Brothers in thought? Ricardo, Smith and Marx certainly had inequality on their minds. Image: Archive Collection / Bildagentur / Alamy / Composite by David McAllister / Prospect

Class dismissed: the economic mystery of the 21st century

Inequality was traditionally the central concern of economists—until it wasn’t. It may be time to re-read the classics
March 26, 2024

The revered thinker David Ricardo was clear about his task. His masterpiece, On the Principles of Political Economy and Taxation (1817), opens by defining “the principal problem in political economy” as “the laws which regulate” the division of “the produce of the earth” between the “classes”. Since those words were written, it’s been fair to call Ricardo “the economists’ economist”—equally admired by Marx and the free-market right—which sets up an intriguing mystery. Classes and the divisions between them underpinned everything for him, and for many of his followers over the subsequent 100 years. However, by the late 20th century, interest had declined to the point where the big social divide barely featured within the discipline that Ricardo helped to found. So: who killed class in economics?

By the time I was a young researcher in the late 1990s, the word had vanished from the lexicon. Some of us tracked inequality trends, but to the high and mighty of the profession such work was mere description. Serious economists saw their job as different: analysis. Unfortunately, their analysis was selective. They would grapple with what trade, tech or education meant for different workers, but barely engage with the big split between those workers in general and their bosses. Instead, they offered soothing suggestions that the growing gap wasn’t all it seemed. When it transpired, for example, that inequality in families’ spending hadn’t risen as much as for incomes, this was latched onto as a sign of mere volatility—people sensibly “smoothing” consumption as their finances bobbed around. I recall surprise at a seminar when I asked whether this income-expenditure mismatch could instead be a sign of the impoverished running down assets or building up debt. 

After things went pop in the credit crunch, the way in which the US economy had been propped up by an orgy of sub-prime loans to poor Americans was dramatically exposed. Suddenly, the income gap—or, being blunter, the class divide—was back in the analytical spotlight. But Serbian-American economist Branko Milanovic is still furious that it ever left the stage, and he worries about the sort of continuing political neglect that—in a UK context—sees everyone from Liz Truss to Keir Starmer propose “growth” alone as an economic panacea. 

The Serbian-American economist Branko Milanovic is furious that the income gap ever left the stage

A lifelong student of inequality, Milanovic achieved unlikely celebrity with his 2013 “elephant curve” of global income growth, which showed strong rises across poor countries such as China (corresponding to the elephant’s back); anaemic advances among blue-collar workers in richer countries (the down-slope of the animal’s trunk); and, finally, another steep rise (as the trunk turned up) for the racing gains of the elite.

To remind us of the half-forgotten ways in which class can be integrated into the big economic picture, Milanovic takes us on a guided tour of six minds, spanning 200 years. The chapters blend tight analysis of how each thinker understood the forces reshaping inequality in their day with gobbets of gossip: Ricardo speculating his way to an astonishing fortune (£350m in today’s wages); the unsparing verdict of Dr Johnson on Adam Smith—a dull dog who grew most “disagreeable” after wine. 

We start in ancien régime France, when François Quesnay first shifted attention away from stocks of wealth, acquired by trade, and towards the “surplus” that the ongoing flow of production provided—for some. He cobbled together an early table demonstrating that the poor were many and the rich few. In a bold “break with tradition”, the Versailles courtier insisted that “the wealth of the poor classes” was “the best indicator” of national prosperity.

The young Smith visited the salons where Quesnay held forth, and eventually also concluded that decent wages for the masses of “servants, labourers and workmen of different kinds” were “the very essence” of desirable “public opulence”. Growth might get us there, but only if capitalist greed didn’t run out of control—the champion of the “invisible hand” is therefore, for Milanovic, an 18th-century Bernie Sanders. Smith blamed scheming merchants for imperial misadventures from the Crusades onwards, and feared businessmen would “deceive” and “oppress the public” in their drive for monopoly profits. (Interestingly, Milanovic finds the most “leftist” lines not in Smith’s newly fashionable ethical writing but in the famously hard-headed Wealth of Nations.) For Smith, profits should naturally drop with development, as the stock of industrial capital builds. The best-run countries, such as the Netherlands, had high wages and low investor returns. 

