“Avoiding Plutocracy Would Require a Political Change”: Branko Milanovic on the Future of Capitalism

In an interview with ProMarket, CUNY Graduate Center economist Branko Milanovic discussed the differences and similarities between US-style and China-style capitalism and explained why, without major reforms, liberal capitalism could lead to plutocracy.

Since 2008, the view that capitalism is in crisis has become increasingly prevalent. Inequality has reached historic proportions, more and more wealth and power are concentrated in fewer hands, and millions of outraged Americans—subjected to a system that rewards predatory behavior and allows monopolists and oligopolists to act with impunity—are purportedly turning to socialism. Democratic presidential candidates Elizabeth Warren and Bernie Sanders have each proposed detailed plans that would remake (or restore) American capitalism, and even the CEOs of Business Roundtable are now trying to jump aboard the “crisis of capitalism” bandwagon.

The problem with this narrative, says Branko Milanovic, is that capitalism is not in crisis—in fact, in his telling, it’s quite the opposite. For the first time in history, he writes in his new book Capitalism, Alone, a single economic system rules the entire world. Once upon a time, capitalism had to share the world with various feudal-like systems, and later it had to compete against communism, but now it stands uncontested as the world’s only mode of production.

The triumph of capitalism, however, has not been achieved through the utopian victory of democratic liberalism that had many in thrall back in the 1990s. The world, writes Milanovic, is currently divided between two competing models of capitalism: liberal capitalism, represented by the US, and the sort of authoritarian capitalism best exemplified by China. Both, he writes, are vulnerable to inequality, social unrest, and oligarchic rule.

Milanovic, an economics professor at the City University of New York Graduate Center and former lead economist in the World Bank’s research department (also, a ProMarket contributor), is one of the world’s leading thinkers on inequality. As an academic, he has spent decades studying the effects of globalization and the changing global income distribution. In books like The Haves and the Have-Nots (Basic Books, 2011) and Global Inequality (Belknap Press, 2016), he has traced the rise of inequality through a wide historical lens.

Capitalism, Alone is a continuation of Milanovic’s previous work on inequality, an ambitious, provocative examination of the political, social, and economic implications of capitalism’s ultimate triumph. In order to learn more about what he believes to be the future of capitalism, we recently interviewed Milanovic, a visiting presidential professor and core faculty at CUNY’s Stone Center on Socio-Economic Inequality, on the differences and similarities between authoritarian and liberal capitalism and why, without major reforms, our current system would inevitably lead to plutocracy. The following interview has been edited and condensed for clarity and length:

Q: The premise of Capitalism, Alone is that for the first time, a single economic system rules the world. How or why did we arrive at this point, where capitalism essentially stands uncontested?

Capitalism beat all other alternatives. If you go back to the latter part of the 19th century, to British-led globalization, capitalism was indeed the strongest and the most potent mode of production. At the same time, it was not ruling the world alone because there were other, feudal or feudal-like alternative ways of organizing production, essentially by using unfree labor, which from today’s perspective seem very obsolete, but at the time covered large parts of the globe.

With the Communist Revolution in Russia in 1917, capitalism had yet another serious competitor, which at its peak included almost one-third of humankind and even more of the land surface.

In both cases, capitalism has shown itself to be stronger and more dynamic. Essentially, we have come to this point because, in some Darwinian sense, capitalism won over competing ways to organize production.

Why did capitalism win? Because it works. It delivered higher levels of output—meaning goods and services—which in turn allowed people to reach higher levels of welfare. It also aligns with our current value system: namely, desire for material success and self-interest, sometimes pushed to an extreme degree. I don’t think those things are immutable, or hardwired into us. I think it’s something that is socially produced. Nevertheless, there is this mutually reinforcing relationship between our value system, which places acquisition of wealth at the top, and what is needed for the engine of capitalist expansion to continue unabated.

