Income inequality in pre-industrial Europe

Guido Alfani, Wouter Ryckbosch

Thomas Piketty and others have prompted renewed interest in understanding long-term patterns of inequality. This column presents evidence from pre-industrial Europe. Inequality rose even during the success stories of early modern Europe, but it can hardly have been the sole requisite for growth. In both economic history and today’s economic theory, the idea of a universal trade-off between growth and inequality needs to be replaced by stronger attention to social processes and institutional developments.

In the wake of the research carried out by Thomas Piketty (2013) and his co-authors, economists have been looking for new theories that help to explain long-term patterns of income and wealth inequality (see Kanbur and Stiglitz 2015). Since conventional theories based on the constancy of factor shares and on the decline of inequality in mature economies no longer hold, economists now face the task of assembling the crucial building blocks for more adequate theorising. We believe that by studying past transitions in income and wealth inequality in very different political, economic, and institutional contexts, the economic history of pre-industrial Europe can offer important clues.

After a long period of relative neglect, several historians of pre-industrial Europe have recently published new work on the issue of income and wealth disparity before the industrial revolution. In a new paper (Alfani and Ryckbosch 2015), we argue that a comparison of inequality trends between Italy and the Low Countries between 1500 and 1800 highlights the factors that drove European inequality to their historic 19th-century levels. The economic fate of both regions during this period is often contrasted instructively, since Italy (together with the rest of the Mediterranean area) experienced a prolonged stagnation or even decline after the Renaissance, while the Low Countries (and the rest of the North Sea area) experienced unprecedented development and expansion throughout the early modern era. This phenomenon, which has been dubbed the ‘Little Divergence’ (Allen 2001), has been shown to hold in the development of real wages, productivity growth, human capital formation, urbanisation, and per capita output (Broadberry et al. 2011, Van Zanden and Van Leeuwen 2012, Pleijt and Van Zanden 2013).

Regardless of this economic divergence, the evidence that emerges from the extensive databases on the distribution of income and wealth (based on fiscal sources) gathered in recent years shows that economic inequality increased from the 16th to the 19th century in both the Low Countries and Italy. This concordance in trends towards growing disparity despite divergent economic fortunes discredits the universality of traditional explanations of inequality growth in northwestern Europe. The idea that the growth of pre-industrial inequality in the North Sea area was caused by a sort of ‘super Kuznets curve’ no longer seems as plausible as it once did. Not unlike economists today, this presents economic historians with the challenge of having to abandon conventional explanations based on biased productivity growth, urbanisation, or technological change to look for alternative movers of inequality.

Figure 1. Estimated trends of regional inequality levels in Northern Italy and the Low Countries

Note: Absolute levels are not directly comparable between the regions due to differences in the sources used.

Source: Alfani and Ryckbosch (2015).

In recent research, two elements have been repeatedly singled out:

The growing number of proletarianised wage labourers throughout early modern Europe (Ryckbosch 2015); and

The role of the state (Alfani forthcoming).

The proletarianisation process refers to the slow but widespread concentration of capital in the hands of a shrinking section of the wealth distribution, while growing numbers were now left without capital. The drivers of this process are generally thought to have been diverse, but are most frequently searched for in the political sphere. With regards to the rise of the state, we argue that the growth of stronger fiscal states in the early modern period initially had redistributive effects that served to deepen economic inequality. Both explanations abandon the idea of a straightforward trade-off between equity and growth in the long term, and focus attention instead on the institutional determinants of wealth and income distributions.

Abandoning the idea of a simple trade-off between equity and growth does not mean that both phenomena were unrelated – and perhaps the historical evidence can help to shed light on the reverse causality as well. The question of the effect of rising inequality levels on the potential for pre-industrial growth has led to largely unresolved debates in economic history. In the 19th and early 20th centuries, historians assumed that finding sufficient fixed capital for large-scale industrial production was difficult during the early Industrial Revolution, and therefore a higher degree of wealth and capital concentration was required to allow for such investments. Although for decades now economic historians have argued that the capital requirements of industrialisation were in fact rather small, and that capital was relatively abundant in early modern Europe (Allen 2011, Vries 2014), this theory has recently been revived by Galor and Moav (2004). They argue that in a time when physical rather than human capital was crucial for the production process, inequality was good for growth.

