I'll just say at the beginning that some of the more in-depth inequality talk went over my head. But otherwise, Milanovic writes extremely clearly and honestly just comes off as a genius. His thesis is that the entire globe now operates under the same economic principles that can be broadly described as capitalism. Thet are production organized for profit using legally free wage labor and mostly privately owned capital, with decentralized coordination. This is the first time the whole globe (or at least its major players) has been on the same page. At least some major states or societies, until now, used slavery, feudalism, hunting and gathering, or some other non-capitalist economic system. Today, everyone is practicing capitalism, divided into two forms: liberal meritocratic capitalism and political capitalism.
The book was amazing, especially chapter two about Liberal Meritocratic Capitalism and chapter 5 about The Future of Global Capitalism. The author is just simultaneously very grounded in quantitative reality but also projecting upwards about social changes, and that makes the book thrilling to read. It is a dense book in a good way, since Milanovic is not wasting words. The writing is great and the ideas expressed are incredibly interesting and engaging.
Liberal Meritocratic Capitalism
Liberal meritocratic capitalism is defined as the following. "Capitalism" is a system where most production is carried out with privately owned means of production, capital hires free labor, and coordination is decentralized. Also, most investment decisions are made by private companies or entrepreneurs. "Meritocratic" means that there are no legal obstacles preventing individuals from achieving a given position in society. "Liberal" means that there is some egalitarianism to correct for inheritance of property, such as providing free education or taxing the wealthy. This re-equalizes society somewhat. Milanovic argues that systemic forces in liberal meritocratic capitalism lead to the formation of an upper-class elite.
One interesting observation Milanovic makes of modern liberal meritocratic capitalism is of a major shift in the system. In Marx's time, capitalists were largely a leisure class who made almost all of their money from capital and very little to none from labor. Today, however, they earn large sums of money from both. Most capitalists today also work day jobs and are highly educated such that it is worthwhile for them to earn large sums from their labor as well as their capital that works for them. Milanovic labels this homoploutia, meaning "same wealth" in Greek. Since today's capitalists earn large sums from labor as well, this confuses the political question around taxation. Whereas the voters of the 1870s could easily argue that capitalists did not earn their income because they did not labor, today's voters see that capitalists work a day job, which makes it more difficult to build the political will to increase their taxes.
Another major observation Milanovic makes about liberal meritocratic capitalist development is about the decline of unions, especially in the private sector. His explanation was a good complement to Cowie's in Stayin' Alive. Whereas Cowie explains the political and social changes that led to a decline in union membership, Milanovic explains more economic changes. He writes that there are two big changes besides politics. First, a shift to a services-based economy meant that workers are now more spread out and have less opportunity to talk to one another and organize. When the United States was a manufacturing-based economy, workers needed to be gathered together on the production line at central locations where dozens if not hundreds or thousands of workers would come into contact with one another. It would be the same in a mine. But if you work at a McDonald's or a TJ Maxx, you don't meet with hundreds of other employees every day, so your ability to organize is diminished. Second, the decline in union power and membership corresponds to a time when China, India, and other developing countries have opened up to foreign investment, meaning that there is now a massive labor pool that capitalists in the developed world can draw from outside their own countries. This effect, however, will likely diminish with time, as this was a one-time opening that cannot be replicated again. But it will take a long time to diminish since there will still be more labor in Asia, Africa, and Latin America willing to work for cheap for a long time.
In a moment of bluntness, Milanovic writes of the problems facing the United States that, "The bottom line is that a very unequal, or polarized, society cannot easily maintain an extensive welfare state." He proposes two alternative solutions. First, the US can pursue policies that can equalize endowments of both labor and capital, so that welfare is not so necessary. Moreover, this would make it more possible to pursue welfare policies, since a more equal society with an expanded middle class is more likely to vote itself entitlements than an unequal society in which the classes fear or resent each other. Milanovic says that to equalize the distribution of capital and skill endowments, a state can deconcentrate ownership of assets (capital) or equalize returns to approximately the same skill levels, making it so that somehow those who get an education at UC-Riverside can get jobs as good as those who go to UC-Berkley. This would require a lot of investment in public schools and perhaps the withdrawal of tax-free status enjoyed at private schools. Second, the US can fundamentally change migration to make it more like a temporary movement of labor without access to eventual citizenship and welfare benefits; otherwise, people tend not to want to support a welfare regime that may favor perceived outsiders.
