So, was it really the Commies that caused the early 20th Century inequality collapse?

Destructive growth?

A good article Tim,

I did like the point about making things to blow things up not being economic growth. It made me think as to whether or not the arms trade is contributing to growth or not. Is the net effect of the arms trade on the global economy a positive or negative one? On one side we have the obvious advantage that we've made something (for example a bomb), on the other hand we've got the disadvantage that it will ultimately destroy something. In between we have the potential advantages/disadvantages that our "will" is being enforced, and we perhaps get global security.

I suppose it actually comes down to a basic question of "is it ever necessary to fight a war". Still, got me thinking, which is sometimes a good thing.

A bit simplistic

"the somewhat discredited ideas of state directed economies and socialism lite"

To a degree this is done by cherrypicking. Much of Chinese industry and infrastructure is in fact owned by and run by the Communist Party, so we tell ourselves that China is "really" capitalist. Parts of India too have had successful socialist administrations. And capitalism has had its huge failures, WW1 and what followed being an example.

Correlation?

The slowdown in the 20s and 30s may also match the decline of the British Empire as the US and Germany became the leading world industrial nations.

It could have taken the second world war to make the UK self reliant and invest desperately in manufacturing, instead of relying on sucking the rest of the world dry.

Post war economic boom because everyone was so relieved to have survived, and the end of rationing made pay and conditions look good?

Pick your isolated facts to fit your theory.

We did get a boost to the work force in the late 60s and early 70s with the Asians being chased out of Africa.

As far as I can tell none of these factors seem to relate to high taxation and strong unions.

Global mobility of wealth and labour should prevent any attempt to recreate the 90% tax rates that drove some into tax exile.

Scarcity of resource

Doesn't this all just come down to globalization and ease of resource mobility?

Technology means you need less people, and in many industries also means you need less skilled people, which means it is easier to move around the world to places with cheaper labour costs (over time these places skill up, and get more expensive, so it moves elsewhere). Modern cargo ships effectively make transport free except for the in-country part to and from the dock (which you would have to pay anyway shipping local goods around the country), so there is little penalty to globalization unless there are border tariffs.

The end result is a massive oversupply of blue collar workers, which is only really offset by the fact that we have enough income in the rest of economy to fund a lot of services jobs which can mop up people (restaurant staff, coffee shop baristas, next day delivery drivers for Amazon, call centers for your iThingy tech support). The major downside is that most of these services are "luxuries" and so as soon as globalization catches up and a chunk of the "middle class" white collar jobs start to move overseas then the whole pyramid collapses, because services industry based economies are reliant on someone at the top of the pyramid pushing money in to it so the guys at the bottom get paid (vs. just having something in the ground to dig out and put on your market barrow - vegetable or mineral).

I think boom really came from three things:

* Post-war work ethic - people wanted to put the country back together again.

* Integration of technology - drives productivity

* Exploitation of world resources - the industrial societies dug up a lot of resources elsewhere in the world which makes them cheap. Since China started hoovering up more and more of them, physical resource costs have gone up somewhat, making goods more expensive.

I think the basic question here is "how does a western services-based capitalist society survive in a situation with a global oversupply of labour and improving skill sets up in Asia and Africa?" Personally I think the answer is "it can't", at least not at the current standard of living everyone expects, and at that point I think it stops being about economics and starts being about religion ^H politics - because you can't have 75% of the populus being "poor" - that is the thing that revolutions are made of.

all very simple

Two massive World wars in the space of a generation decreased the male work force along with explosive global industrialisation. Since the 80s the industrialised labour market has now rebalanced and inequality is a natural consequence.

Money has to go somewhere

I wonder to what extent your argument is true because "high marginal tax rates, currency controls [and] union power" were a package. Capital was a lot less mobile (because of currency controls) so if you were going to invest your money, the UK was the place you were going to put it, regardless of the tax rates or union power, you didn't really have a choice. A political argument for high marginal tax rates and union power was much easier to make, since they are more likely to result in some level of "redistribution" in a more closed economy. A much harder argument to make now when capital can disappear overseas in moments (or, more awkwardly, simply not come to the UK in the first place) and "redistribution" simply becomes an argument over having a larger slice of a smaller pie.

