The Leninist Theory of the First World War

12 12 2017

Did increasing inequality in the capitalist powers cause the First World War? That was the argument the Lenin famously advanced in Imperialism: the Highest Stage of Capitalism. Subsequent academic research has not been kind to the Leninist theory that greedy bankers pushed their respective governments to war in the summer of 1914. Painstaking archival research by fellow business historians helped to show that pretty much the exact opposite was closer to the truth– the bankers, far from wanting war, sought to restrain bellicose governments — for a survey of this literature, see Jonathan Kirshner, Appeasing bankers: Financial caution on the road to war. Princeton University Press, 2007.

Since I tend to believe in Capitalist Peace Theory and have applied in my business-historical research on Anglo-American relations in the 1860s, I am generally inclined to accept the view that Kirschner’s theory is much more accurate than the Leninist one.  However, I have approached the newly-released working paper by Thomas Hauner, Branko Milanovic, and Suresh Naidu on the origins of the First World War with an open mind. Their paper, Inequality, Foreign Investment, and Imperialism, revives a modified form of the Lenininst theory of the origins of the war. The paper expands upon a short comment that Branko Milanovic made in his justly famous book on trends in global inequality, where he had suggested that rising inequality c. 1900 had caused the First World War.  In that book, Milanovic wrote:


I argue that the outbreak of World War I and thus the reduction of inequality subsequent to that war are to be “endogenized” in the economic conditions predating the war, by which I mean that domestic inequalities played an important role in the run-up to the war. In making this argument I go back to an older, and in my opinion, most persuasive, interpretation of the outbreak of World War I. According to this interpretation the war was caused by imperialist competition, embedded in the domestic economic conditions of the time: very high income and wealth inequality, high savings of the upper classes, insufficient domestic aggregate demand, and the need of capitalists to find profitable uses for surplus savings outside their own country.

Here is the Abstract of the new paper:

We present an empirical restatement of the classical economic theory of imperialism and
the origins of World War I. Using recent data, we show 1) inequality was at historical highs in all the advanced belligerent countries at the turn of the century, 2) rich wealth holders invested more of their assets abroad, 3) risk-adjusted foreign returns were higher than riskadjusted domestic returns, 4) establishing direct political control decreased the riskiness of foreign assets, 5) increased inequality was associated with higher share of foreign assets in GDP, and 6) increased share of foreign assets was correlated with higher levels of military mobilization. Together, these facts suggest that the classic theory of imperialism may have some empirical support.

My reaction to the paper is that it contains a great deal of evidence of correlation without much proof of causation. I think that a mixed methods paper that included qualitative material taken from the archives of Europe’s largest banks and its foreign ministries might have produced a more convincing case for the author’s thesis.

On more theoretical grounds, I’m not at all convinced that so-called “surplus savings” and capital exports are associated with colonialism, militarism, and imperialism? In the 1980s and 1990s, Japan, which was then a famously pacific country with strict constitutional limits of military expenditure, exported lots of capital to the USA. These capital exports were due, ultimately, by the thrifty nature of many Japanese housewives. Was Japan militarist then? Or did it just focus on exports cars and VCRs? The United States of the Trump era, is a net capital importer and the adults in the room in the Oval Office know that much of this money is coming from China. In the nineteenth century, Spain, Portugal, Turkey,  and, famously, Russia, were all capital importers. (I will concede that Russia’s close ties to the Paris Bourse, and thus the savings of many French families, did indeed influence diplomacy in the years leading up to assasination of the Archduke).

I’m certainly not denying that too much economic inequality, particular economic inequality of the source type documented in  the new book by Lindsey and Teles on The Captured Economy can indeed be a very bad thing. Rising inequality can be linked to many objectively bad phenomena. However, I don’t think it is fair to associate market-created economic inequality with the chain of events that led to the First World War. Indeed, while many of the named individuals whose decisions collectively led to the First World War were indeed very wealthy and certainly within the top 1% of their societies, few of them enjoyed wealth that stemmed from the operation of the market economy. They were hereditary aristocrats, not LeBron James or Bill Gates.


Are Stagnating Living Standards in the US the Worst Thing in the World?

9 02 2017


It is rare moment when I disagree with the great economic historian Adam Tooze, the author of such magisterial works as Wages of Destruction: The Making and Breaking of the Nazi Economy. Any academic who critiques such a formidable intellectual is skating on thin ice. However, I really need to dissent from something he has just said. In a thoughtful blog post on some newly published data on inequality in the United States, Adam Tooze opined that

The fact that pre-tax incomes for the least favored half of American’s citizens have not risen, but have fallen slightly over the last forty years ought to be a show stopper. Literally, all other policy discourse should surely cease.

