Thomas Piketty’s New Book Brings Political Economy Back to Its Sources — Branko Milanovic

In the same way that Capital in the Twenty-First Century transformed the way economists look at inequality, Piketty’s new book Capital and Ideology will transform the way political scientists look at their own field.

ProMarket — The blog of the Stigler Center at the University of Chicago Booth School of Business
Thomas Piketty’s New Book Brings Political Economy Back to Its Sources

Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace

Daniel Luban — The Elusive Karl Polanyi

Karl Polanyi had thought of calling his magnum opus Origins of the Cataclysm, or The Liberal Utopia, or Freedom from Economics. His publisher, worried about the book’s marketability, instead gave it the title by which it eventually became famous: The Great Transformation. It was an ambiguous phrase. Readers might imagine that “the great transformation” refers to the history the book traces: the imposition, equally utopian and violent, of the market economy upon a recalcitrant society, spreading from England to encompass the globe and ultimately bringing on the collapse of world order in the twentieth century. But for Polanyi the great transformation lay not in the past but in the future. It referred not to the coming of market liberalism but of socialism, understood as “the tendency inherent in an industrial civilization to transcend the self-regulating market by consciously subordinating it to a democratic society.” And this transformation would be the culmination of the dynamic that he famously called the “double movement,” in which the ravages of the market inevitably lead society to “protect itself” against depredation....

Dissent — Spring 2017
The Elusive Karl Polanyi

Daniel Luban, postdoctoral associate in the humanities at Yale University

ht David Fields at Radical Political Economy

Yuriy Gorodnichenko and Gérard Roland — The role of culture on democratisation

Heresy! Economics professors bringing in sociology. The horror of it. Who knows where this could lead. And look where it led Kenneth Boulding, who left economics to participate in the development of general systems theory.

Social science studies usually explain democratisation of countries with the increase in incomes. In contrast, this column argues that culture is a neglected but important determinant of democracy. The findings show that countries with individualist culture democratise earlier than collectivist cultures that may remain stuck for a long time with relatively efficient autocracies.....

We compare decisions of collective action under an individualistic culture, giving social status reward to standing out and innovativeness, and a collectivist culture emphasising conformity and embeddedness in large groups (tribes, clans).

• Individualistic culture tends to create a demand for democracy, as individual freedom is fundamental for self-achievement. Equality before the law and limited government provided under democracy help protect individual freedom.
• Collectivist culture instead focuses more on the necessity of a benevolent ruler to create stability between different clans and groups. The emphasis is more on hierarchy and order, and freedom can be seen as endangering stability.

As I have mentioned previously, the categories of the vertical axis of the Political Compass would be more accurately labeled "law & order" at the pole now labeled "authoritarian" and "freedom" for the pole now labeled "libertarian."

Because of these cultural differences, when there is a window of opportunity for collective action in an individualistic society, however infrequent, revolt against autocracy will always occur, independent of the quality of autocracy, and will lead to democracy. In contrast, in a collectivist society revolts against good autocrats will be rarer. Windows of collective action will thus lead either to democracy or to the establishment of a higher quality autocracy. Collectivist societies may thus remain ‘stuck’ with a relatively high quality autocracy. In the long run, individualist societies will thus end up with a democratic regime, whereas collectivist societies will end up either with democracy or with a high quality autocracy. The implication is that individualist societies will end up more often having democratic regimes than collectivist societies, even if collective action occurs less often than in collectivist societies that might be better in coordinating collective action.

The problem with this analysis is cognitive bias toward individualism and therefore "democracy." The authors focus too much on the poles and thereby creating an excluded middle range that include most political systems today. There is no government on earth today that is a true democracy as a government of the people, by the people and for the people. However, there are still some absolute (despotic and nepotistic) autocracies like Saudi Arabia. The so-called democracies are republics that are actually oligarchic plutocracies. What the authors call "democracy" is actually plutonomy, or as US founding father John Jay, the first chief justice of the US Supreme Court, is reputed to have said, "Those who own the country should govern the country." This was largely the view of the other founding fathers and the US Constitution as well as the discussion around it reflect this bias.

