Global Inequality: Branko Milanovic

Talking with the guy down the hall

This is where I have my office, at the CUNY Graduate Center. And I had a bright idea for this week’s conversation. I’ve been writing lately about inequality (as I should given where I sit!), but with a US focus. How about a conversation with arguably the world’s leading expert on global inequality, who I happen to know is also articulate and fun to talk to? And who sits in the office three doors down.

So here’s a conversation — in person! — with Branko Milanovic. Transcript follows.

. . .

TRANSCRIPT:
Paul Krugman in Conversation with Branko Milanovic

(recorded 5/20/25)

Paul Krugman: So hi everyone, Paul Krugman again. Here's what happened. I've been doing a lot about inequality lately and I realized I should really talk to somebody who is one of the world's leading experts on global inequality and is also an interesting and person to talk to. And after much searching, I decided to walk three doors to my left down the hall and talk to my colleague here at the Stone Center on Socio-Economic Inequality at the CUNY Graduate School, Branko Milanovic, who has a new book, which we'll talk about in part, but also just generally some of his work. So anyway, hi Branko.

Branko Milanovic: Well, hello, Paul, nice to see you. Thank you for the invitation.

Krugman: Yeah, this is going to be fun. So, you are best known for really talking about global inequality as opposed to just national. Do you want to talk a little about what that means? Or if you like, what is the Branko specialty here?

Milanovic: You know, I can define global inequality simply as inequality between world citizens. Technically speaking, whether you do inequality between people within people,

within the group of people in New York, or you do it within the US, or you do it within the world, it’s technically the same, it's just the range that is different.

Now, the difficulty with global inequality is really a technical one. It's difficult to get the data from all the countries or practically 90 to 95% of the world population and likewise 90 to 95 percent of the world income. So it's difficult to get the data and secondly you have to transform them into the same units which means that you have to transform it from local currency into so-called PPP or purchasing power parity dollars. So these are technical issues.

Krugman: Yeah. Within the United States or within most advanced countries we have a survey. We go out there and take a random sample of households and ask people about their income and put that together. But nobody does a survey of the world.

Milanovic: No, we don’t have that.

Krugman: And so what you have to do is you have to take all of these different national data. We have data on sort of average incomes for countries. And then we have data on distribution of income. But it is basically trying to do it as if there was a global survey.

Milanovic: Absolutely, as if there was a global survey which would have been representative for the world and on top of that representative for each individual country.

You know, I'm currently actually putting together the data for 2023. And just to tell you the problems that one faces, because these are really problems of data collection, Africa actually has fewer surveys today than 10 years ago. When I say fewer, I mean like fewer surveys done in the last two or three years.

So if I take the benchmark year where I actually want to align everybody, 2023, because I really didn't want to align people at the time in the midst of COVID, what happens is that essentially you have, about 12 countries in Africa representing about 45% of the African population and maybe 40% of GDP. So clearly it's not enough. And I actually don't want to even present this data because Africa is very important and also the location of African countries is crucial. So if you exclude like 60% of Africa, you're basically excluding people in the bottom two or three decimals of income distribution.

Krugman: It's kind of funny that we almost never do this, but there is a cosmopolitan view.

Milanovic: Yes, absolutely.

Krugman: If you are a random citizen of the world, where would you fit in the distribution? Has anybody ever done that before?

Milanovic: Well, actually I have to say I might have been the first to have done it in 1999 when I was still at the World Bank because the World Bank was a very good place,

especially the unit where I was, because it was collecting the data sets that we just talked about and doing poverty calculation. Technically, moving from poverty calculations to inequality calculations is not particularly difficult. I mean the data set is more or less the same but people have not thought of actually putting it together. However, there are a couple of papers from the 70s that essentially had a similar idea. There were many fewer countries with survey service then and there were no micro data, but the idea was present.

Krugman: Okay. I want to come back to all of this. But before that how did inequality become your thing? Because you have a more interesting life story than most of us.

Milanovic: Well, I'm not sure if it's an interesting life story, but inequality became a topic for me when I was studying my undergraduate. My last two years at the University in Belgrade were on statistics.

Krugman: By the way, you’re Serbian.

Milanovic: I'm Serbian. So I was doing statistics. Now we did quite a lot of statistical distributions, normal chi-square, student distribution, t-distribution, other things, but with zero applications to anything. So we would do all the calculations, we would derive the mean, standard deviation, a-symmetric, the kurtosis and so on. Then on the other hand, I had really strong interest regarding social issues, partly because of my reading of Marx, so that's where it comes from.