Q: Capitalism, you argue, can be changed for the better, but not replaced. We’re in a period where young people are disavowing capitalism en masse, when people from both ends of the political spectrum are saying that capitalism, at least as it’s been practiced in the US and most Western countries, is not working for ordinary people. What made you decide to write a book that essentially says “capitalism is not going away”?

Many people today talk about the “crisis of capitalism.” I really believe it is wrong to think that capitalism is in crisis. On the contrary, I think that capitalism has never been as prevalent and as powerful as it is now. This is, in my view, a pure statement of fact when you consider first, that the capitalist way of production (privately owned capital, hired labor, and decentralized coordination) now spans the whole globe, and second, that it is expanding into areas which were never commercialized before, like our leisure time.

Certain negative features exacerbated by today’s freewheeling capitalism lead many people, young people in particular, to question whether this kind of unbridled capitalism is really the solution for the future. I believe that it is not and that we need to “civilize” capitalism, but I have no doubt that it will remain the only mode of production because we don’t currently have any alternative. That doesn’t mean we won’t have one in 200 years. But as of now, we don’t have any alternative system on the horizon.

Q: Isn’t this prediction a bit fatalistic, though? I’m reminded of Ursula Le Guin, who said in 2014, “We live in capitalism. Its power seems inescapable. But so did the divine right of kings.”

I both agree and disagree. I would agree that we cannot say that the system that we now have—capitalism defined in a very minimalist way, as above—will necessarily remain dominant in the very long-term future. Whether it will or not depends on the relative importance of capital and labor. It could happen that in a hundred years we’ll have a surplus of capital compared to labor because the population would stagnate at some point, but we will keep producing more and more equipment and other physical or intangible things that are capital. In that sense, it could be that the relationship becomes the reverse of what it is now, namely that laborers, due to their relative scarcity, become much more powerful than owners of capital, and that workers take the role of entrepreneur and hire (borrow) capital. This is similar to what exists in today’s startups. In that case, one essential feature of capitalism (hired wage labor) would no longer exist. If you don’t have wage labor, you don’t have capitalism, even if the means of production are still privately owned.

Parenthetically, I would say that this is a very Marxist perspective: there are no “natural” ways of organizing production. They are all socially-determined. In other words, nothing is “innate”, “natural,” or forever.

I do think there are alternative modes of production that could be imagined that are not merely fanciful. I’m just saying that I don’t see that change happening for the foreseeable future.

Q: The triumph of capitalism could lend itself to an “end of history”-type narrative, but you present a different narrative. In your telling, two different types of capitalism are increasingly competing with each other: what you call liberal meritocratic capitalism in the West, and the authoritarian political capitalism of China. What characterizes political capitalism?

I describe three characteristics of political, or authoritarian, capitalism: efficient bureaucracy, absence of the rule of law, and autonomy of the state.

The first one means that such a system tends to be, and needs to be, efficient in delivering economic growth. For many people, the biggest attraction of political capitalism is the efficiency with which, in principle, it delivers growth and does not waste time in needless debates and delays. For many who believe that economic growth is crucial to increase welfare and happiness, such a system is attractive.

The second characteristic is not an advantage. The absence of the rule of law is inherent to this system, because it needs to permanently preserve the power of the state over individual capitalists. The absence of the rule of law and the attendant corruption are therefore immanent to political capitalism, and you cannot get rid of them within that system, because without these things the state remains powerless to exert authority over rich capitalists when it wishes to do so.

The third characteristic is the autonomy of the state, which allows the state to follow mercantilistic policies or otherwise overrule individual capitalists’ interests when needed.

In all three aspects, liberal capitalism is different. It might have efficient bureaucracy, but it’s a deliberative bureaucracy which could be less efficient, simply because it has to follow some democratic rules. It does have the rule of law in principle, and it doesn’t have state autonomy, because under liberal capitalism, very often the rich are basically able to take over the state.

