Economic Elites, Crises, and

Democracy
Economic Elites,
Crises, and
Democracy
Alternatives beyond Neoliberal
Capitalism
z
ANDRÉS SOLIMANO

1
 3
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Library of Congress Cataloging-in-Publication Data

Solimano, Andrés.
Economic elites, crises, and democracy : alternatives beyond neoliberal capitalism / Andrés Solimano.
    pages cm
Includes bibliographical references and index.
ISBN 978–0–19–935598–3 (alk. paper)
1.  Elite (Social sciences)—History—21st century.  2.  Rich people—History—21st century. 
3.  Financial crises—History—21st century.  4.  Neoliberalism—History—21st century. 
5.  Capitalism—History—21st century.  I. Title.
HN460.E4S65 2014
305.5′2—dc23
2014006781

135798642
Printed in the United States of America
on acid-free paper
 Contents

Acknowledgments vii

1. Introduction and Guide to the Book 1

PART ONE: Elites, Entrepreneurs, and the Middle Class: 

The Top 1 Percent and the Rest

2. Economic Elites and the Super-Rich in the Twenty-First Century 25

3. Productive Elites? On Entrepreneurship, the Technostructure, and
the Corporation 55
4. The Fragmentation of the Middle Class in the Neoliberal Era 68

PART T WO : Economic Crisis and the Instability of

Financial Capitalism

5. Stories of Financial Crisis and Austerity from the Nineteenth to the

Twenty-first Centuries 85
6. Making Sense of Crises in Capitalism: An Overview of
Theories and Approaches 110

PART THREE: Elites, Diaspora Migration and Social

Movements in Global Capitalism

7. The International Circulation of Elites and Global Social Movements 131

vi Contents

8. Migrant Diasporas, Development, and the Attachment to

National Identity 142

PART FOUR: Economic Democracy and the 99 Percent

9. Can Capitalism Afford Economic Democracy? 161

10. Epilogue: Deconstructing Neoliberal Capitalism 181

References 191
Index 203
 Acknowledgments

I am grateful to the Entrepreneurship and Business School of Universidad

Mayor in Santiago, Chile, for providing a congenial environment for me
to complete this book. I  would like to thank also my colleagues and good
friends Juan Pablo Jimenez from UN-ECLAC for joint work on economic
elites and taxation that led eventually to ­chapter 2 of this book; and Federica
Chiocchetti with whom I started, some years ago, the exploratory work on
economic democracy that served as the basis for ­chapter  9. I  want also to
acknowledge the unfailing support and encouragement of Scott Parris, now
at Oxford University Press, in writing this book. Appreciation goes also to
Cathryn Vaulman from OUP for her continued help in the publication pro-
cess and to Angelica Sepulveda from Universidad Mayor, who provided very
effective assistance in the final stages of putting together the manuscript.
Last, but not least, my gratitude goes to my wife Bernardita, daughters
Gracia and Paula, and son Pedro for their patience and support while I was
writing this book.
 1

Introduction and Guide to the Book

Since the 1980s and 1990s we have been living in a variant of capital-
ism—dominant in the United States, the United Kingdom, Chile, South
Africa, Russia, and to an extent in China, and a score of other countries—that
embraces policies of privatization, market deregulation, globalization, dena-
tionalization, and financialization as the engines for growth and moderniza-
tion. This variety of capitalism, often called neoliberalism, shows the following
main features: (i) prevalence of monopolistic markets dominated by oligopo-
lies and big conglomerates in key economic activities; (ii) legitimization of the
profit motive over other motivations, such as solidarity and altruism, as the
fundamental mechanism to coordinate human activities and encourage wealth
creation and distribution; (iii) reduced role for the state in the economy as pro-
ducer, regulator, and redistributive agent; (iv) significant concentration of eco-
nomic power and political influence in small but powerful economic elites—in
other words, a strong dominance of capital; (v) a high frequency of financial cri-
ses; (vi) weakening of the influence of labor unions and decline of labor shares
in the national income; (vii) control of the mass media and other mechanisms
of knowledge production, and dissemination by private interests and economic
conglomerates; and (viii) low-intensity democratic processes with reduced citi-
zen participation, and strongly influenced by big money and interest groups.
The adoption of neoliberal policies has been accompanied, in the eco-
nomic and social realms, by pronounced growth cycles, financial instability,
large inequality of income and wealth, sharp internal differentiation of the
middle class generally considered as a stabilizing segment in society, fragmen-
tation of entrepreneurship, the globalization of elites, and a rise in the migra-
tion of highly segmented global labor markets along with the surge of global
and national social movements critical of inequality, power abuses and the
lack of effective and transparent democracy.
2 In t roduct ion

The leading actors in this new play are the rich economic elites. This seg-
ment, popularized as “billionaires” by a publication such as Forbes magazine
or by the phrase “top 1 percent” denoting a small segment of the population
with very high income and wealth levels. The term has been popularized by
the Occupy Wall Street movement but it is also used by recent scholarly litera-
ture on the topic (see ­chapter 2). The top 1 percent has strived in the dynamic
sectors of the economy, such as technology, finance, telecommunications,
energy, media, and entertainment. In today’s capitalism, the very rich control
most of the productive and financial wealth in a process of increasing wealth
concentration that reversed the tendency toward lower wealth-concentration
of the period of regulated capitalism (also called “the golden age of capital-
ism”) running from the late 1940s until the 1970s. Their influence not only
reaches the material realm of the economy; it also extends to the spheres of
ideas and culture, and to the production of a “common sense” aligned with
the views of the elites. As private conglomerates have dominant ownership
of the mass media (TV, newspapers, radio networks) and other centers of
production, and control the dissemination of the knowledge and cultural
content that shape social behavior and political views, they are functional to
the status quo.
A movement, with varying success, to counter the increasing power of eco-
nomic elites in the new global capitalism has been the emergence of national
and global social movements that are critical of corporate-led globalization,
social inequality and exclusion, unemployment, corruption, and the failures
of a representative democracy that have been captured by interest groups
and self-reproducing political and technocratic elites. We live in fragile and
complex times. On one side, there are unprecedented technological break-
throughs and new productive possibilities to raise living standards; on the
other side, we experience uneven growth, social tension in divided societies,
ecological fragility, and climate change.
The growing influence of the rich economic elites on democracy is a source
of concern. Given their unparalleled capacity to appropriate the economic
surplus that is generated in an economy marked by new and more productive
technologies and weak labor, these elites are able to mobilize ample financial
resources to influence the working of political institutions and, thus, to block
or neutralize real or perceived social demands for higher income and wealth
taxation and regulation of big business, and even any nationalization of the
assets concentrated in the elites, although some “business friendly” national-
izations of banks did occur in the United States and United Kingdom during
the financial crisis of 2008–09.
 Introduction 3

There are several channels through which the money of the elites exerts
a decisive influence on democracy. To cite the most important: (i) contribu-
tions by corporations and rich individuals to political campaigns; (ii) lobbying
activities to shape legislation; (iii) the ownership, funding, and influencing of
messages by the mass media and the advertisement industry; (iv) the mobili-
zation of public intellectuals and academics to provide technical arguments
in favor of pro-elite policies.
Nowadays the most important corporate decisions concerning invest-
ment; remunerations of CEOs, middle-rank managers, and workers; and
locations of firms are made in the opacity of corporate boardrooms, which
are accountable to only a small group of dominant stockholders. The lack of
economic democracy in current society is, indeed, large. Consumers, work-
ers, and community members are notably outside the small circle of decision
makers, although they are of course directly affected by the decisions made by
these economic and political elites.
This book reviews theories, empirical evidence and actual historical reali-
ties that can shed light on the main impacts of neoliberal capitalism on the
formation and consolidation of business and financial elites, the fragmenta-
tion of the middle class, the diminished role of labor, the frequency of finan-
cial crisis, and the increased globalization of elites and talent mobility, as well
as the rise of protest movements around the globe. The book also explores the
potentials for greater economic democracy as an alternative social contract to
this elite-dominated capitalism.

1.1  The Different Phases of Capitalism since the

Nineteenth Century: Laissez-Faire, Regulated,
and Neoliberal Capitalism
From a historical perspective, capitalism has undergone different phases in
the last two centuries or so. In the “long nineteenth century”—say, from
around 1815 to 1913, right before the First World War—in Europe and the
New World (United States, Canada, Australia, New Zealand), the dominant
form of capitalism was laissez-faire:  unregulated, relying on self-correcting
markets operating in the framework of a liberal state of low taxation, reduced
business regulation, and the gold standard (at least in the later decades of the
nineteenth century in several countries). In its international dimension, this
was a global capitalism that promoted free trade, unrestricted capital mobil-
ity, and to a large extent, free migration.
4 In t roduct ion

During this long nineteenth century, the hegemonic power was Great
Britain, which practiced a sort of “imperial free trade” based in its colonial
system, better technology, economic power, naval superiority, and liberal eco-
nomic doctrine. As noted by Karl Polanyi, the period from 1815 to 1913 was
historically unprecedented as it yielded, on the whole, international peace in
Europe based on a system of a balance of power among various empires.
Nevertheless, the outbreak of World War I shattered this world system of
liberal (laissez-faire) capitalism. The war’s breakdown of the economic and
political order was followed by more than two decades of economic and politi-
cal turbulence, extending until the end of World War II. The early 1920s were
characterized by very severe inflation in Austria, Hungary, and Germany and
by a difficult return to the gold standard. Attempts to restore orderly trade and
capital mobility were ultimately futile. A severe financial crash took place in
1929, followed by the Great Depression and a bumpy recovery that was con-
solidated only through the economic stimulus provided by the war effort. In
short, the 1920s and 1930s were two decades of economic instability and social
turbulence characterized by the emergence of virulent and destructive nation-
alism, xenophobia, and intolerance in the forms of fascism and Nazism.
Toward the end of World War II, the United States and the United
Kingdom, the two main global powers, gave priority to a new political
and institutional settlement to stabilize global capitalism, curbing its most
self-destructive tendencies and consolidating international peace with the
help of the newly formed United Nations, whose headquarters were to be in
New  York City. In turn, stabilizing the international monetary system and
correcting the balance-of-payments disequilibria were the missions of the
new International Monetary Fund (IMF), with headquarters in Washington,
D.C. In turn, assistance for economic development and reconstruction would
come from the World Bank. The IMF and the World Bank became parts of
the Bretton Woods system, under strong influence of the U.S. government.
The Bretton Woods system, however, was not truly global, as it did not
include the USSR or all countries of the new socialist block.
At a national level, the post-World War II economic and social priorities of
the industrial countries were the provision of jobs for all (full employment),
economic security, and social protection. These new priorities reflected the
demands of a population exhausted by the instability, turmoil, and economic
insecurity of the 1920s and 1930s.
The specifics of this new social contract of regulated capitalism varied from
country to country. In the United States, there were the policies of the New
Deal, led by President Franklin Delano Roosevelt in the 1930s and continued
 Introduction 5

by the Great Society programs of President Lyndon Johnson in the 1960s. The
New Deal included legislation and commitments by government to ensure full
employment, insurance for bank deposits, farm supports, public work programs,
and the creation of institutions to promote the acquisition of housing by the
middle and working classes. New labor legislation was put into place and a fed-
eral system of social security was created to provide income for retirement.1
In Europe, several models of social welfare and policies were also devel-
oped to ensure full employment. In Great Britain, the Labor Party, in govern-
ment after 1945, adopted the recommendations of the Inter-Departmental
Committee on Social Affairs Report, known as the “Beveridge Report,” and
expanded the National Insurance System to cover pensions, unemployment
transfers, and other social benefits, including a labor and tenant covenant and
the National Health System; these programs constituted the bulk of what was
to be the welfare state system in the United Kingdom. In France, in 1944, the
National Council of the Resistance (Conseil National de la Resistance, or
CNR), opposed to the Vichy government and composed of a range of progres-
sive parties and social movements including communists, drew up a govern-
ment program to be applied after liberation that included the nationalization of
energy industries, insurance companies, and banks; social security; and the need
for state planning and policies to guarantee the independence of trade unions.
In West Germany, in 1949, after the end of World War II, a social market econ-
omy was established by the Christian Democratic Union under the guidance
of both Economic Minister Ludwig Erhard and Chancellor Konrad Adenauer.
This was a model that combined market capitalism with social insurance; the
social balance was to be achieved by the combination of active trade unions
and capitalist markets. The German model was intended to be a third way to
navigate between the laissez-fair capitalism of the nineteenth century and the
state socialism and collectivism of the sort implemented by Soviet Russia in the
second half of the 1920s, following the Bolshevik Revolution of 1917.2
We can portray the new system of regulated capitalism put in place in
America and Europe after World War II as having four main pillars:

(i) Keynesian policies, oriented toward reducing the economic fluctuations

of the business cycle and ensuring full employment.

1.  The programs existing in the early 1930s, before FDR, were of only partial coverage and
under the control of local governments.
2.  Decades later, British Prime Minister Tony Blair tried a new “third way” in the UK,
although this “neoliberalism with a human face” was not very different, in substance, from
earlier Thatcherist policies.
6 In t roduct ion

(ii) The welfare state, oriented toward providing social protection and access
to education, health, housing, and pensions to the majority.
(iii) Controlled private capital markets at national and international levels.
(iv) A reasonable balance of power between organizations representing the
interests of capital and labor unions.

In advanced capitalist countries, the regulated system worked fairly well

up until the early 1970s. This period was termed the “golden age of capital-
ism,” owing to its economic dynamism and social stability. In fact, regulated
capitalism was able to achieve reasonably high rates of economic growth,
reduce inequality, maintain macroeconomic equilibrium, and avoid acute
social tensions and recurrent financial crises. However, the system was not
problem-free, either. In fact, by the 1960s the U.S. economy was incubating
fiscal imbalances and noticeable divergences between productivity growth
and wage increases, which eventually contributed to sealing the fate of the
Bretton Woods parity of the U.S. dollar with respect to gold, and to open-
ing the door for a crisis in the prevailing monetary system. In this context,
Keynesian and social-democratic policies started a retreat and were replaced
by a new free-market orthodoxy, that until recently had been on the margins
of mainstream academic debates and policy-options.

1.2  The Ascent of Neoliberalism

The term neoliberalism, as mentioned before, denotes an economic paradigm
and political project centered on privatization, market deregulation, reduced
economic role of the state, financialization, and globalization. Its origins are
associated with the search, in the 1930s and 1940s, of a new liberalism more
suitable for a world that was different from that of the long nineteenth cen-
tury. In fact, people in conservative academic and political circles were uneasy
and disappointed with the dismal economic performance of the 1920s and
1930s, the rise of economic nationalism, the growing influence of Keynesian
economics, and the rapid industrialization of the Soviet Union. They decided
to reexamine the conceptual and practical premises of classic liberalism and
tried to adapt them to the new economic and political challenges of the time.
As a first step, a group of liberals gathered in Paris in 1938, at the Walter
Lippmann colloquium, to exchange views and organize around the quest
for a new liberal approach. Later on, in 1947, the Mont Pelerine Society was
formed in a village of that name near Lake Geneva, in Switzerland. Members
of that society included figures such as Friedrich Hayek, Wilhelm Roepke,
 Introduction 7

Raymond Aaron, Fritz Machlup, and Milton Friedman. It is fair to say that
neoliberalism was, in the 1940s, 1950s, and 1960s, a quite marginalized cur-
rent of economic thinking, with little influence on public policy, even on
conservative governments.
French philosopher Michael Foucault, in a series of lectures given at the
College of France in 1978 and 1979, and published later under the title The
Birth of Geopolitics, undertook an early and insightful analysis of several cur-
rents of neoliberalism. Foucault contrasted two forces: the logic of the “rea-
son of state” (raison d’Etat) prevalent in Europe since the sixteenth century,
where the state constitutes both a pre-existing reality and a process of ongoing
construction strengthened through economic, military, demographic, and
diplomatic means, on one side; and the quest for setting limits to the state
and the sovereign, on the other. Foucault contrasted nineteenth-century clas-
sic liberalism and twentieth-century neoliberalism regarding the relative roles
of markets and the state in the economy and society, and he highlighted in
detail the significant differences between the German Ordoliberalism associ-
ated with Walter Eucken, Franz Böhm and others from the Frieburg School
and the Austrian liberals in the line of Hayek and Ludwig Von Misses, and
American neoliberalism associated with the Chicago School of Economics
of Milton Friedman, Gary Becker, George Stigler, and others. Foucault drew
critical differences in both approach and policy recommendations between
the German Ordoliberals and the American neoliberals and Austrian liberals.
His accounts, somewhat surprisingly, omit the British neoliberals.
The Ordoliberals saw the market as embedded in a broader framework
formed by moral and cultural constraints that pose social limits on its action.
Incidentally, the issue of the disembodiment of the market in society under
liberal capitalism and its dire consequences for society is a main theme of the
classic book by Karl Polanyi, The Great Transformation (see ­chapter 9).
The German social market economy built after 1945, in which the state plays
an important role in the provision of social services and the regulation of big
business and high finance, rested on the recommendations of Ordoliberalism.
In contrast, Hayek and the Chicago School saw no major need for regulating
and constraining the market, and thus advocated for the privatization of money
(Hayek), as well as education, health, and social security; and the extension of
the logic of the market to a variety of unconventional fields (for the action of the
market) irrespective of the social consequences these extensions could have on
the social fabric. For Polanyi, expansion of the market to create “fictitious mar-
kets” (for labor, land, and natural resources) and to include social sectors (educa-
tion, health) were the main causes of social disruption in the twentieth century.
8 In t roduct ion

In advising and supporting Margaret Thatcher in the United Kingdom,

Ronald Reagan in the United States, and General Augusto Pinochet in Chile,
in the 1970s and 1980s, Hayek and Friedman obviously distanced themselves
from Polanyi and disregarded the social consequences for society as a whole in
their advocacy of extending an unregulated market to the largest possible num-
ber of sectors and activities. In turn, they were also apparently oblivious to the
obvious contradiction between supporting the Pinochet regime and their pre-
sumed allegiance to liberty and freedom that suggest their books Constitution of
Liberty (Hayek) and Capitalism and Freedom (Friedman). Different interpreta-
tions of neoliberalism exist. In the neo-Marxian tradition,3 the rise of neoliberal-
ism since the 1970s is seen as an economic and political attempt to restore the
power of capital (the capitalist class) after a period of growing ascendancy by the
labor classes viewed as strengthened trade unions, higher wages, and squeezed
profit margins. In this view, the stagnating and inflationary tendencies of the
1970s were largely a consequence of the deterioration of the power of the domi-
nant classes to ensure adequate conditions for capital accumulation and of the
capitalists to appropriate the economic surplus.
Neoliberalism seeks to restore conditions for achieving increased profits
as a way to boost investment and growth. In the 1970s and 1980s, the adverse
“reaction of the bourgeoisie” to the welfare state, to taxation, labor militancy,
dirigisme, and to inclusive social contracts, was unquestionable. Free-market
economics provided a useful way to reverse the process of diminished busi-
ness profitability and the weakened influence of capital in setting the rules of
the game in both political and economic realms.
Both Harvey (2010) and Dumenil and Levy (2011), the main proponents
of the neo-Marxian view of neoliberalism, show a very different nature of the
financial crisis that started in 2008–09 in the advanced capitalist economies,
compared with the stagflation crises of the 1970s that hit the core capital-
ist countries. In the 1970s, the problem was slower productivity growth and
active labor militancy complicated by two oil price shocks (1973 and 1979),
preceded by the end of the Bretton Woods parities. So, with the crisis of
the 1970s, they hold, the main problem was that labor was too strong in the
new macroeconomic context of adverse supply shocks and exchange rate
instability.
In contrast, the crisis triggered in 2008–09 reflected too much power of
capital, in particular financial capital. In fact, financial capitalism since the
1980s had promoted rapid credit creation and debt accumulation, with both

