The fact
that the entire globe now operates according to the same economic principles—
production organized for profit using legally free wage labor and mostly
privately owned capital, with decentralized coordination—is without historical
precedent.
In the
past, capitalism, whether in the Roman Empire, sixth-century Mesopotamia,
medieval Italian city-states, or the Low Countries in the modern era, always
had to coexist—at times within the same political unit—with other ways of
organizing production. These included hunting and gathering, slavery of various
kinds, serfdom (with workers legally tied to the land and banned from offering
their labor to others), and petty-commodity production carried out by
independent craftspeople or small-scale farmers. Even as recently as one
hundred years ago, when the first incarnation of globalized capitalism
appeared, the world still included all of these modes of production. Following
the Russian Revolution, capitalism shared the world with communism, which
reigned in countries that contained about one-third of the human population.
None but capitalism remain today, except in very marginal areas with no
influence on global developments.
The
global victory of capitalism has many implications that were anticipated by
Marx and Engels in 1848. Capitalism facilitates—and when foreign profits are
higher than domestic, even craves—the cross-border exchange of goods, the
movement of capital, and in some cases the movement of labor.
It is
thus not an accident that globalization developed the most in the period
between the Napoleonic Wars and World War I, when capitalism largely held sway.
And it is no accident that today’s globalization coincides with the even more
absolute triumph of capitalism. Had communism triumphed over capitalism, there
is little doubt that despite the internationalist creed professed by its
founders, it would not have led to globalization. Communist societies were
overwhelmingly autarkic and nationalistic, and there was minimal movement of
goods, capital, and labor across borders. Even within the Soviet bloc, trade
was carried out only to sell surplus goods or according to mercantilist
principles of bilateral bargaining. This is entirely different from capitalism,
which, as Marx and Engels noted, has an inherent tendency to expand.
The
uncontested dominion of the capitalist mode of production has its counterpart
in the similarly uncontested ideological view that money-making not only is
respectable but is the most important objective in people’s lives, an incentive
understood by people from all parts of the world and all classes. It may be
difficult to convince a person who differs from us in life experience, gender,
race, or background of some of our beliefs, concerns, and motivations. But that
same person will easily understand the language of money and profit; if we
explain that our objective is to get the best possible deal, they will be able
to readily figure out whether cooperation or competition is the best economic
strategy to pursue.
The fact
that (to use Marxist terms) the infrastructure (the economic base) and
superstructure (political and judicial institutions) are so well aligned in
today’s world not only helps global capitalism maintain its dominion but also
makes people’s objectives more compatible and their communication clearer and
easier, since they all know what the other side is after. We live in a world
where everybody follows the same rules and understands the same language of
profit-making.
Such a
sweeping statement does need some qualification. There are indeed some small
communities scattered around the world that shun money-making, and there are
some individuals who disdain it. But they do not influence the shape of things
and the movement of history. The claim that individual beliefs and value
systems are aligned with capitalism’s objectives should not be taken to imply
that all of our actions are entirely and always driven by profit. People
sometimes perform actions that are genuinely altruistic or are driven by other
objectives. But for most of us, if we assess these actions by time spent or
money forgone, they play only a small role in our lives. Just as it is wrong to
call billionaires “philanthropists” if they acquire an enormous fortune through
unsavory practices and then give away a small fraction of their wealth, so it
is wrong to zero in on a small subset of our altruistic actions and ignore the
fact that perhaps 90 percent of our waking lives is spent in purposeful
activities whose objective is improving our standard of living, chiefly through
money-making.
This
alignment of individual and systemic objectives is a major success achieved by
capitalism. Unconditional supporters of capitalism explain this success as
resulting from capitalism’s “naturalness,” that is, the alleged fact that it
perfectly reflects our innate selves—our desire to trade, to gain, to strive
for better economic conditions and a more pleasant life. But I do not think
that, beyond some primary functions, it is accurate to speak of innate desires
as if they existed independently of the societies we live in. Many of these
desires are the product of socialization within the societies where we live—and
in this case within capitalist societies, which are the only ones that exist.
It is an
old idea, argued by writers as distinguished as Plato, Aristotle, and
Montesquieu, that a political or economic system stands in harmonious relation
with a society’s prevailing values and behaviors. This is certainly true of
present-day capitalism. Capitalism has been remarkably successful in imparting
its objectives to people, prompting or persuading them to adopt its goals and
thus achieving an extraordinary concordance between what capitalism requires
for its expansion and people’s ideas, desires, and values. Capitalism has been
much more successful than its competitors in creating the conditions that,
according to the political philosopher John Rawls, are necessary for the
stability of any system: namely, that individuals in their daily actions
manifest and thus reinforce the broader values upon which the social system is
based.
Capitalism’s
mastery of the world has been achieved, however, with two different types of
capitalism: the liberal meritocratic capitalism that has developed
incrementally in the West over the past two hundred years, and the state-led
political, or authoritarian, capitalism that is exemplified by China but also
exists in other parts of Asia (Singapore, Vietnam, Burma) and parts of Europe
and Africa (Russia and the Caucasian countries, Central Asia, Ethiopia,
Algeria, Rwanda).