And then suddenly I discovered, I still remember that, in a French newspaper they had French distribution, either of wealth or income. And then I read, there was a guy called Jeannie, he calculated the coefficient, you can put it in deciles, and you can derive something which is the Lorentz curve. And that's basically when I realized, wow, all these distributions that we kind of study, we don't know what to do with them. But you can apply them to something that I like.

Krugman: Okay, so you were being taught math without context, without application, which I've always found personally impossible. I just completely blank out unless there's something to use the math on. You were managing to do the math, but then discovered that there was a real world application.

Milanovic: Yeah, I must say, to some extent, it is challenging because you do it in such an abstract way and you have to be clever to derive these things and so on. And basically, you learn to do it, but then it becomes frustrating because you don't know what to do with it.

Krugman: Okay, and what was your life history? You're starting in Serbia and how?

Milanovic: It's a complicated life history. I was born actually in France, then I studied also in Belgium, then I studied in the US, so it was all complicated stuff. But let me mention one thing which is interesting for people because they cannot even relate to how it was in those days. We are talking about mid-1970s. I still remember that there were big books with lines, basically squares. And then within these squares, you would draw what is called the Lorentz curve. It’s like curvilinear stuff, so you would calculate it simply, with the least squares, which nowadays you do on the computer, but in those days, the big advance was calculators. So with the hand calculator, I would just write the whole formula, whatever the numbers give you. So it would be, Y is equal to 0.25 plus 0.11 squared on Y squared and so on. So that was for me a really huge advance that otherwise I really don't know how exactly I would have been doing that.

Krugman: It’s a story for another time, not many people know, but I actually wrote the 1983 economic report of the president and it was all done on an HP calculator. We didn't have computers yet. It was a really big advance. So you got into this study of inequality and was there a moment where you had a revelation, like, “Hey we can we can actually

look at the whole world the way we look at an individual country?”

Milanovic: The revelation was basically during one of my first jobs in the World Bank in a research unit that dealt with transition economies. Since my dissertation was on income distribution in Yugoslavia, I actually had quite a lot of contacts in Eastern Europe,

I knew people and so on. So then I was working quite a lot on Poland on income distribution and the distribution of subsidies. That's a very interesting topic because Poland had like 15% of GDP in subsidies, mostly on food, fuel and things like that. So you do have the distribution of income and then you have to basically find out who are the recipients of the subsidies. So I did that and that was part of my work.

But then I realized sometime around mid 90s that actually one could do income distribution for the whole world, as you were saying, a very cosmopolitan view. And then of course it took me some time, maybe 2 or 3 or 4 years to start to put all of this together, to think how I will do it and so on, and to publish the paper.

At the same time actually, Francois Bourguignon and Christian Morrison published also a paper on global income distribution. Actually we were really doing it at the same time but theirs was more ambitious because they basically went back to 1820 and it's still a very key paper. It's actually a seminal paper looking at income distribution over 150 years, but obviously with much less data and with many more assumptions, whereas my numbers came from the Postal Service. But you know, the idea was obviously present.

Krugman: Yeah, actually this is funny because my first important paper was on a totally different subject, but three people were at the same time working on the same paper. I just write a little faster than the others so I got the credit.

So you have this thing, and it probably annoys the hell out of you, but you're most famous for “the elephant curve.” Do you want to tell us about that? Because I think it's an interesting story.

Milanovic: Yeah, the elephant curve became of course quite famous. Recently I was in Italy giving a presentation and because there was like a general audience, the organizers said, “Okay, they know you from the elephant curve. So you have to present the elephant curve” and I felt, like, “Really?” And, not pretending I’m them them but I felt

like the Rolling Stones who are being asked to perform “Satisfaction” or “Paint it Black,” like 50 years later. You know, people still want them to sing that song. Anyway, so I did sing my song.

So, the first year I published on this was 1988, then 1993, then 1998. And then I think probably around ‘97, ‘98 I started thinking, well, I should combine them. It seems simple, but any data work is complicated. You had currency re-dominations. You had PPP numbers for Eastern Europe.

Krugman: PPP is purchasing power parity for the audience, which is to adjust the price levels between the countries.

Milanovic: It was really difficult. A dollar is whatever it is now, 1.08 euros, but doesn't

actually buy the same value, as you know, so you adjust for different things. It buys you about 30% more than it buys in New York. So you have to adjust for Spanish incomes.

Actually, you boost their incomes because they can buy more. In any case, I remember it quite well the first time when I derived it, and the curve came up as an elephant, although the original curve was done not in PPP dollars for the reasons that I mentioned,

but actually in dollars at the market exchange rate.

