The three middle classes and populism

In November this year American voters will choose between populism and plutocracy. The choice was clearly highlighted in my Global Inequality (Chapter 4) written more than a year ago although at that time I could not anticipate the extraordinary rise of Donald Trump.

That rise, combined with the populist reaction against globalization, immigration and foreigners, has become the staple of newspaper and magazine articles to the extent that some, like in the recent New York Review of Books, claim (of course with the hindsight) that populism was both inevitable and predictable. It is, not only in the United States, but also in the UK, France, Denmark, Sweden and elsewhere fueled (as is commonly argued), by the very slow or nil real income growth of the middle-income groups in rich countries. The graph below (based on Luxembourg Income Study data) shows this clearly: the shares of the middle four deciles have declined over the past 30 years by between 1 and 4 GDP points in key developed countries. The phenomenon therefore is not only American: it is common to all rich countries. 

But while the origins of populism in the West seem well understood and “reasonable” in the sense that populism is driven by the economic slowdown,  a similar process of rising populism in China seems difficult to explain because it is accompanied not by a declining but by a rising middle class.  The modernization theory leads us to believe that the rising share of the middle class should propel democratization. In effect, this is what we have observed over the past 40 years, from the Carnation Revolution to Portugal  to the fall of Communism or the spread of democracy in South Korea and Taiwan and in all of Latin America.

Could China be an exception to this “regularity”? It is the same question probably that the Communist party leaders ask themselves. If they answer it in the affirmative, they would be throwing in the towel in a fight to maintain their rule. Since they seem unwilling to do so, and are becoming  aware that the ideology of “GDPism”, founded on an infinite growth of real incomes by close to double-digit numbers, cannot be maintained,  they have tried to move the public opinion in the direction of populism, whether of mild Maoist or of soft nationalist kind. Neither of these two tendencies is yet strong enough or sufficiently poisonous, but the potential to crank it up if needed is there. Thus, in the Chinese case, the rising tide of populism is not caused by an economic failure but on the contrary by economic success which is making the maintenance of the old political system more difficult, or is incompatible with it. This is a contradiction between the development of the forces of production and inadequacy of the superstructure that every Marxist would easily recognize.

The third populist reaction is taking place in Russia. It is fueled by yet a different force. Certainly not  by too much economic success, nor so much by economic failure, but by unjust privatizations and by resentment and revanchism, the two feelings that go back to the end of the Cold War that was (mistakenly) interpreted in the West as the victory over Russia. It is this narrative that Putin and the Russian middle classes find abhorrent and which is at the root of their malign populism and nationalism. It is wrong to see it as manufactured by the top; it is more that the top has given it the right to express itself, in a way that the rise of Trump in the United States did not by itself produce populism, but made its expression more acceptable. While in the past people felt some inhibition to air strong xenophobic or racist views, that inhibition is gone when the political leaders freely express such views and moreover get political support for doing so.

Those who therefore personalize the problem and look at Trump, Xi or Putin as somehow guilty of “creating” populism and inflating xenophobia are only partially right. Trump, Xi and Putin allowed populist feelings to express themselves  but did not invent them.  Populism existed before and was based on real and understandable reasons. The diagnosis that sees the cause of our problems primarily in several politicians leads us then to prescribe a wrong remedy. A very imperfect remedy consists in trying to stop such politicians from coming to power or overthrowing them. Such a remedy does not contribute at all to the solution of the underlying problem which either brought them to power, or close to taking power.

A real remedy has to start with the correct diagnosis. And the correct diagnosis is that in the US, populism is rooted in the failure of globalization to deliver palpable benefits to its working class, in Russia, it is rooted in its crony capitalism and inability (or unwillingness) of the West to include Russia as an equal partner, and in China, it is rooted in an inadequate political system. Once we see the correct cause of the problem, we can begin to try to solve it. Otherwise, the sickness of populism, which for all problems blames globalization and foreigners, in the three major powers that control 98% of all nuclear weapons in the world, is indeed a cause for major concern.

The origins of the Great Divergence

While the world is witnessing global convergence (essentially the catch up of Asia with the West), the debates  about the origins of the Great Divergence—the take-off of the West and absence of growth in the Rest—are going strong. I just finished an excellent book ("Escaping poverty") by Peer Vries who reviews the origins of modern economic growth and proposes his own theory on what made the West, and in particular, Great Britain start the Industrial Revolution and China not.

Vries has two characteristics which are not abundant, in the same person, among economists: erudition and common sense. Very often common sense and cleverness, exhibited by more business-inclined types in economics, go without much historical knowledge. But heavy erudition sometimes renders authors other-worldly, a strange feature in a social scientist that economists are supposed to be.  

I would like to discuss Vries’s book under four headings: organization of the book, his theory of why the Industrial Revolution happened in England, his view why China’s chances to begin an industrial revolution were “nil”, and (some) of his critiques of other economic historians.

Organization of the book. Vries divides the book in three parts. In  the first, he reviews all factors which, according to economists, are conducive to economic growth in general; in the second part, he discusses each of these factors as it applies to the explanation of the Industrial Revolution, and in the conclusion, he …well…summarizes them again.

