Intro. [Recording date: February 14, 2020.]
Russ Roberts: Before we get to today's guest, I want to give the listeners a heads' up. Today's guest is Branko Milanovic and we are talking about his book, Capitalism, Alone, which contrasts American capitalism with Chinese capitalism. This was recorded on February 14th, 2020, relatively far in advance--roughly three months before its release on May 11th. If we were recording this today, I would certainly have asked for Branko's thoughts on how China has handled COVID-19 [Corona VIrus Disease, 2019]. But, it just wasn't front-of-mind in mid-February when there had been only 15 cases of COVID-19 in the United States.
So, unfortunately, while Branko has many interesting insights into the Chinese economic and political system in our conversation, nothing here relates to COVID-19. For some of you, that's a feature not a bug. Either way, I wanted you to know that I wasn't ignoring a large elephant in the room. On February 14th, 2020 I knew about the elephant, but it certainly hadn't come into the room.
Not surprisingly, since recording the EconTalk interview, Branko has written about the response of China to the virus. You can find those articles in the Delve Deeper section of the homepage for this episode at econtalk.org. I hope you enjoy our conversation.
Russ Roberts: Today is February 14th, 2020 and my guest is author and economist, Branko Milanovic. He is a visiting Presidential Professor at the Graduate Center, City University of New York and a senior scholar at the Stone Center on Socio-Economic Inequality. For 20 years he was the lead economist at the World Bank's research department. His latest book, and the subject of today's conversation, is Capitalism, Alone: The Future of the System That Rules the World. Branko, welcome to EconTalk.
Branko Milanovic: Well, thank you very much for having me. It's a pleasure to be here.
Russ Roberts: Now, your book talks about two different kinds of capitalism. On the one hand, liberal and meritocratic, and the other is, you call, political capitalism. Talk about the difference between those two systems and which countries embody them that you focus on in the book.
Branko Milanovic: Yeah. The countries that embody them and actually the data that I use to illustrate the two systems come, first I'm going to say, for meritocratic and liberal capitalism from the United States, where we actually have probably, in the area that I work on, which is inequality, probably the best data or most detailed data.
And, the country which illustrates political capitalism is China, where of course I use quite a lot of Chinese data, and I make sort of the structure of the two chapters that deal with the United States on the one hand and China on the other hand, relatively similar. Because, the objective of the two chapters is to look at the forces of inequality--be it inequality in wealth, or opportunity, or income--which might lead to the creation of a self-sustained upper class in both systems. So, that's the structure of the book.
Now, the two systems differ--I mean, first, they are similar in the sense they are both capitalist. That's my argument. And, actually, as you said, even the title of the book is kind of makes this obvious because it says Capitalism, Alone, meaning that capitalism is the only economic system which exists today.
But, they are also different, obviously, in the political space because the political space of a liberal or meritocratic capitalism as essentially democratic. The political space of Chinese-type or political capitalism is not democratic. It's a one party system where the state has much more of a preponderant political role, and, to a large extent also, more preponderant economic role.
Russ Roberts: And, your description of capitalism, I'll try to remember it first. You can correct me and then add to it. It's decentralized, in terms of economic decisions. Labor is hired at wage rates in a somewhat open market. Prices are somewhat free to adjust and steer resources. Investment is made privately. And, so, if I left anything out, tell me. And, how do you reconcile that with China, where a lot of investment is clearly not private? And, I also wonder about how decentralized economic decision-making is there. I simply don't know. Something I think about a lot.
Branko Milanovic: Yeah. Actually the way that you define it is, I think, almost fully correct. But, let me say first that the definition is not mine. It's actually the definition is sort of a standard definition that was used by Marx. It was used by Max Weber afterwards.
And, I think it's a very economical definition of capitalism. It includes, as you said, first, decentralized coordination. Secondly, legally free labor. That's very important because, in the past, labor was not legally free very often. But, that labor is hired labor. Now, the term 'hired labor' is also important because it means that labor is not exercising entrepreneurial function--which, in other words, it's not workers who decide we are going to produce this and that gadget. It is--and that's the third sort of definitional part--it is capitalists who decide on that, who have entrepreneurial function. And, economic life is conducted using privately-owned capital and profit principle. So, this is the definition.
Now, you ask and many people ask: Now, how does it apply to China? It's more or less clear it applies to the United States because actually all the three elements are, I think, very clear in the case of liberal capitalism.
My argument--and it's based on facts, so it's not really what I think China does or what I don't think--but they simply look, first, what percentage of labor force is working as self-employed, because in agriculture in China is mostly self-employed, and in the private sector. And, there you actually find that in 1978 for example, when you had still the commune system in China, in agriculture, you had about 85% I think of labor that was state--I mean, working the state-owned or commune system in agriculture.
Well, that percentage now is less than 10%. So, you really have had a tremendous change of first, privatization, be it privatization in the sense that there are large private companies, or middle-sized private companies, or finally private individuals, mostly peasants, farmers producing on their own land.
Then I look at percentage of private fixed investments. Now, that percentage also has changed. There is a very nice graph in the book which basically shows it's like an X, like a cross. So, you basically start with, like, 80:20 ratio between public and private and you end up--nowadays it is about 60:40 in favor of private.
And, finally, I look at the value added produced in the private sector in China. There was a recent study--because that number was not actually quite well known and it's very murky in the Chinese statistics. I've actually spent lots of time looking at statistical yearbooks of China, but there are so many different types of enterprises. So, I'll just mention downshift in village enterprises, joint companies with foreign ownership, but joint companies with foreign ownership and state ownership, whether it is a local level, township level, city level, municipal level, central level, whatever.
Anyway, the World Bank did recently a very nice study which tried to disentangle basically all of that. And, they came down with an estimate, which--the range, I think, is between 21 and 28% of the value added being produced in the state sector. So, that, of course, leaves more than 75% or about 75% of value added in the private.
This is a long answer, but I think basically, if you look at the numbers, it's very difficult to argue that China is not a capitalist country.
Russ Roberts: So, we're going to get into China a little bit later. And, we're also going to get into some of the more philosophical--and, my favorite part of the book--unusual, came at the end. Usually the first third of a book is the best part. And, then, if you're lucky, that you learn something after that. Not always. In this case, I learned something in the first third, but I learned most in the second two thirds, which was just fabulous. I really loved the range of ideas in the book.
But, you start, and we'll start, with a discussion of inequality in the United States. And, listeners know I'm somewhat skeptical of that data, mainly because I think it's a little bit misleading or at least it's been used in misleading ways: that inequality at a point in time doesn't always tell you, often deceives you as to what's been happening to people over time. And, it leads to people saying that the bottom x percent--50% sometimes, sometimes 90%--have made no progress in the United States.
You seem to be somewhat sympathetic to those claims of--I'll call it stagnation. Talk about that. Clearly the top today is farther away from the bottom today than it was 50 years ago. But, do you believe that, "All the gains in the last 50 years, or 40 years, or 30 years have gone to the top"? There's numbers that suggest that. But, I think those numbers are misleading because of family change and difficulties of measuring inflation correctly. What are your thoughts on that?
Branko Milanovic: Yes. This is a very difficult question. As I mentioned before, of course, I think that the United States has probably the best data on income inequality. You know, I've been working on income inequality for like three decades now.
However, it has become a big political topic in the last, maybe, I don't know, seven, eight, maybe ten years. And, then, it has led to a proliferation of studies that actually, whether from the left or right, actually play in very different things. You can always use the data in a way which would kind of support your priors. Very often, you use the assumptions that would lead you actually to get the results that you a priori believe are the correct results. Let me then address your question--
Russ Roberts: Such a cynic.
Branko Milanovic: You know, this is the truth, because the data are obviously not--
Russ Roberts: Sometimes.
Branko Milanovic: You really deal here with definitions. And, let me just give you, for example, I mean, answering your question, let me just mention some of the issues that we face.
First of all, it is true that, when we look at inequality, at any number, and we say, 'Okay, that's the share of the top 1%, top 10%, this is the Gini coefficient, which is a measure of inequality , we are taking a snapshot picture. So, part of inequality may be due simply to the life cycle element. You have young people, you have in the past old people who are now actually doing much better than in the past. But, in the past, they used to be relatively poor. So, you take a snapshot and you actually find people there who are, they suppose, relatively poor. And, they increase inequality. But, there are also the life cycle in their lives, they are in a position where their incomes are relatively low. So, it doesn't mean that they would actually, over a lifetime, have equally low income.
That was the point which, I think for maybe your listeners, is very nicely illustrated by Joseph Schumpeter who, in the 1950s, said , actually: Imagine that inequality, when you measure it, it's like a hotel. And, in that hotel, you have people at the top floor, so the rich people. And, you see that particular night, you look at them and you say, okay, there are such-and-such people on top floor. There are such-and-such people on the bottom floor. But, he said, let's take another night. And, if these people change rooms--some people from the top go in the middle, and maybe people from the bottom go to the middle or top--then you would, of course, have a very different picture over time.
And, that's indeed the case. These are so-called longitudinal studies . But they are really very difficult to do because you really have to have people stay there and report their incomes and expenditures for years. And, people normally don't do that. So, we still use these snapshots.
