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Branko Milanović on Inequality and the Two Faces of Capitalism

Branko Milanović is a Serbian-American economist currently teaching at LSE and the Barcelona Institute for International Studies. His doctoral thesis, undertaken at the University of Belgrade in 1987, focussed on inequality in then-Yugoslavia, setting the tone for his future work. Ever since, his specialty has been income distribution. Last year, he published Capitalism, Alone: The Future of the System That Rules the World, detailing the consequences of inequality around the world and putting forth the idea of two separate strands of capitalism. On Monday November 30th, Milanović joined Room for Discussion to talk capitalism, the pandemic, and of course, inequality.

Largely ignored until the turn of the millennium, the study of inequality has gained momentum over the last two decades. Although inequality had been rising sharply since the 80’s, it took the 2008 financial crisis to make it painfully clear that middle-class wealth had been stagnating as the rich got ever richer. Milanović stresses that the study of inequality is an empirical one, and thus should concern itself with proportionality, not justness. The field is holistic in that it looks at the entire wealth distribution, as opposed to poverty research that truncates along income levels. Wealth inequality must be distinguished from income inequality: the former refers to accumulated assets (interchangeable here with capital) and is far greater in amplitude than the latter, which concerns only the distribution of wages across society. An analysis of inequality looking at incomes alone is thus hampered by its neglect of capital income (the appreciation in value of assets accumulated), which contributes an oversized amount to overall inequality.

In Capitalism, Alone., Milanović states unequivocally that capitalism is the only remaining viable economic system. In part in order to accommodate the likes of China and Vietnam, purportedly socialist market economies (and even politically communist), he proposes two distinct breeds of capitalism: liberal-meritocratic, that ensures equality before the law (meritocratic), inequality adjustment mechanisms and equality of opportunity (liberal), and political capitalism, where high office is used for private gain and political power is a pre-requisite for economic power.

The liberal-meritocratic model, of which the US is the prime example, is marked by ever increasing wealth inequality. As the rich enjoy a more diversified portfolio and economies of scale in investing, their rate of capital return is higher, stretching the divide ever farther. Milanović sees this as a fundamental problem as it directly impedes social mobility. The solution is large-scale income redistribution by way of inheritance taxes, worker ownership schemes and incentives for small private investors. Historically, wealth has always been concentrated in the hands of the few, even all the way back to ancient Rome: we are primed to believe this is normal. Only recently have the wealthiest also become the highest earners in terms of income. The capital kings no longer merely sit on their inherited wealth, but frequently outwork the rest, making it ethically tenuous to impose exorbitant taxes upon them. There is also a dynamic element at play, as those high on the capital and income scales couple-up (homogamy) and transfer innumerable advantages to their offspring (education, mindset, connections…), leading to a further stratification of society. The issue is compounded as the wealthy set the political agenda; campaign funders being the most concentrated group of all. Indeed, Milanović reminds us that it is irrational to assume the rich donate without expecting something in return, as with any investment. Another fallacy he highlights is that of philanthropy filling in for the state. When social programs are enacted by the government, the decisions are indirectly taken by all, when initiated by a private individual, their individual preferences are imposed upon society.

The defining feature of the political capitalist system would be its paradoxical need for an efficient bureaucracy and the absence of a rule of law, as the state must unilaterally have the power to punish or promote at their leisure. The mot juste for such practices is corruption: an intrinsic and accepted part of the system as long as it doesn’t expose the top to embarrassment and the end goal is wealth accumulation. The poster child of political capitalism is, of course, China. Milanović points out that although inequality in China rose sharply from the 80’s to the 2000’s (in Gini terms), it has been stable since 2003. Now that the once abundant workforce is employed, a skills premium has emerged and wage differentials are slowly closing. The structure of inequality in China is different than in the West: as people have long flocked to the cities and dynamic maritime regions, provincial income gaps dwarf those between US states for example. Although China shows that political capitalist societies can prosper, the country is and historically has always been ambivalent towards propagating its political-economic model, contrary to the liberal democracies of the West. This may also in part be due to its construction out of trial and error, making the Chinese system difficult to package and export.

With an eye to the recent past, Milanović disagrees with Fukuyama’s pronouncement of liberal democracy’s inevitability. He contends that although capitalism is undeniably a unifying theme of the 21st century, this has not necessarily translated politically into democracy. The post-Cold War European revolutions were about being free from oppression and enjoying Western-style prosperity, not necessarily democracy. The last 20 years have given rise to a variety of political systems. Whether democracy will become the convergent norm depends on whether time proves it the best tool for capitalist enrichment. With an eye to the future, Milanović has faith in humankind’s ability to solve our greatest problems (such as climate change through astute subsidies and taxes) and deal with technological revolutions (they won’t make us obsolete, we have survived through them in the past). He doesn’t see one of his capitalist models dominating over the other: only time will tell.

You can find the full interview on the Room for Discussion Facebook page, or pick up Branko Milanovic’s book from all major booksellers. His next offering will apparently be teasing out functional inequality in the historical forefathers of economics Quesnay, Smith and Riccardo… You heard it here first.


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