I've become rather skeptical about the ability to do big changes. The reason is that we have been talking about inequality for 15 years, but when you look actually at what has happened, not much has happened at the level of policies.
So I wanted to start with a quote that you've used, actually, from Adam Smith. He wrote, 'No society can surely be flourishing and happy, of which the far greater part of its members are poor and miserable.' You study inequality, why does it matter?
I think inequality for the country is important, in my opinion, because without a reasonable level of equality and the ability to sort of do well in one's life, I think that growth is affected. So actually I don't believe, like many people do, that the two things are mutually sort of exclusive, or that the more equality you have, the less growth there is. I think at some point, yes. But within the normal scope of the numbers that we have, I think lower inequality means higher growth.
But for a long time, economists forgot to study inequality. In one of your books, you talk about an eclipse that is basically from the '20s to the... Your work and Saez and Piketty's work, can you explain why there's been this disappearance of the study of inequality and why all of a sudden it's come back as a big, big topic?
I think there are three reasons. I will not sort of lay blame, like in percentage terms, to each. One of them, there was an endogenous evolution in economics, which is really very much into looking at general equilibrium and prices. Now, the problem with that is that if you have that point of view, the endowments, which means how much capital you have, what type of labor you have, and so on, really come into play only when you actually pay them. Like, when you have a rate of return of so much, so much, you know, you have so much capital, that's the total amount that you get. But in the classical literature, in Adam Smith or Marx or Ricardo, the question is actually how did you acquire that capital? But that question is not asked by general equilibrium. So I think one reason: pricing is at the center of the study.
The second reason is that there was political pressure not to really emphasize capital incomes and capitalists as such, because the U.S. said, okay, you in the Soviet Union have said you have eliminated classes. Well, we have eliminated two, because everybody can become rich, so essentially there was this American dream, which ignores class because it's really immaterial.
And the third one, I think there was lots of funding of think tanks and others by the rich people. And they are allergic. I have to tell you that, maybe later, from my own experience. They don't like the word inequality. They just don't like it. They like the word poverty. They say, OK, that's great because I'm a really nice guy helping the poor people. But when you put the word inequality, that kind of a little bit irritates them.
Perhaps because inequality implies that maybe there's something to be done about it. But does that get to the point — can you separate then the study of economics from the political environment in which it's happening, or the social time in which it's happening, or are all of these things constructs of the moment in time as well?
I would rather say the latter. I know that this is not necessarily popular, because we would like that what we work on somehow lasts for eternity. But in reality, I think that that book actually was not original. I didn't really have this in mind originally. I was reading these authors. I mentioned Adam Smith, Marx, Ricardo, Pareto, and Kuznets. But I didn't realize until I started — actually I was advanced in writing — how much their view of inequality is really influenced, fashioned, by the times and the place where they are.
And so is ours. And there are topics which none of them has really studied. When you look at issues of slavery, colonialism, gender inequality, racial inequality, they are just not there. They appear a little bit here and there, but these are the issues that we feel much more strongly now than they felt 200 years ago, where actually these issues maybe were more acute than now. So I do think that actually sometimes what we do reflects what is the sort of the prevalent mores of the time. And so inequality today, I think it's a little bit different, the study of inequality, than 100 years ago.
But you're famous for studying inequality at the global level. And many people are more interested in the study of inequality at the state level, the country level. So why at the international level? You say you're interested about the relation between equality and growth, but we see very often, at least historically, moments of enormous inequality and very high growth. So how do you reconcile the two?
It is true there is a difference between global inequality or country-level, nation-level inequality, because in the latter case you do have a political organization that in theory can take care of inequality, or an organization to which you can appeal, so to speak, to actually redress or change inequality. At a global level, such a thing simply does not exist. There is a difference.
