The Future of Capitalism and the Utopia That Never Was

In his review of Paul Collier’s recent book The Future of Capitalism, Branko Milanovic discusses ideology, social democracy, and the “ethical world.”

 

 

Paul Collier’s recent book The Future of Capitalism is a tough book to review. It is short (215 pages) yet covers an enormous area, from a social and economic interpretation of the past 70 years in the West to pleas for “ethical” companies, “ethical” families and even an “ethical” world, to a set of proposals for reform in advanced economies.

 

The most uncharitable assessment would be to say that, at times, the book comes close (emphasis on “close”) to nationalism, “social eugenics,” “family values” of the Moral Majority kind, and conservatism in the literal sense of the word, because it posits an idealized past and exhorts us to return there. However, one could also say that Collier’s diagnoses of current ills are often accurate and remarkably clear-sighted and that some of his recommendations are compelling and sophisticated, yet common-sensical.    

 

Pragmatism and Adam Smith

 

Collier positions himself as a “pragmatist” battling (1) ideologues: Utilitarians, Rawlsians (who are accused, somewhat strangely, of having introduced identity politics), and Marxists; and (2) populists who have no ideology at all but play on people’s emotions. The first three ideologies are wrong, according to Collier, because they follow their script, which is inadequate for current problems. Populists, on the other hand, do not even care to make things better, only to rule and have a good time. Therefore, only a pragmatic approach makes sense.

 

Pragmatism, however, is an ideology like any other. It is wrong to believe oneself exempt from ideological traps if one claims to be a “pragmatist.” Pragmatism collects the ruling ideologies of the day and rearranges them. Like any other ideology, it provides an interpretative framework. Pragmatists are, as Keynes said in a similar context, “practical men who believe themselves to be quite exempt from any intellectual influence, [but] are usually the slaves of some defunct economist [or ideologue; my addition].”

 

The second building block of Collier’s book is based on his interpretation of Adam Smith. The interpretation he advances has become more popular recently and tries to “soften” the hard edges of the Adam Smith of The Wealth of Nations (self-interest, profit, and power) with the more congenial Smith of The Theory of Moral Sentiments. This is an old debate that goes back almost 200 years.

 

There are, I think, if not two Smiths, then one Smith for two sets of circumstances. The Smith of The Theory Of Moral Sentiments is concerned with our behavior around family, friends, and community, whereas The Wealth of Nations concerns our economic life and behavior as “economic agents” (I discuss this further in my forthcoming book Capitalism, Alone). In “Power, Pleasure, and Profit,” David Wootton makes the same point very persuasively. Collier himself says the same thing towards the end of his book (p. 174), but in the early parts still argues that the Adam Smith of Moral Sentiments applies to economics as well.

 

For an economist, only the Smith of The Wealth of Nations matters. Economists do not claim (or should not claim) to have particularly valuable insights regarding how people behave outside of economics. That is why economists use a model of Smith’s homo economicus, who is pursuing monetary gains only—or, more broadly, his own utility. That, of course, does not exclude cooperation with others, as Collier and some other writers seem to believe. It is obvious that many of our monetary objectives are better achieved through cooperation: I am better off cooperating with people at my university than setting up a university of my own. But whether I do one or the other, I am pursuing my own selfish interest. I am not doing things for altruistic reasons—which perhaps I might do in my interactions with family or friends.

 

It is true (and I discuss this in Capitalism, Alone) that under hyper-commercialized globalization, Smith’s economic sphere is rapidly expanding and “eating up” the areas where the Smith of Moral Sentiments applies. In other words, commodification “invades” family relations and our leisure time. Collier and I agree on that. But while I think that this is an inherent feature of hyper-commercialized globalization, Collier believes that the clock can be turned back to an “ethical world” that existed in the past while somehow keeping globalization as it is now. This is an illusion and leads me to Collier’s nostalgia.

 

“In the US, the Golden Age was the age of social mimicry and conservatism, widespread racial discrimination, and gender inequality.”

