Inequality in a meritocratic capitalist world
By Brendan Maton
The idea that wealth stays in a family for just three generations appears in numerous sayings around the world. “Rice paddles to rice paddles” is the Japanese version.
“The father buys, the son builds, the grandchild sells, his son begs” is the Scottish.
This wisdom, however, is being tested by current trends examined by Branko Milanovic, visiting professor at the Graduate Center City University of New York and former lead economist at the World Bank.
Few of today’s super-wealthy have become rich the way monarchs and aristocrats of previous centuries did — “to the manner born”. Nor are they merely the children and grandchildren of successful industrialists. Today’s wealthy increasingly get money from their own labours, not just capital from inheritance or past success.
There is evidence that society’s highest-earners also work very long hours. Having put in all this effort, they are more likely to marry folk like themselves — assortative mating in the jargon. That might seem no different to the arranged marriages of the nobility historically, except that many of those unions ended in disaster, incest or both. Today’s wealthy have established their financial success before selecting a partner and they do so not by direction from scheming kings and queens but under their own judgment. Assortative mating bodes well for their children and grandchildren.
Milanovic categorises the current economic model as meritocratic capitalism: many of the super-wealthy today deserve their gains in as much as they have worked to acquire them. Few are landowning gentry who, in classical economic theory, never put a hand on a spade or a foot behind a plough.
The label meritocratic capitalism is, nevertheless, the beginning of the debate, not the end. It is certainly not an apology for a world in which billionaires’ share of global wealth has doubled in three decades. Understanding why requires recognition of how other factors — taxes, national regulatory policies, education — have directed a greater share of wealth to fewer individuals.
Certainly, the super-rich are not the only ones working hard. Productivity across economies has also rocketed: up more than 90% since 1973. But growing inequality means that hourly compensation has risen by less than 10% over the same period. If this is meritocratic capitalism, then surely more of society deserves fair reward for greater productivity.
Traditional economics theorised that inequality would wane in the most advanced countries. Some reasons offered by Milanovic as to why this has not happened will be familiar to followers of the Rethinking Capitalism lectures. One is the level and nature of rewards for leaders of big companies, which has escalated in recent decades. Bank chief executives in the UK and US enjoyed average yearly increases in remuneration of 13% between 1989 and 2007, most of it tied to the stock price of their company.
Then these kind of rich people tend to earn higher returns on their financial assets. That means that the great wave of privatisation and stock market listing of state-owned enterprises, from banks to electricity utilities to motorway operators, has not democratised investing. The very rich still get to deploy their capital in the best opportunities. One likely explanation is that more and more of this group actually work in the world of finance and privatisation where the juiciest deals are to be found.
Third, globalisation and technology have led to the relocation of manufacturing but not labour. Many of the richest nations are now post-industrial societies with a large population of workers with unwanted skills. No wonder that the broad swathe of middle-earners has shrunk by as much as seven percentage points over the last three decades in countries such as diverse as the UK and Finland.
Then there is the prohibitive cost of elite education in the US and other countries, which in turn leads to a network of the richest as alumni of the best schools and universities. One of Milanovic’s strongest policy recommendations is to provide better public education to improve opportunities for all in their formative years.
He also argues for a reduction in the tax-advantages for the wealthiest investors, noting that these people can afford to pay consultants who will effectively lower their fiscal obligations to just a few percentage points of their income.
But he emphasises that change should focus on increasing opportunities for all rather than taxing the super-wealthy in the current system. This necessitates changing the status quo but the top 0.01% have little incentive to let this happen — and they have the power and influence to get their way. Milanovic argues that the funding of political parties in democracies needs to change. So long as they cannot receive sufficient public finance, politicians will be beholden to wealth donors who may prove not entirely altruistic sources of financial support.
Unless you are the great-grandchild of a billionaire, it is a worrying conclusion.
Branko Milanovic is visiting professor at the Graduate Center City University of New York and recently presented a lecture as part of of our Rethinking Capitalism undergraduate module on “New approaches to inequality”. These lectures will be released weekly to the public. Follow us on YouTube for more or check this page weekly.
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