There is also an interesting section where Milanovic describes the characteristics of the ruling elite in the liberal meritocratic capitalist society. It is long, but I'm copying all eight points in full:
1. The ruling class controls most of the financial capital of the country. We have seen that in the United States, the top 10 percent of wealth-holders control more than 90 percent of financial assets.
2. The ruling class is highly educated. Many members of the ruling class work, and their labor income tends to be high (because of their high level of education). Members of the ruling class therefore combine high income from labor and capital—what I have called homoploutia.
3. The elite invest heavily in their progeny and in political control. Investment in their children’s education enables the children to maintain high labor income and the high status that is traditionally associated with knowledge and education. Investment in political influence enables the elite to write the rules of inheritance, so that financial capital is easily transferred to the next generation. The two together (acquired education and transmitted capital) enable the reproduction of the ruling class.
4. The objective of the investment in political control is done not only to improve the contemporaneous economic power of the ruling class, but to ensure its domination over time.
5. The ability of women to access the same level of education as men and to enjoy the same rules regarding inheritance makes women increasingly indistinguishable from men, when measured by income or power. Thus, the ruling class in liberal meritocratic capitalism is probably the least gendered of all historical ruling classes.
6. Increasing economic and educational similarity between men and women leads to family formation of similarly educated and rich couples (homogamy), which also contributes to intergenerational maintenance of these advantages.
7. Because the upper class is not defined according to hereditary or occupational criteria but is based on wealth and education, it is an “open” upper class. It co-opts the best members of the lower classes who are able to become wealthy and highly educated.
8. Members of the ruling class are hard-working and have an amoral outlook on life (see Chapter 5). Everything that enables this class to maintain and reinforce its position and is within the bounds of the law is, ipso facto, desirable. Its ethics are defined by the existing legal framework, and its use of money to control the political process extends to the use of money to change laws. This flexible interpretation of the rules enables it to stay within the confines of the law even if its practices increasingly diverge from general ethical standards.
Political Capitalism
Political capitalism gets a good explanation, but I think it is less complete than liberal meritocratic capitalism, which makes sense since liberal meritocratic capitalism is practiced in more open societies. Like liberal meritocratic capitalism is exemplified by the United States, political capitalism is exemplified by China. Usually, writes Milanovic, political capitalism is the result of communist revolutions conducted in societies that were colonized or de facto colonized. Political capitalism is defined by an efficient bureaucracy, the absence of the rule of law, and the autonomy of the state. But it confronts a major contradiction between the endemic corruption inherent to the system and the legitimacy of the system as well as a clash between its bureaucracy and the absence of rule of law. Political capitalism, by tying success in the economy to political connections, requires that the state relax rules for some people while pressing the full force of the law against others.
What is especially interesting, as I read Fukuyama, is Milanovic's explanation of how political capitalism forms. Milanovic argues that both Marxist and Liberal scholars are perplexed by the fall of Communism. Marxists' confusion is more obvious: it is difficult to explain why formerly Communist/Socialist countries would adopt capitalist systems, which should have seemed like a downgrade. Meanwhile, Liberals have trouble understanding why Communism emerged in the first place, and can only describe it as a historical mistake. Similarly, Liberals, writes Milanovic, cannot easily explain World War One, which ended the prior decades of liberalism that dominated the world. I think that last point is his least defensible, as the system that existed prior to WWI may have been cosmopolitan but it was not liberal. Liberal principles were in force only in a couple of the major players, and the rest were still aristocratic states. All were still colonizers.
Milanovic is somewhat defensive of communism, not as a system that is good in its own right as a "final form," but as a means for some countries to escape feudalism. Specifically, Milanovic writes (in his own italics) that, "communism is a social system that enabled backward and colonized societies to abolish feudalism, regain economic and political independence, and build indigenous capitalism. Or to put it another way, it was a system of transition from feudalism to capitalism used in less-developed and colonized societies. Communism is the functional equivalent of the rise of the bourgeoisie in the West."
