(Milanovic does outstanding work on income inequality but this book is
just the latest version of TINA.)
The Nation, May 4, 2021
Diminishing Returns
A liberal economist tries to reckon with the state of capitalism today.
By Alyssa Battistoni
The 2008 financial crisis is widely credited with reviving the American
left, from the tent cities of Occupy Wall Street to the proliferating
chapters of the Democratic Socialists of America. Yet it is not just
street protesters and millennial Marxists who have put capitalism under
scrutiny: Liberal pundits and policy-makers have also become analysts of
capitalism’s ailments. Since Thomas Piketty’s 2013 breakout hit, Capital
in the Twenty-First Century, the publishing industry has churned out new
books on capitalism, inequality, and economics at a furious pace. The
past two years alone have seen the publication of Piketty’s follow-up,
Capital and Ideology; Gabriel Zucman and Emmanuel Saez’s The Triumph of
Injustice: How the Rich Dodge Taxes and How to Make Them Pay; Heather
Boushey’s Unbound: How Inequality Constricts Our Economy and What We Can
Do About It; and Anne Case and Angus Deaton’s Deaths of Despair and the
Future of Capitalism, to name just a few. Even capitalism’s erstwhile
champions now find themselves on the back foot: None other than
globalization’s manic hype man Thomas Friedman has turned to mea culpa,
admitting that “we broke the world” by letting capitalism run too
rampant. (“We”?)
BOOKS IN REVIEW
CAPITALISM, ALONE: THE FUTURE OF THE SYSTEM THAT RULES THE WORLD
By Branko Milanovic
The growing body of liberal capitalism studies can be found throughout
the academic disciplines, but it is most pronounced in economics, where
a new cohort has loosened the formalist strictures of a previous
generation and embraced a more historical and sociological approach.
Instead of perpetually refining idealized and abstracted models, these
economists ground their analyses in an accumulating mountain of
empirical evidence documenting the growth of gargantuan fortunes at the
top, the deteriorating health of those at the bottom, the decline of
upper-bracket tax rates, and the stagnation of most people’s wages.
Although its analyses and prescriptions are radical by the standards of
the past few decades of Anglo-American politics, this work is hardly
revolutionary. Yet it has forced many liberals to finally reckon with
the features of capitalism that leftists have long lamented: the
production of vast poverty amid obscene wealth, the convergence of
economic and political power, and the proliferation of crises that
disrupt the system’s promised stability and undermine human health and
happiness.
The economist Branko Milanovic has been a central participant in the
debates of this emerging field, as well as one of its most idiosyncratic
contributors. Born in Belgrade when it was part of Yugoslavia, Milanovic
wrote his dissertation on income inequality in his home country long
before it was a fashionable topic. He went on to research income
inequality as an economist at the World Bank for nearly two decades
before taking up a string of academic appointments; he currently teaches
at the Graduate Center of the City University of New York. But he is not
your typical World Bank economist: Milanovic knows his Marx and, though
not a Marxist himself, has long insisted on the value of class analysis
and historical perspectives to economics, while also dabbling in
political-philosophy debates about distributive justice. His experience
of life under actually existing socialism, meanwhile, gave him critical
distance from the end-of-history narratives that were trumpeted in much
of the West after the fall of the USSR—as well as from the
end-of-the-end-of-history hand-wringing that has proliferated since
2016. The discourse, then, seems to be catching up to where Milanovic
has been all along.
With several books to his name already, Milanovic’s breakthrough came in
2016 with the publication of Global Inequality, as his longstanding
research interests converged with the mainstreaming of the study of
inequality. The book took stock of globalization’s effects on income
around the world and brought an international focus to what in many
countries had been treated as a domestic issue. It garnered attention
for its famous “elephant curve” graph, which showed that since 1988, the
working and middle classes of emerging countries have made huge gains
and the working and middle classes of the developed West have lost
income—all while the rich around the world made out like bandits. The
graph was notable not because it contradicted the conventional wisdom on
globalization but because it presented stark and clear evidence of an
oft-discussed trend. Milanovic argued, moreover, that the graph was not
all bad news: While the working and middle classes of the North Atlantic
were struggling, their peers outside the West were doing better than
ever. Even if capitalism distributes prosperity unevenly, Milanovic
observed, it remains a powerful engine for generating wealth.
Capitalism, Alone, his latest book, takes on still bigger game, offering
an account of capitalism itself. This ambitious undertaking can perhaps
be read as a tribute to Marx. “Whoever studies Marx,” Milanovic wrote in
2018, “can never forget the grandiosity of the questions that are being
asked.” The point of economics is to understand the world as a whole.
And for Milanovic, what is novel about capitalism today is that it spans
the whole world. In previous epochs, capitalist societies coexisted with
those that organized production differently: hunting and gathering,
slavery, serfdom, subsistence farming, and, of course, the socialism of
the Soviet Union. Since the latter’s fall, capitalism has become not
only the world’s dominant economic system but, functionally, its only one.
