Book Summary — The Future of Capitalism by Paul Collier

When I picked up this book, I was deep in the Plato land (this year’s reading theme is philosophy!). I thought I would skim through a few chapters to get the main idea and then go back to philosophy. But what was supposed to be a small detour turned out to be one of the best reading experiences this year.

This is not your typical economics or political science book. Professor Paul Collier is a British development economist and spent the majority of his academic career studying low-income economics. His research spans across the causes and consequences of civil war; the impact of urbanization in low-income countries; private investment in African infrastructure, and much more. He is a sharp thinker and a brilliant writer. He manages to describe complex social and economic phenomenon in very simple and intuitive models — models that will challenge how you think about everything from political ideology to tax policies. This book is full of great insights from beginning to end — I was highlighting so much on my Kindle that my finger felt numb after a few hours of intense reading

So allow me to summarize a few key ideas that I took away from this book

The “Parternist Guardian” of the Political Left and the “Individual Right” of the Political Right

The book started by describing a huge (and increasing) rift in the world today between the well-educated and the less-educated. The well-educated started forming a new shared identity where esteem comes from knowledge and skills. And they have developed a distinctive morality on the basis of their concern for victim groups such as ethnic minority and sexual orientation — and because of that, they also claim moral superiority over the less-educated. On the other hand, the less-educated tend to find the world a lot worse than what their parents experienced — older workers are displaced in the workplace, young people can’t find their first job and hence adopted a pessimistic view that their life will never get better. The life expectancy of this group has been decreasing — despite advances in medicine and increasing life expectancy globally. The attitude of the less-educated towards the well-educated is resentment and fear — that the latter are distancing themselves socially, economically and culturally; The attitude of the well-educated towards the less educated is somewhere between sympathy and contempt. As a result, political opinions are polarizing and social trust is eroding.

This is a widely different picture compared to just a few decades ago. From post-second world war to1970s, the society lived off a huge, invisible and unquantifiable asset — a shared identity forged through a supreme and successful national effort to lift the nation up from the damages of war. Social democracy worked perfectly then, because the nations needed a paternalistic government and society has a high level of reciprocal obligations to lift itself up from the post-war depression. However, as the shared identity starts to diverge, social trust eroded and there goes reciprocal obligations too.

Today, the intellectuals of the left are inspired by the philosophy of Jeremy Bentham and John Stuart Mill. Their philosophy detached morality from any distinct values and deduced it to a mathematical calculation: action should be judged moral if it results in “the greatest happiness of the greatest number”. This ideology wouldn’t be so powerful without the mass adoption of Milton Friedman’s “Economic man” (individuals are completely rational, utterly selfish and infinitely greedy, maximizing personal utility and satisfaction). The left argues: given that the average individual is “selfish”, the society needs Plato’s paternalist Guardian to keep things in order, this is where the big government comes in.

The intellectuals of the right grounded their ideology in John Rawls and Robert Nozick’s philosophy, particularly Rawls’ Liberty Principle that “each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all” and Nozick’s notion that “individual had rights to freedom which override the interest of the collective”. This ideology led to the right’s obsession on individual liberty (over collective interest). Interestingly, Rawls’ other principle of justice — “social and economic inequalities are to be arranged so that they are to the greatest benefit of the least advantaged members of society, and that they are attached to offices and positions open to all under conditions of fair equality of opportunity” — doesn’t seem to have achieved equal emphasis in the ideology of the right today

Both schools of thoughts have repeatedly failed the society today. The left exaggerated the ethical capacity of the paternalistic government and underemphasized the role of the individual moral agent; the right is obsessed with individual rights and breaking the chains of government regulation, and romanticized the “invisible hand” of the market

Three types of narratives that stitch our societies together

Yuval Noah Harari spent chapters after chapters in “Sapiens” and “21 lessons for the 21st century” to convey the key idea that Narrative is the glue sticking society together. Everything we know about evolutionary biology and neuroscience supports this thesis: our brain size limits how many close 1:1 social interactions we can maintain, and hence the famous Dunbar number (150) that has been observed as the “cap” in the size of tribes in our ancestors and primates today. (More on this see my previous book summary: Book summary #4 Behave — The Biology of Humans at Our Best and Worst)