Another matter that the authors overlook is the fact that freedom assume security, whereas security can exist independently of freedom. Therefore, individualism alone is not a sufficient condition for democracy.

Again, societies rarely have become successfully democratic in other than a minimal way of holding period elections without the development of institutions that support law and order in a democratic society. The United States was an anomaly in that it was a new nation, on one hand, and secondly, most of the people involved at the beginning were British. Britain has a long history of power gradually being devolved from the crown to powerful feudal lords, beginning with the Magna Carta, and then from the landed aristocracy to include an upper class of landed gentry under the manor system and then the owners of capital. As result institutions were already either in place or patterns available for adoption by the new government. Imposing democracy on countries without such an institutional heritage and developmental process has generally not worked as well as hoped for.

My conclusion is that since the authors are economists, they have a strong cognitive bias toward methodological individualism that has shaped their thinking on this matter. They need to think it through more deeply. Culture has many more factors that individualism and collectivism, and even though terms are biased in that they carry a connotative charge instead of being purely denotative. Conversely, some sociologists who do not operate under the cognitive-affective bias of individualism might see what the authors call "collectivism" as "tribalism," which implies a strong emphasis on social fabric and social capital, whereas "individualism" implies a weak emphasis on social fabric and social capital. Psychologists might see he individualism of homo economicus as implying alienation and detachment, and the holism of homo socialis as implying adjustment and connectedness.

Interestingly, the only real democracy was evidenced by so-called primitive people. Even Athens, the so-called cradle of democracy, was based on a slave economy that gave the Athenian (male) citizens the leisure to debate the issues. Some time ago, I saw a documentary of a tribe of about two hundred people in Panama that made decisions collectively by consensus sitting in a circle with all members of the tribe, even very young children. Everyone had their turn and the youngest children, who obviously didn't know what was going on yet, were encouraged to say something, which everyone listened to intently, too. As far as I know, the closest we got in the US  was the New England town meeting.

But I am glad to see economists venturing off the reservation.

vox.eu

The role of culture on democratisation

Yuriy Gorodnichenko, Associate Professor in the Department of Economics, University of California – Berkeley, and Gérard Roland, E. Morris Cox Professor of Economics and Professor of Political Science, University of California, Berkeley; and CEPR Research Fellow

Jeffrey A. Winters — Oligarchy and Democracy

Weekend must-read. Detailed analysis. Here are a few of the high points. I highly recommend reading the whole article through, even though it is detailed and longish. It's the basis for understanding what's happening, and it dovetails with the post on economics and law posted previously. This issue extends far beyond economics and shows how and why the conventional approach to economics not only cannot deal with it but is designed not to deal with it.

Democratic institutions aren't sufficient in themselves to keep the wealthy few from concentrating political power….
The complex truth, however, is that the American political economy is both an oligarchy and a democracy; the challenge is to understand how these two political forms can coexist in a single system. Sorting out this duality begins with a recognition of the different kinds of power involved in each realm. Oligarchy rests on the concentration of material power, democracy on the dispersion of non-material power. The American system, like many others, pits a few with money power against the many with participation power. The chronic problem is not just that electoral democracy provides few constraints on the power of oligarchs in general, but that American democracy is by design particularly responsive to the power of money…. 

The founding fathers made sure of that in the structure of representative government, and the rise of the two-party system cemented it. The triumph of Hamiltonian centralization over Jeffersonian decentralization also contributed to the concentration of the power of wealth in US politics.

Oligarchy should be understood as the politics of wealth defense, which has evolved in important ways throughout human civilization. For most of history, this has meant oligarchs were focused on defending their claims to property. They did so by arming themselves or by ruling directly and jointly over armed forces they assembled and funded. Every great increase in wealth required oligarchs to spend additional resources on armaments, castles, militias and other means of defense. The greatest transformation in the politics of wealth defense and thus of oligarchy came with the rise of the modern state. 

Through its impersonal system of laws, the armed modern state converted individual oligarchic property claims into secure societal property rights. In exchange, oligarchs disarmed and submitted to the same protective legal infrastructure that applied to all citizens (in theory if not always in practice). Property rights offered reliable safeguards not only against potential antagonists without property, but also, no less important, against other oligarchs and the armed state itself that administered the entire arrangement. 

