Branko Milanovic: Well, thank you very much for having me. It’s a pleasure to be here.

Branko Milanovic: Yeah. The countries that embody them and actually the data that I use to illustrate the two systems come, first I’m going to say, for meritocratic and liberal capitalism from the United States, where we actually have probably, in the area that I work on, which is inequality, probably the best data or most detailed data.

And, the country which illustrates political capitalism is China, where of course I use quite a lot of Chinese data, and I make sort of the structure of the two chapters that deal with the United States on the one hand and China on the other hand, relatively similar. Because, the objective of the two chapters is to look at the forces of inequality–be it inequality in wealth, or opportunity, or income–which might lead to the creation of a self-sustained upper class in both systems. So, that’s the structure of the book.

Now, the two systems differ–I mean, first, they are similar in the sense they are both capitalist. That’s my argument. And, actually, as you said, even the title of the book is kind of makes this obvious because it says Capitalism, Alone, meaning that capitalism is the only economic system which exists today.

But, they are also different, obviously, in the political space because the political space of a liberal or meritocratic capitalism as essentially democratic. The political space of Chinese-type or political capitalism is not democratic. It’s a one party system where the state has much more of a preponderant political role, and, to a large extent also, more preponderant economic role.

Branko Milanovic: Yeah. Actually the way that you define it is, I think, almost fully correct. But, let me say first that the definition is not mine. It’s actually the definition is sort of a standard definition that was used by Marx. It was used by Max Weber afterwards.

And, I think it’s a very economical definition of capitalism. It includes, as you said, first, decentralized coordination. Secondly, legally free labor. That’s very important because, in the past, labor was not legally free very often. But, that labor is hired labor. Now, the term ‘hired labor’ is also important because it means that labor is not exercising entrepreneurial function–which, in other words, it’s not workers who decide we are going to produce this and that gadget. It is–and that’s the third sort of definitional part–it is capitalists who decide on that, who have entrepreneurial function. And, economic life is conducted using privately-owned capital and profit principle. So, this is the definition.

Now, you ask and many people ask: Now, how does it apply to China? It’s more or less clear it applies to the United States because actually all the three elements are, I think, very clear in the case of liberal capitalism.

My argument–and it’s based on facts, so it’s not really what I think China does or what I don’t think–but they simply look, first, what percentage of labor force is working as self-employed, because in agriculture in China is mostly self-employed, and in the private sector. And, there you actually find that in 1978 for example, when you had still the commune system in China, in agriculture, you had about 85% I think of labor that was state–I mean, working the state-owned or commune system in agriculture.

Well, that percentage now is less than 10%. So, you really have had a tremendous change of first, privatization, be it privatization in the sense that there are large private companies, or middle-sized private companies, or finally private individuals, mostly peasants, farmers producing on their own land.

Then I look at percentage of private fixed investments. Now, that percentage also has changed. There is a very nice graph in the book which basically shows it’s like an X, like a cross. So, you basically start with, like, 80:20 ratio between public and private and you end up–nowadays it is about 60:40 in favor of private.

And, finally, I look at the value added produced in the private sector in China. There was a recent study–because that number was not actually quite well known and it’s very murky in the Chinese statistics. I’ve actually spent lots of time looking at statistical yearbooks of China, but there are so many different types of enterprises. So, I’ll just mention downshift in village enterprises, joint companies with foreign ownership, but joint companies with foreign ownership and state ownership, whether it is a local level, township level, city level, municipal level, central level, whatever.

Anyway, the World Bank did recently a very nice study which tried to disentangle basically all of that. And, they came down with an estimate, which–the range, I think, is between 21 and 28% of the value added being produced in the state sector. So, that, of course, leaves more than 75% or about 75% of value added in the private.

This is a long answer, but I think basically, if you look at the numbers, it’s very difficult to argue that China is not a capitalist country.

Branko Milanovic: Yes. This is a very difficult question. As I mentioned before, of course, I think that the United States has probably the best data on income inequality. You know, I’ve been working on income inequality for like three decades now.

