Economics, Politics, recent

What Comes After Capitalism?

A review of Capitalism, Alone: The Future of the System That Rules the World, by Branko Milanovic, Belknap Press: An Imprint of Harvard University Press (September 24, 2019), 304 pages

“The domination of capitalism as the best, or rather the only, way to organize production and distribution seems absolute,” writes Branko Milanovic in his new book, Capitalism, Alone: The Future of the System That Rules the World. With feudal systems demolished, and the ideological battles between fascism and communism resolved, a clear winner has emerged.

Capitalism is unrivaled in its ability to produce material abundance and coordinate the use of scarce resources. But above and beyond that functional success, capitalist societies also inculcate a set of commercial values that reinforce its supremacy and reward its expansion into new spheres of life.

If capitalism contains the seeds of its own destruction, as Marx thought, such forces are overwhelmed by its propensity to spread and self-replicate—at least so far. As a leading scholar on income inequality at the City University of New York, Milanovic is sensitive to the “internal contradictions” of capitalism that remain. Capitalism, Alone represents his attempt to update Marx’s thought in light of capitalism’s durable success.

Consider the theory of historical materialism. Marx believed that economies transition through various necessary stages of development characterized by different modes of production. The primitive communism of hunter-gathers gives way to feudalism; feudalism is displaced by capitalism; capitalism creates the conditions of precarity for a socialist revolution, and so on. While Marxist-Leninists often debated what the “and so on,” would actually be, the culmination of history in a decentralized communist utopia was considered a scientific certainty.

This linear theory of history was falsified by the actual events of the twentieth century, Milanovic argues. If Marx’s theory were correct, for example, we would expect socialism to have been most successful in relatively developed, industrialized economies like East Germany and Czechoslovakia. Instead, industrialized economies are precisely those for which the “socialist calculation” problem of central planning is largest. The transition of the Soviet Union to capitalism after 1989 was thus an inconceivable historical regression according to orthodox Marxism.

But rather than throw out historical materialism altogether, Milanovic suggests Marx simply got the sequence wrong. Communism turned out to be the most successful in agricultural, Third World economies as a tool to vanquish feudalism, and thus lay the foundation for capitalism. This is validated by our best understanding of how countries like China and Vietnam initiated their economic development. After the Chinese Communist Party’s victory in 1949, for example, China abolished quasi-feudal systems in rural areas through comprehensive land reform, and weakened clan-based social relations by imposing nuclear family structures and gender equality. “This was no less than a complete overturning of historical hierarchical relationships,” notes Milanovic.

The famines spurred by China’s Great Leap Forward were catastrophic. Nonetheless, the broader political centralization and reorganization of society made “a tabula rasa of all ideologies and customs that were seen as retarding economic development and creating artificial divisions among people.” Western societies skipped this revolutionary step because they developed first, having overcome the feudal and familial barriers to growth in a much more gradual fashion. In this respect, the influence of Christianity is perhaps the most neglected factor in Milanovic’s account.

The spread of the Western Church throughout Europe centuries before the Industrial Revolution helped dissolve extended kin-group networks through prohibitions on cousin marriage. This ultimately created the social conditions for the emergence of democracy. Evidence for Christianity’s role includes empirical work by the economist Jonathan F. Schulz, which finds a strong correlation between exposure to the medieval Church and the formation of inclusive city- level institutions and urban population growth. Extending his thesis globally, Schulz even finds that the prevalence of cousin-marriages can “explain more than 50 percent of the variation in democracy across countries today.”

Milanovic suggests that these two developmental histories—gradual and revolutionary—give rise to the two distinctive models of capitalism in the world today: “Liberal meritocratic capitalism” in the West, and one-party “political capitalism” in countries like China, Vietnam, Malaysia and Ethiopia. Nonetheless, the egalitarian ethos spread by Christianity is important for understanding why the West became not just liberal, but democratic. Materialist accounts only get us so far.

In a democratic society, the equality of citizenship gives each member an ownership stake in the commonwealth. Western democracies still have hierarchical organizations like corporations, but the political system is relatively flat: civil servants and elected representatives work within the bounds of a social contract. China’s political system, in contrast, is itself like a top-down mega corporation. Its model of “regionally decentralized authoritarianism,” in which local and provincial leaders move up the ranks by hitting performance targets, even shares similarities with the governance structure of Japanese conglomerates. The ethos of China’s political capitalism is thus to treat citizens as contractual employees, rather than as equal owners with corresponding rights.

