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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Sprache: Englisch
Once there were princes and peasants and very few between. The extremes of wealth and poverty are still with us, but that shouldn't blind us to the fact our societies have been utterly transformed for the better over the past century. As Daniel Waldenström makes clear in this authoritative account of wealth accumulation and inequality in the modern west, we are today both significantly richer and more equal.
Using cutting-edge research and new, sometimes surprising, data, Waldenström shows that what stands out since the late 1800s is a massive rise in the size of the middle class and its share of society’s total wealth. Unfettered capitalism, it seems, doesn’t have to lead to boundless inequality. The key to progress was political and institutional change that enabled citizens to become educated, better paid, and to amass wealth through housing and pension savings. Waldenström asks how we can consolidate these gains while encouraging the creation of new capital. The answer, he argues, is to pursue tax and social policies that raise the wealth of people in the bottom and middle rather than cutting wealth of entrepreneurs at the top.
Richer and More Equal is a benchmark account of one of the most profound and encouraging social changes in human history and a blueprint for continued progress.
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Seitenzahl: 372
Veröffentlichungsjahr: 2024
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CONTENTS
Cover
Table of Contents
Title Page
Copyright
Preface
1 Uncovering a Positive Story
1.1 The Previous Narrative Arguing That Wars and Progressive Taxes Shaped a Century of Wealth Inequality
1.2 A New Historical Narrative: Richer and More Equal
1.3 Measuring Wealth Inequality: Promises and Pitfalls
1.4 Inequality Has Decreased in Other Outcomes as Well
1.5 What Policymakers Can Learn from the History of Wealth
1.6 Outline of the Book
Notes
Part I Building Wealth
2 The History of Wealth Accumulation
2.1 The Trajectory of Real Per Capita Wealth
2.2 The Evolution of Wealth–Income Ratios
2.3 Nineteenth-Century Capital: A New Picture
2.4 Reassessing the History of Wealth–Income Ratios
2.5 Capital–Income Ratios Offer More Stable Long-Term Trends
Notes
3 The Changing Nature of Wealth
3.1 Wealth Composition a Century Ago: Agrarian Estates and Corporate Securities
3.2 The Rise of Popular Wealth
3.3 Household Debt Over the Past 130 Years
Notes
4 Homes and Pensions: The Pillars of Household Wealth
4.1 Homeownership: The First Pillar of Household Wealth
4.2 Pension Savings: The Second Pillar of Household Wealth
Notes
Part II Wealth Inequality
5 The Great Wealth Equalization of the Twentieth Century
5.1 The Evolution of Wealth Inequality over the Past 130 Years
5.2 Did the Super-Rich Escape the Great Wealth Equalization?
5.3 Who Are at the Bottom?
5.4 Gender and Racial Disparities in Wealth Holdings
Notes
6 Exploring the Great Wealth Equalization
6.1 Comparing the Wealth Growth of the Rich and the Poor
6.2 How Homeownership Affects Wealth Inequality
6.3 Wars as Shocks to Capital
6.4 Taxation and the Shaping of Wealth Inequality
6.5 Institutional Change and Wealth Inequality Trends
Notes
7 Hidden Offshore Wealth
7.1 Defining Offshore Wealth
7.2 Assessing Offshore Wealth and its Owners
7.3 How Offshore Wealth Affects Wealth Inequality
Notes
8 Public-Sector Wealth
8.1 Social Security Wealth and its Impact on Wealth Inequality
8.2 Allocating Government Wealth
Notes
9 Inheritance and Wealth Inequality
9.1 A Macroscopic View of Inherited Wealth
9.2 Inheritance and its Complex Impact on Wealth Inequality
9.3 The Genesis of Extreme Wealth:
9.4 Intergenerational Wealth Transmission: The Role of Inherited Capital
Notes
Part III A New History of Wealth
10 Conclusions and Policy Insights
10.1 Revising the History of Wealth Inequality
10.2 Lessons for Policymakers
10.3 Practical Takeaways for Households
References
Index
End User License Agreement
List of Illustrations
Chapter 1
Figure 1.1
Rising Real Average Wealth in the Western World
Figure 1.2
The Changing Nature of Wealth from Elite-Owned to Popular Wealth
Figure 1.3
Accelerating Growth in Popular Wealth over the Twentieth Century
Figure 1.4
A Historic Drop in the Top 1 Percentile Wealth Share
Figure 1.5
Falling Inequality in Lifespans, 1850–2020