And then it came exactly as it actually was later. And what everyone immediately realized, it is really the intuition that we all share, that globalization did very well for countries in Asia. They are like in the middle of the income distribution. Globalization did well for the top 1% and globalization did not do well for the people who are in between,

and that was the lower part of Western income distribution.

Krugman: I'll put it another way at the risk of explaining your work to you. So this is a curve that shows percentage gains in income across the whole of the global population.

And if we live in the United States, then we think of the period from the 1980s up until, well, basically now as being the top. It goes way way up and basically there's Elon Musk and then there's ordinary workers. So the higher up you go the bigger the gains but if you look at the world as a whole there is a second hump which is kind of the developing country middle class which also had big gains. I've never actually quite seen the elephant but anyway somehow the thing looks like this where I guess this is the trunk and there's the body.

Milanovic: I mean, to describe it to people who have not seen it, what it shows is that in the middle of that global income distribution, let's say it was about the 50th percentile, you had really very significant real income gains. As you said, the real income gains are shown on the vertical axis. And then from the top, you go down because the real percentage gains for the middle class in Western countries were much smaller than the percentage gains in China. And then you go back up again with large gains for the global top 1%. So it's really the three points where it was not a monotonic function. It's actually a function that goes up and goes down, then goes up. And that of course attracted the attention. And the very minute when I saw it for the first time on the computer, I knew it was something worthwhile studying because it really coincides with our intuition.

Krugman: Well, somebody's intuition. So, inequality is increasing. Certainly in America. That's what we said at the time because we don't actually believe that the rest of the world exists. But also for a fair number of people. And the question is, is global inequality going up or down? And your answer was yes.

Milanovic: Well, my answer was actually it's going down. But it is true that, for example, in the first paper, 1988 to 1993, there was an uptick in global inequality. And since then, it has gone down. But, you know, it is difficult. You're right. Actually, 99 percent of people think about their individual country’s inequality and these individual countries’ inequality went up.

But at the same time what happened is growth rates were different between different countries, poor countries and large countries. That's the important part. When India and China grow fast and they were originally both poor countries, that of course diminishes global inequality. So that's the logic.

And I mean, sometimes it's kind of strange when people come to the summer school on inequality. They come because they are concerned about inequality and they want to stop the increase in inequality and you tell them, “Look guys, at the global level we have had like 30 years of the decline of inequality,” and they kind of look at you with a little bit of disbelief at first but you know after 10 or 15 minutes you explain the story and they see the logic. I mean it's funny from a global point of view in some ways.

Krugman: We started looking at this probably in the 1980s. So the past 35, 40 years have been a glorious era of equalization in which a lot of desperately poor people are now no longer so desperately poor. But if we're sitting here on Fifth Avenue, we see a world in which a few people are getting filthy rich and a lot of people are being left behind. And just kind of for perspective.

Milanovic: That's the thing. That's how it is actually difficult. In other words, you could be sitting in New York saying, “OK, inequality is exploding in New York.” Maybe also in the 1950s, where the US inequality went down. So, again, what is your unit of analysis in some sense?

Krugman: Yeah. I think you're a globalist. I think you'd be in big trouble under the current administration in the US.

Milanovic: Well, I'm a globalist, but you know, the interesting part about global stuff is looking at any issue from the global perspective means basically looking at three

dimensions whereas when you look at one country, you look at two dimensions. What you want to do is to say the following. And I like to ask this question. I ask everybody, “Who is against equality of opportunity?” Which means who is in favor of maybe rich kids succeeding their parents and staying rich and all the poor kids being poor and nobody says they’re in favor of that. You know, it's like motherhood and apple pie. Everybody says No. No, I'm against it. But then you open the Pandora's box when you say, “Okay, how does it work on a global level?”

Why should a truck driver in Zambia have an income that is one tenth or maybe one twentieth of the bus or truck driver in the US? It’s the same work, same effort, same intelligence, maybe same education. And then you say, clearly it is not equal. And then of course you have to start thinking whether you are against global equality opportunity, whether it is a concept that cannot be implemented because there are other reasons, like, we are not citizens of the world, we are citizens of a given country. Or maybe you should start actually revising what you believe. So in that sense, it does open your mind to issues that you haven't thought about.

Krugman: Yeah, for people who are on the center left you may be a bit further left.

Milanovic: On some issues I'm further right so you know it's difficult.

Krugman: But if you're on the center left then if you aren't morally disturbed by all of this then there's something wrong with you because we can't actually have open borders such that the truck driver in Zambia can just come here. And yet there is something profoundly unjust about the whole thing.

