There is this incredibly important event which takes place, World War I, which takes place in the midst of the largest globalization that has ever existed in history up to that moment. Why wouldn't you have an economistic theory of why this event has happened? But no, there is no theory. It just happens. Okay, well there is a guy who assassinated another guy in Sarajevo. That's the theory. Well, that's ridiculous. We believed that with globalization and mutual trade, the interests would be so strong that we would never go to war because we know that the war would be really bad for me and you. And it actually did happen. It was bad for me and you. And we knew that and we still went to war.
Here in Novara Media, we like to talk about some of the biggest trends of the 21st century. The things that are remaking the world and probably remaking your life too. Multipolarity and the demise of an American-led world order, technological change and automation, the rise of China, demographic aging. All of these are so important and almost all of them will be figuring in our conversation today. All of them are integrated into this fantastic new book by Branko Milanovic, The Great Global Transformation. He talks about how the Western middle class getting poorer goes hand in hand with the likes of China getting wealthier, one falls, one rises. At the same time, we have the end of the end of history. Talk of moving to a multipolar world isn't for the future. It's happening. It's here and now. Now, we often talk about the demise of neoliberalism as if it's something that's yet to really happen. Again, Branko thinks we should be talking in the past tense, the end of the end of history. But what comes next? Well, that's where things get super fascinating. And just to be clear, Branko has the credentials to have strong opinions on this. After all, he's a former economist at the World Bank. He's a big brain. He reads a hell of a lot. You're going to have a great time watching this over the next hour and a half. Branko Milanovic, welcome to Downstream.
Well, thank you very much, Aaron. It's really a pleasure to be here.
I am so excited about this conversation. Some of the stuff we love talking about here on Downstream, the rise of China, the collapse of the West, transformations in the global economy, the decline of the Western middle class. It's all packed into your new book, The Great Global Transformation. I'm so excited because I'm a weird guy. Lots of graphs and lots of big observations. Let's start where it really matters. Why did the USSR collapse and yet China doesn't just not collapse but thrives and becomes one of the world's leading economies after the 1990s?
You obviously want to lead with really simple questions, right? I think that the USSR collapsed because it was economically unsuccessful and because there was increasing realization of the USSR falling behind in terms of welfare of the population, behind Western Europe and the West. It was only successful in military production, but you cannot eat, actually, satellites and tanks. And then that realization, I think, percolated through the establishment. And when Gorbachev came to power, it was not an accidental event. It was an attempt to actually reboot the Soviet Union and to make it more economically successful. However, it just failed for many reasons and it led to the breakup of the Soviet Union. And I think exactly one of the effects of that breakup is the war that we are actually witnessing now for almost four years between Russia and Ukraine. So it was a disaster. On the other hand, China, as you said, was extremely successful, way more successful than anyone could have predicted. And not only anyone in the 1970s, but anyone in 1982 when the reforms started, and even in 1990. And when you think of Tiananmen, what happened there, and it was a belief that actually this was the end of reforms in China, that China would kind of slide back into kind of a Maoist morass. Exactly the opposite happened. They actually, the reforms, I mean, the economic activity increased, the GDP per capita grew tremendously, and China was a great success case. So I just told the history, but of course it's not really, I didn't touch very much on the causes of the two, but maybe we can talk about that later.
I wonder, because I start with that question leading to something else, which is, was there a road untraveled by the USSR in Eastern Europe somewhere like the DDR, East German Republic, where very high levels of human capital, you know, a medium-income country, you know, had they pursued a different path in the mid to late 1970s, could someone like the DDR, Hungary, etc., been more like the Asian Tigers?
They could have actually, if you look at Poland, Poland has become an Asian tiger since the transition and since the end of communism. I think that there, you know, it's always hard to argue something against the facts, the facts which have happened. So when one argues that actually the USSR, for example, could have actually moved differently, it's very hard because people say, no, actually there was only one outcome. I think there were possibilities even after Stalin in the 1950s and 60s. There were possibilities to jumpstart economic development and make the country more technologically successful. I think really the fall of the Soviet Union had to do with an inability to absorb and create new technology in the production, not only of consumer goods, but of the goods that matter for people's livelihood. And I think that was the key problem. And I think they realized that in the 1960s you had reforms which introduced much more market than before, but all of that was eventually not successful. And I think that the fact that when Brezhnev came to power, it was a period of stagnation, ideological, economic, and elsewhere, and in practically all domains, artistic as well, and that made life was not bad, but it really was not going, it's not improving. And I think that led to the huge dissatisfaction, or to the belief rather, that things could be different. That's a little bit different, you know, dissatisfaction is active dislike of something. A belief that something could be better is not an active dislike, it's actually a desire to make things more palatable, more agreeable, better.
