What’s the future of capitalism?

"I am a capitalist and after a 30-year career in capitalism spanning three dozen companies, generating tens of billions of dollars in market value, I’m not just in the top one per cent, I’m in the top .01 per cent of all earners.

"Today I have come to share the secrets of our success, because rich capitalists like me have never been richer."

JB: The words of Nick Hanauer, a super-wealthy American entrepreneur who argues that modern capitalist economies need a major rethink.

Welcome to the LSE iQ podcast where we ask social scientists and other experts to answer one intelligent question. I’m Joanna Bale from the iQ team. We work with academics to tell you about their latest research and ideas. This month we are asking, "What’s the future of capitalism?"

Here’s more from Nick:

"How do we manage to grab an ever-increasing share of the economic pie every year? Is it that rich people are smarter than we were 30 years ago? Is it that we’re working harder than we once did? Are we taller, better looking? Sadly, no. It all comes down to just one thing. Economics."

JB: We’re going to meet a pair of young academics whose recent research on the economic effects of tax cuts for the rich went viral on social media – and received record numbers of downloads.

You’ll also be hearing why the greatest social levelling experiment of the 20th century – the Russian revolution – failed to erase the middle classes, despite brutal repression.

But first, we’re going to challenge a best-selling, prize-winning author who grew up under communism, but now lives in the UK, to tell us which political system is better.

LY: Albania in the '80s was a very isolated country. It was very cut off, not just politically, but also economically and so financially the situation was very bad and there was lots of scarcity. There were lots of queues.

JB: This is Lea Ypi, Professor in Political Theory at LSE, who grew up in communist Albania in the 1980s.

LY: School was very politicized and we were told to love the party and Enver Hoxha, who was the leader of the Albanian Communist Party who died when I was about five and a half - in fact, that's one of my first political memories.

So, it was a combination of heavy political indoctrination with economic scarcity, with the rhetoric of an isolated country that promised to be one of the few remaining really communist countries in the world.

JB: Lea’s new book, Free, is a thought-provoking memoir of how her world transformed with Albania’s rapid transition from totalitarian communism to liberal capitalism.

She explores how each system promises, but fails, to give people different forms of freedom - and how we can learn from both.

JB: In the book you talk about your childhood as really believing in the whole ethos behind that political system.

LY: Political education was really pervasive and started very early. When I was at nursery, Enver Hoxha, the communist leader, died and we were told that this was a great loss for the country and I believed in everything I was told in school, but also at home - no one did anything to try and undermine that narrative.

So my parents sustained those stories that I brought home from nursery and school afterwards and so I believed that I was a good pioneer. I was fighting for the communist cause and I was aware that Albania had to make sacrifices and that we were isolated, that we couldn't travel for example, but I thought all of these sacrifices were necessary in the name of these greater ideals that the country pursued. 

JB: But there was a little glimpse of envy of Western capitalism. There’s a little anecdote you tell about a Coke can.

LY: Because we were so isolated and because people couldn't travel, there was a real fetishization of what was going on outside Albania and especially in the capitalist world. Coca-Cola was something that…was just not imported…but it was considered one of these rare goods that stood as a symbol of some encounter with the West. And so in my book, I tell the story of when my mother and a neighbour had bought, simultaneously, a used Coca-Cola can…and then one of the cans disappeared from the bookshelf….

And so I tell the story when they had this fight, because one of the cans disappeared and my mother was accusing the neighbour of taking her can. And so every Albanian family has a story about a Coca-Cola can… We only really saw them for the first time and we saw the function and we knew that they were to carry these drinks that we'd never had in Albania, after 1990, when the system changed.

JB: So what actually happened in the '90s? ..It all kind of ended very suddenly didn't it?....Statues were toppled and all that kind of thing.

LY: Yeah, in 1990, there was a wind of change across Eastern Europe. Obviously the Berlin Wall had fallen in 1989 and for a while, Albania was untouched by these events, in part because it didn't belong to the Soviet block of countries and so the rhetoric inside the country was that these were changes that only affected other parts of Eastern Europe - and in some ways that this course was also that they were meeting the fate that they had always deserved because they were always so moderate, but then…things changed in Romania as well and that touched Albania because the history of Albanian communism was somewhat perceived by citizens as more in parallel with Romanian communism. 

