Milanovic, B. 2019. Capitalism, Alone: The Future of the System That Rules the World. Harvard University Press.

Chapter 5

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

Chapter 1 | Chapter 2 | Chapter 3 | Chapter 4

Chapter 5: The Future of Global Capitalism

The Inevitable Amorality of Hypercommercialized Capitalism - Max Weber's Capitalism

Capitalism includes a light side and a dark side. The light side is the idea that money-making depends on pleasing other people and this niceness trait spreads from business into personal interactions. It makes people behave toward others with more consideration and respect. Commercial societies are defined by their hierarchies of monetary success and this essentially replaces the old-fashioned feudal entrapments of rank and birth. According to Max Weber the systematic rational pursuit of wealth is one of the key sociological characteristics of capitalism. However, the dark side of capitalism is that the single-minded pursuit of wealth tends to stimulate selfish, greedy and amoral behavior that produces large unequal outcomes for the landlord-capitalist-worker hierarchy. During nineteenth-century capitalism in Britain two constraints helped gain acceptance by the masses. Capitalist behavior was internalized as acceptable through religion. It limited the consumption of the elites and provided bounds on how much wealth was displayed. Capitalist also used most of their surplus income to reinvest rather than consume and this established an implicit social contract.

The Inevitable Amorality of Hypercommercialized Capitalism - Outsourcing Morality

The two constraints mentioned above are no longer applicable in today's globalized capitalism. The world has become less religious and religion now places money-making by any means as one of its top values. In addition, our actions are no longer monitored by the people among whom we live. Today these constraints have been replaced by rules and laws. Morality has been fully externalized or outsourced from ourselves to society at large. Internal checks from one's own belief in what is moral seem to play no role in determining our actions. Outsourcing morality means that everyone tries to game the system. Large companies and the rich find loopholes in the laws to avoid regulations and taxes, or simply hide their wealth from the tax authorities. Financial settlements spread amorality by making the aggrieved party an accomplice in the wrongful behavior. For example, those accused of sexual harassment, tax evasion, and a number of other crimes simply buy off the injured party. In a commercialized society settlements are viewed as a rational move. The problem is not with the individuals who engage in this behavior, but with the system itself. Participants in a globalized and commercialized world have to fight for survival using the same amoral tools.

The Inevitable Amorality of Hypercommercialized Capitalism - There is No Alternative

The problem with hypercommercialized capitalism is that there is no alternative. It is possible to withdraw from the hypercommercialized system, but it is unlikely that large numbers of people will give up the amenities of commercialization and accept a lower standard of living. Success and power in the system is expressed by money, and money is obtained through work, ownership of assets, and corruption. Unfortunately, corruption is another integral component of globalized capitalism.

Atomization and Commodification - Decreased Usefulness of Family

Modern capitalism includes two characteristics: atomization and commodification. Atomization refers to the idea that families have lost their economic advantage. Activities performed at home in traditional societies can now be purchased externally and we have less and less need to share our lives with others. Living together internalizes many activities (e.g., cooking, cleaning, taking care of children and the elderly etc.) and provides economies of scale. However, in rich societies all these activities can be outsourced. In addition, the legal intrusion of society into family life is another form of outsourcing (e.g., prenuptial agreements, courts removing children from families and preventing spousal abuse) further reduces the tacit compact that previously held families together. The new hypercommercialized capitalism has evolved from a system where production was carried out in the home, to a system that used labor outside the home, to a new system where household activities become commodities to be purchased as needed. Only rich societies can afford to fully commodify all the family relations that were traditionally outside the market.

Atomization and Commodification - Private Life as Daily Capitalism

The reverse side of atomization is commodification. There is a historical progression of what becomes commodified. Agriculture was commodified when subsistence agriculture commercialized surplus production. Goods such as clothing that had traditionally been produced in households were commodified by manufacturing activities. Wages earned outside the home were used to purchase commodities that had previously been produced within households. Today this process is also applicable to services. For example, free time becomes a commodity when anyone can sell it by working for a ride-share company or by delivering pizza. Our homes become commodities when we rent them to travelers for a fee. From the point of view of employers, temporary workers have become interchangeable agents or avatars. These developments (i.e., the change in the family or atomization, the commodification of new activities, and the emergence of a flexible labor market) are interrelated and tend to erode the niceness trait mentioned above as people begin to view every action in terms of money and become capitalistic calculating machines.

Atomization and Commodification - The Domination of Capitalism

The domination of capitalism as the only way to organize production and distribution appears to be absolute. Capitalism is responsible for increasing the standard of living of an average human being by many times. But it has not produced a commensurate increase in morality or happiness. People's behavior towards others improved, but this was mainly driven by self-interest alone replacing the centuries-old views about sacrifice, hospitality, friendship, and family ties.