3.  See Harvey (2005, 2010) and Dumenil and Levy (2004, 2011).
 Introduction 9

processes allowed to run free, owing to a sort of “neoliberal paralysis” that

prevented any measures to regulate, control, or stop financial excesses and
rampant speculation. Of course, state activism would have affected the inter-
ests of the powerful financial elites, concerned with making money and intent
on minimal state interference.
In fact, since the 1980s, Wall Street, the City of London, and other
major financial centers had been pressing governments not to regulate the
loan-making process and encouraged the proliferation of new, complex,
financial instruments—a process that ultimately led to financial bubbles and
an overvaluation of assets that could not be sustained, and whose correction
proved very costly for real economic activity, employment, and the interests
of working-class and middle-class people.
While financial capitalism became associated with exacerbated income and
wealth inequality favoring the financial elites and the super-rich, the non-rich
had to incur debt to sustain their living standards and afford the increasing cost
of private education, health, housing, and consumption of durables.
The application of neoliberal policies varied among the countries where
these programs were implemented. In the Third World, a naked and ruth-
less version of neoliberal economics was applied to Chile in the 1970s,
under the military rule of General Pinochet and helped by a cohesive team
of economists trained at the University of Chicago under the leadership of
Milton Friedman and company. The Chilean experiment was a radicalized
version of free-market economics that managed to privatize not only a score
of state-owned enterprises in industry, energy, and public utilities but also
social security (except for the armed forces’ pension system) through a “capi-
talization system.” In addition, the profit motive was extended to education,
health, and other social activities, a step that Margaret Thatcher was unable to
achieve in the United Kingdom.
The political element was important too, as these experiments in privatiza-
tion—or “accumulation by dispossession”—were launched in Chile during a
military regime that ruled without a parliament, that banned political par-
ties, and that severely restrained the action of labor unions and censored the
press. The military used active state violence to push for the neoliberalization
of the country, in a peculiar blend of “closed politics” and “free market eco-
nomics.” Furthermore, in another unexpected twist of history, neoliberalism
was consolidated in Chile by several social-democratic governments (based
on a political alliance between Socialists and Christian Democrats and other
center-left parties, excluding, until the first government of President Bachelet,
the Communist Party) that succeeded General Pinochet in 1990 and that
10 In t roduct ion

stayed in power for around twenty years after the end of the military regime
(Solimano 2012b).
In the First World, the application of neoliberalism by the govern-
ments of Ronald Reagan in the United States and Margaret Thatcher in
the United Kingdom was somewhat more constrained by the presence of
democratic institutions, at least if we compare them with the Chilean experi-
ment, although the crushing of organized labor was not that gentle. Both
conservative leaders deregulated industry, privatized important sectors of
the economy (particularly in the UK), encouraged private capital markets,
curtailed labor unions, and strengthened big corporations and high finance.
In the United States, these policies were started by Republican administra-
tions and were continued by two Democratic Clinton administrations in the
1990s, the latter mainly in the financial sector (repeal of the Glass-Steagal
legislation was led by two treasury secretaries in the Clinton administration,
Lawrence Summers and Robert Rubin). In the United Kingdom, the Blair
governments of “new labor” maintained the bulk of free-market conservative
policies started by Margaret Thatcher.
It is fair to say that neoliberalism was more popular in the Anglo-Saxon
countries than in continental Europe. Apparently, France and Germany,
the Netherlands, were not tempted—at least before the crisis of 2008–
09, to adopt the kind of free-market policies as followed in the United
States and United Kingdom. In Asia, Japan also maintained, on the whole,
a healthy distance from neoliberal policies, although it did experience a
financial bubble in the 1980s, followed by a protracted period of stagnation.
As we shall see in ­chapter 2, inequality—or the concentration of income
and wealth in the top 1 percent of the population—has in recent decades
become more acute in Anglo-Saxon countries than in their non-Anglo
Saxon cousins.
The reach of neoliberalism also extended to other corners of the world.
Its sway was strong in Latin America in the 1990, as several countries of the
region moved, under the advice of the International Monetary Fund and the
World Bank, to privatize their state-owned enterprises; open their economies
to international trade, foreign direct investment, and private capital flows; and
stabilize inflation. Within Latin America, Brazil and Uruguay maintained a
distance from neoliberal economics, while the 1990s saw more enthusiasm
for free-market economics in Argentina, Mexico, Peru, Colombia—and, of
course, Chile. In the 2000s, however, the political pendulum swung again
and the governments of Venezuela, Bolivia, Ecuador, Brazil, Argentina, and
 Introduction 11

Nicaragua adopted more nationalistic and socially oriented policies that dif-
fered from the prescriptions of the Washington Consensus.
The influence of free-market ideas developed in the West also extended
to the former communist world, helped by the actions of the U.S. govern-
ment and the Bretton Woods institutions. In Russia, the first post-Soviet
government of Boris Yeltsin privatized important parts of the gas and other
natural resources entities; slashed public budgets in education, health, and
pensions; and fired many people from state enterprises and ministries. At the
top, the old communist-nomenclature elite was boldly and swiftly replaced
by a new capitalist oligarchy, radically altering the social structure of the
country. The emerging new capitalism tilted the balance of power between
capital and labor to tilt more in favor of the former, redressing the Soviet
period’s “government of the working class” ruled by a communist leadership
and bureaucracy.
The primitive accumulation to reinvent capitalism in Russia took on
unexpected new forms. Former communist apparatchiks and enterprise
directors seized valuable state assets and resources by using obscure, non-
transparent mechanisms. The veracity of this new capitalism was not coun-
terbalanced by the institutions of a hypothetical Russian democratic state,
however. In the new ideological and political environment, the state largely
resigned itself to its key functions of producer, regulator, and (progressive)
redistributive agent. Similar trends were observed, with corresponding
national peculiarities, in Poland, Hungary, the Czech Republic, Bulgaria,
and the Baltic countries.
In China, after the death in 1976 of the father of Chinese egalitarian
communism, Mao Tse-tung, the right turn toward the market economy
has been far reaching. In this case, it was the Chinese Communist Party in
power that led the move from near autarky and egalitarianism to a policy
of open doors to foreign multinationals, coming mainly from the United
States and Europe. Western corporations were eager to transform China into
the new “factory of the world.” In just a few decades, the country became a
main exporter of (largely light) manufacturing, operating in global markets
and taking advantage of Western technologies and managerial capacities. It
utilized the low labor costs and firm control of the work force provided by an
authoritarian state, assuring the incoming multinationals of a docile and dis-
ciplined labor force. Some authors have given the label “neoliberalism with
Chinese characteristics” to this peculiar mix of multinational-led capitalism
under communist rule.
12 In t roduct ion

1.3  Impact of Neoliberalism on the Social

Structure of Capitalism
The world’s experience, so far, with neoliberalism and globalization high-
lights four main impacts on inequality and the social structure of advanced
and developing countries:

1.3.1  A Sharp Concentration of Income and Wealth

at the Top
This refers to the phenomenon discussed at the outset of this chapter and is
known as the “rise of the top 1 percent.” In countries that were pioneers in
embracing the neoliberal model, such as the United States, the income share
of the richest 1 percent of the population is about 22 percent; in the United
Kingdom, it is 15 percent; and in Chile, it has reached a record 33 percent. As
discussed earlier, this trend leads to a worsening of income distribution and
wealth, with a sharp concentration at the top, such that a small group exerts
disproportionate influence and power on the country’s economy and society.

1.3.2  Heterogeneity of Entrepreneurship

Free-market economics has affected the nature of entrepreneurship in
various ways. Far from turning these economies back to the idealized
nineteenth-century capitalism of decentralized and atomistic markets
depicted in most economics textbooks, it has deepened the dominance of
corporate-monopoly capitalism in which the bulk of investment and pro-
duction worldwide is carried out, either directly or through global produc-
tion chains, by big corporations and multinational firms. These companies,
managed by committees rather than by individual entrepreneurs, enjoy
ample command of financial and human resources, upgraded technologies,
and political influence at both national and international levels. In contrast,
small- and medium-size enterprises generate a lower contribution to output
although they are more labor-intensive.
Entrepreneurship is quite heterogeneous:  on one hand, we have highly
successful technological entrepreneurs like the late Steve Jobs, or Bill Gates,
Jeff Bezos, Sergei Brin, Larry Page, and others; on the other hand, we have a
large number of middle-range “opportunity entrepreneurs,” who create firms
and engage in new endeavors but face limited access to credit, markets, and
technologies, as well as the harsh competition with and barriers imposed by
 Introduction 13

oligopolies and big corporations. In addition, there is a segment of “necessity

entrepreneurs” who operate mainly in the service sector and in microfirms,
with reduced financial and technological requirements and tight access to
funding. Necessity entrepreneurs often earn a rate of return that is not very
different from the wages of a middle-rank employee in the formal sector, but
who is subject to greater uncertainty and vulnerability. This type of entrepre-
neurship is certainly different from the classic “Schumpeterian entrepreneur,”
resembling instead an economic survival strategy of at times diminished
employment possibilities, low wages, and social exclusion that are typical of
Third World countries. Nevertheless, necessity entrepreneurs are present in
increasing numbers in the core advanced capitalist economies and the periph-
eral European economies, such as Greece, Portugal, Ireland, Spain, and Italy,
which have been affected by severe economic crises, high unemployment, and
the destructive effects of austerity policies.

1.3.3  Growing Internal Differentiation Within the

Middle Class
The middle class (along with the working class) is the social segment that has
been most affected, in various ways, by the turn to the free market, the rise
of inequality, and the enhanced power of the economic elites. The general
trend is toward increased differentiation within the middle class, with some
segments of the class benefiting from the new capitalism while others failing
to advance in the free market. On the one hand, we observe a thriving upper
middle class composed of highly educated and well-connected top managers
and professionals, such as lawyers, financial experts, economists, and technol-
ogy experts working for banks, big corporations, and independent profes-
sionals firms. This new technostructure (borrowing the highly suggestive term
coined by the late American economist John Kenneth Galbraith) often earns
very good salaries and has access, in the case of top executives, to preferential
stock options and bonuses. They make the main decisions within the corpo-
rations and have appealing opportunities for upward social mobility in the
corporate world, in government, or in the financial sector. On the other hand,
the new capitalism enlarges a less fortunate segment of the middle class, com-
posed of school teachers, employees of ministries and public agencies, cleri-
cal workers, and salespeople in retail stores, for whom free-market economics
has often meant stagnant wages and slim chances for economic progress in
an increasingly segmented and elitist society. This is a segment particularly
vulnerable to shocks in the labor market (including recurrent waves of job
14 In t roduct ion

cuts in the public sector), crises in the financial markets (indebtedness), and
unaffordable health contingencies that make them financially vulnerable.
In some countries, such as China, India, and some Latin American nations,
social statistics show that millions of people have left poverty (as measured by
income-based poverty lines) and have joined the ranks of the “middle class.”
However, in many instances, these new entrants to the middle class (itself
a complex concept to define and measure, as we shall see in ­chapter  3) are
vulnerable to fall again below the poverty line should an adverse situation
take place. Moreover, an increase in income does not necessarily imply greater
economic security, empowerment, and political influence.

1.3.4  Fragmentation and Marginalization of Labor

Probably the main losers, in terms of relative economic position and influ-
ence in the economic and political processes, in the last three decades have
been manual workers and their organizations. The anti-labor stance of the
early experimenters with neoliberalism—in the 1970s and 1980s under
Reagan in the United States, Thatcher in the United Kingdom, and Pinochet
in Chile—was evident. These governments severely distrusted labor and
engaged often in repressive policies toward working-class movements. They
blamed a combination of strong labor unions and alleged “large government”
for the slowdown in productivity growth, squeeze in profit margins, infla-
tionary pressures, and macroeconomic instability that marked the end of the
post-World War II period of regulated capitalism.
A number of changes in the global economy related to international trade,
the structure of production, technological change, and the dynamics and
institutions of labor markets have affected the position of labor. We can high-
light six major factors at work: First, the increased globalization of capital,
such as foreign direct investment and multinationals directing their opera-
tions toward low-wage countries. Second, important changes in the interna-
tional location of the production process and the development of global value
chains that have encouraged production and outsourcing of intermediate
parts and inputs in cost-competitive nations, along with the externalization of
services such as call centers and accounting services. Third, rising immigration
of skilled and unskilled workers to high-income nations in North America
and Europe, from developing countries and former communist nations. This
immigration flow has increased the supply of labor in various categories in
the host countries, bringing in competition from foreign workers and pro-
fessionals. Fourth, the penetration of labor-intensive manufacturing imports
 Introduction 15

produced in low-wage countries that have moderated local wage growth in

rich capitalist economies. Fifth, the information technology revolution that
has encouraged adoption of labor-saving, skill-intensive technologies and has
reduced the price of investment goods, leading to a substitution of labor for
capital equipment including computers. Sixth, the diminished bargaining
power of labor unions, associated with the de-unionization process.
These trends have had the effect of moderating the growth of wages for
workers and middle-rank employees, displaced jobs in industrial nations,
increased wage disparities between CEOs and the rest of the labor force, and
encouraged global inequality. An important effect has been the global reduc-
tion of labor share in national incomes. Empirical studies are showing that
in at least forty-two countries, during the period 1975 to 2012, there has been
a decline in labor share on the order of five percentages points, in contrast
with the near stability of that share in the four decades after World War II.
Moreover, this decline in labor share has taken place in the four largest econ-
omies of the world:  the United States, China, Germany, and Japan. These
trends provide evidence of a regressive distributive shift against labor that has
occurred during the neoliberal era. It is important to note that this decline in
labor share may underestimate the true increase in inequality for this period, if
we consider the sharp rise in the remuneration of top income earners (CEOs
and other senior managers) that is also part of labor income (see ­chapter 2).
In the United States, the decline in overall labor share in the last twenty-five
years is around 6 percent, but if you consider the labor share of the bottom
99 percent of taxpayers, that decline is really 10 percent.4

1.4  Economic and Financial Crises and Austerity

Policies
Besides these effects on the social and economic structure of these countries,
the last decades of the twentieth century and the early twenty-first century
have been a period of macroeconomic volatility and repeated financial cri-
ses. Large-scale financial crises had been more frequent in the periphery of
the world economy—the “global south”—in the 1970s, 1980s, and 1990s,
although advanced economies also experienced some financial crises, such as
the Savings and Loan crisis of the 1980s in the United States, the banking

4.  See Karabarbonuis and Neiman (2013) for the evolution of global labor shares and Elsby et
al. (2013) for data on labor shares in the United States.
16 In t roduct ion

crisis of some Scandinavian countries in the early 1990s, and the debacle of
the Long Term Capital Markets Fund in the late 1990s.
The epicenter of the large-scale financial crises has shifted north, and since
2008–09, the core of the world’s economy, composed of the United States
and several European countries, has been at the center of severe, large-scale,
financial crises that have led to stagnation, unemployment, diminished expec-
tations for future generations, and financial fragility. A historical perspective
confirms that global capitalism, when accompanied by unregulated financial
markets at national and global levels, becomes prone to financial crises in
varying degrees of virulence and intensity. As we show in ­chapter 5, financial
crises of big proportions and with international ramifications were uncom-
mon only during the Bretton Woods period. In contrast, they were present in
the first wave of globalization of the late nineteenth century and early twenti-
eth century, affecting both the center (Europe and the U.S.) and the periphery
of the world economy linked financially with the center. There were also crises
in the 1920s and 1930s, and again in the period of neoliberal globalization
that started in the 1980s.
These crises raise important questions about the role of economists and
the effectiveness (or the lack of it) of existing international financial institu-
tions, such as the IMF and monetary authorities such as the central banks.
In particular, an obvious question is why the mainstream economics profes-
sion, central banks, and the International Monetary Fund, with their large
teams of sophisticated economists, failed to anticipate these crises and/or
prevent them from occurring. It is also relevant to question the role played
by the economic theories that these economists and their organizations use to
understand reality and to influence it. Particularly misleading theories are the
efficient market hypothesis, new classical macroeconomics, and the rational
expectations school that provide unrealistic depictions of how the real world
works; these theories have misguided governments and the economic and
financial authorities. An additional question is the role that economists have
played in generating this general conceptual confusion.
Besides ideas, interests matter. The public policy climate existing before
the 2008–09 crisis and the type of rescue packages put forward in its after-
math underscore the big influence that financial sector elites (bankers, big
investors, hedge fund owners, and managers) have had on the central banks,
finance ministries, and governments. These financial-sector elites pushed for
weak regulation and a hands-off approach to the financial markets; they pro-
moted the notion that the markets could effectively self-regulate themselves.
However, when the crises occurred, the central banks and the government
 Introduction 17

treasuries provided quick relief to the financial intermediaries and bailed out
these institutions, on the grounds that they were “too big to fail.” As a con-
sequence of rescue packages, the unfunded Iraq war, and Bush tax cuts, the
national debt of the United States has climbed, passing on the cost of finan-
cial irresponsibility to future generations.
It is apparent that during the financial boom, gains were privatized.
However, in asymmetric fashion, also during this crisis, losses were socialized.
In the financial binge, the “discipline of the market,” in which gains and losses
of private transactions are borne by market participants, has been conspicu-
ously absent. In turn, the “remedies” for the crisis—through the adoption of
austerity policies—have been controversial. Initially, in 2009 and part of 2010,
the United States and the European countries, adviced by the IMF, attempted
expansionary fiscal policies to counteract the effects of the decline in private
investment and the slowdown in private consumption. This policy was aban-
doned in 2010, and policy priorities shifted away from defending employment
and growth and moved toward containment of fiscal deficits and public debt.
As a consequence, economic growth in Europe and America slowed-down
with respect to its pre-2008 growth trends, thereby increasing unemployment
and, along the way, raising the debt-to-output ratios. Austerity policies have
been particularly detrimental for countries of the European periphery, such as
Portugal, Spain, Greece, and Ireland. Those nations have experienced record
unemployment levels and severe cuts in social benefits. A sense of despair is
pervasive among the populations of these countries. The full consequences
for democracy of a protracted economic crisis remain to be seen.

1.5  Global Elites, Migration, and

Social Movements
In late twentieth and early twenty-first centuries, the migration of workers
has been far more restricted than the movement of goods and services, finan-
cial capital, and foreign direct investment (Solimano 2010a). We live now in
a world in which multinational corporations and knowledge elites are more
global in the scope of their activities. People with higher education, knowl-
edge capabilities, social status, connections, and access to capital have become
the internationally mobile, moving along various circuits and networks in the
global labor markets and global capital markets. International investors move
financial capital around the world, including placing them in fiscal paradises,
with relatively few restrictions from governments or supra-national authori-
ties. There is also an internationally mobile global technostructure composed
18 In t roduct ion

of high-level executives, financial and technical experts, economists and engi-

neers, lawyers, and other professionals who work for multinational corpora-
tions (MNCs) in the private sector or for international organizations such as
the IMF, the World Bank, the Organization for Economic Cooperation and
Development (OECD), the United Nations, and others in the international
public sector. In these international bureaucracies the incomes are, generally,
tax-free and employees enjoy a privileged status. In addition to this interna-
tional circuit of big private or public organizations, there is a degree of mobil-
ity enjoyed by independent entrepreneurs who do not have the backing of the
big international corporations and who try their fortunes in other countries.
As in many things in life, some succeed while others do not.
Globalization has led also to a significant geographical concentration in
the rich OECD countries of individuals with high education and special tal-
ents (the so-called “talent elite”). However, the economic crises of the First
World in 2008–09 and the faster rates of economic growth in several emerg-
ing and developing countries may lead to reversals in the migration of tech-
nological entrepreneurs, professionals, technical experts, medical doctors,
graduate students, scholars, and others. Global job markets change fast in
response to shifts in job opportunities and demographic trends.
At the same time, along with these globalization trends, concentration
of Third World talent in rich countries, and denationalization of economic
activities, we find also immigrant diasporas that reflect conditions such as war
and internal conflicts, political and ethnic prosecutions, economic stagnation,
and other push factors. A  distinctive feature of these diasporas, compared
with purely economically motivated migration, is the people’s commitment
and attachment to their home countries. Diasporas contribute to maintain-
ing historical identities during times of increasingly rootless global capitalism.
Moreover, as these immigrant communities prosper in their host countries,
they become valuable sources of savings, capital, knowledge, wealth, access to
technologies, and international contacts for their home nations. Remittances
are the most visible and important vehicle for transferring financial resources
to the source countries, but this is not the only asset that relocated popula-
tions can transfer to their home nations. Market contacts, knowledge, and
fresh capital accumulated by the diaspora members are also valuable factors
for transfer. However, mobilization of these assets for national development
of the home country is not always automatic; they need some actions initi-
ated by those governments and home-country civil organizations.
Finally, along with the globalization “from above,” led by corporations,
banks, and rich-country governments, there is a social countermovement of
 Introduction 19

“globalization from below,” comprising worker migration and the interna-

tional movements of the poor. Another phenomenon is the rise of global,
national, and local social movements critical of the consequences of neolib-
eral capitalism on inequality, unemployment, economic justice, the environ-
ment, and democracy in those home countries and also more globally.

1.6  Economic Democracy

The power of economic elites, growth of inequality, and the corrosive effects
of big money on democracy that characterize early twenty-first-century capi-
talism have led to a search for alternatives forms of organization, such as eco-
nomic democracy (ED). The quest for either more humane and fair capitalism
or for an effective alternative system is not new. However, the twentieth cen-
tury’s main models for reforming (or replacing) capitalism, such as commu-
nism and “reconstructed” social democracy, are not appealing anymore.
Recent experiments with social-democratic governments in countries
such as the United Kingdom, Spain, the United States, Chile, and Greece
often ended in disappointment, as they ultimately implemented public
policies that were similar to those of neoliberalism. In turn, since 2008,
social-democratic governments in Europe have not been able to offer clear
alternatives to the socially regressive austerity policies dictated by the troika
of the IMF, European Central Bank, and European Commission. Similarly,
in the United States, the Obama administration has refrained from adopt-
ing policies that could have diminished the power of the financial elites and
therefore inequality remains high.
Political democracy and economic democracy are two sides of a genuinely
democratic society. In fact, democracy will hardly flourish when economic
power and the property of productive assets, including the mass media affect-
ing the cultural and ideological makeup of society, is heavily concentrated in
the hands of small economic elites. That elite has the means and resources to
influence the political process in directions to preserve the status quo and its
privileged position in society while excluding the rest from meaningful social
participation and the fruits of material progress.
In the last part of this book we discuss a renewed agenda of economic
democracy that departs from neoliberal policies; this agenda, in turn, is
illustrated with concrete historical and current examples of ED in practice,
including the following principles and aims:  (a)  enhanced participation of
employees in the workplace concerning issues of wage setting, benefits and
working conditions, profit sharing and employee stock option plans, and
20 In t roduct ion

general participation in the firm’s strategic decisions; (b) democratic access

to housing, credit, banking services, and education; (c) a more inclusive and
democratic pattern of ownership of the productive capital in the economy,
including worker-owned and -managed companies, communal property,
not-for-profit organizations and cooperatives; (d)  labor and society having
an effective voice in the design and implementation of austerity measures;
(e) public (not necessarily equal to state) ownership of natural resources and
other strategic productive assets, along with democratic distribution of eco-
nomic surplus and income derived from productive exploitation of those
national resources; and (f )  articulation of a broad agenda for safeguarding
economic, social, cultural, and political rights.
Besides ensuring the technical soundness and political feasibility of a
program for implementing these goals, its eventual application will crucially
depend upon solving, adequately, the “agency problem”:  finding a social
group and political organization with conceptual clarity and the leadership
to steer progressive social and economic change while obtaining the support
of the population for these socioeconomic transformations.

