Tim Worstall

Tim Worstall, Contributor

I write about business and technology.

5/06/2012 @ 8:58AM |819 views

The United States Used to be the Most Equal Country in the World: What Happened?

An interesting paper on American incomes before and after the Revolution tells us that the United States, around and about that time of the country’s creation, was certainly one of if not the most equal nation at that time. There’s a write up on it here and access to an older version of the paper here. The answer as to why this was so is I think to be found in Table 7 (page 39) of that paper with the addition of a little bit of economic theory.

I do think that it’s very interesting that the US, around the time of its conception, the country with the least income inequality. The paper shows that this is not only true if we include only the free population but also it is even true if we include the slave population. I’m sure great fun could be had trying to link that equality with the way the Constitution insists on equality (except for the slaves of course) in a way that the constitutions of other places at the time simply did not.

However, I’m not all that sure that, it having been pointed out to me that this is true, that I am surprised that it is true. In fact, quite the contrary, now that it has been pointed out to me I’m rather inclined to say that it is obvious. For we have a well proven economic theory that not only explains this but actually predicts that it would be so in the circumstances of 18 th century America.

That theory is David Ricardo on rent. And the numbers, in fact the examples given, in that Table 7 rather bear this out.

Start right from the beginning. The United States was, as was everywhere at the time, a largely agrarian society. The paper notes that the largest occupational group was farmers. In farming, just as in anything else, the classical factors of production are land, labour and capital.

Farming at the time was not particularly capital intensive: the second agricultural revolution was really only just starting. It was however both land and labour intensive.

Which is where we should add Ricardo. Using very much a pencil sketch of the theory we find that where there is free land available then rents are going to be very low. There might be some value to a specific location, yes, or specific improvement or quality of land. But rents are going to be low where there are large amounts of unused and free for the taking land. Certainly they are going to be low compared to somewhere where all land is taken, all is used and there is no peripheral land that can be acquired for free.

The US was, if not perfectly at least to great extent, in that first position. Move another two miles west from wherever the last line of settlement was and there was more land there for the taking. England, our most natural comparator and one that is used in the paper, was not in that position. Certainly since 1066 there had been at least a claim to the ownership of all land in the country. Sometimes that claim was in no more than name but by the middle to late 18th century there was no land which was simply free for the taking.

We would thus expect rents to be higher as a portion of expenses to farmers, as incomes to those who own the land and as a portion of the output of the land in the UK than in the US.

Which leads us to why we would expect the US in this situation to be a more equal country. For rents of course get paid to landlords and land holdings in the UK were highly concentrated. Thus a significant part of that much higher rent was being paid to a small group of people. The few great land owning families. This was a class that simply did not exist in the US and even if it had would have been claiming a much lower portion of the national income as a result of the much lower rents.

And the paper bears out this effect: the difference in the income shares, of the top 5%, 10% and so on, really relies upon the additional 9 % or so of national income that the top 1% in the UK were getting in comparison to the top 1% of the US population.

No, I would not be surprised at all to find out that the rents on that UK land were 9% of GDP. But even if they were not, even if the above overstates the case, it is ertainly part of the solution to the observation.

The US was more equal, the most equal country in the world at that time, because the US was just about the only place with free fertile land. This reduces rents and thus the incomes of the landholders as a portion of national income. Thus greater equality as we don’t have a concentration of income among those landowners.

The joy of this analysis is that we’ve finally got an economic theory, Ricardo on rent, that works in both theory and practice. I just wish we had rather more theories that worked in both too….

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