Milanovic: But you know, Paul, when I did these papers on global inequality, the first

people who got interested and who I actually spent quite a lot of time with them and I learned a lot from them were political philosophers. That's a very interesting thing that economists were absolutely uninterested in the issue, maybe because for economists

“country” is still a key unit of analysis and they want to have a government they can influence. I mean, who can they influence on the global level? You know, who cares?

Now, the political philosophers asked that question and they were concerned about that, but they absolutely had no idea. Is global inequality high, low? How do you measure it?

What is the number? And their major concern, interestingly, was inequality in the endowment of physical resources. So they said it's unfair that Saudi Arabia has all this oil. So how should we adjust for that? That people should not kind of have an advantage simply because they live in countries that are abundant with resources. Without actually thinking that many countries are rich without having the resources. So the question is not really whether you have oil that you can exploit. It is part of the question, but it's not the full question.

So these guys were quite interested and actually I knew about Rawls before and Brett a little bit but…

Krugman: Yeah, people may not know…John Rawls, great political philosopher, said a just society is the society you would choose if you didn't know who you were going to be, roughly speaking. “Behind the veil of ignorance.” But then the question is, how deep does the veil run? Is it not knowing which American you're going to be or is it not knowing which person in the world?

Milanovic: And then it was 1999 that he published the book. As I said, I was quite influenced by the people whom I started meeting, but the book was The Law of Peoples. And that book is a very short book. Theory of Justice was his big book that you mentioned that actually develops the idea of the veil of ignorance and this so-called “difference principle” and many other things. The other book was actually sort of an application not of that idea, but general thinking about the world and that book is also short. I would actually suggest people read it. It’s maybe 150 pages and it goes against many of the things that would apply within nation-states but would not apply globally. But he argued they should not apply for the world. For example, he's against migration driven by economic reasons.

Krugman: That's interesting. I didn't know that.

Milanovic: Yeah, he's against that. And actually in my current book, I criticize him.

He's against that because he thought that every society has the right to decide whom they want to accept. And secondly, it's an interesting point: He believed once you have a democratic liberal society, the difference in income between your own and the other country, and you as an individual and another person, really doesn't matter. So in other words, his argument, to make it simple, is an Indian should not come to the United States. They have a democratic governance in India, they're a liberal society. There is no reason that you should come here for higher income.

So there are two points here. There was one point I think that he discounted the importance of income, which is really kind of an anathema to economists because we believe that income is key. But for him, wealth and income, above a certain level,

were not things that mattered.

Krugman: My God. I want to have this discussion but maybe another time. But one of the things I learned from you, and I think I probably knew it at some level, is that from a globalist point of view the most important thing determining your income is where you happen to have been born.

Milanovic: Absolutely, absolutely. And basically when you line people up, honestly you're just one variable in the regression. You just look at the country where people live, and for 97% of people in the world, that's the country where they were born. You basically explain about 60% of income differences. So it's an extremely powerful variable. And the rest actually, there was some work that I started and some other people have done more work on that. Based on your current position in your country's income distribution and using the data on social mobility, you can also estimate where you might have been, where your parents might have been. So if you take these two variables—the country where you're living and an estimated position of your parents— you basically have an R-square of 0.9.

Krugman: Okay. A percentage basically of 80 to 90% of the of the differences in

income are explained by the country of origin and the position of your parents in that country. Okay, so they're basically almost no self-made men in the world. To a first approximation, at first we're all just lucky in our country and our parents.

Milanovic: Absolutely, I think first approximation is like that when you put it within the world. Now, when you put it within the US level, then of course you have a difference.

I mean, if you were born in Wisconsin, it might not make such a difference compared to California because you have free movement of labor. And then obviously there is greater mobility, social mobility within the US with respect to your parents, compared to mobility within the world. Even if you're born to a rich Tanzanian parent, that doesn't guarantee you that you will be rich on a global level, because Tanzania is very poor.

Krugman: I found the elephant curve totally just mind opening, although it's one of those things where after you've seen it, it seems obvious, except you had never thought about it before.

Milanovic: Absolutely. And you have never seen it in numbers. The great advantage of numbers is that you have an intuition. And I think the most powerful numbers are those that actually reinforce the intuition that you have or actually totally reverse the intuition.

But it has to be one or the other. If it falls in between, really, I don't think it works.

Krugman: I'm not sure which that was for me. Somehow, I just never thought about things that way before, but now all of sudden, of course. I want to get past the elephant curve in a minute, but you found this relationship really from 1988 to 2008. So this is the period of hyper globalization, containerization, everything explodes. But it does not actually continue after that, right?