Now, the snapshots are still useful because they tell you, for example, that the top 1% in the United States or this Gini coefficient, which is used, has now increased to a level where it was not probably for the last 50 years. I'm not saying that's the same--as some people argue--it's not the same as around World War I because, at that time--I think it's somewhat a mistake--because that's measuring only incomes without government transfers and taxes. And, as you know, direct taxation was introduced in 1915. So, it's actually after that it, of course, increased tremendously. So, if you don't take it into account, you will actually overestimate inequality.
Nevertheless, when you actually do, I think, appropriate adjustment--because, you look at the after-tax income--you find that it is certainly high now. And, if you compare today with 1970s or 1980s, it is significantly higher. So, it is true in that sense that the top 1% has now wider or greater share of total income than it had 30 or 40 years ago.
Are they the same people? Probably not. So, there is lots of churning, lots of change. So, that particular criticism, I think, is accurate.
There are also many changes, one you sort of mentioned, for example, that was on an issue that I had with Chetty and other studies, is that actually they look at the household income. Now, household in the United States has changed. It was larger. Now it is smaller. So, obviously if you do not correct for at least per capita per individual member, then you, of course, exaggerate the increase in inequality because of a change in household size.
Russ Roberts: Yeah. The mistake I think people make when they hear that--what you said is, of course, true--but when they hear that, oh, households are smaller, they think, 'Well, people are having fewer children.' That is true.
But, the important change here is that people are less likely to be married. There are many more single-person households.
And, in those single-person households, there are often fewer people working. That one person, sometimes, is old, as the baby boomers get older. And, I've quoted this statistic before: The household income of the top quintile at a point in time in recent years was 17 times--17 times--the average of the bottom quintile. Of course, the average family--household--in the top quintile had two earners. A little more than two actually, because there has been[?] a teenager often working. The average family in the bottom quintile had about a half-a-worker working--a little less than half, 0.45 earners--because many of them aren't working.
So, when you correct for that, so, it's still--now it's four times higher. Roughly. Is that raw? Is that horrible? Well, I don't know. It doesn't matter. You can't decide it.
But, the point is that, when you're looking at changes, if you don't correct for that demographic change over time, you're going to get a very misleading effect.
Now, having said that--what you said, the caveats--you also are worried about the level of inequality in the United States. And, I think the central question for me, and you don't talk about this much in the book, is this claim that the current economic system in the United States is rigged. That somehow the rich have figured out a way to keep everything for themselves.
And I think--well, I think that's literally wrong, for a lot of reasons--but it does fuel political anger, this feeling that that could be true. And, you often, in the first third of the book, talk about the things you might do to change inequality. Are you worried about the level of opportunity for people who aren't in the top 1%, 10%?
Branko Milanovic: Yes. I think I am worried, actually, I would say. Let me try to explain my thinking there.
First of all, I believe that actually inequality, as we were just saying minutes ago, it's now become much higher.
And, in the work that I do, partly because I've been doing that always in the World Bank as well, I'm using a per capita measurement. In other words, I do not look at family or household as such, regardless of the number of people, but divided by the number of people.
When I mentioned the World Bank, I think it's important to keep in mind that, when you work with vastly dissimilar households in different countries, you cannot take Mali with nine persons per household and treat it the same way that you treat like one-person households in Sweden. So, obviously, you have to correct for the household size. So, I do the same thing for the United States. So, that's actually taken into account.
But, now, starting from that, what I am actually worried is the following. If inequality now is very high, and if we have increasing situation of what I called 'homoplutia,' which is a new phenomenon, which actually basically I think is the first time actually mentioned my book, is that you have increase in proportion of people who are both rich in terms of income from capital and income from labor. That's something absolutely new. Because, if you look at them, so let's look at the classical British capitalism or even U.S. capitalism in 1920s. You didn't have large capitalists who were also workers receiving a salary. They didn't exist. If they were actually rich, they were actually basically having capital income and that was it. On the other hand, you also didn't have workers who had capital income, because their entire income was derived from labor.
Russ Roberts: And, just trying to--subsistence--just staying alive was a challenge. They weren't saving a lot of money, building up a nest egg, building up financial assets in the past very much.
Branko Milanovic: Absolutely. So, now we have a different situation.
So, now we have actually many more people who have both labor and capital income and who are actually rich in the space of labor and capital. We'll come and maybe discuss that a little bit further because one of the ideas that I have when I talked about what I think could be improved or should be improved is much more widespread ownership of capital in the middle class. But, I'll leave that for the later because it's a part of recommendations, maybe.
Russ Roberts: Yeah, and we'll get to that in a sec. Go ahead, finish what you were saying.
Branko Milanovic: What I mean actually then, why I'm worried is that that particular inequality and that particular type of inequality when you have actually hardworking people who are actually both capital- and labor-rich leads to inequality of opportunities simply because you have many of the things in the United States, including schooling, which has become very expensive and very often unaffordable for the middle class.
Secondly, the rich are able to influence the political process enormously more than the middle class and the poor. And, we have empirical studies there from Gilens[?] and others, political science professors who have found that generally the issues that matter to the rich get debated and acted upon much more frequently than the issues that matter to the poor or to the middle class.
And, in that sense, I didn't use the word 'rigged,' because I think it's a little bit too strong. But, I think the system actually favors the interests of the rich. And, then, the rich tend, which is actually natural because everybody wants really to preserve their own power, then through regulation, and government decision-making, and the Congress, and so on, introduce the rules that are in their own advantage.
And, the danger of that is that you might end up with something what I called before, a self-sustaining upper class that would essentially be reproduced from generation to generation.
Russ Roberts: So, I think we agree on the self-sustaining part, in the sense that I think this is mostly a feature, not a bug. I think it's hard to leapfrog other people in the United States. I've mentioned this many times on the program before: I'm the first person in my family to get an advanced degree. I'm the second person, I think, to go to college. My kids are going to do fine. They went--they've all either been to college. The two that are in college, I expect, will finish college. They have a good life. I have lots of connections for them, in addition to the human capital I've given them as directly. Forget the education--all the stuff they get, they were, for better or for worse, the drive, the ambition, the persistence--they get a lot of advantages by growing up at my house. And, some of those are curses, too, of course, but that's not the point.
But, my point is that I'm in the top 20%. They will probably be in the top 20%--unless they choose not to be. Which they may choose not to be. Like, they're free to do that. And, I respect them deeply if they chose not to be interested in making lots of money. I didn't plan on it. I got lucky. Being an academic in 1980 wasn't so lucrative. And, it's turned out to be lucrative. But, my point is, is that: it's going to be hard for somebody who's not in the top 20% to go ahead of my kids.
However, I do think a lot of them still have lots of chances. I don't see the political system, other than things like carried interest and certain minute provisions of the tax code, which certainly help rich people in all kinds of ways, or that you could talk about maybe the behavior of the Federal Reserve to help rich people. Certainly there are bailouts that help rich peoples. Certainly there are many policies that have made my salary higher than it should be--subsidies to education, perhaps well intentioned, perhaps not. Right? So, there are lots of subsidies and things that help rich people, but there are lots of things that don't.
And, so, I think it's really--when you have the top 1% of the United States paying about 40% of the income tax revenue, it's hard to argue that they're in control. Yes, they have a lot more power than the average person elsewhere. Yes, they get some of their pet things through. Yes, they get better police service by far. Yes, they get better public education and they can supplement it with private. And we'll talk about that. But, the idea that somehow the economic system, day to day, in terms of both entrepreneurship, the innovation that's taking place in the United States, and its availability to enormous parts of the population, the retail revolution of Walmart and now Amazon that's benefited almost everybody, for me, I find that maybe it's a half-empty/half-full distinction here. But, I don't think we should be overly pessimistic about the current state of political power to sustain the advantages of the upper class.
Branko Milanovic: Well, largely I agree with you, actually, all the elements that you have listed which sort of favor the rich. I am not going to repeat them because I agree with all of them.
I think that there is an issue of a judgment where the question becomes whether we believe that the issues that you mentioned, and I said I totally agree with them, are sufficiently important to make the opportunity of those who are in the middle.
And, I actually really emphasize in the middle because it is very clear that a middle income family in the United States now really has a hard time sending the kids to the schools which are like top schools. And, the issue there is that these top schools--I'm not talking only Ivy League: I'm talking really basically of the top 100 colleges that are expensive. And, the issue there is that their expense is not only the quality. I mean, we'll leave aside the quality. Maybe they are actually better in quality. But, in reality, they're basically a stamp of approval saying, 'Well, I went to such and such college. And, thereby, I command higher salary.'
And, actually there are studies for that that show that, of course, the salary differentials are very large, depending where you went. Doesn't mean that you are much smarter. Doesn't mean that you are much better, but actually you went there.
Russ Roberts: And, also, of course, it could be just measuring the selection bias of the people who were able to get in. But, that's hard to know.
Branko Milanovic: No, no; absolutely true. And, of course, when you look at the data, the studies that show percentage of people who go to the top schools and where the parents come from, of course, you have--I think actually I mentioned that in my book; that's not my own number; I actually took it from somebody else--is the ratio is 60 to 1 between the top 1% and the middle class. So, obviously, the kids from the top families that are actually at the top income group, it could be 1% or 5%, have much greater likelihood to be there.
Now, as you mentioned also, it's not only--and that I think is very important--it's not only the advantages of inheritance of financial assets, which of course they would inherit, financial assets and housing and all of that.
