The Haves and the Have-Nots

My review of Branko Milanovic's book was published today in the Washington Independent Review of Books:

Just how rich is Mr. Darcy, the heartthrob of Jane Austen’s Pride and Prejudice? And how could it be that £200 a year was considered a fabulous income? Branko Milanovic playfully considers that situation and others like it in a thoughtful new book that comes to grips with a much weightier topic, involving one of the biggest issues of our time: the inequality of incomes.

Milanovic, the lead economist in the research division of the World Bank, has spent a career compiling and analyzing income data from every corner of the planet. Raised in a Communist economy, he is as comfortable citing Karl Marx as Milton Friedman. He’s also a renaissance man, widely read in many fields, especially literature. He distills his broad learning in a book that is lucid if not always easy, and, at 217 pages of text, is brief as advertised.

The Haves and the Have-Nots is also, as advertised, idiosyncratic. Sandwiched between three long essays that comprise the book are a number of entertaining vignettes that explore questions readers might not have thought to ask. Through his analysis, we come to understand, for example, just how wealthy Mr. Darcy is and, conversely, just how stark Elizabeth Bennet’s options are.

Similarly, Milanovic calculates the social advantage to Leo Tolstoy’s Anna Karenina in her marriage to the civil servant Alexei Karenin, and what falling in love with Count Vronsky means in economic terms. Milanovic looks at how rich the Roman aristocracy was, and mulls over the question of who was the richest person ever (hint: It was not John D. Rockefeller, Bill Gates or Carlos Slim). He even analyzes how open hiring of soccer players has concentrated talent in a handful of well-funded, European-based teams (think New York Yankees on a global scale).

The substance of the book is more difficult to understand but just as rewarding. Milanovic patiently tutors the reader in basic concepts necessary to understand why globalization has not led to a convergence of incomes, as classical economics had predicted, but in fact has increased the inequality between countries even as deregulation and free-market policies have widened the income gap in some rich countries such as the United States.

One of the greatest difficulties for any layman approaching economic issues is to understand the relative values of the numbers, and this is where Milanovic excels. How do the billions and trillions of today’s economies relate to the hundreds and thousands of yesteryear? What can you possibly make of the fact that in today’s world, the per capita income is $1,000 a year in some countries and $45,000 a year in others?

Milanovic’s insights come thick and fast. Asia and Latin America, economically, are mirror images of one another. Asia is a region where the inequality within countries is relatively narrow, whereas the inequality between different countries – say, Japan and Bangladesh – is wide. Conversely, in Latin America, the inequality between countries is narrow, but the gap within countries, such as Brazil, is wide.

As for the United States, Milanovic documents what we all know – that income inequality has increased dramatically in the past several decades and is now considerably higher than in the similarly prosperous countries of Western Europe.

Everyone from Robert Reich to Ben Bernanke has described this development as worrisome for its political and social consequences, but Milanovic keeps his focus on economics. For him, the fact that income inequality in the first part of this past decade reached levels not seen since the Roaring ’20s shows it is no coincidence that we experienced a major financial crisis in 2008, just as we did in 1929. The economic explanation, Milanovic says, lies in an excess of investable assets, which puts too much money in the hands of the wealthy, who then seek ever riskier investments to get adequate returns. Countries are better off economically when more of the income stays in the hands of middle-class families, who spend it on real things they need.

The first of Milanovic’s three essays, on inequality within a nation, especially demands a patient and motivated reader. But the rewards are commensurate. He traces the history of the study of inequality and elucidates the Gini coefficient, the main tool for measuring inequality within a country. The Gini coefficient demonstrates the rise in inequality in the United States, from 35 in the 1970s to above 40 now, compared with 30 in egalitarian Sweden.

In the second essay, Milanovic discusses inequality among nations. Here the key concept for comparing incomes is purchasing-power parity: What the local currency buys in real life, not the current exchange rate, is what determines its value and is the point of comparison.

The third essay looks at how these two different scales of inequality – within a nation and between nations–determine the inequality between individuals around the world. The author demonstrates that location – where you are born rather than into which class in that country – is the main factor in your rank on the global scale.

Milanovic’s brief and idiosyncratic little book provides quite an education. It gives the reader a new perspective and some useful tools for approaching issues of inequality. What it does not do is provide policy prescriptions, or even desirable objectives for national or international policy. Some of his geopolitical conclusions – that China is a world apart, and so far has not articulated a real economic theory for its own development; that Africa remains so poor that it has become a “fourth world” – are not as well founded as his economic arguments. For instance, what does China’s recent massive investment in energy and other natural resources in Africa, Australia and Latin America mean for economic development in all these regions? But that, as they say, is the subject of another book.