Milanovic: No, it doesn't continue after that. That's actually very interesting. As I said, I'm still asked to talk about the elephant chart curve and all that, but it doesn't continue.

Actually, in the next 10 years, and I have two five year periods, what happens at the top?

We had this almost exponential increase, the big trunk where these people were making money, the global top 1%. The financial crisis makes a difference. And they did not recover until 2013. And then of course they recovered. But if you look at 2018 versus 2008, over the 10 years, the rate of growth did not go back to where it was before.

Krugman: So in fact, the global 1% has not been pulling away from the rest the way it had before?

Milanovic: No, certainly not the way that they did before. I don't think there is any doubt. Like everybody, even Piketty and his team have somewhat different data, but even they don't find that it's pulling away. Now, that does not discount people like Musk and Bezos and so on. That's a different story. We don't have them in the surveys, and I honestly think that it's really a different area of inequality economics, when you really want to focus on the top 15 guys who are extremely rich. That's a different story. So it could be that Musk has pulled ahead of the others, but then one should not forget that that's a guy who in one year his wealth increases by 200 billion or I don't know, 100 billion. And then the next time he loses 40 billion. So, these numbers are so large that they actually make no sense.

Krugman: Yeah...I was going to write about what's been happening to the .01% and realized at least at the moment, I don't know.

Milanovic: You know, I have the data and I can slice them even to .1% but honestly, the number of people who are there is so small and these are not people from the Forbes index. You know, these are people whose data you get in the US or Britain or China and they're actually affluent people like us, you know, but they're not Elon Musk.

Krugman: Yeah, my favorite line from the old movie Wall Street, was “a $400,000 a year working Wall Street stiff.” It's more than that now, but…

I really want to get on some other stuff. You view this as a globalization phenomenon, that the elephant curve was kind of driven by…

Milanovic: I view it as global. There are disagreements on that and you may be on the other side of that, but I really view that as a phenomenon driven by this hyper globalization. Really, we were lucky also. When we did the numbers, 1988 is really just a year before the fall of the Berlin Wall. 2008 is actually the year of the financial crisis. So we didn't plan to do that. It just happened that we had this 20 year period. And indeed, that 20 year period, I think everybody finds it different from another 10 year period because many things have happened. Financial crisis happened, then COVID happened, then the economic situation in the world with US-China relations and the war in Ukraine. Things changed in the next 10 years.

Krugman: Yeah, it’s an iron law which says that whenever there's a best-selling book about an economic phenomenon, that means that the phenomenon is over.

Milanovic: It's over, yeah.

Krugman: So “The World is Flat.” That's the end of hyperglobalization. Just like “Rising Sun” meant the end of Japan's rise.

Milanovic: Yeah.

Krugman: Okay, so…I think a lot of the narrative that we have is still based upon your elephant curve era. Everybody has this idea of “the middle is still rising,” right?

Milanovich: The middle is still rising. Actually, China and Indonesia, despite COVID.
China continued this rise despite COVID. India had a really bad year in 2020, but then recovered almost instantly in 2021. So the story is continuing.

And I want to say something about the political interpretation of the elephant chart. So the reason why it became so famous or well known is because of political interpretation of that, which is obvious. If you're unhappy with the position of the middle classes in the West, you have two options. One, let's call it Bernie Sanders option, you tax the rich and improve the situation of the middle class. The second is the Trump option. You basically say, “okay, we are going to screw China because the whole globalization thing is playing in their favor, so we'll do something. But I think that that interpretation is still possibly accurate.

I'm not just trying to basically support my own graph, but the political effects of certain economic phenomena do not happen immediately. And I think it took some time for all of this stuff to get politically reflected. And in 2016 just before the election, the first election that Trump won, you very kindly accepted to speak at my book event. And we're driving there and I don't know, somehow we spoke about the elephant curve. And I said, “well, that's the curve that if Trump could see it, he could actually make his point.”

And you said to me, “Well, they never read anything. So nobody would see it.”

Krugman: Yes. Well, that remains true. Lots of things change in the world, but that remains true. But, there's a bottom of the elephant, right?

Milanovich: Yes.

Krugman: You've still got a “left behind” part of the world.

Milanovich: Right. But, you know, the bottom is also super interesting. Actually, the bottom has had reasonable growth. You know, there is actually reduction in global poverty. There is no doubt about that. But there was also another bizarre phenomenon which is really kind of difficult to interpret and actually when I saw it first it took me a couple of days of looking at all the numbers to figure out what happened. It was a more recent period, the last 10 years. China eliminated the absolute rule of poverty, which meant that the Chinese people who were in the bottom two deciles, 20% of the world, the really bottom, these guys escaped from the bottom.