And, the second level of advantage is the advantages that you get in school because very often, the rich parents, of course, have many more opportunities to actually teach certain things to the kids, which is quite well-known. I mean, even the vocabulary of kids who are born and who live in richer households is greater.
And, the third advantage, which I believe is a very important one, is the advantage of connection and information. And, having come from, of course, a very different environment and having kids in the United States, I see an incredible advantage of what is called information. I will give you an example of when I was studied, actually undergraduate, in Yugoslavia. And, when I read--we had, actually, a class which is called cybernetics--so it was I think Norbert Weber, and one of the things that--
Russ Roberts: Wiener, I think it was Norbert Wiener.
Branko Milanovic: Wiener, Wiener. Yes, Wiener. One of the things that we learned there was actually the power of information. Now for me, it was very difficult to understand concretely what it meant--what is the power of information--because the society was entirely different. Nowadays, when I tell somebody the power of information is so crucial, I totally see it: because, if you're not plugged in, if you don't have good connections, you will not even know that such and such job exists. You would even not know how to apply for a school.
And, let me give you one small example for that, which I think may be interesting. This is a friend of mine, French friend, who actually had a niece who did extremely well. They are also rich in France. She did very well, the niece did very well in a top school, I think high school, in France or something. So, she comes to apply to the United States and comes really simply with excellent grades. Of course, she gets immediately rejected, because what they didn't know--that's again information, the power of information--in order to get accepted to these schools, it's not sufficient just for you to have good grades. You have to show some special talent. Maybe you are jumping with the parachute. Maybe you have led expedition to the North Pole, something.
Russ Roberts: Cured cancer.
Branko Milanovic: Cured cancer, whatever. So, you see, that's the information which they even in a very fancy school in France, they didn't know that information. And, I think that's what kids that are actually raised in rich families do know.
Russ Roberts: So, I'll just say one thing about that. College attendance is way up. College graduation, not so way up. Getting in is as important as finishing and finishing is still pretty hard; and I think we've subsidized through loans, mistakenly, lots of people going to college with not much return. So, I think it's a complicated issue.
Branko Milanovic: I agree.
Russ Roberts: But, the one thing I want to make sure we mention about inequality that you point out that I think is often forgotten--and then I want to change the topic--but, one thing I want to point out is what's called positive assortative mating. I haven't mentioned it much on the program, but it's an important part of a little section of your book. Which is that: Not only does this doctor have a very nice set of financial assets to her name, she's also married to another doctor. So, we have two people who are very similar marrying each other, both wealthy.
I think marriage is a very endangered institution right now in America. If you look at the median income for married couples, where typically both people are working, that's grown pretty nicely over the last 40 years.
The interesting part is that there are not so many of those folks. People say, 'Well you have to have two incomes to really to have a middle class lifestyle. Before, you used to have one.' Could be. But it turns out, the proportion of households that are married is about the same. It's actually a little bit lower, till recently, compared to 40 years ago.
And, so it's true that in a married household, a woman is much more likely to work and now is much more likely to be of a high-education level married to a high-education man. That's the positive assortative mating point. So, they both have high income; they probably both have some assets that they together save a bunch more. But, that phenomenon is very different than, say, it was in 1970 or 1980, when, it's true, the female labor force participation rate was much lower, but there also real were a lot more married couples.
So, now we have a lot more, within a married couple, a lot more women working, but many fewer married couples. So, it's a very complicated point. And, you make the point that this probably accounts, in one study you quote, it's right, but maybe a third of the inequality is due to the fact that high income people are marrying other high income people.
Branko Milanovic: Yeah. I'm very glad that you brought this up, because really, one of the objectives of part of the book which deals with liberal capitalism was to not only highlight increasing inequality and the problems that it leads to--and we didn't even come to the other political issues like who is running in campaigns these days--but I wanted to highlight two aspects, two phenomena.
The first one, the fact that actually what I mentioned already that the people, rich people, are very often rich in terms of capital income, labor income; and secondly, that there is increasing positive assortative mating, meaning that actually people who are highly educated marry each other and then these are actually people with very high incomes.
Now, why I bring this up--and I'll tell you a little bit more about assortative mating--but why I bring these two issues up is because I wanted to highlight--first, they are important. Second, I wanted to highlight, when we talk about inequality, it's not very easy often to deal with it. I mean, why should you penalize people who marry each other? They love each other. They like actually people who are more similar to them.
Russ Roberts: And, it's not an indictment of the economic system if those folks get married and that grows measured inequality.
Branko Milanovic: No, no, absolutely not. So, that's one reason.
The second one, even when you come to what I call homoplutia, the fact that people have a high capital labor income, that too is very difficult to deal with. Because, on an ethical level, it's easier to deal with people who are only capitalists and basically, let's suppose they were just investing or they will give all their money to somebody else to invest and they do nothing.
Here, you have actually, empirically, we know that people with higher income work more hours than people with middle level income or low income. So, you then have really an ethical problem. Should you really very strongly penalize people who are working, like, 70 hours a week, rather than 40?--
Russ Roberts: Married to another workaholic working 70 hours a week, and then saving some of it, investing it in a very simple mutual fund, not taking a big risk, but steadily accumulating more assets over time.
Branko Milanovic: Absolutely. I agree. And, so let me just give you, for example--I think it's interesting--the effects on the assortative mating. The facts--actually I looked at the cohorts of young, first, American males, men between the ages of 20 and 35 in 1970. And I looked at people who were in the top wage group. They were as likely to marry another woman from a top wage group as to marry somebody from the bottom. So the ratio is one to one.
Well, nowadays, for males, it's three to one. So, they are three times as likely to marry a woman who is also from the same top income group as a woman who is from the bottom. But, for women, it's even more dramatic. The change is five to one. It used to be one to one and it's now five to one. Essentially, people actually--and I think that's quite understandable; I have to say myself, I've sort of made similar assortative mating arrangement--is that actually people tend to marry, particularly when they go to school, the age of marriage is postponed; they meet people with whom they share similar interests, similar affinities, similar values; and they marry each other--
Russ Roberts: Experiences.
Branko Milanovic: Experiences; and they marry each other. So, there is nothing wrong about that. On the contrary, I think it's actually a good development. But, on the other hand, it does have the implication of rising inequality.
Russ Roberts: Yeah. And, at the other extreme, you're talking about things that I think are lovely. People are free to choose them. Some people complain that rich people read to their kids before they go to bed. That gives them an unfair advantage also. Which it does, I'm sure, if it's indeed the case that poor people don't read to their kids either because they're tired, don't know that it's important. Maybe it's not important. I don't even know. But, I do think it's a very--I like to think it is, but mainly to be a better human being, not to be richer.
Russ Roberts: So, I want to shift gears radically, and I want to look at China. Because, what you have to say about China was utterly fascinating to me and just opened up a whole different way of thinking about it. In particular, your emphasis on the inevitability, the inevitability of corruption. We've had a program here on EconTalk last year with Mike Munger. We talked about whether capitalism is inevitably likely to lead to crony capitalism and the sort of special treatment or special interests. It's an interesting question. There's no simple answer.
But, you suggest that in the Chinese system, corruption is almost baked in now. Now, give us some idea, first of all, of how we know about the corruption. Some of the stories you tell are extraordinary, like, unbelievable. And, why you suggest that there's a tension in the system between too much corruption and the inevitability of there's always going to be some.
Branko Milanovic: First, I start with the fact that actually, political capitalism, to be successful, it needs to generate high rates of growth, which we know in the case of China, but we know it also in case of Vietnam, Ethiopia now, Rwanda. So, there are more countries than only China. However, China, basically like United States in the other case, is the most prototypical, most important case, the most important example.
Now, in order to do that, China and similar countries need to have, especially China, have to have a very efficient bureaucracy of almost Weberian type. In other words, people who go and make decisions which are cl ever decisions and which follow certain rules, not necessarily laws, but certain rules. Singapore is the best example of that, the best bureaucracy in the world, extremely efficient.
On the other hand, because of the preponderant role of the state and because all of the state not allowing for the formation of independent groups --and that was the case in China, it seems historically. That's also something that Fukuyama mentioned in his Origins of Political Order, the precocious state formation in China. They have to maintain ability to make discreet decisions which might go against the rules. In other words, if you have somebody who has made money in a way that you don't like or maybe has written an article that you don't like, or we have this case of a guy who was kidnapped from the hotel in Hong Kong who was the manager of the funds of the top Chinese politicians and who was then starting to talk too much about that, then you really have to use extra-legal means.
Now, the contrast is here, very, I think, clear is between the need to follow the rules, which is important for economic growth--
Russ Roberts: Decision-making, looking into the future--
Branko Milanovic: Absolutely. And, the need that you should always keep in the background ability to punish somebody or to subsidize somebody.
And, why corruption, in my opinion, is inherent to such a system is because it appears exactly there, between that inability to have rule of law--and actually all my definitions of the political capitalism is really absence of rule of law, existence of laws, but absence of rule of law--and the need for discretionary decision-making.
Russ Roberts: Yeah, so just to try to expand on that a little bit: There are a lot of rules, but they're flexible. Which has--if you have a great bureaucracy--you know, it's kind of like being a parent. You have a certain set of rules in the home. A certain situation--you know, the kid was under a tremendous amount of stress--you might not punish the way you always do. You might give them a little bit of extra money in a situation where you know they're really stretched. That works great in a family. It works pretty well in a bureaucracy of skilled people, but it does lead to a human temptation there.
