Lambert here: Substituting “income inequality” for class, in the very first sentence, is a pretty neat trick. Interesting nonetheless, given that the Socialist Party in Imperial Germany and after went so very, very wrong.
By Charlotte Bartels, Post-doctoral researcher at German Institute for Economic Research (DIW), Felix Kersting, Postdoctoral researcher in Economics at Humboldt University Of Berlin, and Nikolaus Wolf, Professor and Director of the Institute of Economic History at Humboldt University Of Berlin. Originally published at VoxEU.
Traditional Marxists believe that capital accumulation leads to income inequality and support for socialism, a perspective that was challenged by Revisionists. This column examines these competing claims using historical statistics and modern statistical techniques. The authors find that while capital accumulation intensified income inequality, it did not necessarily bolster support for socialism. Moreover, trade unions played a pivotal role in curbing income inequality. The findings highlight the role of historical, institutional, and technological factors in shaping capitalist trajectories, suggesting that a one-size-fits-all approach may be insufficient.
What can we learn from Marx about inequality? The current debate about inequality frequently refers to ideas about capitalist dynamics that were first formulated by Karl Marx and his followers in 19th century Europe (e.g. Bowles 2018). Does capital accumulation increase capital concentration and income inequality? And does it spur political support for socialism? Orthodox Marxists like Karl Kautsky, the leading theoretical Marxist of the Second International (1889–1916) considered these mechanisms to be the defining feature of capitalism (Gronow 2016).
However, these mechanisms were disputed at the time, even within the socialist movement. The so-called Revisionists around Eduard Bernstein heavily attacked the orthodox Marxists arguing that, with the help of trade unions, capitalism could be changed for the benefit of workers.
The debate on the observed increase in inequality during Germany’s industrialisation and their political repercussions shaped all later discussions about income inequality in capitalist economies. This influence extended to the work of Kuznets (1955), who predicted – in response to orthodox Marxism – that inequality would first rise with economic development and then fall.
In our recent work (Bartels et al. 2023), we ask – with the benefit of hindsight – which predictions of orthodox Marxism were borne out in the data of 19th century Germany. We also test the competing predictions of the Revisionists around Eduard Bernstein and investigate how trade unions and labour conflict turned out to be related to income inequality and political support for socialism. We do so by drawing on a wealth of historical statistics and modern econometrics. Our approach can be read as a contribution to the history of economic thought that uses econometric methods to test claims made by economists of the past.
Both orthodox Marxists and Revisionists grounded their arguments in statistical evidence from the German statistical office and other contemporary official statistics. For example, in 1899 Kautsky claimed “If ever a theory was splendidly confirmed, it was the theory by Marx in the data from the German occupation and industry census.” (Kautsky 1899, p.68, own translation). Using the same sources but relying on modern statistical techniques, we reevaluate the Revisionism debate. We compile new panel data on capital accumulation, income inequality, capital share, capital concentration, and socialism across 28 districts and 544 counties in Prussia between 1874 and 1913. We measure capital accumulation and top-income shares using regional wealth and income tax statistics. We compute regional capital shares by combining tax statistics with additional data sources on retained earnings and self-employment. We measure capital concentration by average firm size documented by the firm census. Finally, we collected vote shares from the elections of the federal parliament (Reichstag), strike activity across industries, and membership in trade unions.
Does Capital Accumulation Increase Capital Concentration and Income Inequality?
For Imperial Germany before 1914, we have strong evidence that capital accumulation causally led to a growing share of capital in total income and contributed to income inequality, as first predicted by Karl Marx and believed by his followers, but contested by their critics. To establish causality on the effects of capital accumulation, we exploit the spatial diffusion of industrialisation over time across Prussia. The coefficients from our preferred IV estimation indicate that one standard deviation increase in capital accumulation can causally explain roughly 70% of a standard deviation increase of the change in the top 1% income share and more than 75% of a standard deviation increase of the change in the capital share.
Next, the evidence is mixed about the role of concentration within the process of capital accumulation. Note that orthodox Marists at the time considered this prediction to be crucial: “The concentration of capital sets the historical task: the introduction of a socialist social order. It produces the forces to accomplish this task, the proletarians, and it creates the means of doing so: social production.” (Kautsky 1899: 54). According to our evidence, they were right in their prediction that capital concentration was rising steeply. However, they were mistaken in their conviction that this ‘centralisation’ of capital was causally driven by capital accumulation. Given the weight that Kautsky placed on this question, this finding is significant.