So what happened, other people who were originally higher than the bottom two deciles, they fell into that, mostly Bangladesh, India, some African countries and so on. So paradoxically, when you look at that simply without looking who was there, you kind of say, wow, there was an improvement in the bottom. This is true, there is an improvement because the people from India who came, who fell into that bottom, were originally better off. So there was not much of an improvement for them.

But when you take a snapshot, since all the Chinese basically got out of that group, you actually see significant improvement. This is not a fictitious improvement. I'm just saying the composition of the bottom has changed. And that's actually what makes it also fairly difficult because now with the rise of China, and that's what I'm going to face probably now with the new numbers, Chinese top urban deciles, have really moved to the position of Western middle classes. So what we see now, it's no longer at that point, which is like 80th percentile of the world. It's not the Western lower part of the income distribution, it's actually a higher part of the Chinese distribution. So the interpretation of the curve becomes more complex.

Anyway, you basically should then fix the country percentiles at their positions ten years ago and see how they have grown. The interpretation becomes complicated.

Krugman: The world looks quite a lot different if you think of it in terms of people instead of countries, which is kind of very different.

Milanovic: Absolutely.

Krugman: Okay, I want to move on. I just made you play “Satisfaction” all over again. But you have this new book, Visions of Inequality, which I reread the last few days and which is largely portraits of economists over the past couple of centuries. We can't go through them all, and most of our viewers and listeners will not even have heard of most of these people, I'm sorry to say, but, there's a lot of discussion about Adam Smith. And it turns out the Adam Smith of reality is not at all the Adam Smith that the current right-wing admires.

Milanovic: No, not at all. I actually think the chapters on Smith and Marx are the most

interesting chapters. Just to explain, it was a book that looks at how inequality or income distribution was seen by canonic authors. I have six of them as you say. It starts with François Quesnay, who was a French author writing before the French Revolution. And to some extent, he's a founder of political economy. He and Smith, okay. So after François Quesnay, Adam Smith, David Ricardo, Karl Marx, Vilfredo Pareto. We hear quite a lot about Pareto these days because of the Pareto criteria and all of that.

Krugman: By the way, we meaning you and me, not 95% of the people listening to this.

Milanovic: And then Simon Kuznets, American economist who is also quite famous both in terms of national accounts and for income distribution. So there are six guys. Now, the Smith chapter, I think it's an important and interesting chapter. I read The Wealth of Nations, maybe 20 years ago. Then I reread it and then I read the Theory of Moral Sentiments, which is Smith's first work. What you realize is that the interpretation of Smith that we now have, basically by Chicago school, is a really selective use of quotes.

Smith is critical about every organization, but he is especially critical of employers or masters and especially critical of the way that masters and employees have become rich and the collusion they generally have in order to, as he says, to work against public interest. And these are the quotes you would never hear. You would hear only the quotes when he criticizes government, and of course he does, a lot, but you would never hear more frequent quotes, citations and long passages where he's super critical about capitalists.

Krugman: Yeah, I mean there's also other stuff which you really don't get into, but he's an enthusiastic supporter of bank regulation because he had actually seen one of the history's first banking crises in Scotland.

Milanovic: And when I teach on poverty, I ask, So what is poverty? And there's a big question. Is it absolute? It’s relative. Smith is very much about “poverty is a social construction.”

Krugman: Absolutely. There's a great passage on what does it take to not be poor in England? You have to own at least one good linen shirt.

Milanovic: Linen shirt, yes. But you know, there was a great book by Gloria Liu, called, Adam Smith’s America. And she goes over the perception of Adam Smith from the founding fathers until the first Chicago school and the second Chicago school. And of course, everybody used from Smith what at that time they needed and what became the prevalent doctrine at the time. But when you try to read it, how should I say, without prejudice and without sort of previous ideas, his critiques of, for example, East India Company, and it is known quite well that he was extremely critical, it is not known as well that he was critical of all merchant states, including Venice, Pisa, Genoa. Super critical.

And he was critical of all states governed by money interest and basically plutocrats and capitalists. And that was throughout The Wealth of Nations.

And I intentionally, put six or seven quotes like that, one after another on two pages.

My editor told me, “Can you break them?”

I said, “No. It's like machine gun fire.”

When you read these seven quotations, you just cannot believe is Adam Smith speaking.

Krugman: But he would have hated America in 2025.

Milanovic: He would have been very, very negative. And you know, it's interesting.