Like his previous book, Capitalism, Alone blends empirical research with
creative analysis, bringing an eclectic mix of Marxian class analysis
and Weberian sociology to bear on economic data about inequality,
corruption, growth, and migration. But where Marxists typically seek to
delve beneath the realm of appearances to understand how capitalism
really operates, Milanovic stays at the surface level, analyzing
capitalism’s effects as they appear in the data and developing
typologies accordingly. For him, moreover, clarity about capitalism’s
defects does not translate into a call for its demise. In fact,
Milanovic argues that no such thing will happen. He is not deluded about
capitalism but rather reconciled to it. The book’s philosophy can be
summed up as: It is what it is.
Milanovic opens Capitalism, Alone with a definition of capitalism
borrowed from Marx and Weber and likely familiar to most of his readers.
Capitalism, in this account, is a system in which production is
“organized for profit using legally free wage labor and mostly privately
owned capital, with decentralized coordination.” This system has long
existed, he contends, citing the Roman Empire and sixth-century
Mesopotamia along with the more familiar examples of Italian city states
and Dutch traders—an argument that runs counter to those made by many
scholars of capitalism, who disagree on its precise starting point but
rarely place it quite so far back in history. But today, instead of
competing with or encroaching upon other forms of production, capitalism
operates without any true competitors.
For Milanovic, then, the study of contemporary capitalism means
recognizing internal differences within a unitary system. He identifies
two main types: the meritocratic “liberal capitalism” of the West and
the state-led “political capitalism” of China and a number of other
countries. Like his brief history of capitalism, this schematic is both
unremarkable in its generalities and idiosyncratic in its details.
Notably, his use of “liberal” is not a reference to liberalism as it is
usually conceived in terms of individual freedom, the rule of law, and
democratic governance. Rather, his system of “liberal meritocratic”
capitalism is loosely inspired by two of the possible distributive
systems in John Rawls’s A Theory of Justice. The liberalism of Western
capitalism, Milanovic argues, is found in the fact that goods are, at
least in theory, distributed meritocratically and that social mobility
is “liberal”—that is, aided by policies like inheritance taxes and free
education so that individuals’ opportunities are not constrained by
arbitrary conditions of birth. His analysis of political capitalism, by
contrast, highlights the relationship between the political and economic
spheres: In political capitalism, political power is used to achieve
economic gains instead of the other way around.
Today’s liberal capitalism, Milanovic argues, must be distinguished from
two earlier strains of capitalism: the “classical” capitalism of the
19th and early 20th centuries and the “social democratic” capitalism of
the mid-20th century. He derives these categories not from an assessment
of their underlying distributive principles or how their industries were
organized but from a set of empirical features. In classical capitalism,
capital was highly concentrated and received a rising share of income;
those who owned capital were rich, married one another, and transmitted
their benefits to their children. In social democratic capitalism, this
maldistribution was at least partially checked, with an increasing share
of income going to labor and with rich people less likely to marry one
another as social mobility rose. Although liberal meritocratic
capitalism in Milanovic’s account has retained some elements of the
social democratic compact—access to public education, however
attenuated, and taxes on inheritance that limit the intergenerational
transfer of wealth—it is in many ways a return to the conditions of
classical capitalism and the acute inequality that characterized it.
Milanovic surveys a range of explanations for this change, most of them
familiar. He observes that a decline in the cost of capital,
particularly computing power, has made it efficient to replace labor
with technology, while the decline of labor unions, and with them
labor’s bargaining power, has resulted in a decreasing share of income
going to labor. He also observes a shift in social and cultural mores:
In the period of classical capitalism, the wealthy were often idle,
living off capital income alone, but in the period of liberal
meritocratic capitalism, the owners of capital tend to have high-paying
jobs. Likewise, through “assortative mating,” people of similar wealth
and educational status marry one another and confer these advantages on
their children, not only passing on their wealth but investing in their
human capital. As a result, the novel social and economic patterns of
liberal meritocratic capitalism have reinforced the wealth of the
already wealthy and stunted intergenerational mobility. And if that
weren’t enough, the rich exert influence over the political process to
advance policies that further solidify their position.
What makes the inequality of liberal meritocratic capitalism
particularly slippery, Milanovic writes, is that a number of its
features appear “morally acceptable” to many. Liberal meritocracy’s
beneficiaries rule through “economic power and ideological domination.”
They do not need to violently suppress the lower classes; their status
is legitimated by social norms, including their ability to pay for an
elite education that confirms their intellectual superiority.
This phenomenon is at the heart of Piketty’s recent doorstopper Capital
and Ideology, which both explores and condemns ideological
justifications of inequality. But Milanovic is more ambivalent about the
work that norms do. People should be able to get rich by working, he
argues, and it’s better to have hard-working wealthy people than a
leisure class. The tendency for people to marry those of similar
education and income levels reflects little more than the “greater
participation of women in the labor force, social norms that value paid
work, and a preference for partners who are similar to ourselves.” He
acknowledges that these norms have pernicious side effects—the fact that
people who receive income from capital also work for money makes it
harder to hike tax rates, for example, since today’s wealthy are seen
not as parasites but as people who have earned their money. But rather
than interrogate these beliefs, he simply notes them in passing as one
of the many barriers to change.