Chapter 2
Figure 2.1
Increasing Average Wealth in Six Western Countries, 1890–2020
Figure 2.2
Wealth–Income Ratios in the West over 130 Years
Figure 2.3
UK Wealth–Income Ratios: New and Previous Series
Figure 2.4
The Likely Overestimation of Pre-World War I Dwellings and Fixed Capital in Prev…
Figure 2.5
Revised German Wealth–Income Ratios, 1890–2017
Figure 2.6
The Disappearing Difference between Europe and the US before World War I
Figure 2.7
Capital–Income Ratios Are Lower and More Stable Than Wealth–Income Ratios
Chapter 3
Figure 3.1
Asset Composition Trends: Falling Shares of Agriculture, Rising Share of Housing
Figure 3.2
The Changing Nature of Wealth in the Twentieth Century
Figure 3.3
The Changing Nature of Wealth in Six Western Countries
Figure 3.4
The Dominance of Housing and Funded Pensions in People’s Wealth
Figure 3.5
Household Indebtedness over 130 Years
Chapter 4
Figure 4.1
Rising Homeownership Rates in the West
Figure 4.2
Return and Risk in Equity and Housing Investment over the Past 130 Years
Figure 4.3
Pension Fund Assets in OECD Countries, 1980–2021 (2021 US$ trillion)
Figure 4.4
Pension Fund Assets as a Share of GDP, OECD, 1980–2021
Figure 4.5
Rising Life Expectancy in the Twentieth Century
Chapter 5
Figure 5.1
Top 10 Percentile Group’s Wealth Share, 1890–2015 (%)
Figure 5.2
Top 1 Percentile Group’s Wealth Share, 1895–2015 (%)
Figure 5.3
Recent Trends in Top 1 Percent Wealth Shares in Europe and the US
Figure 5.4
Wealth Inequality in Eight Other Western Countries
Figure 5.5
Long-Run Trends in the Wealth Distribution in Four Countries
Figure 5.6
The Wealth Share of the Super-Rich Over 130 Years
Figure 5.7
A Return of the Super-Rich Since 1980?
Figure 5.8
The Age–Wealth Profile Over the Life Cycle
Chapter 6
Figure 6.1
Wealth Growth among the Middle Class and the Rich in the Twentieth Century
Figure 6.2
Western Wealth Growth Averages of Middle-Class and Rich People, 1910–2010
Figure 6.3
Wealth Amounts Held by the Top 1 Percent and Bottom 90 Percent
Figure 6.4
The Number of Times Wealth Has Multiplied during 1910–2010: the Elite and the Rest
Figure 6.5
Housing Wealth and Financial Assets across the US Wealth Distribution
Figure 6.6
Contributions from Asset Prices and Savings to Wealth Growth across the US Wealth…
Figure 6.7
Homeownership and Wealth Inequality in Europe and the US
Figure 6.8
Changes in Absolute Wealth Holdings around the World Wars
Figure 6.9
A New Wealth Elite: From “Rentiers” to “High-Paid Employees” in Sweden
Chapter 7
Figure 7.1
How Adding Offshore Assets Changes the Top 1 Percent Wealth Shares
Figure 7.2
The Evolution of Offshore Wealth in Spain and Sweden since 1970
Chapter 8
Figure 8.1
The Equalizing Effect of Adding Unfunded Pension Wealth
Figure 8.2
Adding Social Security Wealth: Wealth–Income Ratios and Top Wealth Shares
Figure 8.3
Government Wealth–Income Ratios in Six Western Countries (%)
Figure 8.4
Top 1 Percent National Wealth Shares
Chapter 9
Figure 9.1
Aggregate Inheritance Flows as a Share of National Income, 1890–2010 (%)
Figure 9.2
Aggregate Inheritance Flows as a Share of Private Wealth, 1890–2010 (%)
Figure 9.3
Share of Inherited Wealth in Total Wealth, 1900–2010 (%)
Figure 9.4
Inheritances Are Larger for Richer Heirs but More Important for Poorer Heirs
Figure 9.5
How Large a Proportion of the Super-Rich Are Heirs? Sweden versus the US, 1980–2016
Figure 9.6
Inheritances Account for Half of the Link between Parent and Child Wealth
List of Tables
Chapter 1
Table 1.1
How Inequality Has Fallen in Many Life-Relevant Outcomes
Chapter 3
Table 3.1
Wealth Growth in France, Sweden, and the US: Savings versus Capital Gains
Chapter 6
Table 6.1
Top 1 Percent Wealth Shares during the World Wars
Guide
Cover
Table of Contents
Title Page
Copyright
Preface
Begin Reading
References
Index
End User License Agreement
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Richer and More Equal
A New History of Wealth in the West
Daniel Waldenström
polity
Copyright © Daniel Waldenström 2024
The right of Daniel Waldenström to be identified as Author of this Work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988.
First published in 2024 by Polity Press
Polity Press65 Bridge StreetCambridge CB2 1UR, UK
Polity Press111 River StreetHoboken, NJ 07030, USA
All rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.
ISBN-13: 978-1-5095-5780-6
A catalogue record for this book is available from the British Library.
