Douglas McWilliams - The Inequality Paradox: How Capitalism Can Work for Everyone

This edition first published in hardcover in the United States in 2018 by
The Overlook Press, an imprint of ABRAMS

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Copyright 2018 by Douglas McWilliams

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system now known or to be invented, without permission in writing from the publisher, except by a reviewer who wishes to quote brief passages in connection with a review written for inclusion in a magazine, newspaper, or broadcast.

ISBN 978-1-4683-1669-8

with 13 tables and 15 charts and graphs

I n his book Capital in the Twenty-First Century, economist Thomas Pikkety argued that the contemporary phenomenon of rising inequality across the globe is a function of the inheritance of capital, which, over generations, accrues in the hands of a concentrated patrimonial elite. It was an elegant, simple idea that also posed a clear antagonist: the super rich and the policymakers, who would keep the wealth in their hands.

The reality is more complicated. In The Inequality Paradox, the groundbreaking and timely challenge to dominant theories on global inequality, leading economist Douglas McWilliams argues that inequality is largely driven not by a conspiracy of the rich, as Thomas Piketty suggests, but by technology and globalization that have led to the paradox of rising inequality even as worldwide poverty drops.

But what are the implications of this seeming contradiction, and what ultimately drives the global distribution of wealth? Drawing on the latest research, McWilliams investigates how wealth is concentrated and why it remains in the hands of very few. In accessible and thought-provoking prose, McWilliams poses a comprehensive theory on why capitalism has not met its match in the form of increasingly disparate income distribution, but warns of the coming wave of technological developmentthe fourth industrial revolutionthat threatens to create a scarcity of unskilled jobs that will lead to even greater inequality.

From the inquisitive layperson to the professional economist or policymaker, this book is essential reading for understanding the global economy in its present state, and indispensable in preparing for the imminent economic challenges of our changing world.

The Flat White Economy

To Andrew Richardson and to all those who have
helped me while I have been writing this book

O THER THAN BEING BORN WHITE , MALE AND S COTTISH AND HAVING wonderful loving parents who did everything possible to stimulate my mind as a kid and who sent me to great schools and a super university, I have had two especially lucky breaks which have done much to influence me as an economist.

I was fortunate enough to get a job as Chief Economist of IBM UK in the mid-1980s. This gave me a chance to see how technology was changing the world at a pace that people outside the industry could hardly imagine. Even now, I find those outside the tech industries and especially those outside the commercial sphere can find it hard to keep up with the pace of change in the key technological sectors and see how they alter economic relationships.

What I learned about this helped me immensely with my last book, The Flat White Economy. This describes the cluster of companies that has resulted from the tech sector merging with the creative sector to develop a brand-new economy which now accounts for a whole tenth of UK GDP. It really is important to understand this new economy which works on slightly different rules and, as often happens with emerging (and also intangible) sectors, is badly described in economic measurements in most countries.

But even more important than learning about tech was my good luck in being brought up as an expatriate in both pre-independence Malaya and then emerging Malaysia. I cant defend much that the British did as colonialists, though they did good as well as bad. Malaysians are remarkably tolerant of the former colonials, given what happened in the pre-independence era. But being brought up in a fast-developing economy meant that I was lucky enough to see how economic development takes place at firsthand.

When

What actually worked in the Far East was a bit different. The state was heavily involved in providing basic services, sanitation, law and order, health, transport infrastructure and most especially education, but the business investment was carried out by the private sector, with external investors, attracted by tax-free zones and cheap labour, providing capital, expertise and access to export markets. (Chapter 5 describes this period in more detail.)

This mixed model of development worked dramatically well from the mid-1960s in Singapore, Hong Kong, Korea and Taiwan, followed by Thailand and Malaysia, and then about 15 years later in many other parts of the world, including of course China and India. It is important to note, however, that the world is changing and the next phase of development for many emerging economies is likely to be based on a different model, with proportionately more internal and public consumption and less reliance on external investment and exports.

Some have claimed that this success in economic development in the Far East was proof of the triumph of capitalism. My take is more nuanced. Capitalism was certainly involved but could never have succeeded on its own had governments not also helped. I would call the Asian success the triumph of a mixed model, neither exclusively capitalist nor exclusively state-driven. It is worth noting that there are different Asian models, though they tend (when compared with approaches in the West) to have substantial similarities. Hong Kong has been the most free market, China the most interventionist and state-driven. All depend on an entrepreneurialism that fortunately had not been stamped out by either colonialism or communism.

I also concluded that the development of the Asian economies was going to be the driving force behind the world economy in the latter part of the 20th century and much of the 21st. And so it has proved to be.

Some of the most heated debates I have had while writing this book have been with people who still think that the world remains driven by the West alone. The statistics would have supported them in 2000 when so-called developing economies accounted for only 24% of the world ) the share is now 46% and set to rise to 56% by 2032.

Even while the share is below half, it is normally the case in any market that the most dynamic and disruptive forces tend to set the terms of trade. It is the East that is driving what happens in the West today and arguably has been doing so for the better part of half a century.

My impression is that this is well understood in Europe but that the rise of the Asian economies is often seen as more of a threat than an opportunity in the US. World economic development was essentially driven by the Western world for most of the past five centuries, whereas now the baton has been partly passed to the newly rapidly industrialising economies in the East. These Eastern economies are growing in real terms at 4-8% per annum while even the most buoyant Western economies are growing no faster than 3%.