Difficult to argue that politics has no impact on economic growth, though - the treasury would never have funded the GPO to roll out broadband, for example. And of course it's easy to say that external factors are entirely outside the influence of domestic politics - for example the huge crash in UK economic growth in 1973-1974 (9.8% at Q1 1973 and -4% a year later) - which you could put down entirely to the end of Bretton Woods and the oil crisis. Except the huge peak in growth that came before those events was largely a result of the Barber Boom (lowering of high marginal tax rates) and high inflation (reinforced by wage demands from powerful unions...) and the OPEC embargo was not unrelated to political decisions made by the oil-consuming nations.

So perhaps it's a case that politics happens and growth happens but it's very difficult to determine the influence of one on the other even in hindsight...

It's very simple.

The UK state takes the working poor's surplus income. National Insurance. it's surplus because the worker generates the money. It doesn't go on their services, its redistributed.

The result is the working poor end up where they started with no assets. They have a share of the state's debts, and 90% of those are pensions debts. They are 400K in the red.

The state pension is worth 105K. They are still in the red.

However if Mr Median had invested his NI in the FTSE all share with low charges free of taxation, he would have 840K in a fund. Mr Min wage, 400K. There wouldn't be any pension debts.

So when the working poor have been ripped off and have no assets, it's the socialist welfare state that is to blame.

"Maybe we should deliberately lower inequality with very high tax rates and all the rest in order to get us some of that lovely growth of the 1950s and '60s?"

And rationing. Don't forget the rationing.

Manufacturing became less relevant

Let me add marketing into the mix.

WW2 drove internationalism. It winkled people out of their little countries and showed them other worlds, other experiences, other ways of doing things. This also opened up markets for the countries and corporations who were able to capitalise on them.

The 1950s marked the beginning of the era of the international brand. Brands had existed in America since 1910, but for their domestic market. Suddenly they were everywhere.

Manufacturing was decoupled and took a back seat - it was no longer the key to success as a company. It marked the end of the power of unions to control the price of goods, the speed of manufacture and the relationship between manufacture and market.

This was massively helped by revolutions in communication. Suddenly the world moved into colour as colour printing became economic and colour TV started to gain traction - both leading to a massive explosion in marketing success.

This directly led to the Japanese and later Chinese manufacturing boom as the brand became paramount and where and by whom it was manufactured no longer mattered.

This led to a 50s boom for cheaper UK regions, then a boom for lower wage regions of Europe and eventually, as transport improved, the growth moved away to lower cost regions of the world. End of boom.

Not so much public ownership but public wealth creation

Tim, you mention public ownership, control, and planning, and I'd probably agree with you that those alone don't cause reductions in wealth inequality. But is public spending on wealth creating projects not a different matter. From the 1920s through the 1970s, there was large investment in council housing. After 1947, there was also large investment in the health service. In addition to employment, these also brought wealth to large numbers. A decent home, parents who aren't too sick to work, etc. Taking ownership of the car industry seemed quite different from these other projects. They weren't handing out cheap cars to everyone.

I've always felt that the post war boom time was mostly to do with our new found ability to massively exploit the energy provided by fossil fuels. Obviously we were extracting oil before and during the war but after the war we went energy mad. I bet if you looked at the price of energy vs the cost it would plummet like a stone after the war. At the same time availability will have shot up, suddenly everyone had energy in abundance. With all this new found, almost free, energy it gave people time to invent things and so was born the technological revolution. Thing about revolutions is they almost always seem to cause equality. My guess is that this is because rich people are no better at jumping on the bandwagon of the next big thing than anyone else is (despite what they will tell you).

