Capitalist systems and income inequality by Marco Ranaldi, Branko Milanovic published by VOXEU (12/2020)
“Similar levels of income inequality may coexist with completely different distributions of capital and labor incomes. This column introduces a new measure of compositional inequality, allowing the authors to distinguish between different capitalist societies. The analysis suggests that Latin America and India are rigid ‘class-based’ societies, whereas in most of Western European and North American economies (as well as in Japan and China), the split between capitalists and workers is less sharp and inequality is moderate or low. Nordic countries are ‘class-based’ yet fairly equal. Taiwan and Slovakia are closest to classless and low inequality societies.
Similar levels of income inequality may be characterised by completely different distributions of capital and labour. People who belonged to the highest income decile in the US before WWII received mainly capital incomes, whereas in 2010 people in the highest decile earned both high labour and capital incomes (Piketty 2014). Yet the difference in their total income shares was small.
Different distributions of capital and labour describe different economic systems. Two polar systems are particularly relevant. In classical capitalism – explicit in the writings of Ricardo (1994 [1817]) and Marx (1992 [1867], 1993 [1885]) ¬– a group of people receives incomes entirely from ownership of assets while another group’s income derives entirely from labour. The first group (capitalists) is generally small and rich; the latter (workers) is generally numerous and poor, or at best with middling income levels. The system is characterised by high income inequality.
In today’s liberal capitalism, however, a significant percentage of people receive incomes from both capital and labour (Milanovic 2019). It is still true that the share of one’s income derived from capital increases as we move higher in the income distribution, but very often the rich have both high capital and high labour incomes. While inter-personal income inequality may still be high, inequality in composition of income is much less…”
