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The Future of Capitalism

April 20, 2020 by

This will be a long review because Branko Milanovic, the author of Capitalism, Alone has a lot to tell. Capitalism, Alone is not an easy read, but it is worthwhile. Milanovic is a renowned academic, a former economist at the World Bank and an authority on inequality.

The whole world is capitalist now, Milanovic writes, including China. “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.  We live in a world where everybody follows the same rules and understands the same language of profit-making.” Even in China the state controls only twenty percent of GDP.

Milanovic distinguishes between liberal meritocratic capitalism, as we currently see in its purest form in the US, and political capitalism, of which China is the most important example. Modern political capitalism combines private-sector dynamism, efficient rule of bureaucracy, and a one-party political system, writes Milanovic. Deng Xiaoping, China’s leader between 1978 and 1992, is its founding father. The model can be found in China, Vietnam, Malaysia, Laos, Singapore, Algeria, Tanzania, Angola, Botswana, Ethiopia, and Rwanda, according to Milanovic. Political capitalism has three characteristics, he says. First a highly efficient and technocratically savvy bureaucracy. Their main duty is to realize high economic growth and implement policies that allow this goal to be achieved, because growth is needed for the legimization of its rule. Second is the absence of a binding rule of law. These countries have laws but they are applied arbitrarily. The elite benefits from the arbitrariness since it can simply not apply the law when that is inconvenient, or it can apply it with full force when an ‘undesirable’ political actor, or business competitor, needs to be punished. Zones of lawlessness, including corruption, are not an aberration but an integral part of the system. The third characteristic is the dual ability of the state to be guided by national interests and to control the private sector. “This requires, in order for the state to be able to act decisively, its independence from legal constraints – in a word, arbitrary decision-making by people, and not decision-making by laws.”

The most important advantage of liberal capitalism resides in its political system of democracy, which is built into the setup of the system, Milanovic writes. The most important advantage of political capitalism is more efficient management of the economy and thus higher growth rates. This is not built into the system but has to be constantly demonstrated. Both systems also have their weaknesses: inequality for liberal capitalism and corruption for political capitalism.

Lets first look at inequality. The most important threat to the longer-term viability of liberal capitalism is “a self-perpetuating upper-class and polarization between the elites and the rest. (…) Since the late 20th century the share of capital income in total income has been rising. Capital and capitalists are becoming more important than labor and workers.” Milanovic agrees with the famous French economist Piketty that inequality increases with the concentration of capital. “High concentrations of capital income exist in all Western countries, US and UK are no outliers. It is a systemic feature of liberal meritocratic capitalism that capital income is extremely concentrated and is received mostly by the rich. As countries grow richer, they acquire more wealth from savings. Moreover, the increase in their capital overtakes the increase in their income, and they gradually become more capital-intensive or capital-rich. Richer countries thus will ‘naturally’ tend to be more unequal.”

A fairly new development “is the presence of people with high labor income among the richest income decile, and even more interestingly the rising share of the population that has both high labor and high capital income. In 1980, only 15 percent of people in the top decile by capital income were also in the top decile of labor income, and vice versa. This percentage has doubled over the last 37 years. In classical capitalism, capitalists would be rich anyway and they would have neither the desire nor the time to double up as hired labourers. This may be the product of either capital-rich people acquiring high levels of education and earning high wages, or of high-wage earners saving portions of their salaries and becoming rich capitalists. 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.”

Another new development in the increase of inequality is greater ‘homogamy’: people of the same or similar education status and income level marrying each other; spouses who both all well educated, from the same social class, reading the same novels and newspapers, dressing the same, preferring the same restaurants, places to live, cars to drive and people to see. “If educated, highly skilled, and affluent people tend to marry each other, that by itself will tend to increase inequality.” Assortative mating accounted for about one-third of the inequality increase in the US between 1967 and 2007 and on average 11 percent between the early 1980s and early 2000s in the OECD.

Milanovic also writes about education for the elites. In the top38 US colleges and universities, more students come from families in the top 1 percent than from the bottom 60 percent of income distribution. The same process is beginning to occur in Europe. “As the rich realize the advantages of expensive private education, their willingness to pay high tuition enables those schools to attract the best professors and gradually guts the public system of its best teachers and of children from wealthy families. Further, as the rich continue to separate themselves, their willingness to pay taxes for public education diminishes. The eventual result is a bifurcated education system that replicates the distribution of wealth: a small group of top schools attended mostly by the rich, and a large group of mediocre schools open to everyone else.”

Inequality is not reserved for liberal capitalism by the way. Inequality in China even significantly exceeds US inequality, approaching the levels in Latin America, with, as in the US, a rising share of income from capital and a very high degree of concentration of capital income in the hands of the rich.

The major weakness of political capitalism is rampant corruption. Corruption is part and parcel of the system, because of the discretionary powers of the ruling elite. But “the system is always in precarious equilibrium. The population may tolerate its lack of voice (or in some cases, may not care whether it has a voice or not) as long as the elite delivers tangible improvements in living standards, provides tolerable administration of justice, and does not allow glaring inequalities. If corruption gets out of hand, the system may collapse.”  The current anti-corruption campaign in China is meant “to push these forces back for a while – to make the cost of engaging in embezzlement higher in order to reduce its incidence and merely keep corruption in check. Once the campaign weakens, as it is bound to do, corruption will again become more common”, until another campaign is started.

Capitalism will keep its universal dominance according to Milanovic because of the technological and institutional links of companies and countries in the global system. “We lack any viable alternative to hypercommercialized capitalism. Discarding the competitive and acquisitive spirit that is hardwired into capitalism would lead to a decline in our incomes, increased poverty, decelaration or reversion of technological progress, and the loss of other advantages (such as the goods and services that have become an integral part of our lives) that hypercommercialized capitalism provides.” But, he notes:  “We cannot improve our material way of life without giving full play to some of the most unpleasant traits of our nature.”

Milanovic is overly pessimistic in my view when he writes that ethics and morality cannot play any role in capitalism. Morality has been outsourced to the law, he writes, and personal soul-searching just cannot happen; there is no such thing as lawful but awful. Economic actors play the game as close to the rules as possible; if the rules need to be bent or ignored, they try to avoid being caught. If they are caught nevertheless, they try, by using a phalanx of lawyers, to find the most recondite and spacious explanations for their behavior. And if that fails, they settle. According to Milanovic, anyone who remains inside the globalized and commercialized world has to fight for survival using the same means and the same (amoral) tools as everyone else. You can only impose strong ethical constraints on yourself if you plan to drop out of society or move to a hideaway from the normal world.

Milanovic predicts that worldwide corruption will keep on rising, because life success is measured only by financial success, because open capital accounts make it easier to move money between jurisdictions and thus to launder stolen money or evade taxes and because of the demonstration effect of globalization, where people in middle-inome and poor countries believe they deserve the level of consumption available to people in similar positions in rich countries, a level that they can attain only if they engage in corruption. “Corruption has become normalized, and it will become even more so.”

This book has a high density of information and analysis. Milanovic confirms his authority on inequality. His insights into both capitalist systems, the liberal and the political, are interesting, as are his predictions and recommendations, although I am more optimistic than he is about the possibility of doing the right thing within the capitalist framework.

Branko Milanovic. Capitalism, Alone. The Future of the System That Rules the World. 2019, The Belknap Press of Harvard University Press.