9: Capitalism and Income Inequality

The extent to which capitalism has increased or decreased inequality has generated significant debate from the 18th century onwards. The capitalist system allows people to derive income and wealth from assets that they own. The most valuable assets are those that are scarce. For 18th- and early 19th-century classical economists such as Smith and Mill good quality agricultural land was the scarce asset and therefore the most important source of income and wealth (Smith, 1791; Mill, 1848). However, from the mid-19th century onwards, in the light of the Industrial Revolution, Marx and neoclassical economists emphasized the importance of capital with which to purchase machinery and factory buildings, and finance inventory (Marx, 1961). Gradually skills possessed by the individual moved to the fore. The second Industrial Revolution in the US emphasized the desirability of skill in organizing large businesses and trusts and in foretelling the future through speculation (Hayek, 1949; Kirzner, 1973). Scarcity factors have become more intangible over time. From the 1930s onwards ‘knowledge’ as possessed by professional managers and scientist became a value asset (Harper, 1995). Finally, from the 1970s onwards, entrepreneurship began to be recognized as a scarce factor. The change in emphasis on scarce assets had the potential to remove the inequality that had existed whereby income and wealth were concentrated in the hands of large landowners.

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