Ricardo, by contrast, championed profits—as a driver of investment and growth. He put “distributional conflict between the classes at centre-stage,” though the only battleline that he focused on was at the top, between capitalists and landlords. From a 21st-century perspective, writing workers’ living standards out of the script seems baffling. But it reflected the influence of Ricardo’s friend Thomas Malthus: any pay rise for the masses would “bring forth a higher population”, flooding the economy with workers until wages dropped back to subsistence levels. The corn laws, taxes on imported grain, were the local problem that Ricardo “raised to universal significance”. They inflated crop prices for wealthy landlords, but forced capitalists to pay higher cash wages to fund the same breadline existence for their workers. That meant less profit, so less growth. The corn laws had to go, which, a generation after Ricardo, they did.

© GARY DOAK / Alamy Arrestingly fresh: Branko Milanovic at the Edinburgh Book Festival © GARY DOAK / Alamy

Marx welded Smith’s insights about the downward drift of returns on capital to the Ricardian revelation that a dwindling profit rate would be a disaster for capitalism. His special twist was regarding that prospect as thrilling. Drawing on deep reading of Marx’s work, Milanovic debunks the cartoon revolutionary prophet, for whom capitalism always and everywhere got evermore unequal until it toppled. Instead, he portrays a more nuanced figure: an analyst of competing forces, with varying effects. Indeed, Marx’s most famous “law” predicted a declining rate of profit; that should actually level society. But it turns out that Marx also put forward a host of caveats that could prevent his law from playing out—and that, even if it does, the concentrating wealth of capitalist giants could push the other way. The insistence on rich-poor polarisation in Marx’s political writings may have reflected the requirements of “propaganda”. By contrast, his economics allows for rising wages, and leaves the direction of inequality open. This conclusion may displease rigid disciples, but after 150 years in which the class gap has narrowed as often as it has grown, it also rehabilitates Marx in the technical discussion. 

Income inequality rocketed through most of Marx’s life, on one measure peaking the year that volume one of Capital was published; wealth inequality kept rising until the dawn of the 20th century. Vilfredo Pareto, a fin de siècle Italian polymath, was just as animated by this, but in a very different way. With a frame of mind “darkened” by his wife running off with his cook, he feared that socialism may be unstoppable—but fought an intellectual “rearguard action” for the bourgeoisie. Shrewdly pre-empting Animal Farm, he argued that while one elite could be swapped for another, life wouldn’t become less hierarchical. This trained engineer didn’t stop with that insight, instead establishing (or so he thought) an almost “natural law” of distribution. Using tax data, he insisted that a particular number—“Pareto’s coefficient”—captured the dwindling frequency of the big incomes found on the journey up the social scale or, in other words, the rate at which the rich got rarer. 

In reality, as Milanovic enjoys demonstrating, this coefficient varied even between the few wealthy, late 19th-century European economies Pareto focused on. On a closer look, his magic number changes on the way up the spectrum within a single country. So there is no reliable regularity, still less a law. Nonetheless, Pareto earns his place in the canon for asking the right questions and pioneering the business of answering them with data on individuals, rather than broad-brush social classifications. 

The paradoxes of Pareto’s “nihilist” mind ensure this is a lively chapter. Still, a chart axis labelled “ln inverse cumulative distribution” is emblematic of Milanovic’s reluctance to compromise with the general reader. Even with some relevant background, I had to read parts twice. Some of the difficulty is unavoidable. Modern mainstream economics is not wrong about everything; thinking your way into forgetting it so as to get back inside, say, the classical labour theory of value is challenging. But forays into algebra, even differential calculus, were a greater challenge. When I battled through to the meaning, I mostly felt it could have been conveyed in words. 