Library of Congress Control Number: 2023950839
The publisher has used its best endeavours to ensure that the URLs for external websites referred to in this book are correct and active at the time of going to press. However, the publisher has no responsibility for the websites and can make no guarantee that a site will remain live or that the content is or will remain appropriate.
Every effort has been made to trace all copyright holders, but if any have been overlooked the publisher will be pleased to include any necessary credits in any subsequent reprint or edition.
For further information on Polity, visit our website: politybooks.com
Preface
Over recent decades, private wealth in the Western world has multiplied, making us richer than ever. However, a hasty glance at the soaring number of billionaires – some of whom double as international celebrities – prompts the question: are we also living in a time of unparalleled inequality?
A widely accepted narrative argues that, yes, we are. This story paints wealth as an instrument of power and inequality. It traces a path from nineteenth-century Europe, where low taxes and minimal market regulation allowed for unchecked capital accumulation, to the two world wars and subsequent progressive taxation policies that diminished the fortunes of the wealthy. Yet, the narrative continues, a wave of market-friendly policies in the late twentieth century reversed this trend, sending wealth inequality back towards historic highs.
This tale, though intriguing, is largely flawed.
My goal in this book is to reframe the conversation around the history of wealth. Leveraging new historical data along with existing research, I contend that the main catalysts for wealth equalization are neither the devastations of war nor progressive tax regimes. While these elements have had their effects, they do not account for the broader and more potent forces shaping wealth. Instead, I will demonstrate that the real game-changer has been the expansion of asset ownership among everyday citizens, driven largely by the rise of homeownership and pension savings.
Another, broader purpose of this book is to contribute to a better understanding of the role that economic policies can play for promoting the growth of wealth in the entire population, from the economically disadvantaged to the super-rich. As we confront challenges such as technological disruption, climate change, and potential retrenchment in global trade, private wealth takes center stage. It serves as an investment engine, a cushion against financial shocks, and a revenue base for public initiatives. My hope is that, by exploring the economic history of the West, we can identify policies that encourage new wealth creation and avoid those that put it at risk.
In the course of writing this book, I have incurred considerable debts that I wish to acknowledge. Special thanks for valuable discussions and comments on drafts of the book or its earlier related writings go to Anders Björklund, Bertrand Garbinti, Branko Milanović, Charlotte Bartels, Clara Martínez-Toledano, Daron Acemoğlu, David Splinter, David Weil, Enea Baselgia, Enrico Rubolino, Eric Zwick, Erik Bengtsson, Isabel Martínez, Gabriel Zucman, Guido Alfani, Jacob Lundberg, Jakob Madsen, James Davies, James Heckman, James Robinson, Johan Norberg, John Sabelhaus, Lucas Chancel, Jesse Bricker, Mikael Elinder, Neil Cummins, Olle Hammar, Peter Lindert, Rodney Edvinsson, Rolf Aaberge, Salvatore Morelli, Thilo Albers, Thomas Helleday, and Thomas Piketty. I have also received constructive feedback during presentations at workshops and seminars at Bonn University, the Harris School of Public Policy and the Lifecycle Working Group at the University of Chicago, the Norwegian University of Science and Technology, the Federal Reserve Bank of Chicago, Ōrebro University, the Paris School of Economics, the Research Institute of Industrial Economics (IFN) in Stockholm, Statistics Norway, Stockholm University, and Uppsala University.
In addition, my understanding of wealth inequality and history has benefited greatly from discussions with Andreas Peichl, Anthony Atkinson, Anthony Shorrocks, Ariell Reshef, Enrico Rubolino, Facundo Alvaredo, Frank Cowell, Ignacio Flores, Henry Ohlsson, Jean-Laurent Rosenthal, Jeffrey G. Williamson, Jesper Roine, Leandro Prados de la Escosura, Luis Bauluz, Magnus Henrekson, Marc Morgan, Moritz Schularick, Roberto Iacono, Spencer Bastani, and Yonatan Berman. I have also appreciated help with data from Bertrand Garbinti, Charlotte Bartels, Clara Martínez-Toledano, Eric Zwick, Facundo Alvaredo, Jakob Madsen, Miguel Artola Blanco, Rodney Edvinsson, and Thilo Albers.
At Polity Press, my editor, Ian Malcolm, has given me support with the project and excellent guidance at every step in the process. I was fortunate to receive advice from two reviewers who helped me anticipate a number of important questions about the argument and the evidence. Of course, the final word, and any errors that may appear, are solely my responsibility.
Finally, I wish to thank my wife Nina for her advice and sufferance throughout the long gestation of this book.
