It is important to know that Inequality has become a much more important topic in the press, social networks and academic publications over the last three or four years. This resurgence of interest is particularly striking in the United States where, because of the ideological dominance of the Chicago school of economics, the topic was considered irrelevant and soft. It was thought that only people mistrustful of markets or personally envious would care about inequality. Growth would ultimately improve everybody’s standard of living.
This position was a sharp departure from almost 200 years of economics’ concern with the questions of distribution, which Ricardo thought should be the principal topic in political economy. The Chicago model of economics has obviously been proven false as it bequeathed the West the sharpest economic crisis since the 1930s. It is also important to realize that despite the fact that it was during several decades an “underground topic” there exists an important and sizeable body of knowledge. In this discussion we shall focus on Milanovic understanding of inequality and the consequences to global social policy.
Global Inequality in this Century and the Next According to Milanovic
Milanovic tried to look at the evolution of inequality in this century and the next. He open the chapter with a cautionary tale about the hazards of predictions: almost all literature from the 1970s and 1980s failed to foresee the three crucial developments: retrenchment of the welfare state in the West, emergence of China, and end of communism. We do not have a guarantee that we would do better, but we can try. He tried to avoid numerical simulations because they are subject to an even greater margin of error and give a misleading impression of exactness. He also focused on the key forces that will influence global inequality in the decades to come.
The first is the economics of convergence: catch-up of poor counties, best exemplified by the catch-up of west European countries and Japan with the US after World War II, and the current catch-up of most of Asia with the rich world. To the extent that it continues, these would be strong forces for convergence in individuals’ incomes worldwide. However, convergence in Asia, while crucially important because of large size of the countries, should not make us forget that there is no convergence in Africa and that Africa is the continent whose share in global population is expanding rapidly. So, the forces offsetting global convergence must not be ignored.
The second part of the “equation”: what happens to global inequality in the future has to do with income distributions in individual countries. In this regards, Milanovic zero in on the likely changes in the United States and China. He also tried to explain in detail the reasons (called “the perfect storm”), why he was pessimistic about the likelihood of significant decreases in income inequality in the United States. They have mostly to do with increased concentration of high labor and property incomes in the hands of the same people. This is a “new capitalism”, where the richest capitalists are also working (not merely clipping coupons like rentiers did one hundred years ago).
Then, assortative mating (homogamy) between partners of similar educational backgrounds and incomes, and rising importance of money in politics which ensures that the rules of the game will remain favorable to the rich. On the other hand, For him there is relatively strong likelihood for a reduction of inequality in China: the emergence of typical middle class demands for greater social security combined with the aging of the population and reduction of the skill premium due to the rising average level of education. In terms of the methodology developed in Chapter II, China may be on the descending portion of the first Kuznets curve, while the US is at the peak of the second Kuznets curve.
The concluding part of chapter four discussed about two types of political problems (“hazards”) created by high inequality. Domestically in the rich countries, high inequality and absence of growth among the middle classes, make politics oscillate between populism (in an effort to assuage the “losers” among the middle class; more common in Europe) and plutocracy (to make sure globalization, beneficent to the rich, continues; more common in the US). Internationally, high inequality may lead to imperialist conflicts similar to the ones that were responsible for World War I.
Milanovic has given a deeper understanding of global inequality. It is pertinent to know that global inequality may lead to higher rates of health and social problems, lower rates of social goods, a lower level of economic utility in society from resources devoted on high-end consumption, and it may even cause lower level of economic growth when human capital is neglected for high-end consumption. Therefore, global inequality should not be encouraged in any country.