Contrary to this position, most recent historical explanations continue to assume that lower levels of inequality were beneficial for early industrialisation and development. Unlike Galor and Moav, several economic historians now argue that human capital was already crucial in early modern economic development – and since the total stock of human capital is potentially much larger when spread in a relatively egalitarian fashion, this strengthens the idea that inequality was bad for pre-industrial economic development (Baten and Van Zanden 2008, Buringh and Van Zanden 2009, De Pleijt and Van Zanden 2013). Others have argued that industrialisation was sparked by Britain’s uniquely high wages, which suggests the presence of a large middle class (Allen 2011). ‘New institutional’ economists have similarly argued for the importance of a strong middle class in explaining industrialisation, for instance because of their role in the emergence of favourable institutions in Western European cities and states (Acemoglu et al. 2005). Finally, the concept of a ‘consumer revolution’ presupposes a middle class capable of producing a level of domestic demand sufficiently sizeable to spark economic growth (McKendrick 1982, Fairchilds 1993, Berg 2004, De Vries 2008).

The evidence presented here suggests that developments in inequality, which were similar throughout Europe, cannot of themselves account for the ‘Little Divergence’, and thus prove either theory right or wrong. Inequality rose even in the success stories of early modern Europe, but can hardly have been the sole requisite for growth either, since trends were similar in the South where economic stagnation persisted. We believe that in both economic history and economic theory today, the idea of a universal trade-off between growth and inequality needs to be replaced by a stronger attention to social processes and institutional developments.

References

Acemoglu, D, S Johnson and J Robinson (2005), “The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth”, The American Economic Review 95(3): 546-579.

Alfani, G (forthcoming), “Economic inequality in northwestern Italy: A long-term view (fourteenth to eighteenth centuries)”, Journal of Economic History.

Alfani, G and W Ryckbosch (2015), “Was there a ‘Little Convergence’ in inequality? Italy and the Low Countries compared, ca. 1500-1800”, IGIER Working Paper Series n. 557.

Allen, R C (2001), “The great divergence in European wages and prices from the middle ages to the first World War”, Explorations in Economic History 38: 411-447.

Allen, R C (2011), “Why the industrial revolution was British: commerce, induced invention, and the scientific revolution”, Economic History Review 64(2): 357-384.

Baten, J and J L Van Zanden (2008), “Book production and the onset of modern economic growth”, Journal of Economic Growth 13(3): 217-235.

Berg, M (2004), “In Pursuit of Luxury: Global History and British Consumer Goods in the Eighteenth Century”, Past and Present 182: 85-142.

Broadberry, S, B Campbell, A Klein, M Overton and B van Leeuwen (2011), “British economic growth, 1270-1870: an output-based approach”, Studies in Economics 1203.

Buringh, E and van Zanden, J L (2009), “Charting the “rise of the West”: manuscripts and printed books in Europe, a long-term perspective from the sixth through eighteenth centuries”, Journal of Economic History 69: 409-45.

De Vries, J (2008), The Industrious Revolution: Consumer behavior and the household economy, 1650 to the present, Cambridge: Cambridge University Press.

Fairchilds, C (1993), “The production and marketing of populuxe goods in eighteenth century Paris”, in J Brewer and R Porter (eds.), Consumption and the World of Goods, London, Routledge: 228-248.

Galor, O and O Moav (2004), “From Physical to Human Capital Accumulation: Inequality and the Process of Development”, Review of Economic Studies 71: 1001-1026.

Kanbur, R and J Stiglitz (2015), “Wealth and income distribution: New theories needed for a new era”, VoxEU, 18 August.

McKendrick, N (1982), “The consumer revolution of eighteenth-century England” in N McKendrick, J Brewer, and J H Plumb (eds.), The birth of a consumer society: the commercialisation of eighteenth-century England, London: 3-33.

Piketty, T (2013), Le capital au XXIe siècle, Paris, Seuil.

De Pleijt, A and J L Van Zanden (2013), “Accounting for the ‘Little Divergence’: What drove economic growth in pre-industrial Europe, 1300-1800”, Working Paper.

Ryckbosch, W (2015), “Economic inequality and growth before the industrial revolution: the case of the Low Countries (fourteenth to nineteenth centuries)”, European Review of Economic History 19(4).

Vries, P (2014), Escaping Poverty: The Origins of Modern Economic Growth, Vienna, Vienna University Press.

Van Zanden and Van Leeuwen (2012), “Persistent but not consistent: The growth of national income in Holland 1347–1807”, Explorations in Economic History, 49(2):119-130.