Indeed, political capitalist economies achieve spectacular growth rates by doing an end-run around the constraints of the rule of law and democratic negotiation. They prize efficient bureaucracies and the autonomy of the state, legitimized by continuously rising standards of living rather than the consent of “we the people.” The corruption endemic to political capitalism may even be a feature, Milanovic argues, helping to grease the wheel of rapid development.

Whether or not political capitalism can survive with the slower growth rates of a fully developed economy remains an open question. South Korea transitioned to a multiparty democracy peacefully. Singapore, on the other hand, has remained stable despite its First World status by reigning in corruption and formalizing its technocratic model of governance through carefully designed incentives.

Yet Milanovic argues that liberal meritocratic capitalism faces existential questions of its own. Rising inequality and open migration threaten the survival of the welfare states. Globalization has normalized tax evasion and other forms of transnational corruption. And technological change has increased the incomes of the highly educated, allowing them to live in tacit denial of their own privileged class positions. Inequality may be falling globally, yet the populist revolts of working class people across Western democracies suggest the final stage of liberal capitalism has yet to be reached.

Milanovic believes the West’s next evolution will be what he calls “people’s capitalism.” In this model, direct redistribution would be limited, but everyone would derive adequate income through approximately equal shares of labor and capital. Public education would be strengthened to reduce intergenerational inequality. High taxes on inheritances and campaign finance reforms would reduce the wealthy’s influence over politics. And binary notions of citizenship would be eliminated, allowing free migration without nationalist backlash. Milanovic suggests we can judge whether his vision is coming true by tracking trends in wealth inequality. This goal, combined with the “people” in people’s capitalism, gives the impression that such a future is not just likely but also desirable. In a sense, it would even represent a partial vindication for Marx—a higher form of capitalism that is internationalist in orientation,  and which secures equality in the “pre-distribution” without forgoing the efficient “production and distribution” of the market.

But in another sense, people’s capitalism sounds like the apotheosis of a certain kind of vulgar neoliberalism: Cut the welfare state and birthright citizenship to allow free movement of labor, and give everyone personal investment accounts so working people can be capitalists, too. Whether or not people’s capitalism is a likely scenario is a separate question. If one adopts a materialist approach, history certainly seems to be moving in the opposite direction. Globalization has put pressure on open economies to reduce taxes on capital, for instance, in favor of immobile factors like land and consumption. High wealth taxes are thus unlikely to work absent capital controls or significant global coordination.

Open migration and the welfare state do not seem to be as incompatible as Milanovic thinks, either. The greatest conflicts between natives and immigrants arise in states where benefits are in-kind (like the relatively fixed supply of Danish and Austrian public housing), unconditional (like Norway’s generous child care benefit), clientelistic (like Greece’s reliance on public sector employment), or embedded within labor market institutions (like Germany’s trade unions). Such countries have responded by voucherizing benefits, decentralizing labor relations, and making social insurance more universal and contributory. This doesn’t represent the abolition of the welfare state, so much as a shift from corporatist and socialistic welfare states to the Anglo model. Milanovic’s tendency to lump quite different economic systems into reified “ideal types” causes him to gloss over these distinctions.

Milanovic’s focus on broad measures of inequality causes him to misdiagnosis liberal capitalism’s greatest threat, as well. Shifts in abstract wealth and income percentiles are a much smaller problem than the emergence of stark parallel societies—where migrants and an underclass are pushed to the periphery of civil society. Subdividing citizenship would only exacerbate this trend. Rentier states like Qatar may get by with exploitative guest worker programs, but liberal countries like Canada sustain high rates of immigration and social integration by emphasizing permanent residency and civic equality. By contrast, asylum seekers in Sweden are not automatically granted work permits, which contributes to the social exclusion of young Syrians and Iraqis and, if anything, heightens potentially hostile nativist sentiment.

The emergence of such parallel societies may be most stark in Europe, but restrictions on housing supply have helped produced a dual track economy across the entire Western world. Deindustrialization has hollowed out rural economies, while access to vibrant metro areas is increasingly limited by the high cost of housing. This causes cities from New York to Paris to self-select for an educated elite, who then get access to the best schools and professional connections. Providing disaffected workers with financial assets and better public education thus misses the extent to which social class is reproduced through segregated social networks. The lack of discussion on housing (except insofar as it represents an abstract source of financial returns) is a particularly strange omission given Milanovic’s discussion of land reform.