As has occurred so often in human history, the
rise and apparent triumph of one system or religion is soon followed by some
sort of schism between different variants of the same credo. After Christianity
triumphed across the Mediterranean and the Near East, it experienced ferocious
ideological disputes and divisions (the one between Orthodoxy and Arianism
being the most notable), and eventually it produced the first big schism
between the Western and Eastern churches. No different was the fate of Islam,
which almost immediately after its dizzying conquest split into Sunni and Shia
branches. And finally, communism, capitalism’s twentieth-century rival, did not
long remain a monolith, splitting into Soviet-led and Chinese versions.
The
worldwide victory of capitalism is, in that respect, no different: we are
presented with two models of capitalism that differ not only in the political
but also economic and, to a much lesser degree, social spheres. And it is, I
think, rather unlikely that whatever happens in the competition between liberal
and political capitalisms, one system will come to rule the entire globe.
The
economic success of political capitalism is the force behind the second
remarkable development mentioned above: the rise of Asia. It is true that the
rise of Asia is not solely due to political capitalism; liberal capitalist
countries like India and Indonesia are also growing very fast. But the
historical transformation of Asia is without question being led by China.
This
change, unlike the rise of capitalism to global supremacy, has a historical
precedent in that it returns the distribution of economic activity in Eurasia
to roughly the position that existed before the Industrial Revolution. But it
does it with a twist. While levels of economic development of western Europe
and Asia (China) were roughly the same in, for example, the first and second
centuries, or the fourteenth and fifteenth centuries, the two parts of the
world barely interacted at the time and generally lacked knowledge about each
other. Indeed, we know much more about their relative development levels now
than contemporaries knew at the time.
Today,
in contrast, interactions are intense and continuous. Income levels in both
regions are also many times greater. These two parts of the world, western
Europe and its North American offshoots, and Asia, which are together home to
70 percent of world population and 80 percent of world output, are in constant
contact through trade, investment, movement of people, transfer of technology,
and exchange of ideas. The resulting competition between these regions is
keener than it would be otherwise because the systems, while similar, are not
identical. This is the case whether competition takes place by design, with one
system trying to impose itself on the other and on the rest of the world, or
simply by example, with one system being copied more readily by the rest of the
world than the other.
This
geographical rebalancing is putting an end to the military, political, and
economic superiority of the West, which has been taken for granted during the
past two centuries. Never in history had the superiority of one part of the
world over another been as great as was the superiority of Europe over Africa
and Asia in the nineteenth century.
That
superiority was most evident in colonial conquests, but it was also reflected
in income gaps between the two parts of the world and thus in global income
inequality among all citizens of the world, which we can estimate with relative
precision from 1820 onward, as illustrated in Figure 1.1.
In this
graph, and throughout the book, inequality is measured using an index called
the Gini coefficient, which ranges in value from 0 (no inequality) to 1
(maximum inequality). (The index is often expressed as a percentage, ranging
from 0 to 100, where each percentage point is called a Gini point.) Before the
Industrial Revolution in the West, global inequality was moderate, and nearly
as much of it was due to differences among individuals living in the same nations
as among the mean incomes of individuals in different nations. This changed
dramatically with the rise of the West. Global inequality increased almost
continuously from 1820 to the eve of World War I, rising from 55 Gini points
(roughly the level of inequality that currently exists in Latin American
countries) to just under 70 (a level of inequality higher than that in South
Africa today).
The rise
of income levels in Europe, North America, and later Japan (coupled with the
stagnation of China and India) drove most of this increase, though rising
income inequality within the nations of what was becoming the First World also
played a role. After 1918, there was a short drop in global inequality caused
by what—on the broad canvas on which we operate—appear as the blips of World
War I and the Great Depression, when Western incomes failed to grow.
After
the end of World War II, global inequality stood at its highest level ever, at
about 75 Gini points, and it remained at that high plateau until the last
decade of the twentieth century. During this time the gap between the West and
Asia—China and India in particular—did not grow any further, as Indian
independence and Chinese revolution were setting the stage for the growth of
these two giants. These two countries thus maintained their relative positions
vis-a-vis the West from the late 1940s to the early 1980s. But those positions
were highly skewed in favor of the rich countries: the GDP per capita of both
India and China was less than one-tenth that of Western countries.
That
income gap began to change, and dramatically so, after the 1980s. Reforms in
China led to growth of approximately 8 percent per capita per annum over the
next forty years, sharply narrowing the country’s distance from the West.
Today, China’s GDP per capita is at approximately 30–35 percent of the Western
level, the same point where it was around 1820, and shows a clear tendency to
keep on rising (relative to the West); it will probably continue to do so until
the time when incomes become very similar. The economic revolution in China was
followed by similar accelerations of growth in India, Vietnam, Thailand,
Indonesia, and elsewhere in Asia. Although this growth has been accompanied by
rising inequality within each of the countries (especially in China), the
closing of the gap with the West has helped reduce global income inequality.