However, it has become a big political topic in the last, maybe, I don’t know, seven, eight, maybe ten years. And, then, it has led to a proliferation of studies that actually, whether from the left or right, actually play in very different things. You can always use the data in a way which would kind of support your priors. Very often, you use the assumptions that would lead you actually to get the results that you a priori believe are the correct results. Let me then address your question–

Branko Milanovic: You know, this is the truth, because the data are obviously not–

Branko Milanovic: You really deal here with definitions. And, let me just give you, for example, I mean, answering your question, let me just mention some of the issues that we face.

First of all, it is true that, when we look at inequality, at any number, and we say, ‘Okay, that’s the share of the top 1%, top 10%, this is the Gini coefficient, which is a measure of inequality , we are taking a snapshot picture. So, part of inequality may be due simply to the life cycle element. You have young people, you have in the past old people who are now actually doing much better than in the past. But, in the past, they used to be relatively poor. So, you take a snapshot and you actually find people there who are, they suppose, relatively poor. And, they increase inequality. But, there are also the life cycle in their lives, they are in a position where their incomes are relatively low. So, it doesn’t mean that they would actually, over a lifetime, have equally low income.

That was the point which, I think for maybe your listeners, is very nicely illustrated by Joseph Schumpeter who, in the 1950s, said , actually: Imagine that inequality, when you measure it, it’s like a hotel. And, in that hotel, you have people at the top floor, so the rich people. And, you see that particular night, you look at them and you say, okay, there are such-and-such people on top floor. There are such-and-such people on the bottom floor. But, he said, let’s take another night. And, if these people change rooms–some people from the top go in the middle, and maybe people from the bottom go to the middle or top–then you would, of course, have a very different picture over time.

And, that’s indeed the case. These are so-called longitudinal studies . But they are really very difficult to do because you really have to have people stay there and report their incomes and expenditures for years. And, people normally don’t do that. So, we still use these snapshots.

Now, the snapshots are still useful because they tell you, for example, that the top 1% in the United States or this Gini coefficient, which is used, has now increased to a level where it was not probably for the last 50 years. I’m not saying that’s the same–as some people argue–it’s not the same as around World War I because, at that time–I think it’s somewhat a mistake–because that’s measuring only incomes without government transfers and taxes. And, as you know, direct taxation was introduced in 1915. So, it’s actually after that it, of course, increased tremendously. So, if you don’t take it into account, you will actually overestimate inequality.

Nevertheless, when you actually do, I think, appropriate adjustment–because, you look at the after-tax income–you find that it is certainly high now. And, if you compare today with 1970s or 1980s, it is significantly higher. So, it is true in that sense that the top 1% has now wider or greater share of total income than it had 30 or 40 years ago.

Are they the same people? Probably not. So, there is lots of churning, lots of change. So, that particular criticism, I think, is accurate.

There are also many changes, one you sort of mentioned, for example, that was on an issue that I had with Chetty and other studies, is that actually they look at the household income. Now, household in the United States has changed. It was larger. Now it is smaller. So, obviously if you do not correct for at least per capita per individual member, then you, of course, exaggerate the increase in inequality because of a change in household size.

Branko Milanovic: Yes. I think I am worried, actually, I would say. Let me try to explain my thinking there.

First of all, I believe that actually inequality, as we were just saying minutes ago, it’s now become much higher.

And, in the work that I do, partly because I’ve been doing that always in the World Bank as well, I’m using a per capita measurement. In other words, I do not look at family or household as such, regardless of the number of people, but divided by the number of people.

When I mentioned the World Bank, I think it’s important to keep in mind that, when you work with vastly dissimilar households in different countries, you cannot take Mali with nine persons per household and treat it the same way that you treat like one-person households in Sweden. So, obviously, you have to correct for the household size. So, I do the same thing for the United States. So, that’s actually taken into account.