Branko Milanovic: Absolutely. And, actually, the state would never relinquish that role, because that role is absolutely crucial if the state wants to impose decisions that it likes.
I also use examples of China. I use examples of Russia. You had people like, for example, Khodorkovsky, who are all oligarchs, like other oligarchs, but at some point they get in opposition to the current government; and of course then they get punished. If he had not done that, he would be prospering like other people who are in Russia or elsewhere making money.
So, you know, you know--always, the state needs to have that. And I think that's inevitable. That's actually not only inevitable, but it's actually part of the setup of the system.
And, then, of course, you look at the data on corruption in China, which we now know have the Anti-corruption Campaign, and this is actually--the examples that I took were from the official publication where they detail the corruption and the cases they have actually sort of uncovered. And, these are really amazing things, like that story which says that they found so much bank notes in a guy's basement that they brought, I think, a number of money-counting machines were actually burned down because, you know, they just couldn't handle that many bank notes.
Russ Roberts: And, I think it weighed a ton?
Branko Milanovic: Yes, a ton [crosstalk 00:14:24].
Russ Roberts: A ton. A ton. Go ahead.
Branko Milanovic: Yeah, so these are really the official numbers. And, then the other sorts of data also for corruption is also official numbers because the Chinese published thousands of cases with the detailed information about how much money was apparently stolen, whether it was a criminal organization, an individual, how many years it lasted.
And, what is interesting there, and I divided them into three groups by the territorial level, so actually a low level is the county and the highest level is the province. And, what you find is that obviously embezzlement is higher, the higher is the level. Because, essentially, the functions at a high level give you greater advantage to embezzle. So, obviously, you're not going to embezzle that much in a small village as you would embezzle in Shanghai.
But, what is also interesting: At each of those levels--the party positions and guys who were in the party positions versus the guys who were in the government position dealing with business and so on--party positions embezzled more. And, that also is indicative where the power is. Because again, if you have two guys who are maybe the same position, one is the government office and the other is the party office, then the party office gives you greater political and then economic power; and obviously then you're able to actually make more money or to sell the positions for more money.
Russ Roberts: So, here's the puzzle for me. You know, the old joke--a joke I'm fond of for a lot of reasons--the old joke in the Soviet Union was the worker would say, 'We pretend to work and they pretend to pay us.' So, in that system, they would give you some output requirement. It would be specified in tons or pounds and they'd make really poor quality stuff that weighed a lot. There were all kinds of breakdowns because there's no profit-and-loss system. We understand it doesn't work very well. And, of course, the powerful people in that system skimmed any profit they could. There was a ton of corruption. There was a lot of corruption in that system that made economic activity ineffective.
So, how are the Chinese overcoming that? How are they able, given those temptations and given that we know that many people have given into them, how is anything getting produced there? What's sustaining the economic growth that at least we think is happening?
Branko Milanovic: No, but there, I would disagree with you because I think the comparison between the Soviet Union and China is quite inappropriate because China is a capitalist country. And, a capitalist country, as I was saying, actually corruption is endemic to the system. Coordination is decentralized. People make their own profit. You know. So all the things which didn't exist in the Soviet Union, because in the Soviet Union, you had of course all nationalized--
Russ Roberts: Centralized.
So, where's the--I guess a better question then is: What's the nature of the corruption? Is it an American firm bribing an official to get a special treatment? What's going on? Do we know?
Branko Milanovic: I think that actually, the corruption is so endemic and so in-built in the system that lots of decision-making requires sort of, you know, giving money in order that the decisions would be made in your favor.
Now, I'm thinking--let me just put it in general terms--I'm thinking that corruption, we are--how should I say--having too much of a moralistic attitude towards corruption.
I mentioned, for example, India, and there is a beautiful book called The Eruption of Delhi, by Rana Dasgupta, which details--and of course now you have also, another one is what's called The Billionaire Raj. India is also extremely corrupt. And, in some cases, you can actually argue that the corruption is necessary in order to actually activity to take place at all. Now, it is necessary because--
Russ Roberts: Just the cost of doing business.
Branko Milanovic: Cost of doing business, but the rules, of course, are badly done, and in order for these rules to be circumvented, you have to corrupt people. Now, ideally, the rules would not be so badly done. The rules would be better done so you would not need to do that. But, in cases where actually the rules exist in such a way to discourage economic activity, you do have to have corruption.
Now in China, the corruption--let me mention one more thing, that actually this view of corruption that I put forward in the book is important also because we then actually are able to see this anti-corruption campaign in its own context. And, I think the context is the following. Corruption is endemic to the system, but if you let corruption, like a river, overflow on all sides, that system would eventually tend to collapse because actually, the discrepancy between what it says and what it does will be so large and the people would really get mad and actually you would have political problems.
So, you need, and that's what I think President Xi is doing, is you need to keep the corruption within the river bed. So, don't let it overflow. Keep it within the river bed, and then keep it within the manageable proportions. So, why, I think, if China continues going the way it is going now, we would see that kind of anti-corruption drives every 10 or 20 years simply because they would tend to overflow, and then you have really to bring them back.
Russ Roberts: Yeah. Let me ask a different question about the Chinese system. It's a Hayekian question. The way I would describe your sort of thumbnail sketch of the Chinese system is that, as you point out earlier, two thirds to three quarters is decentralized. The part that's not decentralized tends to be infrastructure. It's real estate buildings, high speed trains, new cities springing up out of nowhere.
And, I think a lot of Americans romanticize the Chinese bureaucracy, which you don't, obviously, but you have a lot of respect for it. How are they possibly--let's pretend there's no corruption. Let's pretend all they're doing is brilliantly laying out the infrastructure, allowed this private sector to thrive with the party taking some cream off the top in various ways. Whether it's corruption or not doesn't matter. Taxes, doesn't matter. Power, all kinds of things are flowing from that.
But, why would we think as economists that the 25% that's left, which is really the underpinning of the whole system, the foundations of it, that it would be well-done? How are they able to do that given that they don't have prices, right? They're making allocation decisions. I have no idea how they're doing it on a day-to-day basis, but we normally would say, 'That's hard to do and they're going to make a lot of mistakes.' And, how are they getting these high rates of growth? Is it just that they're starting at a low rate or they actually have a thriving capitalist system?
Branko Milanovic: Well, partly because, of course, as you said actually, they have started from a low position, but of course now they are a middle income country, and in many branches, like top technological branches, they're actually now among leading countries, actually. They are competing with the United States at that technological level, which nobody really expected even 10 or 15 years ago. Because people talked then--I can remind you of that--people talked about whether China would be able to move into high value-added production, moving from toys into, really higher.
Russ Roberts: 'They're all farmers,' anyway, [?] might say.
Branko Milanovic: Yes, and the now, of course, they are in some areas, like green technologies, like artificial intelligence and so on, like G5 [5G? fifth generation cellular technology?--Econlib Ed.] and things like that. They are actually ahead of practically everybody else. So, it has been transformed.
Now, I don't know. I mean, I cannot tell you the answer how they do it exactly. But, clearly, they have had, I mean, extremely high growth rates.
And, I want to mention something which is also forgotten because we got so much used to China growing at 8%, it used to be, now at 6%, and so forth, that we forget that never in history--I'm actually not using these words very carefully--never in history has there been a growth which was sustained for almost half a century of more than a billion people. That was something unimaginable.
So that was something which I believe means that, generally speaking, the countries that are most successful over a given period of time, then either to project their model outside--and that's what I discussed in the China chapter, whether China would actually be willing to do that or is interested--and secondly, they naturally have imitators.
So, the advantage that China presents for the imitators is twofold. One is they say, the elites say, 'Well, look, actually we don't need really maybe democracy and all these rules of law and stuff like that because if we actually can manage our countries well and people's incomes rise and people are quite happy, we can even organize something which would look like an election, but basically we'll never be overthrown.' And, that's the advantage from the elite point-of-view.
The advantage from the people's point-of-view, is something that I actually believe, is that people are willing to trade some political powers for economic gain. And, they might say, 'Rather than endlessly disagree or agree on things, like, whatever it is, we actually really care about our income, our pocketbook, and we are quite willing to actually'--even if people don't say that openly, but the fact that they'll be quite willing to trade off political powers, political power of decision-making for some income.
And, there, where I disagree, for example, but that's of course lexicographical, in Rawls, Rawls, John Rawls, the political philosopher, says, 'We do not allow for such trade-offs.' In other words, these are the primary goods. The first primary good is actually freedom, political and social freedom. And, then of course, we don't allow for the trade-off between economics and freedom.
And, last point, we think of China, but really, similar trade-offs have existed in the past. I mean, Chile under Pinochet had a very similar trade-off, and that trade-off even continued under democratic constitution, which of course inherited lots of Pinochet-like parts. So, that trade-off--even Russia actually under Putin, the first part of Putin's rule, that was a very clear trade-off. He took a country which was really practically being destroyed and middle class had rate of growth of 6%, so it was quite actually good.
Russ Roberts: No, I think people have a thirst for tyrants. Tragically, but I think it's a real thing. If they think that tyrant will not kill them and will merely take a nice slice out of a growing economic pie, I think they'll put up with a lack of freedom. And, I think the long run strategy there is a bit uncertain. It's a bit dangerous, right? It's not obvious. If you're not lucky, you get no political freedom and you're poor, which is what a lot of times happens.
