Global Inequality (Branco Milanovic)
In a later book, Capitalism, Alone, Branco Milanovic covers some of the topics in Global Inequality in more depth and with expanded reasoning - for that reason in this summary I will leave out those topics, and direct you to that review here.
It is testament to the writing skill of Branco Milanovic that Global Inequality manages both depth and brevity, spanning hundreds of years and global economic insight in under 300 pages. The study of economics and (particularly) inequality are inseparable from politics, and Milanovic doesn't shy away from integrating political philosophy into his thesis. The book is richer for it.
Milanovic is known for his insightful charting of the distribution of real incomes per head, and its changes since 1988, a chart which well explains the current state of the world economy. Variously known as the 'Elephant Chart' or 'Reclining S Curve', it shows series of trends: the very poorest in the world have been left behind with little real income growth over 20 years, the 'global middle class' have seen a dramatic rise in income (countries like China and India), the upper middle class - which is fact the middle income in richer countries, have stagnated, and the global top 1% (which is the top 15% of Americans and similar proportions in richer states) have become proportionally much richer.
This one simple graph informs much of the book and its conclusions. Milanovic takes the two prominent theories of inequality and demonstrates how each fails to fit the data, before putting forth his own hypothesis. A third theory, that the outpacing of skills by technology (or vice versa) and it's effect on inequality is also dealt with by the author's new theory.
The first is the popular Kuznets Curve, the theory by Nobel laureate Simon Kuznets whereby inequality increases initially then falls as an economy develops. Kuznets argued that initially returns on capital would be high, whilst wages would be held down by a large unskilled labour force (leading to rising inequality). As an economy developed further, increased education would lead workers to demand a higher proportion of profits, whilst inequality would be further reduced by progressive taxation being spent on healthcare, education and social security measures. The development of European and U.S. economies in late 19th and 20th centuries supported this hypothesis. The theory is undermined by an increase in inequality in these countries after 1980.
An alternative theory is that of Thomas Piketty, who's book 'Capital in the 21st Century' became an unlikely bestseller. Piketty posits that since the rate of return on capital exceeds the return on labour, over time inequality will increase as an intrinsic feature of capitalism. Inequality in the West fell during 'the short 20th century', 1918-1988, contradicting this theory, but Piketty has an explanation for this. The World Wars and Great Depression reduced inequality because wars are paid for by the rich and much wealth was destroyed by these events, whilst ideology led to high progressive tax rates, and the building of the welfare state. The threat of communism after World War Two was of course an incentive for governments in the West to guard against an underclass - be it allowing trade union power or a large welfare state - an incentive which disappeared with the fall of the Berlin Wall.
While Piketty viewed these political events as exogenous to the general pattern, Milanovic argues that they were all (including and especially World War 1) events that were a result of inequality; and that as such there exists within capitalism a corrective mechanism.
Increased inequality also contains certain self-reinforcing mechanisms, particularly capture of the political process by the wealthy (leading to policies such as expensive elite education and low taxation on capital which helps keep the same individuals or families wealthy).
From the above premises, comes 'Kuznets Waves', where inequality within a nation rises and then falls repeatedly by countervailing forces. These are demonstrated as far back as the Roman Empire. Pre-industrial revolution, Milanovic argues that Malthus' ideas of population growth exceeding food supply as a 'corrective' mechanism were a form of Kuznets Wave.
Why is this an interesting or useful model? Because the ways in which inequality are reduced will be what comes next after inequality peaks. These reasons are, according to the author, both benign and malign. As I write these words there are widespread riots in the U.S. by disenfranchised members of those members of society who have clearly been affected by the rising inequality of which this book describes. Benign reasons for reduced inequality are higher education spending, increased taxes and general inflation. Malign reasons could be war, hyperinflation and disasters like global pandemics.
Beyond this discussion, there is the wider issue of global inequality outside of national borders. Milanovic points out that John Rawls' theory of justice applies to rules within a nation, but that they are contradictory by not applying the same rule globally. The stagnation of the middle classes in rich nations is a direct result of globalisation and technology; the same forces dragging millions in China and India out of poverty. If politically we are for equality of opportunity, then should we be for free migration between nations? And if these forces have a net positive effect on the world, should we all be for them, despite the cost to ordinary citizens in rich countries? The rise of 'strongmen' politicians and far-right wing political parties in these countries suggests that middle income populations will not accept the process indefinitely. These are difficult issues to tackle, but history suggests that they ought to be tackled by policy makers sooner rather than later.
Branco Milanovic's thought provoking and original book ends with 'ten short reflections on the future', somewhat of a preview for his next book mentioned at the beginning of this essay. Read them both.