The Myth of the Neutral Market#
We often speak of “the market” as if it were a natural force, like gravity or the weather. We are told that inequality is an inevitable byproduct of “globalization” or “technological change.” These explanations are convenient because they absolve us of responsibility. If inequality is just the result of “low-skilled” workers being replaced by robots, then there is no one to blame but the march of progress.
However, the history of the 20th century tells a different story. The massive reduction in inequality between 1914 and 1950 wasn’t caused by the market; it was caused by the violent destruction of wealth during world wars and the deliberate policy of high taxation. Inequality didn’t disappear on its own—it was restrained. The resurgence of the wealth gap since the 1970s is not just a mathematical trend; it is the result of a “Policy Pivot” that chose capital over labor.
The External Driver: The Deconstruction of the Social State#
The primary cause of the modern acceleration in inequality is the “fiscal revolution” that began in the 1980s. This was a deliberate shift in the tax burden from those who own capital to those who earn wages.
The Mechanism of Tax Competition#
In the 1980s, the “neoliberal age” was inaugurated with the belief that lowering taxes on capital would promote investment and growth. This triggered a “race to the bottom” or tax competition between states. If one country lowers its corporate tax rate, others feel they must follow or risk losing “skittish” capital to their neighbors.
The numbers are startling. Between 1980 and 2006, the average corporate tax rate in the EU fell from 49% to 30%. In the United States, the top income tax rate was slashed from 70% in 1982 to 28% by the end of the Reagan era. This effectively gave the formula \(r > g\) a turbo-boost, as capital owners were allowed to keep a much larger share of their \(r\) (return).
The Interdisciplinary Lens: Political Choice vs. Technical Necessity#
This shift was legitimized by the ideology of “performance.” Inequality was rebranded as a “spur to performance”—an incentive that would eventually “lift all boats.” However, this ignores the social reality of power. The decline of labor unions in the US and Britain significantly weakened the negotiating position of workers.
Without the “countervailing power” of unions, the share of national income going to wages plummeted. Between the 1980s and 2000s, the share of economic performance allotted to capital income rose by over 11% in Germany and nearly 20% in France. This was not a “technical” outcome of better machines; it was a political outcome of weaker workers and stronger owners.
Tracing the Cascade: The Private Wealth Surge#
The consequence of these policies is a widening gap between private wealth and public wealth. As states lowered taxes, they were forced to cut expenditures or take on debt. Ironically, much of this public debt is owed to the very private individuals who benefited from the tax cuts.
Today, private wealth is increasing in relation to public wealth in all G8 states. This makes the state weaker and less able to invest in the very things—like education—that are supposed to promote social mobility. We have created a system where the state is “living beyond its means” precisely because it has stopped taxing the means of its wealthiest citizens.
The Choice of the Twenty-First Century#
The math of \(r > g\) is a tendency, but policy is the steering wheel. For a few decades, we used the wheel to drive toward a “patrimonial middle class.” Since the 1980s, we have let go of the wheel, allowing the inexorable logic of capital to take us back toward 19th-century levels of concentration.
So what? The current level of inequality is a choice, not a destiny. If we do not coordinate a “second fiscal revolution”—specifically a progressive global tax on capital—we are essentially voting for the return of the rentier. This leads us to the final, most disturbing cause of inequality: the death of meritocracy and the rebirth of the inheritance society.