This is what lies behind the recent drop in
global Gini. The convergence of Asian incomes with those in the West took place
during another technological revolution, that of information and communication
technologies (ICT)—a revolution in production that this time favored Asia. The
ICT revolution contributed not only to the much faster growth of Asia but also
to the deindustrialization of the West, which, in turn, is not dissimilar to
the deindustrialization that happened in India during the Industrial
Revolution. We thus have two periods of rapid technological change bookmarking
the evolution of global inequality (see Figure 1.1). The effects of the ICT
revolution are not over yet, but they are, in many respects, similar to those
of the Industrial Revolution: a large reshuffle in worldwide income ranking as
some groups advance and others decline, along with significant geographical
concentration of such winners and losers.
It is
useful to think of these two technological revolutions as mirror images of each
other. One led to an increase of global inequality through the enrichment of
the West; the other has led to income convergence among large swaths of the
globe through the enrichment of Asia. We should expect that income levels will
eventually be similar across the entire Eurasian continent and North America,
thus helping reduce global inequality even further. (A big unknown, however, is
the fate of Africa, which, so far, is not catching up with the rich world and
whose population is rising the fastest.)
The
economic rebalancing of the world is not only geographical; it is also
political. China’s economic success undermines the West’s claim that there is a
necessary link between capitalism and liberal democracy. Indeed, this claim is
being undermined in the West itself by populist and plutocratic challenges to
liberal democracy. The rebalancing of the world brings the Asian experience to
the forefront of thinking regarding economic development. Asia’s economic
success will make its model more attractive to others and may inform our views
about economic development and growth, in a fashion not dissimilar to that in
which the B ritish experience and Adam Smith, who drew on that experience,
influenced our thinking during the past two centuries.
For the
past forty years, the five largest countries in Asia combined (excluding China)
have had higher per capita growth rates than the Western economies in all but
two years, and this trend is unlikely to change. In 1970, the West produced 56
percent of world output and Asia (including Japan) only 19 percent. Today,
those proportions are 37 percent and 43 percent. We can see this trend clearly
by comparing the United States with China, and Germany with India (Figure 1.2).
The remarkable rise of Asia during the era of globalization is reflected in
popular support for globalization, which is the strongest in Asia, and notably
in Vietnam (91 percent of people interviewed think globalization is a force for
the good), and weakest in Europe, notably in France (where only 37 percent
support globalization).
Malaise
in the West about globalization is in part caused by the gap between elites,
who have done very well, and significant numbers of people who have seen little
benefit from globalization, resent it, and, accurately or not, regard global
trade and migration as the cause of their ills. This situation eerily resembles
the Third World societies of the 1970s, which also exhibited this dualistic
character—with the bourgeoisie plugged into the global economic system and most
of the hinterland left behind.
The
“disease” that was supposed to affect only developing countries (what was
called “disarticulation” in neo-Marxist literature) seems to have now moved
north and struck the rich world. At the same time, somewhat ironically, the
dualistic character of many developing economies is being diminished by their
full inclusion in the globalized system of supply chains.
The two
types of capitalism, liberal meritocratic and political, now seem to be
competing with each other. They are led, respectively, by the United States and
China. But even independently of China’s willingness to make available and to
“export” an alternative political and, to some extent, economic version of
capitalism, political capitalism itself has certain features that make it
attractive to the political elites in the rest of the world and not only in
Asia: the system provides greater autonomy to political elites. It is also
attractive to many ordinary people because of the high growth rates that it
seems to promise.
On the
other hand, liberal capitalism has many well-known advantages, the most
important being that democracy and the rule of law are values in themselves and
both, arguably, can be credited with encouraging faster economic development
through promoting innovation and allowing social mobility, and thus providing
approximately equal chances of success for all. It is the reneging on some
crucial aspects of this implicit value system, namely a movement toward the
creation of a self perpetuating upper class and polarization between the elites
and the rest, that represents the most important threat to the longer-term
viability of liberal capitalism. This threat is a danger both to the system’s
own survival and to the general attractiveness of the model to the rest of the
world.
Excerpted
from Capitalism, Alone: The Future of the System That Rules the World by Branko
Milanovic, published by Harvard University Press, 2019.
With the
US and China, Two Types of Capitalism Are Competing With Each Other. By Branko Milanovic. ProMarket, September 25, 2019
It may
be useful to open this topic with an anecdote. Some ten years ago, I found
myself in an after-dinner conversation, lubricated by wine, with an American
who had been educated at an Ivy League college and was then teaching in Europe.
As our conversation drifted toward matters of life, marriage and children, I
was initially surprised by his statement that whoever he had married, the
outcome in terms of where they lived, what type of house they owned, what kind
of holidays and entertainment they would enjoy, and even what colleges their
children would attend would be practically the same. His reasoning was as
follows: “When I went to [Ivy League institution], I knew that I would marry a
woman I met there. Women also knew the same thing. We all knew that our pool of
desirable marriage candidates would never be as vast again. And then whomever I
married would be a specimen of the same genre: They were all well-educated,
smart women who came from the same social class, read the same novels and
newspapers, dressed the same, had the same preferences about restaurants,
hiking, places to live, cars to drive and people to see, as well about how to
take care of the kids and what schools they should attend. It really made
almost no difference socially whom among them I married.”