1.7  Organization of the Book

This book is organized into four parts. Part A, ­chapters 2 to 4, examines the
social class structure that emerges after the application of the policies of neo-
liberal capitalism. Chapter 2 analyzes the nature of wealthy elites and reviews
various empirical measures for trying to gauge their quantitative significance
and influence, and surveys some measures to curb their power. Chapter  3
discusses various theories of entrepreneurship and reviews empirical studies
dealing with the nature of entrepreneurship in modern capitalism. This chap-
ter also compares the role of the technostructure of the big corporation for
decision making in regard to resource allocation and growth with that of the
independent entrepreneur in the individual firm. Chapter 4 focuses on the
fragmentation of the middle class that has occurred since the 1980s (the neo-
liberal era) into an upper middle class and a lower middle class. It evaluates
the potential contributions and limitations of the middle class to spur growth
through entrepreneurship, job creation, and political stability.
Part B, c­ hapters 5 and 6, focuses on the economic and financial crises that
have shaped global capitalism since the nineteenth century. Chapter 5 reviews
several financial crises that have occurred in the nineteenth, twentieth, and
twenty-first centuries, in both advanced capitalist countries and developing
and emerging economies, and in so doing, highlights their main causes, their
 Introduction 21

mechanisms of propagation, and their economic and social consequences.

This chapter also considers “austerity policies” as a costly approach to foster
recovery after a crisis. Chapter  6 then examines and compares a variety of
alternative views of these approaches, including monetarism, rational expec-
tations, new classical economics, Keynesian and Marxian economics, and
some eclectic theories.
Part C, ­chapters 7 and 8, examines patterns of international mobility in
regard to capital, rich elites, and professional and knowledge elites, calling
attention to rising global social movements that are critical of both global
capitalism and low-intensity democracy. It examines the main features
and potential economic impact of migration diasporas for home country
development.
Part D, c­hapters  9 and 10, provides an agenda for economic democ-
racy and post-neoliberal transformation. Chapter  9 analyzes the concept,
modalities, and potential areas of application for economic democracy, while
­chapter 10 summarizes the main messages of this book and highlights possible
courses for the structural reform of twenty-first-century global capitalism in
the direction of more equitable and participatory societies.
 PA RT O N E

Elites, Entrepreneurs, and the

Middle Class
The Top 1 Percent and the Rest
 2

Economic Elites and the Super-Rich in

the Twenty-First Century

The focus of this chapter is on economic elites and the super rich—a small
minority that, as discussed in the previous chapter, captures a significant share
of national income (well above its numerical importance), controls most of a
nation’s productive wealth, and has a significant influence on the political process
and public policy.1 The study of elites has traditionally been the realm of sociolo-
gists and other social scientists. Mainstream economics, given its methodologi-
cal individualism and, general, disregard on inequality, has generally stayed away
from the topic. However, the economic importance of these economic elites
cannot be denied and recent empirical work on top incomes and the mecha-
nisms of inequality in historical perspective (for example Piketty 2014) may start
connecting economists with the topic of high inequality and economic elites.
High-income individuals are expected to play a role in virtuous dimensions such
as savings generation, investments, and innovations but also they engage in spec-
ulation, rent-seeking and political lobbying.
The dominant practice of the last three decades has been to reduce the
taxes on top income earners and the very rich (in both advanced capitalist
economies and developing countries), relying on the supply-side argument
that, in a market economy, the rich are the engines of economic growth,
largely through their role in capital accumulation and innovation. Lowering
the return on these activities would diminish their productive efforts, thereby
discouraging wealth creation, the argument goes. The issue is obviously con-
troversial, for various reasons. On one hand, it is not clear that the remunera-
tions of top income earners always correspond to the legitimate return on

1.  This chapter draws on and expands material from Jimenez and Solimano (2012).
26 Elit es, En t repren eur s, an d Middle Cl ass

effort and talent that is deployed in competitive markets. Political connec-

tions, social background, and favorable tax and regulatory treatments asso-
ciated with lobbying and campaign financing are factors that contribute to
the amassing of big fortunes and the concentration of income and wealth.
Furthermore, recent econometric evidence (Picketty et al. 2011) shows that
lowering top income tax rates in countries like the US and the UK since the
1980s increased, significantly, the share of incomes going to the top one per-
cent in these two countries but did not led to faster growth above the rest of
OECD. Say, regressive redistribution without growth above the norm.
The rise in income inequality and the ultra-wealthy while the middle class
lags behind, as highlighted in the previous chapter, is contributing to social
contempt in most societies, with movements such as Occupy Wall Street and
We the 99 Percent in the United States, the Indignados in Spain, student
actions in Chile, and protests in Brazil and Turkey, among others. These move-
ments point to the fact that the fruits of globalization and progress are going
disproportionally to a small elite, while the majority and particularly the youth
in these countries face hard times and find it difficult to get jobs (in Spain,
Greece, Portugal, and other nations); thus, they face grim prospects of achiev-
ing genuine economic progress.
The sounds of social discontent have reached the ears of some in the ranks
of the super wealthy. This is the case for billionaires such as Warren Buffet in
the United States and others in Europe (but apparently no billionaires in Latin
America or Africa publicly share this stand), who have called for a greater contri-
bution from the super-rich, through greater tax collection and a fairer tax system.
Most economic studies that explore inequality, until recently, have a strong
statistical focus and they concentrate on the evolution of Gini coefficients and
the ratios between top and bottom deciles or quintiles. Relatively little con-
ceptual and empirical work has been done to understand the motivations of
the super-rich, their main behavioral patterns, and their impact on inequality
and democracy. Until the work, in the last decade and half or so, by Edward
Wolff, Anthony Atkinson, Thomas Piketty, James Davies, Anthony Shorrocks,
Emmanuel Seaz and others on wealth distribution and top incomes a practi-
cal obstacle for studying the elites by economists has been the lack of accurate
statistical information on top income earners and top wealth holders, who pre-
dictably hide their assets to avoid taxation. Using household surveys to track
the super-rich is of limited use, since respondents tend to systematically under-
estimate and underreport their high incomes. Standard income Gini coeffi-
cients (calculated on data from household surveys) deliver a downward biased
picture of the true distribution of income in society (see box 2.1).
 Economic Elites and the Super-Rich 27

Box 2.1
The Gini Coefficient with Very-High-Income Individuals
Very-high-income individuals are often statistically insignificant (as a share of the
total population), but their share of a nation’s income is significant indeed, partic-
ularly in countries with unequal income distribution. Household surveys tend to
severely underestimate the number or percentage of those with top incomes. The
Gini coefficient, a widely used measure of inequality, is insensitive to changes at the
tails of the income distribution line; it is more sensitive to changes in the middle of
the distribution line. Atkinson (2007) derived a formula that takes into account
the wealth share of the super-rich (or top-income individuals), though their num-
bers are small. Defining the parameter S as the income share of top-income indi-
viduals (say, the top 1 percent) and G* the Gini of the rest of the population (say,
the Gini of the bottom 99 percent), it can be shown that the “true,” or corrected
total Gini, is approximately equal to G*(1 - S) + S. Alvaredo (2010), using the
Atkinson formulation and data for the United States and Argentina, shows that
increases in the Gini in both countries in recent decades can largely be explained
by the increase in income share of the very rich. This confirms the sensitivity of the
total Gini to top incomes, in spite of their almost nil importance in terms of num-
ber. Therefore, using standard Gini coefficients obtained from household surveys
depicts a potentially misleading picture of income distribution in most countries.
The corrected Gini coefficient, however, is useful when income concentration at
the top is large and increasing.

In this chapter, we review the concept of elites as developed in the classi-

cal literature on the subject associated with the work of Pareto, Mosca, and
Wright Mills, considering also general theories of the capitalist class and
financial elites. Then we look at recent, very useful, empirical work, using data
from tax agencies derived by the Paris School of Economics, on top income
shares. We also examine international evidence on wealth concentration by
the super-rich in advanced and developing economies, compiled by Forbes
magazine and some wealth-management companies.
The chapter also evaluates several mechanisms and channels through which
the economic elites affect economic development and democracy, and it dis-
cusses issues of reward for talent and innovation, the premium paid for social
and political connections, rent-seeking, the operation of winner-take-all mar-
kets, and the effects of big money on the functioning of democracy. Then, we
28 Elit es, En t repren eur s, an d Middle Cl ass

examine the role of maximum wages, the regulation of compensation by exec-

utives, and the taxation of high-income earners as ways to correct the severe
inequality and to diminish the concentration of income at the top.

2.1  Merit-Oriented Elites, Power Elites, and

Class-Based Theories of Elites
We can distinguish at least three approaches to elite formation: merit-oriented
theories, power-based analysis, and class approaches.

2.1.1  Merit-oriented Theories of Elites: The Italian

Sociological School
The sociological school is concerned with elites mainly as a description of how
societies work and the way social classes and social groups are formed and inter-
act. The main representatives of the “Italian school,” or merit-based theories of
elites, were Vilfredo Pareto (1848–1923), an economist and sociologist, and the
political scientist Gaetano Mosca (1858–1941). Pareto put forward a theory of
the circulation of elites while Mosca (1939) studied the ruling class. The Italian
school held a merit–oriented view of elites. That is, Pareto (1920/1991) envisaged
elites as “people with exceptional qualities,” thus the merit-oriented concept.
He envisaged history as a circulation of elites mainly within nations;2 his main
concern was not the international circulation of elites that is more relevant in
our era of globalization. In his book The Ruling Class (1939), Mosca indicated
that the main source of power for the ruling class (elites) is their superior inter-
nal organization, enabling them to exert a disproportionate influence over the
vast majority of society despite being a rather small group. Superior knowledge
and better organization are key elements for a group to become an elite. These
authors noted that the elite rules any society, even though the members of this
group may change or “circulate” over time.

2.1.2  Power Elites

On the other side of the Atlantic, the American sociologist C. Wright Mills
studied the power structure of U.S.  society in the mid-twentieth century
and concluded that, although personal merit could contribute to a person’s

2. Solimano and Avanzini (2012) analyze the international mobility of entrepreneurial,

knowledge, and political elites.
 Economic Elites and the Super-Rich 29

becoming a member of the elite, the defining element was his relation to
power. In particular, in his book The Power Elite (1956/2000), he distin-
guished the economic, political, and military “power elites” in the United
States. The economic elite—say, CEOs of industrial corporations and banks,
investors and owners—were certainly important, but a more complete char-
acterization of his view of the power compact would include the political and
military elites.3,4 Wright Mills implicitly assumed a large degree of cohesion
(in ideas, institutional participation, lifestyles, clubs, and schools attended by
their children ) among the different subcomponents of the power elite.
The power elite hypothesis, however, was contested both by the “pluralist
school” (Dahl 1967) and the neo-Marxist school (Sweezy 1960).5 The pluralists
made the distinction between a ruling elite and a group with the potential for
political control but that may fail to grab that control for lack of internal cohe-
sion (consensus), and for the effects emanating from of a diversity of interests
within the group. The pluralists were skeptical of the cohesion inherent in the
tripartite elite scheme proposed by Wright Mills. Instead, Paul Sweezy (1960)
argued that the military and political elites are ultimately dependent on the
economic elite (in particular, the capitalist class) that owns most of the pro-
ductive wealth and derives its income from that ownership. Sweezy stated that
the ultimate ruling class is the one that owns and controls the nation’s produc-
tive wealth. For him, the distinctions between separate and autonomous cor-
porate, military, and political elites would eventually vanish as the economic
elite—more to the point, the capitalist elite—became the dominant one.
In a generally sympathetic, but at times harsh, review of Mills’s The Power
Elite, Paul Sweezy, (Sweezy 1960) first praises the book:

Perhaps the greatest merit of the Power Elite is that it boldly breaks the
taboo which respectable intellectual society has imposed on any seri-
ous discussion of how and by whom America is ruled”. (20)

3.  Early on, Thorsten Veblen (1857–1929) characterized the business elite and showed the
importance of symbolic (conspicuous) consumption and a culture of leisure as signals of pros-
perity and abundance in the Gilded Age in North America during the late nineteenth century
and early twentieth centuries.
4.  It is apparent that the complexities of this important subject have remained largely dormant
in spite of its importance. Besides the links and hierarchies between different subelites, there is
the question of how economic elites are formed (inheritance, social and political connections,
talent, access to finance, successful implementation of new ideas, and production of innova-
tions with commercial value) and how they maintain and increase their position in the highest
echelons in society.
5.  See Gilbert (2008).
30 Elit es, En t repren eur s, an d Middle Cl ass

Then Sweezy goes on and criticizes the lack of a class-based framework for
grasping the nature of the power elite in the U.S:

. . . [However], because he [Wright Mills] blurs the whole problem of

class and class relations, Mills fails to throw any but incidental light on
the dynamics of the class system—how people lose high-class status,
how new members of the ruling class are co-opted, and so on. In this
connection, he completely fails to understand the role of preparatory
schools and colleges as recruiters for the ruling class, sucking upwards
the ablest elements of the lower classes and thus performing the dou-
ble function of infusing new brains into the ruling class and weaken-
ing the potential leadership of the working class. It is this aspect of
the American Educational System, involving as it does fairly generous
scholarships and other forms of assistance for the bright poor, which
is most often and least deservedly praised as democratic. (28)

2.1.3  Class-based Theories of Elites

The two more influential figures in the analysis of social classes were Karl
Marx (1818–1883) and Max Weber (1864–1920). Marx defined social classes
in terms of people’s ownership of productive assets and their relation to the
“modes of production” (e.g., feudalism, capitalism, socialism, cooperativism,
and so on), a view that embraced social relations, technology, and different
patterns in the ownership of the means of production. His social classes also
develop views of the world or ideologies in relation to their place in society
and the economic process. Marx, who wrote mostly in the second half of the
nineteenth century, stressed the existence of two main social classes: the bour-
geoisie (capitalists), who own the means of production and control wealth,
shape institutions, and wield political power; and the proletarians, who own
their labor power but are disenfranchised. Although Marx did not conduct
his analysis explicitly in terms of “elites,” according to him capitalism would
lead to increasing polarization and social differentiation between the wealthy
owners of capital and the rest of society.
Max Weber, writing in early twentieth century, shared Marx’s notion that
social classes were largely determined by their role in the production and
ownership of productive assets. However, Weber created a more complex pic-
ture of social class, in which prestige, status, occupation, and mobility play a
major role. For Weber, social class is the main determinant of people’s “life
 Economic Elites and the Super-Rich 31

chances”—their capacity to enjoy a good, secure, prestigious, and enjoyable

lifestyle, in contrast to a life of hardship, insecurity, and anonymity.
Modern analysis of stratification and social class is eclectic, using the
insights of Marx, Weber, and other authors. Stratification and class analysis
tend to follow a multi-variable approach, in which income, occupation, edu-
cation level, status and prestige, values, thinking, and lifestyle are all factors
used to define social class. These variables tend to show a high empirical cor-
relation over time and across units of analysis.

2.2  Financial Elites

In the last three decades or so, the financial sector (banking, insurance, and
real estate) has displaced the industrial sector in terms of economic impor-
tance, becoming the leading sector in several advanced capitalist countries
as well as in emerging economies. Along with this growth in the importance
of the financial sector has come the new financial elite, composed of bank-
ers, investors, and managers. The technostructure of the financial sector has
acquired leading economic and political influence in society. In a sense, there
has been a “financialization of the capitalist class”—or, in another terms,
there’s been a “financialization of economic elites.”
Historically, the “money trusts” of the late nineteenth century and early
twentieth century were important in providing the funding that led to the
consolidation of corporate capitalism.6 Main financiers such as J. P. Morgan
played a critical role in stabilizing the panic of 1907, before the Federal Reserve
System was created in the United States, thereby showing their direct influ-
ence on public policy. As ­chapter 4 will show, the financial elite played an
important role in making the crisis of 2008–09; it also influenced the terms
of the rescue programs that were established for those banks and financial
institutions in the aftermath of the crisis.

2.3  Inside Economic Elites: Defining and

Measuring the Rich
An important issue for purposes of analyzing economic elites is how to define,
in a statistical sense, who constitutes the rich. See box 2.2 for some precise
definitions of rich, super-rich, and mega-rich.

6.  Foster and Holleman (2010).

32 Elit es, En t repren eur s, an d Middle Cl ass

Box 2.2
Defining the Rich
There are several absolute and relative definitions of the rich, based on income
(flow) or wealth (stock) or both. Affluence lines and wealth cutoffs are abso-
lute definitions. Top deciles or percentiles are, in turn, relative definitions.
Affluence lines. Similar to the procedure for establishing a poverty line, cov-
ering the lower tail of the distribution of income, we can concentrate in the
upper tail of the distribution and define the proportion of people considered
as rich, using an affluence line above some cutoff for income or wealth (see
Sen 1988). Those above the affluence line are considered rich. As in the case of
poverty lines, we can also use a head-count measure of the rich.
Wealth cutoffs. Atkinson (2006) defines the rich as those individuals or
households whose wealth is 30 times the mean income per person (e.g., GDP
per capita). The choice of 30 is based on a rate of return of 3.5 percent per
year (long-term return on assets). This level of wealth generates a stream of
interest that is equal to the mean income per person, enabling that rich per-
son to live off the interest (return) on his wealth at an average standard of
living. Incidentally, this cutoff is similar to that used by wealth-management
companies such as Cap Gemini, which define a rich person as someone with
a level of liquid wealth (excludes real estate, personal property,) equal to $1
million. The super-rich person has wealth that is equal to 30 x 30 times the
mean income, able to live off the interest on the interest. The mega-rich per-
son has wealth equal to 30 x 30 x 30 times the mean income per person. The
mega-rich, in Atkinson’s definition, are approximately equivalent to the bil-
lionaires of the Forbes list.
Top deciles, vengtiles or percentiles. This is a relative definition of the rich.
Some empirical applications identify the rich as those located in the upper tail
of the income distribution curve—say, at the top 10 or top 5 percent. The top
1 percent or 0.1 percent would be better characterized as super-rich.

2.4  Recent Work on Top Incomes

Among recent empirical work done on the rich, we have the efforts of the
Paris School of Economics (PSE)—New Economic Thinking (NET) proj-
ect on Top Incomes (PSE-NET Project, for short), and authors Anthony
B.  Atkinson from Oxford University, Emmanuel Saez from the University
 Economic Elites and the Super-Rich 33

of California, Berkeley, Thomas Piketty from the Paris School of Economics

among others. They looked at the level and evolution of the (pre-tax) share of
income held by the top 10, 5, 1, and 0.1 percent. The PSE-NET Project used
time-series data for a large group of advanced (OECD) economies and sev-
eral developing countries and emerging economies. The high-income brack-
ets compose the “top incomes shares.”7 And these top income shares provide
a measure of the concentration of income at this level. A novel approach of
the PSE NET project was to use data on tax income as released by various tax
authorities, such as the U.S. Internal Revenue Service. Tax-based data may
not be easy to obtain, and in some regions (e.g., Latin America), these agen-
cies seem reluctant to share the information with researchers, never mind
the general population. Nevertheless, this tax data improves the accuracy in
gauging top incomes, as compared with using household surveys, although
tax-evasion and tax-avoidance schemes make this data not completely
problem-free, either.
A summary of the PSE-NET project findings is provided in Atkinson
et al. (2011). Some highlights of their work follow:

(a) The concentration of income across countries and over time is not in the
top 10 percent or the top 5 percent, but in the top percentile or the top
1 percent—or even the top 0.1 percent.
(b) During the first half of the twentieth century, the United States and United
Kingdom experienced a fall in top income share (with certain ups and
downs in the first three decades of the century), followed by a stabilization
of that share until the 1970s. Since then—say, in the neoliberal era—the
trend has reversed, with greater income concentration at the top.
(c) Countries in continental Europe (France, Germany, the Netherlands,
and Switzerland) and Japan, avoided, in general, the rise in top income
share during the last thirty years of the neoliberal era.
(d) The increased concentration of income at the top was also experienced in
large emerging economies such as China and India, which have followed
market-oriented and liberalization policies. A similar trend was observed
during this period in Argentina, Portugal, and Spain.
(e) Across countries surveyed, there have been substantial differences in the
income share of the top 0.1, top 1 percent, and the next 4 percent. The
top 1 percent with an income share over 12 percent (around 2005) are
located in the United States (above 20 percent), the United Kingdom,

7.  See Atkinson et al. (2011).

34 Elit es, En t repren eur s, an d Middle Cl ass

Argentina, Canada, and Singapore (see table 2.1). The income share for
the top 1 percent is lower (between 50 and 10 percent) in the Netherlands,
India, Australia, New Zealand, Switzerland, France, Japan, Finland,
Sweden, Spain, Portugal, Italy, and China.
(f ) An important reason for the reported increase in income inequality and
concentration at the top is the explosive growth in compensation for
corporation CEOs since the early 1980s. Higher salaries, stock options,
bonuses, profit-sharing, and other benefits are behind this increase in
executive compensation, widening the gap between CEO pay and the
salaries of mid-level employees and workers. This trend has been espe-
cially serious in the United States and the United Kingdom (see Irwin
2008).

