A century and a half ago, Karl Marx both gloomily and exuberantly predicted that the modern capitalism he saw evolving would prove incapable of producing an acceptable distribution of income. Wealth would grow, Marx argued, but would benefit the few, not the many: the forest of upraised arms looking for work would grow thicker and thicker, while the arms themselves would grow thinner and thinner. This injustice would provoke revolt and revolution, producing a new, better, fairer, more prosperous, and far more egalitarian system.
Ever since, mainstream economists have earned their bread and butter patiently explaining why Marx was wrong. Yes, the initial disequilibrium shock of the industrial revolution was and is associated with rapidly rising inequality as opportunities are opened to aggressiveness and enterprise, and as the market prices commanded by key scarce skills rise sky-high.
But this was – or was supposed to be – transient. A technologically stagnant agricultural society is bound to be an extremely unequal one: by force and fraud, the upper class push the peasants’ standards of living down to subsistence and take the surplus as the rent on the land they control. The high rents paid to noble landlords increase their wealth and power by giving them the resources to keep the peasants down and widen the surplus – for, after all, they cannot make more land.
By contrast, mainstream economists argued, a technologically advancing industrial society was bound to be different. First, the key resources that command high prices and thus produce wealth are not fixed, like land, but are variable: the skills of craft workers and engineers, the energy and experience of entrepreneurs, and machines and buildings are all things that can be multiplied. As a result, high prices for scarce resources lead not to zero- or negative-sum political games of transfer but to positive-sum economic games of training more craft workers and engineers, mentoring more entrepreneurs and managers, and investing in more machines and buildings.