The Four Horsemen Of Leveling: A Book Review

(MENAFN- ValueWalk) Occasionally, we find a book that has such an interesting message that we dedicate a Weekly Geopolitical Report to reviewing it. This week, we will look at by Walter Scheidel.1 The book is an extensive historical analysis of inequality and the factors that reduce it.

In this report, we will discuss the premise of the book, the 'four horsemen' of income leveling and the future it portends. As always, we will conclude with potential market ramifications.

The Basic Premise

Inequality has become a critical issue. In 2013, President Obama said the following about inequality:

And that is a dangerous and growing inequality and lack of upward mobility that has jeopardized middle-class America's basic bargain—that if you work hard, you have a chance to get ahead. I believe this is the defining challenge of our time: Making sure our economy works for every working American.2

Interestingly enough, Scheidel's historical analysis makes it clear that the current level of inequality is hardly unique. And, a certain degree of inequality has been with us since the early stages of human existence. Archeologists note that even early gravesites of hunters and gatherers show distinctions of wealth and status. These differences steadily became more widespread as civilization developed.

In theory, society could take steps to prevent or reduce inequality. However, history suggests the opposite usually occurs. As agriculture developed, Scheidel's analysis shows that wealth became increasingly concentrated. Scheidel's key insight is that civilization and peace tend to bring rising income and wealth inequality.

However, a casual observation of history also suggests that wealth and income distributions are not permanent. Sadly, Scheidel's conclusion is that massive societal disruption reduces inequality. He refers to these as the four horsemen of equality.

The Four Horsemen

The 'Four Horsemen of the Apocalypse' comes from scripture.3 The biblical reference is widely debated but, in general, it refers to tribulations. Scheidel suggests that his four horsemen refer to events that cause inequality to decline. Here is his list:

Mass Mobilization War: Warfare has been part of human history for thousands of years. Small wars didn't seem to cause widespread changes in inequality. That isn't to say that anything short of mass mobilization war had no effect; clearly, in ancient times, being invaded usually led the vanquished nation to lose its material wealth and its citizens who survived usually ended up in slavery. On the other hand, mass mobilization war, the kind seen in the last century, have caused jarring changes in wealth and income distribution, regardless of the outcome. Clearly, the losers fare worse but the wealthy in winning nations tend to see their holdings reduced as well. Mass mobilization warfare adversely affects the wealthy in three ways.

Even the U.S., which suffered significantly less domestic damage from the war than Asia or Europe, saw a massive drop in inequality. The chart below shows the share of income of the top 10% of households and the highest marginal tax rate. Note that even though the highest marginal tax rate was raised to 80% by 1936, the top 10% of households were still capturing over 45% of total income. It wasn't until WWII began that the share of income fell sharply.

The author details many more examples but it is safe to say that war has been effective in reducing wealth and income inequality.

Transformative Revolution: Scheidel shows that civil war has an ambiguous effect on income and wealth distribution but revolution is very effective in changing these arrangements. The classic example is the Communist Revolution in Russia. The author notes that mere revolts that affect a localized area do not lead to large or lasting changes in income and wealth distributions. On the other hand, transformative revolution is extremely effective in changing the patterns of wealth and income.

Shortly after the Bolshevik Revolution, Lenin and his cohorts implemented land reform, expropriating the landed estates of the nobility and the Russian Orthodox Church without compensation. This action eliminated the landed aristocracy. In addition, the Bolsheviks nationalized the banks and took over the Russian industrial base. By 1919, about 97% of arable land was owned by peasants. However, the communists were concerned that another set of landlords would emerge. Thus, they began the process of collectivizing farmland, putting it all under state control.

Initially, collectivization failed. The kulaks, who were the more successful farmers, came under persecution by Lenin. Unfortunately, agricultural production collapsed; although farmers were now more equal, they were equal with less resources, and incentives to work hard evaporated. Lenin was forced to retreat from his communist ideals with the New Economic Policy which allowed limited markets to develop. Although agricultural production rebounded, some differentiation in incomes did as well. Stalin solidified his control by the late 1920s and within a decade farm collectivization was complete. The costs were astounding. Up to 1.8 million kulaks were arrested and it is estimated that six million peasants starved to death.4

In the cities, the secret police5 arrested 1.5 mm Russians in 1937-38, and nearly half died. From 1934 to 1941, it is estimated that seven million people entered the gulag. The incarcerated were put to work, further pressuring wages.6 There is clear evidence that inequality fell in the Soviet Union; Gini ratios from the late 1960s into the fall of the Soviet Union were around 0.28.7 Similar outcomes were observed in China as well.

Transformative revolutions lower income inequality by taking income and wealth from those who have it; there wasn't much evidence that it was shifted to the poor. In general, wealth was destroyed as communism proved to be profoundly inefficient. Thus, equality was achieved by leveling down.

Societal Collapse: The third cause of income leveling is societal collapse. In this situation, a government collapses, leading to a breakdown of civil order. As civil order collapses, the ability of the wealthy to hold onto their assets is compromised. Most of the examples come from ancient history—the fall of Rome, the collapse of the Tang Dynasty in China and the end of some of the kingdoms in the Andes. However, Scheidel does include Somalia in the list of collapsed states.

Societal collapse brings incomes downward by destroying the wealth of the upper classes. Wealth accumulation depends on social and legal stability. If these are lost in political chaos, downward income leveling occurs.

Plague: The classic example of this scourge was the bubonic plague which was mostly the cause of the Black Death. It was a flea-borne bacteria carried by rats. The rats were ubiquitous and were often carried on cargo ships, spreading

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