1Uncovering a Positive Story
Over many decades, the distribution of wealth has been a topic of fascination and contention. It has stirred emotions and sparked debates among scholars, policymakers, and the public alike. The answers to questions such as how wealth is accumulated, distributed, and inherited are important for understanding economic growth, social mobility, and the overall wellbeing of a society. And, as for any other complex subject, our understanding of wealth distribution is evolving whenever new evidence and interpretations come to light.
Calls to reduce the ever-present disparities between rich and poor may be as old as the disparities themselves, and in recent years they have grown louder. The ambition to reduce inequality, however, should not distract us from a positive aspect to the narrative, which is largely untold. Over the past century, people in Western countries have become both richer and more equal. This unseen wealth revolution has profoundly transformed the lives of millions. To understand the origins and implications of this large-scale change is vital in our quest for a more equitable and prosperous future.
The numbers are striking: today, we are more than three times richer in purchasing power than we were in 1980, and we are nearly a staggering tenfold richer than a century ago. Such growth in wealth is extraordinary by historical standards, and it begs the question: what has driven this remarkable change, and why has wealth become increasingly equally distributed? The answer, as we shall see, lies in the broadening of wealth ownership among ordinary people primarily through homeownership and pension savings.
Old Narrative Challenged by New Data
Wealth is defined as the total value of all assets in housing, land ownership, and financial holdings less the value of debts. For much of human history, wealth has been concentrated in the hands of a few, leaving the vast majority with limited resources and opportunities. The past century, however, has witnessed a dramatic shift, with wealth becoming increasingly accessible to the bottom and middle strata of society. This phenomenon has had a profound impact on wealth inequality, helping to narrow the gap between the richest and the rest.
In this volume, I offer an in-depth exploration of the historical trajectory of wealth in the Western world. Drawing upon the latest discoveries of long-term patterns and determinants of aggregate wealth accumulation as well as wealth inequality, I examine detailed and comparable data for all relevant countries. Some of the data series were produced by me and my research associates, but other researchers have produced many of the series used here. However, this book does not just present a compilation of already known evidence; it also introduces new estimates of aggregate wealth–income ratios and wealth inequality.
The analysis reassesses a previously established narrative on the history of wealth, perhaps most notably associated with the works of the French economist Thomas Piketty, and offers a comprehensive historical and political account to shed light on the dynamics of equality within the capitalist economy. In the following sections, I elaborate on the intricacies of Piketty’s work and explain how my own narrative builds upon but also revises the overarching history of wealth distribution. It should be noted that measuring household wealth and its distribution is difficult, as I will explain in more detail below. Estimating historical trends in wealth inequality puts extraordinary requirements on data quality. However, the newer evidence produced in recent years benefits from a closer examination of the sources and analytical choices, and this gives it a clear advantage over earlier works.
Homes and Pensions, Not Wars
Contrary to the old scholarly narrative, this book will demonstrate that the primary drivers of wealth equalization have not been the destruction wrought by wars or the redistributive effects of capital taxation. While these factors have undoubtedly played a role, they are based on presumptions that building wealth is a zero-sum game, and they therefore fail to account for the broader and more fundamental forces at work. Instead, I will show that the expansion of wealth ownership among ordinary citizens, materialized through widespread homeownership and pension savings, has been the real engine of change.
At the turn of the twentieth century, owning a decent home and saving for retirement were luxuries enjoyed by only a select few – maybe a couple of tens of millions in Western countries. Fast forward to today, and these once elusive dreams have become a reality for several hundreds of millions of people. This massive increase in both homeownership and retirement savings, made possible by expanding educational attainment, elevated labor incomes, and financial development, has effectively democratized wealth. It has lifted the fortunes of the bottom and middle segments of society and contributed significantly to the reduction of wealth inequality. In addition, owning one’s home has historically offered high long-term investment returns at low risk and is generally associated with a lower depreciation of housing capital compared to rented homes.
Bidding Farewell to the Zero-Sum Game
Yet this critical aspect of our recent history, with ordinary people building personal wealth at an unprecedented pace, has been largely overshadowed by the prevailing focus among some academics and policymakers on the fortunes of the super-rich and on the role of wars and capital taxation in addressing wealth inequality. This book seeks to redress this imbalance, shedding light on the transformative power of wealth creation, challenging the conventional wisdom that views wealth equalization as a zero-sum game.
Wealth accumulation is a positive, welfare-enhancing force in free market economies. It is closely linked to the growth of successful businesses, which leads to new jobs, higher incomes, and more tax revenue for the public sector. Throughout the following chapters, I will explore the historical, social, and economic factors that have contributed to the rise of wealth accumulation in the middle class, homeownership and pension savings, as key drivers of wealth equalization. I will explore how governments, businesses, and individuals have collaborated to create the conditions for this unprecedented democratization of wealth. And I will examine the far-reaching consequences of this transformation, including the implications for social mobility, economic growth, and the prospects for future generations.