This new formula for political economy had several major consequences. One was that it created the mistaken impression that there were no longer any oligarchs, only wealthy people with no shared political motivation; yet this illusion is proved false every time states in the modern era fail to protect property and wealthy people re-arm or hire private militias once again to do the oligarchic job themselves. Another consequence is that the transformation shifted rather than fully solved the broader problem of wealth defense for contemporary oligarchs. The legal state made property inviolable, but in many cases it also aggressively targeted income and, occasionally, wealth via taxation. This was “taking” of a different kind. 

Indeed, progressive taxation is the unique challenge to oligarchs in democratic states. Heavier tax burdens on those most able to pay can theoretically retard the pace at which the rich enlarge their estates, and in extreme cases could even redistribute wealth downward. The story of oligarchy in America has unfolded as a titanic battle over wealth defense as oligarchs have sought to deflect tax burdens onto others in society. With tens of billions of dollars at stake annually, the struggle is politically charged for a small number of ultra-wealthy Americans. While its intensity has ebbed and flowed throughout American history, it is a battle oligarchs have been winning handily for the past several decades. Again, the question is why. 

Excellent analysis follows about the intersection of economics and politics, that is, wealth and power, in a liberal society.

Interestingly, the analysis supports Thomas Piketty's claims that the Kuznets curve is a historical anomaly rather than the new normal as supposed.

Over the course of the 20th century, two wrenching things happened within American democracy and oligarchy that together constitute the Great American Inversion. First, early in the century, steep new income taxes were imposed exclusively on the rich. By the end of the century, these same tax burdens had been shifted from the richest Americans to the various strata below them. 

Second and related, there was a sharp reversal of economic momentum for average Americans and the rich. The average income of working-class Americans around 1920 doubled in real terms by 1955 and tripled by 1970. A growing American middle class was taking an ever-larger share of an expanding economic pie. Although the chasm separating the rich from the rest remained huge, ordinary citizens were closing the gap at a remarkable pace. But then this process stopped. In the four decades since 1970, there has been almost no improvement on average for the lower 90 percent of American households. Although the U.S. economy continued to grow, income stopped growing for average citizens. Adjusted for inflation, average household incomes in 2010 were almost exactly what they had been forty years earlier. They peaked and stopped in 1970 at “triple 1920.” Growth America became stagnation America. 

The story was much different for America’s oligarchs. At first their wealth shot up significantly during the 1920s. They were also busy in that decade trying to roll back or deflect the new taxes aimed at them. But then the Crash of 1929 hit them in the solar plexus. It is not that oligarchs went to the poorhouse like almost everyone else. The rich still enjoyed very luxurious lives, but their real gains across the next several decades were very modest. One instructive thing about this period of history is that oligarchic influence was weaker during deep political-economic crises and wars than it was during the “politics of the ordinary” between crises. It took decades after 1945 to reverse the relative leveling effects of the Crash, the New Deal and the embryonic welfare state of the Great Society. 

During the long arc from 1920 to 1970, the top 1 percent of American families moved up at barely half the pace of the average household. The very richest families (the top 0.1 percent and 0.01 percent) were having a hard time grabbing a larger share of the growing income pie for themselves. By 1955, the real incomes of these two top strata were actually 20 percent lower than their 1915-–20 level. It was not until 1970 that the ultra-rich were earning roughly the same real incomes they had enjoyed half a century earlier. 

And then, as suddenly as the improvements had come for mainstream society, the new bonanza for the ultra-rich commenced. The decade from 1970–80 was the turning point in the Great American Inversion. This is when the boom for the average household turned to bust and the rich soared after decades of treading water. It is as if a big pause button had been hit in 1970 for the bottom 90 percent at the same moment the fast-forward button clicked on for oligarchs. The cumulative effect was breathtaking. By 1990, real incomes for the top 1 percent exceeded the 1920 level threefold and continued to rise thereafter, while those of the majority did not budge. Reversing the pattern of previous decades, the richer you were, the faster gains accrued. It did not matter if Democrats or Republicans were in charge of the White House or Congress. By 2007, the top 1 percent of households had almost five times the real income they had in 1920; the top 0.1 percent had around six times, and the top 0.01 percent were awash in nearly ten times the real income they had enjoyed nine decades earlier. The tables had turned.