Branko Milanovic: Yeah, it happens also.
And, of course I would also like to distinguish between, we cannot put everybody among dictators, so people who actually are authoritarian leaders and so on. You have one extreme, which was, of course, Stalin, and I've studied Stalin quite a lot. And, that's the situation there that you have, particularly in the latter part of his rule. And, naked tyranny, which actually is a tyranny not over the people only, and of course, approximately, I think one million people at the peak of repression--one million people annually were either, some executed, many of them put in jail and in exile. So, it's about one million out of, at that time the Soviet Russia I think had about 170 million people. So, it's a very high percentage. It's every year you have like one million people who--
Russ Roberts: And, you know someone in that group. Or you have a friend who has a friend in that group?
Branko Milanovic: Yes, in that group, yeah.
Russ Roberts: And, it's enough people that--it's not something you've heard of.
Branko Milanovic: Absolutely.
Russ Roberts: It's in your daily life.
Branko Milanovic: Absolutely. And, at the end of Stalin's rule in 1953, 3% of the population was either in exile or in jail. So, this is one sort of tyranny.
However, if you look at China today, if you look at Singapore, if you look at what I was saying before, Vietnam and others, you have a much softer tyranny. And, actually, in that case, I think smart, autocratic rulers would let many of the decisions be taken by others. Only the key decisions that relate to their power, or to the maintenance of their system, or the cronyism would remain. The danger I think--my last point--the danger is, how do you control the cronies?
Russ Roberts: It creeps.
Branko Milanovic: It creeps.
Russ Roberts: Yeah. I saw a video the other day, it was on Twitter, of--somebody put a large portrait of Putin in an elevator, a huge portrait, and so people would step onto the elevator and be confronted by this. And, he also put a video camera. I don't know if it was staged or not, didn't look staged. But these people, when they saw it, there were different reactions. Obviously we didn't see every reaction. The film was edited to make the more amusing ones, the more shocking ones of the people who cursed and said negative things.
But, I don't know if people realize, anywhere in the world whether--I don't think people realize that in the time of Stalin, cursing at that portrait could put you in the Gulag for 20 years, or 10 years, which was often a death sentence. Not just like, 'Well, the 10 years of life are gone.' No, you're going to die. You're going to be worked to death in cold weather without shoes.
You have to be careful what you wish for and I think--anyway.
Branko Milanovic: But, I think actually people nowadays, I have to say many people, young people especially, don't really know the distinction between these different types of tyrannies. They are, like--as I said, Stalin was the extreme where, I mean, a portrait like that or even actually making any derogatory remark, even with friends--
Russ Roberts: or a neighbor--
Branko Milanovic: actually it would lead you to five or 10 years in jail. And, actually, as you said, actually probably to death because you could be actually sent to what is [? 00:53:39] for example, Camp Kolyma, which you were working in a subzero temperature for forever. So, that's something which obviously doesn't happen now.
But, I want to say also, the problem of keeping corruption in check is very difficult and it's actually very easily seen in the case of Chinese rich people, many of them linked to the Communist Party or actually being the members of the Communist Party, the behavior, their own behavior and the behavior of the kids.
Remember the stories about big rich kids driving Ferraris? Many of these kids being sent here to the United States with extremely luxurious lifestyles? So, it's very difficult to keep this in some kind of order. And, of course I've read and I've seen myself when I was in China, that situation now looks a little bit different because that's a kind of open ostentatious display of wealth is very much frowned upon, and so, people know--not frowned upon: you might actually get in trouble. Maybe you would get lose your job or maybe you will be demoted. So, people are much more aware of that now, under the campaign.
Russ Roberts: Now, you talked in the book about what's the likelihood that China will try to export its system. We know that the so-called Belt and Road Initiative is providing infrastructure in poor countries. The social credit scheme that they are testing, I don't know how real it is yet, that we talked about with Amy Webb here and others, is an exportable system that is deeply appealing to a lot of tyrants. You said it's a soft tyranny, by the way, but if you're a religious person in China--I don't even know how to pronounce the name of the group that starts with a 'U'?
Branko Milanovic: The Uighurs [pronounced "we'-gurz" --Econlib Ed.]
Russ Roberts: What are they?
Branko Milanovic: The Uighurs.
Russ Roberts: The Uighurs?
Russ Roberts: They're not so soft. So, one: Are they going to export this mix of soft/hard tyranny with this social control, do you think? And, does it alarm you? Should we be alarmed?
Branko Milanovic: Yeah, whether they would--that's very difficult question to answer, and really I'm not sort of a China expert, but historically China had not exported this model. It was very happy to be essentially a country that would get tribute from the neighboring countries that will be seen as the center of the universe, but it was not actually eager to export the ideology and power.
Now, of course, when people speak of that, they of course always use, as a contrast, the Chinese fleet, which in the 15th century actually did a number of voyages. And, essentially went with large fleets--much greater than the fleets that the Europeans brought, [?], the Spaniards, others and others were able to put together. The Chinese fleet had much bigger ships, many more people. It's actually running into 10,000 or 15,000 people who would actually went on this voyages of expedition. But, the objective was essentially to project the power--I mean, in a mild way to go there, to bring some goods, not even to open the trade routes--
Russ Roberts: Like a parade.
Branko Milanovic: Like a parade, essentially like a parade. And, then of course it came to the end because it was very expensive. They essentially decided after the--I think it was the end of the 15th century--they decided to close themselves down . And, they burned the ships. And, actually what was also interesting, they burned all the records of the voyages. So, what we know is really very fragmentary compared to what existed. So, that's the argument.
However, I think actually that was the past. That was in 15th century, China went through this period of closing itself, of autarky. The situation now is different and the Belt and Road Initiative is really showing an ability to think big.
And, actually I'm very much in favor of the Belt and Road Initiative because I think the West has actually to some extent forgotten the idea of thinking big. I mean, if you look at the before World War I, the idea--so for example, Berlin-Baghdad railroad, which now seems to us really like sheer fantasy. But, you know, Baghdad would have been in Iraq, would have been much better off now if there was--I mean, I'm not saying that road itself would make a difference, but it would have--
Russ Roberts: Part of a general--yeah.
Branko Milanovic: shown the integration of the part of the world, which is a crucial and very important historical part of the world like Iraq and Syria and all that, with Europe. And we don't do that anymore.
And, also--last point--since I worked in the World Bank for 20 years, I know that as well that there was a significant shift towards so-called soft lending; and you basically lend to the governments, the governments decide whatever they want to do with that money but the other things you organize are conferences, infrastructure, I mean, building of social infrastructure, all of that--you don't do any more: dams, roads, factories and things of that nature that China is doing. And, I think that actually infrastructure investments are very important.
Russ Roberts: So, I want to turn now to what I actually think is that I--I'm sure listeners have enjoyed what we've been talking about, but to me the most interesting part is the last part of the book about what capitalism does to our--I would say to our psyches and our social and spiritual selves.
But, before I do, I want to get one more thing in if I could, because it's, I thought it was so interesting and I hadn't thought about it. You're talking about globalization and how--I'm going to put it my way. This is what I learned from you, and you tell me if I've interpreted correctly. And, what you're doing here is you're really integrating work of Robert Allen or Richard Baldwin and the way they looked at globalization.
So, let me try to put it--where I can think about it. In the past, the wealthy nations went to visit a poorer nation to exploit it. They extracted natural resources. They sometimes enslaved the people who lived there and sometimes brutalized them in terrible ways. The colonial, imperialistic past of the West is not a pretty picture. Sure, some good things came of it for the native populations. Not many. Certainly not at the time. What has changed with globalization--and that that was a form of globalization. Right? That you sent your ships out: you went--you were Columbus, or you were whoever--and you explored the rest of the world and you often dominated it militarily and then economically.
What changed somewhere along the line, which I found so interesting, is that: Once these poorer economies got integrated into the global supply chain, the host, the richer nations and economic players within those nations had an incentive, for the first time, to improve the technologies there on the ground overseas. Over there. And, you talked about the disconnect between consumption, production, what's produced over there is now consumed here. That's a big innovation. But there's this other innovation of what's produced over there is monitored and managed from over here. And, because of that, what I'm going to do is I'm going to make sure that things that I would never have cared about before--which is whether they have access to world class technology--suddenly I have an interest and incentive to do so. And that's going to inevitably lift up their standard of living.
And, what I think about is that a sweater factory in China 50 years ago was a group of women with knitting needles, literally knitting sweaters by hand. It's not anymore. It's not a sweater factory in Mexico anymore. It's not a sweater factory in Indonesia. That factory is--it looks like a factory anywhere in the world. And, the exporting of technology because of the globalization of supply chains is a story that I didn't appreciate until I read your book. Do I have that roughly correct?
Branko Milanovic: No, you have it absolutely correct. I have to say that actually the [inaudible 00:11:39], that most of that story comes from Richard Baldwin. And, I think it's absolutely true because it actually shows that being integrated into global supply chains [?] solves the "problem," quote-unquote, which existed in the past. Because, I am old enough to remember, for example, in the 1970s and the 1980s, there was permanent complaints by the Third World Countries that the rich countries are really unwilling to share technology with them. What the global value chain does is gives the incentive to the original company in the West to actually share best technology with actually people working in a poor country.
