On the role of economics and global inequality

I wrote this in a Twitter discussion about the importance of knowing and reading classical texts in economics (say, from Quesnay to Pareto although these end-points are fairly arbitrary).

●If your definition of economics is this: "I would like to start with the one that I would have used when I was young and studied Marxist economics. Economics matters because it enables you to look at the grand political and economic changes in history and to explain them using economic factors. In other words, it is, if I can say so, a branch of historical materialism. Decisions driven by economic factors shape societies and make them change." Then you must read classics.

●If your definition is this: "A neoclassical view of economics would be more pragmatic. It would be to argue that economics matters - and to use Alfred Marshall’s definition there - because it deals with our ordinary life and its objective is to improve that ordinary life, to make our incomes higher, to allow us to have more free time, and to make poverty disappear so that we can enjoy other activities that we like while having a satisfactory standard of living." Then, you should read them but perhaps not as carefully as under the first definition.

●If your definition is: "Economics is the allocation of scarce resources among the alternative ends." Then you can read only selected classic texts.

●If your definition is that economics is just what businesses and finances do now, then perhaps you should not bother with classic texts.

I would like to explain what I meant by these definitions. The first definition is clearly Marxist in the way it is written, but substantively it is the same definition that can be found in works as far apart historically and even ideologically as Adam Smith and Kenneth Pomeranz. In this view of economics, its role is to illuminate economic factors that have led to systemic changes, to people moving from one way to organize production to another. It is Smith’s stadial theory of economic history, from “the rude state of society” of pastoralists to the commercial society of his time. It is of course Marx’s view too. But it is also the point of view of whoever has studied (say) Roman Empire, its economy, and the dissolution of the manifold links that kept the Western Empire together: Michael Rostovtzeff or Moses Finley. It is a view of economics common to Paul Bairoch and Fernand Braudel. So, it is not a predetermined ideological position, but  the methodological approach that is important here.

The second definition (due to Alfred Marshall) is, I wrote, much more pragmatic. It looks at the ways of improving people’s lives. It is related to the first definition when, under the first definition, we believe that societies tend to choose more efficient ways of production over the less efficient. Through the Darwinian struggle of different modes of production, the most efficient wins, and that most efficient mode increases people’s incomes the most. (Assuming here that we look at people’s incomes broadly, and not only at the mean income which may be misleading.) The second definition allows you not to worry about the grander historical forces but to focus, here and today, on how to make things better.

The third definition is Lionel Robbins’. That definition narrows economics very significantly. Economics becomes similar to operation research. It is not interested in the succession of different systems, not even in improvements in welfare as such, but in optimization. It could be used under any system. It is not surprising that Tjalling Koopmans and Leonid Kantorovich, working in two different systems but both interested in optimization,  came up with very similar findings. The “scarcity => ends” definition can be used to best allocate inputs and people in a factory whether it is privately- or state-owned, to maximize work effort of inmates of a labor camp or of cotton-picking slaves.

The fourth definition is beyond pragmatic. It is concerned with own, or people one works for, immediate maximization of income; it ignores everything that is not useful for that purpose, and blurs the difference between a social science and the profit-making of a single business. It is Gordon Gekko in action.

If you think that these distinctions are too abstract, here is an example to show how they are very much concrete and are in reality applied right now. You can study China by asking the question of whether it is capitalist or not, whether its opening and marketization that began in 1978 is just one very long NEP or an irreversible change; whether Chinese economic history leads us to believe the country will evolve in one or another direction. You are then applying Definition 1.

Or you may not bother with decisions that led China to liberalize in 1978, but focus on policies that reduced poverty, increased its income, or widened disparities between the affluent and the poor. You are applying Definition 2.

Or you can discuss whether the state-owned Chinese banking system is allocating loans in the best way or not: here you are working under Definition 3.

Or you can write an article discussing if Evergrande will pay its creditors next week or not. You are in the world of Definition 4.