Put differently, the egalitarian ethos underlying Western liberal democracy is not just about the mere leveling of incomes; it refers to solidarity through social integration and a shared civic culture. Inequality ceases to be meritocratic when it reproduces itself, not by accident, by with the help of structures that promote segregation and exclusion. The accretion of such structures (regulations that restrict housing supply, two-tiered labor markets, and exclusive universities) is not necessarily an upper-class conspiracy. It occurs naturally enough through the institutional entropy and cultural complacency engendered by sluggish economic growth. There is thus no materialistic force that prevents liberal meritocratic capitalism from sliding back into a set of quasi-feudal relations—a “neo-medievalism” in which a metropolitan and scholastic aristocracy reclaims its nobility by locking-out the underclass. Whether these trends can be reversed crucially depends on the strength of our moral convictions, rooted in what the philosopher Jurgen Habermas once identified as “the Judaic ethic of justice and the Christian ethic of love.”

With Capitalism, Alone, Milanovic has written a data-rich, provocative account of where capitalism is today and where it may be headed. But while the book serves to correct many of Marx’s primitive errors, Milanovic nonetheless remains beholden to the same faulty paradigm. History cannot be fully understood through the lens of class conflict, modes of production, and highly aggregated concepts like labor and capital income. Materialist forces help explain the divergent paths of liberal and political capitalism, but culture and ideas matter, too. Most importantly, history has no predetermined path. Capitalist civilizations can always regress. And if we’re not vigilant, what’s old will become new again.

 

Samuel Hammond is the director of poverty and welfare policy at the Niskanen Center. You can follow him on Twitter @hamandcheese

Comments

  1. People’s belief in reality may increase or decrease, and their fortunes will improve or regress accordingly, but reality will remain reality all the same. Nothing comes “after” it.

    This thesis is analogous to talk of “business cycles” and their supposed inevitability. It is not actually inevitable that societies cycle through periods of rapid expansion followed by contraction, but human nature makes it highly likely, as humans often behave irrationally. Similarly, it is not inevitable that societies will, after believing in supply and demand and natural rights and the information contained in prices, decide to unlearn these things. But human nature does make it likely; just look how little time after the fall of the Soviet Union it took for its ideas to become popular among our youth!

    As to the question of “What Comes After Capitalism”, the answer is, of course, “pain”. Pain that will endure until people relearn the things that they have forgotten.

  2. I believe that human nature/psychology is severely underestimated by capitalism as is today. There was such a rapid growth of technology and change in society in the last 50-80 years that our monkey brain can’t keep up.

    The idea of a free market is all good and well on paper. Your create a good, or service and you are payed for it whoever deems it worthy of the exchange. You can exchange your time for money, go to work for someone. In some sectors it scales well, in others I don’t think so. I admit I am no economist so I am open for corrections, however I do have a subtle discomfort, like an itch or something. For example let’s take a musician, or hollywood celebrity. Someone who might make 20mil on a movie. It’s perfectly fine, people pay 10$ to go to the movies, everyone takes a cut and the artist is payed in the end. With the invention of technology the market opened to the whole world. So 10$ is not that much, but it adds up. Again on paper this is perfectly fine. They earned it. Now this person can earn so much money, that it starts skewing the system and messing with it. This celebrity will open a business, or buy up someone else’s or crash someone else’e. The problem I have is that after a while the money is accumulated in fewer and fewer hands. You might say well those are people who can handle their money. I have no problem with the Elon Musks and Bill Gates of the world, but what is the percentage of these and what is the percentage of the selfish greedy ones? Do we have an answer? Should it matter?

    I am software engineer and I get payed whatever I get payed, and a project has multiple of people working on it. However in some industries the profit of that work that I was payed for far exceeds the amount I was payed and sometimes generates money even after I am gone. Can we come up with a solution that maybe even years after you might get $x a month from that sale? (it could be as low as $1/month).
    Teachers, nurses are super important to our life/society. I think their value is far greater than $50K a year, however that’s what the market is able to pay. I see this also a failing of the market.

    I read an article mentioning that the world is 57 trillion in debt. I scrolled down to the comments section and one of the question was to whom? aliens? So apparently we have a system where there is more money on paper than there actually is. I see this as a problem. How long will it go till? What will be this number in 100 years? in 200 years? What’s the point? Apparently people don’t pay off debt because it’s better to invest money, other people don’t collect debt because they make more money of the interest. These types of accounting tricks are not available to most people.

