Just because capitalism defeated communism at the end of the Cold War does not mean that Western “liberal capitalism” will automatically triumph over China’s “political capitalism”. That’s the provocative argument of Branko Milanovic’s new book, Capitalism, Alone. Executive Editor Damir Marusic and Assistant Editor Aaron Sibarium recently sat down with Milanovic to talk about the future of the system that runs the world. This is a lightly edited transcript of the conversation.
Damir Marusic for TAI: Welcome, Mr. Milanovic. It’s a real pleasure to have you here. I’ve been a fan of your writing for a very long time. You’re one of those writers who seems unafraid to follow your curiosity wherever it takes you. You have a new book out very much in that vein, Capitalism, Alone. Could you tell us a bit about what inspired you to write it?
Branko Milanovic: The book actually has a two-fold origin. After I finished my previous book, which dealt with global inequality, I didn’t have an obvious thing to write about. There were two things that I had in mind but I could not figure out how to put them together for a long time.
The first was an intellectual problem: What is the global-historical importance of communism? In other words, if in 50 or 100 years we study global history, how are we going to assess communism? Is it like an anomaly, some weird thing which happened and never came back? What did it respond to and what did it lead to? And these reflections then lead me to redefining its role as having, ironically, laid the groundwork for the emergence of autonomous, independent capitalism in the countries that were colonized. So that was the first idea. And that of course led me to China. Having grown up in a communist country, I always knew Chinese Maoist history reasonably well, but I didn’t know well at all the real Chinese history of 3000 years. So I brushed up a little bit on that.
And then of course the second part is that I was becoming more and more aware that the rising inequality in the West is not simply a problem of rising [income] inequality, which could be counteracted by taxation policy. But that there is also a real danger of the creation of an upper class that controls the political process, reproduces itself, and creates a plutocracy.
So there were these two origins, and as you can see, one led to the discussion of U.S. liberal capitalism and the other one to the discussion of Chinese political capitalism.
DM: Can you talk a little bit about the role of inequality as you see it in societies? Is there a tolerable level of inequality that is possible—an upper limit? Is it more tolerable in certain societies than in others? And what concerns you most about inequality?
BM: This is of course a very good question. Let me try to answer it in a rather abstract way first.
I’m actually somebody who is in favor of inequality because a certain degree of inequality is always necessary to reward people who are working more, or who are investing better, or who are luckier. Luck plays an extremely large role, and that’s something that we cannot control—nor should we try to. So inequality plays this positive role, because by making some people richer, it allows others to become richer too (as Deng Xiaoping actually said).
But there are certain points where inequality becomes counterproductive, in the sense that it cements economic and political power. And I think that’s where the left-wing critique of inequality seems reasonable to me, because it’s essentially a critique of an upper class. And I do see some tendencies in that direction in the contemporary United States. In the last 20-30 years, not only has inequality gone up, but the intergenerational preservation of inequality arguably has as well—although it’s perhaps too early to judge that second part. But that could be something we have to deal with in the next one or two or three generations.
So these would be the negative effects of inequality. And obviously countries like Brazil and China can burst out on the scene when you least expect it. One would like to be able to point to a Gini coefficient of, say, .32 as being ideal and good for everybody. But obviously, it doesn’t happen like that.
Aaron Sibarium for TAI: You write in the book that what you call liberal meritocratic capitalism (essentially the U.S. model) has a systemic tendency towards inequality. But you also say that this is true of political capitalism (i.e. the Chinese model) as well, albeit through different causal mechanisms. Could you describe those two variants and explain why both tend to generate inequality?
BM: In the case of liberal meritocratic capitalism, there are six different engines whereby inequality increases. I won’t go through all of them, but an important one is the rising share of capital in total output, which is an empirical tendency we have seen in the last 30-40 years—maybe due to rising monopolization, maybe due also to weakening trade unions. There are many other reasons. This then percolates throughout the system.
Of course, the high concentration of capital in the hands of the few has been a characteristic of capitalism forever. But there are other elements too, like the fact that people marry each other now who are much more similar [assortative mating], and the fact that people who are rich in capital now tend to be rich in terms of labor income too, which is really a new phenomenon. I want to highlight that, because people don’t realize that we no longer have classical capitalism, where capitalists would do nothing else. What we have now are people who are rich in terms of both capital and labor income.