I was always interested in Definition 1. It gave economics its magisterial gravitas. It showed why economics matters. When I began the work on global inequality more than two decades ago, I never saw it as a mere work in empirics. Empirics is important as the first step, but one should try (if possible) not to stop there.  I was not quite successful in going beyond (and I criticize myself for that in my forthcoming book). Still for me global inequality was always more about global politics, economics, and indeed power, than about numbers. 

The rising global inequality in the 19^th century was simply a reflection, in numbers, of the greatest ever divergence in power between two parts of the globe: the West and the Rest (see the graph). You could not discuss these numbers without realizing that the rising between-country inequality “explained” or “reflected” (both are probably true) the 1840s Opium Wars and the Indian Rebellion of 1857. Behind increasing within-national inequalities was the class struggle: the Revolution of 1848 and the Emancipation of serfs in 1861.

Then the high plateau of global inequality in the middle of the 20^th century showed us the newly-parceled three worlds: the first world of rich capitalist countries; the second world of socialism; and the third world of Asia, Africa and Latin America.  You cannot understand the work of Frantz Fanon and Samir Amin without knowing that in the background there existed three non-overlapping worlds. You cannot see where Bandung came from if you do not see this graph (or have similar knowledge anyway).

And finally, and most recently, the decrease in global inequality is simply the translation for the rise of populous Asian countries. This mirrors the Industrial Revolution: the center of economic gravity is tilting towards one region, the losing areas are deindustrializing, and as Asia catches up, global inequality is reduced. Political and economic implications of this change are obvious to all: the US vs China conflict is written there in scarlet letters. You do not need to look for its causes in politicians’ speeches.   

What will come in the future we do not know. Will the equalizing trend continue?  Africa, with high population growth and lack of income  convergence, may push global inequality up again, and become additionally marginalized. Or it might replicate Asia. China may become (and is already becoming) too rich to exert a downward pressure on global inequality and the two new hegemons (China and the US) may in two generations from now be in a group of their own.

The economic and political structure of the world today is very different from those in 1921 or 1971. All of that is not only reflected in global inequality numbers; these numbers help us understand political and social movements.  This is how I see global inequality work as proceeding according to Definition 1.

Pro-equality turn in China and the United States?

While the United States and China are at loggerheads on many issues from  trade to intellectual property rights to South China Sea islands, and the talk is rife of a new Cold War, internally both countries are trying to adopt policies to reduce income inequality. The similarity in objectives, and in some cases, even in policies is the product of similarities in the evolution of inequality over the past decades, and of increased social consensus that something has to be done to curb it.

            At the time of the introduction of the responsibility system in 1978 (privatization of land) and first reforms, income inequality in China was at an extremely low level, estimated at 28 Gini points. Today, it is 47, an almost Latin American level. America’s income inequality, using the same metric, was 35 when Ronald Reagan came to power; today it is 42. Chinese increase in inequality, pushed up by the remarkable structural change (movement from agriculture to industry and then to services) and urbanization, has been more dramatic than American. It was often “concealed” by the fact that Chinese incomes have in the meanwhile increased hugely and thus the proverbial pie, although its pieces were distributed more unequally, had grown so much that almost everybody’s real income rose.

            In the past decade, it became clear that in both China and the US inequality increase had to be checked, and if possible reversed. The process in the United States is well known: it goes at least back to the Occupy Movement whose tenth anniversary was marked last month. The Chinese situation is less well known. High inequality has led to many protests. In 2019 (latest available year), the official Chinese count is of 300,000 cases of “disturbing order in public places”, most of them economically or otherwise socially-motivated (Statistical Yearbook of China 2020, Table 24-4). The proximate cause of many protests has to do with the expropriation of real estate that made owners of building companies rich, helped embezzlement by local officials, but dispossessed farmers of their land. The urban-rural gap officially estimated at almost 2 to 1 is among the highest in the world (calculated from Chinese urban and rural household surveys)  The regional gap between the prosperous Eastern cities and provinces, and Western and Central parts of China threatens the unity of the country. Decent housing in big cities has become virtually unaffordable for young families. This has contributed to a drop in the birth rate and accelerated China’s demographic problems (aging and thus declining share of the working-age population).