Table 2.1  Comparative Top Income Share (2005 unless noted)

Country Top 0.1% Top 1% Next 4% Top 5%

Argentina 7.02 16.75

Ireland 10.3
Netherlands 1.08 5.38 11.79 (1999) 17.08
India 3.64 8.95
Germany 4.4 11.1 13.1 (1998) 24.2
United Kingdom 5.19 14.26 14.5 28.7
Australia 2.68 8.79 11.2 (2002) 20
USA 7.7 17.42 15.2 32.6
Canada 5.23 13.56 15.4 (2000) 29
Singapore 4.29 13.28 14.6 27.9
New Zealand 2.51 8.76 12.7 21.5
Switzerland 2.67 7.76 11.5 (1955) 19.3
France 2.48 8.73 13 21.7
Norway 5.59 11.82 11.3 23.1
Japan 2.4 9.2 16.1 25.3
Finland 2.65 7.08 9.5 (2004) 16.1
Sweden 1.91 6.28 11.1 17.4
Spain 2.62 8.79 13.4 22.2
Portugal 2.26 9.13 15.4 (2003) 24.5
Italy 2.55 9.03 12.3 (2004) 21.3
China 1.2 5.87 11.9 (2003) 17.8
Source: Tanzi (2011), Adopted from tables in Atkinson et al. 2011.
 Economic Elites and the Super-Rich 35

2.5  Divergent Evolution of Top Income Shares,

Anglo-Saxon vs. French Capitalism
From the late 1920s to the early twenty-first century, a contrasting dynamic
in top income share is observed in three main capitalist economies:  the
United States, France, and the United Kingdom (see table 2.2). In the mid-
to late 1920s, before the onset of the 1929 financial crash, the top income
share peaked, higher in the Anglo-Saxon countries (U.S. and U.K.) than
in France, with the highest share in the United States (24 percent). Then a
steady decline took place during the Great Depression, World War II, and
the decades of “shared prosperity” (late 1940s to early 1970s). This trend
began to reverse, however, in the United States and U.K.  after the neo-
liberal revolutions fostered by policies of Margaret Thatcher and Ronald
Reagan. The subsequent Democratic administration in the United States
(Clinton) and the Labor governments in the U.K. (Tony Blair and Gordon
Brown) did not abate the new trend. In contrast, France since the 1940s,
under different governments (either Socialist or Conservative), avoided an
increase in income share for the top percentile, which remained stable at
around 8 percent (versus over 20 percent in the U.S. in 2007 and close to
15 percent in the U.K. in the same year). It is apparent that different types
of capitalism may have distinct patterns of inequality and concentration of
income at the top levels.

Table 2.2  Income Share of the Top 10 and Top 1 percent

in France, United Kingdom, and United States
(in percentages, 1927–2007)

United France United

States Kingdom

1927 24 15 18
1937 18 13 15
1942 10 8 12
1972 8 8 7
1982 12 7 8
1992 14 8 9
2002 17 8 12
2007 23 8 14
Source: Atkinson et al. (2011).
36 Elit es, En t repren eur s, an d Middle Cl ass

2.6  Top Income Shares in Emerging Economies

and Developed Countries
The trajectory of the top 1 percent income share for advanced countries and
emerging economies, including Argentina (the only Latin American country
for which we have available and comparable data so far at the time of this writ-
ing), shows dynamic diversity, as can be seen in ­figure 2.1. As noted before,
France’s stabilization of its top income share since the 1940s is in sharp con-
trast with the steady increases since the 1980s not only in the United States but
also in Sweden, albeit at a relatively more moderate level (below 10 percent).

(a)
Argentina China
30 7
25 6
20 5
4
15
3
10 2
5 1
0 0
32

42

52

62

72

82

92

02

86

91

96

01
19

19

19

19

19

19

19

20

19

19

19

20
France India
25 20
20 16
15 12
10 8
5 4
0 0
0

2
2
2
52
62
72
82
92
0

2
3
4
19

19

19

19

19

20

19
19
19
19
19
19
19
19

Italy Netherlands
12 30
10 25
8 20
6 15
4 10
2 5
0 0
74

84

94

04

14

34

54

74

94
19

19

19

20

19

19

19

19

19
 Economic Elites and the Super-Rich 37

(b)
Portugal South Africa
12 25
10 20
8
15
6
10
4
2 5
0 0
70

80

90

00

40

55

70

85

00
19

19

19

20

19

19

19

19

20
Spain Sweden
9.5 30
9 25
8.5 20
8 15
7.5 10
7 5
6.5 0
80

85

90

95

00

05

03

23

43

63

83

03
19

19

19

19

20

20

19

19

19

19

19

20
United States
25
20
15
10
5
0
13

33

53

73

93
19

19

19

19

19

Figure 2.1  Evolution of Top 1 Percent Income Share

Source: Database, Top Incomes Project, Paris School of Economics.

But this diversity in top share is wide; countries such as the Netherlands show
a steady decline in income share for the top 1 percent since the 1940s, reaching
levels that hover around 5 percent (since the late 1970s).
In the developing world, we observe a consistent increase in income share
for the top 1 percent in Argentina, India, China, and South Africa since the
1980s and 1990s. (The data suffers discontinuities for Argentina, with missing
data from the mid-1970s to the late 1990s, so evidence for this country has to
be taken with caution.) In China the top 1 percent’s share increased from a low
of 2 percent by 1986 to close to 6 percent by 2004; this is a threefold increase
38 Elit es, En t repren eur s, an d Middle Cl ass

over a period of close to thirty years, following post-Mao market-oriented

policies, but it is still at modest levels by international standards. In India the
top income share has doubled from below 5  percent around 1980 to close
10 percent in 2000. This trend coincides with adoption of market liberaliza-
tion and privatization policies. South Africa also suffers missing data, but a
trend of rising income share for the top 1 percent is apparent in the 2000s.
Finally, increases in income share for the top percentile are observed in Italy,
Portugal, and Spain since the 1980s, averaging in the range of 5 to 10 percent.

2.7  Top Wealth Holders

The previous discussion shed light on the evolution of growing income share
for the top 1 percent in advanced capitalism and emerging economies. Now,
let us turn to the inequality of wealth. Note, first, that the distribution of
wealth is often more concentrated (higher Gini coefficient) than the distribu-
tion of income (see Solimano 2009 for evidence on Lorenz curves for wealth
and income, using a sample of 130 countries). In the U.S, for example, the Gini
coefficient (2009/2010) for net wealth was 0.87 and the Gini coefficient for
(pre-tax/transfer) income, 0.549. In turn, the share in total net wealth of the
top 1 percent is 35.4 percent while the corresponding share in income for the
top 1 percent is 17.2 percent (Wolff 2012).
As was shown in (box 2.2), the typical categories of high-net-worth individuals
are the rich, super-rich, and mega-rich. The cutoffs used by wealth-management
companies that invest money for rich people can be $1  million, $10  million,
$30 million, or $1 billion.8 As can be expected, the number of people belonging
to each cohort shrinks as the wealth cutoff goes up.
A source of data for wealth levels of the mega-rich or billionaires is Forbes
magazine (for certain methodological limitations of the Forbes list, see Atkinson
2006). This publication has been collecting data on people with a net worth
above $1 billion for more than twenty-five years. The group of billionaires con-
stitutes a very small elite that owns a disproportionate amount of the financial
and productive wealth in the world economy. Forbes started focusing on the
super-rich in the United States and then expanded to survey a number of coun-
tries on different continents. According to Forbes, there were 1,210 billionaires
in the world in 2011, with a combined wealth of $4.5 trillion. Interestingly, it is a

8.  An individual with a net worth of at least $30 million is defined as “ultra-net-worth-Individual

(UNWI)” by Wealth X, an advisory firm based in Singapore (Tanzi 2011). There are near
63,000 UNWI in North America, 54, 325 in Europe, and 45,525 in Asia-Pacific.
 Economic Elites and the Super-Rich 39

Latin American, Carlos Slim, from Mexico, who heads the list of world billion-
aires, ahead of U.S. billionaires such as Bill Gates and Warren Buffet.
In contrast, there are over 2 billion individuals in the world earning less than
$2 a day. This points to the abysmal disparities in the world’s economy today. The
super-rich have accumulated their wealth in sectors such as information technol-
ogy and communications, oil, banking and finance, real estate, and entertain-
ment. The net worth of the super-rich includes physical and financial assets, real
estate, and valuable art objects and deducts debt (human capital is not included
as a measure of (fungible) wealth). The number of those who have inherited their
wealth is not large and the Forbes list tends to be dominated by “new billionaires”.
Table 2.3 shows a list of the ten countries with the highest number of bil-
lionaires in the list of fifty-four countries, as of in 2011. At the top of the list is the
United States, with 412 billionaires, followed by China (115), Russia (101), and
India (55).
Note that the number of billionaires per capita is the highest in the United
States, followed by Russia. Interestingly, among the top five countries, there
are three emerging economies. It is also worth noting that the BRICS (Brazil,
Russia, India, China, and South Africa) are among the top ten countries that

Table 2.3  Worldwide Top 10 Billionaires by Country (2011)

Rank Country/Region Number of Share of Billionaires Share of

billionaires world total per 10M world
(%) population
(%)

— World total 1210 100 1.7 100

1 United States 412 34 13.2 4.47
2 People’s Republic of 115 10.6 0.9 19.26
China
3 Russia 101 8.3 7.1 2.04
4 India 55 4.5 0.5 17.3
5 Germany 52 4.3 6.4 1.17
6 Turkey 38 3.1 5.2 1.07
7 Hong Kong 36 3 51 0.1
8 United Kingdom 33 2.7 5.3 0.89
9 Brazil 30 2.5 1.6 2.75
10 Japan 26 2.1 2 1.83
Source: Forbes.com and Wikipedia.
40 Elit es, En t repren eur s, an d Middle Cl ass

Table 2.4  Billionaires in Latin America per Country (2011)

Rank Per capita Country Number of Billionaires

rank billionaires per 10M

1 2 Brazil 30 1.6
2 3 Mexico 11 1
3 1 Chile 4 2.4
4 5 Argentina 2 0.5
4 4 Venezuela 2 0.7
4 6 Colombia 2 0.4
Total 51
Source: Forbes.com.

have the most billionaires in the world. It is no longer true that high wealth is
a phenomenon limited to rich, OECD countries.
As table 2.4 shows, in the Latin American context, Brazil is the country
that has the largest number of billionaires (30), followed by Mexico (11).
Chile is the country with more billionaires per capita in the region.

2.8  Critical Issues of Economic Elites: Heroes of

Productive Capitalism or Economic Oligarchs?
Having reviewed the empirical evidence on top incomes and top
wealth-holders, let us turn now to issues pertaining to the origin and legiti-
macy of major inequality, addressing the contribution of these economic
elites to economic development and its impact on inequality and democracy.

2.8.1  Top Incomes and Top Wealth: What is

Being Rewarded?
Is top income or big wealth the reward provided by competitive markets to
individuals for their ingenuity, hard work, bright ideas, innovative capacities,
and superb education? In other words, is being rich the proper reward for hav-
ing “talent and merit” in an economy in which the opportunities for economic
success are fairly distributed? Or, is wealth accumulation also the result of privi-
leged class position, social background, political connections, rent-seeking, and
other forms of noncompetitive behavior? The rather cheerful description of
capitalism in Milton Friedman’s Capitalism and Freedom (1962), for example,
 Economic Elites and the Super-Rich 41

stresses that markets generally perform a good job in rewarding those who
are more talented, hardworking, and successful, and those who are willing to
take more risks. It is implied that they naturally deserve higher pay than those
who perform more routine tasks and contribute less to the addition of value.
The stories of legendary innovators such as Bill Gates and Steve Jobs, among
others, illustrate the magic of capitalism that rewards handsomely the bright
ideas and business acumen (and some ruthless behaviors against competitors
and consumers, as well). These examples of ingenuity and success certainly do
exist and are part of the “wonder of capitalism.” However, they are outliers, and
their numerical importance—albeit not the innovations and wealth creation
they have brought about—is small. The summer of 2013 issue of the Journal
of Economic Perspectives (Symposia 2013) attempts to shed light on these issues
and try to identify the causes of the rise of the income share of the top 1 per-
cent in recent decades. Some authors argue that top incomes reflect the market
reward to superb abilities and entrepreneurial drives and are the outcomes of
the interplay between the supply and demand for talent (in the case of execu-
tive’s compensation) while others present evidence of appropriation of rents by
corporate executives who set themselves very generous compensation packages.
In addition, they point-out changes in social norms that accept greater wage
differentials within corporations than in the past and show that lower top mar-
ginal income tax rates (a main factor behind the rise of top income shares in the
US and UK) have not led to higher economic growth.

2.8.2  Privatization, Accumulation by Dispossession,

and Political Connections
A less rosy picture of capitalism and the efficiency of unregulated markets sug-
gest that what is critical in the formation of economic elites is the appropria-
tion of valuable assets by different means, including coercion, and in processes
that are often far from competitive and transparent. Marx, in his Capital (1867),
discussed the process of “primitive accumulation” as an important step in the
formation of the capitalist system. Historically, this often involved transforming
communal property into private property—for example, taking land through
the enclosures mechanism, expelling peasants and transforming them into land-
less proletarians who will work for a salary in capitalist factories located in urban
centers. The capitalists subsequently accumulate capital by extracting surplus
value from the workers who have been dispossessed of their land. In recent times,
a new wave of primitive accumulation, or “accumulation by dispossession,” in
David Harvey’s (2005) terms, has taken place, this time through the privatization
42 Elit es, En t repren eur s, an d Middle Cl ass

of public enterprises and common goods, such as water and public land. This
is most evident in countries that have adopted neoliberal policies, such as the
U.K., Russia, China, India, Chile, Poland, Hungary, Czech Republic, and some
other countries around the world. Rapidly following these privatizations, new
economic oligarchies have emerged (in post-Soviet Russia the new oligarchs,
as mentioned before, were former nomenclature members, a feature common
to other former communist countries). In particular, the “inside privatization”
of state-owned enterprises accomplished in noncompetitive ways has enabled
the rapid formation of powerful economic elites. In this respect, part of big
wealth accumulation could be considered a reward for having the right political
connections.
Another case is Spain’s privatization of state-owned companies and banks
in the 1990s by its socialist government, which led to the formation of big
multinational corporations in telecommunications (Telefonica), oil and nat-
ural gas (Repsol and Gas Natural), power companies (Endesa, Iberdrola and
Union Fenosa), and banks (Banco Santander and BBVA).9 A “helping hand”
from individuals in powerful places, special licenses to run monopolies, dedi-
cated subsidies, tariff protections, or tax credits can make the difference for
those wanting to enter the club of the super-rich.
In post-socialist transitional nations, a small acquiring minority has ben-
efited from the privatization of public enterprises and public assets, accom-
panied by low taxes for the rich and lax business regulation. The winners in
this game have made the billionaires list published by Forbes. Meanwhile, the
majority of the population does not enjoy these privileges and has to suffer
the lower wages, curtailment of labor rights, and limited social benefits that
accompany privatization and economic liberalization.

2.8.3  Top Economic Elites as Entrepreneurs and

Innovators
Sometimes the economic elites are mainly entrepreneurs, although it is clear
that rentiers are also part of the economic elite. The entrepreneur is envis-
aged as an engine of growth, given his distinctive talent for combining capi-
tal, labor, and vision, and for realizing opportunities and seeing prospects
for profits (see Schumpeter 1934/1989). The critical role of the entrepreneur,
according to Joseph Schumpeter, is making innovations, such as introducing
a new good, a new line of production, or opening a new market; much of this

9.  For a detailed analysis of Spanish multinationals and foreign direct investment, see (Chislett
2011).
 Economic Elites and the Super-Rich 43

entails a process of “creative destruction,” in which new technologies and new

ways of doing business replace older ones.
Another view analyzing the role of entrepreneurs and managers for effec-
tive production in the presence of uncertainty was presented by Frank Knight
(1921). Both John Maynard Keynes (1936/1998) and Karl Marx (1867) gave a
more qualified and perhaps less benign picture of the entrepreneur (this topic
is dealt with, in more detail, in ­chapter 3).

2.8.4  The Market for Talent

A mainstream rationalization of the very rich is the so-called markets for talent
that concentrate earnings in a few, highly talented individuals. In this context,
small differences in individual abilities can generate large differences in pay and
rewards, owing to increasing returns to ability. This winner-take-all market theory
is often used to explain high earnings in the arts, sports, entertainment, and other
fields involving talent. For example, the number-one tennis player in the world
makes an income several times larger than the second- or third-ranked player,
who can be nearly as talented. Recently, this theory is has been also applied to the
compensation of CEOs and other high-level executives (Kaplan and Rath 2013).
Frank and Cook (1995), in their book Winner-Take-All-Society, argued
that the lure of high earnings attracts an excessive amount of talent to those
activities compared to what is socially optimal, considering the probabilities
of winning the big prize (say, winning a tournament in tennis or golf ) were
known ex ante. This theory also can be relevant for explaining behavior in
financial markets, where the expectation of making large salaries and get-
ting stock options or bonuses led to a concentration of talent. Incidentally,
several billionaires come from banking, hedge funds, and investment com-
panies where “financial innovations” are highly profitable. In this case, the
large rewards do not reflect, necessarily, positive contributions toward creat-
ing genuine economic value. On the contrary, high pay in the financial sector
may reward activities that are socially disruptive—for example, financial cri-
ses induced by reckless and risky behavior. Occupations that offer important
social value, but whose pay is comparatively modest (teachers, public employ-
ees, and physicians in public health systems), may not lure enough talent.

2.8.5  Top Economic Elites and Inequality

High concentrations of income and wealth in small economic elites are often
associated with significant levels of social inequality and worsening income dis-
tribution. For the reasons just surveyed, observed income and wealth distribution
44 Elit es, En t repren eur s, an d Middle Cl ass

in capitalism can be far from socially optimal and morally fair. In addition, the
welfare implications of economic growth and prosperity are crucially dependent
on how these gains are appropriated in society. Evidence of large gains among
the top 1 percent or the top 0.1 percent in the United States, U.K., China, India,
and to some extent, Argentina, suggests that changes in GDP per capita can be
only a limited indicator of society’s well-being. The reality of recent decades is
that economic elites have benefited disproportionally from the recent economic
growth, globalization, technological improvements, and prosperity.

2.8.6  Top Economic Elites and Democracy

The rise of small and powerful economic elites in the neoliberal era has had
several undesirable effects on democracy. Some of the mechanisms by which
money affects the political process in a representative democracy have been
highlighted but need to be explored more.
A representative democracy follows the principle that one person gets
one vote. However, political campaigns to elect representatives to a parlia-
ment or government need money, and those who hold the financial resources
have an unfair advantage to influence the political process because of that
money need. Candidates for elected positions in unequal societies tend to
cater to those with the financial resources that will enable them to be elected,
usually through generous campaign financing. This behavior may have a
greater pay-off than directing their efforts toward attracting median voters,
as argued in political-economy theories. In turn, the mass media are impor-
tant in shaping people’s views, values, and ultimately, the political outcomes.
A  trend toward concentration of ownership of TV networks, newspapers,
and other media, often in the hands of oligarchies and economic elites, is
ongoing in many countries, such as the United States, the U.K., Russia, and
Latin America. In addition, money affects the political process through inter-
est groups and donations by corporations, oriented to steering legislation and
regulations in directions that are favorable for their concerns. Clearly, spend-
ing money on lobbying and making contributions to campaigns affect the way
democracy works and shape the legislation that is passed.
A study sponsored by the American Association of Political Science
(“American Democracy in an Age of High-Inequality”) identifies two mecha-
nisms (there are more channels, however; see c­ hapters 1 and 2) through which
inequality affects democracy. First, there’s inequality in voter participation;
that is, the poor tend to vote less frequently than the rich in countries such
as the United States. Second, there’s the unequal ability to use lobbying and
 Economic Elites and the Super-Rich 45

form interest groups to influence policy, with more potential for high-paid
professionals, managers, and business owners.10
The financial crisis of 2008–09, which led to massive bailout for banks,
highlights the political power of the financial industry. Besides the sec-
tor’s lobbying Congress for favorable legislation, soliciting funding for
anti-regulation recommendations coming from conservative think tanks, and
courting favorable media coverage, there is the problem of job rotation, with
high-level personnel alternating between government and private positions,
often with obvious conflicts of interest.

2.9  Curbing the Power of Economic Elites

How to restrain the power of economic elites so that the benefits of economic
growth, technological change, and modernization can be widely shared? We
can identify two mechanisms for reducing the excessive income concentra-
tion at the top.

(a) Setting “maximum wages” and, more generally, passing regulations and
establishing caps on executive pay.
(b) Higher taxation of top incomes.