And, what was also interesting there that was actually work of Bob Allen. Bob Allen actually looked at the sort of technological advances and so forth. And, actually he found very interesting results that at very--as countries, for example, let's take the United States. The United States today doesn't have really any incentive to improve technology at the level of wage, which is like $1 per hour, for example. So, what Bob Allen found is that countries are actually still poor today, in the past and still now, really do not have technology that is appropriate for improvement in technology, which is appropriate for their level of development.
So, they have to really go back to the technology which might have existed like 150 years ago in this country. But, what global value chains do, is they actually have an incentive to find the appropriate technology for that country at that level of wage rate because they are paying that level of wage rate.
So, when I see all these issues now with China stealing, so-called stealing, intellectual property rights and technology, not only is it also done oftentimes by the American companies because they wanted to have access to Chinese market, which is of course very often the case. It's because they often really care about the factories there because they are part, an integral part, of their own company.
Russ Roberts: So, the analogy--I finished your book last night; I'm lying in bed, couldn't sleep. Thinking about it, trying to get prepared for the interview today. And, I came up with a very--it's not a good analogy, but I think it illustrates the point in a certain way. I've used this before: In a poor country, a garbage truck is a simple truck, might be a cart pulled by an animal even, with a bunch of labor--four, or five, six people collecting garbage off the street in all kinds of ways, loading it onto the truck. So, the capital-labor ratio is: the capital is very low, the labor is very high. In America, there's an extraordinary piece of equipment. This garbage truck gets driven by--usually it's got one driver; sometimes there's a second person, but there doesn't have to be. Sometimes there's two more people, but at most there's three. If it's a really fancy truck, it actually has an arm that comes out and picks up the garbage, throws it into the truck by itself and the people are there just to make sure it doesn't get--make too much of a mess.
There's no incentive for an American company to help the poor country's crummy garbage truck get more efficient, more effective, get better mileage, whatever it is. Like I say, they're stuck with--it might be an ox pulling a cart. In America, they are always trying to improve the arm: make the arm more quicker, make the arm work more efficiently, make it cheaper, make it so you only need two people instead of three. One instead of two.
But, what this is saying is--it's not a good analogy because garbage isn't a part of the global supply chain, exactly. But, the idea is the equivalent analogy would be: First, you give them our truck. Or, you give them a truck that's appropriate. You improve the truck they have because, like you say, you're bearing those costs, so you want them to be cheaper. It's just such an extraordinarily powerful way to think about how the world has changed.
Branko Milanovic: Absolutely.
Russ Roberts: It's just an amazing thing.
Branko Milanovic: No, even your example, I mean, what the company would do, let's suppose that it owned trucks in Bangladesh. They would improve even if they would not change the number of people that are being, servicing the truck because labor is cheap. They would improve the way that they collect garbage. I mean, rather than actually three guys may be rushing and picking it up, maybe one would go to the other house to pick it up. The two others would go to the different house. They would actually make lots of improvements that are very difficult in poor countries to actually conceive.
I have a cousin, actually, who is now living as a--working for the U.S. Peace Corps in Guinea. And, of course, what he has noticed that, and I've noticed that also in many poor countries, is numerical skills of people are very, very limited. So, if you have very limited numerical skills--and people, like, in villages in Africa, for example, may not have numerical skills--you're not going to improve the way things are done. But, the company which comes from France, or the United States, or China would actually work with you to improve these skills.
Russ Roberts: Maybe you'd want the truck to get better mileage. When you talked about time--there's so many margins for improvement that often are just, you know, limping along the same way they always have. And, that outside technology can often be transformative.
Branko Milanovic: But, let me just say one more thing in that sense: that also the implication, the negative implication of that for rich countries, is that the companies which they have are no longer, in reality, their companies.
Russ Roberts: Correct.
Branko Milanovic: They are now companies for themselves--and they equally care about, or actually in some cases more, might care--for labor in China or Burma than for labor in the United States. So, that's the implication, which is not very palatable to the people here.
Russ Roberts: Right. And, you have a lot of things to say about how that changes the political forces that might restrict that force of globalization. And some of the negative aspects of the concerns people have about globalization today are really motivated by that exact point--that they're not our company. They have our name on it. And of course it works both ways. When Toyota is here, bragging about on Twitter like they do in my promoted Twitter account, about how many jobs they create, I find it a little bit annoying. But, obviously, they have an incentive to make Americans happy now.
Branko Milanovic: Absolutely.
Russ Roberts: Which, overall, mostly a good thing, I think. But I understand how particular groups, it could be painful and costly.
Russ Roberts: So, let's turn now to the last part of the book, which I, even though I found all of this incredibly just, this is the most interesting part for me. And, for a lot of reasons I think listeners will--I think you'll agree and you'll see why I find it so interesting.
So, in the last, I think it's the last chapter, you talk about the bright and dark side of capitalism. And, we'll stick with the United States because, for us, for me, it's the system I know the best. I don't know what its, what the analogous effects are in, say, China where they've become more, dramatically more capitalist in the last 40 years. But, stick with the United States.
So, let's start with just what you call the bright side, which is the Adam Smith insights, I would say, and then the dark side. So, start with the bright side.
Branko Milanovic: The bright side--it was of course mentioned by Smith, it was mentioned by Montesquieu, by others--is that money-making or commercial societies, as Adam Smith called them, are societies that ultimately are regulatarian societies, not in the sense that everybody would have the same income, because we already talked about that. But, they are societies where class distinction, which in the past existed between different orders, between different class--
Russ Roberts: Between nobles and serfs.
Branko Milanovic: nobles or serfs, or caste system in India--they would no longer exist.
It's interesting here to mention when they said the caste system that Marx in his writings about the British influence in India was actually very favorably disposed toward British imperialism because he saw British destruction of the sort of feudal-like institutions of India bringing in capitalism. And, then ultimately capitalism would bring working class; and the working class would overthrow the capitalists.
Russ Roberts: He was partly right: he did--you could argue he foresaw the current modern state of India. But not exactly. But, anyway.
Branko Milanovic: No, no, he was actually right. And, actually what I want to say: He mentions particularly the fact that capitalism dissolves all these sort of legal and noncommercial institutions that have been, of course, they are in existence for millennia, and actually kept large parts of the population totally without any rights and in the worst possible conditions. So, this is actually the light side and the bright side of capitalism.
Russ Roberts: And, you also talk about--I just want to make sure you don't forget it because it's so important--the inherent empathy: That, if you want to be successful in the commercial world--
Branko Milanovic: Absolutely.
Russ Roberts: you have to put yourself in the shoes of your customers, the person you deal with.
Branko Milanovic: Yeah. That's actually, of course, very much in Adam Smith, as we all know. And, I think it's actually why I believe that Adam Smith is particularly relevant for us now, is because some of the issues that he has identified then.
I'm not saying that we've forgotten, but there were really a movement. We had two World Wars, we had the Great Depression, we had the challenge of communist system versus capitalism, and so on. So, we might have forgotten some of the key insights that he had at the origin of capitalism.
And, we are now sort of looking back at Adam Smith and actually seeing very similar things today. So, one of them, of course, is that you have, inherently you have to have empathy because if you don't have empathy with your customers, they are not going to buy things from you and you are not going to become rich.
So, in other words that what Montesquieu said, 'It softens our manners,' our behavior. It is a system which would naturally lead.--and, I, of course, have some doubts about it, but let me explain the logic, which would naturally lead to peace, because peace is needed in order for you to trade and to make money.
There are, of course other elements which might lead us sometimes towards the war, but in principle it's not the war-like system. Actually Schumpeter had exactly the same view even including--as I said, I don't agree on that--but including the view of the World War I that he saw as a kind of a residue of the aristocratic behaviors of the past. So, it was not capitalistic to destroy the machinery that was necessary for you to become rich. So, that was--there are two things there are really: empathy with others, they saw; and peace.
Russ Roberts: And, anybody who has been in a restaurant, in a less capitalist, or at least less competitive system, knows that it's different. Right? When you walk into the restaurant in a capitalist system, the owner smiles at you because he wants you to have a good experience. If he doesn't, you probably might not come back. And, some of that's fake, of course. But the idea that's that you have to empathize and be good to your fellow human beings is, uh, it's something.
Branko Milanovic: But, even technically speaking, you know, discrimination, which of course in the United States is still present: There is, of course, not equal opportunity for everybody.
But, if you're the owner of a restaurant, you are actually going to welcome equally whoever comes in, whether he is Chinese, black, white or whatever, because people are just bringing you money. So, in that sense it's a great equalizer.
Russ Roberts: You can still discriminate. But, it costs you.
Branko Milanovic: It will cost you, yeah. That's what, of course, the essential feature of capitalism which, of course, we now is going we move to the dark side--
Russ Roberts: Yeah, let's go to the dark side.
Branko Milanovic: there as well. Is that, essentially, you are unlikely in that case to destroy the bright side because your essential, how should I say, motivation is profit. So, yes, you can actually discriminate and not treat nicely somebody, but that person is not going to come back and then your profit will be affected.
Russ Roberts: And, you're at risk of losing the whole enterprise. So, one thing to say, 'Oh, I'll make a little bit less, I won't serve this particular clientele,' but you don't, it's not, running a restaurant, it's a hard thing to do, is a very slim, not much room there for that kind of discrimination.
