Two Types of Capitalism Are Competing With Each Other
The economic rebalancing of the world is not only geographical; it is also political. China’s economic success undermines the West’s claim that there is a necessary link between capitalism and liberal democracy. Indeed, this claim is being undermined in the West itself by populist and plutocratic challenges to liberal democracy. The rebalancing of the world brings the Asian experience to the forefront of thinking regarding economic development. Asia’s economic success will make its model more attractive to others and may inform our views about economic development and growth, in a fashion not dissimilar to that in which the B ritish experience and Adam Smith, who drew on that experience, influenced our thinking during the past two centuries.
The above graph shows how global inequality increased almost continuously from 1820 to the eve of World War I, rising from 55 Gini points.
With the US and China, Two Types of Capitalism Are Competing With Each Other
By: Branko Milanovic – The Graduate Center, CUNY
Human capital the predominant source wealth
Smith and al. used de-identified U.S. tax records, including novel linked firm-owner-worker data to examine whether the idle rich replaced the working rich at the top of the U.S. income distribution. They found that top earners are predominantly working rich rather than idle rich, and that the majority of top income accrues to the human capital of these wage earners and entrepreneurs. In particular:
- In 2014, over 69% of the top 1% and over 84% of the top 0.1% earn some pass-through business income. In absolute terms, that amounts to over 1.1M pass-through owners with fiscal income over $390K and 140,000 pass-through owners with fiscal income over $1.6M.;
- In both number and aggregate income, these groups far surpass that of top public company executives, who have been the focus of much inequality commentary;
- Controlling for parents’ wealth, they find that more than 75% of top earners in the parent-linked sample are self-made.
Capitalists in the Twenty-First Century
Authors: Matthew Smith, Danny Yagan, Owen M. Zidar, and Eric Zwick
From: U.S. Department of the Treasury, Princeton University, University of California, Berkeley, University of Chicago