2.9.1  Maximum Wages and Regulation of

Excessive Executive Pay
A proposal for setting a maximum wage has been floated in the past and is
being so present. It comes up particularly at times of high inequality, when
there are financial scandals, and during periods of war. In the United States, a
cap on top incomes was proposed in the Gilded Age as a way of slowing the
increasing inequality in income. In fact, during World War I, the American
Committee on War Finance supported legislation to enact a 100 percent tax
on incomes over $100,000 (dollar value at that time) to help finance the war
effort.11 During World War II, Franklin Delano Roosevelt, who was supported
by the labor unions, proposed a maximum wartime income of $25,000 a year

10.  The impact of plutocracy and special interests on the rise in income inequality and the
workings of the American political system is well depicted in Sachs (2011) and Stiglitz (2012).
11.  In the early 1920, Communist Party members in the Soviet Union were subject to a maxi-
mum wage, the partmaximum. The cap was removed in 1932, as Stalin ruling elites started to
demand special perks and privileges.
46 Elit es, En t repren eur s, an d Middle Cl ass

(equivalent to approximately $350,000 in current dollar value). In 1944, the

U.S. Congress increased the top tax rate on income over $200,000 to a record
94 percent (Pizzigati 2010). Top income tax rates remained near 90 percent
for two decades—until the mid-1960s.
Then the top tax rates started a steady decline to reach the current maxi-
mum of 35 percent. In the 1990s and 2000s, the explosion in CEO and top-
management compensation stimulated demands for establishing ceilings on
those top incomes. By example, the ratio of CEO pay to average worker salaries
prior to the 1980s was on the order of 30 or 40 to 1—at most. Nowadays this
ratio could exceed 300 to 1, or even more (Anderson et al. 2011). In fact, the
rise in corporate pay and the addition of high-variable compensation schemes,
which encourage excessive risk-taking in the financial sector, have likewise
been considered a significant factor in the financial crisis of 2007–08. Further
evidence of the crucial role of very high executive compensation in the con-
centration at the top is provided by Bakija et al. (2012). These authors present
data for the U.S. that demonstrate that executives, managers, supervisors, and
financial professionals account for about 60 percent of the top 0.1 percent of
income earners in recent years, and can account for 70 percent of the increase
in the share of national income going to the top 0.1 percent of the income dis-
tribution between 1979 and 2005.
In the United Kingdom, the High Pay Commission, composed of academ-
ics, members of the private sector, and civil society and worker representatives,
documented an explosive increase in compensation and wages for executives and
board members in the 1990s and 2000s, compared to those of previous decades.
In fact, while the ratio of executive compensation to average salaries was in the
range of 13 to 44 to 1 in 1979–80, that increased to 38 to 113 to 1 in the years
2009–11. The High Pay Commission recommended keeping a base salary for
executives and reducing to a minimum the use of bonuses and stock options as
compensation for these high executives. Other observers proposed that taxpayers
and worker representatives have a seat on the boards of corporations, giving them
a vote in the determination of executive compensation, as well as the salaries and
benefits for other employees and workers (discussed further in ­chapter 9).
There are several arguments to be made against allowing big wage gaps and
in favor of instituting income caps or in other ways of regulating excessive pay:

(a) Excessive wage gaps within a company are demoralizing for the work
force, adversely affecting worker productivity. Along these lines, both
management theoretician Peter Drucker and financier J.P. Morgan have
argued against compensation ratios that exceed 20 to 1.
 Economic Elites and the Super-Rich 47

(b) Big wage gaps reflect negative standard norms of economic fairness in soci-
ety and undermine the legitimacy of market economies.12
(c) In the financial sector, excessive compensation induces above-normal
risk-taking, with ambitious managers tempted by the prospect of mak-
ing big bonuses and winning other financial prizes. This often leads to
a deterioration in the quality of loan portfolios and opens the door for
financial fragility and crisis, which is fiscally costly, destroys jobs, and
undermines the social welfare.

2.9.2  Taxation of Top Incomes

An obvious mechanism for reducing the command of resources by the very
rich and enabling the state to perform some redistributive role is taxation of
high-net-worth individuals, or HNWI. Tanzi (2011) provides several justifi-
cations for this. One is the standard taxation principle based on one’s ability
to pay (i.e., the rich have greater ability to pay more taxes and therefore should
bear a greater tax burden). Tanzi observes that high incomes may not corre-
spond to “genuine and deserved income” in the sense of economic fairness and
efficiency (say reflecting talent and effort). In fact, HNWI are rarely atomistic
players in competitive markets; rather, they are individuals who benefit from
the rules, institutions, government practices, monopolies, and restrictions on
competition that leave room for super-normal profits. In turn, international
experts on inequality such as Thomas Piketty and Emmanuel Saez writing in
the British newspaper The Guardian (Piketty and Saez 2013) have argued for
rising top marginal tax rates on incomes up to 80 percent in some OECD
countries. They show the lack of evidence of positive supply-side effects from
lower income taxation that was used to support the lowering of income tax
rates in the 1980s. In fact, the experience of reducing top income tax rates in
the last three decades has been a sharp increase in the share of income going to
the top 1 percent (a regressive redistribution particularly strong in the US and
UK) without apparent growth gains in these countries compared to econo-
mies that refrained from such tax reductions.
In addition, excessive remuneration for CEO and high-level managers in
the banking system and in hedge funds in the United States is connected with
the occurrence of financial crisis due to their poor job performance in allo-
cating capital and their preference for taking excessive risks in the run-up to

12.  For an analysis using the experience of wage regulations in major sports leagues for execu-
tive pay, see Dietl et al. (2010).
48 Elit es, En t repren eur s, an d Middle Cl ass

the crisis of 2008–09. Then, those same executives were protected economi-
cally by the government’s opinion that they were “too big to fail.” In the Latin
American and post-socialist countries, in some cases, privileged access to prop-
erty through insider privatization schemes and special tariffs and protections
against competition led to great wealth accumulation of dubious legitimacy.
Tanzi makes the argument for progressive taxation, with those at the top will-
ingly paying more to preserve their high social status and influence. However,
those on the way to the top may be more sensitive to higher taxation. A dis-
tinction can be made between taxing only the very high incomes and taxing
those with high but not exorbitant incomes. In practice, this distinction may
not be easy to draw.
During the neoliberal era, personal income tax rates in the United States
were reduced under Reagan and in the U.K. under Thatcher, a trend adopted
also by other nations. In the United States, the tax rate went down from
around 70 percent in 1979 to 50 percent in 1990 and to 35 percent in 2005.
In the U.K., the top rate went down from over 80 percent in the late 1970s to
around 40 percent in the late 1980s, and has remained here. The lowering of
tax rates for top incomers coincided with increases in the Gini coefficient in
both countries in these last three decades.

2.9.3  Taxation in High-Inequality Regions: Latin

America
Tax systems in regions with high income inequality, such as Latin America,
play a small role in reducing their structural inequalities in income and wealth.
In addition, the trend toward reducing personal taxation that has taken place
in the advanced economies is present in this region (see ­figure 2.2).13
We can identify three main features of the tax systems in Latin America
that run against a redistributive role for the state and that therefore fail to meet
any fairness criteria. These features are: (i) a comparatively low total tax burden
(share of tax revenues over GDP), (ii) an unbalanced tax structure between
direct and indirect taxes, with a modest contribution of direct taxes to total
tax collection, and (iii) a low level of tax compliance (tax evasion and tax
avoidance).

13.  From 1980 to the present, in Latin America the legal income tax rates, both personal and
corporate, have experienced a major decline, which is in line with the lowering of tax rates in
several other nations around the world. The average maximum rates for personal income tax in
Latin America decreased from 49.5 percent in 1980 to 27.3 percent in 2009. In turn, corporate
income taxes rates declined from 43.9 percent to 27.1 percent in the same years.
 Economic Elites and the Super-Rich 49

The total average tax burden in Latin America is low, compared not only
with high-income regions but also with other regions having relatively similar
levels of economic development. In fact, Latin America has the second lowest
tax burden in the world after developing Asia. When compared to those of
the developed countries, tax revenues in Latin America as a share of GDP are
near half (18.4 percent of GDP in Latin America, compared with 34.8 per-
cent in the OECD and 39.2 percent in the European Union).14

60
49.6
50

40 43.3 36.5
Percentage

32.4
30.4 28 28.5 28.5 28.2
33.1 28.6 27.3
30
29.7 29.2 27.8
27.2 28.4 28.3 28.4 27.1
20

10 14 14.1 14.3 14.5 14.7 14.9 14.6 14.7

10.9 12.1

0
1980's 1992 1997 1998 2000 2001 2003 2005 2007 2009

Maximum rate-Personal Income Tax Maximum rate-Corporate Income Tax

General VAT Tax rate

Figure 2.2  Evolution of Income Tax (IT) and Value Added Tax (VAT) (Average Latin
America, 1980–2009)*
Source: Jimenez and Solimano (2012).
Note: Data for 18 countries: Argentina, Bolivia, Brasil, Chile, Colombia, Costa Rica, Ecuador, El
Salvador, Guatemala, Honduras, México, Nicaragua, Panamá, Paraguay, Perú, Rep.Dominicana,
Uruguay, Venezuela.

14.  However, there are profound differences between countries in the region. Brazil, Argentina,
and Uruguay have tax burdens closer to the levels of developed regions, representing more than
25 percent of GDP. Meanwhile, and despite recent efforts, in most countries of the region the
tax levels remain below 20 percent of GDP, with extreme cases such as Mexico and Guatemala,
where the tax burden is around 11 percent of GDP. These differences reflect not only historic
taxation levels, macroeconomic circumstances, tax compliance efforts, and recent reforms but
also the origins of fiscal revenues coming from the exploitation of nonrenewable resources.
Those revenues, in countries specialized in the production and trade of commodities (oil in
Mexico, Venezuela, and Ecuador; copper in Chile) are a high proportion of total revenues,
reducing in some cases the incentive to get additional tax revenue. In Latin America, there
are eight countries whose fiscal revenues are more dependent on such income, such as Bolivia,
Ecuador, Mexico, and Venezuela with shares over 8 percent of GDP.
50 Elit es, En t repren eur s, an d Middle Cl ass

The tax structure is also heavily reliant on indirect taxes, which are gener-
ally less progressive in nature. Indirect taxes (as a share of GDP) represent a
similar share in Latin American (9.6 percent of GDP) as in the OECD and
European Union (11.0 percent and 11.7 percent, respectively). However, when
direct taxes and social security contributions are compared, the differences
are enormous. The direct tax burden is more than 10 points higher in the
OECD (14.7 percent) and European Union (16.1) than it is in Latin America,
where it represents a meager 5.4 percent of GDP.15
Furthermore, the Latin American region relies on taxation of labor
income. The greatest tax evasion and tax avoidance involves non-wage
income, and preferential treatment of capital gains further limits collection of
non-wage income. In fact, income from capital gains receives generous prefer-
ential treatment in most Latin American countries, where these earnings are
either totally exempt or are subject to very low tax rates. Yet, this non-wage
income could be an important source of government revenue.
Maximum personal and corporate tax rates in Latin America have a thresh-
old of roughly ten times the GDP per capita. In contrast, in most developed
regions the maximum tax rate begins at levels of three to five times per capita
income (see table 2.5). The personal income tax rate in the region is capped
at 27.10 percent, lower than in Western Europe (39.9 percent) and the United
States and Canada (32 percent), but also lower than in East Asia (29 percent)
and Sub-Saharan Africa (35.2 percent).
Another important limitation on tax revenue is the low performance of
property taxes in the region. To put property taxes in Latin America into inter-
national perspective, table 2.6, shows that property taxes in developing and tran-
sitional countries raise far less revenue relative to GDP than they do in OECD
countries. In the early 2000s, property taxes in OECD countries represented
2.12 percent of GDP, while for developing countries this figure was 0.6 percent,
and for transition countries it was 0.68 percent. The trend for revenue in all three
groups has been slightly upwards since the 1970s, however. Table 2.6 suggests
that, in terms of revenue collection, property taxes (as share of GDP) are associ-
ated with level of economic development. For example, the OECD countries

15.  The main difference in the composition of income taxes between Latin America and the
OECD countries is in the level of personal taxation. While the OECD collects an average
9.2 percent of GDP from personal income taxes, the Latin American and Caribbean region
collects a pale 1.5  percent of GDP. In terms of contribution to total tax revenues in Latin
America, the share of corporate tax is 70 percent and for the share for personal income tax
is 30 percent, while the OECD’s tax structure is the other way around: 30–70, with a much
greater share of personal income tax.
 Economic Elites and the Super-Rich 51

Table 2.5  Personal Income Tax (PIT) and Corporate Income Tax (CIT)
(various regions, 2009)

Taxable Income of the PIT Tax Rate (Percentage)

Minimum Maximum PIT PIT CIT
(Low) (High)
(multiple of GDP
per capita)

Latin America (18) 1.52 10.27 10.6 27.1 26.8

Caribbean (17) 1.47 5.99 17.5 32.1 31.1
East Asia and Pacific (32) 1.19 15.65 9.0 29.0 24.0
Central Europe and 1.08 2.16 13.3 19.4 15.8
Central Asia (31)
Middle East and 1.21 8.60 10.4 26.0 24.9
North Africa (21)
South Asia (8) 3.22 34.17 8.6 25.7 30.4
Sub-Saharan Africa (47) 2.55 19.11 10.1 35.2 30.3
Western Europe (20) 0.36 3.97 16.7 39.9 26.1
U.S. and Canada (2) 0.20 5.42 12.5 32.0 26.5
Note: Numbers of countries in parenthesis.
Source: Jimenez and Solimano (2012) using data from ...

Table 2.6  Property Tax Revenues in Representative Groups of

Countries (percentage of GDP)

1970s 1980s 1990s 2000s

All countries 0.77 0.73 0.75 1.04

(37) (49) (59) (65)
OECD countries 1.24 1.31 1.44 2.12
(16) (18) (16) (18)
Transition countries 0.34 0.59 0.54 0.68
(1) (4) (20) (18)
Developing countries 0.42 0.36 0.42 0.6
(20) (27) (23) (29)
Latin American countries . . . . . . 0.36 0.37

Source: Jimenez and Solimano (2012).

52 Elit es, En t repren eur s, an d Middle Cl ass

rely more on property taxes than do the developing countries. However, that
relationship is not necessarily monotonic; Latin American countries are found
to collect far less in property taxes than the average developing country.
Table  2.7 presents the measures of property tax performance for some
Latin American countries. Even though reliance on property taxes is low,
there is significant variation across countries. For example, in Peru, revenue
from property taxes in recent years (2005–07) represents 0.16  percent of
GDP, while in Bolivia for the same period that figure is about four times
larger, at 0.62  percent of GDP. The relative importance of property taxes
has decreased over time, though there are cases where property taxes have
consistently increased over time, such as in Brazil, Colombia, Ecuador, and
Guatemala, while in Mexico property taxes have represented 0.18 percent of
GDP, showing no change since the early 1990s.
It is apparent that the potential for raising taxes on top income in Latin
America and elsewhere is not small, but some words of caution are needed.
First, we have to consider that, in a globalized world economy with capital
mobility, attempts to raise personal income taxes in one country may trigger
the flight of capital and savings from the higher tax countries to lower tax
countries. Second, a move toward increasing top income tax rates has to be
accompanied by greater efficiency in the tax system so as to encourage tax

Table 2.7  Property Tax Revenues in Latin American Countries

(percentage of GDP)

1990–94 1995–99 2000–04 2005–07

Argentina 0.65 0.62 0.59 0.44

Bolivia . . . . . . 0.69 0.62
Brazil 0.37 0.41 0.42 0.44
Chile 0.55 0.65 0.7 0.59
Colombia 0.25 0.46 0.48 0.54
Ecuador 0.1 0.13 0.13 0.14
Guatemala 0.09 0.07 0.14 0.16
Mexico 0.18 0.18 0.18 0.18
Paraguay . . . 0.36 0.39 . . .
Peru . . . . . . 0.17 0.16
Uruguay 0.52 0.7 0.71 . . .
Latin American countries 0.34 0.39 0.45 0.42
Source: Jimenez and Solimano (2012).
 Economic Elites and the Super-Rich 53

compliance and prevent tax avoidance and tax evasion. Third, the political
feasibility of increasing taxes on top incomes has to be considered. As eco-
nomic elites become more powerful, their capacity for lobbying to block pro-
gressive tax reform should not be underestimated.

2.10  Concluding Remarks

The new economic elite is associated with phenomena such as globalization,
economic liberalization, privatization and the rise of inequality. The rise of eco-
nomic elites poses important analytical, empirical and policy challenges and
more research is need in this important area. This elite comprises not only capi-
tal owners but also highly pay executives. Salaries, bonuses, and stock options are
main factors behind this explosive rise in compensation for top managers. The
history of how these top incomes and great wealth have been accumulated by
different individuals in the last two to three decades around the globe remains
to be written. The rewards for talent, political connections, and accumulation
by dispossession surely have played important roles in this process.
The high compensation of top executives and the concentration of income
and wealth in the top 1 percent, or the top 0.1 percent, have become impor-
tant issues in the public debate in recent years. The data presented in this
chapter shows a trend toward increased share of income at the top 1 percent
in both Anglo-Saxon developed countries (U.S. and U.K.) and the large mar-
ket liberalizers such as China, India, Portugal, Spain, and Italy. In addition,
we observe the rapid formation of billionaires in Russia, China, India, and
other developing nations. This general shift in economic power to capital and
top managers highlights the excessive influence that dominant sharehold-
ers, boards of directors of corporations, and banks have in determining how
profits are shared among the factors of production—factors that have helped
generate value in those firms and corporations.
The chapter also examined the potential for and limits of regulating high
salaries and for taxing the rich in the capitalist economies. The experience of
the last three decades with tax cuts for top incomes in OECD countries (par-
ticularly the U.S. and the U.K.) has been one of regressive redistribution to
the top with little gains in economy-wide growth. Reversing the top income
tax cuts seem necessary but national taxation of income and wealth may be
difficult to sustain in a world of high capital mobility across national bor-
ders and fiscal paradises that allow the rich to escape taxation. Thus national
taxation of high income requires, being effective, to be supplemented by
global taxation of high incomes and wealth. In addition, there is a need for
54 Elit es, En t repren eur s, an d Middle Cl ass

broader reforms addressing the concentration in ownership of productive

assets. These reforms need to address the design of new institutions for more
equitable wage-setting processes, progressive taxation, universal access to
good quality education, the development of new social norms on fair pay and
inequality. Comprehensive and coordinated actions in various fronts, rather
than fixes based on single policy instruments, seem a more promising way to
reduce inequality and curb the financial power of rich economic elites that
characterizes contemporary capitalism.
 3

Productive Elites? On
Entrepreneurship, the Technostructure,
and the Corporation

In the previous chapter we analyzed to what extent dominant economic

elites are “productive” elites or whether their rise in power and wealth is more
connected to privatization, financial speculation, favoritism, and political
influence through intense lobbying.1 The economic elites can consolidate their
position in society through an exchange of favors with government officials
who have the capacity to grant special benefits, contracts, inside privatization,
and so on. Wealthy people and corporations can contribute to the election
and can maintain in positions of power those officials by using several mecha-
nisms, such as campaign financing, lobbying, and contributions to think tanks
and universities that produce reports favorable to their interests. The symbiosis
between money, public policies, and the elites in contemporary democracies is
neat but not always transparent.2
In this chapter we go inside (or within the vicinity of ) the economic elites
and focus on the entrepreneur and the capitalist. For that purpose, we look at
the entrepreneur as mobilizer of resources and organizer of production, con-
trasted with the large corporation whose senior management and technostruc-
ture control critical investment, funding, and location. For the entrepreneur, we
take another look at the views of neoclassic economics and the views of authors

1.  Parts of this chapter and the next chapter are drawn from Solimano (2012c).
2.  Of course, productive elites can and do also exert political influence through similar means as
those of rent-seeking elites, even though their economic contribution to productive capacities can
be greater.
56 Elit es, En t repren eur s, an d Middle Cl ass

such as Marx, Schumpeter, Knight, and Keynes. For the corporation, we con-
sider the institutional perspectives of Veblen, Schumpeter again, Galbraith, and
Sweezy, highlighting the differences among them with respect to the separation
of ownership and control, as well as the degree of alignment (or lack thereof )
between the corporate technostructure and its proprietorship.
We highlight the heterogeneity and complexity of entrepreneurship and
survey types of entrepreneurial behavior as related to opportunity and neces-
sity. In addition, we take up the role of family and social background, values,
class membership, age, and education with the propensity of certain people to
engage in entrepreneurial activities.

3.1  Entrepreneurship—General View

The term entrepreneur comes from the French and means “to undertake”—in
this context, to pursue a business or productive activity. There is certain con-
sensus that the word was first used by Richard Cotillon, in the eighteenth
century, an early writer on the functions of the entrepreneur as an agent who
deals with risk in business and production. John Stuart Mill and Jean Baptiste
Say, in the nineteenth century, were influenced by Cotillion and extended the
word’s use to an organizer of new business, bearing risk and exerting control
of the production process.
Karl Marx developed a theory of capitalism in which the distinctive fea-
ture of the “capitalist” (in some sense, the equivalent of the entrepreneur) was
to accumulate and ever-expand the reach of capital. In his words:

The capitalist shares with the miser the passion for wealth as wealth.
But that which in the miser is a mere idiosyncracy, is, in the capitalist,
the effect of the social mechanism of which he is is but one of the weels.
The development of capitalist production makes it constantly necessary
to keep increasing the amount of capital laid out in a given industrial
undertaking and competition makes the immanent laws of capitalist
production to be felt by each individual capitalist, as external coercive
laws. It compels him to keep constantly extending his capital in order to
preserve it, but extend it he cannot, except by the means of progressive
accumulation. (Marx´s Capital, Vol. 1, Chapter 22, section 4)

Marx was writing in the time of competitive capitalism that characterized

the nineteenth century, which explains his emphasis on the “coercive laws” of
competition. He also underscored the function of the capitalist factory system in
 Productive Elites? 57

combining technology and wage labor for attaining profits that are reinvested in
the search for more profits, which are needed to expand capital—all in a process
of wealth creation that is punctuated by recurrent crises in overproduction and
distributive conflicts. In Marx´s terms “Accumulate! Accumulate! That is Moses
and the Prophets” (Marx´s Capital, Vol. 1, Chapter 22, section 4).