Now, of course, if everyone else is discriminating, it can persist and I just want to put a footnote in: Gary Becker understood that. He gets mischaracterized often and I have encouraged listeners to read his original book, The Economics of Discrimination, to see what he actually says as opposed to what people say he said.
Russ Roberts: But, now let's go to the--I want to say that your bright side story, is--I've devoted a good chunk of my life to making that vivid. I think it's understated. It's not--underappreciated would be the right way to say it. It's under talked to, it's not talked about enough. I think there's a lot to be said for romanticizing capitalism because I think it has--there's a natural assumption that profit is evil and profit is exploitive.
And I think we have failed to teach our children the positive side of the economic system that sustains our standard of living. So, obviously my poem, "It's a Wonderful Loaf," is trying to do that. My novels try to do that.
But, what I appreciate about your book, is that you made a case for the dark side that I had to confront.
And, so let's talk about the dark side. And, it's not the usual dark side. The usual dark side is, 'Some workers don't make a lot of money under capitalism. There's a lot of inequality. But what you're talking about is the impact of a commercial system on your soul, if I could be so bold.
Branko Milanovic: Yes, that's a very good way of putting it.
Let me--what I would actually see somewhat dark side, and I agree that the chapter is on balance dark: Is that capitalist systems, we know that, have always tended to expand. Because, if your motivation is profit, you want to expand, you move to new areas of activities. We just talked about global value chains. It's another form of expansion. We also can talk about the origins of capitalism where you actually started with people who were producing, for example, shoes at home and then eventually went to factories, produced thousands of shoes, and then we're basically consumers of those shoes that they were producing.
Now: The new area of activity that capitalism has moved to, have become activities that in the past had never been commercialized. And that's our private life. And, this is the movement which was to some extent enabled by also by our wealth--by our ability to commercialize the activities that we were doing ourselves or we were doing or other people in our family were doing.
Which actually I have to make a point there, were often done and still are being done for no commercial return, mostly by women. So, there is a discrimination part there that I don't want to gloss over.
Nevertheless, they were not done for money, commercially. There was no movement of commercialization in that part.
And, that part, as we all know is, for example, cooking, cleaning, taking care of the elderly, taking care of the children, taking care of your dogs, ability to actually outsource many of the things that we actually do.
Including, what I called outsourcing of the law, which I think is a very important part, is that we now, in the system that we live in, we oftentimes believe that ethical things are determined externally by law.
So, it is no longer--because I think religion has become less important--it's no longer what we believe is ethical ourselves. We basically say, and I think it's very clear if you go to Wall Street, it says: Whatever is ethical is whatever the law says. And, even if I don't do exactly by the law, but I am not being caught, it is still okay.
So, in that sense, outsourcing of law and outsourcing of our internal life, which goes, for example, prenuptial agreements, that's basically outsourcing of--essentially, you bring the law into your home.
And, so we bring the law into our home, and we bring commercialized activities into our homes.
And, when we do that, we are, I think, essentially being willing, commercial or capitalist machines, because we start computing and calculating all of the things which in the past did not have an implicit price or value put on them.
And, then finally we of, course, then move into creating of our personal property, which is our own apartments or homes. We create hotels of them; and we create from our cars, we create, actually, it's no longer personal property, it becomes capital in Marx's definition because you really basically use that to make profit or money.
So, in that sense, our life, internal life, and very, sort of, how should I say, part of our lives which is very personal, has become object of commercial activities and commercialization.
Russ Roberts: Yeah. The language you use, I think, which is--I hear it often from sociologists. I don't find it convincing, but from you I find it more convincing, maybe because you speak my language. It's a commoditization of everything.
You know, usually this gets argued about whether we should sell kidneys or not. I think we should be able to sell kidneys. I think that's probably a good thing. And, the sociologists and others push back against that : 'Oh, it's a terrible thing.' And, of course, the way I look at it I think, 'Well, more lives are going to be saved; that's probably a good thing.' It is a terrible thing that someone might, in economic distress, feel they have to sell a kidney--but, saves a life. I look at the full picture. Other people just say it's wrong. 'It's just immoral, we can't deal with it.'
But, I think--the part that I found persuasive and provocative is, first of all, this idea that, with Airbnb and Uber, for example--which I think are wonderful things overall--whether Uber is sustainable or not remains to be seen. I'm not so sure. But, certainly with Airbnb, and Uber in its current state, my time is commoditized in a way that never has been available before.
In graduate school we're taught that the cost of your leisure, the cost of an hour of leisure is your wage rate. And, you know, if you think about that in 1978, that's a kind of a silly statement, because you can't actually make that trade. You can't work an extra hour: certainly you or I in our current lifestyle, occupations: we can't work the extra hour and and give up a little leisure and get a little more stuff.
Yeah; we can consult. We'd wave our hands. When people would say that, we'd say, I could take a different job that paid a little more, work more hours, that had more hours to it.
But, now I can go work the gig economy--in theory. I could just--and I meet people like this in Uber. They say--the last Uber I had, he said he was a software engineer. I said, 'Why do you drive?' 'Well, I like to drive. I make a little extra money, pay for my kids, whatever.' And, in a way, I think it is generally a beautiful thing. People are free to make that choice if they want.
But, what it does, and this is what I hadn't really thought enough about, is it sort of takes every minute of every daily life and turns it into a calculation.
Now, as economists, we tend to look at the world that way. We say, 'That's what people do. They calculate.' I think they don't. But, what you're suggesting is, is that the economic reality around us kind of encourages us to do that.
And, one other thing, which I found so extraordinary. Tell me if you think I got this right. In the old days, 1915, 1920, 1860, '80, '43--in the old days, forming a household was incredibly rewarding financially because of, quote, "Two can live as cheaply as one." Now, it's not literally true. Two can't live as cheaply as one. But, that statement is trying to get at the fact that there are economies of scale in the provision of these household goods.
What you're pointing out, which I didn't really appreciate until I read your book, is that, because of the extraordinary effectiveness of capitalism--particularly, say, in the provision of food, right? Food is so incredibly inexpensive; prepared food is so incredibly inexpensive--the incentives to form that household have gone down. They're just not there any more.
And, the result of that is what you call atomization. We could call it loneliness. And people choose it; so, we can't say there's something sinister about it. But it's a social change that I didn't fully appreciate.
Now, I'm going to push back on it, on that claim, in a minute. But, elaborate on that point. Because it's really a deep insight I hadn't really thought about enough.
Branko Milanovic: Yeah, I think that actually--
Russ Roberts: Sorry, one more thing. It's all about the division of labor, and Adam Smith's very first insight. That as we start to divide labor, we could improve it and make it more effective and then we can add capital. And, here we have this--at Harris Teeter, the prepared food is extraordinary because they're preparing it for zillions of people. And blah blah blah.
Branko Milanovic: What--commercialization, I think you'll have explained it very well, so I don't need to repeat it. But what commercial is, what commercialization of our private lives does is puts the shadow value, shadow price, on every unit of time. Because as you said, in the past, you could not choose to work like eight hours and a half, or nine hours and a half, or ten hours and a half, but nowadays you can choose whatever unit of time you want to work.
Now, the result of that is that the jobs themselves become gig jobs, many of them become, because they really are now being sold or used actually in very tiny units--
Russ Roberts: Little packets.
Branko Milanovic: Small packets. They are not really coming anymore like in eight-hour jobs, or many of them don't.
And, now, but the implication, which I think is very important and what you pointed out, is: Once I can actually furnish or actually satisfy all my needs through commercialization, what is the role of the family?
And, then the objective, particularly when you're wealthy enough, even for example, health issues and needing somebody else to help you in old age, you can outsource that too, or you can buy it. We have old people's homes. You can find, you can buy obviously--
Russ Roberts: People come into your house.
Branko Milanovic: People to come to your house and all that. So, the question is, then: Are our preferences such that eventually many of us would live alone?
Now, let's suppose for the moment that I am right.
Russ Roberts: I 've just got to interrupt for a sec. This is really the flip side of the Coasean question of why the firm exists, right? Because in theory you could outsource everything and just use the market. And, now we've turned that on its head, which is crazy. Sorry for interrupting.
Branko Milanovic: I haven't thought of that actually. I haven't thought of that because in reality that's what we do actually--
Russ Roberts: The transaction costs have gotten so low for so many of these activities , and they're going to continue to fall with the application technologies, the smartphone.
Branko Milanovic: Yeah, absolutely. I haven't felt that . But essentially when I said we have all become, as individuals, we have all become capitalist enterprises. And that, actually what I said is the ultimate triumph of capitalism. It's not only that it is geographically wider than ever in history. It's also now conquered our selves.
And not only conquered, because I don't want to make this sound like somebody that's conquering me. It's actually I am willing participant in that conquest because I like it and I actually have many advantages from that.
The question , however, is that ultimately we become households of one. Of course, there are many technical issues--how you will deal with children, whether you will have and all of that.
But, there is no doubt that if you look at the household size in the United States and also if you look at actually changes across time in rich countries, you have a decline in household size. We started our conversation with that. We didn't put it into context of automatization[?atomization?], but it really is there. You have Nordic countries where the average household size is less than two, and then you have of course countries that are much more, when you cannot commercialize these activities when the household size is, like in Mali, nine.