Now, when we come to [Chinese] political capitalism, my thinking there is not as developed as with liberal capitalism, simply because the data are not as available, nor is the discussion as common and fertile as it is in the U.S. But when we look at the evolution of the Chinese upper 5 percent over the last 25 years, you basically have total replacement of the top, where [unlike before] you have a professional class and capitalist owners who are now there.
Now, what are the structural elements? There is a rising share of capital in total output in China just as in the U.S. That’s actually observable in the data. Obviously, that share is underestimated [in China], as it is underestimated here [in the U.S.] as well. What I think is very interesting in political capitalism is the role of corruption. Corruption, in my opinion, is an intrinsic element of that system, and that corruption then of course percolates: it has an impact throughout the income distribution. There are nice Chinese data I show in the book where you see how the level of corruption rises with administrative level [of responsibility]. And it is always higher when you talk about corruption within the CCP, the Communist Party apparatus, than within government or business, which again shows you that the real power is within the Communist Party apparatus. So these would be some of the structural features that I see in the case of political capitalism.
DM: You talk about the various stages of capitalism, and about the role communism played in capitalist development. Do you have a theory of history that you subscribe to?
BM: It’s an excellent question, and a very difficult one. I would say that I have an implicit theory—implicit simply in the way that I construct my argument. Particularly when I talk about the role of communism in global history, I do see some regularities which appear. But obviously I’m not Karl Marx, I can’t tell you for sure what the next stage of economic development will be. But I do think that there are certain—how should I say—certain improved stages, at least in the last two centuries, not only in the West but actually in global history. But I cannot totally dismiss the possibility of a non-linear theory, in which there are different cycles. When we have this graph which shows this incredible increase of GDP per capita, you always wonder, is it going to continue on this exponential trajectory? Or will it actually become a logistic curve, or will it actually decline?
So to answer your question, I do have an implicit theory. This theory is very much a stage theory, but I cannot dismiss a more cyclical view of the world.
DM: I ask because many on the American Left seem nostalgic for an earlier stage of American capitalism [one that predominated in the middle part of the 20th century, lionized by people like Paul Krugman], one they perceive to be more equal and democratic. Is that possible? Can we go back?
BM: I see it as possible, but I’m not sure what the likelihood is. Still, I think that we cannot totally exclude the possibility that within the next, again, 20 years or so, the U.S. might end up by being more “socialistic” than Europe. And let me try to explain why that might happen.
I think some of the excesses of capitalism are actually most prevalent, most obvious, in the United States. There is quite a lot of disenchantment with some of these effects, particularly among the young, and I think the end of the Cold War has liberated a certain kind of left-wing energy in the U.S., which during the Cold War was really constrained.
Whereas in Europe, the workers’ movement was stronger, trade unions were stronger—all of that. Nor was the dichotomy between “us” and “them” as strong as it was in this country. So I would not be totally surprised if more left-wing policies actually happen in the U.S, rather than in Europe, which would really be a change in their relative positions.
AS: On that point, Elizabeth Warren’s Accountable Capitalism Act proposes that we create an entirely new federal bureaucracy that can hand out or deny federal corporate charters to any company over $1 billion in value. That’s one way she wants to combat inequality. But in your critique of political capitalism, you say that discretionary bureaucracy creates systemic incentives for corruption, which exacerbates the gap between the haves and have-nots in China. Is there a lesson there for Elizabeth Warren, and for progressives who want to tame inequality through administrative agencies?
BM: Yes, I see your point. I don’t know the details of Elizabeth Warren’s proposal, but you’re right that the creation of bureaucracy and the use of discretionary power by the bureaucracy is always a danger.
On the other hand, we have also to remember that this was the argument used against FDR and the New Deal, with Hayek saying it could lead down the “road to serfdom”. But things have not turned out exactly like that, so it’s hard for me to say which way it might go.