And then
he added, “I was not aware of that at the time, but I can surely see it now.”
The
story struck me then and stayed in my mind for a long time. It contradicted the
cherished myths that we are all deeply different, unique individuals, and that
personal decisions such as marriage, which have to do with love and
preferences, matter a lot and have a big effect on the rest of our lives. What
my friend was saying was precisely the opposite: He could have fallen in love
with A, or B, or C, or D, and ultimately would have ended up in virtually the
same house, in the same affluent neighborhood—whether in Washington, D.C.,
Chicago or Los Angeles—with a similar set of friends and interests, and with
children going to similar schools and playing the same games. And his story
made a lot of sense.
Of
course, this scenario assumed that people who attended the same college would
couple up. Had he dropped out of college, or not found anyone suitable to marry
there, the outcome might have been different (say, a house in a less affluent
neighborhood). His story dramatically illustrates the power of socialization:
Almost everyone at the top schools comes from more or less equally affluent
families, and almost everyone adopts more or less the same values and tastes.
And such mutually indistinguishable people marry each other.
Recent
research has documented a clear increase in the prevalence of homogamy, or
assortative mating (people of the same or similar education status and income
level marrying each other). A study based on a literature review combined with
decennial data from the American Community Survey showed that the association
between partners’ level of education was close to zero in 1970; in every other
decade through 2010, the coefficient was positive, and it kept on rising. A
different database provides another perspective on this trend; it looks at
marriage statistics for American women and men who married when they were “young,”
that is, between the ages of twenty and thirty-five. In 1970, only 13 percent
of young American men who were in the top decile of male earners married young
women who were in the top decile of female earners. By 2017, that figure had
risen to almost 29 percent.
Percentage
of U.S. men aged 20 to 35 in the top male decile of labor earnings who married
women aged 20 to 35 in the top and bottom female deciles by labor earnings,
1970–2017
At the
same time, the top decile of young male earners have been much less likely to
marry young women who are in the bottom decile of female earners. The rate has
declined steadily from 13.4 percent to under 11 percent. In other words,
high-earning young American men who in the 1970s were just as likely to marry
high-earning as low-earning young women now display an almost three-to- one
preference in favor of high-earning women. An even more dramatic change
happened for women: the percentage of young high-earning women marrying young
high-earning men increased from just under 13 percent to 26.4 percent, while
the percentage of rich young women marrying poor young men halved. From having
no preference between rich and poor men in the 1970s, women currently prefer
rich men by a ratio of almost five to one.
Percentage
of women aged 20 to 35 in the top female decile by labor earnings who married
men aged 20 to 35 in the top and bottom male deciles by labor earnings,
1970–2017.
In a
very ambitious 2017 paper, Pierre-André Chiappori, Bernard Salanié and Yoram
Weisstried tried to explain both the rise of assortative mating and the
increasing level of education among women (which contrasts with a lack of
increase in educational attainment for men). They argued that highly educated
women have better marriage prospects, and thus, there is a “marriage education
premium,” which is perhaps as important as the usual skill premium that
education provides. While the skill premium is, in principle, gender neutral,
the marriage education premium is, the authors argue, much higher for women.
Underlying this must be greater “pure preference” for homogamy among men
because if that did not exist, the rising education level of women might be as
much of a deterrence in the marriage market as an attraction.
There is
a further link between, on the one hand, assortative mating, and, on the other
hand, increasing returns to investment in children, which only more educated
couples are able to provide. They can, for example, expose their children to a
learning-conducive atmosphere at home and introduce them to cultural
experiences that less-educated parents may have little interest in (concerts,
libraries, ballet), as well as to elite sports. The importance of linking these
seemingly unrelated developments—women’s education, greater work participation
by women, assortative marriage patterns, and the increasing importance of early
childhood learning—is that it illuminates one of the key mechanisms of
within-generation creation of inequality and its intergenerational
transmission. If educated, highly skilled, and affluent people tend to marry
each other, that by itself will tend to increase inequality. About one-third of
the inequality increase in the United States between 1967 and 2007 can be
explained by assortative mating, according to research by Koen Decancq, Andreas
Peichl and Philippe Van Kerm. For countries in the OECD (Organization for
Economic Cooperation and Development), assortative mating accounted for an
average of 11 percent of increased inequality between the early 1980s and early
2000s.
But if,
in addition, the returns to children’s early education and learning are sharply
rising, and if these early advantages can be provided only by very educated
parents, who, as the data show, spend much more time with their children than
less educated parents, then the road to a strong intergenerational transmission
of advantages and inequality is wide open. This is true even if—and it is
important to underline this—there is high taxation of inheritance, because
inheritance of financial resources is merely one of the advantages that the
children of educated and rich parents enjoy. And in many cases, it may not even
be the most important part. (Although, as I argue elsewhere, taxation of
inheritance is a particularly good policy for leveling the playing field and
increasing equality of opportunity, it is an illusion to believe that such
taxation will by itself be sufficient to equalize the life chances of children
born to rich and poor parents.)
