I am enjoying Piketty’s Capital, which is extremely carefully and well written. This is my second blog on aspects of his argument, and the focus here is on ways of representing inequalities of wealth (capital) and income. Piketty is respectful but critical of some commonly used measures, two of which – the Gini coefficient and the interdecile ratio – I comment on by way of an introduction.
The Gini coefficient remains a popular synthetic index of inequality. It ranges from 0 to 1, equaling 0 in cases of complete equality and 1 when inequality is absolute (when a tiny group owns all available resources). In practice the Gini coefficient varies from around 0.2 to 0.4 in the distributions of labour income observed in actual societies; from 0.6 to 0.9 for observed distributions of capital ownership; and from 0.3 to 0.5 for total income inequality (i.e. labour income + capital). The Gini coefficient has its uses (as do others like the Theil index). But it skates over a lot too. It purports to summarize in a single numerical index all that a distribution can tell us about inequality: ‘the inequality between the bottom and the middle of the hierarchy as well as between the middle and the top or between the top and the very top’. Inevitably, it can mislead. For example, the nature and salience of inequality are different at different levels of the distribution and should be analyzed separately. And the Gini coefficient and kindred indices tend to ‘muddy’ inequality with regard to labour with inequality with regard to capital, even though the mechanisms at work and the political rationales for inequality are different in the two cases.
What about interdecile ratios? The OECD and many national reports often deploy the P90/P10: that is, the ratio between the ninetieth percentile of the income or wealth distribution and the tenth percentile. This can be helpful, but again it glosses over a lot. These ratios ignore the evolution of the distribution beyond the ninetieth percentile for example. Whatever the P90/P10 ratio may be, the top decile of the income or wealth distribution may have 20% of the total, or 50%, or 90%. Piketty ruefully notes that official reports willfully neglect the top ends of income or wealth distributions.
Piketty makes a case for starting, if not ending, by emphasizing the shares of income and wealth claimed by different groups, particularly the bottom half and the top decile in each society, rather than the threshold levels defining given percentiles. Shares, he maintains, give a ‘much more stable picture of reality than the interdecile ratios.’
The data he tabulates are fascinating. He uses the language of ‘class’ while recognizing that his labels are merely convenient rather than grounded in social structures and relations. Thus he writes of the top 10% as the upper class, incorporating the top 1% or the dominant class and the next 9% or the well-to-do class; the middle 40% or the middle class; and the bottom 50% or the lower class. I’ve seen worse classifications!
Piketty then looks at ‘class’ by share of (i) labour income, (ii) total capital, and (iii) total income (labour + capital) for ‘exemplar’ countries of ‘low inequality’, ‘medium inequality’, high inequality’ and ‘very high inequality’.
Let’s start with (i) labour income. The share by class for low (= Scandinavia, 1970s-‘80s), medium (= Europe, 2010), high (= USA, 2010) and very high inequality (= USA, 2030?) countries works out as follows.
LABOUR INCOME
Low inequality: upper class = 20% (dominant class = 5%, well-do-do class = 15%); middle class = 45%; lower class = 35%.
Medium inequality: upper class = 25% (dominant class = 7%, well-to-do class = 18%); middle class = 45%; lower class = 30%.
High inequality: upper class = 35% (dominant class = 12%, well-to-do class = 23%); middle class = 40%; lower class = 25%.
Very high inequality: upper class = 45% (dominant class = 45%, well-to-do class = 17%); middle class = 28%; lower class = 20%.
Now (ii) total capital: the share by class for low (= not yet observed), medium (= Scandinavia, 1970s-‘80s), medium-high (= Europe, 2010), high (= USA, 2010) and very high (= Europe, 1910) countries works out as follows:
TOTAL CAPITAL
Low inequality: upper class = 30% (dominant class = 10%, well-to-do class = 20%); middle class = 45%; lower class = 25%.
Medium inequality: upper class = 50% (dominant class = 20%, well-to-do class = 30%); middle class = 40%; lower class = 10%.
Medium-high inequality: upper class = 60% (dominant class = 25%, well-to-do class = 35%), middle class = 35%, lower class = 5%.
High inequality: upper class = 70% (dominant class = 35%, well-to-do class = 35%), middle class = 25%, lower class = 5%.
Very high inequality: upper class = 90% (dominant class = 50%, well-to-do class = 40%), middle class = 5%, lower class = 5%.
Finally, the figures for (iii) total income (labour income + total capital): the share by class for low (= Scandinavia, 1970s-‘80s), medium (= Europe, 2010), high (= USA, 2010) and very high (= USA, 2030?) countries is as follows:
TOTAL INCOME
Low inequality: upper class = 25% (dominant class = 7%, well-to-do class = 18%), middle class = 45%, lower class = 30%.
Medium inequality: upper class = 35% (dominant class = 10%, well-to-do class = 25%), middle class = 40%, lower class = 25%.
High inequality: upper class = 50% (dominant class = 20%, well-to-do class = 30%), middle class = 30%, lower class = 20%.
Very high inequality: upper class = 60% (dominant class = 25%, well-to-do class = 35%), middle class = 25%, lower class = 15%.
Setting aside issues of incomplete data, margins of error and the projections in relation to the USA, all of which Piketty is open about (see his inputs online), these statistics are staggering. And there are solid reasons for thinking they seriously under-estimate the concentration of capital ownership (for reasons that are obvious to Piketty and should be to us).
I would contend that: (a) we have become overly accustomed to inequality, (b) we have absorbed – as if by osmosis – a sense that ‘there is nothing we can do about it’, and (c) that (a) and (b) are in actuality calculated products of a neo-liberal ideology painstakingly designed to justify a (post-1970s) era of financial capitalism that, close to home, profits Britain’s 0.1%, who have commandeered its governing oligarchy. We are the subjects of a class/command dynamic that has commodified our political elite.