A Vision For Egalitarian Capitalism

Noema: Since your time as the lead economist in the World Bank’s research department, you’ve been considered the world’s foremost expert on global patterns of inequality, especially on inter-country inequality — that is, the level of income inequality between different countries. These days, maybe even more attention is paid to inequality within countries. Would you briefly tell us about how these two different types of inequality have evolved over time?

Milanović: We can trace the data back to about 1820. We know that the increase of global inequality was driven during the 19^th century both by growing between-country inequality and by growing within-country inequality. In other words: inequality went up in terms of both location and class.

Then you had the period, during most of the 20th century, with high overall global inequality but with a shrinkage of within-country inequality and slight increases in between-country inequality. The peak of that pattern was from the 1960s to the 1980s. If you looked at India and China’s GDP per capita compared to the Western world, both were at the bottom.

Then after that, because of the rise of China and India (and of course Indonesia, Vietnam and so on), you start to see the shrinkage of between-country inequality and a slight increase of within-country inequality. Looking to the future, if Asia continues growing as it has in the past 40 years and if Africa does not fall further behind, we should continue to see a decline of between-country inequality.

Noema: Most discussions of inequality focus on inequality of income. But inequality of wealth is even more glaring, both within and between countries. What is the relationship between inequality of income from property and inequality of income from labor?

Milanović: As measured by the Gini coefficient, inequality in income from property compared to inequality in income from labor in advanced countries is about a two-to-one ratio. The Gini coefficient for inequality in income from property is about 90 — which means it practically cannot get any higher — whereas the Gini coefficient for labor income (before taxation) is 40 to 50. The latter is still a high number, but the difference between inequality from income and inequality from property and thus wealth is enormous.

Now, in the United States, you have very unequal ownership of capital — more than 70 percent of all financial assets in the U.S. is owned by 10 percent of the population. So, as you have a rising share of total income going to capital, which has been a tendency in most countries since the 1990s, it naturally means that total income will tend to become more concentrated. The point is that with the current extremely uneven distribution of financial assets, the wealth of a country goes more only to the people at the top, and very little percolates downward.

Noema: You’ve sometimes expressed skepticism about the welfare state, at least as it existed in the 20th century, as a mechanism for addressing inequality, and you’ve argued that rather than trying to equalize incomes, we instead need to think about equalizing endowments. Would you expand on what you mean? And what kind of institutions might need to be built to make this kind of policy more concrete?

Milanović: While there is little doubt about the historical role that the welfare state has played in checking the increase of inequality in the 20th century, I am skeptical about the ability of the current welfare state to play a meaningful role in the 21st century. The forces that are pushing inequality up within rich countries — globalization, technological change — are stronger than ever. Add to that the fact that we have a quasi-automatic transmission of inequality in wealth to inequality in income.

Additionally, as I discuss in my book “Capitalism, Alone,” phenomena that are by themselves desirable — like the ability to marry people we like and more capital-rich people who are also wage earners — paradoxically tend to exacerbate inequality. When two equally educated and rich individuals partner, it increases inequality. And taxing capital more may not be sufficient to thwart the concentration of income.

The forces that have been used in the past to address inequality — high marginal tax rates, increased levels of education to reduce the premium for highly skilled labor, trade unions — are either declining as a force (like the trade unions) or have reached their maximum. In other words, with tax rates for richer people and the affluent middle class already at, on average, 45 to 55 percent — you’re not going to increase that to 70 percent. Or, at least, people won’t like that or won’t vote for that.

What we need is a redefined vision of a more egalitarian capitalism, starting with endowments. If the endowments are more equally distributed, then you’ll need less redistribution of current income. To use [former British Prime Minister Margaret] Thatcher’s term, the idea of “peoples’ capitalism” is to “financialize” the middle class — that is, to provide them with financial assets. The aim is not only to give them more of a stake in the system but also to break the strong link between growing inequality and the rising share of income received from capital. So, in my view of the world, it’s essential that we lower the inequality of the distribution of financial assets.

Now, you asked me: What are the institutions? That is a more difficult question. First, there are two general directions of change that I would like to see happening there. When it comes to policies to promote a broader ownership of capital, we need a whole gamut of things: tax advantages and insurance to favor small depositors or small investors, employee stock ownership plans, actual participation of workers in the management of their companies, and higher taxation of inheritance — the proceeds of which could be distributed as grants to all citizens.