Because I look mostly at income distribution. So he says, in the course of history with the development of commercial society, wages will go up because we know from history, as a country becomes richer, some of the income is being shared by “the old dogs who cloth and feed us,” as he says. So wages will go up. He says rent will go up as well because the demand for the produce of the earth would increase simply because there are more people and also mining and also we need clothes and so on.

He says the third source of income is interest, or profits, which will not go up. He believed that it would go down because there is greater plentifulness of what he calls “stock,” meaning capital. From that point he derives his view about what social group should not rule society. And he says capitalists, because that's the only social group whose interest is opposite to the interest of society.

Krugman: Because he thinks that capitalists basically don't want economic growth.

Milanovic: They don't want economic growth. So it's really very different, totally different from Ricardo. We might go to Ricardo next, but he really believes that economic growth means reduction of profits for capitalists. And he uses as an example, of a good country, the best country is the Netherlands. Netherlands, he says, has high wages. Actually at his time it had the highest wages. And it had a very low rate of profit because the stock is plentiful.

And moreover, he has an interesting ethical point. He says, “one should not have sufficient amounts of capital to live without work.” There are not many ethical points in The Wealth of Nations but that one is very interesting and…

Krugman: I love that citation. We're running long so let’s just say a word about Ricardo first because twenty first century American economics owes a lot more to Ricardo than to Smith. Ricardo uses these stylized, extremely dry, colorless models with almost no human beings. In other words, exactly the kind of thing that people like me do. But one thing that really strikes me and you really emphasize it is that Ricardo looks at income distribution, inequality.

Milanovic: Ricardo is all about different classes. Except for the one thing everybody cites him for which is comparative advantage in trade. And he had preferences. He actually liked the capitalists and hated landowners. So this is interesting that classical economics was very much about who gets what. And not just about who gets what but, actually, the class basis of income in Ricardo. I was obviously interested in income distribution, and Ricardo’s class structure is in some ways even sharper than under Marx. For Marx, when he starts studying actual societies, he realizes there are not only two or three classes. There are many more because you have small landowners. Where do you put that? You have lumpen proletariat. They are not workers. So you have a problem.

With Ricardo, as you said. I think Ricardo has two major contributions. One is methodological, and that's the contribution of abstract analysis, which is essentially mathematics written in words, because Ricardo is mathematics. It simply was written in words, but it's totally mathematical and it's totally model and abstract. But that abstract approach leads him likewise to create classes and to argue, that classes are central in the determination of distribution and consequently in the determination of growth rates, because it's only capitalists who are active agents.

So profits are important because, by assumption, practically all profits are reinvested.

And without high profits, you don't have growth. So it is that class analysis and, as you know, I criticized the neoclassical turn in the 70s and 80s and 90s, because the class analysis just disappeared.

Krugman: Well, I want to get to that. Let's fast forward 140 years to post-war Anglo-Saxon, mostly American economics, where income distribution practically disappears from the discussion. I was kind of wishing that your book had a few more people in it because it’s not just right wingers who say it's Marxist to even care about income distribution but John Kenneth Galbraith in The Affluent Society is saying, basically, “we all have enough.” That's not the problem anymore. Maybe there are a few “pockets of poverty.” That's his phrase. But what's your take on how that happened?

How did we become so blind to this?

Milanovic: You know, I have several explanations. First of all, the class-based analysis was totally present in 19th century authors. So, of course, the three classes are defined by Smith. Then Ricardo continues. With Marx we’re still essentially talking about three, but in his case, he actually starts believing and arguing that landowners are basically capitalists who own land. So it becomes even more sort of restricted, like basically to two classes.

But then you have Pareto, and I will not go into all these details, but Pareto actually starts working for the first time with individual income distribution. He doesn't look at classes anymore. He's anti-Marxist, so that works for him. But he believes there is an elite and then everybody else.

Then you come to Kuznets, the American economist of Russian origin who came here during an important period. And in the chapter on Kuznets, I really wanted to emphasize that. The US is at the peak of its economic power producing 40% of the global GDP. At the same time, US inequality goes down. And I think William Burns says, “We have traversed two thirds of the road to complete equality,” in within 20 years or something. So Kuznets is working under conditions of huge wealth and reduction of inequality. And he has a generally sunny picture of the world. And I think actually many economists then follow that picture of the world.

On top of that, there is, I think, a political element. The political element comes from the competition with communist countries. The communist countries say, “Officially, there are no capitalists. There is no private ownership of assets, there are no more classes, we have abolished classes. Everybody is now a worker for the state. End of the class structure.”