I've heard a line which is that the USSR didn't fail in so much as it was optimized for World War II. Its economic model, its political model, everything about that particular polity was optimized to fight a conflict after 1945. And the point is that just never happened. Do you think that's just a bit of cope and wishful thinking or...
No, it's possible. I think that actually they overestimated the importance of war because they underestimated, in some sense, I think, their power. What I want to say is the following. If you look back at the origin of the USSR, you had from the very beginning attempts to actually end this revolution through foreign intervention. So as you know, in the 1919-1920s, Americans, French, British all intervened in Russia to actually stop the revolution. And I think they sort of developed a state of mind, and of course in 1941 when Hitler invaded, they developed a state of mind which I think is not alien to Russians even today, that somehow somebody is all the time trying to attack them. And in that state of mind, then you overprepare, you overestimate the importance of the military. And I think in the Soviet Union they have spent, current estimates are they're spending about 15% of GDP on the military. Had they spent that money, had they spent 5% on the military and the other 10% on something much more reasonable, I think that the dissatisfaction or unhappiness of the people would have been less.
Yeah, I mean, two people I've spoken to in the last couple of weeks, one is Vali Nasr, an Iranian academic from Johns Hopkins, and another is Serhii Plokhy at Harvard. Great. And you know, you look at Iranian foreign policy, its policy of foreign defense, it's rooted in a paranoia that's centuries old. The same with Russia. You can go back to Hitler, you can go back to the Civil War, you can go back to Napoleon, you can go back to the Great Northern War. And it's, I think it's something that's really lost on Brits and Americans that these mindsets about national interest and foreign policy go back a really long time. They're very hard to get rid of. Let's go back to China for a minute. You mentioned the reforms of the early 1980s. How important is Deng Xiaoping and Dengism, and what exactly does he do to the Chinese economy?
Before I answer that, let me just go back on the previous question when you mentioned, because China is actually an interesting counterpart to the USSR. You know, China, I mean, has built the military and has atomic bombs and all that, but I think they did not exaggerate military production the same way the Soviet Union did. Actually, once they got, I think, 300 or 400 atomic weapons, they stopped. That's enough. But the Soviet Union went for 10,000. They wanted to have a little bit more than the Americans. And why do you need 10,000 if you know you can destroy anybody with 500? So that was what I meant. Really, really, in some sense, irrational stuff, in my opinion. Now, how important was Deng? Well, Deng, I think, was, I mean, a super important person, actually. He obviously was not designed to be Mao's successor. Hua Guofeng was a successor, but he eventually was selected by the top class. And it was also interesting, we have to admit, that he was the person who decided to go with the Tiananmen massacre. But then he was a person also who in 1992 went for this southern tour, which actually after the retrenchment of Tiananmen and political retrenchment and more left-wing policies after 1992, actually the situation went back to the very pro-market oriented, pro-rich, pro-rich people, actually, as he said, being rich is glorious. So there's no doubt, I think it's incontestable that he had a super important role in China. So if you take it, it was a Mao time and then there was a Deng time.
Do you think he died a Marxist? You know, when you read the biographies and so on, they say Deng died a committed Marxist. The project was to unleash or to liberate the forces of production. Then others say, no, he just realized that, you know, this state model under Mao failed and they wanted to more, they wanted to more closely approximate the Western model. Of course, there's a bit of overlap between those two arguments, but where do you stand on where Deng was politically?
I think that he was, I think he remained Marxist or he remained Leninist. Let me put it like that. And that's why I actually think the current regime in China and the current development can be very well understood if you think of China and Deng said that being a new economic policy, it's Lenin policy from the 1920s, where you essentially unleash the private sector, but you never give up the political power. So in other words, you let them be rich, be sort of have a good life, but you keep an eye on them. And on top of that, the political power stays with you and you insulate the state from the rich people. And I think if I were to define it like that and to present it to Deng, I think he would agree.