    The world is turning more and more into a game of poker were you have to sit down with 1000$ and everyone else at the table has $100mil. Yeah, good luck with that.

    I support equal opportunity (not equal outcome), however the equal opportunity part is disappearing more and more.

    What’s after capitalism. I think we need to accept that things have changed, people are better off from a survival point of view, but are not happy. The reason for their unhappiness is the unfairness of the system, financial insecurity and loneliness. In my opinion those are the things that need to be fixed. Capitalism is mostly fine.

  3. A lot of your questions have already been answered, and your ideas have already been vetted. You should read more of the history of economics.

  4. “However in some industries the profit of that work that I was payed for far exceeds the amount I was payed and sometimes generates money even after I am gone. Can we come up with a solution that maybe even years after you might get $x a month from that sale? (it could be as low as $1/month).”

    Then argue for residuals with management or form a union and place it in the employment contract. Maybe if you sell your home for a profit, the contractor who built it should get a residual cut?

  5. If the work that you do ultimately does not generate a profit, should your employer be allowed to reclaim your paycheck?

    If you want a claim to unanticipated profits, you’ll probably need an agreement that gives you a share of unanticipated losses.

    There’s also the common problem of a person who sells a $1M contract to his company’s client believing that he deserves all (or at least a significant part) of that $1M, because “It would have been $0 without me!” He doesn’t appreciate that there are a hundred (or even a thousand) other people who could say the same thing - the people who build and deliver the product, the supply chain, etc.

    Ultimately, if I sell you a $20 hammer, whether it is used to build a dozen houses or gathers dust in your garage is your doing, not mine. Would you want to live in a world where every seller of every product did a full background check and asked you a ton of questions to determine how much value you would get from the item, then jacked up the price accordingly? Or, if he determined that you would get little value from it, simply sold it to someone else?

  6. A point that Douglas Murray makes is that okay now you have the political system that you have always wanted . Now what? You are still the same person with whatever limitations you have . You have the same regrets and unfulfilled ambitions as before. You will still get old and your partner still doesn’t understand you etc.

    Your human nature remains constant.

    Likewise what is it that you can’t do today within reason that you could do in your ideal political system? You might have some more money but so what. What good is that ?

    Do now substitute politics for life.

    I speak of course from the perspective of the sorts of people who raise such questions in the first place namely western intellectuals with very comfortable lives .

  7. @Molinas

    Thanks for responding.

    Not as nuanced as you may imagine. Did your company give you a job? No. Nobody gave anyone anything. You made a trade. The company had a job and you were capable of providing the labor. So you traded your skill and ability to work for the compensation the company offered. Like people who sell boats, cars and homes you wish your labor had commanded more. There is nothing wrong that, it is a natural feeling. You are always free to make a better trade. You are even free to seek the residual profits but if you don’t receive that additional compensation there is no fault or blame to be assigned.

  8. That’s the difference between an entrepreneur & an employee. The employee takes minimal risks compared to the entrepreneur: accordingly, her (practically fixed) rewards are smaller.

    I spent my life being an employee (at numerous different companies, from large multinationals to shops with half a dozen people). It was a relatively convenient arrangement for me; I’m not complaining. And I would never have taken on the responsibility of making payroll for others. That’s a responsibility I couldn’t live with.

    So it’s a trade-off, as everything else is in life. Some people soar; some crash; some trudge along. Some even excel as employees. There’s no best generic solution for this problem, either: people have differing inclinations, skills, special talents &c. There has to be an anarchistic free market in employment, too, so everyone can find the niche most suitable for them. Not perfection, just the best one around.

  9. To understand the principle that has been called Say’s Law, it is useful to start by thinking about what unhampered exchange is: the mutual offering of goods and services between people. Seeing exchange as a mutual offering shows demand-and-supply is not an unsolvable chicken-or-egg problem. People produce what in their best judgment they think others want, in the expectation that others are producing or will produce what they want. Production, in other words, is always speculative.

    In small social settings, this speculation is usually not too difficult. Two people deserted on a tropical island, for example, can discuss beforehand what each one will make and offer to the other. In larger social settings this speculation is harder, so a money system develops to help people judge what others want using market prices as a signal of consumer preferences. But the essence does not change: people produce what they judge others want in expectation that others will provide what they want.

