The Golden Revolution, Revisited: Chapter 3

This Insight is the fifth in the serial publication of the new, Revisited edition of my book, The Golden Revolution (John Wiley and Sons, 2012). (The first instalment can be found here.) The book is being published by Goldmoney and will also appear as a special series of Goldmoney Insights over the coming months. This instalment comprises the third chapter of Section I.

View the Entire Research Piece as a PDF here.

The Sources of Economic "Inequality"

“Why have labor market institutions and social norms related to inequality changed at about the same time that skill bias of technology accelerated? This may be a coincidence, or the overall changes in inequality may be the result of changing labor market institutions and social norms, and less the product of technology.”


Does economic inequality matter? This provocative question tends to evoke a visceral, emotional response by many, and even during what are considered to be relative prosperous economic times. In times of economic difficulty, such as our present age of high rates of un- or underemployment, in particular for the relatively young and unskilled, and stagnating (or even outright declining) real median household incomes, it becomes the basis of political campaigns, as demonstrated recently in the US, UK, and a handful of continental European countries. (Of course, inequality is a perennial focus on political campaigns in much of the developing world, in particular in Latin America.)

While beyond the scope of this book, I do believe that inequality matters and that it can threaten the modern, liberal, democratic traditions that most Europeans and North Americans have come to take for granted. Extreme inequality begins to resemble slavery, in that the choices of the poor are so restricted relative to those wealthy few that the poor are essentially faced with a Hobson’s choice of doing one of a handful of menial jobs with little if any hope for economic advancement, or doing no job at all and living, if not in poverty, then in dependency. Extreme inequality is also associated with political instability, vicious economic cycles, and social stagnation.

This chapter will explore primarily the monetary sources of inequality, with specific reference to the monetary theories of Cantillon and the Austrian Economic School, as described in the previous chapter. However, let’s begin with what we might call the “natural” sources of economic inequality, and review some of the more popular historical and recent literature on the topic.


Few would deny that there is not such a thing as “natural” inequality. Although the processes involved are not known in specific detail, it is widely believed that Mother Nature does not bestow her physical, mental, and perhaps even emotional gifts in equal measure across the population. Yes, the “nature vs. nurture” debate has raged in some form almost since the dawn of philosophy, yet while the advances of modern science have certainly made some additional progress in our understanding, it remains unclear to just what extent nature matters. We know, however, that it does. And that it matters at all implies that there is naturally some degree of inequality in society.

This holds true, no doubt, whether a given society is characterized as primarily capitalist or socialist in structure. Even in highly socialistic societies there are those individuals who, for whatever reason, rise to the top of the social structure and enjoy the associated benefits in some degree. Yes, there are the clever and charismatic “Gandhis” among us who might eschew material things voluntarily, but we should have no doubt that, were they to turn their formidable abilities to amassing even a small amount of wealth, that they would most probably meet with somewhat greater success than the average individual.

The inequality debate, therefore, requires one to determine whether inequality is somehow simply natural, flowing from nature in some way, or unnatural, as in caused by the organization of society itself in a way that is unfair and could, through social reform, be made fairer. Thus, the inequality debate is perhaps better understood as one of “fairness,” which in modern times has always held a prominent place in the political lexicon, if not always in the economic one.

There are many who hold that a capitalistic system of strong private property rights is in itself unfair. One of the earliest, most cogent and thorough critics of capitalism— indeed, the man who gave it the name—was Karl Marx. Das Kapital remains a classic work of social economics, if one that has lain outside the Western liberal mainstream. It was, in its time, the foremost critique of that burgeoning mainstream, and it inspired several generations of anti-capitalist reformists and revolutionaries. (The Austrian School would arise some decades later as critics not only of Marx but also of the German mercantilists or “historicists” as they were known at the time.)

While it is beyond the scope of this book to refute Marx in general, it is instructive to refute his specific view that, over time, capitalist societies would naturally tend toward inequality. Indeed, according to economic and social historians, inequality generally declined in the developed world during most of the twentieth century, including in the United States, at least up until the 1970s. (Please keep that decade in mind.)