We've continued to use more energy but my gut feel is the rate of change of our energy use has dropped. As well the newness of it has worn off and the easily exploitable benefits of lots of energy have been exploited already e.g. fridges.

Appreciation

Thank you The Register for your journalistic excellence. Everyday it is refreshing to explore your take on what, and what does not, ail us.

where's the second part

OK, so you have a theory about the period between 1929 and 1980. (Not saying it is convincing, but there is some coherence to it.)

So how does it explain the sudden and accelerating increase in inequality since Thatcher & Sons destroyed the unions, the industries that they recruited from and notions of social cohesion and progressive taxation?

-A.

Since the 80's

So what's changed? The main thing seems to be house prices, which kind of links to your recent article on land values in San Francisco. In the UK, until the 1980's houses could be thrown up pretty easily and infrastructure was built in the national interest with precedence over local concerns. I wonder how much nimbyism and it's effect on house building and infrastructure building, has acted as a brake on growth/competition and what effect this has had on inequality?

Also surely the massive increase in women entering the workforce has had an effect. In the 50's if you had two families, both with housewives, but one with an unemployed/low income male and one with an average income male, then the inequality isn't massive. In the 90's if you have two families, one with no earners and one with a male AND a female earner, then the inequality is far higher?

But without unions, taxes, controls...

We would have had the same technologically led massive economic growth but it would have been concentrated in the hands of a few lucky owners of a few massive corporations.

Imagine if half the country's GDP and the only growth industries were owned and controlled by a handful of people who when they can't control government can simply ignore them.

Where's the balance El Reg ?

Whilst Tim's articles are interesting they are the view of one side of the economic spectrum only, and any criticism or attempts at rebuttal are restricted to those of us on these forums. Whilst I'd hate to see the Register become too focussed on economics, isn't it time we had the views from the opposite side of the fence from the Adam Smith Institute. This is hardly balanced reporting.

agricultural land, great aristocratic fortunes,death duties etc.

Lose the son(s) and heir(s) in the Great War and death duties may bite twice in a generation. Sell your low yielding agricultural land and invest in bonds: again wiped out by the Great War. Yes, it is the great urban estates that had the best chance of survival.

Why Booms After Every War?

Actually, if one goes back in history, the World War II postwar boom was preceded not just by the Roaring Twenties, but by a historical pattern that people were noticing (the nuclear stalemate of the Cold War finally ended it).

An economic boom is ended by excessive speculation - the bubble collapses. People are left out of work, but the government isn't going to massively intervene in the economy to end the human misery - that sort of thing just isn't done.

And then a war starts. Well, that's national survival for you, so of course deficit financing is now permissible. And so what was impossible before becomes possible now - people are put to work.

The war ends. Now the economy is humming, but its products can be put towards the service of real human needs. An economic boom.

Keynes wasn't the only one to suggest getting out of this circle. Unrestrained free enterprise is not capable of producing an economy with no crashes ever and full employment always - that takes a hand at the switch ready to limit or remedy the potential damage of excessive speculation. As ordinary working men far outnumber businessmen, in a democracy it is their economic interests that should be jealously safeguarded by the government.

Its just because so many died. There was room to grow. We need to kill a few billion people, maybe 5.

"So how does it explain the sudden and accelerating increase in inequality"

I'm not trying to explain inequality, I'm trying to explain growth rates. Largely on the grounds that I don't care very much about inequality but do about growth rates.

But since you insist: standard models would suggest that if you add a few billion low productivity and low pay people to the economy then the low skill and low pay people originally in the economy are going to get the shaft. And that's what globalisation has done since 1980 or so (really, 1978 started it in China).

So, increasing inequality within rich countries is a result of globalisation. I've even written a piece about it for this very publication:

http://www.theregister.co.uk/2014/09/28/inequality_rising_screw_the_one_per_cent/

For if I am to worry about inequality and or poverty then I'm not going to worry about within rich country inequality. I'm going to worry about global inequality and absolute, not relative, poverty. And since globalisation reduces global inequality and massively reduces absolute poverty then to hell with relative poverty in the UK and bugger rising inequality in already rich countries.

