One of the benefits of studying economics (and economic history) is that you’re a bit more resilient to the populist sentiments of politicians and policy-makers. Especially during election time, facts and fiction are often mixed together in one of those big, black pots, with a touch of fantasy added as special ingredient, and served to expectant ears. We all like to have our ideas about the world affirmed and politicians are good at exploiting this weakness. They tell us exactly what we want to hear. Never let the facts get in the way of a good story.
Much has been said in the build-up to this South African elections, for example, about growing inequalities in South Africa. Whether you think severe and persistent inequality is only slightly bad or extremely bad, there is no denying that a highly unequal society, like South Africa’s population, is not only morally unjustifiable but also a barrier to higher rapid growth. And this is not peculiar to South Africa, of course. Mechanisation, globalisation, and various other trends seems to be driving a gap between those with wealth and those without. Even the IMF has acknowledged that this is an issue.
Many ascribe this growing inequality as an inevitable consequence of the capitalism machine. Like Marx predicted, it seems as though the social structures of our societies are crumbling under the corruption of commerce. And it’s not only the lefties that are having a field day: prominent economists, like Brad Delong, are struggling to come to grips with robots hijacking our jobs. But, as Delong notes, this is not the first time that we’ve encountered the problem of inequality. Sometimes the past is the future we fear. During the Great Depression, many in Europe thought that communism was the only way to escape the deprivation that permeated Western societies. The iron curtain, and its collapse, would later show communist claims to a utopian future to be false.
But even in our own history, we have telling reminders that the egalitarian past we so happily paint is all but true. I recently discovered a table in the Records of the Cape Colony (Theal, 1905) that listed wages paid to all government employees of the Cape Colony in 1827. Remember, this is a time before the discovery of minerals, before the abolishment of slavery, yes, even before the Great Trek. This was a society, presumably, without the upheavals and inequalities of modern capitalism, without the corruption and nihilism of the ‘neoliberal’, materialistic world we inhabit today. And yet, Lord Charles Somerset, then governor of the Cape (let’s call him the premier, or the president), earned £10 000 annually (p. 28). In contrast, a bookkeeper in the Office of Collector of Tithes and Transfer Duties (equivalent to someone working for SARS today), earned, on average, £45 (p. 43). That’s right, he (his names was TF Dreyer) earned 222 times less than the president. What does an auditor at SARS earn annually these days? Let’s say a conservative R300 000. Apply the same ratio, and Lord Charles Somerset earned the equivalent of R66 million. Jacob Zuma, officially at least, earns only R2,6 million. Or take Patrick Kelly, a messenger in the Office of Civil Engineering, who earned £9, less than 1000 times that of Lord Somerset. And, of course, these were all white government workers. Had you been black, you could at best wish for a job in the police, at £4 per annum, that is, 2500 times less than the president. (If a policeman today earns R100 000 annually, that would take the president’s salary to R250 million. Zuma could buy a Nkandla every year with that money.)
Capitalism does not necessarily lead to higher inequality, especially not in the very long run. (In more thorough research, Dieter von Fintel and I showed that the eighteenth century Cape Colony was also severely unequal.) But even in the short run, capitalism isn’t always bad. An excellent example is South Africa’s own recent history: Branko Milanovic of the World Bank recently tweeted South Africa’s Gini coefficient for the last decade. While income inequality is slightly higher in 2010 than in 2000, the pattern is decidedly mixed over the decade. Our spending is less unequal in 2010 than in 2000. These changes in inequality also masks the rapid declines in poverty that the country has seen since 1994. A SALDRU report by Arden Finn, Murray Leibbrandt and Ingrid Woolard of UCT shows the incredible gains that a free market (with help from the state) has allowed: From 1993 to 2010, a multidimensional index of poverty has fallen by 29 percentage points from 37% to 8%. These are dramatic improvements, often unappreciated.
The past is a scary place. The future is brighter than we think. We still have problems to solve, but the we are in far better shape to do so. Let’s remind politicians of that this elections.