To return to the previous question for a moment, another reason I think that the U.S. might end up more socialistic than Europe is the role of immigration. Europe is not a continent used to immigration, but it has recently accepted lots of immigrants. Now [the Europeans] are actually finding themselves in a situation they were not expecting. But the U.S. was created by immigrants, and I think there is less resistance to immigration here, and a much greater ability to absorb immigrants. So that’s one element that might strengthen the right in Europe more than the United States.
AS: Talk to us about immigration—specifically your migration proposal, and the demand curve for migrants you draw in your book, showing a negative relationship between the demand for migrants and the full rights of citizenship they are accorded.
BM: Yeah, it’s a very controversial proposal. When you are looking at global inequality, you ask the following question: how much of my income is determined by the place I was born or where I am now, and how much is determined by my parental income?
And it turns out that the country where you were born explains about 60 percent of your income. Then parental income explains another 20 percent, so only 20 percent comes “from you”—globally speaking. So migration must be a very strong force, because you can improve your income tremendously if you come from a poor country to a rich country, which will then reduce global inequality and help equalize opportunity. My priors are cosmopolitan, and I say in Capitalism, Alone that I’m in favor of migration.
But then there are problems. There is a political problem in that some people don’t want migration, often for cultural reasons and sometimes for economic ones. And then there is also the problem that migration is a little bit different from the movement of capital. Yes, movement of capital does change the setup of a country; it’s not a neutral agent. But people are even less neutral. They come with cultural backgrounds, opinions, prejudices. So they do change the structure of a society where they go. So where are we going to end up? Are we going to shut the doors and not accept anybody?
I hope not—which is why I came up with this curve. (Weyl and Posner had a very similar argument in their book.)
The idea is that we should work under the assumption that there is a trade-off. The native population is more likely to accept immigrants if it doesn’t have to share certain good things with them. They are willing to share some of the good things, but not all of them, including withholding a right to citizenship. In other words, there is a trade-off between the rights that the migrant gets, and the willingness of the domestic population to accept migrants.
AS: So in order to bring more migrants, you would need to lower the number of rights/benefits you’re giving them. Couldn’t that create a problem for lower-skilled workers? If the migrants don’t have as many rights, it may be easier for large firms to exploit them, which could end up depressing wages for low-skilled workers. So you might convince the public to accept more immigrants, but hurt lower-income natives in the process. Is that a potential trade off?
BM: Not in my proposal, because I specify that there should not be discrimination or difference in treatment at work. So in other words, there is no difference in wages, there is no difference in treatment. However, your point is well taken because when these people come, they increase the supply of labor, which could indirectly depress wages.
My goal with the curve, however, was actually to placate others who may not be directly affected by migration but still feel affected anyway. For example, people in the UK are disproportionately sensitive to immigrants using health services. Not because immigrants actually use them—in fact, immigrants use them less than natives—but because they’re more noticeable when you’re in a waiting room in England and you see that they are speaking Romanian or Polish or some other language. You notice them and say, “why, if they were not here, I would have already seen a doctor by now.” So it’s actually that element I was trying to assuage by saying, “Okay, these people won’t have all the rights that you guys have.”
DM: Is your proposal more targeted for the European migration crisis than here? It seems hard for Americans to explicitly embrace the idea of not giving everyone equal rights, given this idea that everyone is potentially an American.
BM: I agree with that. My idea was mostly motivated by Europe, and I do receive quite a lot of interest from Europeans. However, I have to say it’s also a little bit influenced by the American situation.
Let me give you an example: I myself have a green card. That’s already created a category of sub-citizenship because there are certain rights that I don’t have. So there is already a gradation in terms of citizenship, it’s no longer all or nothing.
Now, of course, many people go through the green card and become citizens—which in my proposal might actually be precluded. But the green card covers a very wide spectrum of people and educational levels, skill levels, income levels. So you don’t have a group of people who are identifiable by their ethnic background or even income, because in the green card category you have both low-skilled workers and well-paid entrepreneurs in Silicon Valley. So the green card case is easier to deal with because of the lack of homogeneity of that group.
I’m not sure if I answered your question, but I see the point that in the American view of the world, citizenship or the right to become an American is quasi-universal.