The second is education: so-called “human capital.” What is needed is equal access to high-quality higher education. In the case of the U.S., it’s very obvious that what matters is not simply the number of years in school but where you go to school. The gap in wages between people who go to top schools and those who go to mid-level schools is quite significant.

Historically, what was really outstanding in the U.S. was its high-quality public education. There were always the Harvards and Yales and so on, but in terms of numbers of students, these were always smallish relative to public universities, and they still are. The bulk was public education. Unfortunately, the quality of public universities is now being eroded. The discrepancy between the endowments and money at private and public universities means that top private universities can simply attract far better people than public universities.

Of course, this has the effect of driving up the price of access to a top-notch education, which means that there is unequal access to these top institutions. It’s not just about the student loan debt, which is hard to repay. Just to get your kid into a position where he or she can have a chance to go to a top private school requires an investment, it was recently calculated, of over $1 million per child.

So, this is a two-pronged approach — one focused on broadening access to financial capital, the other on broadening investment in so-called human capital through more access to high-quality education.

Noema: The British Labour Party has recently proposed incrementally transferring up to 10 percent of the equity of larger U.K.-based companies into employee trusts, partly to help give workers a direct voice in these companies and partly to pay a dividend to workers. What do you think of this proposal? How do you compare it with other similarly motivated proposals, for example California Governor Gavin Newsom’s “data dividend” or several Democratic presidential candidates’ ideas about not just taxing the robots, but owning the robots?

Milanović: The proposal is very similar to what I argue for in “Capitalism, Alone.” Note that it broadens ownership and, at the same time, gives greater participation to labor, which, according to various studies, should be very good for productivity. It thus shows that the ostensible trade-off between equality and growth is often non-existent. A “data dividend” may also be a good idea. It has similarities to the idea of using real estate (inheritance) tax to give grants to all.

All these ideas are driven by the desire to make the distribution of income more equal not only through taxation but also through some form of de-concentrating assets. This is what is called pre-redistribution: policies that aim to make starting points more similar rather than to use only taxes and transfers to equalize outcomes. If starting points are more similar, then your tax-and-transfer policies can be less extensive.

Noema: Would you give us a brief overview of your new book, “Capitalism, Alone” and of what motivated you to write this particular book at this particular time?

Milanović: “Capitalism, Alone” is about income distribution and the elite formation under what I call “meritocratic capitalism” or “liberal capitalism,” where the U.S. is an example, in contrast to what I call the “political capitalism” of China. The empirical stuff on the U.S. looks at the systemic forces driving up inequality in a meritocratic liberal system. And then on the other hand, I look at the inequality and corruption in China’s political capitalism, which includes three key features: efficient administration, the absence of the rule of law and the autonomy of the state.

My motivations for writing this book were twofold. I am, of course, interested in inequality and what you may call elite-formation, but I’m also interested in the role of communism in global history. I had a desire to write a small book that would look at the global historical role of communism. Did it have a role? Did it accomplish something? How can we explain it now, after the fact, now that it no longer exists? This has motivated, in part, my discussion of China and political capitalism.

I argue that communism was a system that enabled less-developed and colonized countries to transform themselves by developing autochthonous or indigenous bourgeoisies. In other words, communism was paradoxically a system that enabled the growth of capitalism. Functionally, its role in Asia was the same that the bourgeoisie had in the West: smashing growth-inhibiting feudal institutions. Of course, this argument is a reversal or revision of the typical view of the role of communism within both Marxist and liberal traditions, and I expect it to be controversial.

Noema: Earlier in your career, you worked on post-communist transitions, and now you’re trying to figure out varieties of capitalism. At this point in history, why do you think capitalism is still a useful analytical term, without communism being around to compare it to?

Milanović: I think the concept of capitalism is still useful. I use a very simple definition of capitalism: the system of economic organization in which most of the production is conducted on privately owned means of production, where most of the labor is hired labor and where coordination is decentralized. That’s the definition that both Karl Marx and Max Weber used.

So when people ask me if China is capitalist or not, I tell them: forget the name of the Chinese Communist Party. Political parties call themselves whatever they want, often for historical reasons that are detached from current practice. Look instead at the data from the World Bank, which are far from ideal but still useful. The bank has calculated the share of the state sector in GDP and the share of the state sector in employment, and in China today, around a quarter of economic output comes from the state sector. For employment, it is between 5 and 16 percent.