Milanovic concludes by writing that political capitalism relies on the ability to insulate politics from economics and the ability to maintain a relatively uncorrupt centralized backbone that can enforce decisions in the national interest, not just the business interest. That is what makes a state like China so successful, because a strong Communist ideology keeps the state above the business interest that would otherwise consume it. I think there may be some requirement for successful political capitalism of a communist or otherwise ideologically charged party or movement at the helm of government. Milanovic believes that political capitalism is not likely to be attractive or mimicked around the world because it will fail in most cases to be economically successful in spite of the model China has provided.
The Interaction of Capitalism and Globalization
Like how states can use a communist revolution in place of a bourgeoisie to develop into political capitalist societies rather than liberal meritocratic capitalism, Milanovic also asserts that societies may deviate from the Western path of development. Whereas the United States, the UK, and Japan developed through import-substitution industrialization (and were followed by countries like Brazil, South Korea, and Turkey), there is an alternate path by which countries like China and India have developed by simply inserting themselves into global supply chains. Instead of using tariffs to support domestic industry, they can draw money in from developed countries by providing a cheaper alternative. For example, customer service jobs going to India and basic manufacturing going to China.
In this section, Milanovic also discusses the "citizenship rent" or "citizenship premium." Citizenship gives advantages to its holder, namely (1) a greater set of economic opportunities due to higher wages, (2) a claim over social benefits, and (3) nonfinancial rights like voting or the right to a fair trial. People are less tolerant of mobility today due to the divergence of different countries' incomes and wealths, because we recognize the premium we have and don't want to share it so easily. The conclusion is that either the gaps in economic development between countries must be reduced, welfare states in the rich world must be diminished, or migrants must be granted considerable fewer rights than natives. But at the heart of this is a massive injustice and a massive privilege. Identical individuals who live in different countries have very unequal income streams throughout their lifetimes. And unfortunately, most studies and discussions are based on income inequality in individual countries, not global income inequality. But it is global inequality that is must more severe. Since politicians are elected in nation-states, they don't concern themselves with global issues like this.
The Future of Global Capitalism
In the final chapter of the book (and also probably the best chapter), Milanovic sounds the alarm over amorality in hypercommercialized capitalism. This chapter is less economic and more philosophical and psychological; it's the point where the book really stands out. Milanovic starts by pointing out that religion and the tacit social contract that encouraged investment no longer exist in today's society. Religion's decline isn't explored in the book, but the elimination of the tacit social contract is. Milanovic writes that our actions are no longer monitored by our neighbors, as Adam Smith imagined. As we have moved from "community" to "society," we are now surrounded by strangers, and we become anonymous. Our coworkers rarely interact with our families. Our families may not interact as much with our friends. Whereas 300 years ago, before the Industrial Revolution, we may have lived in a village in which our co-workers, our friends, and our families all interacted with one another daily (and sometimes were the same people), today that world is gone in developed countries. I don't think it is a coincidence that we are less happy today.
The effect of being "unmonitored" reminded me of the public perception of Mitt Romney and Donald Trump's tax returns when they ran for President. Our public discourse about the two was too focused on legality and not enough on morality. People asked "Wouldn't you do that if you could?" rather than "How could you ethically pay so little in taxes?" I am not knowledgeable enough about past feeling, but I wonder if a person two hundred years earlier would feel morally unburdened like Mitt Romney did about paying no taxes in some years despite being incredibly rich.
The modern capitalist society is defined by atomization and commodification. Through atomization, we are all forced to surrender to certain efficiencies of capitalism. Long ago, it used to be more efficient for large family groups to live together and produce certain goods in the home. The family (which was larger and included extended family) would grow food, prepare it, and cook it. The family would clean together, garden together, and take care of babies together. Families made their own clothes and furniture and would come together to build homes. Today, all of those activities have been atomized or commoditized in one sense or the other. First, it became more efficient to live in a nuclear family, and now it may be more efficient to be a household of one. Family gets in the way of moving for a new job or education, both prized under capitalism, and family "internalizes" economic activities more efficiently produced by economies of scale in a factory. There is less space between the family and society than there was between family and community. Whereas the home was once sacrosanct, today private agents may enter it frequently to perform lawncare or cleaning services or to deliver food. Government agents may even enter it to prevent abuse of a spouse or a child. Some of these things may be good, some may be bad, but the change is significant. The home is not what it used to be.