JB: Lea is referring here to the overthrow and execution of Nicolae Ceausescu, the president of Romania, during the anti-communist uprising in December 1989.

LY: There was this cult of the individual and the cult of Ceaușescu was somewhat similar to what in Albania we had with Enver Hoxha. And so there became a wave of protest at universities, which started the beginning as a wave of protest for economic conditions, but very quickly turned into something much more radical and demanding, fundamental political change.

And…to the surprise of citizens, the government caved in very quickly and so it wasn't as violent or as repressive as one might have expected given the nature of Albanian communism up to that point. Everything changed overnight. We had political pluralism and then this was followed by an opening of borders and so all Albanians who have been isolated for 50 years, who couldn't travel, were now allowed to travel. 

JB: So, in 1991, the first democratic elections took place since the communists had taken power almost 50 years earlier. The communists managed to retain control of the government in the first round of elections but fell two months later during a general strike.

In her book, Lea describes the chaos that ensued as Albania embraced unbridled capitalism, leaving it on the brink of civil war. Privatisation meant that many people lost their jobs. Others lost all their savings in unregulated investment schemes. So, hundreds of thousands were forced to leave for a new life in the West.

Lea also discovered that her parents had been leading a double life.

JB: You discovered that your family were actually dissidents, didn't you? That they kept all that from you when you were child…that both your grandfathers had been political prisoners and conversations about people going to university were actually secret code for going to prison or even being executed. How did you feel when you discovered all of that?

LY: So, it was very strange and very confusing for me because my parents had never done anything to undermine the narrative that I was given at school. To be told overnight that this is not what reality is and what you believed up to that point is very different, was very hard to take and very hard to absorb quickly.

You don't know who to trust, and you don't know if you can ever trust anyone again, so I feel like the consequences of that has stayed with me in terms of making me really concerned and keen to discover what really the truth is behind the surfaces and behind the appearances and also behind the way in which messages are often ideologically driven and packaged.

JB: This led Lea to reflect on the different freedoms she experienced under communism and capitalism in her book.

LY: What was happening in the communist period was that there was a sense in which in scarcity one had to, but in the presence of a discourse of solidarity that was in one way or another imposed by the state, people found ways of sharing and tried to find ways of overcoming the hardships of daily life through this, through coming together. And so they built very strong networks, very strong contacts with neighbours or with family.

Also, it wasn't a society that was commodified and so it was very hard for example, to buy services for someone to be a babysitter. If you needed someone to look after your child, you had to rely on a friend or on a neighbour, or grandparents did a lot of care work, and so it was a society that wasn't pervaded by market values in a way in which society afterwards became pervaded by market values.

And with that entering and opening up to markets in this uncontrolled way came also this discussion around individual responsibility which replaced the old discourses of solidarity …The idea was that if you were unable to become wealthy, or if you didn't succeed, it was your responsibility and it was seen as a failure and so asking for help was no longer sharing a condition of facing a common adversity…

In the post-communist spirit, if you went through these kinds of hardships, if you were unable to make a living, it was because you had failed..and so there was a kind of stigma around joblessness, around asking for help and help could only come in the form of charity rather than mutual collective support.

JB: You explore these differences in freedom between communism and capitalism. Which one do you think gets closer to freedom for most people?

LY: I've always reluctant to compare one to the other and because I think they're actually really hard to compare. There are such different metrics and so you're not really comparing, like for like. To me, it looks like each of them has their forms of unfreedom….each of them has a set of ideals that it promises and each of them has a set of historical and political failures that it needs to take responsibility for.

And so I'm more interested in the kind of cracks in the system and in trying to see and to talk about how these systems that promise us freedom, actually fail to realize that, and to think about the history of these attempts, to realize freedom as something that we can learn from when we take forward this search for freedom.