Hmmm

Theres little evidence this is the case, capitalism works best when you have customers. Low wages and easy credit ultimately lead to most of the money and alk of the power in fewer and fewer peoples hands. Higher taxes ensure the money keeps circulating, keeping the system functioning. This is why inheritance taxes and inequality matters to everyone. You might find a few knowledgeable people on TED, even a billionaire believe it or not saying exactly that. The highest rate of tax in the USA was 80% in the 50's and they didn't turn into the Soviet union. Our wealth depends on customers too,if we run out of young people willing to pay for our houses then obviously that price will fall.

Inequality

I'd put it down to the use of debt at consumer AND government level.

Once a borrower cannot repay their debt, the creditors have the debtor by the short and curlies.

Thus the creditors can choose whatever interest rate they like, using the threat that they will take all their money away from you and lend it to some other schmuk! So the Capitalist can capture all wealth creation for themselves without lifting a finger.

Look at how they totally subverted the democratic process in Greece for an example!

There is a way to get out of this problem, but it is for a brave government

Of course the allies also basically nationalized all of the German businesses and IP that they could get their grubby paws on during and after the war.

Pharmaceuticals, radio, recording, aircraft, rocketry, improvements great and small all then free for everyone to use.

So let me get this right....

The post war boom was due to the introduction of tech...

Which kinda begs the question 'what the fuck happened in the 80's?'

Thoughts, Tim?

The Jilted Generation

Female Proportion of Labour Force

I am wondering if the rate of female employment has any effect on inequality.

Though difficult to find, going very far back, this link gives the proportion of employed persons who are female, for the USA from 1900 onwards.

Over the period chosen as particularly relevant by Tim (1920 to 1980), the female proportion of the labour force goes from around 20% to just over 42%. This is a very substantial change. It also occurs to me that female wages for each year, particularly over that period, may well have varied significantly less than male wages for each year.

Subsequently, from 1980 to 2008, the female proportion of the labour force fluctuated mildly between 42.5% and 47.0%. There was then a marked increase, to 53.6% in 2010 and to 57.0% in 2014.

Best regards

There's a little matter of buying on tick (post WWII Hire Purchase) and the introduction of those euphemistically named debt cards the banks preferred to call "Credit Cards" (1970's ...present). Both created a large increase in consumerism and had nothing to do with left/right economic policies.

Credit was to European workers what mirrors and pans were to savages; a cruel beguilement.

There has never been a time of greater economic equality, ever. The closest people got to this state being achieved was after the great plagues swept through and depleted the european populations of skilled human resources.

Efforts to establish a fairer distribution of wealth were made almost entirely by socialists and workers themselves via trades unionism. It is fair to say some monied, yet philanthropic, pre labour party libertarian socialists (usually Quakers) of means and influence did give great credence to both education and putting workers rights and humanitarian goals before profit. As influential to thinkers as their altruism was, capitalists then, as today, retained the upper hand and abundant power to burden workers shoulders in assurance those workers genuflected before the Alter of Lucre.

Socialist economic policies are the only means to ensuring a more egalitarian civilisation. Communism certainly fuelled a more radical approach to engendering a fairer playing field as its audacity galvanised thinkers and doers within and without.

The populations of the Soviets closest neighbours tore at each others throats with some demonising and others evangelising. Germany, who had fought off the Russians in WWI soon faced a dilemma when the Weimar Republic disintegrated into dozens of political parties. One party, DAP, were quick to see the appeal of certain aspects of communistic economic policy and soon added "socialist" to it's name; NSDAP. Despite the neutralisation of trade unions in the Reich, the NSDAP adopted many of the best socialist policies and soon had internal organisations which oversaw the interest of workers.