There's that sort of, there's a TED talk by Eric X. Li, and you know, you always see him popping up on social media, and he makes this argument which you kind of formulate in the book as political capitalism, which is to say you have a market or a mixed market economy, but a market economy for profit with wage labor, with a working class, with an economic elite, but the point is capital, big C capital, doesn't set the political objectives of the ruling party and therefore determine the national interest. And you know, Eric X. Li says something quite similar, and I think it's a really good explanation of China, and I think we're going to learn a ton of lessons from China here in the West in regards over the coming years. You mentioned the new economic policy and really this idea that actually China possibly has a new economic policy that might last, you know, a century, who knows, right? Is that where the USSR starts to get things wrong? Is there another alternative world where the NEP carries on and actually...
I actually think if you want really to sort of make the alternatives, one alternative was, it was very, how should I say, likely alternative when it happened, 1921-22, is NEP or NAP continues. You don't have collectivization of agriculture. As we know, Ukrainian agriculture is extremely rich and Russian as well too. They could actually feed themselves, they continued exporting. The issue was, are we going to go for that type of agricultural development which then can support industrialization? And I think that was the main dividing line between, as we know actually from the literature at the time, between people who wanted industrialization at every cost because that was the sign of a successful and powerful economy. And to some extent, they were also afraid again of being attacked. And if you have industry, obviously you're going to have the military and stuff like that. But I think that the path of agricultural development with free trade and sort of so-called NEPmen prospering would have been better for the Soviet Union. And there was a book by Bob Allen, the English, British historian, that actually looks at that kind of a counterfactual. And he thinks actually that counterfactual would have been better for the Soviet Union. I forget the name of the book, but it's actually a book about the Soviet Union, and it's actually studying precisely that point: did collectivization actually improve industrialization? In other words, did your ability to extract so much surplus from the peasants and on top of that to kill 3 million of them, did it really help the industrialization in a significant way? And his argument is no.
What were the arguments or what were the debates within the Politburo and the people around Lenin at the time? Because presumably you have a massive surplus from agricultural production which you can sell and you can reinvest the proceeds of that into industrialization, which was kind of the idea of the five-year plans anyway.
But of course they wanted to take it, I mean, really forcibly. And so they didn't want to let private enterprise or small private enterprise or peasants and so on really sell the goods on their own side, which was a mistake actually. Going back to China, if you remember, actually we mentioned that 1978 was liberalization in China. It was exactly like that. The communes were ended. The fact of private ownership of land is still formally state, it's not individual, but the factories individual, and individuals started paying taxes in kind. So in other words, you produce whatever you do, but you know, okay, I'm going to give to the state 20%, but everything else is for my own either consumption or sales. And that was, I think, the model that NAP, a new economic policy, promoted. And actually that model, I think, would have worked quite well in the Soviet Union.
I could go down a rabbit hole with you and talk about this for the next hour. I think some people watching and listening would love to see that conversation, but really this book is about the world we're living in after 2008, 2016. You say that the era of neoliberal hegemony is ended or it's coming to an end. We're living in its kind of embers and that we are seeing the end of the end of history. Unpack that a little.
Yes, first of all, the first point, I think that very few people would disagree that neoliberal globalization or the globalized neoliberalism, whichever way you want to put it, that we have been used to since probably 1990 and which had probably its peak around 2000 when China joined WTO, I think that period has ended. And I think it is obvious that it has ended because the economic policies of the large countries, big countries like the United States or China, have changed. They have changed externally because they have become much more mercantilistic. In the case of the United States, not only since the last election of Trump, it was actually since 2016 and continued by Biden. So that international part has changed. Ideologically, you know, of course trade is still going on and trade to GDP ratio has not changed and all that, but ideologically you don't have the same situation that you had 10 years ago where it was believed, you know, we don't really take into account politics, we have, you know, supply chains, doesn't matter where it is, whoever is cheaper, we'll use that guy. It has really changed now.
Sorry, can I ask what you say ideologically? What does that mean? Because I suppose many people say, well, Trump says something, but actually, like you say, global trade GDP is broadly unchanged. You say ideology, they would say rhetoric. So what do you mean by ideology?