Does Capital Accumulation Lead to More Political Support for Socialism?
The orthodox Marxist hypothesis regarding the relationship between capital accumulation and support for socialism was always related to the claim that capital accumulation would lead to an immiseration of the working class, which would fuel the political struggle. In the words of Karl Marx: “Along with the constantly diminishing number of the magnates of capital […] grows the mass of misery […]; but with this too grows the revolt of the working class […].” (Marx 1867, Ch.23). Our findings speak against this prediction. Real wages started to increase, significantly in the 1890s. This is in line with evidence from other industrialised countries at the time, such as the UK (Allen 2009). We also do not find evidence that capital accumulation strengthened political support for socialism through any other channel.
Can Capitalism, With the Help of Trade Unions, be Changed for the Benefit of Workers?
The Revisionists rightfully stressed the role of labour conflict in limiting income inequality. In the wake of the new trade laws of 1869, a growing number of trade unions was formed in Germany. They quickly improved their organisation and managed to mobilise an increasing part of the industrial workforce. After the end of the anti-socialist laws in 1890, unions were allowed to resume their activities. We find support for the Revisionists’ claim that successful strikes helped to redistribute income between capital owners and workers, albeit only temporarily. A 10% increase in the number of successful strikes is associated with a reduction of the top 1% income share by around 1.4 percentage points. These are sizeable magnitudes given that, on average, the top percentile received 12% of total income. Apparently, the greater the number of successful strikes, the more income was redistributed from top-income earners to the middle and bottom of the distribution. What is more, the Revisionist strategy of strengthening the trade unions seems to have been a building block for the remarkable political success of the SPD before 1914.
General Laws of Capitalism and Institutional Change
Our paper illustrates why theories seeking ‘general laws of capitalism’ are bound to fail unless they place historical factors such as institutional and technological change on centre stage (Acemoglu and Robinson 2015). We view our study as a case of how economic theory itself – in the form of Marxist thinking – can lead to policy responses that make a given economic model no longer a good fit for the data. The possibility of institutional change that could limit inequality and let workers benefit from industrial growth was not part of the Marxist predictions. This speaks to the bemoaned dilemma of social democratic socialism: “Socialism cannot be achieved without participation in democratic institutions, but participation erodes the will for socialism” (Przeworski and Sprague 1986: 2).
To conclude, our evidence on Germany before 1914 shows again that any quest for general laws of capitalist development must be elusive. We find that Marx and his orthodox followers were (partly) correct in their diagnosis of the wide-ranging effects of capital accumulation on capital concentration and income inequality. However, they underestimated the scope for institutional adjustment within a capitalist society. Nevertheless, while Marx is long dead, his question about the long-run dynamics of capitalism will continue to haunt us.
References available at the original.
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“Germany before 1914”. Oh.
How’s that “institutional adjustment within a capitalist society” working out in the present?
Swimmingly, if you are of the 0.1%…
> “Germany before 1914”. Oh.
Because, IMNSHO and AFAIK– haven’t done a lot of reading, here — the performance of the German Socialist Party was tragic and catastrophic, culminating in voting the war credits for World War I. They didn’t do so great after the war either, but before the war…. Remember that the Bolsheviks thought of themselves as peripheral, and were hoping and waiting for revolution to break out in the heart of Europe, which was much more industrialized, working class institutions were broad and deep, the peasantry was far weaker, culture and education were at a high level, the party organizations were broader and deeper, and they were wrong, wrong, wrong.
Not to say that matters progressed after that. But to my mind that was the catastrophe that set the stage for failures to come.
Might want to check out “Fascism and Big Business” by Daniel Guerin. Published in 1939, right before the war. Gives a great overview of the economic and political environment that spawned all that. Its available as a free PDF online.
The lack of mentions to the french regulation school surprises me.
A link or some sources would help clarify your surprise.
Or, we could examine the ways in which organized labor’s successes in the last century and the attitude of the working class toward socialism intersect.
I’d posit that capitalists believe labor unions to be the ‘foot-in-the-door’.
On that note, it is interesting how the word solidarity seem to have been wiped from the vocabulary. As best i recall, that was a very central concept for the labor unions.