    Say’s Law, then, can be described as follows: The value of goods and services anyone can purchase is equal to the market value of what they supply. Or in an aggregate, macroeconomic sense, the value of goods and services any group of people can purchase in aggregate is equal to the market value of what they supply in aggregate.

    […]

  10. Considering capitalism is simply individuals owning their own labour and doing what they want with the products thereof, anything that comes “after” will be tantamount to slavery. I don’t see why we would be discussing what comes afterwards when our responsibility is to fight to the death to preserve our hard-earned freedom. But I suppose it’s best to understand what people think might happen to sabotage our way of life:

    Open migration certainly threatens the welfare state, but @jdfree49 made the great point recently that unhealthy inequality stems from the welfare state. Providing people with resources they did not earn and installing a tax and regulatory regime that stifles the economic growth required for the low-skilled to gain employment will of course nurture a class of people perpetually dependent on those handouts. Saying the existence of such people is a threat to the welfare state ignores that these people would not exist without the welfare state. But then again, we wouldn’t have mass immigration if the welfare state weren’t luring entitled people from around the world, so perhaps the argument here is that the welfare state must collapse under the weight of its own failure.

    The author seems to think that the real problem isn’t statistical inequality but the parallel societies it represents, but also seems to think that the welfare state is not the root cause. In light of this, the changes he suggests be made to the welfare system are going to be insufficient to solve the problem.

    It’s not totally clear to me what this would actually look like. Is this the abolition of the welfare state and replacement of Medicare and Social Security with an individualized self-funded investment portfolio like the Australian super-annuation program? I don’t see how that is politically feasible, since a significant swath of people made dependent by the welfare state will not be able to put aside enough to cover their own expenses. Seems like a pie in the sky proposal.

    Everyone wants to strengthen public education, the problem is there isn’t agreement on how it’s done. It’s not a matter of throwing more money at it. The source of America’s education failures is in the home, so government’s ability to solve them are limited. I doubt an effective proposal for education reform was proposed in this book, so again this seems pie in the sky.

    High taxes on inheritance will just further incentivise tax evasion, as the author mentions, and is frankly gross. Money that was taxed as income and will be taxed again when used should not be subject to more taxation just because the person who earned it died. The government should not be getting between dead parents and grieving children.

    Also, good luck with free migration without nationalist backlash. It’s not just the economic toll of mass immigration people oppose, it is the transformation of their neighbourhoods. The cultural factors are probably more important than the economic ones, so until those are addressed the nativist backlash can only grow.

    The reviewed book doesn’t seem to address the question of what happens after capitalism, just makes suggestions for how to tinker with the current system. I don’t find the suggestions as described to be practical, desirable, or effective.

  11. Your scenario presupposes that there is only one entity available to offer employment, a situation that is only possible in a communist system where it is the State that employs everybody. A free market system has a multitude of employers competing for workers.

    The only reason some Walmart employees are on food stamps is because the government offers them food stamps. If that handout (paid for by some of the taxes Walmart pays) wasn’t supplementing their wages, those employees would not be able to afford to work at Walmart, they would have to find other employment, and Walmart would have to increase wages or benefits to find and retain employees. It is physically impossible for people to work for less than a living wage (without dying, that is), so if we want employers to provide a greater share of that income, government needs to step back and let the market adjust accordingly.

  12. I don’t know what’s there not to be liked about capitalism. All of those things people bitch about exist because the voluntary choices people make. Bill Gates got filthy rich? Well, knock me over with a feather: he fuckin’ sold his software to everybody & their dog. He made so many people happy that the world’s greatest courtesans can hide their visage in shame.

  13. Yet, the biggest environmental disasters happened in the socialist countries, such as East Germany, Czechoslovakia, Poland, and the USSR. How do you square that circle, comrade?

  14. As long as your customers voluntarily exchange their goods with your goods, everything is cool w/ me.

  15. I’m not an advocate of a true free market. I don’t want my upstairs neighbours to run a discotheque until 6 a.m. daily. Also, I don’t want mercury dumped in the drinking water. I accept some regulations. I’m happy to pay tax and fees for sewers and the like. I think it’s OK for the state to organise these major projects, solicit bids, award the contract, and verify compliance. I don’t accept my tax going to redistributive purposes. Want to redistribute some of the money from my wallet to yours? Think of a product or service that I want to buy.

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