Milanovic points out plenty of others. In his view, the social
democratic tool kit of the past—unions, mass education, high taxes,
social transfers—will not suffice to fix the current state of income
inequality. Service workers are difficult to organize and are unlikely
to attain the power of unions in the heyday of manufacturing. Mass
education has hit a “ceiling” and is likely to deliver diminishing
returns to a new generation of young people. High taxes and social
transfers have also become “politically difficult” to achieve in a
globalized economy without risking capital flight—and in any case, as
Milanovic notes, the large middle class of rich countries now looks upon
such transfers skeptically, unconvinced that it will benefit from them.
Perhaps most significantly, a new wave of “economic migration” presents
a challenge to welfare states, one that threatens to send them into a
vicious cycle of cuts. (I’ll return to this shortly.)
For Milanovic, then, liberal meritocratic capitalism describes a system
in which a small elite has managed to entrench its position even though
equality of opportunity is ostensibly the norm. In defining political
capitalism, he shifts gears, setting criteria focused not on an
empirical analysis of the ruling elite but on the system’s form of
governance.
Here Milanovic turns to Weber for his baseline definition of political
capitalism: a system in which actors use “political power to achieve
economic gains.” As an ideal type, its key features are an efficient
bureaucracy, absence of the rule of law, and the autonomy of the state.
In the absence of democratic mechanisms, state legitimacy stems from the
ability to deliver growth; if growth falters, other aspects of the
system may come into question. Growth is managed by a technocratic and
meritocratic bureaucracy, yet laws are arbitrarily applied, ignored, or
modified in pursuit of the goal of adequate growth. Corruption is
“endemic to political capitalism,” at least to a point: Taken too far,
it damages the growth that legitimizes the system in the first place or
increases inequality to a point that delegitimizes the bureaucracy that
manages it. The real aim is not to plunder the system but to retain
control over it. Whereas liberal democratic states have largely been
captured by capitalists, political capitalist states are autonomous
insofar as they alternately encourage and rein in the private sector
according to the national interest.
Milanovic’s argument about political capitalism, which draws on his past
research on socialist economies, is also partly genealogical. While his
account of the development of liberal meritocratic capitalism follows a
familiar trajectory, he identifies political capitalism as the outgrowth
of communism. Communism, he maintains, is hard to understand within what
he describes as the teleological narratives advanced by both liberals
and Marxists. Marxists have traditionally thought that capitalism was a
necessary stage on the way to communism: Capitalism would develop the
forces of production, which communists would then seize and put to use
for the benefit of all. Liberals, meanwhile, expect “linear progression
towards richer and freer societies.”
Yet in Milanovic’s view, neither the Marxist nor the liberal account
offers a satisfactory explanation for the rise and fall of communism:
The rise presents a problem for liberals, the fall for Marxists.
Moreover, neither account is well-suited to explain the “specifically
Third World” path to development, instead assuming that such countries
will simply follow the trajectories of the developed West. Milanovic’s
approach is to invert the traditional Marxist view: He contends that
communism acted as a way station to capitalism rather than the other way
around. Communism, he writes, was “a social system that enabled backward
and colonized societies to abolish feudalism, regain economic and
political independence, and build indigenous capitalism,” noting that
communist movements in Asia, Africa, and Latin America did the work
instigated by bourgeois revolutions in the West, with the added
challenge of overthrowing not only feudal powers but colonial ones. Once
in power, communist parties built infrastructure, educated populations,
and developed extensive bureaucracies—all of which ultimately paved the
way for capitalism once the Cold War ended.
One might note that it is strange to describe a system in terms of what
it gave way to, which after all is easier to see in hindsight. But
Milanovic’s point is that communist societies modernized under the
control of powerful states, many of which have retained an authoritarian
stamp even after their transition to capitalism.
From these broad brushstrokes, Milanovic outlines a set of empirical
features with which to identify systems of political capitalism: They
are characterized by single-party rule and political structures that
emerged after an anticolonial independence struggle, usually a violent
one. In some of these states, a left-wing party stewarded the transition
to capitalism. It is not entirely clear what these criteria have to do
with communism’s evolution into political capitalism, and Milanovic
doesn’t explain, which is particularly striking given that this
definition of political capitalism is notably constructed so as to
exclude the former Soviet Union. In fact, Milanovic asserts that only 11
countries fit his description: China, Vietnam, Malaysia, Laos,
Singapore, Algeria, Tanzania, Angola, Botswana, Ethiopia, and Rwanda.
Although these countries share some historical trajectories, the huge
variability among them (not all, for example, were communist) raises
questions about how useful a category political capitalism is as
Milanovic has constructed it. More generally, the fact that most of the
world’s countries do not fit into either of his categories suggests
further limitations to this scheme for parsing capitalism. How should we
understand Russia and Brazil, India and Saudi Arabia?
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