 

The Utopia That Never Was

 

In Collier’s view, the social democracy that brought about the Golden Age of 1945-75 did so for ethical reasons. In several places, he repeats this breathtaking claim: “[Roosevelt] was elected because people recognized the New Deal was ethical” (p. 47). The origin of social democracy lies in a (nice) co-operative movement, he argues, whereas in reality, the reforms that followed the first and second World Wars were the product of a century-long, often-violent struggle by social democratic parties to improve workers’ conditions. Social democracy did not come about because ethical leaders suddenly decided to make capitalism “nicer.” It was because two World Wars, the Bolshevik revolution, the growth of social-democratic and communist parties, and their links with powerful trade unions, exacted a change of course from the bourgeoisie under the looming threat of social disorder and expropriation. It is not through the benevolence of the right that capitalism was transformed, but because the upper classes, chastised by past experience, decided to follow their enlightened self-interest: give up some in order to preserve more. (For similar interpretations, see Samuel Moyn, Avner Offer.)

 

This difference in how we interpret history is important. When applied to the present day, Collier’s view calls for ethical rulers to appear somehow. My interpretation implies that nothing will be changed unless there are strong social forces that push back against financial sector excesses, tax evasion, and high inequality. What matters is not ethics or ethical leaders but group/class interests and relative power.

 

In Collier’s telling, the 20th century’s trente glorieuses was an Arcadia where moral giants strode the Earth, companies cared about workers, and families were “full” and “ethical.” This utopia never really existed, at least not in the way it is described in the book. Like many others, I have pointed out that 1945-1975 were very good years for the West, both in terms of growth and surely in terms of narrowing wealth and income inequalities. But they were no Arcadia, and in many respects, they were much worse than the present.

 

Collier’s “ethical family,” in which “the husband was the head” (p. 103), where every member (allegedly) cared for each other, and several generations lived together, was a hierarchical patriarchy that legally forbade all other types of family-formation.

 

In the US, the Golden Age was the age of social mimicry and conservatism, widespread racial discrimination, and gender inequality. It is often forgotten that during the Golden Age, France was basically on the brink of a civil war twice: during the Algerian War and in 1968. Spain, Portugal, and Greece were ruled by quasi-fascist regimes. The 1970s brought about the terrorism of RAF and Brigate Rosse. If these years were so good and “ethical,” why did the universal rebellion of 1968 take place, from Paris to Detroit?

 

That imagined world never was, and we are highly unlikely to return to it. Not only because it never existed, but also because the current world is entirely different. Collier overlooks the fact that the world of his youth, to which he wants people to return, was a world of enormous income differences between the rich world and the Third World. It is for that reason that the English working class could (as he writes) feel very proud and superior to the people in the rest of the world. They cannot feel so proud and superior now, because other nations are catching up. Implicitly, regaining self-respect for the English working-class requires a return to that worldwide stratification of incomes.

 

The book is thus built on quicksand, based as it is on a world that did not exist and will not exist. The 2020s will not be the imagined 1945, however loudly we clamor for it. But this does not mean that Collier’s analyses of our current problems and recommendations are wrong. Many of them are very good. 

 

Ethical Firms and “Ethical” Families

 

Collier argues that to be seen as ethical and to offer their workforce meaningful jobs, companies should include workers in management, give much more power to middle-level management, and introduce profit-sharing. These are all well-taken recommendations. Like Collier, I believe that, in addition to providing “better” jobs, they would increase companies’ profitability. The question, however, is how many companies nowadays can afford to provide such meaningful and (relatively) stable jobs due to fast-evolving changes driven by globalization. Nevertheless, the idea is correct. 

 

Collier then moves to what may be the most intriguing recommendation in the book, one that goes beyond the usual “let’s have higher and more progressive taxes.” He looks at the big divide between prosperous global cities (like New York and London) and their left-behind hinterlands. The success of metropolises comes from economies of scale, specialization, and complementarity (gains of agglomeration). People can specialize because the demand for specialized skills is high (the best tax accountants are located in New York, not in small dilapidated cities). Companies can enjoy economies of scale because the demand is high, and specialized workers benefit from complementarity in skills from other workers with whom they are in close geographical and intellectual contact. 

 

So who are the main winners from the success of metropolises, asks Collier? People who own land and housing (as housing prices skyrocket) and highly-skilled professionals who, after paying higher rents, still make more in global cities than elsewhere. Collier’s suggestion then, based on his work with Tony Venables, is to heavily tax these two groups of people, i.e., to introduce supplemental taxes which would be geographical: tax housing and high-income individuals living in London.

 

How to help hinterland catch up? Use the money collected in London or New York to give subsidies to large cluster-like companies (like Amazon) if they set their businesses in left-behind cities like Sheffield or Detroit. One can quibble with this idea, but the logic of the argument is quite compelling, and the taxation suggested by Collier has the advantage of going beyond the indiscriminate increase in taxes for all. We are talking here of targeted taxation and targeted subsidies. This is the strongest part of Collier’s book.