Tooze is right to argue that the accumulating evidence that the living standard of the median American is stagnating, or at least growing at a much slower rate than it did in the long boom following 1945. He is also probably correct to link this phenomenon to rising inequality and to the post-1980 decoupling of median incomes and productivity growth (see image below, which is taken from the June 2015 issue of the HBR). I agree with Tooze that figuring out how to start increasing median living standards in the US and other advanced economies is a central challenge facing our generation.




I do not, however, agree that stagnating US living standards is a policy issue of such overwhelming importance that all other US policy discussions– ranging for marijuana legalization to police brutality towards Blacks to climate change to refugee policy should stop. Even during the Second World War, when Britain faced an existential threat, discussions of non-war policy questions continued– the famous Butler Act was passed in 1944, reshaping the education system. Is it really the case that stagnating living standards are such an emergency issue that all other policy questions should be put on the backburner until it is resolved by the leadership of the US? It is indeed unfortunate that the growth of living standards has, by many metrics, slowed down.  However, I would reject the view that it is a show-stopper that requires us to stop talking about all other issues.  Particularly when viewed from the standpoint of cosmopolitan prioritarianism, it is easy to see that stagnating median living standards in the US aren’t the worst problem in the world. I would say that malnutrition in sub-Saharan Africa is actually a worse problem.

Chrystia Freeland on Inequality

5 11 2015

Canada’s new minister of International Trade is Chrystia Freeland, a Harvard and Oxford graduate, former Bloomberg executive, and author. (see here) In 2013 she gave a TED talk in Scotland based on her book on increasing inequality, The talk is nuanced, thoughtful, and contains some insights that people across the political spectrum will agree with. Note how Freeland offers olive branches to both the Tea Party and Occupy Wall Street here.  Freeland distinguishes the various causes (technological and political) of rising (within-country) inequality.  She is obviously a superb communicator and is capable of explaining complex trends to a mass audience. Much like the book on which it is based, the talk is long on diagnosis/description and short on cure/prescription: Freeland does a great job of explaining why rising inequality is a problem and what is causing it but the talk sort of trails off when it comes to proposing solutions. In fact, her talk doesn’t really offer any practical solutions aside from calling for some sort of “New New Deal.” Her talk, and the book it is based on, are therefore reminiscent of the more famous work on inequality by Thomas Piketty, which presents tonnes of evidence about rising inequality and then devotes just a few pages to proposing a solution that isn’t terribly practical.

In any event, her TED talk is worth watching, as are the two following videos, which show, respectively, Freeland’s conversation with her friend Larry Summers at Rotman (very serious) and Freeland’s 2014 appearance on the Bill Maher Show (funny).

This Week’s EconTalk Episode: Piketty

22 09 2014

Thomas Piketty of the Paris School of Economics and author of Capital in the Twenty-First Century talks to Econtalk hostRuss Roberts about the book. The conversation covers some of the key empirical findings of the book along with a discussion of their significance.

Listen to the podcast here.

Mr. President, Please Meet Professor Clark

30 01 2014

In his State of the Union Address, President Obama vowed to do more to fight the growing gap between rich and poor and falling rates of social mobility. There is, of course, abundant evidence that the gap between rich and poor is widening in the United States, that inequality is more pronounced in that country than in other advanced economies, and that it is harder in the US for someone with poor parents to achieve social mobility that for poor children in other advanced economies. Inequality has been a hot issue ever since the rise of Occupy Wall Street.

With exquisite timing, the economic historian Greg Clark has published a book showing that social mobility is very limited even in the most redistributive welfare states. By searching for rare surnames in historic census and tax data in a variety of countries, Clark has been able to compare the rates of social mobility. He found that even in Sweden, most families have achieved little social mobility over the last few hundred years. People with noble surnames in Sweden still earn significantly more than the people with the most common surname (Andersson) despite economic upheavals such as war, rapid industrialization, and the emergence of a welfare state supported by high inheritance and income taxes.

The really interesting data in Clark’s book relates to China, which has seen a massive change in its social system since the Manchu dynasty was overthrown in 1911. After the Communist takeover of China, people of noble and merchant ancestry were frequently subjected to discrimination and even persecution that sometimes led to execution. There was a form of affirmative action for the children of peasants and workers. Despite this radical social engineering, people in noble and other pre-1911 upper class surnames tend to be wealthier than other Chinese. They have come out on top. There are, as of yet, no clear explanations for why inter-generational inequality persists despite huge changes in the social order and the outright confiscation of property.