Song: Who’s Side Are You On
Harlan County -coal strike
And very powerful as a symbol used to good affect by dissidents in Poland IIRC.
It depends where you’re looking from. The movement started as a genuine workers’ concern to reform socialism into more actual form but got quickly captured by PMCs and turned into regime change (not without meddling by usual suspects). Capitalism restored, big industry liquidated, workers fired, public utilities sold out to western corps, pensions raided, public health in steady decline etc. A regime where workers were really able to shake the foundations of the nation turned into one where they are utterly powerless with no language.
The part conveniently left out by the author is that most labor unions during the period of their success were run by socialists and contributed to mass socialist parties that bolstered the success of unions by working with them. So without the socialists and their parties none of these trade unions would exist or be successful… hints at it here ” After the end of the anti-socialist laws in 1890, unions were allowed to resume their activities.”
I’ll put videos of these two lectures which I stumbled on here as they seem to fit the topic and are thought-provoking (even as I disagree some of the statements):
https://www.youtube.com/watch?v=hLtkJ-AgLuY
https://www.youtube.com/watch?v=TEv0uUx3Byo
Each 1.5 hours long, but can be watched at 1.25x or even 1.5x speed.
Oops, I should add: about the rise and fall of neoliberalism globally.
I read Gary Gerstle’s The Rise and Fall of the Neoliberal Order last month in the same interest in the history of neoliberalism. When the New Deal Order (or when both sides of the American political spectrum were subscribed to New Deal liberalism) collapsed, it gave rise to the Neoliberal Order. As the Neoliberal Order falters, what will step up? This is why I think these are important times to be paying attention to the world.
I have a lot of time for Marx’s critique of capitalism, and I think he was a very good classical economist. I am less persuaded by his political science and even less impressed with any “inevitable-ist” predictions based thereupon.
That’s pretty much my take on Marx as well. I’ll add that he was a very good historical analyst. But at the end of the day, he was a product of his time and did buy into the Enlightenment conceit about human rationality. Similar to his “inevitable-ist” predictions, I see his weaknesses as stemming from his inherently Liberal context. He hoped that Liberalism could be harnessed for good.
> even less impressed with any “inevitable-ist” predictions
Absolutely. The argument has been made (I have to read the book) that in his later, post-Capital writings, he abandoned that position (hat tip, Hegel).
correct!
So if labor power is the governor limiting capitalist power then sounds like a big motive for the capitalists to try to get rid of labor or limit it to low skill and easily replaced. Hello Walmart and automated factories?
Freud was another 19th century outsider who certainly created a stir by putting sex in the personality picture but whose psychological theories may have been as notional as those of Marx. Which leads to my own notion that outsiders are great and indeed essential when it comes to pricking the bubble of the insiders but may lack insight when it comes to insider psychology. Better psychologists the key?
Psychohistory ? Foundation is runing the second season…
Running or ruining? Could go either way
The author picked a “special” period to refute Marx, just like back in my “special” day when the affluent society and leisure suits were in. Which led to lots of illusions. Until our elites decided to scrap the New Deal.
Imperialism and imperialist war: kind of missing from the study? Ending the study in 1914? Presumably August, not the end of the year by which time every social democrat party had voted to support “their” country (after having sworn earlier that “workers have no fatherland”).
I did not follow the criticism of Marx that accumulation and centralization were not causally linked. There might be some logic that I missed, but if you look around today, those factors seem integrally linked.
So does the development of capitalism lead mechanically to the adoption of socialism by the working class? Well the German bourgeoisie was pretty worried about this, that’s how we got Hitler.
And it was the communists who led the resistance to fascism and imperialism both in Europe and abroad. But the author is right that there is no automatic link. It is something developed in struggle. And the communists had a lot more to do with the defeat of fascism and the ending of classical colonialism than “liberals” or “progressives”.
So yes, there is no automatic link: our elites “manufacture consent” and when that doesn’t work use repression. But the US is in the midst of a crisis, the history is still being written. and… and… well my crystal ball is a bit cloudy right now…
Every social democrat party had voted to support “their” country? True, if you ignore Russian Social Democratic Labor Party (Lenin’s Bolsheviks with 5 MP + 1 agent provocateur) and Serbian Social Democratic Party (with 2 MP) the progenitor of the Communist Party of Yugoslavia. Both parties led later, arguably, the most successful/authentic socialist revolutions in 20th century Europe.