            The Chinese leaders, somewhat like American social critics and the Davos participants, have bewailed such inequality for years, but have done almost nothing to change it. That state of affairs is in the process of change. Earlier decisions to increase state investments in Central and Western regions, to spread the fast railroad network throughout the country, and to give authority over the implementation of the hukou (residence permit) system to provinces, with the right to abolish it altogether, have all to be seen as attempts to reduce China-wide inequality by reducing income disparities among the provinces and enabling easier movement of labor between rural and urban areas, and thus lower inequality between the two.

            More importantly, the latest moves by the Chinese government show an even greater awareness of what needs to be done to stop the increase of inequality. They resemble, in some aspects, the measures that the US might pass in the next couple of years. The concerted effort to crack down on platforms and high-tech companies and to increase their regulation is similar to the anti-monopoly suits brought on by the US against Google and Facebook. The American system, because of many checks and lobbying power of tech giants, moves much more slowly than the Chinese but the objective of control of sectors who are natural monopolies and have acquired enormous economic and political power is common to both countries. Xi Jinping’s moves are often interpreted in purely power-political terms. While there is certainly such an element, curbing the power of monopolies has its own economic (efficiency) and social (equality) rationales.

            Education has, both in the US and China, become extremely competitive and affordable, in its best form, only to a small minority. The transmission of family privileges via the education system was amply documented for the United States. Some recent  work by Roy van der Weide and Amber Narayan shows that social mobility in China is equally low. Xi Jinping’s decision to ban for-profit tuition companies is an attempt to “democratize” access to top education and to reduce privileges of rich families. Whether the move would be successful may be questioned. The underlying inequality and education competitiveness are not affected as rich parents may still buy individual tutoring. The intention of the policy though is right. Biden has likewise spoken about the revitalization of American public education system that was the backbone of prosperity after the Second World War but has since  deteriorated.

            “Common prosperity”, a new slogan enounced by the Chinese government, attempts to promote policies to correct inequalities accumulated over the past forty years –some perhaps inevitable in the transformation of the country—by  changing the direction away from a single-minded pursuit of high growth to that of a more equitable society. It is not very different from what the progressives and a part of the Democratic establishment have recently argued for: the end of neoliberalism that has  governed economic policies of all US administrations since the early 1980s. If this “pro-equality turn” indeed takes place in both countries, the moves we have seen so far are just a preamble. The long era that began with Deng Xiaoping in China and Ronald Reagan in the United States may be coming to a close.       

Can globalization be “improved”?

 In an excellent just-published book “Six faces of globalization” Anthea Roberts and Nicolas Lamp, produce six plausible narratives of globalization and what, according to each, went wrong or right with globalization. Their approach is to take a given narrative, present all its points as its defenders would, with rather minimal outside (i.e. their own) interventions, and in the second part of the book discuss overlaps and differences between these various narratives.

Here, I will review the six narratives, saying perhaps little about each of them explicitly both because they are all rather well known by the general public and because I hope that my critique of each narrative will indirectly throw sufficient light on narratives’ main points.

The first approach Roberts and Lamp discuss is the establishment view according to which globalization ultimately benefits all participants even if the gains are uneven and in many cases take a long time to materialize. The establishment narrative is often self-serving as when it ignores the fact that the US did not become rich through free trade but rather through Hamiltonian protectionism, or that a number of trade agreements established after World War II were motivated less by some abstract free trade principles or “liberal international order” but rather by the US strategic desire to bind in a strong interdependent framework the nations of the “Free World” (conveniently defined to include everybody, regardless of domestic politics, who is not communist). The biggest advantage of the establishment narrative is that it can quite plausibly point out to the fact that tighter economic links between nations have since 1980 contributed to the doubling of the world per capita output and consumption of goods and services.