Well, what I mean by the ideology is that actually people nowadays think much more and they act to some extent upon that, whether for example certain goods would be produced in China or would be produced in Vietnam or India, and whether it is better to actually buy them from India because it is safer in the case of conflict with China. It is kind of obvious that China, for example, had all the problems with IPOs in the United States, with TikTok, which we know. It's also obvious that we have now rare earth as a sort of a political issue. It's no longer an economic issue, buy or sell it. So the economic things are now used as political tools. In other words, there is a political coercion to do certain things economically, which in the past would be done purely on economic grounds. So I think it's not only the rhetoric, it is just that things have changed and that there is an adjustment on both sides in where you produce, what type of, as I was saying, supply chains you want to support, what you don't want to support. It is just a different world. And of course, on top of that, we have the war between Russia and Ukraine, which again has changed the situation with Europe and Russia, exports of gas, which now don't exist anymore. So these are fundamental changes which are driven by politics and war.
Yes. Serge Schmemann was saying that, and this is not a particularly outrageous claim, the big winner of the Russia-Ukraine war is China. And something you talk about in the book, which I've never really focused on before, is this idea that there's a decoupling, a long-term decoupling of Russia from Europe, which is a geographical decoupling. All the major Russian cities are near Europe because it's historically been a European power. And you kind of begin to talk about the possibility of, you know, the center of Russian economic life shifting east. That's a really fascinating idea, isn't it?
It is a fascinating idea. It's kind of hard to happen, but there is a certain logic to it. As I said, it's very hard to imagine that you would have 10 million people from St. Petersburg, Moscow moving to Vladivostok tomorrow. It's very hard. But because Russia was centered into Europe. But if you take a longer-term view and say, okay, this break between Russia and Europe is, we cannot say permanent because nothing is permanent, but it's a long-term break. It is very unlikely that Europe would go back to what is perceived as a state of dependence in terms of energy to Russia because there will be precedents. They would say, look, there was a Cold War, then there is no hot war, there is like stuff like that. So they would not go there. That would push Russia, it already is happening, to be much more directed towards trade and exchanges with the South, which means India and China. And then there is another argument: if you could actually just transport people costlessly, you say, why shouldn't I develop the Pacific, where actually the center of economic activity is? So why shouldn't I be closer to China, which is now growing, and the Asian region, whereas Europe is not growing? So in some sense, it is reasonable to imagine that Russia would shift east, but as I said, it is very difficult to achieve. Now let me just make a counterargument against that. Think of St. Petersburg. St. Petersburg did not exist until Peter the Great decided to build it. It was marshes and nothing. So he decided to build it as a sort of open port towards Europe. So that was a political project as well. I'm not saying that actually it's as easy to go, I don't know, like 6,000 kilometers or whatever east. But one can imagine a political project which would be, or sort of through economic exchanges, that you do have different distribution of population.
You put some numbers actually on just how enormous Russia is. It's what, 16 million, I think, square kilometers, but to fly from one end to the other is like 9 hours, not a train, to fly. That's just incredible.
So I mean, I think that's, it's much higher. I mean, that's another thing when you think of the development of the American Pacific coast. It started also from nothing until 1849. But of course it's closer. You fly from New York to San Francisco, 5 hours and a half, and I think Moscow to Vladivostok is like 9.
Yeah. Let's stick with China. You again, because there are just tons of numbers on this, and there's one particular graph which elucidates how badly Britain has done in the last 15 years. We talk about that more in a few minutes, but you seem to insinuate, if not explicitly say, that the rise of China, particularly since the 1980s, is more historically significant than the industrialization of Europe. Now, obviously, Europe catalyzes a global process, the Industrial Revolution, but in terms of just sheer stuff being made and people's lives being transformed, the two are incomparable. So this process, this moment we're living within, the transformation of China as it ascends to the top rank of global economic powers, how should we think of it, and where are we sitting in that sort of period? Are we still at the start? Are we in the middle or at the end?
I think we should really realize, maybe actually contemporaries have trouble realizing that, but we should realize that we're really living in a period of dramatic global transformation, to use the title of the book, which is similar but bigger. It is similar to the Industrial Revolution in the following sense. The Industrial Revolution created what is called the Great Divergence. West European countries and then North America afterwards and finally Japan became much richer. Big countries like India and China stagnated or even declined in the case of China. It created a huge gap in incomes between these countries and in welfare of the people and actually enabled also colonization and the spread of the Western countries around the world. When you look at today's situation with the rise of India and China, Indonesia and so forth, you clearly have a reversal of that. You can just look at the numbers. I mean, there were some graphs there that you mentioned. You simply have these countries going back to the position relative to the West which they had in 1750 or 1800 when they were not as far behind. So there is a clear reversal. What was bigger now is that simply there are more people involved in that than there were in 1750 or 1800. So I would say, to summarize, I would say geopolitically it is as dramatic a fact as the Industrial Revolution in terms of the numbers of people, simply because the world has now 8.4 billion people, it involves more people, but it is very, at least, totally dramatic as the Industrial Revolution was.