High income and wealth inequality in the United States
used to be justified by the claim that everyone had the opportunity to climb up
the ladder of success, regardless of family background. This idea became known
as the American Dream. The emphasis was on equality of opportunity rather than
equality of outcome. It was a dynamic, future-oriented concept. Joseph
Schumpeter used a nice metaphor to explain it when he discussed income
inequality: We can see the distribution of incomes in any one year as being
like the distribution of occupants who are staying on different floors of a
hotel, where the higher the floor, the more luxurious the room. If the
occupants move around between the floors, and if their children likewise do not
stay on the floor where they were born, then a snapshot of which families are
living on which floors will not tell us much about which floor those families
will be inhabiting in the future, or their long-term position. Similarly,
inequality of income or wealth measured at one point in time may give us a
misleading or exaggerated idea of true levels of inequality and can fail to
account for intergenerational mobility.
The
American Dream has remained powerful both in the popular imagination and among
economists. But it has begun to be seriously questioned during the past ten
years or so, when relevant data have become available for the first time.
Looking at twenty-two countries around the world, Miles Corak showed in 2013
that there was a positive correlation between high inequality in any one year
and a strong correlation between parents’ and children’s incomes (i.e., low
income mobility). This result makes sense, because high inequality today
implies that the children of the rich will have, compared to the children of
the poor, much greater opportunities. Not only can they count on greater
inheritance, but they will also benefit from better education, better social
capital obtained through their parents, and many other intangible advantages of
wealth. None of those things are available to the children of the poor. But
while the American Dream thus was somewhat deflated by the realization that
income mobility is greater in more egalitarian countries than in the United
States, these results did not imply that intergenerational mobility had
actually gotten any worse over time.
Yet
recent research shows that intergenerational mobility has in fact been
declining. Using a sample of parent-son and parent-daughter pairs, and
comparing a cohort born between 1949 and 1953 to one born between 1961 and
1964, Jonathan Davis and Bhashkar Mazumder found significantly lower
intergenerational mobility for the latter cohort. They used two common
indicators of relative intergenerational mobility: rank to rank (the
correlation between the relative income positions of parents and children) and
intergenerational income elasticity (the correlation between parents’ and
children’s incomes). Both indicators showed an increase in correlation between
parents’ and children’s incomes over time (rank to rank increased from 0.22 to
0.37 for daughters and from 0.17 to 0.36 for sons, and intergenerational income
elasticity increased from 0.28 to 0.52 for daughters and from 0.13 to 0.43 for
sons). For both indicators, the turning point occurred during the 1980s—the
same period when U.S. income inequality began to rise. In fact, three changes
happened simultaneously: increase in inequality, increase in the returns to
education, and increase in the correlation between parents’ and children’s
incomes. Thus, we see that not only across countries, but also across time,
higher income inequality and lower intergenerational mobility tend go together.
So far,
we have only looked at relative mobility. We should also consider absolute
intergenerational mobility, that is, the change in real income between
generations. Here, too, we see a decline: absolute mobility in the United
States declined significantly between 1940 and the 2000s, as a result of a
slowdown in economic growth combined with increased inequality. We should keep
in mind that absolute mobility is very different from relative mobility, since
it depends largely on what happens to the growth rate. For example, absolute
mobility can be positive for everyone if the income of every child exceeds the
income of their parents, even if the parents’ and children’s positions in the
income distribution are exactly the same. In this example, complete
intergenerational absolute mobility would coincide with a complete lack of
intergenerational relative mobility.
Excerpted
from Capitalism, Alone: The Future Of The System That Rules The World, by
Branko Milanovic, published by Harvard University Press, 2019.
Rich
Like Me: How Assortative Mating Is Driving Income Inequality. By Branko
Milanovic.
Quilette,
October 18, 2019
Liberal
meritocratic capitalism can be best understood by contrasting its
distinguishing features with those of nineteenth-century classical capitalism
and with social-democratic capitalism, as it existed between approximately the
end of the World War II and the early 1980s in Western Europe and North
America. We are dealing here with “ideal-typical” features of the systems and
ignoring details that varied among countries and across time. But in the
following sections, where I focus on liberal meritocratic capitalism alone, I
discuss these features in detail for a country that can be taken as
prototypical, namely the United States.
Table
2.1 summarizes the differences between the three historical types of capitalism
through which Western economies have passed. For simplicity, I take the United
Kingdom before 1914 as representative of classical capitalism, Western Europe
and the United States from the end of World War II through the early 1980s as
representative of social-democratic capitalism, and the twenty-first- century
United States as representative of liberal meritocratic capitalism. Note that
because the two key features that differentiate liberal from meritocratic
capitalism, taxation of inheritance and broadly available public education,
have weakened in the United States over the past thirty years, the country may
have shifted toward a model of capitalism that is more “meritocratic” and less
“liberal.” However, since I am using the United States as an example of all
rich capitalist countries, I think it is still acceptable to speak of liberal
meritocratic capitalism as a single model.
