Saturday, April 4, 2020

Interview with Branko Milanovic

Branko Milanovic: “If we equalize the initial capital, it will not be necessary to redistribute so much”

Interview by Francesc Trillas (originally published in Catalan in Política & Prosa, December 2019) about Milanovic’s last book, “Capitalism, Alone”

Question. What is different in “Capitalism, Alone” from your previous books?

Answer. It's a different book ... well, not completely different, because it's also about inequality. But it is more ambitious, because it has a more political and philosophical side.
Let me start with the title. The title means that capitalism is the only mode of production, the only way of organizing production (except for globally irrelevant cases) that exists in the world today. This may seem like a statement that is irrelevant to some people. For example, young people have already lived only under capitalism. But if you look historically, you will see that capitalism was created on a large scale after the Industrial Revolution, and had competitors at that time, even though the British were leading globalization, because much of the world was feudal.
In central Europe there was forced labor in the year of the revolutions of 1848. In Russia and the United States there was slavery in the 19th century. In India there was also forced labor. The rival that capitalism had to defeat in some way was feudalism. In the end, capitalism prevailed, we have almost nowhere people who do not have the same rights as others. But also since 1917 with the Russian Revolution there was another competitor, Communism ...
Q. You know well because you lived under a communist regime

A. Indeed, this competitor was significant because it reached a third of the world's population, and probably more than a third of the earth's surface, including China and Vietnam afterwards. And some countries that came closer like Ethiopia, Angola, and others. But now they are gone and China has become a capitalist country. That is why capitalism is alone today.
Q. It's alone, but in a diversity of ways, right? Because in many parts it is not brutal capitalism like Manchester in the 19th century.
A. Okay, these are different forms of capitalism and the book in fact is about different forms of capitalism, not one. The book broadly outlines the existence of two major forms of capitalism: what can be called meritocratic liberal capitalism and political capitalism. Today, unfortunately, the word meritocratic has come to mean something that is deserved. But I use the concept of John Rawls, for whom meritocracy simply means that there are no legal restrictions for each one to become what they want. In other words, not because you were born black or in a poor family, you must not have the same rights.

This is very undemanding in social terms: there are no quotas, no free education ... but with liberal capitalism in the sense of Rawls's "liberal" concept it does mean that there is some correction for this birth inequality. I use the United States as an example of this kind of capitalism because I know the country well and know the data much better.
The rich and very educated marry among them: this is homogamy; the same individuals have high incomes of capital and labor: this is homoplutia.
And the second type of capitalism is the political capitalism of China (and of Vietnam, Angola, Ethiopia, etc.). The book has a political side, because it says that we have capitalism as the only mode of production now, but from a political and social point of view it comes in two different versions, which are to some extent competing. To understand why what I call political capitalism is different, I look at its genesis, where I argue that communist revolutions in China and Vietnam are equivalent to bourgeois revolutions because through communist revolutions they were free from all feudal impediments, and were able to free their countries from foreign rule. And communism could only do these two things, because they were so well organized. And almost without being aware they created a national bourgeoisie ...
Q. You mean the cadres of the communist party?

A. Not only, because now this world is capitalist in the sense that most of the added value is produced by the private sector.
The system in these countries is capitalist, and has not been planned; it is just as history has turned out. They started out as socialists, of course, and tried to put socialism into practice, but found themselves creating a national bourgeoisie. I think the genesis, the creation of this political capitalism, is very different from the origin of liberal capitalism, because the liberal capitalism of the United States and the West did not have to get rid of external colonizers, despite the fact that the United States was a colony, but it was a very different situation.
I look at the systemic forces that increase inequality in the two types of capitalism and lead to the creation of a sustainable elite in both cases.
Q. And within liberal capitalism, do you not distinguish between the most laissez-faire system in the United States and the most social democratic system in Europe?

