Western nations have seen remarkable per capita wealth growth over the 20th century and, in this period, wealth inequality has also fallen. This column explains this development by the emergence of inclusive political and economic institutions that broadened access to homeownership and pensions for millions. It questions previous explanations and offers several lessons for today’s policymakers to empower those below who are still building wealth.
Western households are richer in per capita terms than in the past. Rising homeownership, the emergence of pension funds, increasing house and stock prices, and entrepreneurs building successful companies are behind this development.
Several previous studies have established that wealth inequality declined over the 20th century (see e.g. Atkinson and Harrison 1978, Goldsmith 1985, Roine and Waldenström 2015, Wolff 2017, Scheidel 2018, Smith et al. 2023). In a notable contribution, Piketty (2014) explained this equalisation with major shocks to capital, mainly wars and progressive taxes, that slashed the capital of the rich and equalised wealth until the 1980s, when neoliberal policies reversed the trends.
In a new book (Waldenström 2024), I review recent evidence and reassess existing data to arrive at a different conclusion, both regarding the key determinants behind the historical wealth equalisation and how to interpret recent inequality trends.
The great wealth equalisation
Looking at the facts of wealth and wealth inequality, we see the trends are actually quite clear. Real per capita net worth has multiplied many times over the past century, and the value growth accelerated after the 1980s.
Wealth inequality has declined over the past century and is today much lower than it was 100 years ago. Figure 1 shows this development by zooming in on the richest 100th in the population. At the start of the 20th century, the richest 1% held well over half of all private wealth. Then something happened. After the 1910s, wealth inequality started declining, and it went on until the 1970s, when the top share landed at 20%. This is the ‘great wealth equalisation’ of the 20th century.
After 1980, European wealth concentration has stayed at historically low levels, exhibiting little or no trend until today. The US experience is quite different, and its wealthiest percentile has increased its wealth share to between 35% and 40% today – much higher than in Europe, but lower than prewar levels of both the US and Europe.
Figure 1 The great wealth equalisation: Top 1% wealth share, 1890–2020
Source: Waldenström (2024).
Lifting the bottom, not lowering the top
Have the recent increases in wealth concentration seen in the US come at the expense of the middle class? The answer is clearly no. Figure 2 shows average annual growth rates in Western countries. Top wealth holdings grew since 1980 by 4.3% per year, but the rest of the population also experienced wealth growth at 3.1% per year, a historically high level.
Looking at the long-run development, Figure 2 shows that the historical decline in top wealth shares (white bars) was due to expanding ownership in the bottom 90% (blue bars) rather than decreasing wealth holdings in the top 1% (red bars).
Figure 2 Wealth and inequality trends: Lifting the bottom, not lowering the top
Note: Average annual growth in real wealth per adult in blue and red bars over six Western countries (see Figure 1).
Source: Waldenström (2024).
These findings offer a new and nuanced narrative of capital formation and wealth distribution in modern capitalist economies. They challenge the view that attributes 20th-century equalisation primarily to shocks to capital of the rich: wartime destruction and redistributive capital taxes. Non-belligerent countries like Sweden and Spain followed similar trends as the countries engaged in warfare. Capital taxation indeed restrained entrepreneurship and the accumulation of large fortunes, but the heaviest historical increases in tax burden fell on workers’ wages rather than capital.
Two widely held assets account for the build-up of wealth among ordinary households: housing wealth and pension funds. A century ago, wealth was largely concentrated in agricultural and business assets, owned by a small elite. Political and economic institutional reforms then appeared. Universal suffrage led to broadened education and improved working conditions, which in turn increased workers’ productivity and allowed them to start saving, first in a home and then for old age. Today, housing and pension savings comprise three-quarters of private wealth in Western countries.
What policymakers can learn from the history of wealth
History never fully repeats itself, but five central policy lessons stand out from this new wealth narrative.
- Question zero-sum thinking. Viewing the economy as a zero-sum game – that someone’s success comes at someone else’s expense – has little support in the data. During the 20th century, ownership of assets increased at both the top and the bottom of the distribution. New businesses created products, jobs, incomes, and tax revenues that were not ‘taken’ from anyone, indicating how dynamic and value-creating growth lifts everyone.
- Homeownership benefits households and society. Private homeownership is associated with lower wealth inequality, less depreciation than in rented housing, a toehold for borrowing, and high long-run investment returns at low risk.
- Private pension planning provides security through funded savings. A private pension buffer strengthens personal finances in retirement and provides the opportunity to invest beforehand if needed. Funded private pension systems also address the demographic trend towards more retirees and fewer contributing wage earners.
- Tax capital income, not wealth. Taxes on capital income, such as corporate profits and dividends, are most effective in both redistribution and revenue generation (Bastani and Waldenström 2020). Wealth taxes, and even inheritance taxes, have always caused problems. They drain the free resources of entrepreneurs, are difficult to collect, and generate little revenue, so most countries no longer use these capital taxes.
- Power and wealth: strengthen politics and media without hindering business activity. Wealthy individuals can sometimes leverage their resources to exert disproportionate influence over policymakers and media. The best way to address this is not by limiting business growth, but by protecting political and media institutions from undue influence. Effective measures could include enhanced transparency, stricter rules on campaign contributions, and support for smaller media outlets.
In summary, economic history shows that broad and equitable ownership is achieved not by restricting those at the top – where successful entrepreneurs thrive – but by empowering those below who are still building wealth. Two key assets, housing and pension savings, have been especially vital in this process. Promoting homeownership and long-term savings, therefore, fosters both wealth creation and economic equality.
Source : VOXeu