We start
with the key characteristic of every capitalist system—the division of net
income between the two factors of production: owners of capital (owners of
property more generally) and workers. This division need not coincide with two
distinct classes of individuals. It will do so only when one class of
individuals receives income only from capital, and a different class receives
income only from labor. As we shall see, whether or not these classes overlap
is what distinguishes different types of capitalism.
Data on
the division of total net income between capital and labor is murky for the
period before 1914, since the first estimates for the United Kingdom, which
were made by the economist Arthur Bowley, were not done until 1920. Based on
this work, it has been argued that the income shares of capital and labor are
more or less constant—a trend that came to be called Bowley’s Law. Data
produced by Thomas Piketty (2014, 200– 201) for the United Kingdom and France
have cast severe doubt on that conclusion, even for the past. For the United
Kingdom in the period 1770– 2010, Piketty found that the share of capital
oscillated between 20 and 40 percent of national income. In France, between
1820 and 2010, it varied even more widely: from less than 15 percent in the
1940s to more than 45 percent in the 1860s. The percentages became more stable
after World War II, however, reinforcing belief in Bowley’s Law. Paul
Samuelson, for example, in his influential Economics, included Bowley’s Law
among the six basic trends of economic development in advanced countries
(although he did allow for some “edging upward of labor’s share”) (Samuelson
1976, 740). However, since the late twentieth century, the share of capital
income in total income has been rising. While this tendency has been quite
strong in the United States, it has also been documented in most developed
countries, as well as developing countries, although the data for the latter
must be taken with a strong dose of caution (Karabarbounis and Neiman 2013).
A rising
share of capital income in total income implies that capital and capitalists
are becoming more important than labor and workers—and thus acquiring more
economic and political power. This trend occurred in both classical and liberal
meritocratic capitalism, but not in the social-democratic variety (Table 2.1).
A rising share of capital in total income also affects interpersonal income
distribution because typically, (1) people who draw a large share of income
from capital are rich, and (2) capital income is concentrated in relatively few
hands. These two factors result almost automatically in greater income
inequality between individuals.
To see
why both (1) and (2) are indispensable for the automatic translation of higher
capital share into greater interpersonal inequality, make the following mental
experiment: assume that the share of capital in net income goes up, but that
every individual receives the same proportion of income from capital and labor
as every other individual. A rising aggregate share of capital income will
increase every individual income in the same proportion, and inequality will
not change. (Measures of inequality are relative.) In other words, if we do not
have a high positive correlation between being “capital-abundant” (that is,
deriving a large percentage of one’s income from capital) and being rich, a
rising aggregate share of capital does not lead to higher interpersonal
inequality. Note that in this example there are still rich and poor people, but
there is no correlation between the percentage of income that a person draws
from capital and that person’s position in the overall income distribution.
Now,
imagine a situation where poor people draw a higher proportion of their income
from capital than rich people do. As before, let the overall share of capital
in net income increase. But this time, the rising share of capital will reduce
income inequality because it will increase proportionately more the incomes of
the people at the low end of the income distribution.
But neither of these two
mental exercises reflects what is happening in reality in capitalist societies:
rather, there is a strong positive association between being capital-abundant
and being rich. The richer a person is, the more likely they are to have a high
share of their income coming from capital. This has been the case in all types
of capitalism (see Table 2.1, rows 2 and 3). This particular
characteristic—that capital-abundant people are also rich—may be taken as an
immutable characteristic of capitalism, at least in the forms that we have
experienced it so far.
The next
feature to consider is the link between being well-off in terms of capital
(that is, being capital-income- rich within the distribution of capital
incomes) and being well-off in terms of earnings (that is, being labor-income-
rich within the distribution of labor incomes). One might think that people who
are capital-abundant rich are unlikely to be rich in terms of their labor
income. But this is not the case at all. A simple example with two groups of
people, the “poor” and the “rich,” makes this clear. The poor have overall low
income, and most of their income comes from labor; the rich are the opposite.
Consider situation 1: The poor have 4 units of income from labor and 1 unit of
income from capital; the rich have 4 units of income from labor and 16 units
from capital. Here the capital abundant are indeed rich, but the amount of
their labor income is the same as that of the poor. Now consider situation 2:
Everything stays the same as in situation 1 except that the labor income of the
rich increases to 8 units. They are still capital abundant, since they receive
a larger share of their total income from capital (16 out of 24 units = 2/3)
than the poor do, but now they are also labor-rich (8 units versus only 4 for
the poor).
Situation
2 is when the capital-abundant individuals are not only rich but also
relatively well off in terms of labor income. Everything else being the same,
situation 2 is more unequal than situation 1. This is indeed one of the
important differences between, on the one hand, classical and social-democratic
capitalisms, and on the other, liberal meritocratic capitalism (see Table 2.1,
row 4). The perception and reality of classical capitalism was that capitalists
(what I call here capital-abundant individuals) were all very rich but
typically did not receive much income from labor; in the extreme case, they
received no income from labor at all. It is no accident that Thorstein Veblen
labeled them the “leisure class.” Correspondingly, laborers received no income
from capital at all. Their income came entirely from labor. In this case there was a perfect division of
society into capitalists and workers, with both sides receiving zero income from
the other factor of production. (If we add landlords, who received 100 percent
of their income from land, we have the tripartite classification of classes
introduced by Adam Smith.) Inequality was high in such fragmented societies
because capitalists tended to have lots of capital, and the return on capital
was (often) high, but inequality was not compounded by these same individuals
also having high labor incomes.