And Milanovic writes that the reverse side of atomization is commodification. While atomization makes it possible for us to live alone because we can satisfy all our needs from the market (like hiring a babysitter instead of a family member doing it for free), commodification encourages the individual to provide that market service. We satisfy the needs of strangers instead of community members for money instead of social capital or altruism. I think that atomization creates depression and commodification creates anxiety. When we are atomized, we feel alone, and when we are commodified we feel stressed at not being productive. The gig economy is an example of commodification by commercializing our free time. Why sit on the couch when you can be driving for Uber? The result of the gig economy is also that we are not more polite due to our selfishness as Adam Smith imagined. Because we are unmonitored and can switch jobs more easily, there is less incentive to behave well since we won't see many people again. Ratings systems seek to alleviate this, but are not a full replacement. And so Adam Smith's observations are limited to capitalism in a community, and cannot fully describe how capitalism works today, in society. More and more I think I need to read Ferdinand Tonnies on community and society.
Milanovic finishes by writing about the evolution of Western capitalism. He discusses three types of liberal capitalism that have existed in the past and present. (1) classical capitalism is defined by workers gaining income from labor only and capitalists gaining income from capital only; (2) social-democratic capitalism is defined by a similar arrangement, but differentiated by the fact that not all capitalists are richer than all workers due to significant redistribution through taxes and welfare, moderating inequality; (3) liberal meritocratic capitalism is marked by homoploutia, and discussed above. But there are three different types of capitalism that may emerge as a form of historicist progress. One is people's capitalism, in which everyone has approximately equal shares of capital and labor income (as in each person deriving the same percentage of income from each); people's incomes will still differ, but there is free healthcare and education to help intergenerational mobility and increased capital share does not translate into increased inequality, so inequality does not tend to rise. Then there is egalitarian capitalism, in which everyone has approximately equal amounts of labor and capital income (as in each person getting the same amount of money). This would create very little inequality and the relative equality of incomes would ensure equality of opportunity. It sounds to me like Milanovic believes these would be progress in capitalism, gotten through social democracy. But finally, he points out that it is possible that progress is actually political capitalism. This would be achieved not through social democracy, but by elite capture of government in Western societies to run an efficient economy that allows for very little mobility. The more plutocratic Western democracies become, the more likely that outcome is.
At the end, Milanovic provides four broad policies that would lead to progress towards people's capitalism or egalitarian capitalism. I am quoting him directly:
1. Tax advantages for the middle class especially in the areas of access to financial and housing wealth, and a corresponding increase in the taxation of the rich; plus, the return to high taxation of inheritance. The objective is to reduce concentration of wealth in the hands of the rich.
2. A significant increase in funding for and improvement in the quality of public schools, whose cost must be low enough to be accessible not only to the middle class but also to those in the bottom three deciles of the income distribution. The objective is to reduce transmission of advantages across generations and make equality of opportunity more real.
3. "Citizenship light," which would entail the end of a strictly binary division between citizens and noncitizens. The objective is to allow migration without provoking nationalist backlash.
4. Strictly limited and exclusively public funding of political campaigns. The objective is to reduce the ability of the rich to control the political process and form a durable upper class.
Miscellaneous Facts:
- In 2016 the top 1% of the top 1% contributed 40% of campaign donations.
- John Stuart Mill on the costliness of bribes in 1861: "There has never yet been, among political men, any real and serious attempt to prevent bribery, because there has been no real desire that elections should not be costly. Their costliness is an advantage to those who can afford the expense by excluding a multitude of competitors."
- Interesting quote from Immanuel Wallerstein: "If anyone thinks that without state support or from a position of opposition to the state he can become a capitalist... this is an absurd presumption."
- Apparently China overthrew Robert Mugabe in 2016.
No comments:
Post a Comment