So I think it's undoing the effects of the Industrial Revolution at the level of individual incomes. It's actually bringing, if you will, the world back to the distribution of economic power in the Eurasian continent to where it was in 1500, where China and India were not significantly different from Italy or England or the Netherlands.
I love Downstream so much. It's pretty much the most enlightening conversation I have every week. Except, of course, those with my wife and my daughter, my two-year-old daughter. She's very sharp as well. But after that, it's always Downstream. And that's often something I hear from you guys as well. You love it. You love the events. You love the show. You want more. Well, there is more. There's a newsletter. It's brand new. The first one was published last week. We have another one out this week. Get on that train. novaramedia.com/downstream-newsletter. We are talking to some of the most interesting people in the world about some of the biggest issues. We can't cram it all into the video. And there's also some nice little anecdotes and vignettes that you'll find exclusively in that newsletter. If you want to get smarter, if you want to have a smile on your face before the new working week begins, subscribe to the newsletter. Do yourself a favor.
Have you read Exterminate the Brutes? I'm sure you have, by Sven Lindqvist. Yes. And he talks about, again, for people who aren't really big into political economy and the relationship between technological change and politics and military power, the ability to project it, you know, he talks about, you obviously don't get steamships without steam and you don't get Gatling guns without that stuff. And all of a sudden, over the space of 70 years, British soldiers can just go up these rivers within the interior of Africa and just mow down thousands of people at a time with weapons. And for somebody in your game, that's just an obvious connection. But I think often we fail to understand how much of a game changer the Industrial Revolution was, not just for us, but for the entire planet. So where are we in that moment for China? It starts, let's say, with Deng. Where are we with that now?
I think we are not, I mean, if you take that example, we are not there yet, or maybe we'll never get there, because to some extent China is recapturing the position that it had before, like we're talking about, let's say, 1500. It does not necessarily imply, nor may it be even feasible for the Chinese to do the same thing that, for example, the British did to China, because when you mention that, of course, the British went with their ships into the inland waters of China and they went all the way to the Summer Palace and, of course, opened the ports and all that. I don't see this happening now. I don't see China in the next 20 years or 30 or 50 years telling the Brits actually that they should import French cognac like the Brits asked them to import opium. You know, I just don't see that. So that kind of maybe raw military power may not be exercised because the other side is also very strong. But some other power may be exercised. Maybe China would exercise it in Africa. Maybe it would exercise it in weaker European countries or actually South Asia. We don't know that. So, but it is not unreasonable to assume that with a huge economic success and industrialization and actually nowadays new technologies, you also develop the means of coercion that you might want to use, but it's a guess, obviously, so much of it a guess.
You talk about China's rise in relation to the United States, and I want, from a big brain who was at the World Bank, I want to know which is the measure to use, because of course if people look at nominal GDP, America is still much bigger than China. In terms of PPP, a different measure for GDP, China is now significantly bigger than the US. So which one should people trust?
Well, I think you can use both. I mean, let me tell you why I have preference for the PPP measure. First of all, because I work with income distribution, income inequality, and you use PPP because you want to say, okay, what is the welfare of people? So if I have this coffee and I have this water, it should be counted in terms of price the same everywhere. So it is true that in London this is much more expensive than, let's suppose, in Kolkata. But when I talk about the welfare, the guy who is in Kolkata and he drinks this coffee and drinks this water should actually get the same utility, if you will, as I do. So in that sense, I'm in favor of PPP. PPP simply means China produces like now, like 15, well, 20, 30% more of stuff than the US. But when you go to the exchange rates, you say, okay, they produce all of this stuff, but let's suppose they sell all this stuff at the rate, at the prices that they have now, they would get less than the US. So it is true that actually at some level, exchange rate, PPP exchange rate GDP makes sense. So I'm for using both, but I really see the advantages of the PPP rather than the market exchange rates. Plus, on top of that, you can take the following thing: if China were to actually appreciate the yuan, it would eliminate, you know, half of the gap. The current gap is about 30% in favor of the US. Let's suppose China appreciates by 10%, half of the gap will be gone. So nothing has happened. It's simply that there was a change in the exchange rate, and then half of the gap is gone.
