Finance and Inequality

• Applicants: Professor Dr. Christian Bayer; Professor Dr. Carsten Burhop
• Subject Area: Economic and Social History ; Economic Policy, Applied Economics
• Term: since 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 536073558

Essentially, all income flows in the economy and all financial transactions linked to the acquisition and sale of assets are channeled through the financial sector. Shifts in the distribution of income and wealth correspond to shifts in financial activities. Thus, banks translate changes in the income distribution into a new allocation of wealth and capital in the economy. But the financial sector itself also shapes the evolution of income and wealth inequality: compensation trends in the financial sector contribute to income inequality and new financial products can accentuate differences in rates of return between rich and poor households. Yet finance can also help to reduce wealth inequality. For instance, capital gains from debt-financed home-ownership have been a key driver for middle-class wealth accumulation. Despite these close links between finance and inequality, financial historians, financial economists and macroeconomists have long ignored the intricate connections between both fields of inquiry. The proposed Center for Advanced Studies (CAS) aims to study the nexus between finance and inequality from a long-run historical and internationally comparative perspective. This is of particular interest at the current juncture where two prominent secular trends have characterized advanced economies in the past decades. First, in many countries income and wealth inequalities have risen substantially, reaching levels last seen in the 19th century. Second, over the last decades the size of the financial sector expanded significantly, household and public debt has grown to record levels, and the structure of financial intermediation has changed – a process that has been described as “financialization” of the economy and as a shift from managerial to investor capitalism. From a historical perspective, this concurrence of transformational changes in financial markets and shifts in the distribution of income and wealth recalls similar debates at the beginning of the 20th century when a transformation from entrepreneurial to managerial capitalism was underway – back then the debate was framed with reference to terms like “Finanzkapitalismus” (in Germany) or “money trusts” (in the US). In the proposed CAS, we will study how fundamental changes in the distribution of resources in the economy have affected the development of the financial sector, shaped the patterns of financial intermediation and household finance, and influenced the business of banking over time. We will also ask if and how the financial sector contributed to rising and falling inequalities of income and wealth since the 19th century. Bringing together scholars of financial history, macroeconomics, and finance, the CAS will enhance our understanding of how financial markets have shaped and responded to secular trends in inequality, and inform the important scholarly and public debate about inequality.

• DFG Programme: Advanced Studies Centres in SSH
• Subproject of: KFG 50: Finance and Inequality