Back in 1992, I did a book on the transition to market economies in Eastern Europe, where I had a table that lists the share of GDP and employment by state-owned enterprises in Western countries. If you look at that, China now is between where France and Turkey were then. Now, maybe you don’t think that France was a capitalist country in 1982 — fine, call it whatever you want. But this is where China is today in real life.

Noema: State ownership is one part. What about unpacking the idea of ownership? What does the term “political capitalism” imply in terms of formal, legal ownership rights? And how does that fit your conception of the state itself?

Milanović: What I argue is that under political capitalism, owners could be almost seen as custodians of state property. One of the characteristics of political capitalism is that you don’t have the rule of law, only “rule by law.” That means the state can throw you in jail more or less at will. You are required to operate in a certain way, and if you don’t, they can always find something that you have not done properly to use against you. Political capitalism means that your ownership is not guaranteed against expropriation by legal or extra-legal means.

But that does not mean that it’s not capitalism. After all, even in the West, capitalism has also had periods when there were forced nationalizations, like England, France and Italy after World War II, where there were nationalizations of big companies. It was not like you got back enough money for your property, and it was not as if you could choose not to be nationalized. So, I think political capitalism is still capitalism, even if the ownership of property is not guaranteed.

Noema: You’ve written a lot in your career about inter-class inequality and inter-country inequality. But what about inequality between regions within states?

Regional inequalities within countries may in fact be the biggest drivers of political discontent today. The “Yellow Vest” movement is a revolt by provincial France against Paris, Brexit is a revolt of England against London, politics in the U.S. is about the coasts against the middle.

These regional divisions typically correspond to a split between the more technically advanced and globally integrated parts of the economy versus more extractive or secondary production parts of the economy. The left-behinds blame these transitions on globalization, creating calls for de-globalization and what we sometimes sloppily refer to as populist politics.

Milanović:  A further example, which people often forget, is Turkey. In Turkey, the split is exactly like that: [President Recep Tayyip] Erdoğan has a majority in the countryside but has lost all the cities. And Hungary is also the same: Budapest is against [Prime Minister Viktor] Orban.

But how to put it in a broader perspective? Unfortunately, we know much less about regional inequalities within countries, which we really need to start thinking more about. The data for that do exist. I did some work many years ago on the five largest federations — the U.S., China, India, Indonesia and Russia — looking precisely at inter-regional inequalities. But it was mainly a numerical exercise, and I did not look at what might be driving these divergences or consider how these differences would become a political issue in the future.

One challenge for thinking about regional inequality is defining the units. For example, in the U.S., if we choose to measure the coasts against the center, are we just introducing units that are convenient for us? After all, the natural units in the U.S. would be states. But at the level of American states, the two big stories are first, that mean incomes between the states have converged and second, that the pattern of inequality within individual states has changed. It used to be the case (and many people think it still is) that the most internally unequal states were the southern states. This was true in the 1950s, but now it’s changed: the most unequal states are mainly on the coasts — California, New York and Texas, for example.

But thinking about inequality in terms of states doesn’t tell us much about the politics of inequality in the U.S. What really matters is not inequality within states defined by administrative borders but rather the gap between the big cities (which are doing well) and everyone else.

Noema: But there’s a paradox here. Whereas the greatest local inequality is occurring in globally connected urban areas — places like London, coastal California and New York — the political revolt emerges from the countryside, albeit often orchestrated by elites who are, in fact, urban elites (like Trump).

Milanović: Inequality is so multifaceted, so it depends on what you want to look at. In this case, I think the inequality that you want to look at is differences in mean incomes (or perhaps some other indicator) between the cities and the countryside. What you’ll find, I think, is that it’s really urban versus rural.

Overall, the situation is a little bit like the rise of Christianity, where you also had a big conflict between cities and the countryside. During the early days of Christianity, pagan meant rural. The people in rural areas were not Christianized because Christianity started in Rome and in the cities. Christianity was a religion of poor people in cities before it spread to richer people in cities. But who was left out? The people in the countryside.

Today, we have something similar: The globally connected cities are doing much better than the countryside. London is a prime example: Northern England has declined and even southern England is not doing very well, but London has disconnected itself from the hinterland. At the same time, it’s one of the most unequal cities in England. Durham, for example, is much more equal than London, but it voted almost 60 percent for Brexit.

What people are unhappy about is that feeling of being left out and ignored. In many places in the U.S., Britain and elsewhere, there is a feeling that nobody cares about us, that we’ve been abandoned. That’s what needs to be addressed.