A. Not much. At first I make a bit of distinction, but I really believe that there is essentially liberal capitalism today and that democratic social capitalism was diluted in liberalism in the 1980's (after approximately 1945). Of course there are differences between Denmark and the United States, but the systemic factors associated with globalization, technological change and the decline of unions, and the issues associated with migration, move them in the same direction. From a global perspective, they are not that different, though there are differences between countries.

Q. What is the impact of the two forms of capitalism on inequality?

A. I speak of seven systemic forces that cause inequality in liberal capitalism:
First, the increase in the percentage of GDP contributed by capital, which means increases in interpersonal inequality; this is an empirical reality that has been happening for the last 30 years. Second, this directly translates to an increase in interpersonal inequality because the people who receive a large portion of their income from capital are above in the income distribution. If two people, poor and rich, had the same share of income from capital, an increase in the ratio of capital to total income would not create interpersonal inequalities, but it really is not the case. Third, rich people receive better returns on their assets, as Piketty tells Capital in the 21st Century.
Fourth, the rich and very educated get married more to each other: this is called homogamy. Fifth, the same individuals or families have high incomes of both capital and labor; this is called homoplutia. This was not the case in classical capitalism, where the great capitalists or landowners did not basically work. There are now great executives of companies who have high income from work and capital because they accumulate wealth over the course of their working lives. By the way, this is more productive than if you are just earning a living. None of the latter two phenomena, homogamy and homoplutia, are ethically or morally bad, public policy has nothing to do with them, each one marries who they want and working is productive. All this makes it not easy to deal with inequality in modern society.

Sixth, rich people are trying to buy, or have a non-proportional influence on, the political system, more than between the 40's and 80's. And seventh, they are transferring all these benefits, which come from having more wealth and education, to their children, more than in the past. Educated parents spend more time on parenting than other parents (we have good data on this), giving their children immense benefits compared to other children, solidifying the upper class. This is also a positive thing, it is desirable for parents to spend more time with the children, but in this way they give huge advantages to their offspring.
This, combined with the control of the political process, leads to the creation of an upper class in liberal capitalism.

Q. And many of these forces are also present in political capitalism ...

A. In the countries of political capitalism there are three additional factors. First, an efficient administration or bureaucracy, with few restrictions on its operation, which does not have to spend time on deliberation. This is a key aspect of political capitalism for generating growth. Second, the absence of rule of law, which leads to endemic corruption. This is not something that is a system anomaly. The system must be corrupt because without the rule of law, one must be able to punish in some way. Coercion is not based on the law but on power. And thirdly, in these countries there is state autonomy. The interest of the state can be imposed beyond what the rich want. The power of the capitalist bourgeoisie is less than in liberal capitalism, which has become the empire of the rich. They maintain the autonomy of the state to pursue mercantilist policies or even to pursue policies contrary to the richest. China's rich, rather than Russia's, are custodians of a wealth that is, in a sense, the state's wealth. The rich have more power in liberal democracies.
Q. Another book that has also been published this fall, is Capital et idéologie, by Thomas Piketty. This book makes a series of proposals to reverse what it describes as a shift of the social base of progressive parties, which today seem to have the support of the more educated sectors, but are losing the support of important sectors with a low level of education or income. Do you agree with this description, and with Piketty's proposals?

A. I have prescriptive parts in the book. The part of Piketty's book on Change in Voters’ Structure, which is very relevant for Spain, relies on evidence based on surveys from very diverse countries. Partly because of the success of working-class policies, there is a new group of voters who are becoming more socio-liberal; their interests change because they are now wealthier and have a better education. But without American political analysts seeing it, a lower-class part of the working class has stopped voting.
My general philosophy in terms of prescriptions is that if there are such forces that increase inequality, pre-1980 policies based on education, unions, taxes and transfers may no longer work as before. There can be no more years of compulsory education, we are on a roof, people cannot be forced to have doctorates. Unions are in decline. Middle-class people no longer want to pay higher taxes than they already pay or vote for them, and they are more skeptical about the use of public money than in the past.