So for people watching, basically, China could muck about with this economy, and by normal GDP, it could be the largest economy in the world, but that doesn't advantage its exports, it's actually a disadvantage.
Exactly. It would make actually Chinese exports more expensive, Chinese growth rate lower. So you can become bigger, but then you pay the cost in terms of the exports and the growth of the economy. China actually, when you read Chinese papers and stuff in English, I unfortunately cannot read Chinese, but they very often insist on second largest economy. They never mention the largest economy. It's insistent and it's not accidental. It's always the second largest, the second largest.
Is that from the whole, you know, hide your strength, bide your time kind of...
It looks like that, because they could actually say the largest economy.
It's the polar opposite of British politics, where, you know, our politicians still say everything's world-leading and we're still, you know, world number one in terms of aviation engines. You know, they clutch at straws where we're still number one. The Chinese are saying, no, we're number two. We're not, you know, maybe there is something to that.
That's what Deng said, you know. Of course, most people like to be number one. I'm sure they like to, but I've noticed that in the, well, China Daily, for example, which is the official publication, and elsewhere, even in the political documents, there is always this mention of the second largest in a positive way, like we are strong, we are big, but we're second.
Often when we talk about Russia and Ukraine, you know, you get, and this really winds me up, analysts on X, and they'll say, how on earth are we taking Russia seriously? Their GDP is the size of Italy. And then, of course, you look at PPP, which is the measure you're talking about, it's the fourth largest economy in the world. I mean, when we're looking at Russia and its military-industrial complex, surely we should be looking at PPP, not nominal GDP.
No, I agree, I agree. You know, and I think Russia is, in terms of PPP, actually, I don't know, fifth or sixth, actually. It's a large economy, so it's not actually true to say it is the same as Italy.
Yeah. Well, I think it overtook Japan recently on like CIA Factbook or something. So, you know, it's because you look at the nominal GDP, US is number one. You know, Russia's barely in the top 10, not even in the top 10, I think. And you look at PPP, China's number one, and Russia's, you know, above the likes of the UK and France, and it's a whole different geopolitical reality. True. And I do get really worried when I look at or I see rather sort of powerful people in this country looking at the nominal GDP.
But you know, in the first chapter of my book actually, which is called The Rise of Asia, you have, I think, this kind of cool graphs where actually I show what were kind of the challenges of the West when the New International Economic Order happened in '74, '75. If you look at the distribution by different political parts of the world, the West was, you know, 50% of global GDP or thereby, and of course lots of population. China was only 2% of global GDP, 20% of the population. So when you look at this number, you say, well, you know, it is not a power in economic terms, but it could become a power simply because there are so many people. When you look at Russia today, which is also solitary in the same way that China was solitary then, because it was not part of some kind of association or group, Russia produces 3% of global GDP, but it has only 2% of population. So it is clearly not in the same league that China was in 1974. And it is, I think, some kind of a difference there. And well, China nowadays is like 10 times as big as Russia in terms of both population and GDP.
And I think you have in the book that at its peak the USSR comprised about 12% of global GDP, right? Which is just, you know, again, it's incomparable to the rise of China now.
Incomparable, it's like 22 versus 12, actually. And the USSR was for a long time the second largest economy. These are the World Bank data, which are done retroactively. And then it was overtaken by Japan, then Japan was overtaken by China, and then eventually China overtook the United States. But it is interesting also that China and the US now represent almost 40% of global GDP. This is a lot, like for two countries really to have like almost 40% of global GDP is a lot.
That's proper bipolarity, right?
Yeah. It's kind of a bipolarity. Exactly. Yeah. Yeah.
Is social mobility dead in the West today? No. Is it dying?
I think it's slower than it used to be, and that's actually what I was discussing in part in chapter three about the elites in the West. The elites in the West are what I call homoplutic, which means that they are at the same time among the richest capitalists and the richest wage earners. And on top of that, of course, they are people with credentials and so-called, quote-unquote, meritocratic view of the world. And in such a world, obviously, your kids, if they come from such a family with all these advantages, are very likely to succeed, and social mobility would be less. So it is factually true that social mobility, if you look at the US since the 1980s, has declined, and actually it has a consistent decline. So you have a consistent increase in inequality, consistent decline in social mobility. But it doesn't mean that social mobility has stopped.