But, now, starting from that, what I am actually worried is the following. If inequality now is very high, and if we have increasing situation of what I called ‘homoplutia,’ which is a new phenomenon, which actually basically I think is the first time actually mentioned my book, is that you have increase in proportion of people who are both rich in terms of income from capital and income from labor. That’s something absolutely new. Because, if you look at them, so let’s look at the classical British capitalism or even U.S. capitalism in 1920s. You didn’t have large capitalists who were also workers receiving a salary. They didn’t exist. If they were actually rich, they were actually basically having capital income and that was it. On the other hand, you also didn’t have workers who had capital income, because their entire income was derived from labor.

Branko Milanovic: Absolutely. So, now we have a different situation.

So, now we have actually many more people who have both labor and capital income and who are actually rich in the space of labor and capital. We’ll come and maybe discuss that a little bit further because one of the ideas that I have when I talked about what I think could be improved or should be improved is much more widespread ownership of capital in the middle class. But, I’ll leave that for the later because it’s a part of recommendations, maybe.

Branko Milanovic: What I mean actually then, why I’m worried is that that particular inequality and that particular type of inequality when you have actually hardworking people who are actually both capital- and labor-rich leads to inequality of opportunities simply because you have many of the things in the United States, including schooling, which has become very expensive and very often unaffordable for the middle class.

Secondly, the rich are able to influence the political process enormously more than the middle class and the poor. And, we have empirical studies there from Gilens[?] and others, political science professors who have found that generally the issues that matter to the rich get debated and acted upon much more frequently than the issues that matter to the poor or to the middle class.

And, in that sense, I didn’t use the word ‘rigged,’ because I think it’s a little bit too strong. But, I think the system actually favors the interests of the rich. And, then, the rich tend, which is actually natural because everybody wants really to preserve their own power, then through regulation, and government decision-making, and the Congress, and so on, introduce the rules that are in their own advantage.

And, the danger of that is that you might end up with something what I called before, a self-sustaining upper class that would essentially be reproduced from generation to generation.

Branko Milanovic: Well, largely I agree with you, actually, all the elements that you have listed which sort of favor the rich. I am not going to repeat them because I agree with all of them.

I think that there is an issue of a judgment where the question becomes whether we believe that the issues that you mentioned, and I said I totally agree with them, are sufficiently important to make the opportunity of those who are in the middle.

And, I actually really emphasize in the middle because it is very clear that a middle income family in the United States now really has a hard time sending the kids to the schools which are like top schools. And, the issue there is that these top schools–I’m not talking only Ivy League: I’m talking really basically of the top 100 colleges that are expensive. And, the issue there is that their expense is not only the quality. I mean, we’ll leave aside the quality. Maybe they are actually better in quality. But, in reality, they’re basically a stamp of approval saying, ‘Well, I went to such and such college. And, thereby, I command higher salary.’

And, actually there are studies for that that show that, of course, the salary differentials are very large, depending where you went. Doesn’t mean that you are much smarter. Doesn’t mean that you are much better, but actually you went there.

Branko Milanovic: No, no; absolutely true. And, of course, when you look at the data, the studies that show percentage of people who go to the top schools and where the parents come from, of course, you have–I think actually I mentioned that in my book; that’s not my own number; I actually took it from somebody else–is the ratio is 60 to 1 between the top 1% and the middle class. So, obviously, the kids from the top families that are actually at the top income group, it could be 1% or 5%, have much greater likelihood to be there.

Now, as you mentioned also, it’s not only–and that I think is very important–it’s not only the advantages of inheritance of financial assets, which of course they would inherit, financial assets and housing and all of that.

And, the second level of advantage is the advantages that you get in school because very often, the rich parents, of course, have many more opportunities to actually teach certain things to the kids, which is quite well-known. I mean, even the vocabulary of kids who are born and who live in richer households is greater.