Unfounded Fear of Technological Progress - Lump of Labor Fallacy and Our Inability to Visualize the Future

Machines have been replacing human labor for two hundred years and each time the fears of mass unemployment and doom and gloom have been unjustified. The current fear of robots is no different and based on three fallacies: 1. the lump of labor doctrine that holds that the total number of jobs is fixed, 2. the fallacy that human needs are limited, and 3. that the materials and energy capacity of the earth will reach its limits and stop economic progress. Of course the introduction of new technology will cause some workers to lose their jobs, but this will not affect society as a whole as new jobs are created. Our needs are clearly not unlimited because new technology has and will continue to create new needs that we cannot forecast. Finally, history has shown us that as one resource becomes scarce and rises in price, substitutes are created to supply an alternative (e.g., beet sugar, synthetic rubber, fracking). History has taught us that a world of robotic workers is not something that we should rationally fear.

Unfounded Fear of Technological Progress - Problems with Universal Basic Income

Universal basic income would have four features including the following: 1. It would be universal, i.e., provided to each citizen, 2. it would be unconditional, 3. it would be distributed in cash, and 4. it would be a constant income source. It is popular on the left because it would reduce poverty and possibly inequality. It also appeals to the right for the opposite reason, i.e., it would hopefully eliminate the endless complaints about excessively high incomes and attempts to limit them. It would perhaps also reduce the continuous tinkering with the tax and transfer system.

In spite of its political appeal, universal basic income has significant application problems. First, we have no experience with how such a program would actually work. Second, the cost would require changes in some existing programs, and perhaps the elimination of others. Getting political agreement on these changes would be difficult. Third, it implies a new philosophy underlying the welfare state. Currently the welfare system in rich countries is based on the idea of social insurance. It protects against predictable contingencies. But a system of universal basic income ignores risk and distributes money to everyone equally, although money received by the rich could be clawed back through taxation. Fourth, it is not known how this would affect behavior. It is possible that society could become very polarized where a large part of the working-age population would choose not to work at all. Considering these four problems, it appears that the idea of a universal basic income needs a lot more thought.

Luxe et Volupte (i.e., Richness, calm, and pleasure) - The Two Scenarios: War and Peace

When considering the further evolution of global capitalism we need to consider the possibility of a global nuclear war. World War I caused the communist revolution in 1917 and lead to an alternative socioeconomic system that represented a challenge to capitalism for the better part of the twentieth century. It also produced World War II, lessened the global importance of Europe, and resulted in the rise of the United States as a global power. These wars were caused by the European imperialism that led to high domestic inequality in income and wealth generated by global capitalism. The rational view that capitalism needs peace because of the strong economic interdependence among nations did not prevent early wars, and it might not prevent another global conflict. The good news is that if another global war did not lead to the extinction of humankind, it would not negate the technological advancements made during the past several hundred years. Thanks to global capitalism technological progress has spread to the entire world and would be preserved. Capitalism would be both the cause and savior of civilization.

Luxe et Volupte - Political Capitalism versus Liberal Capitalism

The main advantage of liberal capitalism over political capitalism is derived from its political system of democracy. Democracy is viewed by many people as desirable in itself with no need of justification for the effects it has on outcomes such as economic growth and life expectancy. But democracy also provides a powerful corrective to economic and social trends that become detrimental to society as a whole.

Political capitalism promises a much more efficient economy and higher growth rates. The question is whether people rank basic liberties over wealth and income, or whether they are willing to trade their basic liberties for greater income. However, to prove its superiority, political capitalism needs to continuously deliver higher rates of growth. It also faces two additional problems. In a system based on political capitalism it is difficult to change course if bad decisions are made because of the absence of democratic checks, and there is also an inherent tendency toward systemic corruption because of the absence of, or discretionary application of the rule of law.

Global capitalism might evolve in three possible directions. The first includes the liberal meritocratic capitalism developed in the west. The second possibility is the further development of the political capitalism developed in China and a few other countries where property rights are expanded, personal rights are contracted, and unaccountable state institutions are dominant.

A third possibility might consist of a system of rentiers who lease or lend their capital to democratically organized companies. This type of system would remain capitalist in that it would retain private ownership of the means of production, but there would be no wage labor. (Note: Some have referred to this as rentier capitalism).

Luxe et Volupte - Global Inequality and Geopolitical Changes

If the effects of the economic and geopolitical changes discussed in this book continue we should expect income levels to increase in China and later in Asian countries close to those of Western countries. This convergence will return the world to the relative parity of income levels that existed before the Industrial Revolution. Around the year 2000 India began a similar rapid economic growth that contributed to the decline in both global income inequality and global poverty. By 2040 the world's Northern Hemisphere, including North America, Europe (except for Russia), Japan, Korea, and China may have approximately the same income. South, and Southeast Asia will not be far behind. Africa is a big unknown. The success of China and India could jump-start the development of Africa, further reduce global income inequality and relieve the migratory pressures on Europe. In addition, the convergence of worldwide incomes might also reduce the risk of a disastrous global war.