            The left-wing narrative (under which I combine both what Roberts and Lamp term the “populist” left-wing narrative à la Bernie Sanders and Elizabeth Warren and the “corporate-power” monopolistic narrative) is, in many ways, the most consistent. Its strong points are two: (1) domestic polices have been slanted in favor of capital-rich and high-income individuals, and (2) pro-corporate policies have allowed large companies to become monopsonist in the labor market (the only local employer), and not to pay their fair share of taxes. Not only are both points true, but they correctly direct one’s attention toward the political origins of the middle class malaise. The malaise was to a large extent (I will come back to this “large” qualifier) manufactured by the ability of rich companies and individuals to create favorable legal framework for themselves, including most importantly lower taxes. (Reading “The Wall Street Journal” allows one to very simply define the view of the world of that category of people: there are only two variables that matter: how high is the “market” and how low are taxes?)

But the qualified “to a large extent” was not there for no reason. The decline both in the size and relative income of the Western middle class is not only the product of domestic policies. It happened also because globalization allows companies to move to cheaper (lower wage) locations, or to replace production of domestic goods by cheaper imports.

The proponents of the left-wing view have hard time acknowledging a tacit coalition of interests which has been created between the capitalists of the rich world and poor people of developing  countries.  They both gain  by replacing more expensive  Western workers. In the chapter on corporate greed narrative, an accurate critique of large Western corporations for avoiding taxes is mixed up with an attempt to show that NAFTA or other similar arrangements have produced worse outcomes for workers in poor countries, and that there is thus an identity of interests between workers in rich and poor countries. This is very difficult to accept. Very low-paying jobs, from the Western point of view, are generally very well-paying jobs from developing country’s point of view. Workers from Vietnam, Thailand, Ethiopia, or Peru are not unhappy to be hired by North American or European or Chinese companies. In many cases, their alternative is not having a job at all, or living at the edge of subsistence through self-employment.  The attempts to argue for some kind of international workers’ solidarity simply fall flat on the hard grounds of self-interest.

That problem however does not bother what Roberts and Lamb call the “right-wing populists.” Right-wing populist do have a consistent view of the world. First, in it, the welfare of foreigners does not matter at all (hence, they are uninterested in whether Mexican workers are better off with trade or not). Second,  national cultural homogeneity –a largely fictitious recreation of the 1950-60s—is the ideal to strive for. Their problem is not lack of intellectual coherence. The problem of right-wing populists is that their supporters like parts of globalization that provide them with cheap goods, but do not like losing high-paying jobs which is a sine qua non for the production of cheap goods they like. In other words, their supporters love buying cheap HD television screens, but they also like having a $50 per hour manufacturing jobs. These two things cannot however exist together. The right-wing politicians therefore can, as Trump did, make lots of moves (and noise) to slant the playing field in favor of their countries, but they cannot disconnect from globalization. Their opposition to globalization will forever remain on a verbal level; they are tied to the mast of globalization by the attractiveness of achieving high real income through consumption of cheaper goods. Thus, the right-wing opposition should not be, in my opinion, taken seriously in matters of policies.

I will mention only briefly the other two narratives. The geoeconomic narrative looks at globalization through the bellicose eyes of national interest. It is not an attractive approach, but it is internally consistent. For its adherents, there is no such a thing as a good or bad globalization. There is only a good globalization for the United States or a bad globalization for the United States (or any other given country). This allows them to shift seamlessly from supporting using power to extract intellectual property rights, to using power to prevent sharing intellectual property rights; from being in favor of higher labor standards to being against them.  Thus its total intellectual inconsistency in detail is explained by full intellectual consistency at the higher level.

The last narrative is of the “we [everybody in the world, regardless of nation, income, class, gender, race etc. ] are in the same boat” type. There is not much to say about it except that, unlike any other narrative, it manages to lack both internal intellectual consistency and to be totally fluid in how things should be improved.

So, is it, taking Roberts and Lamb book’s approach, possible to “improve” globalization? The only narrative that shows some promise is what they call (in my opinion, mistakenly) “populist” left-wing. It sees the key problems at the level of national politics, in the national political systems, and it can, at least in theory, focus on these shortcomings and try to mend them. It cannot be, I think, too optimistic on all issues because of the natural propensity of globalization, either through capital movements or trade, to favor cheaper producers, and Western middle class is most often not that producer. But that approach can reduce the political and economic power of the top 1 percent, fund public goods, increase taxes for the rich and large companies, and improve the national political climate.