How wealth inequality is holding us back

Regular readers will know the extent to which I suffer for knowledge. And so it was that I found myself at the National Association of Pension Funds conference in the rain in Edinburgh this week.

The good news is that a good many fund management companies present at the conference were handing out free umbrellas (thanks, everyone) and also that my search for nuggets of interest was a great success.

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He suggested that it won't be long now before extreme poverty is actually eradicated (on current projections almost no one will be living on less than a dollar a day by 2028) and put forward a brilliantly graphic example of just how much richer we have become by looking at the cost of an hour of light.

How long, Ridley asked, would it have taken someone on the average wage to buy an hour of artificial light to read by at various points in history in the US? In 1800, the answer was six hours. In 1870, it was 15 minutes. In 1950, it was 8 seconds. By 1997, it was a mere half a second.

But the graph he showed that grabbed me most was the one on income inequality: look at a global measure and it seems that not only is extreme poverty disappearing, but the world taken as a whole is becoming a more equal place.

This is excellent news on all sorts of levels but particularly because research increasingly shows that progress moves at its fastest when wealth is relatively well distributed.

I am reading a book by historians Charles Foster and Eric Jones on this very subject (The Fabric of Society and How it Creates Wealth, Arley Hall Press).

Foster and Jones traced the social and economic conditions in four societies that manufactured cotton cloth between 1100 and 1780 northern Italy, Germany, Lancashire and Holland and looked at how and why these particular areas were so successful at generating wealth. There appears to be a clear answer.

In each country, a society emerged where a large number of families owned a small amount of capital "wealth was fairly widely distributed" (perhaps as a result of having plural political institutions). "Vigorous technical and social innovation then occurred" which created rising wealth across the board probably because "many families had enough wealth to permit innovators to experiment and establish their new ideas."

In the end, however, some families worked it so that they ended up economically and politically more successful than most others, wealth became concentrated in a few hands and that was that: plural government turned to oligarchy, innovation declined and "these societies ceased to be able to generate increasing wealth for their citizens".

A quick look at one village in northern Italy in 1243 Piuvica. Records (amazing that there are any, isn't it?) show that there were 238 resident householders in the village and that the top 50% controlled 80% of the wealth.

You might think that sounds a lot, but in the great scheme of history, it suggests an astonishingly equal distribution.

Similar figures exist for what was the city state of Orvieto. This was the period in which business development surged in northern Italy, when the quality of cloth (silk, cotton and wool) surged and when great innovation appeared in accounting and banking. But with wealth came greed.

And after 1300 or so, committees of citizens gave way to chief magistrates who often succeeded in making the position hereditary to their families. They became signori.

Next came rising budgets and taxes and the armies of officials needed to administer them. By 1427, you could see the changes in the records from the city of Florence: 8% of the households held 80% of the wealth.

This came with some good (just as the concentration of wealth in the UK post-industrial revolution gave us 150 ornamental lakes designed by Capability Brown, the Italian concentration gave us the artwork of the Italian Renaissance), but it might also have had something to do with the fact that, by 1700, "an exporting textile industry in Italy barely existed and the country was no longer rich".

You'll be wondering what my point is. It is this: wealth inequality may be, as Ridley suggested, falling across the globe, but in the West, it is rising to uncomfortable levels.

In the US, the top 1% of the population owns more than 35% of the nation's wealth, while the top 20% owns not far off 90%. The bottom 80%, between all of them owns a mere 7%.

The UK looks pretty rubbish when it comes to wealth distribution as well. The top 1% have something in the region of 20% of the wealth and the top 10% holds 50%. And, as I write, a good 150 ex-hedge fund managers, chief executives or retired politicians-turned consultants are probably in the process of designing new lakes for their estates or, as Foster puts it when he refers to the UK's rich after the industrial revolution, "expending their talents on trivial pursuits".

The wider world might be doing fine in the distribution stakes. But, if progress even partly depends on a good distribution of wealth, this shift doesn't bode particularly well for us.

This article first appeared in the Financial Times.