Let’s look at the crux of Marx’s inequality theory in more detail. What Marx is arguing, and what is subsequently updated by neo-Marxist Thomas Piketty in his best-selling book Capital in the 21st Century, is that labor has a certain value and that the capitalists who own the means of production exploit their workers such that they are not fairly and fully compensated for their labor. Hence the “class-conflict” concept for which Marx is particularly famous. This exploitation is made possible because the workers have only little to no bargaining power vis-à-vis the owners of the capital goods. As productivity increases, as it tends to do in capitalist societies due to innovation, technology, etc., the benefits thus accrue disproportionately to the owners of capital. Over time, therefore, as an economy becomes ever more productive, the capitalists grow ever richer while the typical laborer is left behind.

Sounds plausible, right? Perhaps, but here again the evidence suggests otherwise, as historical periods associated with higher productivity growth are as if not more frequently associated with declining rather than increasing inequality. Let’s now return to the 1970s, the decade in which the long twentieth century trend toward less inequality begins to reverse and productivity growth also slows down. What happened? What changed?

Well, arguably the single most important economic development of the 1970s, and one of the most important of the entire twentieth century for that matter, was President Nixon’s unilateral, probably unconstitutional and supposedly “temporary” August 1971 decision to end of the official conversion of dollars into gold at any price and, from 1973, to allow the dollar to free-float versus other currencies.

What followed thereafter were sharply higher prices for oil and other imports. Rather than maintain a stable money supply, the Federal Reserve accommodated the so-called oil-shock to keep growth going, but this would lead, in time, to asset and consumer price inflation and, no surprise, to a trend of rising inequality. Since US interest rates peaked in the early 1980s, bondholders have ridden the inflation gravy train, which has been remarkably steady. Shareholders have also benefited, although the ride has been rougher. But best of all has been the ride for those owning prime property and fine art, who have done the best of all. The “wealth” supposedly created by inflationism is really wealth redistribution in disguise, for one of the mostly unseen and misunderstood effects of monetary inflation is that the gains in worker productivity accrue disproportionately to the owners of capital.

Productivity vs. Workers Compensation

Household income charts

No, this is not “fair.” It is also not natural to capitalism. Under a properly capitalist system, in which each participant can freely exchange their labor, accumulated capital, or ingenuity, then as workers become more productive they will be able to command higher real wages. That there has been essentially complete stagnation for nearly half a century notwithstanding positive labor productivity growth is clear evidence that inflationism fuels “unnatural” inequality which favors the owners of capital over labor. There are, however, those who argue that technological innovation also fuels inequality. This is difficult to dispute in its entirety and certainly those highly productive, innovative individuals and businesses that find ways to build a better mousetrap, or for less cost, will find that they become wealthy as a result. But wait, if their wealth is thus derived from a free and fair exchange with their customers, what on earth is “unfair” about that? What can possibly be unfair about making people’s lives better by producing things they want at prices they can afford? Yes, there are those like Karl Marx and his contemporary disciple Thomas Piketty who take the other side of this argument but ultimately their ideas rest on two assumptions, which in turn reduce to the same:

  1. That laborers are unable to make free and reasonable decisions regarding what available work they wish to do and how much they require to be compensated for it (i.e. the “Labor Theory of Value”)

  2. That consumers are unable to make free and reasonable decisions regarding what they wish to consume and how much to pay for it

As we live in an age of choice, when we expect to be able to choose our lifestyles and the products we consume, there aren’t many who would embrace assumption 2). But do you see how assumption 1) is essentially the same? The workers are the consumers. They are ultimately exchanging their labor and consumption goods with each other. Yes, the owners of capital sit in the middle as it were, and extract forms of “rent” from their accumulated assets, but the historical data strongly imply that this “rent” does not have a natural tendency to increase over time; rather, any such tendency is not endemic to capitalism at all but rather is an insidious aspect of inflationism.

