Governments of all stripes across the world have, since the turn towards what are often termed ‘neo-liberal’ policies in the late 1970s, cut taxes for the richest individuals in society, ostensibly to encourage them to engage in more entrepreneurial activity and stop them leaving for lower tax nations. There is certainly no doubt that the incomes of the top 1%, and even moreso for the top 0.1%, have increased dramatically more than middle and lower income earners since that time.
But prosperity is not all down to those currently at the top of society. Those of us lucky enough to live in industrialised countries with a high standard of living and the prospects of continuing economic growth in between periodic recessions, are ‘standing on the shoulders of giants’, to coin a phrase. Whether rich or poor, we live in a society with capitalist institutions which, more or less between different countries, encourage continuous technological advancement and productivity growth. But we inherited these institutions which were established in the past and which continue to evolve. Markets, different kinds of business organisation, finance and the state, among others, all have a long history and, to greater or lesser degrees, create an environment in which wealth can be created.
The very highest earners never make their money in a historical or social vacuum. If they had been born in a very poor country without the kinds of institutions mentioned above, they would have found it impossible to earn nearly as much. Even some of the poorest people in rich countries would find that formal employment is absent and the prospects of improving one’s lot to a significant degree would probably be close to nil. The investor Warren Buffet has admitted as much; that if he had been born and tried to make a living in a country wracked by civil war and with poor growth prospects and weak institutions, he would have had little hope. It is the historically gifted institutions of the US that have given him the opportunity to make his fortune, plus some skill on his part.
National prosperity can be seen, from one angle, to be the outcome of the economic activity of millions of individuals interacting in society. But, more often than not, they did not design capitalist institutions such as the rule of law, a large role for markets, a financial sector providing credit to businesses etc. This was due to the cumulative efforts of those individuals living before them, or the particular historical circumstances of the nation. They can of course contribute to economic and social evolution through their innovations in the spheres of business, government and other organisations. Their prosperity and standard of living are thus partly the consequence of a gigantic number of decisions made in the public and private sectors in the past, which shape their activity in the present and future. This is the dynamic referred to in sociology and political economy: the interaction between human agency and social structure. Each is shaped, but not wholly determined, by the other.
We inherit institutions as the ‘rules of the game’ in our society and economy. The past accumulation of knowledge, technology and the use of traditional factors of production (land, labour and capital) also play a large part in the determination of our activity and the income we can generate in economic life. Clearly there is also a significant role for individual action, but this remains shaped by history and the social structures in which we participate. It may be difficult to separate the impact of human agency and social structure on economic and social outcomes, and there is thus a place for humility in any success individuals manage to achieve in life.
Past investment spending by businesses and governments, in factories, offices and machines on the part of the former, or in education, scientific research and infrastructure by the latter, and whether they turn out to be productive or not, also play a large part in creating the economic environment in which we operate. Once again, our present and future activities are partially shaped by this kind of historical accumulation, and help to shape our behaviour. When we mentally trace a path backwards in time to attempt to locate the sources of the economic outcomes we have experienced in life, we can find all sorts of historical actors, akin to examining a family tree in genealogy.
The prosperity of all, from rich to poor, is therefore inevitably bound up with that of others, and this has become especially marked in capitalist economies which have helped to generate unprecedented volumes of international trade and investment. From the individual to society and the nation-state to the global economy, all have particular histories which play a large role in determining the opportunities and constraints facing each of them in the present, shaping future economic outcomes. This is not to say that we are powerless in the face of our inheritance. Far from it. But the existing, historically created, economic and social structures set the context for individual action in the present, as much as individuals play their role in transforming social structures. This is a justification for the notion of path dependence: history matters.