Q: The rise of political capitalism, you write, has contributed to the rise of Asia and to a “rebalancing” of the global political and economic order. As a result, global inequality has declined. Within states, however, inequality is rising. This is especially true for the states that represent the two competing types of capitalism—the US and China—both of which suffer from vast and growing inequalities.

Absolutely. So far, we have spoken mostly about the major differences between liberal and political capitalism, but there are also similarities. There are similarities in the increase of inequality in both, as well as the rising share of capital income.

There is also an important similarity that might lead to a convergence of the two systems. In the “end of history” or “why nations fail” literature, the convergence is basically seen unilaterally: the terminus of history is liberal rule-based capitalism. But I think a very different convergence can be imagined, and I discuss it briefly at the end of the book.

With the current movement toward plutocracy in liberal capitalism, you have rich people who are able to influence the policies of national governments. Essentially, economic power gets conflated with political power. In the case of political capitalism like China’s, it is political power that is often transmuted into economic power. The outcome in both cases may be the same: the concentration of both political and economic power in the hands of an elite.

My data on China is obviously not as good as the data on the US, but the point I try to make is that the systemic features that might lead to the creation of a self-sustaining elite exist in both systems. The elite might be recruited differently, but the outcomes could be very similar: a cementing of the power of the elite.

Q: So both types of capitalism have an inclination towards a self-perpetuating upper class and growing polarization between the elites and the rest of the population.

Yes, absolutely. If you take the current presidents of China and the United States, they actually illustrate that process uncannily well. Trump is, of course, a person who came from the business world. Whether he’s as extremely wealthy as he says is irrelevant, he is a wealthy businessman and became the head of the US. On the other hand, you have Xi Jinping, who made his whole career within the Communist Party apparatus, whose father was also a relatively important official, and who parlayed his political power into wealth for his own family.

So the outcome is ultimately the same, a combination of political and economic power, but the path to that was different.

Of course, we have more data from the US illustrating this process, and I discuss them extensively: rising share of income from capital, higher returns on the assets of the rich, their marriage patterns (so-called homogamy) and also the fact that, increasingly, the same people are both capital-rich and labor-rich. So all of that, combined with advantages that they convey to their offspring and control of the political process, leads to the formation of an elite.

We have much more anecdotal stuff on China. But in a recent paper that I worked on while I was also writing the book, we show, using detailed household surveys, a huge change in the composition of the top five percent in China. One of the things we find is that entrepreneurs and business people within China’s top five percent find it particularly valuable to be members of the ruling Communist Party. If you are, for example, a successful entrepreneur, then being a CCP member gives you an additional advantage. Or maybe being a CCP member gives you an advantage if you want to become an entrepreneur. Either way, we empirically see the advantage of combining these two things.

Q: It’s clear why authoritarian capitalism leads to a self-perpetuating upper class, but you also argue that a systemic feature of liberal capitalism is that, essentially, income and wealth become increasingly concentrated. Does Western-style capitalism inevitably lead to plutocracy? 

The current system as it is does seem to be inevitably moving towards a concentration of political and economic power. But I do think that there are ways to break this process, among them taxing high wealth or making it difficult to acquire such extravagant wealth to begin with. Another is reducing the influence of moneyed interests on politics, which means changing the way political campaigns and elections are financed.

It seems to me that an increasing number of people realize that if you have such incredibly high wealth held by a few individuals, it is almost certain that its influence will spill over into politics.

Q: You talked about the possibility that the two competing strands of capitalism might converge at some point. Do you believe liberal democratic countries could eventually devolve into authoritarian capitalist systems?

Not quite. Rather than authoritarian capitalism per se, I’m referring to a situation in which the formal political system and the political reality become increasingly divorced: officially, you’ll have a democratic system, but de facto you would have a plutocracy.

For example, think of the Roman Republic and how it became first the Principate and then the Empire. It was all seemingly done within the rules of the Senate. The senators were still voting for the emperor but, of course, you couldn’t vote the emperor out. The actual system and the formal system diverged more and more.