However, what is actually interesting about global inequality, particularly now with globalization, is that we have witnessed a period of dramatic changes in relative positions and the ranking of different people and different countries. When I say countries, I don't mean countries as such. I mean people from the countries. So that really meant that certain classes, certain groups of people have done extremely well and the others have not done well. And I think that actually those who have not done well, comparing themselves to those within their country who have done well, and comparing themselves to people from other countries who have done well, have also been one of the reasons behind the political issues and the turbulence that we have now.
Uh-oh, I have a two-part question. First of all, can you explain to the audience this concept that made you famous, the elephant curve, and how it got its name? Because I love that story that you told. And then secondly, to pick up on what you just said, then what matters more? Does inequality on a global level matter more, or does inequality within a nation matter more for the sake of social and political stability?
Okay. Can I ask the second one? Because first, I do think if you were to ask me which one is more important, I would say definitely national inequality, because national inequality is something that every citizen here in principle can deal with. In other words, in principle you have the right to political action, you have the right to choose a political party or the candidate, and you have the right to express your opinion. At the global level, it's much more diffused, as I was saying before, because you don't even know what is happening. You have no political organization. It is much more difficult to do than at the national level. However, there is this interdependency of which I was talking, that what happens at global level might have significant impact locally or nationally.
Now, going to the first question, the elephant chart — many people might know it, but that's the chart that shows who basically gained in terms of real income the most during the high globalization period, which probably ended like, you know, you can say 2018 approximately, or 2016, and where they were in the global income distribution. So why the chart became quite well known was that it shows clearly that towards the middle of the global income distribution, where you have Asian countries, and to simplify, where you have lots of people from urban China, they have done very well, growing at 8% to 10% per annum. So that's a lot, a big number.
And then when you go to the top 1%, where actually you have really very strong domination of the Americans — really, US citizens are 40% of the top 5%. So they're really big there. They have done also very well during high globalization. And then you see one group, well, these guys have not done very well. Their growth was lately quite close between 0% and 1% annually. And when you look at who are these people, they're around the 70th, 80th percentile of global income distribution. But they are mostly from the lower middle class or middle class of the rich countries. Not only the US, it's also France, Italy, Germany, Japan, so forth. And you see here the interaction between global inequality and domestic. And it looked like an elephant.
I'm having trouble visualizing it.
Well, that was, as I was saying to Bethany before, I didn't name it. I still don't remember who it was. I think there was a guy on social media. See, it goes like this. So the guy just looked at this and then drew an elephant there. And this was the trunk of the elephant. That was the global top 1%. There was sort of the middle of the whatever is the back of the elephant. And well, and he called it, I think that he called it the elephant chart, and then he became famous. So maybe he should have a trademark for this. Maybe social media is good for something.
But since we're interested in capitalist inequality, so first of all, can you praise capitalism for the success of China or not? Number two, the fact that capitalism — or that China was so successful in reducing inequality at the international level — is something that is good for us in the United States? Because a lot of people in the States are angry about the fact that they don't see themselves being better than their parents. And the consolation that the Chinese are much richer today is not going to cut it.
Well, these are really excellent questions. I have to say now, we didn't plan this. But these are really the two big themes of my forthcoming book. It comes in three weeks in the UK, and here it will be in March. It's called The Great Global Transformation. And the theme is exactly, as Luigi said, the following. If you ask any audience, and I've tried that on many audiences, I'm sure I would get also the same answer from you guys. If you ask them two abstract questions: Are you guys generally in favor of mean country incomes becoming more similar? And they'll say, OK, like Mexico becomes more similar to the US, Algeria more similar to France, and so on. Everybody says, yes, why not? This is really nice. It would be nice if the world was more equal.
Then you say to them, OK, second question, are you in favor of reduction of global inequality, where actually we define inequality between citizens, actually between individuals? So it's no longer countries. It's actually not mean income. It's individuals. And people say, yes, we are all very much in favor of it. But then you say, OK, the first equality that is happening means that China, as you were saying, is getting richer. The whole economy of China by 2015 has overtaken the US in PPP terms. It's only 30% below the US in terms of market exchange rates. That creates the political problem. There is one hegemon. There is one would-be hegemon. So suddenly, this good development becomes a source of international friction.
