Pride and Prejudice and Asset Prices

The Federal Reserve and its counterparts abroad slashed interest rates in the face of the 2008 financial crisis and have kept them very low — in some cases below zero — ever since. This isn’t an arbitrary policy: Central banks believe that they need to keep rates low to avoid sliding into recession. But there has long been bitter criticism of low rates, coming from both the right and the left.

On the right, the main complaint seems to be that savers aren’t getting the returns they deserve — although it’s not clear why savers deserve high returns in a world that seems to have more savings than it knows what to do with. On the left, the complaint is that low rates push up the prices of stocks and other assets that are mainly owned by the rich. And this, the critics claim, widens inequality.

Well, I want to take on the latter argument, which is fundamentally misguided. And one way to illustrate why is to think about an economy simpler than the one we have now — the economy of Jane Austen’s England. I’ll explain later how the sense and sensibility we gain from Austen translates in the 21st century.

So: Early-19th-century England was an extremely unequal society that was still largely dominated by landowners, who lived off the rent paid by their tenants. This rent, as David Ricardo explained in 1817, was determined by the interaction of the population with the supply of fertile land. And the income from land was stable enough that it provided a quick measure of a man’s status. The marriageable Mr. Bingley had 4,000 pounds a year; the estimable Mr. Darcy, 10,000. Tellingly, “Pride and Prejudice” doesn’t tell us the value of either man’s estate; the income was the thing.

But England was also in the early stages of the Industrial Revolution, with a rising bourgeoisie deriving its income from industry and trade. This new elite differed in some important ways from the old elite, but the lines were never sharp. Industrialists could buy their way into the gentry by acquiring country estates. Landowners like the Duke of Bridgewater, who built a pioneering