As we embark on this journey, it is important to recognize that the story of wealth equalization is not one of unmitigated success. There are still significant disparities in wealth within and among nations, generating instability and injustice. Over the past years, wealth concentration has increased in some countries, most notably in the US. However, by acknowledging the progress that has been made and understanding the mechanisms that have driven it, we can lay the foundation for further advancements in our quest for a more just and prosperous world.
1.1 THE PREVIOUS NARRATIVE ARGUING THAT WARS AND PROGRESSIVE TAXES SHAPED A CENTURY OF WEALTH INEQUALITY
In his bestselling book Capital in the Twenty-First Century (2014), Thomas Piketty described the historical development of capital and wealth inequality in the Western world. His work built on the research by a large international collective of scholars, including several studies by me and my coauthors. The book quickly gained attention from both academics and policymakers. Piketty’s unique approach in combining historical data with a simple yet thought-provoking analysis that also has an ideological bent has been appealing to many.
In this book, I will refer to Piketty’s narrative as “the previous narrative,” although it has not been told for more than a couple of decades.1 However, the aging process of narratives can be quick, as new insights and revisions continue to emerge from the ever-growing body of research on the history of wealth.2
The narrative that is primarily associated with Piketty describes wealth accumulation and concentration over the past century as following a U-shaped pattern. Wealth levels and concentration peaked in the late nineteenth century and up to World War I. This was the result of an unchecked capitalism that had little regulation, taxation, or democratic influence. Europe’s aggregate wealth–income ratios at that time were estimated to be extraordinarily high, with capital values of around 600 to 800 percent of national income. These levels then dropped significantly during the 1920s, and even more after World War II. Wealth–income ratios began to rise again in the 1980s, marking the completion of the U-shaped pattern and leading Piketty to declare: “Capital is back!”
Wealth inequality according to this narrative is also described as following a U-shaped pattern. High levels of inequality in the past dropped sharply during the twentieth century, driven primarily by the shocks to capital during the two world wars and the rise of progressive taxation. Wealth was slashed, particularly among the rich, by wartime capital destruction and through regulations, and postwar redistributive taxation prevented the emergence of new fortunes and thus the rise of wealth concentration. After 1980, this narrative claims, neoliberal policies deregulated markets and lowered taxes. That led to a boosting of capital values, mainly benefiting a small wealth-holding elite, and it elevated wealth inequality towards historical levels.3
In summary, this account views the history of wealth as a story about the consequences of restraining capitalism and the failure of doing so. Wars and redistributive policies tempered the natural tendencies of capitalism to accumulate and concentrate wealth. The dismantling of the restrictions through the liberalization of Western economies in the 1980s reawakened these forces.4
1.2 A NEW HISTORICAL NARRATIVE: RICHER AND MORE EQUAL
The scholarly dialogue that emerged in the wake of Piketty’s Capital concentrated largely on its theoretical constructs and the paradigms it employed. Although the debate was rigorous in questioning the theoretical underpinnings and proposing alternative models of capital and inequality, there was a conspicuous absence of scrutiny of Piketty’s historical data and the empirical conclusions that were drawn from it.5 This void in critical appraisal is of course well deserved, but it may also be attributed to a prevalent disinterest in economic history and lack of attention to details in historical data within the mainstream economic community.
While it may be partially understandable that many economists are concerned principally with contemporary phenomena, this focus undermines a nuanced understanding of historical trends and their contemporary implications. This relative neglect not only impedes a critical evaluation of historical research but also, inadvertently, cedes an almost monopolistic influence to those researchers who do engage deeply with historical data.
Therefore, the emergence of new research initiatives in recent years that interrogate the historical dimensions is particularly encouraging. Notably, these new contributions not only corroborate or challenge earlier data but also extend the empirical base by incorporating previously unexplored countries. Some studies have revisited the historical datasets of countries such as Germany and the United Kingdom to offer revisions, while others have unveiled new empirical evidence for countries hitherto lacking in this type of data.
In this book, I collect the updated data series and pieces of evidence presented in the recent research literature to build a new analysis of the history of wealth and wealth inequality in the West. The data show that we are both richer and more equal today than in the past, and the accumulation of housing wealth and pension savings among the middle classes emerge as the main factor behind this development. At its core, the new narrative thus hinges on the interdependence of wealth accumulation among average citizens and the equalization of wealth.6 Wealth creation is here regarded as inherently positive for a country’s economic development, reflecting the successful outcomes of business ventures and other private and public investments, and providing the means to advance new structures and set up buffers against unexpected future shocks.
To present the main empirical results of the book, this storyline can be distilled into three overarching facts.