And, the third advantage, which I believe is a very important one, is the advantage of connection and information. And, having come from, of course, a very different environment and having kids in the United States, I see an incredible advantage of what is called information. I will give you an example of when I was studied, actually undergraduate, in Yugoslavia. And, when I read–we had, actually, a class which is called cybernetics–so it was I think Norbert Weber, and one of the things that–

Branko Milanovic: Wiener, Wiener. Yes, Wiener. One of the things that we learned there was actually the power of information. Now for me, it was very difficult to understand concretely what it meant–what is the power of information–because the society was entirely different. Nowadays, when I tell somebody the power of information is so crucial, I totally see it: because, if you’re not plugged in, if you don’t have good connections, you will not even know that such and such job exists. You would even not know how to apply for a school.

And, let me give you one small example for that, which I think may be interesting. This is a friend of mine, French friend, who actually had a niece who did extremely well. They are also rich in France. She did very well, the niece did very well in a top school, I think high school, in France or something. So, she comes to apply to the United States and comes really simply with excellent grades. Of course, she gets immediately rejected, because what they didn’t know–that’s again information, the power of information–in order to get accepted to these schools, it’s not sufficient just for you to have good grades. You have to show some special talent. Maybe you are jumping with the parachute. Maybe you have led expedition to the North Pole, something.

Branko Milanovic: Cured cancer, whatever. So, you see, that’s the information which they even in a very fancy school in France, they didn’t know that information. And, I think that’s what kids that are actually raised in rich families do know.

Branko Milanovic: I agree.

Branko Milanovic: Yeah. I’m very glad that you brought this up, because really, one of the objectives of part of the book which deals with liberal capitalism was to not only highlight increasing inequality and the problems that it leads to–and we didn’t even come to the other political issues like who is running in campaigns these days–but I wanted to highlight two aspects, two phenomena.

The first one, the fact that actually what I mentioned already that the people, rich people, are very often rich in terms of capital income, labor income; and secondly, that there is increasing positive assortative mating, meaning that actually people who are highly educated marry each other and then these are actually people with very high incomes.

Now, why I bring this up–and I’ll tell you a little bit more about assortative mating–but why I bring these two issues up is because I wanted to highlight–first, they are important. Second, I wanted to highlight, when we talk about inequality, it’s not very easy often to deal with it. I mean, why should you penalize people who marry each other? They love each other. They like actually people who are more similar to them.

Branko Milanovic: No, no, absolutely not. So, that’s one reason.

The second one, even when you come to what I call homoplutia, the fact that people have a high capital labor income, that too is very difficult to deal with. Because, on an ethical level, it’s easier to deal with people who are only capitalists and basically, let’s suppose they were just investing or they will give all their money to somebody else to invest and they do nothing.

Here, you have actually, empirically, we know that people with higher income work more hours than people with middle level income or low income. So, you then have really an ethical problem. Should you really very strongly penalize people who are working, like, 70 hours a week, rather than 40?–

Branko Milanovic: Absolutely. I agree. And, so let me just give you, for example–I think it’s interesting–the effects on the assortative mating. The facts–actually I looked at the cohorts of young, first, American males, men between the ages of 20 and 35 in 1970. And I looked at people who were in the top wage group. They were as likely to marry another woman from a top wage group as to marry somebody from the bottom. So the ratio is one to one.

Well, nowadays, for males, it’s three to one. So, they are three times as likely to marry a woman who is also from the same top income group as a woman who is from the bottom. But, for women, it’s even more dramatic. The change is five to one. It used to be one to one and it’s now five to one. Essentially, people actually–and I think that’s quite understandable; I have to say myself, I’ve sort of made similar assortative mating arrangement–is that actually people tend to marry, particularly when they go to school, the age of marriage is postponed; they meet people with whom they share similar interests, similar affinities, similar values; and they marry each other–

Branko Milanovic: Experiences; and they marry each other. So, there is nothing wrong about that. On the contrary, I think it’s actually a good development. But, on the other hand, it does have the implication of rising inequality.

Branko Milanovic: First, I start with the fact that actually, political capitalism, to be successful, it needs to generate high rates of growth, which we know in the case of China, but we know it also in case of Vietnam, Ethiopia now, Rwanda. So, there are more countries than only China. However, China, basically like United States in the other case, is the most prototypical, most important case, the most important example.