DM: How bullish are you on China? The catastrophe waiting for China has been predicted for decades without ever coming to pass. And as you said, the statistics are murky. But when it comes to the post-colonial road from feudalism to capitalism, how much of a model is China’s path? Will other countries attempt to emulate it?
BM: There are actually two separate questions there. The first one is China: How sustainable is the Chinese political and economic system? It has been pretty solid, but I think it is fundamentally brittle in some respects—unlike the Indian political system, incidentally, which I think is extremely flexible. If you take a snapshot on any day in India, you may have 10 rebellions, but the system itself is not fragile. Because it’s democratic, it can accommodate all these different interests. By contrast, China might be fragile because it has a very centralized system. It hasn’t solved the problem of succession. This is really not a small issue—it has brought empires down. Genghis Khan didn’t have a solution to the problem of succession, then the empire disappeared after two generations. So I think that’s a big issue.
But if we assume that this does not lead to a major problem, then I think the system actually does have some features that might be attractive to other parts of the world. It dispenses with certain constraints, which in more democratic systems are organized by civil society. Now we all go kind of nuts about how great civil society is, but I think we have to be more realistic after 30 years of NGOs is that they are basically lobbyists in disguise. They don’t want to call themselves lobbyists, but that’s what they are de facto. [Francis] Fukuyama does a very good job of pointing this out—how lobbyists eventually create a situation in which very little can be done within a political system. I think that there is a danger of that happening in a liberal capitalist system. Then the political capitalists can come in and say: “Look, it doesn’t make sense that you cannot build an airport in 50 years; we are going to build it in five months.” And I think that’s the sort of advantage that many countries find [when they look at China].
AS: In the book, you say that one of the advantages of political capitalism is that it generates high growth-rates. It seems like there are several different causal mechanisms that could explain how it does this. Is it that the Chinese state makes very good investments? Is it that the Chinese state prevents some of the democratic constraints on capitalism that normally limit growth, such that both state and private actors can operate with more latitude? What’s the most salient mechanism?
DM: And how much does it have to do with the fact that they’re starting from such a low level of development?
BM: Absolutely, starting from a low point is good for your rate of growth because obviously you can imitate what others have done and so on. Although it is also true that many countries at the very low point have trouble growing because there is no saving, there is no investment, so it’s not that easy. But once you have gotten off the ground, yes I agree.
However, what is interesting in the case of China is that only 10 or 15 years ago, everybody who was writing about China was saying, look, they have done really well, they’re producing all the toys, you can buy bears and stuff like that, but are they going to be able to do what Japan and Korea have done with the higher value-added production. What China has done recently, in the last decade or so, is jump one step ahead of that. They’re going for the technologies where they compete directly with the United States, which is quite extraordinary because this was not an idea that was being aired 10 years ago. That was a surprise to everybody.
Recently I read an interview with Daron Acemoglu, and he recognizes this. I’m not a fan of his books, but I actually appreciate very much his willingness to recognize that this isn’t something he was expecting, because one of his arguments was that if you’re not a democracy, you cannot innovate. And here the opposite was true.
But what are the main forces at work? I’m not a specialist on Chinese growth. I think that all of these elements that we mentioned have worked, but especially the ability of the state to focus on certain tasks. Take, for example, this extraordinary network of fast trains. Now people tell you, “These things are never going to generate profit, they are always loss makers.” But they also have externalities. For China, having a fast railroad network is absolutely crucial. China 15 years ago didn’t have anything. I was comparing China recently with Russia. Russia has one fast train between Moscow and St. Petersburg. I’ve been there, it’s not a bad train, but it’s one—and China has I think 15,000 kilometers [of high speed rail]. And they started at zero like 15 years ago. So that’s the difference.
AS: Implicit in your answer is that private companies have a disincentive to create these massive infrastructure projects because they just don’t have the profit motive. The state has to get involved. Is this an argument for industrial policy?
BM: Could be, but I chose an example which serves me well because it is really infrastructural investment that the private sector will not do. China’s decision to go for all these technologies—green technologies, artificial intelligence, and so on—was clearly made at the senior level [by the state]. But the decision is still being implemented by private companies.
