A New Way to Measure Inequality

The Gini coefficient measures how unequally (or equally) wealth is distributed in a society. The latest data show that Denmark is the most egalitarian country in the world while income inequality is highest in the south African nation of Namibia where 56% of the population lives on less than $2 per day.

But how do these nations stack up against historical societies? Has inequality improved over time? Branko Milanovic of the World Bank, Peter H. Lindert of UC Davis, and Jeffrey G. Williamson of Harvard decided to find out and in the process devised an innovative way of measuring inequality. (Here is a link to their NBER paper, if you know where to get a free version please leave a link in the comments. and thanks to Egalitarian for the link non-gated version.)

Reliable income data wasn't around before the late 1800's, so the researchers turned to what are called social tables where different social classes are ranked from the richest to the poorest. (These were also called political arithmetick, which happens to be name of a neat blog.)

Here is a graphic showing the Ginis for four modern nations and 12 pre-industrial nations. A value close to 100 means more inequality while closer to zero means more equality.

Comparing the Ginis of modern and pre-indsturial nations, the reseachers found that a sample of nine modern countries had a Gini of 43.3 while the pre-industrial revolution countries had a Gini of 45.7. (The difference between the lowest and highest Ginis within each of the two groups was 31.5 and 39, respectively.) So it seems that while human civilization has advanced by leaps and bounds over the past two millennia, income inequality has stayed relatively the same.

But the graphic and the Gini data don't tell the whole story.

What if you looked at how much inequality the elite could extract, and how much is actually extracted? This is done through calculating the difference between the actual Gini and the maximum Gini. (The latter concept is akin to society's elite taking up so much of the income share that what's left would only be enough for everybody else to just get by.)

It turns out that the typical modern nation has extracted about 33% of the available inequality (for the U.S. it's about 41%, for China it's 47%) while the researchers' sample of past societies squeezed out almost all of the available inequality.

Modern nations with the most potential for inequality (Brazil and South Africa) have extracted about two-thirds of the maximum inequality, equal to the most egalitarian pre-industrial societies (England and Wales circa 1688 and Kingdom of Naples circa 1811).

"While inequality in historical pre-industrial societies is equivalent to that of today's pre-industrial societies, ancient inequality was much greater when expressed in terms of maximum feasible inequality. Compared with the maximum inequality possible, today's inequality is much smaller than that of ancient societies."

When you plot Gini scores against income per capita for each of the pre-industrial nations you see for the most part that the more recent societies extracted a lot less inequality than the more ancient nations. This is shown on the graphic from the paper below. The black and dotted curves represent two estimates of the maximum possible inequality. You can ignore the blue dots. Click on the image for a larger graphic.

So this new method of measuring inequality by looking at how much of it is left on the table is potentially more informative, the researchers' argue:

As a country becomes richer, its feasible inequality expands. Consequently, if recorded inequality is stable, the inequality extraction ratio must fall; and even if recorded inequality goes up, the ratio may not...Thus, the social consequences of increased inequality may not entail as much relative impoverishment, or as much perceived injustice, as might appear if we looked only at the recorded Gini.

Where would you want to live? In today's Namibia or Holland in 1732? I think I know what Robert Frank would say.