The New Wealth Narrative in Three Facts
Fact #1: We Are Richer Today
To gauge a country’s affluence, the wealth in the population serves as a comprehensive metric. Higher average wealth permits greater consumption of goods and services, more savings and investment for future prosperity, and an insurance against unforeseen events. Figure 1.1 illustrates a marked growth in the average real per capita wealth in the Western world over the last 130 years. Particularly since the end of World War II, the average wealth in the population has risen substantially, amplifying sevenfold from 1950 to 2020.
Figure 1.1 Rising Real Average Wealth in the Western World
Note: Wealth is expressed in real terms, meaning that it is adjusted for the rise in consumer prices and thus expresses change in purchasing power. The line is an unweighted mean of the average wealth in the adult population in six countries (France, Germany, Spain, Sweden, the UK, and the US) expressed in constant 2022 US$. For further details and sources, see chapter 2.
In essence, it is notable that each postwar decade has witnessed an augmentation in wealth. This affirms the robustness of the first fact in the new wealth narrative: we are wealthier today than at any previous point in modern history.
Fact #2: Wealth Is Different Today
Over the course of a century, the asset composition that constitutes private wealth has undergone a monumental shift. A century ago, in the early twentieth century, wealth comprised primarily agricultural and business assets, largely concentrated among the affluent. If we look at the situation today, the majority of personal wealth is tied up in housing and pension funds, assets that are more evenly distributed among the populace. Figure 1.2 visualizes this transformation by showing the average asset shares across a number of Western countries.
Figure 1.2 The Changing Nature of Wealth from Elite-Owned to Popular Wealth
Note: Unweighted average of six countries (France, Germany, Spain, Sweden, the UK, and the US). For further details and sources, see chapter 3.
Hence, the second fact of the new wealth narrative: wealth has transitioned from being largely elite-centric to being widespread, diffused across the average household. This shift has profound implications for wealth distribution, as we will discuss later.
Fact #3: We Are More Equal Today
A salient goal of this book is to chart and comprehend the evolving patterns in wealth inequality. The issue that we are interested in is not confined merely to the growth of the wealth “pie” but also its equitable distribution. In fact, much of the past debates about wealth among both academics and policymakers concerns the trends in the distribution of household wealth rather than the amount of wealth amassed over the past years. When looking at the most recent data on wealth inequality in the Western world, they reveal a substantial reduction in wealth inequality over the past century. Figure 1.3 shows that, while the wealthiest 1 percent once held quadruple the wealth of the least wealthy 90 percent, the tide has turned. As of 2010, the bottom 90 percent possess twice the wealth of the top 1 percent. Notably, the growth rate in real wealth for the least wealthy far outstripped that of the wealthiest segment.
Figure 1.3 Accelerating Growth in Popular Wealth over the Twentieth Century
Note: The figure shows the total value of wealth of the lower nine decile groups (“Lower 90%”) and top percentile group (“Top 1%”) in each country’s distribution, calculated as an unweighted average of the six countries (France, Germany, Spain, Sweden, UK, US). For further details and sources, see chapter 2 for wealth totals and chapter 5 for wealth shares.
A similar pattern is found in figure 1.4, depicting the average of the share of total wealth held by the richest percentile in Europe and the US across history. In 1910, the richest percentile held three times more wealth than in 2010. This forms the third fact in the new wealth narrative: wealth is more equally divided today than it was in the past.
Figure 1.4 A Historic Drop in the Top 1 Percentile Wealth Share
Note: The figure shows the unweighted average of the wealth share held by the richest 1 percent of the wealth distribution in six Western countries (France, Germany, Spain, Sweden, the UK, and the US). For further details and sources, see chapter 5.
I coin this phenomenon “the Great Wealth Equalization,” a term that, despite its grandiosity, is grounded in empirical data. Europe, particularly France and the UK, led in this equalizing trend, moving from extreme concentrations of wealth to more modest, post-welfare-state levels. While the US started from a less unequal base a century ago, its path to equalization has been less pronounced; recently it has even regressed in terms of wealth concentration and also in more broader inequality terms. Had I presented the US and Europe separately in the figure, we would have seen an upward recent trend in wealth concentration in the US while the European trend would have been even flatter. This indicates that there is a complexity and multifaceted aspects that one needs to take into account when discussing the evolution of wealth inequality. However, taking the very long historical view, even current US levels of inequality pale in comparison to those witnessed in Europe 100 years ago.
Institutional Shifts and Expanding Wealth Definitions
Several factors contribute to the important historical accumulation of housing and pension assets in the population. However, in the new wealth narrative presented in this book, specific attention is paid to the role of political and economic institutions in society. By institutions, I mean the laws and norms that confine the rules of the game shaping decisions and interactions between people. The twentieth century saw a number of profound institutional changes that have bearing on the evolution of wealth and wealth inequality in the Western countries.
