Branko’s Law: Inequality is eating away at Democracy

The anonymous blogger Pseudoerasmus recently returned to activity after a hiatus (not counting Twitter) of several months.  Though he describes himself as a “hopeless positivist”, I think of Pseudo as a sort of empirical volcano; his trademark style is to confront plausible-sounding (but often complacent) economic-historical theories with a veritable ash-storm of contradicting facts.  These eruptions can be hard on theories (not to mention reputations), but they are fascinating to the voyeur and irresistible to dilettantes (such as myself), who often get singed but who do get a fair hearing.  Empiricism may have its dogmas, but Pseudoerasmus reminds us of its unparalleled value as a via negativa – which is to say that, as an antibiotic to bullshit, empiricism really works.  There are not many blogs as stimulating – and none from which I have learned more.

The latest plumes from Mt. Pseudo were triggered by Branko Milanovic’s recent Global Inequality: A New Approach for the Age of Globalization – a book that I strongly recommend and which Pseudo also likes, but which does contain an unfortunate excursus on the origins of the Great War (or, The Second Thirty Years War, if you share my weakness for world-systems theory).  In his post, Pseudo takes on the John A. Hobson theory, endorsed by Milanovic, that European domestic “underconsumption” led to imperialist competition, which later commentators (Lenin among them) saw in turn as a cause of the Great War.

I’m going to leave the Hobson theory alone, if only because all these centenary-driven searches for the cause or causes of the Great War have seemed silly to me.  Why should we expect the causes of World War I to be any different than the causes of any European war in the 250 years that preceded it?  The Great War was significant not in its causes, but in its magnitude and consequences.  In its wake all causes of war are worthy of study and remediation.

Besides, there are plenty more theories in Branko’s book; some floated, some attacked.  Consider the following:

“Naïve ‘economicism’ that looks only at the forces of supply and demand is insufficient to explain the movements of income distribution.  It is also wrong to focus only on institutions.  Institutions and policies work within what economics allows: they are, if one wishes to use this term, “endogenous”, that is, largely dependent on income level, and they can only vary within what income permits.” (p. 73.)

The above seeks to dispose of laissez-faire and Douglas North-ian institutionalist theories in a single swipe.  Institutions are symptoms, not causes.  It is not democracy that leads to national wealth, it is economic growth that makes democracy possible.  Milanovic here takes on the core identification problem in contemporary growth theories and switches their now-almost-conventional understanding of cause and effect.  His insistence on the priority of economic structure, were it not so reminiscent ‘Marxian’ otrthodoxy, might be broadly accepted as refreshingly realistic.  Indeed, Milanovic is not afraid to bring the concept of class into his analysis.  He accedes to the debilitating American preference for the broad use of “middle class” to cover both mid-to-low salaried and hourly wage “workers”, but it never unclear what he is talking about – and he takes “class” is directions, as we shall see, that no Marxist ever contemplated.

And another theory shot down:

“The fact that the [mid-twentieth century] downswing in inequality coincided with enormous increases in per capita incomes, despite wars in which all countries considered here were involved, show that over the long-term, growth does not require rising inequality.  Historical data do not support the hypothesis of a trade-off between the two.” (p. 89.)

But if growth doesn’t require or explain rising inequality, what does?  Here Milanovic shows himself to be attracted to the “great cycle” school of economic and social history.  If Fernand Braudel’s conjonctures or Kondratieff cycles appeal to you as a mode of analysis or explanation, you may also like what Milanovic does, which is to advance a theory of “Kuznets waves”.   This is partly in response, to Thomas Piketty, who has famously cast doubt on the venerable Kuznets curve theory (which states that, as an economy develops, market forces first increase, then decrease economic inequality) and pointed instead to a steady increasing tendency towards inequality in capitalist economies, one that was interrupted only by the capital destruction and period of economic flattening that was initiated by the aforementioned Great War.  But Milanovic suggests that inequality in developed countries may follow successive Kuznets cycles, or “waves” – with the implication that the current increasing inequality trend will someday top out.  Some combination of beneficial or horrific economic and political forces may cause the 2020s or 2030s to look more like the 1940s or 1950s.

To call Kuznets waves a theory is probably saying too much.  Milanovic offers no model for the repeated reversals of direction in inequality measures that such a theory would have to explain.*  He might himself concede that his notion provides an alternative interpretation of the data from which Piketty derives his law of an ever-increasing and ever-more-concentrated capital share.  And I think this is the real point.  For all its attempts at theoretical novelty, the book belongs squarely in the recent “empirical turn” taken by macroeconomics and economic history.  This turn may not exactly be a recourse to “measurement without theory”, but the main theory seems to be that fairly reliable socio-economic measurement (even reconstructive measurement) is possible and that these measures with basic economic and political concerns to be illuminating in themselves. **   Whether the time-plotted Gini values of the last 150 years represent a wave or a steady (but shock-interrupted) growth line may matter to some theorists; the data present challenges to our current political and social discussions that do not change with theory that explains them.