Why? In large part owing to class structure and power.

Many analysts have pointed out the role of globalization, higher international capital mobility and the related decline of unions in causing this reversal of fortunes. What has gone largely unnoticed is the compounding effect on these trends due to the increasingly aggressive strategies of wealth defense on the part of oligarchs. As the United States was becoming a tiger economy exclusively for the rich, tax burdens on American oligarchs grew lighter by the decade. Meanwhile, tax burdens on the strata below grew more regressive as average Americans went from seeing rapid gains to being mired in economic molasses and rising debt.…

It is impossible to make sense of these transformations without understanding how oligarchic power operates within American democracy.

It is not just political power that has been operative but "going Galt" and refusing to participate, daring government to prosecute "wealth defense" through tax evasion avoidance, and now we see also through massive fraud. It also explains the depredation of the middle class the tax burden was shifted down to those affluent enough to pay, but unable to compete with the power of wealth at the to and sophisticated approaches to wealth defense.

The income defense industry is comprised of lawyers, accountants, wealth management consultants, revolving-door lobbyists, think-tank debate framers and even key segments of the insurance industry whose sole purpose is income defense for America’s oligarchs. The industry is wholly funded by oligarchs, and it would simply not exist if oligarchs did not have massive fortunes to defend. There is no parallel (much less countervailing) industry serving the material interests of the mass affluent, the middle class or the poor. The activities of the income defense industry extend far beyond mere “interest group” lobbying over policies. Its salaried specialists assist oligarchs in exerting a form of power that is unique to the ultra-rich: the defensive redeployment of their money and income across a global geography of jurisdictions, banks and offshore havens through the use of tailor-made tax instruments, evasive trusts and shell corporations…

The most strategic theater is taxes, with combat conducted on two fronts. The first is the effort to lower the published top tax rate as much as possible and also to set the income threshold for the top bracket low enough that large numbers of relatively modest income earners feel the oligarchs’ pain. The second front is making the spread between the published tax rate and actual (or “effective”) taxes paid as wide as possible. This is one of the most important and costly fights the income defense industry wages on behalf of its oligarchic patrons. In the 1970s, oligarchs paid an average effective tax rate of about 55 percent, which was almost 80 percent of the top published rate. By 2007, the top 400 income earners in America paid an effective tax rate of 16.5 percent, which was barely 50 percent of the top published rate. Thus, the [income defense] industry delivered lower tax rates on which oligarchs paid a lower proportion. The richer the client, the wider the income defense spread achieved.…

The upshot.

The income defense industry, attached symbiotically to the nation’s richest citizens, has fortified the material power and influence of oligarchs. It has enabled them to fight much more tenaciously even in the face of deep crises that, in earlier decades, delivered serious setbacks to their broader wealth defense agenda. Although oligarchs still operate mostly atomistically, their common deployment of a highly networked and organized industry lends their actions an unprecedented degree of unity. Combined with weakened unions and considerably less political unity among average citizens, America’s oligarchs are arguably more powerful today than during the robber baron era at the turn of the 19th century.

Where conventional economics fails.

"America does not have oligarchs, it has rich people", declared one of my seminar students at Northwestern University. This could only be true if wealth were somehow stripped of its inherent political potency. Whatever else American democracy has achieved, it has not managed this. Rather, oligarchy and democracy operate within a single system, and American politics is a daily display of their interplay.

So is economics.

The conclusion.

Universal suffrage and liberal freedoms empower all citizens in a radically equal manner. But the one-person/one-vote principle does little to prevent oligarchs from exercising the power of money in a manner that is profoundly unequal. Formal juridical equality is essential to human freedom. But full political equality, even in the most liberal democracy, is impossible as long as concentrated wealth places grossly unequal political influence in the hands of a few citizens. Democracy fused with oligarchy is certainly better than no democracy at all. But there should be no illusions that it is anything other than a partial step toward full political equality and representation.

The American Interest
Oligarchy and Democracy

Jeffrey A. Winters | Professor of Political Science at Northwestern University