Well, I suppose it's still alive, but it's mostly downwards. If we're talking about real social mobility, the proletarianization of the middle class is the real story.
That could be. Yeah, it could be. But yeah, I was actually thinking of the sort of numbers that look at social mobility regardless whether it is up or down. It simply measures the change in the position of the children compared to the parents. So that could be both of them, you know, but it's also true, you know, if there is social mobility down, you know, social mobility is an ordinal number. So if somebody goes from the 60th percentile to the 45th, which is downward mobility, well, somebody has to fill the 60th percentile. So somebody has to come there as well. Yeah. You know, so I'm not quite sure one can say definitely that social mobility has declined, but I would not go too far to say that we don't have it anymore.
Yeah. I mean, you have this great chart where you talk about earners. So it includes, as I understand it, capital gains from assets as well as incomes, the top 5% of earners globally. And of course, the United States is, you know, runaway number one, right? The UK was number two in 2008. It's really fallen, which I find fascinating. And then, of course, China has done really well. Most of the, well, I think all the European countries have actually fallen a little bit, right? And that to me was a really interesting story, and it kind of visualized the extent of Britain's problems in recent years. There was a great podcast recently with Eliza Philby, who is a professor over here, and she said the meme on social media is, you know, I need to marry a guy in finance. What they're actually doing is they're marrying somebody whose dad was in finance. That's the reality, rather than like the TikTok meme, even if it sounds less sexy. Is that a threat to our political model?
I think actually what is a threat to the political model is what I said before and actually what you also said, the rise of what they call the homoplutic elite. Homoplutic simply means, I invented this term because the term didn't exist, I mean, you had to make up some Greek word, you know, homoplutic means technically same wealth. What I meant by that is that there is a rise of people who are at the same time having very large capital incomes from property and very large high incomes from labor. This is an unprecedented situation. Think of the 19th century Britain or even early 20th century or mid-20th century. You had the top guys, and the top guys generally had income from capital. I'm not saying they didn't have any income from labor. But what this homoplutic means is not only that you are in the top decile income, which means you're a really rich capitalist, you're in a top decile by labor income, which means that you really work hard, you're very high level, and you are paid for your labor. And this is what I believe is a new elite, and that elite, of course, transmits all these advantages to their kids. And that was actually what your interlocutor, I think, also meant. And I think what I find worrisome is that that elite, because it is a meritocratic, quote-unquote, elite, believes that they totally deserve that position and they are a hardworking elite. We have actually the data that show that people with higher wage per hour tend to work many more hours. So combine all of that, combine all of that, that I am a rich capitalist, I am a rich worker, I work very much, I feel that I deserve this position, I feel that I should give all these advantages to my children. The children actually go to the best schools, they get high incomes themselves and inherit high incomes. So you really have an elite which is very hard to sort of break.
When does that change, by the way, amongst the elite, this idea that the wealthiest, most high-performing or most economically, culturally successful people, politically successful people, are the ones that work hardest? So, you know, you'll be following some billionaire on Instagram and he'll be sharing a picture of his alarm clock getting up at 5:00 a.m. But the point was for almost all of human history was to amass wealth in order to join the leisure class. When does that shift happen?
I don't know. It's really an excellent question, but I think that shift happened probably over the last 50 years or so. But there was certainly a cultural shift. There was a cultural shift that you accept, for some small groups, but you believe first, you tend to underplay your wealth. Yeah. Many of them don't want to actually accept that they're wealthy. And secondly, you want to create the impression that that wealth is the result of your intelligence and hard work. And Daniel Markovits, whom I quote in the book, says such a new elite has the old-fashioned virtues and the old-fashioned vices. The old-fashioned virtue is actually hard work, you know, almost Calvinist type, you know, stuff, although they consume a lot, but they hide that. But part of that is also contempt for those who did not succeed, because if you believe that the entire success is based on measurable criteria like intelligence, hard work, or I don't know, abstinence or whatever you want to call it, and those who don't have it then consequently have either to be lazy or not to be smart or to be too driven by passions or whatever. So you create that moral judgment, which in my opinion was driving quite a lot of dissatisfaction with either Hillary or with people who oppose Trump.
