of income or wealth claimed by a particular group.
For example, some people use the term “middle class” very broadly to encompass individuals who clearly fall within the upper decile (that is, the top 10 percent) of the social hierarchy and who may even be quite close to the upper centile (the top 1 percent). Generally, the purpose of such a broad definition of the middle class is to insist that even though such individuals dispose of resources considerably above the average for the society in question, they nevertheless retain a certain proximity to the average: in other words, the point is to say that such individuals are not privileged and fully deserve the indulgence of the government, particularly in regard to taxes.
Other commentators reject any notion of “middle class” and prefer to describe the social structure as consisting of just two groups: “the people,” who constitute the vast minority, and a tiny “elite” or “upper class.” Such a description may be accurate for some societies, or it may be applicable to certain political or historical contexts. For example, in France in 1789, it is generally estimated that the aristocracy represented 1–2 percent of the population, the clergy less than 1 percent, and the “Third Estate,” meaning (under the political system of the Ancien Régime) all the rest, from peasantry to bourgeoisie, more than 97 percent.
It is not my purpose to police dictionaries or linguistic usage. When it comes to designating social groups, everyone is right and wrong at the same time. Everyone has good reasons for using certain terms but is wrong to denigrate the terms used by others. My definition of “middle class” (as the “middle” 40 percent) is highly contestable, since the income (or wealth) of everyone in the group is, by construction, above the median for the society in question.7 One might equally well choose to divide society into three thirds and call the middle third the “middle class.” Still, the definition I have given seems to me to correspond more closely to common usage: the expression “middle class” is generally used to refer to people who are doing distinctly better than the bulk of
the population yet still a long way from the true “elite.” Yet all such designations are open to challenge, and there is no need for me to take a position on this delicate issue, which is not just linguistic but also political.
The truth is that any representation of inequality that relies on a small number of categories is doomed to be crudely schematic, since the underlying social reality is always a continuous distribution. At any given level of wealth or income there is always a certain number of flesh-and-blood individuals, and the number of such individuals varies slowly and gradually in accordance with the shape of the distribution in the society in question. There is never a discontinuous break between social classes or between “people” and “elite.” For that reason, my analysis is based entirely on statistical concepts such as deciles (top 10 percent, middle 40 percent, lower 50 percent, etc.), which are defined in exactly the same way in different societies. This allows me to make rigorous and objective comparisons across time and space without denying the intrinsic complexity of each particular society or the fundamentally continuous structure of social inequality.
Class Struggle or Centile Struggle?
My fundamental goal is to compare the structure of inequality in societies remote from one another in time and space, societies that are very different a priori, and in particular societies that use totally different words and concepts to refer to the social groups that compose them. The concepts of deciles and centiles are rather abstract and undoubtedly lack a certain poetry. It is easier for most people to identify with groups with which they are familiar: peasants or nobles, proletarians or bourgeois, office workers or top managers, waiters or traders. But the beauty of deciles and centiles is precisely that they enable us to compare inequalities that would otherwise be incomparable, using a common language that should in principle be acceptable to everyone.
When necessary, we will break down our groups even more finely, using centiles or even thousandths to register more precisely the continuous character of social inequality. Specifically, in every society, even the most egalitarian, the upper decile is truly a world unto itself. It includes some people whose income is just two or three times greater than the mean and others whose resources are ten or twenty times greater, if not more. To start with, it is always enlightening to break the top decile down into two subgroups: the upper centile (which we might call the “dominant class” for the sake of concreteness, without claiming that this term is better than any other) and the remaining nine centiles (which we might call the “wealthy class” or “well-to-do”).
For example, if we look at the case where inequality of income from labor is relatively low (think Scandinavia), represented in Table 7.1, with 20 percent of wages going to the best paid 10 percent of workers, we find that the share going to the top 1 percent is typically on the order of 5 percent of total wages. This means that the top 1 percent of earners make on average five times the mean wage, or 10,000 euros per month, in a society in which the average wage is 2,000 euros per month. In other words, the best paid 10 percent earn 4,000 euros a month on average, but within that group the top 1 percent earn an average of 10,000 euros a month (and the next 9 percent earn on average 3,330 euros a month). If we break this down even further and looked at the top thousandth (the best paid 0.1 percent) in the top centile, we find individuals earning tens of thousands of euros a month and a few earning hundreds of thousands, even in the Scandinavian countries in the 1970s and 1980s. Of course there would not be many such people, so their weight in the sum total of all wages would be relatively small.