If WWII had not happened the result may have been a Soviet Europe, USSER, as communism was gaining monumental strength with workers throughout Europe. The strength of influence of communism within neighbouring countries was directly proportional to their distances from its borders. Where water and wet weather kept it bay, its effects were more dilute in the UK.

Immediately post WWII, Churchill had bankrupt Britain and picked all the threads of a well-worn Empire... India would fall first and start its own economic destiny. In the Pacific, Japan had capitulated moments before the Soviet troops marshalled along the Chinese coast embarked on their invasion of Japan. The recriminations for their cruelty to the Asian populations, especially the Chinese, was more terrifying than any atomic bomb. Both East and West the USSR had beaten the axis. In Stalin's hesitation, both regions feel into an American dictatorship.

Radiating East and West of Moscow, spheres of influence were established. With the exception of the UK (which the American's believed was either communist or socialist - they couldn't decide as they didn't understand the differences), other european countries were engorged with American dollars and awash with Coca-Cola. Britain was given a fraction of the loan it asked America for. America also walked away with the blueprints of Britain's top secret technology.

Oh, the Rentiers

In Europe and parts a bit to the west, the rentiers were severely damaged-- more so in WWII than in WWI, as WWII saw more worldwide damage.

The rentiers are the ones who (besides living on the stored assets and the sweat of others to a large extent) also mostly want the status quo in order to maintain their positions-- any changes had to be "positive" (like a reduction in income taxes at the top end).

The wars upended the financial and social stratification-- vast wealth and ossified economic empires burned to ashes; lots of niches opened up for people to move into from the oppressed masses below.

Eventually all that cruft regrew, more rentiers established their financial castles, and here we are again. Unfortunately, a new world war probably will open rather more niches in society than one may want...

When did The Register become a political rag?

Where is the technical angle or connection?

This article is just another hack trying to bolster a new orthodoxy.

Careful with timing

Events and actions a decade or two before can cause outcomes only measurable much later.

For example, I have heard someone comment prior to the collapse of the Bretton Woods System increases in consumer spending correlated to increases in wages. After the collapse of Bretton Woods there is a correlation between increases in consumer spending and increases in consumer debt.

It is highly possible the collapse of the Bretton Woods System in the early 1970s contributed to increasing wealth and income inequality in the late 1980s.

Similarly, the deregulation of transportation and communications in the late 1970s had certain impacts.

The changes to the income tax system were actually fairly small until the late 1980s. It is hard to comprehend how changes in income taxation on the wealthiest have a significant impact in wealth and income inequality, since they only impact one end of the wealth and income spectrum. However, it is possible there is correlation with changes to capital gains taxation and executive compensation.

By far the biggest economic impacts in the 1980s were those due to what John Naisbitt called "Megatrends", and other business futurists predicted. The movement of low skilled industrial labor offshore, the automation of low-skilled white collar work, the decline of skilled blue-collar work, along with the rise in the dual-professional household all had impacts.

Free Trade, Globalization, Pensions and Capitalism

The problem with any form of Government is that without sufficient safe guards the economic system proposes can be controlled by a powerful elite. We've been seeing this increasingly in the United States since the late 1970s and if you're watch the Republican nominees you can see that none of them are viable candidates for a Democracy and I wonder if Bernie Sanders isn't the only candidate in the election cycle that understands Democracy at all.

Free Trade and Globalization have proven to be nothing less than the wealthy being able to suck the money out of the middle class of established economies. It is entirely possible that with appropriate safe guards this/these ideas may have been beneficial to many nations but because the wealthy have been able to subvert reasonable government regulations

Perhaps the biggest challenge to changing much of this is that Pensions are now largely directly in the stock market instead backed by the companies that people worked for, of course, a decreasing number of people seem to work for any particular company for the length of their work life.

All of the above only strengthens the hold that the Uber Wealthy have over both Governments and the Populace.