Tax rates of 90% of maximum marginal rate only affected a very small part of the population. Maximum rates can be increased, but I don't think much is gained.
Since we cannot redistribute current income much, it would be better to develop policies to equalize the initial endowment. Both human capital and asset ownership.
If we equate capital relatively, we will not need to redistribute so many resources. How is financial capital decentralized, which is much more concentrated than income? We need to think of a people’s capitalism where the middle class has more capital, withdrawing privileges that large investors have. At present small investors have no advantage but the rich do: they can transfer resources to descendants, accumulate profits, etc. Inheritance taxes must be used to redistribute ownership.
Q. But to do all this would require some degree of international coordination, right? Otherwise, capital would move ...

A. Yes, it requires international coordination. It is also necessary that everyone has the same access to the same quality of education. There are currently two levels of education, which cannot be seen in the school years, but in the quality of the schools. Years of education no longer determine wage levels, but the quality of education does. The quality of public education must be significantly improved, in order to balance the provision of human capital. In the United States, change should be almost revolutionary. Today's system is to preserve the privileges of rich people. And the last point is to reform the financing of the political system. I do not give many details, but these are my prescriptions. We need a new goal: people's capitalism.
Q. Is there any difference between this people’s capitalism and the popular capitalism Margaret Thatcher spoke of?

A. My people’s capitalism bears some resemblance to the popular capitalism of Margaret Thatcher, though she did little to materialize it except for the privatization of home ownership. The concentration of share ownership did not diminish, but I think he had the same idea.

This should be the next great goal of capitalism in rich countries: greater equality in capital provision. It should be a democracy or a capitalism of owning people. The system would be much more stable if everyone had a stake, rather than the current situation, where the forces of inequality are getting stronger.
Q. On a personal level, even after many years have passed, do you miss the Yugoslav federation in your cultural identity, in your life?

A. Not now, but yes when the break-in and in particular the war took place. My family was neither religious nor nationalistic. The breakup of the USSR was not a tragedy for many people (for some it was a great development, like the Baltic states, unless you were part of the Russian minority in those countries), but it was for many others , who had to redefine their identity. People don't appreciate that. There were a lot of mixed families that don't exist anymore, as the documentary “Brothers no more” (about the distance created between basketball players and former Friends Petrovic and Divac) explains. This shock, this redefinition of identity, is not easy. You need to reevaluate your identity and the identity of others.
Q. You have made proposals that have been relatively controversial with regard to immigration.

A. I think, at least in theory, that globalization should include free movement of workers, as well as ideas and capital. But people are not avatars, they have cultures and social norms. Work is not the same as capital, there are cultures, religions, world views, along with economic reasons. For these reasons immigration is conflicting. Before you say no one comes (like the Dutch politician who said the country was already full), you must accept, for the population's preference, temporary immigration permits (4 or 5 years), as the system in Germany, but with an obligation to return. They would come only if they had a job, and their permit would not be renewed.

Sure, this has drawbacks, but the general idea is that foreigners come for jobs that exist, and after leaving, without direct access to citizenship, but protection of health and work. There would be some citizenship protections, but not all.
Q. You have also criticized environmental movements in developed countries.

A. It is very easy to ask that others do not have access to amenities and luxuries that we have. Some environmentalists have no idea what the numbers are. If you set the income level as it is, one option is for the poorest to leave them as they are. But if you want them to get better, and a lot of people, up to middle levels in the rich world, there are no resources for everyone without growth.
They have to tell us what they want to do, you can't go out of reality. If they want radical solutions, they have to say how they make it politically viable. If they want us to think seriously, they have to do the numbers and tell us what strategy we will follow. How will we do it? They haven't thought about it enough. And sometimes it is unfair to many people who want to be rich, have cars, travel by plane ...
There is a link between global inequality and climate footprint, because the rich pollute more, consume more, and eat more meat. With less inequality, there would be less climate footprint. But by reducing Bill Gates's consumption, it would just be a drop in the ocean - no illusions should be made. But this is not a topic that I discuss in my book.

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