But the second development at the individual level, we get richer and so on. That's nice. But let's suppose you're from a rich country. I'm from a poor country. But then at some point, and that will happen with the Chinese and others, who overtake Western middle classes. So you might not necessarily like that idea of being overtaken. And maybe at first you would not even see that they're overtaking you. But over the years, you would realize that you cannot go to big sporting events because they're internationally prized. There will be Chinese and Indonesians there and not you. And there will be other things like, you know, a new iPhone or, you know, a new pair of some fancy tennis shoes or whatever. You know, you would realize that.
Even if you at first say, well, it doesn't matter that the Chinese have become richer than I, you would see it. And I was saying, actually, for Luigi, for you, I was saying, well, you notice that in Venice, obviously. Like, eventually, the nice views of Venice would not be seen by Italians. Italians would be somewhere else, and other people would have the primary view. So at that point, you don't like that idea. And I think that was at the origin. I'm not saying that's the only reason, but it's one of the reasons of political backlash. So that's why I was talking indirectly about the interdependency of the two before.
So if inequality is a flaw of current capitalism, is it fixable under capitalism as practiced in a Western democracy? Are the mechanisms there for it to be self-correcting, or does there need to be an intervention by the state, and if so, what kind of intervention?
You know, I think there has to be an interaction by the state, but I have to say that I'm, how should I say, I've become rather skeptical about the ability to do big changes. The reason is that we have been talking about inequality for 15 years, but when you look actually at what has happened, not much has happened at the level of policies. But there are certain things that have happened, and people don't write about that. For me, the interesting thing is that UK inequality has now been on a decline for about six, seven years. So we're not talking about some bizarre event. We're really talking about one of the major countries with a decline in inequality. Chinese has been on a plateau. US, too, has been actually — income inequality with the Gini coefficient, or you look at the share of the top 1% or 5%, has been sort of stable.
The interesting detail about the US, and I have to show you that because it shows the power of the government or the state. During COVID, what happened during COVID? The market income inequality before government intervention went up by one and a half Gini points. Now, it doesn't mean much to many of you, but it is a significant number given that the whole inequality in the US is 40. So one and a half went up. Okay, what happened at the level of income that you received after government transfers and taxes? It went down, inequality went down by one and a half point. Why? Because the U.S. through the CARES Act and other acts distributed like, I know, 15 or 18% of GDP. And if you look actually at who received that, the gains went, I mean from the government transfers, went all the way up to the 70th percentile of the U.S. income distribution. The richest people didn't get it, but everybody, I mean, they got something probably. But that shows you the power of the state.
Now, is it feasible to do year after year? I kind of doubt. And that's why, to end the question that they answered, I become a little bit skeptical, and I don't like the approach that every problem that appears seemingly is fixable through greater taxation. I think it becomes really somewhat boring at the end that any problem that you see, you say, okay, I want to tax this, I want to tax that, and so on. People actually don't want excessive taxation, in my opinion.
But you are kind of, at some level, lucky, because you are in the right time, at the right place when things happen. So you were in the socialist bloc at the time the socialists basically collapsed, you could see the collapse. Then you went to the World Bank at the peak of the neoliberal thinking, and now you're seeing the neoliberal consensus collapse. So two questions: number one, what is collapsing next? Where are you going next? We know it.
But you should not come with me.
And second, how do you interpret these changes and what is left now of the neoliberal consensus?
You know, I actually think that when I think back on my life, I do actually believe now that within my lifetime, I have seen two universalist ideologies collapse. The first is socialism, and the second one is neoliberalism. I don't think that anybody could argue that today, ideologically, we are at the same position that we were in 1995, I'd say. Things have changed, and I don't need to convince you. We all know that.
