A Vision for Egalitarian Capitalism

Branko Milanović is a visiting presidential professor at the Graduate Center at the City University of New York. He sat down for an interview with Yakov Feygin, the associate director of the Berggruen Institute’s Future of Capitalism program, and Nils Gilman, the Institute’s vice president of programs, in Washington, D.C. Milanović’s new book, “Capitalism, Alone,” came out in September 2019.

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Berggruen Institute: 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. But of course, these days, maybe even more attention is paid to inequality within countries than between them. Can you briefly tell us about how these two different types of inequality have evolved over time?

Branko Milanović: We can trace the data back to about 1820. We know that the increase of global inequality was driven during the 19th century both by growing inter-country inequality and by growing intra-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 very high overall global inequality but with a shrinkage of in-country inequality and slight increases in between-country inequality. The peak of that pattern was from the 1960s to the 1980s: If you look at India and China, their GDP per capita, compared to the Western world, were both 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, then we should continue to see a decline of between-country inequality. That would actually push global inequality down as well.

BI: 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: When you look at inequality, as measured by the Gini coefficient, comparing inequality in income from property and inequality in income from labor in advanced countries, we are talking 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 with inequality in income 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 is a tendency in most countries since the 1990s, it naturally means that total income will tend to become more and more concentrated. The point is that with the current extremely uneven distribution of financial assets, the wealth of a country goes more and more only to the people at the top and very little percolates downward.

BI: 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. Can you expand on what you mean by this? 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 in rich countries, capital is very heavily concentrated among the wealthy, so you 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 — tend, paradoxically, to exacerbate inequality. The first often implies that two equally educated and rich individuals partner (which increases inequality). The second that deciding, for example, to tax 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 that on average for richer people, for the affluent middle class, are already at 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.

“The forces that are pushing inequality up within rich countries are stronger than ever.”

What we need is a redefined vision of a more egalitarian capitalism, starting with endowments. And if the endowments are more equally distributed, then you’ll need less redistribution of current income. To use 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 the rising share of income received from capital and growing inequality. So, in my view of the world, that’s an essential thing: to lower the inequality of the distribution of financial assets.

Now, you asked me: What are the institutions? That is a more difficult question. 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 finally 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. What made the U.S. special was the existence of so many really top public universities. Unfortunately, this 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, effectively, that there is unequal access to these top institutions: people who are middle class have a hard time paying for access to the top schools. 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.

BI: The British Labour Party has recently proposed incrementally transferring up to 10 percent of the equity of larger United Kingdom-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 candidates’ ideas about not just “taxing the robots” but “owning the robots?”

Milanović: I think this is a proposal very similar to what I argue in “Capitalism, Alone.” Note that it broadens ownership and at the same time gives greater participation to labor, which, according to the studies that exist, 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 more equal the distribution of income not only through taxation but also through some form of de-concentration of 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.

“Pre-redistribution: policies that aim to make starting points more similar rather than to use only taxes and transfers to equalize outcomes.”

BI: Let’s talk about your new book, “Capitalism, Alone.” Can you give us a brief overview of it, and 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 inequality up 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.

“I argue that communism was paradoxically a system that enabled the growth of capitalism.”

BI: 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. In China today, around a quarter of economic output comes from the state sector, and for employment, it is between 5 and 16 percent.

Back in 1992, I did a book on the transition to market economy in Eastern Europe, where I had a table listing 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, be my guest, call it whatever you want. But this is where China is today in real life.

BI: 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.

“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.

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

The reason we ask this is that, for all the focus on both inequality between countries or class inequality within whole countries, regional inequalities within countries may in fact be the biggest drivers of political discontent today. The gilets jaunes movement is a revolt by provincial France against Paris, Brexit was a revolt of England against London, politics in the U.S. is about the coasts against the middle.

It’s also worth noting that 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: I agree with that political assessment. A further example, which people often forget, is Turkey. In Turkey, the split is exactly like that: Erdogan has a majority in the countryside but has lost all the cities. And Hungary is also the same: Budapest is anti-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. Do we go with ex-post knowledge? 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 that are doing well and the rest.

“What really matters is not inequality within states defined by administrative borders, but rather the gap between the big cities that are doing well and the rest.”

BI: But there’s a paradox here: Whereas the greatest local inequality is occurring in the globally connected urban areas — places like London, coastal California or 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. So these were the pagans. And there was a big disconnect between the people in the cities with their new religion and the pagans left behind 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. I spent three days in Durham, which is much more equal than London, but which 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.