First, before 1914, and especially before 1815, changes in inequality within and between European nations were more pronounced than has been appreciated. Introducing the concept of real, as opposed to nominal or conventional, income inequality reveals these pronounced trends.
Second, between 1500 and 1815 the prices of staple foods rose much more than the prices of what the rich consumed. This greatly magnified the rise in real income inequality, because in those days the poor and the rich depended more heavily on buying services from each other than is true today. The poor needed land-intensive food and housing, and land was owned by the rich. The rich, in turn, hired labor services much more than today, so that the fall in workers’ real wages became a fall in the cost of an affluent lifestyle.
Third, the opposite happened between 1815 and 1914, for two main reasons. One is that real wages rose, and servants became more expensive. The other is that globalization cut the price of grains relative to other goods and services.
Fourth, since 1914, relative price movements have had little effect on trends in income inequality. The earlier price effects were not repeated, because the budget shares spent by rich and poor on different categories of goods and services have become less starkly different than they were in earlier times. The poor now spend only a tiny share of their income on food, and the rich cannot afford many servants. Thus, the main swings in relative prices, such as the oil shocks since 1973, have had similar effects on purchasing power up and down the income spectrum.
In retrospect, the wartime era between the 1790s and 1815 was an historic high-water mark of expanded population, scarce food, cheap servants, and wide income gaps in Western Europe. It was the kind of period that could have inspired pessimistic theories of population and economics. If one were inclined to fear that population growth would cause food scarcity and a drop of wages back down to subsistence, the year 1798 would have been a good time to write an Essay on Population persuading a wider public to take these fears seriously. And if one thought that population growth tended to raise land rents for the rich at the expense of workers and capitalists, with work- ers’ wages again sinking back to subsistence, 1817 would have been a good time to publicize this prediction in a book on the Principles of Political Economy and Taxation.
Interestingly, the century between 1815 and 1914 saw a decline of inequality. Real wages rose because of increasing productivity, falling trade barriers and thus falling prices. The secular deflationary trend has contributed to decreasing inequality. In other words, long-term deflation has mitigated poverty and inequality. DEFLATION IS NOT BAD AND INEQUALITY CAN FALL EVEN WITHOUT MASSIVE GOVERNMENT REDISTRIBUTION.