JB: So, Lea Ypi explores how both communism and capitalism promise, but fail, to give people different forms of freedom - and what we can learn from both. And how, in both systems, messages are often ideologically driven and packaged.

But she is reluctant to be drawn on which system works better for most people.

You are listening to the LSEiQ podcast with me, Joanna Bale. This month we are asking, what’s the future of capitalism?

The iconic ‘Greed is Good’ speech from the 1987 movie Wall Street came to epitomise the new individualism and excesses of the 1980s. Michael Douglas plays Gordon Gekko, the unscrupulous corporate raider who will stop at nothing to increase his vast wealth.

The decade saw Margaret Thatcher and Ronald Reagan being elected on promises of major tax cuts for the rich. They formed a close personal and ideological bond.

Nearly four decades later, President Trump sold his tax cuts as "rocket fuel" for the economy, arguing that freeing up money for the wealthy would allow them to hire more workers, pay better wages and invest more.

So, it’s a political idea that has persisted - that letting rich people keep more of their money in tax cuts means they will effectively share it out. That it will ‘trickle down’ to the lowest income earners.

But it’s an idea that has been comprehensively debunked by our next guests, David Hope and Julian Limberg, of LSE’s International Inequalities Institute and King’s College London.

They analysed the economic effects of tax cuts introduced by politicians like Thatcher, Reagan and Trump across five decades and 18 wealthy nations.

Their conclusion: the rich got richer and there was no meaningful effect on unemployment or economic growth.

It really struck a nerve.

DH: So, it was, I would say, not the typical response we get when we publish an academic paper.

So that paper has been downloaded about 150,000 times, which put that in some context, my previous working paper in that series was downloaded, I think a staggering 200 times. And so this was really quite different from the norm in that respect. 

This is David Hope. When I worked with him and Julian Limberg back in 2020 to publicise their research, we never imagined what would happen next. It attracted extensive global media coverage, went viral on social media, and was cited by high-profile economists and politicians. As a result, it became the most downloaded paper in the 18-year history of LSE Research Online - the database of all research produced by LSE academics.

DH & co: So for someone who's never had a Twitter account, to go viral on Twitter was quite an experience. And we had many of our colleagues sending us memes about the paper during the days after its release. And we took it upon ourselves to put those at the start of a number of academic presentations we did on the paper after that, because you don't get this opportunity too often. I mean, you were on Twitter at the time Julian. What did you think of the reaction that we got? 

JH: Yes. Although I have to admit very irregularly and I forgot my password every now then, but yeah, it was actually quite interesting because we got more or less two types of reactions. And one was actually reactions that said, "This cannot be true and we don't believe this." And also, "You are socialists and that's it." That was one kind of reaction.

And the other type of reaction was basically, "Well I knew all of this already. Thank you a captain obvious." So there was little ground in between these two extremes, which we found quite surprising actually. And it actually, I mean, strengthened our belief that a data driven approach, look at these questions, going a bit beyond this political polarization is needed. And actually, the substantial need for such research. 

JB: And who was interacting or reacting on Twitter?

JL: Well, so, generally from the broad public, there was particularly interest in the US, I would say..We also got quite some high profile politicians tweeting about it. So, Elizabeth Warren had a tweet about it, which was also sent to us because not that usual Twitter users that some friends of mine send it to us. But yeah, that was also the case…

JB: Why do you think it captured the imagination and why do you think particularly in the US? 

DH: …Clearly, and I think we were a bit naive maybe in not thinking about this beforehand, it's clearly a very partisan and polarized and politically contentious issue, particularly in the US. In part because as they've evolved through Democrat and Republican administrations, there have been major changes in taxes on the rich. So we've seen big tax cuts under George W. Bush. We've seen big tax cuts under Donald Trump. And so I think it really plays into the political dynamic in that country. And that was why people were very engaged with it. 

JB: I asked David to explain why cutting taxes for the rich did nothing to boost economies. He refers to Thomas Piketty, the economist who argues that unless capitalism is reformed, it will threaten the democratic order.