The
situation is different in liberal meritocratic capitalism, as found in the
United States today. People who are capital-rich now tend also to be labor-rich
(or to put it in more contemporary terms, they tend to be individuals with high
“human capital”). Whereas the people at the top of the income distribution
under classical capitalism were financiers, rentiers, and owners of large
industrial holdings (who are not hired by anyone and hence have no labor
income), today a significant percentage of the people at the top are highly
paid managers, web designers, physicians, investment bankers, and other elite
professionals. These people are wage workers who need to work in order to draw
their large salaries. But these same people, whether through inheritance or
because they have saved enough money through their working lives, also possess
large financial assets and draw a significant amount of income from them.
The
rising share of labor income in the top 1 percent (or even more select groups,
like the top 0.1 percent) has been well documented by Thomas Piketty, in
Capital in the Twenty-First Century (2014), and other authors. What is
important to realize here is that the presence of high labor income at the top
of the income distribution, if associated with high capital income received by
the same individuals, deepens inequality. This is a peculiarity of liberal
meritocratic capitalism, something that has never before been seen to this
extent.
Excerpted
from Capitalism Alone : the future of the system that rules the world by Branko
Milanovic, published by Harvard University Press, 2019.
.
Capitalism(s),
Alone. By Branko Milanovíc. Evonomics, November 16, 2019.
We are
all capitalists now. For the first time in human history, the globe is
dominated by one economic system. In his book Capitalism, Alone, which he will
discuss in this lecture, economist Branko Milanovic explains the reasons for
this decisive historical shift since the days of feudalism and, later,
communism.
Surveying
the varieties of capitalism, he asks: What are the prospects for a fairer world
now that capitalism is the only game in town? His conclusions are sobering, but
not fatalistic. Branko Milanovic explains how capitalism gets much wrong, but
also much right—and it is not going anywhere. Our task is to improve it.
Capitalism,
Alone: the future of the system that rules the world. London School of Economics, October 23, 2019.
Capitalism,
Alone by Branko Milanovic is a remarkable book, possibly the author’s most
comprehensive opus so far. For economists working on inequality measurement,
often accused of dealing with ‘measurement without theory’, Capitalism, Alone
provides a novel paradigm within which analysis of distributional issues in
different economies and social systems can be placed. The overall thesis of the
book is that, for the first time in global history excluding a few country
cases, capitalism (referring to production organised for profit using wage
labour and mostly privately owned capital) is currently the ‘sole
socio-economic system in the world’ (2).
This
does not entail the end of history however, since a set of typologies of
capitalism are sketched by Milanovic in the book – although the author does
this in a more stylised manner than usually provided in the academic literature
on varieties of capitalism. In my view, the main contribution of the book lies
precisely in the neat way Milanovic categorises these ideal-typical social and
economic systems, as I explain in the following.
Liberal
Meritocratic Capitalism represents the typology of capitalism embraced by the
core economies of the West, with the US being its most paradigmatic example.
Individuals in liberal meritocratic capitalist states receive positive shares
of both capital and labour incomes, whilst tax and transfers redistribute a
fraction of those incomes. The moderate degree of redistribution does not,
however, erase ‘social separatism’ (215), entailing that the rich consume more
private education and health services than the middle class and the poor. Due
to this, intergenerational mobility under liberal meritocratic capitalism is
not necessarily high. Last but not least, democracy is one of the main
strengths of liberal meritocratic capitalism, since the feedback of voters
ensures, in principle, that the system does not end up failing in the provision
of basic liberties (defined as a primary good by John Rawls, 208), although at
the cost of lower growth rates of income than liberal meritocratic capitalism
could achieve by retrenching these rights.
Up to
this point, not much novelty. However, Milanovic reaches further than other
scholars working on capitalism by defining a novel phenomenon that alone
encompasses several challenges that liberal meritocratic capitalism has been
facing in recent decades: homoploutia (34). Namely, the rising share of the
population earning both high labour and capital income (hence owning the same –
homo, wealth – ploutia). Although the association of high labour and capital
income at the top of the income distribution has been studied by economists
before (by Tony Atkinson, among others), it is in Capitalism, Alone that this
concept is embedded for the first time within a thorough analysis of the
underlying socio-economic system. Why is a rising degree of homoploutia
dangerous within liberal meritocratic capitalism? Because it allows economic
elites to become more autonomous from the rest of society, and to overlap to a higher
extent with political elites, introducing plutocratic features. If this
distortion expands, the danger is that liberal meritocratic capitalism would
assume the contours of the other main typology of capitalism analysed in the
book: Political Capitalism.