So, out of commercialization of these activities, and out of wealth, we might move toward situation where typical nuclear households would become not a rarity but at least would become less prevalent than they are now or they were in the past.
And, I think it's a big social issue and we have to reflect on that. And, I don't have an answer to this, but I am actually just highlighting that these things, atomatization[?] of individuals, commodification, and gig economy are really related.
Russ Roberts: So, now I'll push back a little bit. So, I found that very interesting, and I think, as listeners know, I'm really interested in whether we really make decisions like economists say we do, and I think we don't. But, you certainly force the reader to consider how these opportunities, which are mostly good, how they have these social aspects that we kind of don't think about much.
You can think about another version of it--of course, is the--you used the phrase 'hyper-commercialization.' There's a social tolerance of it because we sort of think, well, first of all, we have a prestige factor you talk about, which is, if we keep score via wealth--that's where prestige is; that's how we keep score. And, so we have a respect for wealth. Of course, there's a flip side to that. But, in general there's a respect for wealth.
And, you could argue that the rise of the tech firms in Silicon Valley and Seattle, their ability to extract our data and sell to third parties in return for really hip, wonderful, sometimes glorious products--that exchange, most people are like, 'Yeah, great, I'm all for it. Yeah. It's fine, whatever.' And, we don't say, 'Well, gee, this is, there's something threatening about this.' We just say, 'Well, of course they want to make money and I get the free product and it's okay.'
Branko Milanovic: True actually, and I think that's another--how should they say, willing participation in that. I have to be very clear on that. I am in favor of that because I am myself participant in that. But, when I highlight some of these issues brought by commodification is simply because I'm aware it brings really potentially an important societal change for which we are not, maybe, prepared.
Russ Roberts: So, this is my pushback. Thanks for reminding me. So, my pushback is that culturally I think there's going to be some changes. You point out that religion has declined. Religion was one check, before, on the urge to say make lots of money. Not so much necessarily that a rich man has to go through the eye of a needle to get into heaven. But, just the idea that there's other things that matter. These are not the only things that matter. So, that's in decline. And, socially we haven't come to grips I think with these changes.
So, my pushback is, is that: I think it's still up to us, what capitalism looks like over the next 25 years. We're doing this face to face in Washington, D.C. on a Friday afternoon. I think it's about 12:30 right now. And, at sunset, I'm going to turn off my cell phone, because I keep the Jewish Sabbath; and I'm not going to make any money. Not going to drive an Uber. And, I'm not going to check my stock, my financial assets. And, I'm going to spend a lot of time with my wife and our friends and we're going to eat and sing, and it's going to be a really different type of time. That's still available.
Now it's a challenge, because if you don't believe in God--it's a struggle for modern people--I get it. But, we also see a pushback from secular, we could call it secular religion, with faiths of non-divine origin. We see the minimalist movement. We see where people don't want lots of material items. They don't want a big house. We see pushback in the desire for face to face. Yes, people are absorbed in their cell phones. Yes, it's really fun. It's a challenge, but people start turning off their cell phones. They start putting restrictions on their cell phones. There are going to be all kinds of face-to-face opportunities, I think, that will reduce this atomization. So, I think we're in a transition time, and it's going to be interesting to see how we handle it.
Branko Milanovic: Yeah, of course. Technically speaking, people have freedom. They can do whatever they like technically, of course. Societal norms and type of societies that exist and that we ultimately do choose actually limited, constrained freedom.
But, let me push back on what you meant with Shabbat. I don't want to go into--very obviously religion is a very personal, emotional issue. But, I still think that using economic logic is important there, too, because if you were poor or somebody else much poorer, and if you needed absolutely to work on that day, then of course the cost of not observing commercial activities and actually shutting all your phone and everything else would be hard.
So, I think we all agree on that.
So, in that sense wealth is, as I mentioned that in the book, it gives you freedom. And, I want just a parenthetic[?] comment on that. The reason for example, why in communist regimes you did not have private wealth but you had wealth which you would enjoy while you were in that given function is because ability to amass wealth would ultimately give you freedom, and you can just say, 'Okay fine, I'm going to resign. I'll just do something else.' But, that's not what the system would allow. So, there was a logic of the system that would actually let you use wealth--a nice apartment, a driver, car and all that. But, once you lose political power, that's all gone.
So, that's why I think wealth is, of course, extremely important for freedom. So, that gives you the freedom also to disconnect yourself for a day or for a month or whatever period you want. But, of course, the less wealth you have, the less likely you are to disconnect yourself. This is obviously Economics 101--but the higher the opportunity costs of disconnecting, of course the less likely you are to do that.
So, I think that in that sense, I think we still have in the background, and that's what capitalism does to us. And, we talked about people who are actually in non-capitalist environment, have issues. They are not numerical as people who are in capitalist environment. David Landes actually used that quite a lot and rightly so. And, I think Joel Mokyr, in the work on the industrial revolution. Ability to to calculate, which means the ability to see what is the value of my time, is absolutely crucial, because in the preindustrial or pre-commercial societies, that was not perceived as such. But, now we perceive it to such an extent, of course, as you know that lawyers in this town, we are in D.C. today, lawyers, of course, count in 15 minutes times. And, I've actually met people, I mean literally, have problems going to the bathroom because they had to bill 15 minutes.
Russ Roberts: Too high an opportunity cost, yeah.
Branko Milanovic: It's actually, really, commercialization has gone so far.
Now you mentioned to me there, of course, there is always pushback. You have, for example, communism: the pushback is you become radical individualist. You have capitalism: and the pushback, 'Okay, I'm going to become really non-commercial. I'm going to really [inaudible 01:33:04] not get[?] involved--
Russ Roberts: a monk--
Branko Milanovic: All these activities.
Russ Roberts: I'm a monk one day a week. But, some people could be a monk, 6, 7--
Branko Milanovic: Seven--yeah. But, I'm not disputing that--of course, these are the communities that exist; there are people who kind of want to withdraw from life, commercial life. But they are marginal.
Russ Roberts: Yeah, they're struggling too.
Branko Milanovic: They are struggling. I know the case, for example, somebody mentioned to me a community, I think in Alaska, the people raise children there, but of course the issue, why it was brought to me, somebody told me the story, is that the parents there don't want to vaccinate their children. So, the mother that they told, about whom I heard the story, of course suddenly had really second thoughts about joining that commune and all of that because she was afraid that her children are going to get infected, to get actually measles and diseases.
So, you know, I'm not saying that these communities are not important, but they can have a life on the margins of society. People can exist there, they can stay there, maybe spend a whole life.
I kind of doubt that very often the kids would continue that lifestyle. So, they may be integrated into the economy, into the prevailing economy. So, I'm not really thinking that this pushback is going to be that important, not even in climate change--but this is a different topic.
Russ Roberts: But, no, I'm not suggesting this is going to be a--though there might be some kind of religious revival, there's a little bit of one right now. But, I think the non-religious part, the norms of how to interact with both your smartphone and this potential for constant commercialization of your time, your home, your car--I think other norms will evolve that, perhaps, will fight against this.
Branko Milanovic: No, it could be. Obviously we don't know. I just think that the logic of capitalist development that I mentioned before is two-fold. One, is that territorial expansion, which actually has now covered the entire globe practically. I mean, Cuba is even to some extent. I know in property terms it's not capitalist economy, but it does actually have a large segment of the economy that is working based on U.S. dollars and foreign currencies--the euro and so on.
Russ Roberts: People running restaurants out of their homes.
Branko Milanovic: Yeah. It's really--so, that's geographical expansion.
The second one that we were concerned about and we talked about was in Chapter 5 of my book, is really that expansion within our private life. And, I see the logic of that expansion continuing, because there are even more activities that can be commercialized. Now if you ask me what, I cannot really tell you easily what they are, but they can be found[?]--
Russ Roberts: It's a G-rated program.
Branko Milanovic: Yeah, exactly. They would be found.
Russ Roberts: Yeah. But, just one last thing on this. Is it really such a bad thing? Again, I'll give you the full pushback and the regular.
One side of me says, 'Is it really such a bad thing that people can pick up take out food and not have to cook anymore?' And, at the same time, it's this huge movement, this enormous fascination with cooking. My children, who are in their twenties are incredibly interested in cooking. They don't do takeout. Now, they also keep kosher, which makes eating a little more problematic at times, but they're not alone. Their friends--it's an enormous universe of YouTube videos of obsession with quality of food preparation. This is something of a pushback against, I think, this counterforce, against this commodification.
Branko Milanovic: I agree. Let's go back in history. We always had, whenever something was dominant to a large extent, we always had a pushback. I think this is the human nature that, something which actually would never change. One of the reasons that I mentioned, actually, why we have two types of capitalism, and now an analogy that I gave: Historically, whenever certain religion or way of doing things tended to become generalized, there were pushbacks for other historical reasons. Split up in Christianity, several of them, split up in Islam very early on, which actually, to a large extent, replicates Persia versus Arab world. And, communism, too. You have Mao split up with Soviet Russia. So, you always had these kind of splits. So, they will have a pushback, too.
Russ Roberts: My guest today has been Branko Milanovic. His book is Capitalism, Alone. Branko, thanks for being part of EconTalk.
Branko Milanovic: Thank you very much. It was really a pleasure to have this discussion.
Russ Roberts: Yeah, I agree.