DH: Our results align pretty closely with some work from Thomas Piketty, that would suggest that what happens if you cut taxes on the rich is that they then bargain more aggressively for their own compensation at the direct expense of workers lower down the income distribution. So, the story of the paper then is really to do with rent seeking among CEOs and top executives - and that increasing when you have lower taxes on the rich.

JB: David refers here to rent-seeking, which is the effort to increase one's share of existing wealth without creating new wealth. Rather like a greedy child demanding a bigger slice of the pie so that there’s less left on the plate for everyone else.

DH: So, thinking about the policy implications of the paper, I think there’s one major and fairly obvious policy implication, which is not to cut taxes on the rich to boost the economy, and particularly if you care about inequality. I think it’s particularly important to make this argument because proponents of cutting taxes on the rich often may use this type of argument abou t the economic benefits.

So, in 2017, when Donald Trump was introducing the Tax Cuts and Jobs Act, he claimed to the American people that this would be rocket fuel for the US economy. We don’t find any evidence in our study across 18 advanced economies of 50 years of that effect being true.

JB: David and Julian are now following up this research by investigating why ordinary people support tax cuts for the rich.

DH: The average citizen seems to be fairly poorly informed that taxes on the rich have fallen really dramatically in the past 40 years. If you give them that information, it makes them less likely to support tax cuts for the rich. And these effects, we've found, are particularly strong for Republican voters.

JB & co: And why do you think people are so poorly informed about this? 

JL: Well, that's a good question, actually. I mean, it's hard. We haven't particularly looked into why that might be the case. I think it probably has something to do with the importance of studying economic history, probably, basic economic history education that people get... Speaking as a person who has done tax policy research most of his academic life, the first reaction you get from people is that they're uninterested... It’s too technical and all of these things. So that might also play into there. So maybe economic history, stydying economic history, economics, but over a longer term, over a long ru and making it a bit more interesting and showing that thisis actually central questions about inequality that come along with it, central questions about who gets what, that taxation is at the core of it, might make a difference there.

DH: I think also, in a more practical sense, maybe the media have some role in this not being so well communicated and it seems like maybe politicians on the left are not getting this message across.

Our work would suggest that having a more progressive system of wealth and income taxation would be one way in which you could reduce inequalities between members of society.

JB: So, David Hope and Julian Limberg say their research shows that cutting taxes for the rich has no effect on economic growth or unemployment. It simply makes rich people richer, increasing income inequality in modern capitalist economies. And it’s a political idea that is deeply ingrained - so the situation could continue to escalate.

Economists and political scientists have long focussed on how rising wealth inequality creates divided societies. But what else might be contributing? Let’s return to how people behave under communist regimes. This time, Bolshevik Russia following the Russian Revolution of 1917, one of the most extraordinary social levelling experiments of the 20th century.

Tomila Lankina is Professor of International Relations at LSE. In her new book, The Estate Origins of Democracy in Russia: From Imperial Bourgeoisie to Post-Communist Middle Class, she reveals how the Russian middle classes survived despite brutal repression under Stalin. In doing so, she challenges the idea that inequality is just driven by wealth, instead highlighting the significance of social, cultural, and educational factors.

Her book focuses on a recently discovered archive of letters and documents from a large merchant family.

TL: The reason why this archive was preserved is because one of the members of the family, Constantine Neklutin, immigrated to America and took his immediate family with him. But a large chunk of his relatives of over 30 people stayed in Russia. And they were writing letters to him and his wife. And in turn, Constantine was sending packages and money transfers to this family. And he preserved records, very meticulously.

And what we learned from this archive is the process of adaptation of merchant families who might have lost all their wealth, but they haven't lost the values and the human capital.

My book is very much a story about the non-tangible aspect of inequalities, like human capital endowments, that cannot be simply taken away in the same way that material wealth could be redistributed.

JB: Tomila talks about human capital, a concept used by social scientists to designate personal attributes that help individuals or groups to realise their potential and become productive members of society. It includes knowledge, skills, experience, intelligence, training and judgment.

TL: They were absolutely obsessed with obtaining education for themselves, for their children. Even in Bolshevik Russia, they clung onto these lives from the past. And very much these lives revolved around education, education, education. That was very much part of who they were in terms of their social identities, sense of belonging, and social status.