The fact that human beings are able to break through that number and stitch smaller family units into villages, organizations, religious communities, countries and even the world is a pure miracle. And such large size, well-functioning societies are possible because we managed to tell powerful stories that captured the imagination of the population

In this book, Paul argues that there are three types of such narratives that glue societies together — all are essential to keep the society well oiled

• Obligation: the narrative of obligation instils fairness and loyalty and tells us why we ought to meet reciprocal obligations
• Belonging: the narrative of belonging defines a shared identity (the “us”) — with “who” that we share those reciprocal obligations with.
• Causality: the narrative of causality tells us the consequences of our actions and therefore establishes the meaning and purpose of our obligations

One related and upsetting hypothesis on “Motivated Reasoning”: Because of the power of narratives, evolution favors better storytellers — those who can persuade others to coordinate together. The massive brain expansion in Homo sapiens in the past two millions years, and hence the capability to “reason”, has been primarily driven by the need for persuasion and socializing, rather than the need to make better objective decisions. Our intuition makes decisions, the reason is used to convince others to follow.

The author talked about the post-war period (1945–1970) as one of the best examples of the power of narrative. The huge gap created by the war requires a strong paternalistic state to intervene, and the compliance rate by the rich is high because of the shared understanding of reciprocal obligations. In China, the 30 year of economic reform after the cultural revolution was another example of such shared national identities that brought the entire country together on one single goal — lift as many people out of poverty as quickly as possible. And it was a huge success. The poverty rate fell from 88% in 1981 to 0.7% in 2015.

However, what worked a few decades ago is no longer working so well in the west today. Paternalistic states of Social Democracy lost its appeal because the narrative of belonging (shared identity) is weakening, and hence the narrative of reciprocal obligation weakens, too. Politics today are still based on locations, but our narratives (shared identities and the social networks) are becoming increasingly less so — this divide between spatial politics and non-spatial ideologies underpins many problems we see in today’s political world and results in the huge rift in our societies. For example, the divide between the well-educated and the less-educated in American politics; the divide between the young and the old in Brexit. So what can you do about it? Well one option is to change policies from location-based to ideology-based — but that doesn’t really work as long as human activities are still mostly organized by location. Another option is to move people with the same ideology to the same location — you see this type of movements to some extent in today’s world, but mostly in elite populations who can afford mobility. Completely re-organizing the world’s population by ideology is not only unrealistic but also completely disruptive. So the only remaining option, the author argues, is to restore the shared narrative for people who are from the same place — rebuilding reciprocal obligations within families, firms and nations

The Winners and Losers of Urbanization

In his famous Harvard public lecture series “Justice”, Michael Sandel facilitated a debate between students on the moral justification of progressive tax policies. As much as I intuitively agree that progressive tax policy has many benefits for the society, I always find it hard to find moral justification for continuously increasing the tax rate for the ultra-rich. At the heart of it — it’s a question of “desert”. If we assume that the ultra-rich earned their wealth through equal opportunities, don’t they deserve to keep what they earn as much as we all do?

In this book, Paul gave me a new perspective to look at this debate differently. His core idea is that the high-income population doesn’t always “deserve” what they earn because some people disproportionately benefited from the rise of the metropolis (urbanization). Hence the economic rent that those groups accumulated should be taxed away to support those who disproportionally suffered from urbanization.

A bit of context first. Large urban areas originally started because of deeper skill specialization. Companies become more effective when they have a large pool of talents of specific skills that they can draw from; Talents become more productive when they are surrounded by others who share the same skills. Firms and specialized talents started to cluster, which made them more productive, hence attracting more talents and firms to gather in the same location. And when you start to form those larger clusters, other things start to follow — restaurants, entertainment, and eventually, property price surge. In theory, increasing property price is fine because as productivity rises, wages also increase — everything should be in equilibrium. But that equilibrium breaks down for two groups of people.

