What can we learn from Marx about inequality? The current debate about inequality frequently refers to ideas about capitalist dynamics that were first formulated by Karl Marx and his followers in 19th century Europe. Does capital accumulation increase capital concentration and income inequality? And does it spur political support for socialism? Orthodox Marxists like Karl Kautsky, the leading theoretical Marxist of the Second International (1889–1916) considered these mechanisms to be the defining feature of capitalism (Gronow 2016).
However, these mechanisms were disputed at the time, even within the socialist movement. The so-called Revisionists around Eduard Bernstein heavily attacked the orthodox Marxists arguing that, with the help of trade unions, capitalism could be changed for the benefit of workers. Both orthodox Marxists and Revisionists grounded their arguments in statistical evidence from the German statistical office and other contemporary official statistics. In our recent work (Bartels et al. 2023), we reevaluate the Revisionism debate using the same sources but relying on modern statistical techniques. We compile new panel data on capital accumulation, income inequality, capital share, capital concentration, and socialism across 28 districts and 544 counties in Prussia between 1874 and 1913.
Does capital accumulation increase capital concentration and income inequality?
For Imperial Germany before 1914, we have strong evidence that capital accumulation causally led to a growing share of capital in total income and contributed to income inequality, as first predicted by Karl Marx and believed by his followers, but contested by their critics. To establish causality on the effects of capital accumulation, we exploit the spatial diffusion of industrialization over time across Prussia. The coefficients from our preferred IV estimation indicate that one standard deviation increase in capital accumulation can causally explain roughly 70% of a standard deviation increase of the change in the top 1% income share and more than 75% of a standard deviation increase of the change in the capital share.
According to our evidence, orthodox Marxists were right in their prediction that capital concentration was rising steeply. However, they were mistaken in their conviction that this “centralization” of capital was causally driven by capital accumulation.
Does capital accumulation lead to more political support for socialism?
The orthodox Marxist hypothesis regarding the relationship between capital accumulation and support for socialism was always related to the claim that capital accumulation would lead to an immiseration of the working class, which would fuel the political struggle. Our findings speak against this prediction. Real wages started to increase significantly in the 1890s. We also do not find evidence that capital accumulation strengthened political support for socialism through any other channel.
Can capitalism, with the help of trade unions, be changed for the benefit of workers?
The Revisionists rightfully stressed the role of labor conflict in limiting income inequality. We find support for the Revisionists claim that successful strikes helped to redistribute income between capital owners and workers, albeit only temporarily. A 10% increase in the number of successful strikes is associated with a reduction of the top 1% income share by ca. 1.4 pp. These are sizable magnitudes given that, on average, the top percentile received 12% of total income. What is more, the Revisionist strategy of strengthening the trade unions seems to have been a building block for the remarkable political success of the SPD before 1914.
To conclude, our evidence on Germany before 1914 shows again that any quest for general laws of capitalist development must be elusive. We find that Marx and his orthodox followers were (partly) correct in their diagnosis on the wide-ranging effects of capital accumulation on capital concentration and income inequality. However, they underestimated the scope for institutional adjustment within a capitalist society. Nevertheless, while Marx is long dead, his question about the long-run dynamics of capitalism will continue to haunt us.
Bartels, Charlotte; Kersting, Felix, Wolf, Nikolaus (2023). Testing Marx: Capital Accummulation, Income Inequality, and Socialism in Nineteenth-Century Germany. Review of Economics and Statistics, forthcoming.
Gronow, Jukka (2016). On the Formation of Marxism: Karl Kautsky’s Theory of Capitalism, the Marxism of the Second International and Karl Marx’s Critique of Political Economy. London: Haymarket Books.