3.2  Alternative Views of Entrepreneurship: Neoclassic,

Schumpeter, Knight, and Keynes
Let us look briefly how different schools of thought and major economic
thinkers have viewed the entrepreneur as part of the economic process.

3.2.1  Production without Entrepreneurs: 

Neoclassical Theory
In neoclassic economics, production and growth follow from a production
function whose origin is rarely discussed. Conspicuously, among the factors
of production there are no managers or entrepreneurs who organize produc-
tion, hire labor, and combine capital with technology. There is a blueprint of
economically efficient combinations of factors of production, such as labor,
capital, and technology, to produce goods and services. The production func-
tion, however, is ultimately a “black box.” The entrepreneur as an organizer
of business and production, linking goods with markets, and utilizing credit
markets, is clearly absent from this production framework.

3.2.2  Creative Destruction and the Role of Risk

and Uncertainty
In the Austrian tradition was a main theoretician of the role of the entrepreneur
in the twentieth century, Joseph Schumpeter. Unlike the neoclassic theorists,
Schumpeter developed an eclectic theory of entrepreneurs based on a mix of
direct observation, psychological theory, and economic analysis. He posited that
the entrepreneur has a distinctive talent for combining capital and labor, with a
vision for opportunities and prospects for profit. In Schumpeter, the critical role
of the entrepreneur is to make innovations, such as introducing a new good, devel-
oping a new line of production, or opening a new market. These actions represent
a process of “creative destruction,” in which new technologies and new ways of
doing business replace the older ones. Schumpeter stressed that the entrepreneur
was different from the manager, the pure inventor, or the provider of credit.
58 Elit es, En t repren eur s, an d Middle Cl ass

Schumpter then jumps from a micro theory of the entrepreneur to a

macro story of development in a dynamic economy. In particular, he stresses
the difference between a growing economy and a developing economy. The
former stays in the same (stationary) circular flow under given parameters of
technology and organization. The developing economy jumps, is driven by
innovation, from one circular flow to another.3
Frank Knight (again influenced by the Austrians) offered important
insights on the subject as well. He stressed the links between entrepreneurship,
profits, risk, and uncertainty.4 The function of the entrepreneur and the man-
ager, according to Knight, was to organize production when the productivity
of workers is unknown and other contingencies relevant to production do
not obey clear probabilities, owing to the presence of “uncertainty.” Profit for
Frank Knight was the remuneration of risk-taking, a different category from
the return on the capital that is invested in the production effort. Interpreting
Knight, other authors have emphasized that the entrepreneur needs residual
property rights (as an owner) to exercise the function of “specializing in judg-
ment, common sense and intuition as [emphasis added] vehicles to carry pro-
ductive decisions in a world of uncertainty.”5

3.2.3  Volatile Investors: Keynes

It is apparent that Schumpeter held an almost romantic view of the entrepreneur
as the “hero of capitalism” who, against all odds, carries forth his vision of inno-
vation and productive creativity. In contrast, John Maynard Keynes, a financial
investor himself, was well aware of the almost insurmountable uncertainties of
the investment process, and so he stressed the particular “psychology of the inves-
tor” that departs from rational economic calculation portrayed in neoclassic the-
ory as a cold-blood calculator of costs and benefits. Instead, Keynes depicted the
investor-capitalist of the real world more as a “casino player,” a gambler driven by
“animal spirits,” rather than as a hardworking Puritan satisfied with delayed grati-
fication (sacrifice of consumption) in favor of long-term capital accumulation.
The critical passage by Keynes appears in his General Theory (1936/1998) reads:

Even apart from the instability due to speculation, there is the instabil-
ity due to the characteristic of human nature that a large proportion

3.  See Schumpeter (1934/1989).

4.  This author was influenced both by the Austrians (Menger, Von Mises, Bohm-Bawerk, and
Hayek) and by the neoclassical theory. See Knight (1921).
5.  Langlois and Cosgel (1993).
 Productive Elites? 59

of our positive activities depend on spontaneous optimism rather than

mathematical expectations, whether moral or hedonistic or economic.
Most, probably, of our decisions to do something positive, the full con-
sequences of which will be drawn out over many days to come, can only
be taken as the result of animal spirits—a spontaneous urge to action
rather than inaction, and not as the outcome of a weighted average of
quantitative benefits multiplied by quantitative probabilities. Thus, if
animal spirits are dimmed and spontaneous optimism falters, leaving us
to depend on nothing but a mathematical expectation, enterprise will
fade and die. (161–62)

The investor and the entrepreneur have an urge to action (rather than
inaction) and are affected by herd behavior, interdependent expectations, and
changes of mood and perception that lead to waves of optimism, euphoria,
and mania, followed by periods of pessimism and depression that generate
sharp business and financial cycles.

3.2.4  Corporate Entrepreneurship and the Managerial

Class: Veblen, Schumpeter, Galbraith, and Sweezy
The transition from competitive capitalism to corporate capitalism that
occurred at the end of the nineteenth century and continued throughout the
twentieth century led to a reconsideration of the theory of the corporation
and the need to accommodate this new actor in modern capitalism. As the
corporation became a large and complex organization that needed organiza-
tional capacities to manage large volumes of capital, adopt new technologies,
anticipate market behavior, and deal with uncertainties and large labor forces,
it became clear there was a need to hire professional management. In terms of
social groups or economic actors, this development brought with it a distinc-
tion between the role of entrepreneur and that of management (technostruc-
ture), the latter now being a layer of executives, technical experts, financial
specialists, and lawyers.6 This development also affected the composition of
elites, raising the importance of knowledge elites.

6.  The psychology of the entrepreneur is different from that of the employee. The latter, being a
wage-earner, is supposed to be more risk-averse than the entrepreneur and have a lower preference
for independence than either the entrepreneur or the self-employed. In terms of long-run eco-
nomic success, it is not clear that being an entrepreneur is superior to being a top manager. A well-
educated, capable employee that can make a career in a corporation (and/or move to others), and
reach well-remunerated senior positions that are rewarding from both a professional and a pecuni-
ary viewpoint. In contrast, entrepreneurship is risky and not all succeed. In addition, pursuing an
60 Elit es, En t repren eur s, an d Middle Cl ass

Several authors, in the institutional tradition, tried to capture the essence and
implications of this shift in the nature of modern capitalism. Thorstein Veblen
(1899/1934), at the turn of the twentieth century, coined terms such as absen-
tee ownership and the leisure class to denote the growing detachment of owners
and entrepreneurs from the running of large corporations. Joseph Schumpeter,
always fond of the individualistic, daring, and visionary entrepreneur, lamented
that corporate capitalism, with its monopolistic market structures and profes-
sional managers, increasingly was replacing entrepreneurship. This change was
bound to produce a routinized and bureaucratized system run by a cast of man-
agers less prone to innovate. John Kenneth Galbraith, in three influential books
(The Affluent Society [1958/2006], The New Industrial State [1967], and The
Economics of Innocent Fraud [2004]), stressed the growing dominance of the
corporation over personal concerns. Galbraith identified the shift in power in
American capitalism away from capital owners and entrepreneurs and toward
the technostructure or management class that was now making the most impor-
tant corporate decisions with a large degree of autonomy.
Paul Baran and Paul Sweezy, in Monopoly Capital (1966), share a similar
view on the importance of the corporation in 20th century capitalism. As the
following quote shows, their analysis is closer in spirit to Marx´s insight of the
centrality of accumulation:

The replacement of the individual capitalist by the corporate capitalist

constitutes an institutionalization of the corporate function. The heart
and core of the capitalist function is accumulation: accumulation has
always been the prime mover of the system, the locus of its conflicts,
the source of both its triumphs and its disasters. But only in the infancy
of the system could accumulation be said to exhaust the obligations of
the [individual] capitalist. (Chapter 2, section 7)

While Baran and Sweezy recognize the separation of ownership and con-
trol in the large corporation, and the differences in interests between owners
and managers, they argued that managers are not a separate class and that they
perform the roles of protectors and spokesman for the proprietary class. For
Baran and Sweezy, the real conflict was between managers and small property
owners, rather than between managers and large property owners.

entrepreneurial career may have an irreversibility component that prevents reinsertion in employee
positions, as entrepreneurial paths can erode traits such as reporting capacities and tolerance for
collective decision making. As shown later in the chapter, empirical evidence points to the choice
of entrepreneurship only after being an employee.
 Productive Elites? 61

The neoliberal era, with its reassertion of the power of owners of capital
over the workers and trade unions, sought to align the interests of managers
with the interests of owners. This was accomplished by establishing gen-
erous new compensation mechanisms that reduced the role of salary and
increased the role of bonuses, profit sharing, and preferred stock options,
thereby turning management compensation away from the wage setting
that is used for middle- and lower-ranked employees and moving it closer
to capital income.

3.3  Varieties of Entrepreneurship

Entrepreneurs in advanced capitalist countries and developing economies
often operate under highly differentiated and heterogeneous productive
structures. Accordingly, the entrepreneurial profile can be quite different
as well. A Bill Gates or Michael Bloomberg are certainly different from the
owner of a hot dog stand in Manhattan or a small shop in Managua—even
though they can all be classified as entrepreneurs.
Productive heterogeneity, then, is reflected in significant differences
between micro, small, and medium-size companies (all SMEs), on the one
hand, and large corporations, on the other. These differences are manifested
in capital intensity, employment generation, technology development, credit
access, and export orientation. The SME are often viewed as important sources
of employment creation, but not necessarily of technological development. The
bulk of research and development activities are carried out by large corpora-
tions. Nevertheless, this view can be challenged somewhat, or at least qualified,
by the experience of the United States. The Small Business Administration
(SBA) reports that small firms in the high-tech sector innovate more than
do large firms in that sector and they have a higher percentage of patents per
employee than do the big companies. Similarly, younger firms are more likely
to have more patents per employee than are older firms (Wadhwa et al. 2009).
So, defining what constitutes entrepreneurship is not a simple matter.
We can distinguish at least three measures of entrepreneurship. First, there
is self-employment with hired workers. Statistics for the economically active
population typically distinguish between owners, managers, employees, and
the self-employed. Using this measure, we see that an entrepreneur has to hire
other people as employees or workers to carry out the production.7 Second,

7.  Some empirical studies define the entrepreneur as a self-employed person who owns or manages
a firm of at least two people.
62 Elit es, En t repren eur s, an d Middle Cl ass

there is new business creation in the formal sector,8 measured, for example, by
the number of newly registered firms in a given year (say, as a share of total
number of firms registered).9 Third, there are the stages of business creation,
development, and consolidation, regardless of formal registration. The Global
Entrepreneur Monitor (GEM) focuses on early-stage entrepreneurial activity
as its measure of entrepreneurship. This distinguishes between nascent entre-
preneurs and baby entrepreneurs, the latter counted as the proportion of the
adult population currently involved in operating a business for fewer than
forty-two months.
Some of these views have drawbacks. Judging entrepreneurship by firm
registration may underestimate actual entrepreneurial activity by exclud-
ing informal sector entrepreneurship, whereas the GEM method can over-
estimate the amount of new-business creation because nascent firms may
soon vanish from the market. So, this underscores the ambiguity in the
formal/informal dimensions of entrepreneurship and suggests that there
is a great deal of entrepreneurial activity at the level of very small firms,
which differs sharply from ownership patterns we have observed for large
corporations.10
A further distinction is made between entrepreneurs by necessity and
entrepreneurs by opportunity. In the first, individuals engage in indepen-
dent business activities because they cannot find jobs as paid employees or
workers or as a productive concern. Some surveys show that entrepreneurs
by necessity would prefer to be salaried rather than self-employed, should
the choice be open to them. The motivation for obtaining higher income
(an ambition element), besides a yearning for independence, is character-
istic of entrepreneurs of opportunity. Unlike the necessity entrepreneur,
the opportunity entrepreneur does not engage in entrepreneurial activi-
ties as a strategy for economic survival in times of diminished employment
prospects.

8.  This is the procedure of the World Bank Global Group Entrepreneurship Survey (WBGES).
9.  Registered companies are legal entities that can incur debts, pay taxes, and undertake legal
transactions.
10.  Urban economist Edward Glaeser (2007) makes the simple but important point that the
number of companies in an industry or city is useful for assessing those industries’ or cities’ levels
of entrepreneurship (and employment growth capacity, too). In fact, if a given level of employ-
ment is distributed among a larger number of firms, then the number of company leaders or
entrepreneurs per worker must correspondingly be higher. This suggests that countries with
relatively larger SME sectors have higher degrees of entrepreneurship than do economies with
a smaller SME sector.
 Productive Elites? 63

3.4  The Role of Family Background

and Personal Characteristics in Shaping
Entrepreneurship: Empirical Evidence
An important issue here is the determinants of entrepreneurship. Is the entre-
preneur primarily a product of social and family conditions? Or is the entre-
preneur a born risk-taker and visionary with a gift for business creation? Does
an elite position transmit over time? Does entrepreneurship boost social
mobility in a capitalist economy?
Theoretical models and empirical evidence tend to show persistence
across generations regarding attitudes toward work, entrepreneurship, and
risk-taking.11 That means that, to some degree, entrepreneurial propensities
tend to be inherited. A corresponding hypothesis is that children of managers
of big corporations are less likely to become entrepreneurs than the children
of small-business owners (see Glaser et al. 2009). This underscores the impor-
tance of small businesses in promoting entrepreneurship, while challenging
the assumed tight link between entrepreneurship and the super-rich.
A set of micro studies on entrepreneurship carried out by CEFIR-NES
(Centre for Economic and Financial Research-New Economic School) analyzed
the main determinants of entrepreneurship, using surveys (personal interviews)
of around 400 entrepreneurs and comparing the results with an equivalent sur-
vey of “non-entrepreneurs” used as a control group. The studies were conducted
for three large emerging economies: Brazil, China, and Russia (Djankov et al.
2005, 2006, 2006a, 2007) and tried to gauge the role played by personal char-
acteristics such as age, gender, cognitive capacities, attitudes toward risk, educa-
tional attainment, labor-leisure preferences, and family background. The studies
also examined the impact of sociological factors such as social networks and
educational levels of parents, along with the effect of values and perceptions of
institutions. The main results are summarized as follows:

(a) Entrepreneurship tends to occur higher in families in which parent are

(or were) entrepreneurs or firm managers.

11.  Choice theoretic models have tried to make endogenous the formation of “preferences”
such as the propensity to save money, the preference for work over leisure, the tolerance and
even love of risk-taking. Preference formation is formed through the efforts of parents to instill
their own values in their children (see Doepke and Zillibotti 2007, and references on cultural
transmission of values therein), with the ensuing consequence that the probability of becom-
ing an entrepreneur is higher in families where parents are (or have been) entrepreneurs than in
households without an entrepreneurial background.
64 Elit es, En t repren eur s, an d Middle Cl ass

(b) Entrepreneurs have a greater tolerance for risk than non-entrepreneurs,

as measured by the proportion of respondents willing to engage in risk-
neutral games.
(c) When offered, in a simulated game, a large sum of money in exchange
for retirement, the proportion of respondents who accepted the offer
(receive the money and keep working/investing) was far greater among
entrepreneurs than non-entrepreneurs. This is interpreted as a higher
preference for work than for leisure—or a greater “greed effect”—among
the entrepreneurs.
(d) In Russia, the level of educational attainment among entrepreneurs was
higher than among non-entrepreneurs, although this finding was not
replicated in China and Brazil.
(e) Social network effects are particularly important among entrepreneurs
when compared to the control group.

Regarding intergenerational mobility, other studies have found a greater

influence of parental economic conditions on children’s outcomes in the
United States and the United Kingdom (two countries with relatively higher
income Ginis among the industrialized countries) compared to more egalitar-
ian nations, such as Sweden and other Nordic countries (see Torche 2009).12
The degree of intergenerational mobility in the Latin American countries has
varied from country to country. For Chile, the evidence has shown increased
intergenerational mobility in the middle and lower classes but closed patterns
of mobility in the top decile.13 This is consistent with a high concentration of
income and wealth at the top, but more even distribution of income in the bot-
tom 90th percentile (Solimano 2012c). Studies for Brazil find an important role
for family background in explaining overall earnings inequality, suggesting a
high level of intergenerational persistence—say, a low degree of social mobility
(see Bourguignon et al. 2007). In Mexico, a changing occupational structure
has led to greater opportunities for social mobility in the last four decades or
so, but family background continues to play an important role in the economic

12. Intergenerational mobility refers to the correlation in economic and financial outcomes

between parents and children. A society with a high degree of intergenerational mobility is one in
which the correlation between the economic fortunes of parents and children is low. Conversely,
intergenerational mobility is low when that correlation is high. It is important to note that this
relationship refers to economic and financial considerations, and this may also correlated with
inherited genetic attributes, as well as the transmission of values and family socialization.
13.  Torche (2009).
 Productive Elites? 65

possibilities of children. In general, the evidence for Latin America is drawn

mainly from cross-section surveys that include retrospective information about
social origins and economic characteristics of parents. These point in the direc-
tion of strong mechanisms for the reproduction of inequality in wealth and
status across generations (but not necessarily of the reproduction of poverty).
An empirical study on entrepreneurship in the technology sector of the
United States (covering computer and electronics, defense, health care, and
services) was based on a sample of 549 companies (Wadhwa et al. 2009). It
revealed that a majority of founders of these new companies (71 percent) were
of middle-class background, with a very small percentage (less than 1  per-
cent) coming from extremely wealthy or very poor backgrounds.14 The extent
to which this finding of a strong middle-class origin for entrepreneurship
extends to other sectors beyond these new technologies is an open question.
Regarding the influence of age and education on entrepreneurship,
the Wadhwa et  al. study found that the average age for starting a business
is forty, and most company founders had considerably high levels of edu-
cation (over 95  percent had a bachelor’s degree and 47  percent had more
advanced degrees).15 In terms of timing, entrepreneurs generally did not initi-
ate a start-up right after graduating from college; the typical sequence is to
first be an employee (for five to six years) and then switch to entrepreneur.
This study also suggested a certain independence from family background in
terms of propensity to entrepreneurship—as slightly more than half of those
studied were the first to initiate a business in their family. Concerning the
motivation for becoming an entrepreneur, the survey showed that the more
entrepreneurial-oriented individuals had a combination of pecuniary motiva-
tions (accumulating wealth), excitement for commercializing an idea, a desire
to be one’s own boss, and, when relevant, the hope to continue a family tradi-
tion of entrepreneurship.16
However, there are some important examples of outstanding entrepre-
neurs that challenge the notion of education and entrepreneurship as closely
related. In fact, obtaining a formal education can be too slow a route for highly
talented, impatient, and ambitious entrepreneurs. Bill Gates (Microsoft),

14.  Historically, this is in line with the middle-class origins of the entrepreneur in the capitalism
of nineteenth-century England.
15.  Their academic performance located them among the top 30 percent in high school and col-
lege (with better academic performance in the former).
16.  Entrepreneurs are not necessarily people with the highest achieved formal education—say,
holding a Ph.D. or masters degree, which is more the case of the scientist or the intellectual.
66 Elit es, En t repren eur s, an d Middle Cl ass

Sergei Brin and Larry Page (Google), or Mark Zuckerman (Facebook) all
decided, at some point, to interrupt their studies and turn to entrepreneurial
endeavors, each with great success.17
Thus, entrepreneurs seem to be people with skills for performing various
tasks, such as management and people interaction, as well as a capacity to deal
with financial and technical problems; these factors distinguish them from
the expert or the specialist. Lazear (2004), using longitudinal data from top
universities in the United States, found that those who, in graduate school,
choose a greater variety of subjects and have more varied occupational experi-
ences also have a higher propensity to become entrepreneurs than do indi-
viduals who choose narrow educational strategies and fewer employment
experiences. These findings provide backing for the “balanced skills hypoth-
esis” for entrepreneurship.

3.5  Concluding Remarks

This chapter has highlighted the complexity of the relationship between the
economic elites and entrepreneurship. The historical record, casual evidence,
and empirical research indicate that the middle class, not the very rich, is the
social segment that provides most entrepreneurially oriented individuals. This
was, indeed, also the case for the nascent industrial capitalism in the eigh-
teenth and nineteenth centuries, and again in the last wave of technological
entrepreneurship of the late twentieth century and early twenty-first century.
In addition, necessity entrepreneurship is a survival strategy in economies
with excess labor and/or during downturns in the business cycle. The conclu-
sion is that entrepreneurs do not necessarily come from rich elites, although
highly successful entrepreneurs may become very rich afterwards and become
part of those economic elites.
The determinants for entrepreneurship involve a complex interaction of
family background, quest for independence, education, desire to accumulate
wealth, economic survival, ingenuity, and risk-taking capacities. In general,
the available empirical evidence tends to show that entrepreneurs are more
risk-tolerant, show a higher preference for work than for leisure, and come
from families in which parents were entrepreneurs or firm managers and have
higher education levels.