I think the part that is missing here is that, well…..The capitalists can read Marx, too. On the face of it, under the historical and social conditions in which Marx was writing at the time, he was likely correct, but look at the effect Marx had upon history. Marx kick-started revolutionary movements, and in doing so, he also kick-started counter-revolutionary movements, including preemptive counter-revolutionary movements. Effective preemptive actions, such as the destruction of unions and the (dare I say effective) heavily propaganda-oriented education system we were all subjected to as children in the USA are not taken into account by the author, it seems to me. I doubt very much that Marx ever imagined how impactful his writings would become. There is no way that Marx could have grasped how much his writings would influence future events. Had he understood that, he may have been able to see how hard capitalists/elites would work to undermine not just his so-called predictions, but also his accurate descriptions and critiques.
That is my one frustration with cold war history, the communist nations did not get to thrive or fail on their own. They were/are all under sanctions simply because they exist.
He never imagined so many “styles” either it seems to me (Toffler). All proliferating via the tube at first, and now the net (loudspeakers were bad enough in the 30s). Bill Buckleys, Bill Crystals, and Norquists, and Gingriches. One copasetic with every persona imaginable…that you might be inclined to pull off the rack and try on. There’s the outright Prolefeed like Santos; but really, when it’s in your face so much, the guys I mentioned before who attempt to put on more refined airs seem to me a form of Prolefeed also.
Seems like we’re past Marx, and these days dealing with electronic thought control (transmissions to the tubes, phones, and laptops, not your head). And “the sea of irrelevance” is full of all the ways you can interpret the Espionage Act.
Right now on social media I’m noticing a lot of curio “science” phenomena. I’m suspecting the movement is in a scientistic direction. Basically it is trying to say we are on the verge! ITER is on the verge! [we are converging to more power?] But this may be a distraction, since a more legit direction may be trying to come along at the same time that says life is way more complex/ornate than we thought. We are on the verge of conquering viruses! But then you learn a little more about IgG4 antibodies, and, when you know better how they work, it makes you question being on the verge of the great fix you were starting to believe mRNA vaccines were.
It is more interesting to look at this from the opposite end of the telescope. Take the once beautiful city of San Francisco. I’ve heard they are considering disincorporating San Francisco because it has disintegrated into an entrenched poverty that cannot be mitigated. Now that’s very interesting. For comparison we could call it capital deprivation. So we do indeed have these two opposites. And each is sick in its own way. So it depends on what “capital” is good for. If we want ultimate dysfunction then capital accumulation could be useful. But it’s very difficult to think of that kind of dysfunction as useful. That’s when capital itself becomes utterly pointless.
I think it might be worthwhile to consider a more specific hypothesis.
Kuznets argued (his curve) that the first phases of economic growth lead to rising income inequality but, in the second phase, there is a reduction in inequality. He suggests that this reduction in inequality is the result of the dynamics of ongoing economic growth. What Kuznets actually observed in his research was the decline in inequality in the United States from the First World War which was not an automatic result of growth but rather that of growing self-organization (unions), social unrest, political reforms, and the resulting rise of state redistribution. He noted a type of interlude in the U.S. with inequality declining for a short period of time and rising again from the late 1960s.
It seems more likely that it was all three factor markets (capital, land, and labor) jointly contributing to rising income inequality (see “The Invisible Hand?” by Bas Van Bavel and his analysis of the Medieval City States in Italy between 1000 and 1300, the development of the Dutch Republic between 1100 and 1800, and modern England, the United States, and Western Europe between 1500 and 2000).
Van Bavel maintains that in non-market constrained societies (for example, feudal societies), the introduction of factor markets (land, labor, capital) is the real revolutionary change. This process contains its own seeds of destruction, with one factor market–that of capital/finance– gradually beginning to dominate and, with this wealth, comes the conquering of political power. Then the economy begins to stagnate as happened in Northern Italy, the Low Countries, and later England etc.
His list is evocative:
1) Financial investment yields much more than other investments.
2) The economy begins to resemble a casino.
3) The political power of financiers becomes enormous as they directly or indirectly enter politics.
Bavel’s hypothesis is quite cyclical and he argues that, after the relative fall, these economies do not seem to recover.
A similar, general argument is made by Jonathan Nitzan and Shimshon Bichler in their “Capital as Power: A Study of Order and Creorder”