Now, in order to do that, China and similar countries need to have, especially China, have to have a very efficient bureaucracy of almost Weberian type. In other words, people who go and make decisions which are cl ever decisions and which follow certain rules, not necessarily laws, but certain rules. Singapore is the best example of that, the best bureaucracy in the world, extremely efficient.

On the other hand, because of the preponderant role of the state and because all of the state not allowing for the formation of independent groups –and that was the case in China, it seems historically. That’s also something that Fukuyama mentioned in his Origins of Political Order, the precocious state formation in China. They have to maintain ability to make discreet decisions which might go against the rules. In other words, if you have somebody who has made money in a way that you don’t like or maybe has written an article that you don’t like, or we have this case of a guy who was kidnapped from the hotel in Hong Kong who was the manager of the funds of the top Chinese politicians and who was then starting to talk too much about that, then you really have to use extra-legal means.

Now, the contrast is here, very, I think, clear is between the need to follow the rules, which is important for economic growth–

Branko Milanovic: Absolutely. And, the need that you should always keep in the background ability to punish somebody or to subsidize somebody.

And, why corruption, in my opinion, is inherent to such a system is because it appears exactly there, between that inability to have rule of law–and actually all my definitions of the political capitalism is really absence of rule of law, existence of laws, but absence of rule of law–and the need for discretionary decision-making.

Branko Milanovic: Absolutely. And, actually, the state would never relinquish that role, because that role is absolutely crucial if the state wants to impose decisions that it likes.

I also use examples of China. I use examples of Russia. You had people like, for example, Khodorkovsky, who are all oligarchs, like other oligarchs, but at some point they get in opposition to the current government; and of course then they get punished. If he had not done that, he would be prospering like other people who are in Russia or elsewhere making money.

So, you know, you know–always, the state needs to have that. And I think that’s inevitable. That’s actually not only inevitable, but it’s actually part of the setup of the system.

And, then, of course, you look at the data on corruption in China, which we now know have the Anti-corruption Campaign, and this is actually–the examples that I took were from the official publication where they detail the corruption and the cases they have actually sort of uncovered. And, these are really amazing things, like that story which says that they found so much bank notes in a guy’s basement that they brought, I think, a number of money-counting machines were actually burned down because, you know, they just couldn’t handle that many bank notes.

Branko Milanovic: Yes, a ton [crosstalk 00:14:24].

Branko Milanovic: Yeah, so these are really the official numbers. And, then the other sorts of data also for corruption is also official numbers because the Chinese published thousands of cases with the detailed information about how much money was apparently stolen, whether it was a criminal organization, an individual, how many years it lasted.

And, what is interesting there, and I divided them into three groups by the territorial level, so actually a low level is the county and the highest level is the province. And, what you find is that obviously embezzlement is higher, the higher is the level. Because, essentially, the functions at a high level give you greater advantage to embezzle. So, obviously, you’re not going to embezzle that much in a small village as you would embezzle in Shanghai.

But, what is also interesting: At each of those levels–the party positions and guys who were in the party positions versus the guys who were in the government position dealing with business and so on–party positions embezzled more. And, that also is indicative where the power is. Because again, if you have two guys who are maybe the same position, one is the government office and the other is the party office, then the party office gives you greater political and then economic power; and obviously then you’re able to actually make more money or to sell the positions for more money.

Branko Milanovic: No, but there, I would disagree with you because I think the comparison between the Soviet Union and China is quite inappropriate because China is a capitalist country. And, a capitalist country, as I was saying, actually corruption is endemic to the system. Coordination is decentralized. People make their own profit. You know. So all the things which didn’t exist in the Soviet Union, because in the Soviet Union, you had of course all nationalized–

Branko Milanovic: I think that actually, the corruption is so endemic and so in-built in the system that lots of decision-making requires sort of, you know, giving money in order that the decisions would be made in your favor.

Now, I’m thinking–let me just put it in general terms–I’m thinking that corruption, we are–how should I say–having too much of a moralistic attitude towards corruption.

[More to come, 42:49]