What we find is that some of these people lost absolutely everything. Their relatives were repressed. Many aristocrats immigrated. Some of their relatives stayed. Many were shot, incarcerated in the Gulag, but they all banded together. They helped each other. They preserved their social networks.

And they helped provide the same kind of education that they thought they merited in the Tsarist period. They often had home-schooling groups. They taught their children in the home or their aspired for very good schools. And many of them actually kept these schools from the Tsarist past alive well into the 1920s. Many of these schools simply changed their names in Soviet Russia, but they often retained the same teachers. So we find the direct extension of the kind of human capital and aspirations that I link in my book to these so-called educated estate of aristocracy, merchants, the urban groups..of meschane, and clergy of course.

JB: & co: And what does this mean for how we tackle inequality now?

TL: So, this means, unfortunately, a message that is not always very easy to sort of digest or accept to policy makers, because it tells us that simple redistributive solutions to inequality in a kind of material sense don't work very well in the long term. So, we find, for instance, that Russia might have a levelled out incomes, Bolshevik Russia, communist Russia, in the 20th century. But in the kind of subsequent generations, the inequalities reappear, either in the material sense or simply in the sense of human capital.

JB: So Tomila is saying that human capital – the knowledge and skills that people accumulate – cannot be so easily re-distributed as material wealth.

TL: Of course, in the Soviet Union, there was not such a big income inequality, like we find now in modern capitalist societies. But in a kind of non-material sense, in terms of status, education and prestige of professions, very much, we find the reproduction of inequalities, if not, in the same then in the next generations. And so, the message for policy makers is that one has to focus on these kind of non-material aspects of levelling society.

JB: So, we’ve heard from Lea Ypi, who draws from her personal experience of life under communism to explore how both communism and capitalism promise, but fail, to give people different forms of freedom. And how, in both systems, messages are often ideologically driven and packaged.

Messages like ‘trickle down economics’, an idea that has been debunked by David Hope and Julian Limberg - who found that tax cuts for the rich introduced by politicians including Thatcher, Reagan and Trump across five decades and 18 wealthy nations simply made the rich richer.

Then we heard from Tomila Lankina who analysed why the greatest social levelling experiment of the 20th century – the Russian revolution – failed to erase the middle classes, despite brutal repression. She believes that addressing inequality isn’t just about wealth and income, but also about overcoming hidden barriers such as access to high quality education.

Finally, I asked Lea Ypi if she believes that capitalism will continue to dominate in the long term.

LY: No, I don’t think it will. I mean, no system, if you think about the history of humanity and from its beginnings to now, the world has gone through different political regimes and different understandings of what democracy is and what brings freedom, and how should political institutions relate to each other, so I don’t think capitalism is eternal.

I also think there are important contradictions that we are all aware of and perhaps we haven’t articulated sufficiently the response to those contradictions. And perhaps we lack emancipated discourses that can take citizens forward in terms of carrying them to the next stage. But we do face very significant crises, and the environmental breakdown is just one example of the inability of the system that we have, of the values that are at the centre of that system, to cope with the scale of the crisis that awaits us and so to me, it seems necessary to think about alternatives to that system.

JB: People say capitalism lifted lots of people out of poverty, but inequality appears to be getting worse, doesn’t it?

LY: I always like to talk about freedom rather than equality… capitalism and liberalism pride themselves on promoting freedom and for me, the most important critique of capitalism is not one that says capitalism is unequal, it’s one that says this is a system that has promised to bring freedom to everyone in the world, but in fact, in bringing inequality has also made it impossible for some people to be as free as others. And if you live in a world in which only some people are free and others aren’t, then how can you call that a free world? And how can you think that the system that dominates that world is a system for the free?

JB: This episode was produced by me, Joanna Bale, with script supervision from Sophie Mallett, and editing by Mike Wilkerson. If you’d like to find out more about the research in this episode, please head to the shownotes. And if you enjoy LSEiQ please leave us a review.

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