Now, how it would look, that of course nobody knows, but I mean we can have some guesses. My guess in the great global transformation is that there will be something for the western countries, for the rich countries, which I called — well, that's a difficult word — but the term national market liberalism. So let me explain. There would be liberal or neo-liberal policies. But they would be circumscribed, they would be limited to the market sphere, where actually there will be greater deregulation as we've seen today, lower taxation and all the typical stuff. But they would not be applied to the international arena, where we would have mercantilists. So I think it is sort of an interesting combination because you would think normally mercantilist policies would go with the larger state role in the economy domestically, but I think that that link would be broken. So I'm not sure what this new ideology would be, but let me put it like that. Very simple way, I would expect economic space domestically to remain neoliberal, but I would expect the space externally, internationally, to become mercantilistic.
So we have had people on our podcast, including Martin Wolf, who have argued that capitalism and democracy are inextricably linked. And I wanted to read you something that you've written. And you wrote, 'If Chinese and Singaporean meritocracies continue to consistently outperform societies where the social sphere is organized in a democratic fashion, there is, I think, little doubt that their appeal will be such that in 100 years, it may seem to those who are around so very quaint that people thought in a complex society, social decisions should be taken by democratic vote.' So I think you're a little bit more skeptical about the idea that capitalism and democracy are linked.
You know, I'm very much, in some sense, quite an economist of the world. And for me, I have to say, since I was really a kid, actually, when you alluded to that, I remember reading, for example, newspapers and reading what was always in small letters, what was the industrial rate of growth of Yugoslavia over this month? And I would be, in those days, that was early 70s, I would be very disappointed if it would not be double-digit. And it was not. It was like 7, 8 percent, which nowadays looks high. Why did I mention that? Because I think really economic growth is fundamental. And I think that there is a trade-off that people are directly or indirectly willing to make between so-called political liberties and economic growth.
And if you sort of think, as I think some people in China do, or maybe even Singapore, as I mentioned there, is that the organization of society is essentially such as an organization of a company. In a company, in capitalism, you don't have democracy. The company is run hierarchically. So you can say, OK, the society is also run like that. And let's see what is the outcome. Is the outcome good or is it bad? And if the majority of people say, OK, it is run hierarchically, but the right people are there on top, and they are running us, and I actually am not interested in how they have come there, maybe through some sort of mutual sort of decision making as in the Communist Party, it's okay with me. So in that sense, I think that there is acceptance of a trade-off between democratic rights and economic growth.
Many people don't, including John Rawls, who actually believed that really there cannot be a trade-off. He explicitly says, no, no trade-off. But he also said that really greater wealth is not an objective that normal people in normal societies should have. He said it was a businessman's objective, but not really normal people. And that's why he believed that actually economic wealth is not so important. But for an economist, that comes like a heresy. Economic wealth is really crucial for us. So to conclude, I think I would not agree that there is no trade-off. And secondly, I would also argue that if you look historically, there are many cases of successful capitalism without democracy. I'm not talking now about Pinochet in Chile. I will tell you like Louis Napoleon III in France with the economic sort of takeoff of France, with Bismarck in Germany, with Spain and Portugal, with Greece, with Turkey, with Brazil. So if you take all of these countries historically, and including the United States, it was, of course, originally a slave-owning oligarchy. So it's not democratic. So I would question that even empirically the link between the two is strong.
First of all, I come from a country that really blossomed with democracy, because Italy took off. The Italian miracle is a miracle of democracy. And I'm a little bit scared that you sound like Irving Kristol, that says that countries should be run like corporations. There is a fundamental difference between the two because you can choose among corporations, at least until there is a little bit of competition. But most people cannot choose across countries. So they don't have the exit option that we have in corporations. So that's pretty scary.
No, I'm just saying that actually many people might think that the rules which are at the corporate level, which are hierarchical rules, because you can also say, and there was, of course, as you know, the whole literature about transforming the workplace to become a democratic workplace. Well, it seems not to work. It seems that we want to have hierarchical organizations in order for the companies to work better. What happens if it also turns out, and that was the quote, that hierarchically organized societies outperform economically non-hierarchically organized societies?