Thus to judge the inequality of a society, it is not enough to observe that some individuals earn very high incomes. For example, to say that the “income scale goes from 1 to 10” or even “1 to 100” does not actually tell us very much. We also need to know how many people earn the incomes at each level. The share of income (or wealth) going to the top decile or centile is a useful index for judging how unequal a society is, because it reflects not just the existence of extremely high incomes or extremely large fortunes but also the number of individuals who enjoy such rewards.
The top centile is a particularly interesting group to study in the context of my historical investigation. Although it constitutes (by definition) a very small minority of the population, it is nevertheless far larger than the superelites of a few dozen or hundred individuals on whom attention is sometimes focused (such as the “200 families” of France, to use the designation widely applied in the interwar years to the 200 largest stockholders of the Banque de France, or the “400 richest Americans” or similar rankings established by magazines like Forbes). In a country of almost 65 million people such as France in 2013, of whom some 50 million are adults, the top centile comprises some 500,000 people. In a country of 320 million like the United States, of whom 260 million are adults, the top centile consists of 2.6 million individuals. These are numerically quite large groups who inevitably stand out in society, especially when the individuals included in them tend to live in the same cities and even to congregate in the same neighborhoods. In every country the upper centile occupies a prominent place in the social landscape and not just in the income distribution.
Thus in every society, whether France in 1789 (when 1–2 percent of the population belonged to the aristocracy) or the United States in 2011 (when the Occupy Wall Street movement aimed its criticism at the richest 1 percent of the population), the top centile is a large enough group to exert a significant influence on both the social landscape and the political and economic order.
This shows why deciles and centiles are so interesting to study. How could one hope to compare inequalities in societies as different as France in 1789 and the United States in 2011 other than by carefully examining deciles and centiles and estimating the shares of national wealth and income going to each? To be sure, this procedure will not allow us to eliminate every problem or settle every question, but at least it will allow us to say something—and that is far better than not being able to say anything at all. We can therefore try to determine whether “the 1 percent” had more power under Louis XVI or under George Bush and Barack Obama.
To return for a moment to the Occupy Wall Street movement, what it shows is that the use of a common terminology, and in particular the concept of the “top centile,” though it may at first glance seem somewhat abstract, can be helpful in revealing the spectacular growth of inequality and may therefore serve as a useful tool for social interpretation and criticism. Even mass social movements can avail themselves of such a tool to develop unusual mobilizing themes, such as “We are the 99 percent!” This might seem surprising at first sight, until we remember that the title of the famous pamphlet that Abbé Sieyès published in January 1789 was “What Is the Third Estate?”8
I should also make it clear that the hierarchies (and therefore centiles and deciles) of income are not the same as those of wealth. The top 10 percent or bottom 50 percent of the labor income distribution are not the same people who constitute the top 10 percent or bottom 50 percent of the wealth distribution. The “1 percent” who earn the most are not the same as the “1 percent” who own the most. Deciles and centiles are defined separately for income from labor, ownership of capital, and total income (from both labor and capital), with the third being a synthesis of the first two dimensions and thus defining a composite social hierarchy. It is always essential to be clear about which hierarchy one is referring to. In traditional societies, the correlation between the two dimensions was often negative (because people with large fortunes did not work and were therefore at the bottom of the labor income hierarchy). In modern societies, the correlation is generally positive but never perfect (the coefficient of correlation is always less than one). For example, many people belong to the upper class in terms of labor income but to the lower class in terms of wealth, and vice versa. Social inequality is multidimensional, just like political conflict.
Note, finally, that the income and wealth distributions described in Tables 7.1
–3 and analyzed in this and subsequent chapters are in all cases “primary” distributions, meaning before taxes. Depending on whether the tax system (and the public services and transfer payments it finances) is “progressive” or “regressive” (meaning that it weighs more or less heavily on different groups depending on whether they stand high or low in the income or wealth hierarchy), the after-tax distribution may be more or less egalitarian than the before-tax distribution. I will come back to this in Part Four, along with many other questions related to redistribution. At this stage only the before-tax distribution requires consideration.9
Inequalities with Respect to Labor: Moderate Inequality?
To return to the question of orders of magnitude of inequality: To what extent are inequalities of income from labor moderate, reasonable, or even no longer an issue today? It is true that inequalities with respect to labor are always much smaller than inequalities with respect to capital. It would be quite wrong, however, to neglect them, first because income from labor generally accounts for two-thirds to three-quarters of national income, and second because there are quite substantial differences between countries in the distribution of income from labor, which suggests that public policies and national differences can have major consequences for these inequalities and for the living conditions of large numbers of people.
Capital in the Twenty-First Century Page 29