The causes of growth are nicely divided into direct causes, the ones that we would readily put in the production function: geography and factor endowments; the proximate causes: trade and innovations; and the “deep causes”: institutions, state and culture.

The structure has certain advantages of symmetry, but I found it a bit tedious. It taxes the patience of the reader and provokes some fatigue because essentially the same issues (and even some sentences) are repeated in the general and “applied” sections. I also think it is unfortunate that Vries has not set up in a separate chapter his own views on the origins of the Great Divergence. As it is, his views have to be pieced together from various parts of the book. To this I turn next, and I hope to faithfully reflect Vries’ opinions.

Why did England take off? I found Vries’ explanation very compelling, perhaps because it is also somewhat eclectic. But the reality seldom obeys our abstract schemata. Vries agrees with Bob Allen’s view that the key ingredients in British industrialization were expensive labor and cheap energy and money. This led to labor-saving innovations which were at the origin of the technological revolution. But England also had, Vries argues, a very strong “infrastructal” state that until 1830 followed protectionist policies and often manipulated tariffs and taxes to help domestic producers, engaging in what would be today viewed as “industrial policy”. Furthermore, England had a big government, high taxes, high government expenditures, “yuge” Navy, enormous debt to GDP ratio, and extravagantly highly paid government officials. Externally, the country pursued  imperialist and mercantilist policies. Finally, and quite importantly, workers became the proletariat who had to go to the market to sell their labor (that is, lacked the cushion of working on own plot of land), and labor force became “commodified”.

England, in this short sketch, presents four distinguishing features:

Favorable factor endowments

Capitalism: rational profit-making and commodification of labor

Big government

Outside projection of power (“fiscal-military, mercantilist and imperialist state”, p. 433).

It is the addition (appendage, as it were) of an acquisitive, determined and big state that distinguishes Vries’ explanation from others which, as he points out, present an idealized Smithian picture of a government of low taxes, strong property rights, and tolerable administration of justice. His views on the importance of the use of force in international trade (on the open seas, “the distinction between peaceful, consensual trade and simple piracy was often very thin if not simply non-existent”, p. 148) makes his views close to Findlay and O’Rourke’s (whose work Vries cites very favorably) and even the world-system theorists. But with the latter, he agrees only that mercantilism and imperialism helped West’s take off but cannot explain it. Which brings us to why China has, as Vries several times mentions, “nil” chance of starting the technological revolution.

Why China did not take off? Here Vries is obviously at odds with the California school as well as with dependency theorists (respectively, Pomerantz and Frank) who believe that China had as great a likelihood, say, around 1750, of becoming the first industrial power as did western Europe. Vries sees many reasons why this was unlikely. Consider the four features that made England take off: they are all reversed in the case of China. China’s labor was cheap, energy and money were expensive. Chinese government was weak, paternalistic and unable to collect taxes. China had no army to speak about and was not engaged in military operations beyond its borders. And finally, production in China was organized in family units: it was the land of household mode of production (p. 204), or as Marx would have said, petty commodity production. Thus, workers could stay at home and work together with their families, often living cklose to the subsistence level. What was lacking was the reserve Army of the unemployed who in order to survive had to “feed” the capitalist engine in the West.

But while China was very unlikely to achieve a technological breakthrough, it was an equally or more market-oriented society as the West, at least as far as market for the consumption goods was concerned; China’s markets were more integrated than European, it conducted greater amount of long-distance trade, and its government was much smaller. So here we would, looking from a neoclassical angle, behold all the ingredients that should help China grow (integrated market, small government, low taxes). Yet  they did not. Qing China, in effect, in Vries’ rendering, sounds much more Smithian than Britain (p. 354) but precisely because it was more Smithian it failed to develop.

Critiques. As I already mentioned,  Vries presents a rich, very erudite review of an enormous literature and critiques a number of narratives that have either enjoyed or still enjoy significant currency among economists. Let me mention, for lack of space, but a few them.

Jared Diamond and Ian Morris are “savaged” for their geographical determinism: “As general statements, claims about challenges and responses [are mechanistic], and do not explain anything at all” (p. 165).

Gregory Clark and Oded Galor with their views on the importance of fertility behavior for  human capital formation and innovation cannot explain such seemingly anomalous development where high increase in population does not produce more innovations, or decline in fertility does not improve investment in skills: “unified growth theory has nothing to offer historians” (p. 197).

Daron Acemoğlu and James Robinson start from an unproven assumption that market is always good for growth and their “metanarrative is a stylized generalization of a very...positive interpretation of modern history of Great Britain and the USA” (p. 137).  In addition they never define “extractive” or “inclusive” institutions. David Landes as well as Acemoğlu and Robinson “reproduce all the standard clichés when it comes to Asian institutions” (p. 59).

The California school is just plain wrong on China’s level of development being close to the European level prior to the take-off and Andre Gunder Frank writes “with his usual lack of nuance and overdose of self-assurance” (p. 340).

Peer Vries has written a great book from which one can learn a lot, not solely to improve one’s understanding of the past but to stimulate one’s thinking about the factors that make economies grow today.