Why “Make America Denmark Again” Will Not Happen

Branko Milanovic:

Why “Make America Denmark Again” will not happen: The rise of inequality in rich countries is way over-explained. Because income inequality (evaluated at the level of households or individuals) is such a complex variable, the outcome of a vast number of technological, political,  demographic and behavioral factors and its neat decomposition into these various factors is impossible, we shall always have a plethora of potential explanations. This way a point nicety raised in a recent post by Chico Ferreira from the World Bank.

But not all explanations are equally powerful or make sense. A couple of days ago at a conference at Northwestern University, I listened to the explanation proposed by Gerald Davis from University of Michigan. Davis argued … that the rise of US inequality coincides with the decline of large companies that used to employ hundreds of thousands or even millions of workers and by their substitution by much smaller companies. … His argument is that large hierarchical structures have to engage in some evening out of salaries (internal redistribution) in order to keep cooperation, needed for the success of the enterprise, going.

I think that the deconcentration of which Davis  writes is only a proximate cause of the rise in inequality. The “deep cause” was technological change, combined in an inextricable way (as I argue in my “Global inequality”) with globalization. What happened, I think , was that advances in technology such as stock management (just-in-time), ability of speedy “bespoke” production, and crucially advances in telecommunications made “broken up” (devolved) production more efficient. The concentration of workers in one place that, at the origin of the Industrial Revolution, was made indispensable by the importance of the energy sources available at discrete physical points, could now be reversed. We could go back to a type of production that predates the Industrial Revolution, a kind of a modernized “putting out” system.

In doing so companies were helped by globalization because the area over which the putting out system can now extend was the globe itself, not only villages 10 miles in perimeter from Manchester.  …

My view is indeed one that may be called “technological determinism”, but that determinism is playing itself out on an ever expanding field made possible by globalization.  In other words, technological determinism is itself a function of globalization … and technological determinism in turns helps globalization. So the two go together. Moreover even things that seem to be policy-related (say, decline of trade unions) may in many instances be driven by the combination of new technology and globalization.

It is for that reason that I am skeptical that “the happy days of the 1960s” will ever come back. This is the idea that  I somewhat jokingly called “Make America Denmark  Again”. That world made sense with the technology and the policy as it was in the 1960s but not today. The world of large-scale manufacturing, homogeneous working class, trade unions, capital controls and a quasi-closed economy (US exports and imports combined were less than 10 percent of American GDP in the 1960s; they are more than 30 percent today) is over. When we think of how to address inequality today we should move from the ideas that worked half-a-century ago.