Tim, just a quick comment to say how much I appreciate your columns. This is mostly because your ideas and comments agree pretty much exactly with my thoughts, and therefore you are an intelligent, erudite (and presumably handsome) man. Please carry on the great work! I hope and pray that people who have the ability to mess up my life with their policies read them and pay attention. Would be interested to see you and Lewis Page get together and look at defense spending some day.

This item should be filed under "editorial".

Won't someone think of the children ?

The economic boom was created by the boom in survivable babies and ended when baby production topped out in 1972.

Missing link

Interesting piece on infant/child mortality

https://jscholarship.library.jhu.edu/bitstream/handle/1774.2/936/WP90-07_Childhood_Mortality.pdf?sequence=1

Tech acceleration during WW2

While the 1930s did see many technological advances, as noted, WW2 itself did accelerate certain technologies (radar and communications, in particular) beyond where they might have reached without the war (over the same time period). Once the war was over, that technological expertise naturally sought out peace-time applications, in my example leading to a sudden explosion in radioastronomy, but also in more consumer-applicable communications fields. I would be surprised if this development in select, narrow fields did not give other, related areas a boost -- dragging them forward at an increased pace, so to speak.

@Tim Worstall

Maybe we should deliberately lower inequality with very high tax rates and all the rest in order to get us some of that lovely growth of the 1950s and '60s?

I still don't understand the socialist obsession with other peoples money. We could more readily equalise beauty by hitting the pretty with a brick, or applied intelligence by taxing education, or health by a centrally planned diet and exercise regime, and even lifespan could be equalised by euthanisia a-la Logans Run.

I earn my income by legal means, paying all taxes which are due under the system. That I don't spend every penny I earn is more due to budgeting than it is a high income. Just how much of what I earn do socialists feel entitled to, and why? Why do they think I would continue to make the sacrifices I do now, in return for the higher comp, if I'm to see it squandered on other peoples pipe dreams?

Short of a global implementation, which will never happen, I don't see how this could be expected to work without emmigration controls - the best & brightest would simply leave, again. The world is a lot smaller now than it was during the brain drain of the 1970s, and those with the greatest skills and/or wealth are the most mobile.

So, maybe there is something to this strong unions, government management of the economy

The 70s called for a chat. They want their power cuts, lack of service, zero choice, and appaling politically motivated strikes back.

It so happens that the turning point in the 1980s coincides with (1) acceleration of skill-biased technological progress, (2) increased globalisation and entry of Chinese workers into the global labour market, (3) pro-rich policy changes (lower taxes), (4) decline of the trade unions, and (5) end of Communism as an ideology.

Seems to me that the 80s was around the time that education as a route from poverty really got going. Certainly by the late 80s my family had realised this may be the best route for us, and I became the first generation of our clan to graduate university.

Despite Labours paucity of thought concerning pushing 50% of kids into uni [1], it remains true that those graduating a STEM subject will enjoy better than average earnings. It is also around the time the property market began to motor, which is one of the core drivers of wealth differential, particularly as the generation with the greatest property gains is also the generation that had the largest pensions, leaving more of that wealth to be inherited tax free [2].

Those who educate themselves to an above average level, and who's families play the long game regarding property ownership and passing wealth down the generations, will drive "inequality" ever higher. If educating yourself, working hard, investing in your families future, and leaving something to the kids is a bad thing then someone will have to explain that to me, because I don't see it.

[1] Yes, graduates tend to earn more than others but that doesn't mean making everyone a grad will increase everyones income any more than the rampant GCSE grade inflation that continues unabated.

[2] There is no capital gains tax on a PPR, and since most houses fall well below the IHT threshold, there are no gains there. Each generation rolls the inheritance into an ever better PPR until they get to the IHT threshold. Thereafter grannies pad gets left to the next generation below, and so it goes. Eventually you start needing to gift assets and taking proper advice, but by that time your family will have a few million in assets.

"I am disappoint"!

Lots of utterly useless opinions by what must be kids with no real knowledge of history.

And almost all missing the point of the article.

It was about inequality, NOT about economic progress or which system is best.