Milanovic
defines political capitalism, through the historical example of Deng Xiaoping’s
China, as an ideal-typical socio-economic system in which the autocratic and
technocratic bureaucracy in power has the duty of delivering high economic
growth (possibly higher than liberal meritocratic capitalism), both to justify
its leading role and the absence of a binding (that is, selective application
of) rule of law (91). The main danger for a country picking this ideal-typical
system is that endemic inequality due to corruption and the discretionary power
of the political elite might not be tolerated by the population, especially
whenever economic growth slows down. In other words, high and widespread income
growth is the necessary glue for a system where endemic corruption and rising
inequality might lead to disruption. The selective application of the rule of
law is also important, since a rule of law without exceptions would allow
competition between different economic elites, which could eventually overturn
the power of the political elite in charge.
The
above, although it represents the central thesis, is only a fraction of the
material that the reader will find in Capitalism, Alone by Milanovic as an
analyst of the different types of capitalism. Among other topics, I would like
to mention the detailed historical review of economic and political development
in China, within which Milanovic empirically demonstrates how fast the share of
fixed investment and industrial output by privately-owned firms has risen in
the Chinese economy. At least as interesting is the analysis the author
delivers on the unsettled role of communism within global twentieth-century
history, claiming that ‘communism enabled backward and colonized societies to
abolish feudalism […], and build endogenous capitalism’ (75).
The last
part of this review focuses instead on the policymaker Milanovic. Imagine the
author joins the hypothetical council of advisors of the political elite in a
country under liberal meritocratic capitalism. What should be done to move
towards People’s Capitalism – with individuals earning equal shares of income
sources, inequality under control and high intergenerational mobility – while
avoiding the potential divergence into political capitalism? Milanovic provides
readers with a set of economic and social policies, among which I will
highlight the two most substantial ones.
First,
the author proposes the introduction of tax advantages for the poor and the
middle class in order to increase their endowments of financial capital with
respect to the richer deciles of the income distribution. This would reduce
concentration of wealth in liberal meritocratic capitalism, lowering the
dangers that come with homoploutia, though whether this would be sufficient is
not analysed in detail by Milanovic. As an interesting example, this would be
similar to the recent scheme of a ‘Share Savings Account’ introduced in Norway
in 2017.
Second,
and possibly more controversially, Milanovic proposes the introduction of
‘Citizenship light’, giving incremental access to welfare benefits and other
social and economic rights for immigrants, ending the strictly binary division
between citizens and non-citizens (217). The objective would be to make
immigration more palatable politically. Milanovic defines citizenship as ‘a
joint monopoly exercised by a group of people […] that gives rise to the
citizenship rent’ (133), leading to higher income streams than those of
non-citizens. In sum, native citizens are more likely to accept migrants, the
less migrants are granted the benefits annexed to citizenship. The author
qualifies this proposal as a realistic solution in order to allow migration to
happen, migration being one of the key variables to reduce global income
inequality (see Milanovic, 2016). In my view, the statement that access to
welfare benefits in rich countries is based mainly on citizenship is only true
to some extent (156). Social insurance systems in many welfare state countries
are mainly based on residence (for example, Norwegian National Insurance
Scheme, 2019), in combination with employment and with the amount of years one
has contributed to the system with tax payments. In other words, if citizenship
does not play the role assigned to it by Milanovic in countries with generous
welfare states, the worst-case scenario depicted by the author – that the
welfare state in the era of globalisation has to be dismantled in order to
allow migration without backlashes (156-57) – becomes a more remote
possibility.
Let us
switch to the specific topic of the challenges faced by welfare states in a
globalised world, touched upon in the book in Sections 2.3b (50) and 4.3 (155).
Milanovic claims that ‘it has become a truism that the welfare state is under
stress from the effects of globalization’ (50). In my view, this claim is not
robust depending on how one defines the costs and benefits (or added value) of
a welfare state economy. If globalisation increases income volatility and
entails unemployment shocks, then the visible costs of welfare benefits in
terms of national income increase. These costs are publicly discussed, as they
entail higher taxes to be covered. However, the hidden gains of these measures
provide economic value that does not show up in the national accounts, as they
avoid even higher income reduction. The costs in terms of lost productivity and
income when large shares of the population are not protected by social
insurance might in the long run be even higher than the short-run costs of
paying for services and transfers in times of recession (Kalle Moene, 2018).
Ultimately,
I highly recommend Capitalism, Alone to all readers and scholars interested in
challenging their understanding of the (supposed) sole socio-economic system we
live in, including how Milanovic advocates to change it for the better and move
towards the ideal-type People’s Capitalism outlined in the book.
Book
Review: Capitalism, Alone: The Future of the System That Rules the World by
Branko Milanovic. By Robert Iacono. LSE Review of Books , November 11, 2019.
Just
because capitalism defeated communism at the end of the Cold War does not mean
that Western “liberal capitalism” will automatically triumph over China’s
“political capitalism”. That’s the provocative argument of Branko Milanovic’s
new book, Capitalism, Alone. Executive Editor Damir Marusic and Assistant
Editor Aaron Sibarium recently sat down with Milanovic to talk about the future
of the system that runs the world.
More interesting
articles here. Harvard University Press.
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