Weekly Geopolitical Report – Revisiting Scheidel’s Horsemen: Part III (May 4, 2020)

by Bill O’Grady

In Part I of this report, we discussed Scheidel’s thesis on the events that reverse the normal trend of inequality and used this analysis to frame the COVID-19 pandemic.  In Part II, we introduced the equality/ efficiency cycle and discussed the first issue that would be affected by a shift to equality.  In this final Part III of the report, we will address the other four issues, discuss inflation and conclude with market ramifications.

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Weekly Geopolitical Report – Revisiting Scheidel’s Horsemen: Part II (April 27, 2020)

by Bill O’Grady

In Part I, we introduced Walter Scheidel’s four horsemen and examined the impact of COVID-19 using his framework.[1]  This week, we introduce the equality/ efficiency cycle and discuss the first issue that would be affected by the reversal of this cycle.

COVID-19 and the Equality/Efficiency Cycle
We postulate that economies pass through cycles of equality and efficiency.  We developed this concept based on the seminal work of three scholars.  The first strand is the idea of the equality/efficiency tradeoff, which comes from Arthur Okun.[2]  He argued that societies face a tradeoff between equality and efficiency.  Efficiency is necessary for growth, while equality is required for political and social stability.  However, there is no evidence that Okun saw this tradeoff as a cycle; instead, he saw it as two competing forces to be constantly balanced.

The second source of our postulate is from Peter Turchin, who suggested that countries cycle between periods of greater or lesser equality.  In the following chart, Turchin shows this cycle in the U.S. from the early 1800s to 2000.  Measuring inequality (red line) is a simple calculation that originated with Kevin Phillips.  It is the ratio of the largest fortune in the U.S. relative to average household wealth.  The well-being line (blue line) is the detrended and log-transformed level of social optimism, which is the average age of marriage, along with the wages of production workers divided by per-capita GDP, life expectancy and average height.  The chart shows that well-being is inversely correlated to inequality.

(Source: Peter Turchin)

The third source of our thesis comes from Walter Scheidel, who suggests that efficiency cycles are the norm due to the power of capital.  Efficiency continues until it is stopped by one of four major disruptions: mass mobilization war, revolution, societal collapse or pandemic.

Therefore, our thesis is the following:

  1. Societies face a tradeoff between equality and efficiency.
  2. This tradeoff leads to cycles in which the goals of one or the other dominate.
  3. The natural course is for efficiency to dominate because capital tends to accumulate economic and political power over time.
  4. What reverses the dominant trend is a cataclysmic event, i.e., mass mobilization war, revolution, collapse of social order, pandemic.
  5. What reverses an equality cycle is persistent inflation, which is usually supported by equality policies of trade impediments, immigration control and regulation.

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[1] Scheidel, Walter. (2017). The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century. Princeton, NJ: Princeton University Press.

[2] Okun, Arthur. (1975). Equality and Efficiency: The Big Tradeoff. Washington, D.C.: Brookings Institution Press.

Weekly Geopolitical Report – Revisiting Scheidel’s Horsemen: Part I (April 20, 2020)

by Bill O’Grady

Although we do cover current events in the Weekly Geopolitical Report, we also try to anticipate changes that may be a consequence of current situations.  The COVID-19 crisis is just such an occasion.  We regularly update the current path of the virus in our Daily Comment, but we will consider the longer-term ramifications of COVID-19 in this report.  We have recently discussed the pandemic, in general, in our weekly reports, and in the previous two installments we discussed how the virus has frayed relations in the EU.

This week, we frame the impact of the pandemic using Walter Scheidel’s book on inequality, The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century.[1]  We reviewed this book in a previous WGR published in 2017.  In Part I, we will examine Scheidel’s thesis that says inequality tends to be resolved by violent or extreme events.  Simply put, history shows little evidence that periods of high inequality are reversed without tragedy.  Using this thesis, we will examine how the COVID-19 pandemic best fits into Scheidel’s framework.  In Part II, we will discuss the equality/efficiency cycle and introduce one of five problems that could be resolved by the pandemic.  In Part III, we will examine the other four problems, discuss the impact of inflation and conclude with market ramifications.

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[1] Scheidel, Walter. (2017). The Great Leveler: Violence and the History of Inequality from the Stone Age to the Twenty-First Century. Princeton, NJ: Princeton University Press.