The first one is straightforward. Landlords in booming metropolis do not “deserve” the capital gain of their properties. Assuming that landlords do not live in the city themselves, then technically they do not have any contribution to the productivity rise due to high concentration of firms and high-skill labor, and hence should not benefit from it. But in reality, they are reaping huge profit from the increase in property price, and leaving renters — skilled labor who should be benefiting from the productivity increase they help to contribute to — receiving little net benefits (because increasing rent is taking away most of their wage increase as well).

The second scenario is a bit more subtle. Suppose skilled worker A has a large family and higher housing needs. Skilled worker B is single and only needs a studio. They both have the same skills and work in the same city. A will choose to stay in the city, as long as the wage increase can catch up with the cost of renting. The same is true for B. However, because A needs a bigger house for her family, the essentially sets the equilibrium housing prices in the city (if the rent goes up any further, A would leave, dragging down housing demand and hence the price). B benefited from that because her willingness to pay per square feet is higher (she only needs a studio) than what she actually pays. B is the winner in this situation because they both contributed equally to the productivity rise of the city, yet B is pocketing more surplus than A does.

If landlords and single high-skilled workers in urban areas are winners, who are the losers? First, those living in rural areas, because their talents and job opportunities are taken away by the metropolis. Second, low-skilled labor in developed societies. They all contributed to the maintenance of the rule of law and good infrastructure — things critical to the productivity of society; yet they are not benefiting from the increased productivity in the form of increased wages

So, the economic rent accumulated by the “winners” — city landlords and single high-skilled workers should be taxed and used to compensate the “losers” — rural areas and low-skill labor. This is morally justifiable because the “winners” do not deserve all the benefits they accumulated. This is economically efficient because taxing the surplus (economic rent) shouldn’t change people’s motivation to work.

The case against immigration

As someone who has moved from place to place for my entire life, I have (conveniently) believed that globalization and migration are two correlating and positive forces that propel the progress we see today. I am frustrated at anti-immigration statements from Trump and Brexit supporters and think that they don’t understand the huge benefits that US and UK are getting from globalization and immigration. But this book challenged my views on that.

First of all, globalization and migration are two separate concepts. Globalization is about comparative advantage but migration is about absolute advantage. One example to demonstrate that: China became the world’s factory because labor was comparatively cheap. But a Sudanese doctor immigrated to London and became a taxi driver not because he is comparatively more skilled at driving taxies, but because the absolute wage in UK is much higher. Although the standard assumption is that migration is globally efficient (In the Sudanese doctor example, global GDP increases), there’s really no reason to believe that either the country of origin (Sudan) or the host society (UK) definitely benefit from migration — Sudan lost an excellent doctor and UK taxi drivers now have more competitors. The only clear winners are migrants themselves (Sudanese doctors), because otherwise, they wouldn’t have chosen to migrate.

As someone who’s lucky enough to have options to migrate, I should really ask the hard question — how much migration is ideal for a host society and for the country of origin? Who is getting the benefits from it and who is bearing the cost? What are the mechanisms to transfer benefits from winners to losers?

Final Note — Milton Friedman and Neoliberalism

This book also quoted an upsetting phenomenon revealed by recent social research studies: Students who are taught the classic economics — rational self-interest and the power of free-market — become more likely to be selfish afterwards. I was probably one of them. Two economics professors influenced me the most during my student years: William Chan from the University of Hong Kong and Edward Lazear from Stanford. Chan started his academic career at the University of Chicago and Lazear (who was also Chan’s research advisor) was the chief economic advisor of the Republican Party. As part of their classes, I spent many late nights in college drawing utility functions and indifference curves and abstracting policy thinking and big societal problems into completely rational and selfish economic men. Milton Friedman’s theories are simple, logical and elegant — they were pretty captivating for a curious yet ignorant student who had seen too few problems in the world. I wonder, how many assumptions am I taking for granted when I form my own thinking on issues such as inequality and the role of the government.

Final Thought

A good book challenges readers’ belief system through counter-intuitive data points and alternative mental models — and pushes readers to step outside their own ideology “echo-chamber” and embrace a contrarian point of view. It should also raise even more questions than it attempts to answer and leave the inquisitive minds with many more threads to explore. This book does exactly that.