17.  Of course, there are many college dropouts who do not achieve the same success as these exam-
ples. Many studies of entrepreneurship and its merits suffer from some degree of selection bias, as
they often do not include the stories of failure.
 Productive Elites? 67

Sector heterogeneity is evident when we compare entrepreneurship

in low-productivity areas of developing countries, sectors that are largely
dominated by entrepreneurs of necessity, with technological entrepreneurs
of middle-class background in the advanced economies. In Latin America,
entrepreneurs of opportunity can play a useful role in providing jobs when
the formal economy is unable to do so. The pervasiveness of entrepreneur-
ship by necessity is observed not only in the developing world but also in the
advanced capitalist and crisis-hit nations of the European periphery.
Upward social mobility is viewed as an antidote to entrenched social
inequality and for institutionalized rigidities in economic progress. However,
the mechanisms for social mobility can be wide open. In principle, this mobility
can be achieved through vehicles such entrepreneurial activity, being a well-paid
employee of the technostructure of corporations, or becoming a self-employed
person. Less socially desirable ways to move up and become part of the eco-
nomic elite is to engage in rent-seeking, corruption, and illegal activities.
 4

The Fragmentation of the Middle Class

in the Neoliberal Era

The neoliberal era has strengthened the economic elites and dis-
tanced them from the middle class and the working class. As seen in c­ hapter 2,
income and wealth have concentrated, heavily, at the top 1 percent or the top
0.1 percent in several advanced capitalist countries. A similar trend has devel-
oped in the former communist nations and in developing countries that have
embraced policies of economic liberalization, privatization, and globaliza-
tion. Due to rapid growth in China, India, and some Latin American coun-
tries, people have left poverty and allegedly joined the ranks of the “middle
class,” measured there by people earning incomes above the poverty line. This
raises important issues concerning the definition and identity of the middle
class that go beyond simple income measures. They involve matters of rights,
quests for security, and economic stability.
International organizations and private-sector commentators have
cheered the emergence of a “new global middle class” that seeks to emu-
late the consumer patterns of the more affluent middle classes in advanced
capitalist countries. In particular, the consumer and behavioral patterns of
the American upper middle class seem to be influential for the Chinese,
Russian, Indian, and Latin American new middle classes. Beyond these
aspirations, though, are the realities of the neoliberal era: various segments
of the new middle class are affected by job instability, rising costs of educa-
tion, growing indebtedness and shortages of affordable health and housing,
among other things. Simultaneously, an ongoing process of internal differ-
entiation seems to be taking place within the new middle class. On the one
hand, the traditional middle class whose jobs are in public schools, public
hospitals, ministries, and state-owned enterprises has suffered the effects of
 The Fragmentation of the Middle Class 69

stagnant salaries, fiscal retrenchment, austerity policies, and privatization.

On the other hand, an “emerging” middle class has formed that includes
financial experts, lawyers, economists, and business administrators who
have experienced more economic success. This latter segment can choose
to enter the job market either as independents or, as said in the previous
chapter, by joining the technostructure of large corporations or the finan-
cial sector, thereby reaping the benefits of liberalization, privatization, and
globalization policies.
This chapter takes a fresh look at the concept of the middle class, its
alleged dynamic effects on the economy, and its stabilizing effects on democ-
racy and society. The chapter also reviews the values and ideology of the
middle class in relation to the working class and the economic elites.

4.1  A Rediscovery of the Middle Class by

Mainstream Economics
Mainstream economics, entrusted with methodological individualism, has
for a long time forgotten or dismissed class analysis. However, in the last
decade there has been a resurgence of interest in this segment of the field.
Part of this interest was born in international organizations such as the World
Bank, which feels its traditional focus on poverty, albeit important, is too nar-
row a basis for social policy in developing countries where economic growth
has pulled people out of poverty.
With regard to the “advanced economics”, in the mid-1970s, MIT econo-
mist Lester Thurow did important work on the middle class at a time when the
U.S. economy was hit by a combination of high inflation and supply shocks
(stagflation) that dampened the possibilities of a rising middle class which had
been enjoying steady prosperity in the three decades after the end of World War
II. Thurow stressed the importance for capitalism and democracy of having a
strong middle class, and he cautioned that the increase in lower-paying jobs
and the stagnation of middle-class incomes in the United States were inimical
trends for guaranteeing stability and social cohesion. These developments were
reinforced in subsequent decades by increased inequality and income polariza-
tion at the top, even more stagnant wages, and growing middle-class indebted-
ness. Thurow used an income metric to define the middle class as those with
incomes between 75 and 125 percent of U.S. median income.
In the 2000s, Thurow’s arguments of the 1970s were taken up by some
developing economists such as William Easterly (2001), who argued for a
“middle class consensus” on development by showing (based on cross-section
70 Elit es, En t repren eur s, an d Middle Cl ass

econometric analysis) that a higher share of income for the middle class (and
lower ethnic polarization) is empirically associated with higher income, higher
growth, more education, and other favorable outcomes. In fact, Easterly said
that countries with a middle-class consensus are indeed “fortunate societies”
because they have the following:

Countries with a middle class consensus have a higher level of income

and growth. We can see why relatively homogenous middle-class soci-
eties have more income and growth, they have more human capital and
infrastructure accumulation, they have better national economic poli-
cies, more democracy, less political instability, more “modern” sectoral
structure, and more urbanization. (22)

The argument sounds persuasive, in principle. However, while it is a

well-established fact that advanced economies enjoying high per capita
incomes and acceptable levels of social cohesion also have a large middle class,
it does not necessarily follow that the middle class causes these positive out-
comes (see Solimano 2009).

4.2  The Middle Class as a Source of Consumer

Power, Entrepreneurial Traits, and Social
Moderation: Myth or Reality?
Let us briefly review three main arguments that have been advanced regarding
the positive contribution of the middle class to consumer power, economic
growth and the stability of democracy, and then offer some qualifications to
these arguments:

(i) The Middle Class as a Source of Consumer Power. The growth of purchas-
ing power for the middle class can be a source of increases in aggregate
demand.1 The argument posits that the middle class expands consumer
markets in education, health services, housing, durable goods, enter-
tainment, and other goods and services being a source of economy-wide
growth on the demand side.

The ability of the middle class to pull the economy from a stagnation trap
and sustain growth on a permanent basis has to be qualified. As mentioned

1.  The marginal propensity of the middle class to consume may be higher than the propensity
of the rich but lower than the poor.
 The Fragmentation of the Middle Class 71

before, many in the middle class have to rely on debt to finance their acquisi-
tion of housing, durables, pay for university education, and so on. Therefore,
middle-class expenditures are vulnerable to financial shocks, such as cuts in
the supply of credit and/or hikes in interest rates that affect mortgage pay-
ments and consumer debt service.2 Another source of instability for the middle
class is the labor market. The financial and jobs crises triggered in 2008–09
have affected middle-class families, hitting particularly hard the youth of all
classes, including the middle class. In fact, youth unemployment has climbed
to 60 percent in Greece, 50 percent in Spain, and is at around 20 percent in
the United States.

(ii) The Middle Class as a Source of Entrepreneurship. In ­chapter 2, we identi-

fied the middle class as a source of entrepreneurial activity, at least since the
industrial revolution.3 Max Weber described the influence of an emerging
capitalist class governed by a Protestant work ethic oriented more toward
savings (a lower time preference), hard work, and willingness to take risks.
This new entrepreneurial middle class, in this view, tolerated delayed grati-
fication in order to save and accumulate capital, earn profits, and ascend the
social hierarchy. The new “spirit of capitalism” factor would be embedded
in the patterns of behavior for this new bourgeoisie of middle-class origin.

The identification of the middle class with entrepreneurial values of

thriftiness and hard work has to be qualified.4 The middle class is a het-
erogeneous segment of the population that includes individuals with dif-
fering values and working in various occupational categories, including
entrepreneurs, self-employed, and paid employees.5 In addition, as noted in

2.  The shift in income distribution from wage earners to rich elites, along with the stagnation of
wages for middle-income groups, that has been observed in the United States and other high-income
countries in the last two to three decades generates a tendency for aggregate demand to stagnate.
The rapid expansion of debt and the financialization of the economy that have coincided with the
rise in inequality have been rationalized as a mechanism to keep up spending, thereby offsetting the
recessionary trends often associated with the concentration of income at the top.
3.  Before the industrial revolution in England, the dominant landed aristocracy was consid-
ered a segment of the population that preferred more leisure than hard work, risk-taking, and
entrepreneurship; see Doepke and Zilibotti (2007).
4.  The implicit theory is that different social classes have different values and cultural traits
(the class-value specificity hypothesis).
5.  Middle-class individuals who are employees tend to prefer a steady, more stable flow of
income (salary) rather than face the potentially more profitable but also more risky income/
profit profiles associated with entrepreneurial activities. This is typically the middle class,
whose members work in the public sector at different levels of the hierarchy, from clerical
72 Elit es, En t repren eur s, an d Middle Cl ass

c­ hapter 3, within the middle class, the entrepreneurial segment itself can be
heterogeneous.6

(iii) The Middle Class as a Stabilizing and Democratic Segment in Society.

A strength of the middle class is its supposed democratic nature, making
its members less prone to political adventure. The reasoning is that soci-
eties with a large and consolidated middle classes also have a moderate
political center that ensures economic and political stability.

In contrast, unequal societies are economically polarized, with strong

elites, a weak and frustrated middle class, and a disenfranchised poor; these
societies may be attracted by authoritarianism and populism. The evidence
shows, certainly for Latin America, that high inequality expressed in social
discontent tends to be correlated with social conflict, authoritarian cycles,
populism, and recurrent economic crises.7 Empirical evidence (drawn from
Easterly’s work) has proved that, for a large sample of developing countries,
a higher share of income going to the middle class (along with lower ethnic
polarization) is associated with higher income, higher growth, more educa-
tion, and other favorable development outcomes.

4.3  Middle-Class Fascism, and Authoritarianism

Reality is more complex than what is suggested by econometric analysis. In
fact, the historical record for the behavior of the middle classes during cri-
ses of democracy in Latin America and Europe, at different times during the
twentieth century, suggests a more nuanced story of the relationship between
middle class and democracy. Authoritarian experiences in Latin America,

work, to medium-level staff positions, and even to executives of ministries and public agencies.
A similar logic could be extended to middle-class individuals who are employees of corpora-
tions in the private sector.
6.  In an empirical study of 13 low- to middle-income countries, Banerjee and Duflo (2008)
provide evidence of the pervasiveness of the entrepreneur by necessity in the developing world.
The typical middle-class entrepreneur in their sample has one employee (in some cases, a maxi-
mum of three employees), their stores or “firms” have minimal productive assets like machine
and equipment, and their activities display very low levels of technological intensity. The find-
ings of this study are hard to generalize as a depiction of middle-class entrepreneurship in the
world economy, as low-income countries with large informal sectors dominate their sample;
the low-range definition of middle-class individuals (those earning between $2 and $10 per
day) is likely to include people in poverty, capturing mostly entrepreneurs by necessity.
7.  See Smith (2005) and Solimano (2006).
 The Fragmentation of the Middle Class 73

such as the military coups of the 1960s, 1970s, and 1980s, do not support the
hypothesis that the middle class is always and everywhere a staunch guard-
ian of democracy. In fact, the authoritarian regimes that governed Brazil,
Argentina, Chile, and Uruguay at different times in those decades had varying
degrees of support from the middle classes, who apparently were pleased that
attempts at democratization and redistribution of income and power failed
(e.g., Allende in Chile, Campora-Peron in Argentina in the 1970s, among
other cases). For them, the military rule was “restoring order” to society.
Further back in history, the regimes of Mussolini in Italy and Hitler in
Germany in the 1920s and 1930s were popular among wide circles of the
Italian and German middle classes, who were frightened by the economic
insecurity, high unemployment, rampant inflation and then financial crises,
and rise of left-wing political movements.8

4.4  The Search for a Definition of and Identity

for the Middle Class
A serious problem with middle-class analysis is how to define that class—who
belongs to it. It’s a task subject to several caveats and methodological ambi-
guities, and researchers have used a range of definitions and measurements.
One of those measures, with currency among economists, is income-based
(or consumption-based); another focuses on occupations, assets, values, atti-
tudes toward risk, and aspirations for economic security, housing, education
of their children and upward social mobility. This second approach is more
preferred by sociologists.
A relative (income-based) definition is the one adopted by Lester Thurow
(between 75 and 125 percent of median income as mentioned before). Easterly
(2001) defines the middle class as those households in the second, third, and
fourth quintiles (20th to 80th deciles) on the income scale. Solimano (2009)
employs a definition that encompasses individuals ranging between the 3rd to
the 9th deciles, with a distinction made between a lower middle class (3rd to
6th deciles) and an upper middle class (7th to 9th deciles). This greater distinc-
tion can be useful in studying the dynamics of the middle class. That is, while
the lower middle class is a segment vulnerable to a fall into poverty owing to
adverse events in the labor and financial markets, the upper middle class may
advance into the upper class when certain economic conditions are favorable.

8.  See Hobsbawm (2002) and Frieden (2006) for good historical accounts of those periods
in Europe.
74 Elit es, En t repren eur s, an d Middle Cl ass

There are several income/expenditure-based absolute definitions of the mid-

dle class. Some include a range of income between $2 and $10 per day (Banerjee
and Duflo 2008), a range of $2 to $13 per day in Purchasing Power Parity (PPP)
(Ravallion 2009). Kharas and Gertz (2010) use expenditures in the range of $10
to $100 per day to define middle-class membership. Birdsall (2010) employs
a mixed definition of absolute ($ per day) and relative measures (percentile)
in which middle-class individuals have income between $10 a day to the 90th
percentile. The World Bank (2012), in a report on the middle classes in Latin
America and the Caribbean region, used a income-range of $10 to $50 per day to
define middle-class membership in this region. The report considers a “vulner-
able class” any that is located between “poor” and this “true” middle class.9
Beyond actual income (or expenditures), there are subjective definitions of
the middle class, in which people are asked to define themselves. For example,
people are asked to select their perceived position along a wealth scale (ranging
from 1 to 10), and then they are classified into three subjective social classes: poor,
middle class, and rich; this method uses the relative sizes of these “objective”
classes—say, measured by income—as a reference (Lora and Fajardo 2011).
Using absolute definitions, it can be said that between 58 and 66 percent
of the population in Latin America is middle class, according to the World
Bank study for the region. When relative definitions are used, around 60 per-
cent of that population is middle class. In contrast, estimates based on the per-
centage of the median income deliver a middle class that is in a broad range
of between 22 to 42 percent. Clearly, the size of the middle class is sensitive to
the empirical definition used to define and measure it.
American sociologist Dennis Gilbert—an expert on class structure in the
United States—associates classes with job positions (occupations) in the eco-
nomic system and with their sources of income (capitalist property, job earn-
ings, and government transfers). In his book The American Class Structure in
an Age of High Inequality (2008), the author develops the following taxon-
omy with six social classes: (i) a capitalist class, whose members obtain their
income from profits and the return on productive and financial assets; (ii)
an upper middle class of college-trained professionals and managers; (iii) a
middle class consisting of lower-level managers, semi-professionals, non-retail
sales workers, and craftsmen; (iv) a working class of less skilled workers per-
forming routine and supervised manual and clerical jobs; (v)  a poor work-
ing class of laborers, service workers, and low-paid operatives; and (vi) an
underclass of unemployed and part-time workers depending on government

9.  World Bank (2012).

 The Fragmentation of the Middle Class 75

transfers. Gilbert then aggregates these six classes into a three-class scheme
of: (a) a privileged class (composed of capitalists and upper middle class); (b) a
majority class (composed of middle and working class); and (c) a lower class
(composed of the working poor and the underclass).10
The majority class in the United States, according to Gilbert’s calculation,
constitutes around 60 percent of the population of the country.

4.5  The Identity for the Middle Class: Values

and Ideology
Traditional middle-class values underscore how this social segment attaches
much importance to having job stability, affordable housing, and good edu-
cation for their children; they hold moderate political views. Where do these
values come from? Neoclassic economics considers values, tastes, and cul-
ture as exogenous variables that are generally constant or, at best, change very
slowly over time. Others authors think differently.
For example, Karl Marx (1848/1979) emphasized the role of the eco-
nomic structure, modes of production, and concomitant supportive social
relations in shaping people’s ideas, beliefs, values, and ideology. Max Weber
(1905/2001) highlighted the Protestant ethic, which rewards savings, work,
and the accumulation of wealth. Weber stressed that capitalism needs a value
structure functional to capital accumulation, technological change, and accel-
erated social mobility, which is different from the values prevailing in the old
feudal order based on the divine origin of authority, tradition, and other
social rigidities.11
Antonio Gramsci, an Italian theorist and political activist in the
neo-Marxian tradition, developed the concept of cultural hegemony,12 referring
to the prevalence and acceptance in the population of the beliefs, values, and
ideas of the dominant social classes.13 This concept of a dominant social class,
as discussed in c­ hapter  2, could encompass power elites, the capitalist class,

10.  Typical (average) annual household income levels for the United States are in a range of
$150,000 to $2 million for the privileged class; $40,000 to $70,000 for the majority class,
and $15,000 to $25,000 for the lower class; Gilbert (2008).
11.  In Max Weber, the implicit causality goes from values (affected by religious preferences) to
the economic system, a reverse causality to that present in Marx.
12.  See Forgacs (1988).
13.  Gramsci’s theoretical work was developed before and after being imprisoned by Benito
Mussolini.
76 Elit es, En t repren eur s, an d Middle Cl ass

and the very rich. For Gramsci, through a process of cultural socialization, the
population (e.g., the majority class) adopts the values of the dominant class
and those values become “common sense” for the society at large.14
Gramsci highlights the existence, in capitalism, of various mechanisms for
the domination and hegemony that combine ideas and culture (into “com-
mon sense”), along with other, more traditional forms of political power
based on coercion and violence (such as repression and censorship), for the
maintenance and cementing of certain social orders.
Noam Chomsky, MIT professor and father of modern linguistics,
coined the phrase and concept manufacturing of consent.15 This refers to the
action of the media and the educational system to legitimize certain values
in a capitalist society that is driven by the profit motive. In particular, the
privatization of education during the neoliberal era is seen by Chomsky as
an attempt to build a system of knowledge and values that creates a con-
formist culture and that deters critical thinking. The extent to which these
values are acquired and internalized by the middle class is an open question,
although the effects of education and a media dominated by private inter-
ests can be strong.
An important question in the literature on culture, values, and social
structures is the extent to which values are class dependent. Recently there
have been attempts to empirically test the values of the middle class and
their degree of particularism (or lack of ).16 In particular, Gramsci’s concept
of cultural hegemony would be equivalent to the hypothesis that there is an
absence of middle-class (or working-class) particularism.
This idea of cultural particularism is advanced by literature that puts empha-
sis on the uniqueness of middle-class values. We may try to test the hypothesis
for an absence of cultural hegemony by verifying if the values of the middle class
are different from the values of the rich or the values of the poor. In Gilbert’s
formulation, the hypothesis can be restated as testing whether the values of the
majority class are different from the values of the privileged class and the values
of the lower class.
A World Bank study, prepared mostly by economists, found no support for
a hypothesis of “middle-class particularism.” That is, the study found no sta-
tistically systematic differences in the values of the middle class and the values

14.  See Jones (2006).

15.  See Herman and Chomsky (1988).
16.  These empirical studies include Amoranto, Chun, and Deolikan (2010) of the Asian
Development Bank and Lopez-Calva et al. (2011) at the World Bank.
 The Fragmentation of the Middle Class 77

of the upper and lower classes.17 Apparently, middle-class values seem to be

dictated by moderation and they lie between those of the poor and the rich.
An Asian Development Bank study, using a survey, showed that respon-
dents from (high-income) OECD countries are more liberal in some val-
ues than respondents in developing countries. In addition, this study, for
the OECD countries, showed that the middle class has a higher degree of
political activism—that is, it participates more in politics (voting in elec-
tions, membership in political parties, and so on) than do either the rich or
the poor.18
It is fair to say that the results of these studies should be taken as tentative
and suggestive, since what is considered as “values” reflects mainly the opin-
ions of individuals on different topics, which tend to show short-term varia-
tions more than do values that are structural in nature; those change more
slowly over time.

4.6  Growth and Inequality in the Middle Class

Let us return to a topic introduced earlier concerning the effect of eco-
nomic growth on the size and empowerment of the middle class. In fact,
income-based measures of the middle class show the growth of a new
middle class in China, India, and Latin America, and even in sub-Saharan
Africa—regions that have experienced respectable growth in recent years
(or decades). A piece of evidence in this direction is provided by a World
Bank report (2012):  in the Latin American and Caribbean region, in the
years 2000 to 2010, the middle classes grew by around 50  million people,
totaling 152 million individuals in 2009, or nearly 30 percent of the region’s
population.19 This report showed, however, that along with a decline in pov-
erty (from 40 percent to 30 percent over the period) there was a rise in the
size of the vulnerable class (that segment with incomes above the poverty
line but below the threshold to be considered middle class). Moreover, the
study showed that the number of people who jumped directly from poverty
to middle-class status in the last decade was small. Therefore, most of the
people who left poverty entered the pool of the vulnerability class rather
than becoming part of the “true” middle class.