It’s nice to see that the most economically and historically literate journalists have sought out Professor Clark. Matt Yglesias reported on Clark’s findings. Dylan Matthews of the Washington Post did a great interview with Greg Clark, which you can read online here. In the course of the interview, Clark said this about Sweden:

And that’s where Sweden’s system does provide advantages over the U.S.’s. They haven’t changed mobility rates, but they’ve changed the consequences, strongly, of ending up at various points in the distribution. It’s a much better place for people who end up at the bottom of the distribution.

P.S. There is some interesting data showing that the rate of social mobility varies considerably between US counties. As you would expect, the old slave states have low social mobility but some of the other findings shown on this map are harder to explain.

A Curiously Ahistorical Viral Video on Inequality

10 03 2013

In the last few days, a short video on income inequality in the United States has gone viral. The video clip is based on research by HBS Professor Michael Norton, who did a survey asking Americans what they thought the ideal distribution of wealth in the United States ought to be. Essentially, the asked participants how much of the national wealth should each quintile of the US population control (i.e., the top 20%, the bottom 20%, the middle 20% slices). Norton then compared these numbers with the actual degree of inequality. The results were shown in the video.

I believe that rising inequality is a problem. I believe that there is a lot that governments can do to combat this trend. I think that President Obama is absolutely right to ask Congress to increase taxes on the wealthy. However, I would question Norton’s methodology, which involved asking average Americans to pick a number out of the air to describe the degree of income equality that thought was ideal.

I find this video to be even more problematic.

This video is essentially ahistorical and says almost nothing about whether inequality has increased over time. (There is a brief reference to the fact inequality has increased since the 1970s but that’s it). Norton’s published research cites the research showing that inequality in the US has increased dramatically since about 1980. Among people who teach American history and American political economy, the basic story of income inequality in twentieth century America is well-known. US society in the early twentieth century was highly inegalitarian. Then, during the New Deal and WWII eras, the Gini coefficient plummeted. The United States became a society with a large middle class and few people at the very extremes. Since 1980, inequality has reverted to Gilded Age proportions. Paul Krugman has helped to popularize this stylized account of American inequality in the New York Times.

Somehow, this important data was left on the cutting room floor by the creators of the video. The omission of the historical context is unfortunate for several reasons.

First, the omission of the historical information discourages the viewer from thinking about the causes of rising inequality. Obviously a short video can’t engage with the debate about the causes of rising inequality. Is rising inequality driven by globalization, technological progress, fiscal policy (i.e., Republican tax cuts for the rich), or some combination of the above? However, mentioning that inequality began to rise around 1980 would be a way of getting viewers to think about why it has increased.

Second, a historical or empirical approach is more likely to convince viewers than the more deductive or philosophical approach taken in this video. This video might appeal to followers of the late Harvard philosopher John Rawls, who conducted some interesting thought experiments about how much inequality we ought to permit. The average person, however, is more likely to be convinced by empirical data. The average person is a bit like Edmund Burke. He or she tends to be suspicious of attempts to bring the real world in line with grandiose theories and philosophical speculations. Tell someone that society ought to adopt principle x, and they will likely ask “Has any real world society done this? How did things work out for that society? Is that society similar enough to our country to make the adoption of principle x feasible?”

The argument that there are tribal societies on this planet in which economic inequality is very low likely isn’t going to convince many voters to support a more egalitarian distribution of wealth. After all, these societies can be dismissed as primitive, alien, and left-overs from a distant period of human history. Pointing out that societies that other Western industrial democracies have lower inequality than the United States would be more convincing, since some of these societies are objectively very successful (great companies, high GDP per capita, and trains that make Amtrak look like crap). However, when we use this approach, we run into the problem of anti-foreigner bias: people might dismiss the Danes and French because they live far away and eat smelly cheese.

To my mind, the argument for equality most likely to win over middle-of-the-road Americans is a historical one: between the 1940s and 1970s, the distribution of wealth in the US was much more egalitarian than it is now and the country experienced rapid economic growth. Americans are a practical people who believe that the proof of the pudding is in the eating. The Middle-Class America of Paul Krugman’s childhood is neither exotic nor ancient history. It is within the living memory of many people today. Tell people that a vote for equality is a vote for post-war prosperity, and you will have a winning argument.