And the Americans presumed high mobility will likewise enable them to say, “We have abolished it too. We don't have social classes, we are really doing well, everybody can become rich. Basically, social class doesn't matter whether you own capital and now own labor. It doesn't matter. I might actually become richer than you, you might lose the money and I can become rich.”

And then finally, the turn in economics towards, basically, general equilibrium and the approach where the type of asset that you have, capital versus labor is kind of irrelevant because you do have endowments as a generic thing. I might have skills, you might have capital or the reverse, but that’s what really matters. And there are prices which are determined by the general equilibrium model.

Krugman: “Equilibrium” being very econo jargon, but basically, supply and demand.

Milanovic: Supply and demand, yes. Everything working together.

Krugman: Yeah, America in the 60s, you know, it wasn't really equal, but economists kind of thought it was, and it was certainly much more equal than today. And we kind of thought that was the natural end state of capitalism, that that's where you end up, and we were seriously wrong.

Milanovic: So I think actually all these elements made the study of income distribution kind of, how should I say, peripheral. I mean, these are the facts. You go, for example, to textbooks. I use the example of Samuelson’s because it was the most famous. And you ask the following question: where does Samuelson discuss income distribution? He discusses quite a lot of wage determination. There are, like, three chapters. Then he also discusses the termination of capital incomes, margin of productivity, more capital, less capital. But he never puts them together, except at the very end of the book when he talks about developing economies.

And then in developing economies, suddenly the Gini coefficient, the Lorentz curve, and income distribution appears. So then you kind of wonder, like, what happened to income distribution in non-developing economies? So that's very standard.

Krugman: I will say one thing. In the case of Samuelson, it may well have been not just that he didn't think about these things, but that the politics were very real. Samuelson’s was the second Keynesian textbook in America. The first one by Lorie Tarshis was killed because corporate interests moved in to block it, and Samuelson was just a very savvy, cautious writer who avoided stuff that…

Milanovic: I mentioned it in the footnotes somewhere, that actually he's the second textbook. Yeah.

Krugman: And it was partly because he managed to slide it in underneath the radar of the right wingers who were preventing the discussion of this stuff. I will say my first semi-popular trade book, which was The Age of Diminished Expectations, had a chapter on income distribution because writing this in 1989, it was already clear. Inequality was exploding. The publisher tried to make me take the chapter on inequality out. They said nobody cares about that.

Milanovic: You should have told me that. I would have mentioned that in my book.

Krugman: I had to fight to keep it in.

It's all quite a story.

Milanovic: I have to say that there is a certain autobiographical element there.

We talked about me looking at Lorenz curves in 1975. So I was actually very much interested in inequality at that time. And what happened? There was a disappointment.

I remember that. That's why I'm actually very negative about Alan Blinder's book, Toward an Economic Theory of Income Distribution, which actually was his PhD dissertation. I received a sort of brochure when it became available in the American, what is called, Cultural Center, you know?

Krugman: Yeah.

Milanovic: And I went really sort of expecting something. And I got this book. I still remember how it looked. It was with a green cover and white and stuff. And I took this book home and was opening it. And then I see these millions of equations and the assumptions which were really extraordinary. So there was this disappointment, huge disappointment. So there was this autobiographical element. When I wrote the book, Worlds Apart, as I said to people, “It is not an article for the Journal of Economic Literature, objectively reviewing the literature. It is my view, obviously combined with, how should I say, with “ex-post thinking” about what happened during that period.” So there’s a certain autobiographical element.

There are actually other people, for example, like Jan Pen, whose book on Income Distribution I liked very much. So it's not all negative, but most of that is negative in the sense that I thought that the topic was left aside. And as you were mentioning before, there were significant political reasons for that.

Krugman: Okay, just to say, I know Alan Blinder well. He’s a great guy. Just put this down to a youthful indiscretion.

Milanovic: No, I know. I added afterwards, he didn't continue working on that. He started working in microeconomics and I know that, actually. I've listened to him. Once I was even on a conference panel with him. He was a great guy. It's just that, his dissertation was not bad, but it was reflective of the times. So it's not him. It's the times.

Krugman: Wow, there is so much we could talk about but I'm looking at the clock and we have run long. This happens every time I do this. We could keep on going and it’d be endless. But it's great that we got to talk about this. And we are sitting in the Stone Center on Socio-economic Inequality where this is supposed to be our bread and butter.

And somehow or other socio-economic inequality doesn't go away. So there continues to be some things to work on.

Milanovic: Yes, somehow. Anyway, thank you very much for the invitation. Maybe we can have the second part in my office, you know, three doors down the hall.

Krugman: That’s right.