Urban political structures and the historical roots of wealth inequality

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The evolution of wealth inequality is driven in part by past political structures. This column presents a case study from Germany, focusing on the history of the southern city-state, Nördlingen. The results of the study highlight how past political elites were able to exploit extreme moments of crisis, such as wars and epidemics, to enrich themselves, driving up wealth inequality. In fact, the extent to which a region had an oligarchic political structure transpires to be a clear driver of wealth inequality trends, today as in the past. 


 

Wealth inequality is an important issue. It is connected to the distribution of political power, has the potential to destabilise societies, and can have profound effects on economic development. Recent research by economic historians shows that about three quarters of the inequality growth that led to the high levels seen in 20th century Europe happened in the early modern period – that is, roughly between the years 1500 and 1800 (see Figure 1).

Despite wide interest in the topic, economists have little systematic evidence about the causes of long-run historical inequality growth. A forthcoming paper in the Journal of Economic History investigates to what extent the closed (or ‘oligarchic’) political structure of cities – typical of wide swathes of Europe at the time – can help explain why wealth was so unequally distributed at the dawn of the modern age, as economists like Thomas Piketty have shown. Put differently, the research asks to what degree clusters of urban elites were able to manipulate the system to better themselves at the expense of their fellow citizens, and how this affects wider society today.

Figure 1: Wealth inequality in Europe, 1300-2010 (top 10% wealth share)

Notes: The Alfani series averages data from the Sabaudian State, the Florentine State, the Kingdom of Naples, and the Republic of Venice. The Piketty series averages data from France, the United Kingdom and Sweden.

Source: Alfani (2021) 

 

What about the impact of politics on inequality?

So, the structure of power is important in terms of shaping trends in wealth disparities. To study the broad association between oligarchic political structure and inequality, it is possible to construct a city-level panel dataset registering wealth inequality (reconstructed from wealth tax registers) and participative local democracy in a sample of German cities between 1500 and 1800. The data show that cities without elections to the city government displayed substantially greater wealth inequality. For example, the top 1% wealth share was about 5% higher, and the top 5% share was about 6% higher in places without elections – that is, in cities that had a more oligarchic political system. Clearly, lower political representation meant a wider wealth gap.

Individual case studies can help shine a light on wider patterns. To understand better the mechanisms behind this relationship, it is possible to use a second panel dataset (also based on archival tax documents) of all taxpayers in a Southern-German city-state: Nördlingen. This place was very similar in terms of its political institutions to many other cities in preindustrial Europe – for example, Italian city-states such as Venice or Genova. Using approximately 27,000 data points of individuals during the 16th and 17th centuries, it is possible to study how personal wealth and wealth distribution changed when an individual became part of the government in an oligarchic political system. 

Taking up a government position brought about personal profits for the lucky ones. The analysis shows that political elites increased their personal wealth substantially after they entered office – by 44-55%, on average. Those that had the greatest political power in the city – mayors – increased their personal wealth even more – by another 30-34%. This increase in the personal wealth of political elites contributed to higher wealth inequality in the city-state overall. For example, government members were 7-10% more likely to be part of the top 5% of the wealth distribution. The sources of government members’ personal enrichment were most likely a combination of substantially increasing salaries (over which government members decided themselves), patronage, and the embezzlement of public money. 

Interestingly, government members enriched themselves the most in a period of severe socio-economic crisis. For example, officials increased their personal wealth substantially during the Thirty Years’ War (1618-1648), an event that coincided with a lethal plague wave hitting the city, killing about 40% of the local population. This suggests that moments of severe socio-economic crisis, such as warfare and epidemics — which were very frequent in the pre-industrial world — could be a veil for political elites’ personal enrichment at the expense of the wider population, contributing to higher inequality. Never waste a good crisis, after all.

This behaviour has dangerous aggregate effects. Many researchers have argued that contemporary politicians who enrich themselves increase economic inequality in the societies they govern (Acemoglu, 2008; Querubin and Snyder, 2013). The behaviour of political elites can also help explain the historical roots of wealth inequality (Scheidel, 2017; Piketty, 2020; Alfani, 2021). This is relevant because some of the standard explanations for economic inequality, such as technological progress, industrialisation, unfettered markets or economic growth were practically non-existent in the period before 1800 (Kuznetz, 1955; Deaton, 2012; Piketty, 2014). Economists are still searching for reliable evidence on the drivers of inequality at that time (Milanovic, 2018).

 

How reliable is the evidence?

The analysis is not without weaknesses. The results flagged in this article mainly derive from the fact that data about wealth inequality is very rare for the time before the 19th century (when national statistical offices started collecting systematic data). The city-level dataset contains ‘only’ 33 cities (this is, however, one of the largest datasets currently available for the cities of a single European country in the early modern period). Similarly, the individual-level data are available for a single city-state only. This because the city created its tax registers in a way that was extraordinarily systematic for the time, because the registers stood the test of time over the last 400 years, and because it is almost impossible to compare wealth across places in a time when there was no uniform currency. It is possible that this city’s political structure was, in some key respects, typical of urban Germany, and indeed of much of early modern Europe. So, the conclusions drawn may well hold more widely.

 

What should researchers do next?

As is often the case, new data will help derive new insights. Future research will hopefully make more individual-level data available, to provide a broader empirical basis for the conclusions drawn. The precise mechanisms behind the enrichment of political elites are still poorly documented. 

To understand the roots of inequality, but also to avoid glorifying historical accounts of political elites in the past, economists need to understand better whether politicians, for instance, stole public money or engaged in patronage (which was partially accepted at the time). Similarly, other characteristics of pre-industrial political structure, such as feudalism in agricultural areas, have not been systematically studied yet but hold considerable promise to explain why inequality was already high in the pre-industrial world. 

Understanding the power structures of the past is vital for charting the trajectory of wealth inequality over time. The more we can understand about our ancestors, the better we will be able to understand our economies and societies today.

Author: Felix Schaff