It’s at the interaction of data and “the social question” that Milanovic excels.  He has long reminded us that inequality must be considered both within countries and between them, but his updated, celebrated “elephant diagram” now shows just how this is playing out, with a new “global middle class” making real gains while the old “developed country middle class” (the 80 to 85 percentile range in the diagram) stagnates.  The feel of the chart is that the gains of the former are at the expense of the latter (this conclusion dovetails nicely with the “China Shock” paper series of David Autor et al.), yet all the while the top 1% do very well indeed.

elephant_graph

The heart of the book outlines the trends supporting “elephant” shape and, here is the crux, the implication of these trends for politics and society in developed countries.  Will the increase in inequality and the associated hollowing out of the middle class pose a threat to capitalism?  No, says Milanovic (no standard Marxist contradictions-of-capitalism prediction from this guy).  Capitalism will survive; democratic capitalism may not, because democracy, in any sense but name-only, requires a middle class:

“It is not for nothing that since Aristotle, and more recently since Tocqueville, the middle class has been seen as the bastion against non-democratic forms of government.  There is no special moral virtue embodied in the “middlemen”…  People in the middle class favored democracy because they had an interest in limiting the power of both the rich and the poor: to keep the rich from ruling over them and the poor from confiscating their property.  The large numbers of people in the middle class also means that a lot of people share similar material positions, develop similar tastes, and tend to eschew extremism of both the left and right.  Thus the middle class allows for both democracy and stability.” (p.194.)

The “large numbers” Milanovic refers to are, of course, in decline.  Milanovic shows how, for 8 Western democracies, the percentage of persons within 25% of median per capital income has declined since 1980, and how, the same 8 countries, the income share of persons in the top 5% has increased.  The United States, who self-concept as a “middle-class society” has always been somewhat dubious, was among the leaders in middle class numbers losses and upper class income-share gains.

Decline_of_Middle_Class

But the raw number losses implied by the matter less than the social and political consequences of a diminished middle class.  With the top 5% having twice the disposable income of the entire middle class, Milanovic points out that:

  • “Goods and services consumed by the middle class (that is, middle-class patterns of consumption) become much less important to producers” (p.195f.);
  • “Support for public provision of social services, principally education and health, declines”. (p.197.)  Even police protection loses support in favor of private “guard labor” – an employment category accounts for 2 out of every hundred workers in the US.

On the political side, Milanovic points to the twin ascents of plutocracy and populism.  I won’t summarize his analysis here – these phenomena are known to us, and suffice it say that Milanovic’s words, written at least a year ago, read like today’s headlines – but I will include a graphic that underscores his point around the rise of populist/nativist movements.  With the vote share of nativist parties having been on the increase everywhere since 2000, the recent Brexit vote and the so-far-successful presidential campaign of Donald Trump should not have surprised anyone.

Increase_of_Populist_Party_Vote

I am not suggesting that Milanovic should be taken as the last word on the social and political consequences of inequality, globalism, or the decline of the middle and working classes in developed countries.  There are other takes on these problems.  Kevin Baker, in a December 2015 New York Times op-ed, has suggested that populist uprisings, ugly and nativistic as they are, can lead to a rejection of “establishment narratives” an d a resurgence of “practical democracy”.  Robert Fogel, in The Fourth Great Awakening & the Future of Egalitarianism (2000) links populism and nativism, at least in America, to periodic religious revivals*** and eventual net increases in egalitarianism and democratic participation.  And Richard Hofstadter , in The Age of Reform (1955) and elsewhere, famously documented the ugly politics and definite-but-incomplete transitions that led from the Populist to the Progressive eras.  The explicitly segregationist Woodrow Wilson, who we rightly or wrongly consider to be the culmination of the first Progressive wave, embodies this treasure-in-earthen-vessels type of argument; the only improvements we ever get in democracy come from deeply imperfect voters electing equally imperfect politicians.

Point taken.  Donald Trump, if elected, may fall well short of being a second Tamerlane.  But this does not mean that Milanovic’s analysis should be ignored or written off as figure-laden free-riding on the fashionable subject of inequality.  Milanovic, in an accessible and fascinating book, has identified the linkages between within-country trends and between-country changes that are putting incredible economic pressure on consensus policy-making and politics-as-usual in the US and elsewhere.  Inequality is not the only destabilizing force in the world, or even the most dramatic.  Inequality, rather, is the silent rot that makes effective responses to political and economic challenges increasingly difficult to organize.  Milanovic’s analysis makes this deterioration impossible to ignore and easier to discuss intelligently and with full awareness of what is at stake.

——

*But on his own excellent blog, Milanovic has speculated on the limits to inequality, using historical and current ranges of Gini values.)

** It is too soon to tell whether the new empirics will coexist with the “modeling discipline” side of economics or will represent a kind of reversion to an older storytelling approach, though I doubt that it will.   The current storytelling resurgence may simply reflect that fact that economists and economic historians are becoming attracted to the same questions and that long-term data sets are increasingly useful to both.

*** Might there be “Edwards waves”?

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