During the 1910s and 1920s, there was a broad wave of political democratization in the West as most countries experienced the introduction of universal suffrage. In its aftermath, a series of political reforms changed the economic reality of most people. Educational attainment was expanded to broader groups. Labor laws were changed to improve the rights of workers. These institutional shifts lifted the productivity of workers, and that in turn elevated their labor earnings. Meanwhile, the financial system developed by offering better services to people, increasingly backed by better regulations. All of this gave ordinary people new opportunities to acquire mortgages for purchasing their own homes. Another outcome was a general improvement of living standards that extended the lifespans of most people, and this motivated them to start saving for retirement and accumulate pension savings.
Two other important institutional developments during the twentieth century – cross-border capital flows and the advent of modern social insurance – have a bearing on what we define as wealth in the empirical analysis. Should foreign assets be part of domestic wealth? Should the present value of promised future pension incomes be counted as the pension wealth of today’s citizens? How important these possible new assets may be, incorporating them into the analysis shows that the overarching findings of the book remain largely unaltered.
Specifically, one possible extension of the wealth concept is to address the impact of hidden offshore assets owned by wealthy Westerners. This issue has received much attention in the political debates, and there have been calls for improved reporting, and also the taxation, of offshore wealth. The question of tax-driven capital flight from rich countries to tax havens has been on the agenda since the liberalization of capital accounts and the emergence of new technologies for international transfers during the 1980s. In recent years, researchers and policymakers have started to examine the quantitative effects of these asset flows for wealth inequality estimates of rich countries in the event that the offshore assets are not fully disclosed to the authorities. The results, however, show only marginal effects on wealth inequality in Western countries when estimates of offshore wealth are added to the wealth of its richest individuals. The long-run historical wealth equalization in the Western world remains unchanged.7
Another extension examines how the vast values generated within modern welfare-state systems affect the wealth inequality trends. People’s entitlements to future pensions and social insurance transfers are financed by income taxes. These taxes lower people’s ability, and probably also their willingness, to save privately for social insurance. If, instead, taxes had been lowered, people would have accumulated wealth themselves. Researchers have tried to calculate the values that would have been generated by capitalizing the stream of expected future pensions and social insurance incomes. The results show that this would significantly reduce wealth inequality, since the new wealth would be owned by all wage earners. For example, top wealth shares are reduced by about half when adding this social security wealth. Since social insurance and pension systems emerged gradually over the twentieth century, this result acts to reinforce the main finding of the book, namely that the long-run wealth equalization is even more pronounced than when just counting standard, marketable wealth.
1.3 MEASURING WEALTH INEQUALITY: PROMISES AND PITFALLS
The distribution of wealth is a unique aspect of inequality analysis that has traditionally garnered less attention than the distribution of income. There are several reasons for this. We often lack individual-level data on assets and debts, making it impossible to measure wealth differences within the population. Certain assets, especially corporate assets, pension savings, and consumer durables, are also difficult to value. For some of them we lack current market prices, since they are not traded regularly and the values therefore have to be estimated. Pension assets materialize in most cases only after people retire, which means that the amounts in pension funds are not exactly equivalent in consumption terms to money deposited in the bank. Consumer durables such as cars or boats are relatively straightforward to consider as assets, but home electronics or furniture are less so, and their values need to be heavily discounted if they are added to personal wealth.
Furthermore, understanding what wealth is gets complicated by the life choices people make, such as planning for retirement, investing in education, and acquiring property. How much wealth people own is affected by the life stage they have reached. For instance, younger individuals might have fewer assets not because they are impoverished, but because they have not had the time to accumulate wealth like their older counterparts. As they educate themselves and get a job, they start investing in a home and saving for old age. Because of this, wealth increases as people grow older. After retiring, however, people begin consuming their assets, and in some cases use up everything before they die. This hump-shaped life-cycle pattern of wealth is well known and recurrently found in all countries and time periods. A specific result is that many of the asset-poor people in society are simply young people who have not yet had the time to start building wealth (I will come back to this question in chapter 5). Altogether, interpreting and analyzing wealth is a multifaceted endeavor.8
Defining Wealth
Wealth is the value of all the things we own. When talking about wealth, this book always refers to net wealth, or net worth, which means the sum of assets net of debts. This interpretation of wealth is the standard definition among all researchers and statistical agencies.
Assets are classified into non-financial and financial types. Non-financial assets encompass real estate – houses, summer homes – as well as land and other tangible goods such as agricultural assets. Financial assets include cash, bank savings, and investments in mutual funds, stocks, and individual-linked pension funds. The valuation of assets is typically done by using current market prices that are multiplied with the quantities of each asset component. An alternative valuation approach, which has been common in the construction of aggregate capital stock estimates in the national accounts, is the so-called perpetual inventory method. This method defines an asset’s value as the sum of past years’ investments net of an annual depreciation rate. In contemporary developed economies, non-financial and financial assets are approximately equal in their aggregate value.