There is another, simpler way to explain why technological innovation is not the primary cause of inequality but quite possibly the reverse: arguably the greatest single invention of the great Industrial Revolution is mechanized agriculture. Without it, most people would still be agricultural laborers. Standards of living would be far, far lower. Most would-be “capitalists” would just be skilled artisans, unable to source mass labor to work in a factory of some kind, thereby more efficiently mixing economically scalable labor and capital goods.

So-called Luddites were those who rebelled in the eighteenth to nineteenth centuries against mechanized agriculture because they argued that it displaced farm workers. Yes, of course it did. You don’t need as many farmhands working the fields if you have a tractor. But is anyone today really prepared to argue that, to reduce inequality, we should get rid of tractors or other agricultural machinery? There was far more economic inequality back in the day of the great landed estates, when many farm laborers couldn’t support a family at even subsistence level, yet the lord of the manor didn’t work at all if he chose not to, lived the high life, probably also maintained a city residence for social purposes, and shot deer and game for “fun,” rather than because this was necessary for survival. Indeed, for anyone to shoot deer or game on the estate without strict permission, including one of the laborers, the penalties could be severe, including imprisonment or even death. Is anyone in this modern age of choice really prepared to go there and defend the view that technological innovation is necessarily a force for exploitation, inequality, and just plain evil?

Yes, technology can displace workers. However, history shows that this tends to be temporary. Displaced workers normally if not always find other employment, although they may have to accept low wages while learning new skills. That can be complicated if minimum-wage laws are in force, preventing workers from temporarily acquiring new skills on the job in exchange for reduced wages. Consider that labor market flexibility was part and parcel of the Industrial Revolution. Minimum wage laws were essentially nonexistent.

Yes, workers would occasionally organize and strike for higher wages, and often they would succeed. I, for one, do not see anything wrong with workers voluntarily organizing to press for higher wages, or for employers to make a nursery or school available for their children, or perhaps a medical center, or any one of the many facilities that had become relatively common in and around factories by the middle of the Industrial Revolution. But for workers to organize violent action to damage capital goods or render them inoperable even by those workers who would prefer to work instead is a different matter. That intrudes on private property rights. Worse still is when the government actively seeks to promote and support such action by taking sides to garner votes. (Recall that the “Soviets” that would form into the USSR in the 1920s originated as local labor unions.) Imagine had property rights not been secure during the nineteenth century and capitalists—call them Robber Barons if you prefer—had been unable to secure their plant, property, and equipment. Can anyone honestly believe that the Industrial Revolution would nevertheless have succeeded in quintupling the average family’s real income over the course of just a few generations? To return to an essential point from earlier, the Austrian Economic School absolutely and emphatically does not advocate economic anarchy. There must be social institutions in place that can recognize, protect, and enforce property rights. There must be recourse to economic fraud. There must be a robust legal system for adjudicating disputes. Friedrich Hayek perhaps put it best when he explained how governments are essential for setting the rules of the game, but they should not participate in it. Like a football match, or any exciting, competitive sport, if the rules are unclear, everyone just keeps arguing with or, worse, buying off the referee rather than trying to play their best. Frequently changed or arbitrarily enforced rules and regulations encourage rent-seeking behavior, erode commercial ethics, and undermine what could otherwise be healthy economic progress.

In this regard, it is important to recognize that money manipulation is a particularly insidious form of arbitrary and sometimes frequently changing regulation. It results in all the deleterious effects noted above and, as we explore in some detail in the following chapter, also fuels inequality of the unnatural, immoral sort.

The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information purposes only and does not constitute either Goldmoney or the author(s) providing you with legal, financial, tax, investment, or accounting advice. You should not act or rely on any information contained in the article without first seeking independent professional advice. Care has been taken to ensure that the information in the article is reliable; however, Goldmoney does not represent that it is accurate, complete, up-to-date and/or to be taken as an indication of future results and it should not be relied upon as such. Goldmoney will not be held responsible for any claim, loss, damage, or inconvenience caused as a result of any information or opinion contained in this article and any action taken as a result of the opinions and information contained in this article is at your own risk.

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