Milanovic introduces Simon Kuznets as perhaps the greatest economist of the 20th century

Milanovic’s judgments, though, are arrestingly fresh. He introduces the final link in his great tradition, Simon Kuznets, as perhaps the greatest economist of the 20th century. The more obvious choice, John Maynard Keynes, lurks in the background: others explored the link between underpaid workers and depressed demand using his theories, but the man himself ducked divisive distributional questions. Kuznets, by contrast, pioneered modern accounting for national income and offered thorough analysis of how that income was shared. His “simple and magisterial” model predicted that, with industrial development, inequalities would first widen (as cities of gold and squalor rose and boomed) and then narrow (as the flow of farmhands into factories slowed, and the profits of early capitalists dissipated). 

But Kuznets was grappling with the realities of his day, which turned out to be an exceptional era. The decades after the Depression had witnessed levelling on a scale “almost never encountered short of revolutions”: between 1929 and 1946, the fortunes of the American super-rich sank “two-thirds of the distance to absolute income equality”. To breathe life back into the model, Milanovic documents technical shortcomings in the way it has been tested, and offers the intriguing thought that we might have entered a fresh Kuznets cycle for the transition to a service economy. But he realises it’s a hard sell. The widening gap after the 1970s had delivered a “coup de grâce” to interest in Kuznets—and all serious thought about inequality and class. 

The final chapter on how study of inequality fell “into a desuetude” is the glory of this book. Unexpectedly, it begins in iron-curtained Europe. There’s an interesting detour through the distributional consequences of varieties of communism: full state planning (pretty equal wages, topped up by uneven corrupt spoils); Yugoslav worker coops (where employees split the old capitalists’ surplus, but unequally); the lunacy of the Cultural Revolution, where effort-related differentials were banned, yet a gender pay gap was just fine. I squirmed on spotting Stalin cited as a data source on rural incomes, but the purpose here is not to defend the Soviet order. Rather, it is to highlight parallels with how the west in the era of the Cold War thought—or, rather, didn’t think—about inequality. 

While Brezhnev’s bureaucrats hoarded and distorted data, the US Chamber of Commerce sponsored the free-market Mont Pelerin Society, and the hard-right Koch brothers bankrolled the Cato Institute. The American-led world didn’t crush free enquiry in the same way, but deep intellectual commitments led both sides to look away from inequality. Hayek and Engels, Milanovic explains, agreed on one thing: once institutions that they regarded as just were in place, distributional arguments were immaterial. Economists in both systems reduced the variety of experience to a “representative household”. 

In western models, people became interchangeable. Bill Gates and someone living in a cardboard box were imagined to make choices with the same basic “optimising” equipment, and typically on the basis of the same information. No-one worried about how the rich got rich—whether by innovation or by “pillage, exploitation, inheritance, monopoly”; their “endowments” just arrived with them in the marketplace of life. Taunting Marx with their quip “to each according to what he and the instruments he owns produce,” Milton and Rose Friedman obliterated the distinction between incomes for people and incomes for machines. Ultra-mathematical “general equilibrium” analysis reduced profit and wage rates to one more pair of prices.

Milanovic’s fury culminates in a broadside against a hapless technocrat, Alan Blinder, whose “theory” of incomes concerned a world where “everybody was an optimising agent who knew everything”. It wasn’t just unrealistic, but defined away the very possibility of class difference. After the conflicts and revolutionary convulsions of the 20th century, such Cold War economics achieved a “vacuity” to match the many safely pulpable, quasi-Marxist treatises churned out in Moscow. 

After rising postwar wages and falling poverty made class divisions less urgent, it became tempting to forget them, and focus on questions that suited wealthy funders and flattered western states. Meanwhile, the allure of mathematical models made it intellectually respectable to forget Ricardo’s “principal problem”. Complacent disengagement set in, which, even as inequality began to rocket again, wasn’t shaken off.

The world had to wait 60 years after Kuznets’s theory for another with the same weight. It was authored by Thomas Piketty. His warnings about untrammelled profits racing ahead of wages are, for Milanovic, even darker than Marx’s. But for inequality studies the outlook is bright. Income surveys now cover 90 per cent of the world, and data is reaching ever-further back into history. The book closes with excited anticipation about thoroughgoing testing of Piketty’s pessimism, Marx’s uncertainty and Kuznets’s sunny-side-up perspective. 

The moral of the story? Mind the gap—and never forget it again.