So this idea that the highest of high when it comes to income are also increasingly the highest of high when it comes to capital gains. People are doing really well from not working. I wonder, is that, that's clearly a global phenomenon, but is that more of a phenomenon in the United States where...
You have obviously big tech, and people are joining companies when they're small, and they're getting equity and stocks in the company rather than being paid. Because I look at the UK, we have a different model. We're a subimperial state. Or I look at France, which has a much larger state, and you know, the public servants are still paid pretty well. It doesn't have a new economy like the US. Are you describing, in terms of elite and these new characteristics of it, is that more prevalent in the US, or is it just leading and will eventually follow?
I think it's leading, actually. I think I have a graph there. The US, if you take the 10% of the richest people in the US and the UK and France and Mexico, let's say, what you find is that one-third of that 10%, which means like 3% plus in the US, are this new political elite. In West European countries, that percentage is 20% of that elite, so we're talking about 2% of the population in the UK, so it's less. But if you look at old-fashioned capitalist countries like Mexico and Brazil, very few people are that elite, because people who are rich capitalists are rich capitalists, they are not really lawyers or they are not software developers. So I think it is something that the US has in many cases leading, but it's not something that is unknown elsewhere, and I think it will become the same.
And so somebody like Gary Stevenson, who's become this big voice in this country when it comes to inequality, Gary Stevenson would say you've had this massive divergence in incomes, the wealthiest of the wealthy now have so much money they have a lower marginal propensity to spend. What do they do with it? They buy assets which will generate returns for them. Is that what's driving this?
Well, this is a theory. It is actually interesting that you mention that, because this is the issue which was raised even during the Great Recession. It's kind of simple, but it may be true. It's essentially you have high inequality. That means that there are quite a few people who are wealthy and they have excess savings simply because the marginal propensity to consume is low. You don't know what to do with that. So they are in search of alternative ways to invest that money, and that was a story, of course, before World War I as well, is essentially you search for that. There was a paper and there were actually some studies by two guys, I think Atif Mian and Amir Sufi, arguing that the subprime crisis was the result of that. Essentially, you had to offer to them something, you didn't know what to offer, so either you invest in China or elsewhere, or you invest in something which turned out to be extremely risky, and that was camouflaged by not being risky. But it is important there to realize that, and I think people did realize, not maybe immediately after the crisis, is that inequality was generating what became the bubble, and it was doing that because simply the people on the top had surplus money and they have to do something with that money.
But that is a really... if you try and explain that to people in this country, if you make the argument, for instance, for a wealth tax, not just to fund better public services or to reduce the deficit, but to change this pattern. I mean, that's actually what Gary says, you know, it's not just to fund the state, but we need to stop this recursive feedback loop of the ultra-rich buying more assets, exacerbating inequality, and you know, going over and over and over again. Do you think the political class, the Western political class, understand the nature of that feedback loop, or...
I think they understand, but they probably don't want to do that because they... well, like we saw the French tax that failed now, the idea to actually tax people with high wealth. I don't know, they may be afraid that actually these high-wealth people would leave the country, or they would invest money elsewhere, that the money would not stay. I don't know, but I think the logic seems to me rather clear, and it is an old logic. You know, we're going even to... actually, it was a British economist, John Hobson, who originally defined it. He was an underconsumptionist, and many economists didn't like this idea of underconsumptionism, but it is true that... I mean, that was after, for all Keynes, who used it, that the marginal propensity to consume decreases with income. So at some point, when you have huge income and you have huge wealth, you cannot all consume it, you know, and people don't consume it, and that's the issue. So when Liz Truss was giving tax cuts to the ultra-rich, that was just, in terms of trying to help with final demand, that was just the stupidest thing you can do.
Well, it seems to me it's actually... I mean, going back to the elementary Keynesianism, if you want to increase aggregate demand, you do have to redistribute from rich people to poor people, not because you necessarily like poor people, but because they are going to spend that money and the rich people will not spend that money. So there will not be the multiplier effect. And it's actually interesting that Keynes... but that's another topic. Keynes did not use that particular sort of way to increase aggregate demand. He mentioned that, of course, MPC was playing a prominent role there, but he preferred actually to go with the state spending directly rather than through redistribution. And I think it was a political decision, but maybe that's a different topic.
Well, he's living through the First World War, the Great Depression. He's on the front line of all of that stuff. So it kind of adds up, right?
