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posted on 30 July 2016

Are Changes Coming To Capitalism?

by Branko Milanovic

Appeared originally at 29 July 2016

Sometimes it's useful to put symbolic dates on when a different era begins. The end of Thatcherism, it could be argued, came on July 10 in the then PM-candidate speech by Theresa May. It was perhaps appropriate that another woman, a Tory Prime Minister, would be credited with the ending of Thatcherism.


Back to Talking About the Way Capitalism Functions

The key words, which immediately attracted attention (see also Philip Stevens in Friday's "Financial Times") were not those about inequality (which has become a common place these days) but about the changes in the internal structure of capitalism: reintroduction of workers' and consumers' representatives on management boards, limits on the executive pay, reduction of job insecurity for the young people and much greater access to top jobs for those coming from less privileged backgrounds.

For the first time since the late 1970s (at the top level of policy-making), we are back to the issues of reforms in the way capitalism functions rather than discussing the ways in which the external environment would be made more market friendly. In essence, this is a confession that "civilizing" capitalism cannot be done only "externally" by relying on the "harmony of private interests" but that the state has a bigger role that goes beyond ensuring the protection of property rights, taxation and redistribution.

Rebellion Against Neo-liberal Concept of Capitalism

The past 35 years have shown that the neo-liberal conception of capitalism, combined with its global reach, has increased inequality to often unsustainable levels, left large segments of the population in the rich world without significant increase in real income and with heightened insecurity, and brought populist policies with a vengeance. Theresa May was thus right to highlight that the Brexit vote was at least as much a vote about the British economic system and the role of the political elite as it was about Brussels.

It may be too early to see exactly how things may change but I can imagine the main changes in three areas.

Economic Policy in Advanced Countries

The first area is economic policy of the advanced countries. The key disagreement there is between those who believe that the current economic dissatisfaction and the populist backlash are the product of the 2007-08 crisis and those who call for more fundamental changes. The first group believes that the problems will vanish once Western economies go back to growing at 2-3 percent per year and reduce unemployment (as the US has already done). I think they minimize what has happened in the meantime and lack any ideas how to address the structural weaknesses of capitalism. This is where Theresa May steps in by arguing for structural changes (the structure is meant here as the way capitalism works).

I have argued in my "Global Inequality" that taxation of current income seems to have reached the maximum that the rich countries' electorates can tolerate. Therefore, reduction of inequality, "empowerment of ordinary people" and widening of opportunities have to be accomplished through a change in the distribution of both financial and human assets. This implies deconcentration of capital ownership (which in all rich countries attains almost unfathomable Gini levels of 0.85-0.9) and much fairer access to high-quality levels of education (and thus to high pay) to those born in poorer families.

On the first point, it is often said that the middle class has no interest to acquire capital mostly because of volatility in its returns. But if as much ingenuity had been deployed in finding fiscal ways to make diversification of ownership appealing to more people as it was invested in making the rich create tax loopholes, one would be able, in the medium term, to reduce the current extreme concentration of wealth.

Economic Development

The second area where I see the need for major changes is in development. It has always been the case that the development economics (including development economics as applied by major international organization) has moved together with economic ideology waves in rich countries. In full ideological lock-step with neo-liberalism, the past several decades in development were dominated by efforts to "improve the economic framework" (make regulation lighter, allow faster registration of enterprises, reduce government red tape etc.)

While many of these policies made sense they had two significant shortcomings: they exaggerated (again fully in agreement with similar policies pursued in advanced economies) the ability of the free market to spontaneously produce desirable outcomes, and they shifted the role of international agencies toward the "soft" areas, from gender and sexual-orientation equality to "transparency", to the detriment of actual investments in roads, infrastructure, telecommunication, electricity generation. Indeed, the "framework goods" are important, but they are not all that matters. Moreover, this emphasis led to millions of hours of (wasted) work and thousands of papers that just repeated nostrums, creating NGOs they preyed on foreign and their citizens' money to pay themselves hefty fees under the pretense of doing the work of development. Such lop-sided emphasis has made organizations like the World Bank consistently less important players in the area of development. The more robust Chinese approach, reflected in its policy in Africa, and now in the new Asian Infrastructure Investment Bank has given, one would hope, a good jolt to the old development institutions to move back to the harder areas of development, and not solely on organizing conferences with "stakeholders".

Adjustment of Immigration Policies

The third change that is coming regards immigration policies. Here Europe is the primary battlefield because the issue of migration has been conflated with the issue of terrorism. This is an unprecedented development. Whether we look at the European migrations in the 19thor 20th century to the Unites States and Latin America, Indian labor moving to the West Indies, or the Chinese moving to East Asia, migration problems were seen as those of assimilation, jobs and wages for the native labor, but never as issues of personal security. (A possible, small exception to that is the view, briefly held in the United States, that South-European immigrants at the close of the 19th century were disproportionally likely to be anarchists.)

Major adjustments in European countries to accept more of non-European migrants are already taking place. Even if Angela Merkel cannot go back to what was already done and expel the migrants Germany accepted last year, it is clear that no such wave will be willingly accepted In Europe any time soon. (It does not guarantee that another such wave may not materialize though - but it will not be welcomed.)

But creating a fortress Europe is difficult and runs counter the economic interests of an aging Europe that needs fresh labor from Africa and Asia. This is why I have argued in "Global inequality" for a change in the approach to citizenship which is currently seen as an almost inevitable end-point for any individual who makes it to a EU country (or the United States and Canada). Instead of that, different levels of residency, including temporary jobs (that were originally the idea behind the German Gastarbeiter system) with the obligation to return to the country of origin, should become generalized. Citizenship rights should be divorced from the right to work in a country.

Redefinition of How Capitalism Works

If this line of thinking is correct, we should expect in the next decade a major redefinition of how capitalism works in the advanced societies, a redefinition of the role of international development organizations, and a redefinition of what it means to be a migrant and a citizen. This should, in principle, allow the rich countries to continue their key role in globalization and to be rid of this paradoxical position, where they, the spiritus movens of globalization, seem now most afraid of it.

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