Comparing Income and Wealth Inequality in Pre-Industrial Economies: Lessons from 18th-Century Spain
By Esteban A. Nicolini (Universidad Carlos III de Madrid) and Fernando Ramos Palencia (Universidad Pablo de Olavide)
Abstract: In this new working paper on preindustrial inequality, Nicolini and Ramos Palencia build upon their earlier work on income inequality in eighteenth-century Old Castile (Nicolini and Ramos Palencia 2015) by looking into one particularly important, and difficult to assess, aspect: how to reconstruct, for a given preindustrial society, estimates of both income and wealth inequality – considering that the sources, according to the place and the period, have the tendency to inform us only about one of the two. Given the amount of new information about long-term trends in preindustrial inequality, of either income or wealth, which has been made available by recent research, the authors point at what clearly constitutes one of the next steps we should take and in doing so, they also provide a useful contribution to the methodological debates which are taking place among scholars working on preindustrial inequality.
Distributed by NEP-HIS on 2016-03-29
Review by Guido Alfani
In this paper Nicolini and Ramos explore the connection between income and wealth for a large sample of communities from different Spanish provinces: Palencia, Madrid, Guadalajara and Granada. They combine information from two different sources:
1. the Catastro de Ensenada (ca. 1750), which provides information about household income, and
2. probate inventories (covering the period 1753-68), a source which has often been used to estimate wealth inequality.
These two sources are combined using nominative linkage techniques in order to take advantages of one to solve the weaknesses of the other. In particular, the almost-universal scope of the survey within the Cadastre enables Nicolini and Ramos to assess with certain precision the actual coverage of the probate inventories (which tend to be biased towards the upper part of the distribution). This allows them the resampling or weighthing of the information to improve the study of wealth inequality. It should be underlined that the Catastro de Ensenada is a truly exceptional source. It was an early attempt at introducing a universal tax on income. As the new tax was proportional and should have replaced a number of indirect provincial taxes with regressive effects, this fiscal innovation clearly moved in the direction of a more equitable system of taxation. Unfortunately, the new tax was never implemented – but at the very least, the attempt to introduce it generated a vast amount of useful information.
Nicolini and Ramos were able to reconstruct both income and wealth for 194 observations, out of the much larger sample of 6,214 households for which they only have information about income. Nicolini and Ramos then explore the connection between income and wealth, finding (as was expected) a very strong correlation. However, they go much deeper, thanks to an econometric approach in which the distortions in the sample (determined in particular by over-representation of rich households) are corrected by weighting. They obtain many interesting and potentially useful results, in particular:
- they estimate the average rate of return to wealth to be 2.9% p.a. – which is, generally speaking, much smaller that usually implied in the literature. For instance, the rate of return to wealth implied by Lindert in his work on the Florentine Cadastre of 1427 was 7% p.a. (see below). However, if the association between income and wealth is analyzed by considering their logarithm (which is the econometric specification preferred by Nicolini and Ramos), then the elasticity of income to wealth varies between 0.4 and 0.9 depending on the region. This means that a 10% increase in household wealth is associated to an income increase comprised in the 4-9% range. This range is consistent with empirical findings in many studies of past and present societies, all of which suggest that income inequality is lower than wealth inequality;
- the distribution of household income increases less steeply than the distribution of household wealth. This might be due to the fact that labour income is relatively larger in the bottom part of the distribution, or that the wealth of the bottom part of the distribution consists for a larger part of income-producing assets, while the wealth of the richest people would consist also of other assets, including (unproductive) status goods and luxuries as well as cash;
- the relationship between wealth and income differs depending on the sector of activity of the household head (primary vs secondary/tertiary) and on the place of residence – although somewhat surprisingly, and differently from what reported for other European regions (for example Tuscany by Alfani and Ammannati 2014), Nicolini and Ramos do not find that urban households had greater wealth than rural ones. In the study by Nicolini and Ramos urban and rural wealth were usually on par, but in the extreme case of Guadalajara urban dwellers were less wealthy than rural dwellers.
This paper makes many interesting and potentially important contributions to the study of inequality in the early modern period, a field which has been particularly fertile in recent years. First, it provides new information about inequality in the Iberian peninsula, integrating other recent studies (e.g. Santiago-Caballero 2011; Reis and Martins 2012). Secondly, it contributes considerably to the development of a methodology to translate in a non-arbitrary way income distributions into wealth distributions, and vice versa. This is a crucial point, which deserves some attention.
The Ensenada Cadastre is an exceptional source as it provides data on income. As a matter of fact, most other sources of the “cadastrial” kind are essentially property tax records, which always list real estate and sometimes other components of wealth – but not income. However, it has also been argued that for the preindustrial period, in most instances wealth distributions are the best proxy we have for income distributions (Lindert 2014; Alfani 2015). This being said, moving from the good-quality distributions of wealth that have recently been made available for different parts of late medieval and early modern Europe (in particular, Alfani 2015; Alfani and Ryckbosch 2015) to acceptable distributions of income is clearly a worthy pursuit.
I would differ with Nicolini and Ramos Palencia in their statement that theirs is the first attempt at studying together income and wealth distributions in the pre-industrial period. For example, Soltow and Van Zanden (1998) did so in their study of the Netherlands. However, Nicolini and Ramos do provide useful and interesting insights into how to convert wealth distributions into income distributions. Many such attempts are currently underway and there are earlier examples, like Lindert’s method to convert the distribution of wealth in the 1427 Florentine catasto into an income distribution (results used in Milanovic, Lindert and Williamson 2011).
Moreover, Nicolini and Ramos Palencia stress many potential pitfalls in procedures of this kind. This being said, there are aspects of their current reconstructions which are a bit surprising and might be the result of sampling issues, as 59% of the 194 observations relate to the province of Palencia. Is Guadalajara, where rural dwellers were wealthier than urban dwellers, an exceptional case or does this depend on the very small sample (just 12 observations) the authors have for that region? To dispel any doubts, more probate inventories should be collected, in order to improve the territorial balance within the sample and to better account, both in the estimation process and in the econometric analysis, for possible regional variations. However, this does not alter the general conclusion. The paper by Nicolini and Ramos is a very useful piece of innovative research, grounded in new archival data and packed with useful insights about how to improve our knowledge of inequality in the pre-industrial period.
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