Introduction
In "The Haves and the Have-Nots," economist Branko Milanović takes readers on a journey through the complex world of global inequality. This book offers a comprehensive look at the various forms of inequality that exist in our world today, from individual income disparities within countries to the vast economic gaps between nations. Milanović's work is not just a dry academic treatise; it's an engaging exploration of how inequality shapes our lives and societies.
The author draws on his extensive research and expertise to present a nuanced understanding of inequality, its causes, and its consequences. He challenges some common assumptions about wealth distribution and offers fresh perspectives on how we can measure and address inequality on both national and global scales.
Key Ideas
The Evolution of Inequality Studies
Milanović begins by tracing the history of inequality studies, highlighting two key figures: Vilfredo Pareto and Simon Kuznets.
Pareto, an Italian economist from the early 1900s, was a pioneer in studying income distribution among individuals rather than social classes. He believed that social arrangements had little effect on income distribution, proposing the 80/20 law: 80% of an economy's effects come from 20% of the causes. This led him to conclude that inequality levels would remain largely unchanged regardless of societal structure.
However, Simon Kuznets challenged this view in 1955. He theorized that inequality among individuals does change as society evolves. Kuznets found that economic growth initially increases income inequality but later decreases it. This was evident in the shift from agricultural to industrial societies, where the new industrial class initially earned much more than farmers, increasing inequality. However, as societies advanced, factors like increased education and progressive state policies eventually led to a decrease in income inequality.
This shift in understanding marked a significant development in how we view inequality, recognizing that social arrangements and policies can indeed impact income distribution.
The Dual Nature of Inequality
Milanović presents inequality as a complex issue with both positive and negative aspects, likening it to cholesterol in the human body. He argues that some level of inequality can be beneficial for economic growth when it motivates people to work hard and pursue innovative ideas. In this sense, inequality can drive progress and development.
However, excessive inequality can be detrimental to society. When inequality creates a complacent population where only a small, wealthy group receives the best education and job opportunities, it stifles creativity and overall economic growth. This scenario limits the potential contributions of a large segment of the population, resulting in lower overall economic output.
The author also emphasizes the link between inequality and economic justice. When inequality stems from discriminatory practices based on race, gender, or inheritance, it's considered unjust, even if it doesn't negatively impact economic growth. This connection between inequality and justice often leads to social unrest and demands for change in societal structures.
Measuring Inequality: The Gini Coefficient
One of the challenges in addressing inequality is measuring it accurately. Milanović discusses the difficulties in quantifying income inequality, noting that comprehensive household income data has only been available since the 1950s in most developed countries, and even later for many developing nations.
The author introduces the Gini coefficient, developed by Italian economist Corrado Gini, as the most widely used method for measuring inequality. This coefficient ranges from 0 (perfect equality) to 1 (maximum inequality). The Gini coefficient allows for comparisons of inequality levels between countries and over time.
Using this measure, Milanović provides a global perspective on inequality:
- Latin America emerges as the most unequal region.
- Africa follows, then Asia.
- Rich and post-communist countries generally show lower levels of inequality.
- The most egalitarian countries, such as Nordic nations, have Gini scores between 0.25 and 0.3.
- The most unequal countries, like Brazil and South Africa, have Gini scores around 0.6.
This standardized measure allows for meaningful comparisons and helps policymakers and researchers track changes in inequality over time.
Comparing Inequality Across Time and Space
Milanović explains methods for comparing wealth and inequality across different eras and countries. One approach involves converting currencies into a standard unit called Purchase Power Parity (PPP), based on the US dollar. This allows for comparisons of purchasing power across different economies and time periods.
Another interesting method measures income by its ability to purchase human labor. Using this approach, the author notes that American industrialist John D. Rockefeller was the richest person ever, with his 1937 wealth equivalent to the labor of about 116,000 people – surpassing even modern billionaires like Bill Gates when adjusted for time and inflation.
These comparisons reveal interesting insights about global wealth distribution. For instance, half of the world's richest 1% consists of 29 million Americans, followed by smaller numbers from other developed nations. Notably, there are few representatives from Russia, Africa, India, or Eastern Europe in this top tier.
Socialism vs. Capitalism: The Equality Dilemma
Milanović delves into the historical comparison between socialist and capitalist systems in terms of equality. He confirms that socialist systems were indeed more egalitarian, with Gini scores in the upper 0.2 to lower 0.3 range, compared to capitalist countries' scores in the low to mid-0.3s.
The author attributes this greater equality in socialist systems to policies like the nationalization of large industries and land ownership. However, he also points out the significant drawbacks of these systems. The lack of incentives for hard work and creativity in socialist economies led to stagnation and a lack of innovation. Milanović notes that no socialist country ever produced an internationally successful product, highlighting the system's failure to foster growth and advancement.
Moreover, the author questions whether socialist systems truly achieved their egalitarian ideals, pointing out that corruption often led to wealth concentration among those at the top of the political hierarchy.