Luxe et Volupte - Concluding Notes on the Social System toward which The Book Might Lead

In this chapter Milanovic reviews the three types of capitalism that developed in the West and speculates about the future by adding two hypothetical systems including people's capitalism and egalitarian capitalism. Then he discusses the possibility of the system evolving into a plutocracy and eventually political capitalism.

Classical capitalism - Workers have income from labor only, and capitalist have income from capital only. There is very little redistribution of income via taxes and transfers. Interpersonal inequality is high and the advantages of wealth are transmitted across generations.

Social-democratic capitalism - Workers have income from labor only and capitalist have income from capital only, but not all capitalist are richer than all workers. There is significant redistribution of income through taxes and transfers, with free public health care and education. Interpersonal inequality is moderate. Equal access to education allows intergenerational income mobility. The political system is a democracy.

Liberal meritocratic capitalism - Most people have income from both labor and capital, but the extremely rich have most of the capital income and substantial labor income. As societies get richer the share of capital income increases. This translates into higher interpersonal inequality. The tax and transfer system redistributes a significant amount of income, but social separatism becomes more important, i.e., the rich invest in private education and health systems. Intergenerational mobility is less than in social-democratic capitalism. The political system is a democracy.

People's capitalism - A hypothetical system where everyone has approximately equal shares of capital and labor income, but peoples incomes still differ. Inequality is low and does not have a tendency to rise, the redistribution of income is limited, and there is free health care and education that helps intergenerational income mobility. This would prevent the formation of a durable elite. The political system would be a democracy.

Egalitarian capitalism - Another hypothetical system where everyone has approximately equal amounts of both capital and labor income, inequality is low and does not have a tendency to rise, and the redistribution of income is limited to social insurance. Relative equality of incomes provides equality of opportunity. This system would represent a combination of libertarianism, capitalism, and socialism.

The policies that would lead to a more equitable system of income distribution, less concentration of wealth and income from capital, and an improvement in intergenerational income mobility are relatively simple and include changes in taxes, education, and citizenship rights. These include the following:

1. Tax advantages for the middle class in the areas of access to financial and housing wealth, an increase in the taxation of the rich, and a return to high taxation of inheritance.

2. A significant increase in the funding for improving the quality of public schools. This would reduce the transmission of advantages across generations and increase opportunity for the middle class and those at lower income levels.

3. End the strict division between citizens and noncitizens to allow migration without provoking a national backlash.

4. Limit funding of political campaigns to public funding. This would reduce the ability of the rich to control the political process and to form a durable upper class elite.

The convergence of liberal and political capitalism

Another possibility is the evolution of liberal capitalism toward a plutocratic and eventually autocratic political capitalism. As the plutocratic features of capitalism become stronger, the likelihood of the system evolving into political capitalism increases. As political power and economic power become more united, liberal capitalism becomes plutocratic and begins to resemble political capitalism. The system would include property rights, but personal rights would be contracted. The end point is the unification of the elites who believe they can run society more effectively. Political capitalism would require an efficient bureaucracy, and include autonomy of the state, and a discretionary application of the rule of law. There would also be an increase in intrinsic inequality-increasing corruption that would present a threat to the system's survival.

Note: To print a larger version of the illustration above, click on the graphic and then print it using the lanscape layout.

__________________________________

Related summaries:

Buchanan, M. 2002. Wealth happens. Harvard Business Review (April): 49-54. (Buchanan describes a universal law of wealth based on a network effect that appears to have some important implications for economic policy). (Note).

Graham, J. L. and N. M. Lam. 2003. The Chinese negotiation. Harvard Business Review (October): 82-91. (How to deal with China. Understand the cultural context of Chinese business style). (Summary).

Ignatius, A. 2021. "Americans don't know how capitalist China is." Harvard Business Review (May/June): 61-63. (Summary).

Martin, J. R. Not dated. A note on comparative economic systems and where our system should be headed. (Note).

Martin, J. R. 2024. Distribution of U.S. Household Wealth 2024.

Mitter, R. and E. Johnson. 2021. What the West gets wrong about China: The fundamental misconceptions. Harvard Business Review (May/June): 42-48. (Summary).

Oser, J. 1963. The Evolution of Economic Thought. Harcourt, Brace & World, Inc. (Summary).

Piketty, T. 2014. Capital in the Twenty-First Century. Belknap Press. (Note and Some Reviews).

Porter, M. E. and M. R. Kramer. 2006. Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review (December): 78-92. (Summary).

Porter, M. E. and M. R. Kramer. 2011. Creating shared value: How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review (January/February): 62-77. (Summary).

Thurow, L. C. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. William Morrow and Company. (Summary).