Similarly, a number of countries today like Hungary, Russia or Turkey are what’s called “illiberal democracies”: formally they’re democratic, but essentially you have no chance of changing the leaders or the regime. I think that’s one possible outcome.

Q: You make some policy proposals in the book. How can Western countries avoid devolving into full-on plutocracies?

I divide my recommendations into three main parts:

The first one has to do with de-concentrating capital ownership through tax advantages for the middle class and a corresponding increase in taxes for the rich, as well as reinstating high taxes on inheritance. Reducing the concentration of wealth would also reduce the concentration of income and give the middle class a much bigger stake in the financial ownership of capital.

The second element is enhancing public education and equality of opportunity by increasing funding for and improving the quality of public schools. Despite individual cases of people who are poor being able to go to top schools, the number of such cases is small and of no statistical importance. Moreover, the high cost guarantees that top schools essentially cater to the rich. In other words, the extremely high cost of private education is used as a tool by the rich to reduce competition faced by their children.

The third part is changing the financing of political campaigns to reduce the ability of the rich to control the political process.

These three elements can be broken down into a number of policy options—some of them very radical—which in my opinion would be able to stop the slide toward plutocracy.

Q: In the book, you also suggest that the nationalist backlash against immigration and globalization could be countered with something you call “citizenship lite.” Can you explain what that means?

This is something that I think is more relevant to Europe than the US. I start with the idea that labor should have full worldwide mobility in the same way that globalization means full mobility for capital, ideas, or technology. The problem is that full mobility of labor is politically unacceptable in today’s world, whether due to cultural reasons or because people in rich countries fear that their “citizenship premium”, which foreigners hope to get too, will thereby be eroded. In short, they are against migration for cultural or economic reasons or both.

The danger is that you end up with a situation, which now looks more and more likely, of a Fortress Europe and, to some extent, Fortress United States. That situation is not good for anybody. It’s not good for migrants, it’s not good for the local population who often needs migrants, and it’s not good for the countries migrants arrive from, because people who go abroad make connections, learn new technologies or ways of doing business, and bring these things back.

That’s why I suggest that we find a compromise that would enable people to migrate but would not give them the path to citizenship, that is, to an open-ended stay in the new country. In terms of wages and labor protection, all the rights would exist, obviously, for the migrant population (as for the locals), but migrants would have to return to their home countries after a given number of years, say five, and their presence in the country would be dependent on having a job.

Q: As you acknowledge in the book, though, this proposal carries some significant risks—namely, the risk of creating an underclass, akin to the Kafala system in Dubai. What’s more, it’s human nature that when you emigrate somewhere that you might want to settle there.

That’s true. This proposal is not something I would like to have in an idealized world, but it is sort of a lesser evil. It also has significant disadvantages, like the possibility of creating an excluded underclass. The difference between this system and systems that exist in the Gulf countries and Singapore is that there you have extreme mistreatment of labor: people’s passports are being impounded, they’re forced to work long hours and so on. None of that mistreatment would be legal under the system I propose.

But it is true that if you stay for five years somewhere, you acquire friends, connections, you might want to get married. This is not a painless solution; it is not a silver bullet.

Q: Many of the recommendations you make, whether it’s increased taxation on wealth or tightening campaign finance rules, are major reforms that would mean less political power for wealthy elites that currently have an outsized influence on the political system. As you wrote in this blog a year ago, elites may like to speak the language of equality and inclusivity, but stop short of supporting policies that would actually reduce their power.

True. Avoiding plutocracy would require a political change. The recommendations I make are all broad, because specific policies differ from country to country, but what they all share is that in all cases, you need political participation: if there is no groundswell of support for some of these policies, nothing will happen. New laws and new regulations come from control of the political process, be it Congress, the president, parliaments. Economic forces will also play a very big role, but I believe political participation is absolutely crucial. Particularly in what are (still) democracies.

For more on this, check out the following episode of Capitalisn’t: 

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