When discussing wealth inequality, the inclusion of funded pension savings in household wealth is contentious. Advocates argue for their incorporation on the grounds of providing a complete picture of an individual’s resources, ensuring international comparability, enhancing policy formulation, and reflecting behavioral economics accurately. If funded pensions were excluded it would create inconsistencies in household budget calculations, since pension savings have represented a large share of household net saving in most Western countries for several decades. Critics counter that pension savings are not readily accessible like other assets; they pose valuation difficulties on account of their future uncertainty, and their variability in availability may distort wealth distribution measurements. Standard wealth definitions nowadays cover funded pensions, both in the wealth research literature and in the standardized national accounting systems.
When it comes to liabilities, mortgages are the dominant type. Approximately 80 percent of all debt in modern economies stems from home loans. They are the essential counterpart to one of the most significant non-financial assets – residential property. Beyond this, student loans account for roughly a tenth of total debt. Other types of debt, often labeled as “consumer debt,” make up the remainder and can vary from auto loans to credit card balances. During earlier historical eras, private-sector borrowing was not so dominated by mortgages, and other types of collateral, such as corporate shares or borrowing against one’s own name, were relatively more common.
Measuring Household Wealth Today and in the Past
The pursuit of a robust understanding of wealth and its distribution is a data-intensive endeavor. The evidence in this book draws heavily on wealth information coming from administrative registers, such as property and tax records, as well as household surveys. Yet, as with any empirical study, such data sources are not without their limitations and complexities.
In the contemporary context, corporate shares in closely held firms form some of the most problematic assets to deal with. The valuation of many closely held firms emerges as a substantive issue. These entities, exemplified by Germany’s Mittelstand firms, lack a public trading platform, necessitating reliance on accounting data for valuation, which inevitably introduces a degree of imprecision. Furthermore, trusts – legal constructs often employed for tax-minimization purposes – complicate the picture. These trusts may or may not be openly reported in administrative registers or household surveys. While researchers have adapted methodologies to account for the muddling effects of trusts on the estimation of households’ wealth and also of wealth inequality, especially in jurisdictions where trusts are pervasive, a residual degree of uncertainty remains.9
Turning to historical data, the absence of comprehensive digitalized registers and surveys, particularly before the 1970s, introduces additional complexities when estimating individual wealth holdings and the overall shape of wealth distribution. Researchers must often resort to alternative data sources such as probate records and estate tax returns, which have often been kept in different archives going far back in time. These records provide valuable insights into the wealth holdings of deceased individuals, offering in many contexts unique opportunities to estimate household wealth inequality. However, they necessitate additional inferential steps to generalize their findings to the broader living population, which may not exactly resemble the population of the deceased.10
Another data source that is often employed in historical contexts is that of wealth tax payments, often presented as tabulated distributions in official publications. Although useful, this source introduces its own set of limitations and should be interpreted with caution. In particular, if reporting one’s wealth is associated with paying more taxes, there can be strong incentives to underreport the true amount of asset holdings or overreport indebtedness. If such reporting behavior is more common among the wealthier echelons, and there are good reasons to believe it is, that could bias the measured wealth inequality downwards and give a picture of society being more equal than it really is. But readers can rest assured that extensive efforts have been made in previous research to devise methods to minimize systematic biases in tax-based estimates of historical wealth inequality.11
Estimating the Inequality of Wealth
By far the most common statistical measure of wealth inequality in the historical literature is the top 1 percent wealth share. This metric quantifies the ratio of the wealth held by the richest hundredth of all wealth holders to the overall wealth in a given population. For instance, a 20 percent top percentile group’s wealth share, a figure not uncommon in contemporary European settings, implies that the average wealth of this elite group is twenty times that of the general population.
The top 1 percent wealth share is notably convenient for historical analyses. This is because its calculation demands only an understanding of the elite’s wealth holdings and an aggregate figure for a nation’s total wealth. Historical tax systems, often designed with a focus on taxing the affluent, offer pertinent data, rendering this measure particularly advantageous for longitudinal assessments of wealth inequality.
Another widely employed metric is the Gini coefficient, or Gini index. This index ranges from zero to one, where zero indicates perfect equality and one denotes extreme inequality – that is, all wealth being concentrated in the hands of a single individual. The Gini coefficient’s strength lies in its utilization of comprehensive population data, thus enabling it to capture nuanced shifts across the wealth distribution that may escape the top 1 percentile metric. However, individual or household wealth data covering the entire population have not been commonplace for more than a few decades, which makes the Gini coefficient less commonly employed in historical analyses.12
An additional perspective on wealth inequality measurement comes from viewing trends in wealth inequality using