Now these companies are really private companies in one sense. However, they are also companies that can to some extent be seen as custodians of capital. The discretionary power of the state is the reason many Chinese go to Hong Kong: they cannot be sure that their companies won’t be dispossessed if something goes wrong one day.
So, I think there is a role for industrial policy, but it’s interesting that it is being implemented through private companies. Railroads are a good example of something which has large externalities, but there are other things which are really done by private companies where they don’t have externalities.
DM: So China has political capitalism, and the United States has liberal capitalism. Where does the European project fit in this typology? Obviously it has more in common with the American model than the Chinese model, but where exactly does it fall on the spectrum?
BM: Going back to what I said about the U.S. becoming more left-wing in the future, I think the essential fabric of Europe is still social democratic. You’ll have austerity measures and all of that, but it is essentially social democratic, to a greater extent than the U.S. In a sense, it is a gentler version of the United States. It has of course many obvious advantages that you can see in terms of the health system. This is very obvious if you look at the life expectancy of Europeans. The gap between the French or Spanish life expectancy and the U.S. life expectancy is increasing, because in the case of the U.S. life expectancy is actually going down. The fact that the U.S. has not really been investing in public infrastructure for several decades now is also showing. So that’s what I see as the difference, despite the fact that if you look at per capita income, the gap between the U.S. and Germany or France is still the same as it was 30 years ago.
Now, how would the European project work? That’s a big question. I don’t think anybody has the answer. It’s a bit like India—always in a permanent crisis, but it somehow emerges from this crisis, it doesn’t collapse. So there is a certain anti-fragility to the European project. People might overreact because if you look at any given point in time, every country in Europe practically has a problem. I’m not going to list them all, because the French have the Gillet Jaunes, Spain has a problem in Catalonia, Germany with AfD, UK has problems within itself and within Europe, Poland has a problem with constitutional accord and so on.
But is the European Union project really in danger of collapse? I absolutely don’t believe that. I think it is going to survive.
DM: It seems to me that part of the problem with the EU is that there’s no executive capacity. There’s this completely negotiated process, and obviously we are still dealing with separate countries with separate economic histories, separate systems. Is there something new that perhaps emerges out of this, or do you just see it as variations on the systems you’ve been discussing?
BM: It’s an interesting point. I mentioned Fukuyama before because I’ve read both volumes of Political Order in the last year and a half. And one of his insights is that the European system at the European level very much resembles the American system, because of the different checks and veto points, the importance of lobbies, the non-transparency in many cases. But of course the European system is to some extent more cumbersome, because the nation-states have more of a role than states in the U.S. do. So it is a very, very cumbersome mechanism of decision making.
But it does have results which are really quite extraordinary. It’s made war unthinkable, for starters. But there are also many other things, including the portability of pension rights, free movement of labor, free movement of goods and services. There are many ironies, too, but Europe is full of ironies. We will now have a European Union where the English language will de facto not be a native language in any of the member countries, but everything will be conducted in English anyway. So you will have the situation of Latin, which still exists even though nobody really speaks it. But Europe is full of these contradictions.
Incidentally, I’m not a huge fan. I am from Serbia myself originally, and I’m actually quite Euroskeptical, especially when I talk about the likelihood of those countries [of the Western Balkans] being accepted in the European Union. So I’m not starry-eyed, seeing the European Union as some ideal. But it is definitely a very successful project, and I think it’s a project that will remain.
AS: We have been talking a lot about economic institutions, and how economic incentives shape policy. Toward the end of the book, you also talk about the need for a culture that can justify the entire system—a certain set of legitimating values. Could you talk about how those values manifest in different contexts, how they operate in political versus liberal meritocratic capitalism? Because it’s not obvious those systems have the same cultural preconditions.
BM: That last chapter is an interesting chapter because it led me to an area that is really a bit out of my comfort zone. It’s about the value systems of capitalism. Of course Adam Smith said a lot about that. I thought later that it is not accidental that we really have to go back to Adam Smith, because the essential problems that he wrote about, while they have been overwhelmed to some extent by the sheer number of events that have occurred since he was writing, have not been totally overcome. We had World War I, then we had the rise of communism, then we had World War II, then we had all these factors that forced capitalism to adapt dramatically.