The Simpsons and Economic Inequality

2 02 2012

Let me direct you to a light-hearted yet important blog post by Dani Rodrik. Ensure that you click the link to the PowerPointPresentation.

The Changing Justification for Tax Cuts: From Efficiency to Fairness

24 04 2011

The Changing Justification for Tax Cuts: From Efficiency to Fairness

Matt Yglesias has posted something interesting about the ongoing debate in the US about tax cuts for the wealthy. He notes that people on the right of the political spectrum traditionally defended tax cuts for the wealthy on the grounds that they would spur economic growth. In effect, they were asking voters to trade the principle of economic equality away for higher economic growth. The famous trickle-down metaphor said that the best way to help the poor was to invigorate the economy with a bit more inequality.

There is more and more empirical evidence that the Reaganite formula for economic growth (cut taxes and regulation) doesn’t actually work. Much of this evidence, I am proud to say, has come from the discipline of economic history. There is a great deal of evidence of the suggest that there isn’t necessarily at trade-off between growth and equity. For most of human history, massive inequality was a fact of life: there was a huge gap between the peasants and the wealthy in Elizabethan England, but this sure didn’t produce modern economic growth. Even during the British Industrial Revolution, the rate of economic growth in Britian was pretty slow by today’s standard, less than 1% per year. Really rapid economic growth only became common in the Western world at roughly the time these countries were starting to create welfare states. In the 30 years after 1945, when there was consensus in favour of fairly generous welfare states in the United States and other Western countries, economic growth was rapid. Income tax rates for the wealthy were sky high in 1950s America, but this didn’t keep the US from enjoying tremendous prosperity. Presumably there was enough inequality in Eisenhower’s America to encourage the Don Drapers of the world to work hard.  The period since the late 1970s, which saw the erosion of the redistributive state in most Western countries (as represented by Reaganite tax cuts, Thatcher, Prop 13, etc.), also saw a slow-down in economic growth and technological progress.

So now that the economic argument in favour of cutting taxes for the rich has been shot to hell, the right’s justification for tax cuts has shifted from economic efficiency to equity: the right is now arguing in favour of tax cuts for the wealthy on the grounds of fairness.

Yglesias summarizing the new argument coming from right-wing figures such as Arthur Brooks, Yglesias writes:

It’s not that higher taxes on our Galtian Overlords would backfire and make us worse off. It’s just that it would be immoral of us to ask them to pay more taxes even if doing so would, in fact, improve overall human welfare.

Two days ago, the Center for American Progress in DC in hosted a public forum with leading economists and policy experts to discuss the proposition that a focus on equity and economic inclusion is necessary to grow the U.S. economy. In the companion framing paper titled “Is Equity the Superior Growth Model?” authors Sarah Treuhaft from PolicyLink and David Madland from American Progress discuss how economic growth has been slower and less broadly shared over the past several decades, leaving more and more families, even entire communities, behind with diminishing prospects for catching up. Let me quote from their excellent paper at length:

Economists have long considered the relationship between equity and economic growth. Early economic thinking was heavily shaped by Simon Kuznets, a Nobel Prizewinning economist, who argued that economic inequality increases while a country is developing, and then after a certain average income is attained, inequality begins to decrease. His explanation for this pattern was that shifting from agriculture to industry caused inequality to rise but further growth led to increased economic opportunities as well as equalizing government policies.

Kuznets Curve

Kuznets Curve

This argument and its graphical representation—the inverted U-shaped Kuznets curve—suggested that inequity was good for economic growth, at least at the early stages of development. Alas, overwhelming evidence has accumulated that development does not quite work like Kuznets predicted.

Many countries have not become first less and then more equal as they develop. Instead, there have been a wide variety of development patterns, with some countries growing relatively equally at all points in their development and others growing unequally at all points in their development, and still others vacillating between relatively equal and unequal. South Korea, for example, has seen relatively equitable economic growth throughout the past 60 years as it developed from a relatively poor country to a middle-upper-income country. Brazil, historically one of the most inequitable countries, has in very recent years begun to grow more equally. And in the United States, from the 1940s to the 1970s, economic growth went with increased equality, but since the 1970s, additional growth has reduced equity.

The real world has not conformed to the Kuznets curve. Still, the idea that there is a tradeoff between growth and equity did not just go away. Instead, it remained influential, even for advanced countries, though the hypothesis was largely untested.

Read more here.

Update: Krugman has commented on Yglesias’s post. See here also.