Wealth Inequality and Income Redistribution: Theory and Evidence from Prussian Landowners

Author – Nils Henrik Blossey.

Abstract :

Wealth inequality is on the rise again in the advanced economies after having declined for much of the 20th century. However, while this historical trend is well-documented, scholars still struggle to explain why wealth inequality remains largely removed from political conflict, and why voters refrain from redistribution through the electoral process.

In this paper, I argue that wealth inequality remains absent from political conflict because governments have found alternative ways to supply the economic functions that wealth provides to average households: insurance against income shocks. Income shocks confront propertyless citizens with poverty and increase their willingness to challenge the unequal distribution of wealth. For this reason, wealthy elites have incentives to support income transfers to the poor to replace the insurance functions that broad asset ownership would otherwise provide, thereby stabilizing the property order.

I study this proposition in the context of late 19^th-century-Prussia, where agrarian estate owners – the infamous Junkers – controlled vast shares of land in Germany’s Eastern provinces. Focusing on landholding inequality, I suggest that large landowners leveraged income transfers to offset the economic insecurities of landless workers in the post-feudal rural labor market, where workers could not rely on landownership as insurance against poverty.

To test these predictions, I digitize a unique survey of poor relief spending in Imperial Germany in 1885, which I combine with data on landholding inequality in Prussian counties. This survey also documents the relief expenditures on Prussia’s estates, which often formed independent administrative units, allowing us to identify social benefits subject to the discretion of landowners.

I demonstrate that estates spent as much on social benefits per head as urban municipalities, and significantly more than otherwise comparable rural municipalities. OLS and IV regressions show that higher levels of landholding inequality were associated with higher poor relief expenditures. The composition of relief recipients reveals that expenditures were targeted to the inactive population, indicating that poor relief provided insurance against life-cycle shocks for those who had lost their only means to maintain subsistence.

This paper contributes to several literatures. First, it provides a new explanation for the political sustainability of wealth inequality and connects to previous work on the interactions between wealth and welfare states. Second, it questions a core tenet of democratization theory, namely the opposition of landowners to redistribution. Instead, I show that landed elites were willing to forge sectoral alliances with workers to preserve the established economic order.