The Rise of Global Inequality
Milanović traces the emergence of significant inequality between countries to the Industrial Revolution. Before this period, while some inequality existed (e.g., the Roman Empire was richer than its neighbors), it was relatively limited as most nations operated at subsistence levels.
The Industrial Revolution created a stark divide between industrialized nations that could produce goods efficiently and those that lagged behind. This inequality continued to rise until the 1950s, saw a brief period of decrease, but has been on the rise again for the past 30 years.
The author introduces the concept of the Lucas Paradox to explain why this inequality persists. This paradox refers to the tendency of capital to circulate among rich countries rather than flowing from rich to poor countries as economic theory might suggest. Even in the age of globalization, both wealthy nations and rich individuals from poor countries tend to invest in developed economies to minimize financial risk.
Milanović illustrates this with the example of China, which in 2007 received foreign direct investment comparable to much smaller countries like the Netherlands, and significantly less than the United States. This pattern of investment perpetuates and exacerbates global inequality.
The Importance of Birth Place and Family Income
One of the most striking points Milanović makes is about the determinants of individual income in the global context. He argues that in today's world, inequality is primarily based on place of birth rather than class, as Karl Marx had posited in the 19th century.
The author states that more than 60% of the variability in global income can be attributed to one's country of birth. This means that being born in a wealthy country like the United States or France gives an individual a significant advantage over someone born in a developing country like Angola or Cambodia, regardless of their specific income class within their respective countries.
Milanović further notes that when combined with parents' income class, place of birth explains more than 80% of a person's income. The remaining 20% is influenced by factors such as gender, race, age, and individual effort.
This revelation challenges the notion of global meritocracy and highlights the profound impact of circumstances beyond an individual's control on their economic prospects.
Comparing Inequality: United States vs. European Union
Milanović offers an interesting comparison between inequality in the United States and the European Union. While both had similar Gini coefficients (just above 0.4) in 2007, the causes of inequality in these regions differ significantly.
In the United States, inequality is primarily driven by income disparities within the country, with rich and poor people dispersed throughout the nation. In contrast, the European Union's inequality is largely due to differences between member countries. The EU includes extremely wealthy nations like Luxembourg (with a GDP per capita over $70,000 PPP) and much poorer countries like Romania (with a GDP per capita of $10,000 PPP).
This comparison highlights how similar overall inequality measures can mask very different underlying structures and causes of inequality.
The Global Middle Class
The author provides insights into the concept of the global middle class, offering a new perspective on global inequality. He defines the middle class as those with incomes 25% above or below the national median income.
In most Latin American countries, only about 20% of the population fits this definition of middle class, while in developed countries, it's around 40%. However, when calculating for a global middle class, Milanović finds that most of this group resides in Asia (nearly 600 million people), with smaller numbers in Africa (100 million) and Latin America (90 million).
Strikingly, almost none of the global middle class comes from developed countries. This is because the upper-income boundary of the global middle class is lower than even the poverty threshold in rich countries. This observation underscores the vast economic disparities between developed and developing nations.
Final Thoughts
"The Haves and the Have-Nots" provides a comprehensive and nuanced look at global inequality. Branko Milanović's work challenges readers to think beyond simplistic notions of rich and poor, offering a more complex understanding of how inequality operates on individual, national, and global levels.
Key takeaways from the book include:
- The evolution of inequality studies, from Pareto's static view to Kuznets' dynamic understanding.
- The dual nature of inequality, which can both motivate economic growth and stifle it when excessive.
- The challenges in measuring inequality and the importance of tools like the Gini coefficient.
- The rise of global inequality following the Industrial Revolution and its persistence due to factors like the Lucas Paradox.
- The crucial role of birth place and family income in determining an individual's economic prospects.
- The different structures of inequality in the United States versus the European Union.
- The concept of a global middle class and its implications for understanding worldwide economic disparities.
Milanović's work emphasizes that while individual effort and talent play a role in economic success, systemic factors like place of birth and family background have an outsized impact on a person's economic opportunities. This understanding challenges notions of pure meritocracy and highlights the need for policies that address structural inequalities.
The book also underscores the complexity of addressing inequality. While some level of inequality can drive economic growth and innovation, excessive inequality can lead to social unrest and economic inefficiency. Finding the right balance is a challenge that policymakers and societies must grapple with.
Moreover, Milanović's analysis of global inequality patterns reveals the interconnectedness of the world economy and the persistent disparities between developed and developing nations. This global perspective is crucial for understanding and addressing inequality in an increasingly interconnected world.
In conclusion, "The Haves and the Have-Nots" provides readers with a rich, multifaceted understanding of inequality. It encourages us to think critically about the causes and consequences of economic disparities and challenges us to consider how we might work towards a more equitable global society. While the book doesn't offer simple solutions to the complex problem of inequality, it equips readers with the knowledge and perspectives needed to engage meaningfully with one of the most pressing issues of our time.