 

I am less enthusiastic about Collier’s suggestions regarding the so-called “ethical family.” Here, Collier is at his most conservative, although that social conservatism is masked under the cover of scientific studies that show children living in “full” families with two heterosexual parents are doing much better than children living with a single parent. 

 

Collier almost implies that (say) mothers should stay in unloving or abusive relationships so that there would be two parents in the family. Such families should, according to Collier, be given support and for all children, public pre-K and kindergarten education should be free (very reasonable). Collier also very persuasively describes manifold advantages that the children of the rich receive, not only through inheritance but through the intangible capital of parental knowledge and connections. This type of social capital inheritance is not a well-researched topic, and I hope this changes since its importance in real life is substantial.

 

Collier displays clear preference for “standard” families and even some “social eugenics,” for instance when he criticizes a UK policy that provides free housing and (since 1999) extra benefits for single mothers to have encouraged “many women..to bear children who will not be raised well” (p. 160).

 

The argument that parents should sacrifice themselves (regardless of the psychic cost) for children is also dangerous. It leads us to the family formation of the 19th century, when women often lived in terrible marriages because of social pressure not to be seen as abandoning or not caring for their children. This is neither a desirable nor feasible solution for today. An ethical family should consider the interests of all members equally, not subjugate the happiness of some (mostly mothers) to that of others.

 

“Why should goods, services, and one factor of production (capital) be allowed to move freely, while another factor of production (labor) is to remain stuck?”

 

The Ethical World

 

Collier has surprisingly little to say about the ethical world. His ethical world is a world largely closed to new migration, which Collier rejects on the grounds of cultural incompatibility between the migrants and the natives, based on a view that goes back to Assar Lindbeck and George Borjas. Interestingly, Collier does not quote either of these two authors nor any others. (The book is directed at a general audience, so mentions of other authors are extremely rare).

 

It is slightly disconcerting that Collier, who has spent more than three decades working on Africa, has almost nothing to say about how Africa and African migration fit into this “ethical world.” There are only two ways in which he addresses migration: First, he argues, migrants or refugees should stay in countries that are geographically close to their source countries: Venezuelans in Colombia, Syrians in Lebanon and Turkey, Afghanis in Pakistan, and so on. Why should the burden of migrants be exclusively borne by countries that are often quite poor is never explained. Surely, an ethical world would require much more from the rich.

 

Second, Collier argues that the West should help good companies invest in developing countries in order to increase local incomes and reduce migration. But how this is to be achieved is never explained. It is mentioned almost as an afterthought and is considered deserving of two sentences only (in two different parts of the book). This is in contrast with a detailed explanation, discussed above, of how governments should encourage and subsidize large companies to relocate to second-tier cities. Could a similar scheme be designed for investments in Africa? Nothing is said.

 

Furthermore, where does this leave African migrants currently crisscrossing the Mediterranean? There are no geographically-close countries where they could go (surely not Libya), nor can they wait for years in Mali for Western companies to bring them jobs. Again, nothing is said about that. Unsurprisingly, Collier is very supportive of Emmanuel Macron, whose anti-immigration policy is quite obvious, and of Denmark’s Social Democrats who are in the process of creating a kind of national social democracy, with new laws that practically reduce immigration to a trickle. Collier seems to favor Fortress Europe, although he does not say so explicitly.

 

In keeping with his anti-immigration stance, Collier argues that migration is not an integral part of globalization. Why should goods, services, and one factor of production (capital) be allowed to move freely, while another factor of production (labor) is to remain stuck? Surely, the fact that trade is driven by comparative advantages and migration by absolute (p. 194) is not the reason to be against migration. On the same grounds, one could be against the movement of capital too.

 

In conclusion, I think that Collier’s recommendations regarding the “ethical firm” and the metropolis-hinterland divergence are spot-on; his recommendations on “ethical family” are a combination of very perceptive and sensible points with a view of the family that at times comes from a different age, and almost nothing is said about what an “ethical world” would look like. The latter is a big omission in the era of globalization, but perhaps Collier was solely interested in how to improve nation-states.

 

Branko Milanovic is the author of Global Inequality: A New Approach for the Age of Globalization and of the forthcoming Capitalism, Alone, both published by Harvard University Press. He is a senior scholar at the Stone Center on Socio-Economic Inequality at the Graduate Center, City University of New York. An earlier version of this post has previously appeared in Milanovic’s blog.

 

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