Branko Milanovic’s global inquality research is featured in this article on the predictability of inequality cycles.
Excerpt:
Even though inequality began to rise after 1980, it took economists a couple of decades to really notice. Among those who turned their attention to the fallout was Milanovic, who grew up in Communist Yugoslavia, spent a couple of decades in the research department of the World Bank, and now teaches economics at the City University of New York. Milanovic originally built his reputation in the late nineties, when, using a giant World Bank database of household incomes, he was able to demonstrate how the benefits of globalization had been distributed among different classes across various groups of countries. The big winners were the “global plutocrats,” whose returns on capital shot up, and the new mass middle class of the emerging world, mainly in East Asia and India, who benefitted from the spectacular growth of their regions. The big losers were Western middle-class workers whose incomes stagnated as the industries they worked in were hollowed out by foreign competition. Hence the visceral appeal of Donald Trump’s protectionist measures against China.
Milanovic isn’t just a whiz at number crunching; he has a whimsical, wide-ranging appreciation for history and culture. He has written about income distribution in the early Roman Empire (inequality during the Augustan age was roughly comparable to that of the United States today), the effects on European soccer when limits on the number of foreign players allowed in club teams were lifted (the richest clubs became even more dominant in their leagues), and the financial implications of Elizabeth Bennet’s decisions in “Pride and Prejudice” (marrying Mr. Darcy would put her in the top tenth of one per cent, while, as a spinster, she would have fallen from the top percentile to about the fiftieth percentile). “Capitalism, Alone” builds on Milanovic’s previous book, “Global Inequality,” which came out in 2016. Indeed, so many of the themes and ideas in the new book were prefigured in the last one that ideally the two should be read together.
In “Global Inequality,” Milanovic traced the fluctuations of inequality back to the Middle Ages in Holland, Spain, and Italy, and showed that inequality has been going up and down in long and unpredictable waves ever since, responding to various contending forces. In the fourteenth century, for instance, the Black Death led to shortages of labor, which drove up wages in Italy; in the twentieth century, two world wars and the Great Depression destroyed a generation’s worth of capital, causing the incomes of the rich to plunge. Surveying all the data, Milanovic concludes that there seems to have been some sort of cap on inequality—a limit to the economic divisions a country can ultimately cope with. The rise of inequality in the United States during the nineteenth century, its subsequent fall during the middle decades of the twentieth century, and its resurgence in the past four decades provide an example of the wave at work. Kuznets had come up with his inverted-U-shaped curve only because he had focussed on too small a slice of history.
In “Capitalism, Alone,” Milanovic turns from the past to the future. With the rise of the emerging economies of Asia, he says, we now have two alternative forms of capitalism operating side by side. One is the “liberal meritocratic” version found in the West, and championed by the United States. The other is “political capitalism,” the less democratic and more authoritarian variant, which has taken shape, most notably, in China. Like all schematics, this one elides a lot of details, but it provides a useful conceptual frame.
In the “liberal meritocratic” world, inequality arises from the way capital is accumulated. The rich are able to save more than the poor, and thus come to own a disproportionate share of the capital and the wealth in the economy. Since the return on capital, a major source of income for the rich, tends to be higher than the growth of wages, the rich become richer. Almost as potent is the way the benefits of education are distributed: rich people tend to be more highly trained, and can earn higher salaries; they are also able to earn higher returns on their capital, since their wealth gives them greater tolerance for illiquidity and risk. In addition, they tend to marry other rich, educated people and are able to pass on more capital to their children, thereby perpetuating inequalities from one generation to the next.
The “political capitalism” of China has its own inequality-generating dynamics. Although China has become capitalist to the core—almost eighty per cent of the country’s industrial output is produced in the private sector—the commercial classes are under the thumb of a highly disciplined, autocratic bureaucracy. The rule of law is attenuated, decision-making can be arbitrary, property rights are not fully secure, and corruption is endemic. China is essentially going through a hugely accelerated version of the industrial revolution and the Gilded Age rolled into one. Add in the insidious impact of cronyism, and a very unequal society results. Income distribution in China, it turns out, is even more skewed than in the United States, approaching the sort of levels one finds in the plutocratic republics of Latin America.
What does all this mean for the future of global capitalism? Milanovic finds little on the horizon within either system that would curb the trend toward greater inequality, let alone reverse it. Despite the subtitle of his new book, though, Milanovic wisely trains his attention on the past and the present, steering clear of grand predictions. As he has pointed out, the economics profession has an abysmal track record when it comes to seeing into the future. Attempts to make predictions about societies are, in his view, inherently doomed, because of the contingencies of human events. To have predicted that a decline in inequality was going to happen in the first part of the twentieth century, one would have had to foresee (among other things) the onset of a global conflagration in 1914—and even as late as 1913 almost nobody did.
The problem with thinking in terms of waves or cycles is that doing so creates a false promise of predictability. Take the stock market. People often characterize it as something pulled between bull markets and bear markets; but, as anyone who has tried to time the market knows, it’s almost impossible to predict how high a wave might go or how long it could last. The contours of stock-market cycles become discernible only once they are over. The same seems to be true of inequality waves. That’s why Milanovic pointedly ended one of his earlier books with a quote by the poet Constantine Cavafy:
Men have knowledge of the present.
As for the future, the gods know it,
alone and fully enlightened.
Read the full New Yorker article by Liaquat Ahamed.