But to some extent we are now back to capitalism alone, in the sense that there is no other system—and so we go back to the problems that were discussed in Adam Smith’s time. And I think that leads us to look at the value system that capitalism promotes. This is where I’m actually a little bit pessimistic. Because I think that with the death of religion, and with the emphasis on the acquisition of wealth (which is intrinsic to capitalism, in much the same way that corruption is intrinsic to political capitalism) we have an intrinsic scheme of values where our worth is determined by our money, even if we don’t always accept that. In English, we say “How much is he worth?” This is really moving from a value system to a system of purely how much money you have.
And I think the system with capitalism, which grows into the commodification of new areas, leads to a situation which from the moral perspective becomes difficult. The value system promoted by capitalism justifies the perpetuation of the system, but the value system itself is not something that we can actually feel very comfortable with. That’s why I say the inevitable amorality of capitalism. It’s not immorality, obviously, it’s amorality,
So that, I think, led me to the importance of culture. It goes back to Max Weber—the idea that culture is one of these elements that constrain your actions.
AS: On that point, Fukuyama talks about how Asian countries have a long history of bureaucratic autonomy, and how those bureaucracies evolved both formal and informal mechanisms of self-policing that enabled them to deal with corruption historically. Not eradicate it, but deal with it. You argue that political capitalism has these incentives that lead to corruption. But doesn’t that argument presuppose a particular moral or cultural psychology that may not be present to the same degree in some of these Asian countries—those that have a strong tradition of bureaucratic management and self-restraint?
BM: You have in mind Singapore, for example?
AS: Yes, exactly.
BM: Yes, the clean government.
But there are of course many elements in Singapore which I think could actually be imitated. For example, take the United States. Nobody is in favor of going into debt, of course, but it’s destructive to have bureaucrats paid way below what you can make in the private sector. And that was one of the first things that Singapore fixed. The U.S. bureaucratic system is determined by how much the president is paid. But that has not changed in ages. It is really self-destructive, because what happens is you have not direct corruption, where you get money under the table, but de facto corruption, where you stay for a while in government and acquire all the networking, as people say is the case with many schools now. And then you go out there and you make money off that networking.
So in that sense, Singapore doesn’t seem like a cultural thing to me. It seems to me that there are really economic incentives, because if you look at China, China has traditionally been, and is still considered to be, a corrupt country at all levels. It’s not really that they’re culturally non-corrupt.
AS: One last question on culture. You write that under the liberal meritocratic model of capitalism, people feel as though they have earned their status—even though a lot of it is actually due to inherited endowments that are unchosen. There have been a lot of debates recently in the United States about the pitfalls of meritocracy. Could you talk a bit about that? What, in your view, is the problem with our hyper-meritocratic culture?
BM: I think there is a problem there because you tend to justify—and that’s part of the hypocrisy—you tend to justify any income or any position that you have received by believing it’s something that you have earned—that this actually represents your inherent, innate value. And on that point, I always like to quote Hayek—which comes as a surprise to people—because Hayek really did not have that view. His point was that the rules of the game have to be observed, but the rules of the game don’t guarantee that the best people are actually going to win. There will be many cases of accidents, or cases where somebody who theoretically should not have gotten that money got it, and I think that was a very important insight.
I think Hayek had a number of very important insights, and one of them is that the question “who is worth what” is really only applicable if you have a hierarchical system in which you decide what somebody is worth. So in that sense, I think that an element of undeserved wealth is quite okay. Now, the problem is that at the level of your own perceived self-worth, you might be unwilling to accept luck or accidents as the explanation for your status, and so of course you try to explain that by your own worth. People have noticed this before: that self-justificatory element in the current upper class, which is not unjustified, because we know these people have worked very hard. We know that empirically they work more hours than people from the middle classes. But they tend to be self-justificatory, and that might lead them to taking all the power and not even being aware of it.
DM: Branko, thank you so much for your time. This was really a treat.
BM: It was really a pleasure. It was not easy. You guys had really tough questions. But it was really a pleasure talking.