17.  Lopez-Calva et al. (2011).

18.  Amoranto et al. (2010).
19.  See World Bank (2012). The study uses an income definition for the middle class.
78 Elit es, En t repren eur s, an d Middle Cl ass

A further step is to examine the relationship between economic development

and the size of the middle class, using cross-section data on size of the middle class
and GDP per capita. The ­figure 4.1 scatter diagram shows the relationship between
these two variables for a sample of 127 countries (ca. 2000).20 Two observations
emerge: first, the relationship between the two variables is nonlinear; and second,
the relation is unstable for the countries with a GDP per capita below $11,000—the
low- and middle-income countries. In addition, the diagram shows that the relation-
ship between middle class and GDP per capita is stabilized for the countries with per
capita incomes above that threshold.
The relationship between inequality and the middle class seems more robust
than the relation between GDP per capita and the middle class (see ­figure 4.2).
The implications of this are worth mentioning, since several of the rapid-growth
countries and regions we have mentioned also experienced a rise in inequal-
ity along with accelerated growth (this has been the case in China and India).

75%
Income Share of the Middle Class (broad definition,

70%

65%

60%
Deciles 3 to 9)

55%

50%

45%

40%

35%

30%
- 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
GDP per capita, PPP adjusted, constant 2000 intl. US$

Low-Income Economies [GNIpc < 905 US$] (Mean 60.41%; Variance 0.0022)
Lower-Middle-Income Economies [905US$ < GDPpc < 3595US$] (Mean 59.94%; Variance 0.0045)
Upper-Middle-Income Economies [3596US$ < GDPpc < 11115US$] (Mean 61.21%; Variance 0.0050)
High-Income Economies [GNIpc > 11116US$] (Mean 66.67%; Variance 0.0006)

Figure 4.1  The Middle Class (broad definition) and GDP per capita (127 selected coun-
tries, circa year 2000)
Source: Solimano (2009).

20.  Using a relative definition of the middle class approximated by the income share of the 3rd
to the 9th decile; Solimano (2009).
 The Fragmentation of the Middle Class 79

75%

70%

65%
Income Share of the Middle Class
(broad definition, Deciles 3 to 9)

60%

55%

50%
2
R = 0.4863
45%

40%
R2= 0.9024
35%

30%
0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900
GINI Index

Income Gini Index Net Worth Gini Index

Figure 4.2  The Middle Class (broad definition) and Income and Net Worth Gini Index
(129 selected countries, circa year 2000)
Source: Solimano (2009).

Therefore, the “growth effect” that expands the size of the middle class operates
in an opposite direction when it comes to equality. In fact, inequality tends to
shrink the relative importance of the middle class.

4.7  Empowerment and Vulnerability of

the Middle Class
An important concept to evaluate the effects of growth and prevailing eco-
nomic structures on the middle class is that of empowerment. A critical question
in this connection is the extent to which an increase in the rate of growth in the
gross domestic product (GDP), which is the dominant yardstick of progress
in the neoliberal era, leads per se to an improvement in the capacity of indi-
viduals to exercise their economic, social, and political rights. Do they enjoy
more economic security, participate more in the democratic process, and wield
a reasonable degree of influence in the formation and implementation of public
policy? A growing middle class, in its role as source of consumer power, is not
necessarily equivalent to a middle class composed of individuals who assert their
citizenship rights and hold authorities accountable for policies and decisions.
80 Elit es, En t repren eur s, an d Middle Cl ass

In this book we stress the notion that the middle and working classes
have grown more vulnerable to adverse economic shocks as the result of the
neoliberal period. We can identify three sources of this vulnerability relevant
to the middle class (and the poor): (i) the labor market (loss of employment
and fall in wages); (ii) the financial markets (over-indebtedness and the
tightening of credit); and (iii) health shocks, such as catastrophic illnesses,
injuries, disabilities, and death. An Economic Security Index (ESI) prepared
at Yale University (and supported by the Rockefeller Foundation)21 applies
this framework to measure the impact on individuals and households of a
variety of events, such as recessions, unemployment, credit tightening, high
debt, and low financial protection from adverse health contingencies.
The ESI shows that since the 1980s the degree of overall economic insecurity,
across all social classes, increased in the United States.22 Indicators of this dete-
rioration in the middle class include, among other factors, a fall in private house-
hold savings since the 1990s and a rise in household debt levels. These trends, in
turn, were exacerbated by the financial crisis triggered in 2008–09.

4.8  Concluding Remarks

In the neoliberal era, the middle class fragmented and the economic and
social distance between its upper segment (executives, financial experts, and
so on) and its lower segment (schoolteachers, public-sector employees, cleri-
cal workers, and others) has apparently increased. Middle-class analysis is
a complex subject. At an analytical level, the concept and definition of the
middle class is still largely unsettled. The alleged virtuous effects of the middle
class for democracy, stability, and growth have to be qualified. The middle
class is certainly a source of consumer power in a growing economy, partic-
ularly in a capitalist consumer-oriented society, but its reliance on debt to
finance durable consumption, pay for the education of children, and acquire
housing makes it vulnerable to financial shocks, recessions, unemployment,
and health contingencies.
Claims of a pro-democracy middle class seem to be supported by recent
value surveys; however, contemporary and historical experiences in Latin
America in the 1970s and 1980s, and in Europe in the 1920s and 1930s,

21. www.economicsecurityindex.org.
22.  According to ESI calculations, one in five Americans has experienced a decline of over
25 percent in household income between 2008 and 2010, without having the financial resources
to cope with this decline.
 The Fragmentation of the Middle Class 81

have shown that the middle classes are often supportive of authoritarian
regimes—ranging from military dictatorship (Latin America) to fascism
and Nazism (Italy, Germany, Spain). These authoritarian regimes are ori-
ented toward restoring and preserving the power of rich economic elites
and toward repressing the working classes. Also, this chapter has made the
point that the relation between GDP per capita and the size of the middle
class is unstable for low- and middle-income countries, whereas the rela-
tionship between inequality and relative size of the middle class is more
robust across nations, qualifying the popular notion that economic growth
(irrespective of its distributional implications) is an unquestioned blessing
for the middle class.
Finally, growth of the middle class (measured by income levels) in countries
that have experienced relatively rapid GDP growth (China, India, and Latin
America) says relatively little about the people’s real empowerment, degree of
economic security, and financial autonomy.
 PA RT T WO

Economic Crisis and the Instability

of Financial Capitalism
 5

Stories of Financial Crisis and

Austerity from the Nineteenth to the
Twenty-First Centuries

Spain, Portugal, Greece, Ireland, and Italy are the latest cases illus-
trating a perennial history of the financial crises that have been a common
feature of capitalism. Until recently the belief was that the world was divided
into a financially stable core (typically the mature capitalist economies of
North America, Europe, and Australasia) and a chronically unstable periph-
ery (emerging economies and developing countries in Latin America, Africa,
and Asia). Nevertheless, the crisis of 2008–09 originated in the United
States and then spread to Europe, completely challenging that view.
The intensity of the latest financial crisis suggests that the core of the world’s
economy was not that financially stable after all. Moreover, the traditional dis-
tinction between core and periphery needs to be refined. It is apparent that a
new “super-core” composed of the United States and Germany has emerged, and
that super-core largely dictates the terms of austerity programs imposed by the
IMF, the European Central Bank, and the European Commission. Those auster-
ity programs are being imposed on the European periphery of Ireland, Portugal,
Greece, Spain, and Italy. As a consequence of the crisis, the European social con-
tract of equality, social protection, and social cohesion is at risk of unraveling
in countries plagued by high unemployment, social despair, and the inability of
their political systems to offer a path to economic recovery and hope.
Historically, the frequency of financial crises has been higher in periods
of liberal and neoliberal capitalism than in times of regulated capitalism.
The first wave of globalization involved the gold standard (liberal, global
capitalism, ca.1870–1914). The second wave of neoliberal globalization
86 Econo mic Crisis an d Instabilit y of Capitalism

(since the 1980s) has had periods of high international capital mobility dur-
ing which financial interests have dominated industry and the real side of the
economy (these have been also called periods of “financial capitalism”). In
these two episodes of globalization, there have been frequent financial crises
in both the core and the periphery economies.
Unlike the interwar years, which were characterized by unstable macro-
economic conditions and bouts of very high inflation, the first wave of global-
ization was a time of low inflation and predictable exchange rates under the
aegis of the gold standard. The second wave of globalization has been a period
of moderate to low inflation, largely owing to the introduction of low-priced
manufacturing goods coming mainly from China, which has moderated
wages in the industrialized countries and dampened any inflationary expec-
tations. Because of the combination of high growth and low inflation, the
central banks and the mainstream macroeconomists, in a self-congratulatory
tone, had put forward the idea that we are living in an era of “great modera-
tion”—in both advanced and emerging economies.
The wake-up call to reality came with the financial crash of 2008–09, which
made clear the obvious contradictions between apparently stable macroeco-
nomic conditions (the “great moderation”) and mounting indebtedness, grow-
ing financial fragility, over-leveraged banking systems, and overvalued asset
prices, particularly in the property markets (see box 5.1).
The current spate of financial crises in the advanced capitalist countries
also is a crisis of economic paradigms. Neoclassic and neoliberal economics
was built on the assumptions of “rational economic man,” continuous market
equilibrium, rational expectations, and efficient financial markets. These para-
digms, largely detached from the real world, have been the standard training
for most economists in Western universities in the last three decades, and this
thought also has dominated the research and teaching agendas in academia, as
well as shaped the policies of the central banks and the world’s finance min-
isters since the 1970s. In contrast to what is studied in universities, the real-
ity of financial crises shows, in full force, the destructive impact of myopia,
short horizons, manias, manipulative behavior, and other patterns of human
behavior that are startling departures from the idealization of self-correcting
and harmonious markets that is portrayed in economics textbooks. The mul-
tiple episodes of financial crisis show that an overgrown financial sector can
develop an inorganic life of its own, with damaging effects on the real side of
the economy.1

1.  See Reinert (2012) for an interesting analysis of the view of how financial markets can
become depredatory mechanisms in circumstances of growing indebtedness.
 Stories of Financial Crisis and Austerity 87

Box 5.1
Types of Economic and Financial Crisis
Economic crises are disruptions of the “normal” working of an economy. They
usually involve (unused) productive capacity, increased unemployment of
labor, and “overproduction,” although these features can be considered part
of the normal operation of a capitalist economy. Some theorists try to explain
the causes of crises as “exogenous” events, while others consider these events
“endogenous” features of a capitalist economy. A “classic” macroeconomic cri-
sis often involves high inflation, fiscal deficits, unsustainable balance of pay-
ments deficits, and massive exchange-rate depreciation. Historical examples
of very severe macro disequilibria are the hyperinflation of the 1920s and late
1940s in Central Europe and the various Latin American inflationary crises of
the 1980s.
Also, a financial crisis may comprise elements of:  (a)  a banking crises,
(b) an internal debt crises, (c) an external debt crises, and (d) a sovereign debt
crises (Reinhart and Rogoff 2009). Other definitions of crisis include “sudden
stops” often associated with a sharp cut in external financing, leading to cuts in
absorption, severe exchange-rate adjustments, and output contractions. “Twin
crises” combine currency crises and banking crises.
Financial crisis often lead to defaults and the rescheduling of outstand-
ing public and private debt, a process generally preceded by “austerity pro-
grams”—costly adjustment programs entailing recession, unemployment,
and cuts in wages that upset socio-political equilibriums and can usher in
political change.

This chapter takes a look at several financial crises that have occurred from
the nineteenth to the twenty-first centuries, and seeks to derive some lessons
from these crises. Special attention is paid to the policy and intellectual environ-
ment that surrounded the gestation, outburst, and exit of the crises. The analysis
highlights the main rules of international engagement regarding the interna-
tional monetary system, the degree of integration of capital markets, types of
fiscal and monetary policies adopted, and the socio-political equilibrium of the
global economy.
The chapter also makes some critical observations of the role played by the
IMF and the central banks in their apparent inability to warn of impeding
crisis, to recognize the magnitude of an event such as 2008–09, and to under-
stand the destructive effects of subsequent austerity policies.
88 Econo mic Crisis an d Instabilit y of Capitalism

5.1  International Policy Regimes and Frequency

of Financial Crisis—The Long-Term Perspective
We can identify four distinct international policy regimes between approxi-
mately 1870 and the early twenty-first century, which provide a useful context
for analyzing various crises over time.2 These policy regimes include:

(i) The first wave of globalization (ca.1870–1914), involving the gold stan-
dard, free trade, free capital mobility, and reasonably free migration flows.
(ii) The interwar years.
(iii) The Bretton Woods system (1944–1971) of regulated capitalism.
(iv) The period of neoliberal globalization since the 1980s.

Each of these periods, or “economic eras,” has a certain international mon-

etary characteristic, with rules for trade, capital mobility and migration, macro
policies, socio-political equilibrium, a dominant international reserve currency,
and a hegemonic nation or “empire.” Financial crises were present mostly in
regimes (i), (ii), and (iv). It is interesting to note that the quarter-century of
regulated capitalism (iii) running from the end of World War II to the early
1970s—during which global and national financial markets were restricted,
guided by the priorities of the real side of the economy via the so-called the
Bretton Woods regime—was the exception. This was when global financial cri-
ses, with their contagion effects across countries, were virtually absent.

5.2  The Gold Standard and the First Wave of

Globalization (ca.1870–1913)
The long nineteenth century (say, from 1815 until 1913)  had a hegemonic
power constituted by Great Britain, which was promoting free trade and free
finance under certain global rules largely imposed by the British Empire. The
period of 1870 to 1913 was of pax Britannica, with London functioning as the
financial center of the world and the British pound (sterling) the dominant
currency in the context of the international gold standard.3
Economic historians have called this period the “first wave of globaliza-
tion.” Along with free trade and capital mobility, the time was also marked by
large flows of migration from Europe and the New World, in an era of no pass-
ports and visas; this was also termed the “age of mass migration” (Hatton and

2.  See Solimano (2010a).

3.  See Eichengreen (1995) for an analysis of the gold standard in this and subsequent periods.
 Stories of Financial Crisis and Austerity 89

Williamson 1998). In spite of generally low inflation (prices of goods), there were
frequent financial crises in the United States and Europe, and in countries of the
periphery in Latin America, Asia, British offshores, Russia, and other countries.
There were several banking crises in the core economies that were accompanied
by debt and currency crises in the periphery. In most cases, the crises were fol-
lowed by contractions in economic activity, unemployment, and bankruptcies of
companies and banks. Other financial crises of the nineteenth century occurred
in 1825–26 in London and in 1837 and 1857 in the United States.

5.2.1  Crises in Core Economies

A major financial crisis in the core economies occurred in 1873. It started in
Vienna, at that time the capital of the Austro-Hungarian Empire, with a stock
market crash in May 1873, following a period of over-expansion of credit,
speculation, and fraud. It also affected the German empire after the unifica-
tion of Prussia. A boom in railway construction in Europe had preceded the
crisis, following capital inflows to Germany from France after reparations
stemming from the Franco-Prussian war. In both Vienna and Germany there
had been expansion in the construction sector and the flowering of largely
unregulated lending institutions that financed mortgages for residential and
municipal construction in Vienna, Berlin, and Paris.
In a way, this nineteenth-century crisis was similar in its origins to the
crises of 2007–08 in the United States, 2008 in Iceland, 2009–10 in Ireland,
and 2009–10 in Spain. These were all preceded by booms in the housing sector.
The European financial crisis of 1873 led to an outburst of nationalism
and anti-Semitism, and a hostile attitude toward foreign banks and economi-
cally influential groups. A similar trend was observed in the 1920s and 1930s
in Europe, suffering the effects of rampant nationalism and xenophobia. In
America, religious fundamentalism erupted after these financial crashes,
accompanied by frauds and “unorthodox” behavior by financiers, regulators,
and politicians.
In September 1873, the United States also experienced a financial crisis as
the result of contagion effects from Europe. This crisis followed an economic
boom that had begun at the end of the American Civil War. As in Europe,
the crisis was preceded by over-investment in railways, particularly the north-
ern railway boom, and a scandal involving the Crédit Mobilier of America
construction company concerning the First Transcontinental Railroad. This
crisis was followed by bank failures and by increases in unemployment. It had
international ramifications, as trade in wheat with Russia and Central Europe
was affected by competition from China.
90 Econo mic Crisis an d Instabilit y of Capitalism

An important institutional monetary factor has been singled out as asso-

ciated with this crisis—the Coinage Act of 1873, in which the United States
demonetized silver and shifted to gold as the main metal backing its money
supply, effectively entering the gold standard. Before the United States entered
the gold standard, however, the country had been on a bimetallic system, with
silver and gold both used as its money commodity. The Coinage Act led to a
decline in silver prices that affected mining activities in the western territories
and was opposed by various special interests. At the same time, the gold pro-
ducers defended the act.
The Coinage Act was very controversial, identified as the “Crime of 1873.”
Years later, Milton Friedman adopted the view that the end of bimetallism and
the ensuing switch to gold had some adverse long-term effects for the American
economy.4 A “Long Depression” followed the panic and financial crisis of 1873
(the name is distinguished from the Great Depression of the 1930s and now from
the Great Financial Crisis of 2008–09). The ending date of the Long Depression
is not completely clear; some ascribe it to 1879, while others set its termination
at 1896.5 During this period, however, it is estimated that near 18,000 businesses
went bankrupt, including private banks and individual states.
Another main financial crisis in the United States was the Panic of 1893, also
associated with railroad over-building accompanied by shaky financial practices
to fund that railway boom. Estimates of unemployment show that it increased
from around 3 percent in 1892 to 18.5 percent in 1894, declining gradually then to
5 percent by 1900 (Roemer 1996). Another panic occurred in 1901, following a
crash on the New York Stock Exchange that was linked to struggles for financial
control of the Northern Pacific Railroad. A severe banking crash took place a few
years later and was called the “Banker’s Panic of 1907,” during which the stock
market fell by near 50 percent from its peak the previous year. This financial crisis
was very serious and led to many bankruptcies of state and local banks.
Interestingly, a leading role in ending the cycle of crises was played by
rich banker J.  P. Morgan, who committed part of his personal wealth and
mobilized other bankers’ money to provide liquidity to the banks in distress
and thus avoid a major financial collapse.6 It is well known that the United
States—unlike several European countries—did not have a central bank that
could provide liquidity as a lender of last resort. Individual bankers played

4.  Milton Friedman (1992); see also ­chapter 4.

5. Literature on this long depression includes Newbold (1932), Musson (1959), and Saul
(1969/1985).
6.  A recent, interesting account of the 1907 crisis is told in Brunner and Carr (2007).
 Stories of Financial Crisis and Austerity 91

this role, coordinating among themselves for purposes of avoiding financial

crashes of big proportions. The 1907 crisis was especially important, in that it
led to a significant change in the monetary institutions of the U.S economy.
In 1908, the National Monetary Commission was created and chaired by
Senator Nelson W. Aldrich, with the mission of investigating the crisis and
proposing a new monetary and regulatory framework. That commission led,
in 1913, to the creation of the Federal Reserve System—in other words, a cen-
tral bank.7 The commission studied, closely, during its years of deliberation
the European experience with central banking and adapted it to the realities
of the United States.

5.2.2  Crisis in the Periphery

The economies of the periphery also experienced several financial crises in
that first wave of globalization. The concept of a periphery at that time was
broader than it is today and included Latin America, Asia, Africa, northern
Europe (Scandinavian countries), and Oceania. Most of the crises occurring
in the periphery were connected with crises in the core countries, although
national characteristics—such as degrees of macro imbalances, levels of exter-
nal and internal debt, nature of regulations, degrees of financial fragility, and
levels of fiscal deficits—also played an important role in the intensity and
duration of those crises. At the same time, evidence shows that crises in the
core had a different effect on countries of the periphery. In general, Argentina,
Brazil, Chile, and Portugal suffered more from these core-driven crises than
did other periphery countries, such as Australia, Canada, New Zealand, and
Norway.8
The financial crisis in London during 1825 and 1826 spread to continen-
tal Europe and cut trade and capital flows to Latin America. Chile, Ecuador,
Colombia, and Venezuela defaulted on their external debts, a phenomenon
that extended to most of Latin America later on. The crisis of 1873, which
originated in Central Europe, led to a collapse in capital flows to Italy,
Holland, Belgium, Russia, and the United States. Later on, in 1876, the
Ottoman Empire, Egypt, Greece, and Latin American countries defaulted on
their debts (Marichal 1989).

7.  On December 22, 1913, Congress passed the Federal Reserve Act, creating the Federal
Reserve System. The first governor was Charles Hamin. Curiously, the first president of the
(influential) New York Federal Reserve was Morgan’s deputy, Benjamin Strong—suggesting a
weak separation between private finance and central banking in that period.
8.  See Bordo and Meissner (2005), Bordo (1986, 2006).
92 Econo mic Crisis an d Instabilit y of Capitalism

Note that the repeated debt defaults of the nineteenth century came
as more or less unavoidable events, following austerity measures aimed at
repaying the debts; these austerity measures were often at the cost of drops
in economic activity, cuts in real wages, higher unemployment, and serious
social distress. Several European countries that are still undergoing severe
crises as a result of 2008–09 should study closely these historical examples
of the costly and ultimately fruitless efforts at servicing unsustainable debt
levels.
Another crisis that developed in England, and that had strong effects in
Argentina and Uruguay, was that of the Baring Bank in London in 1890.
The Baring Bank was the oldest merchant bank in London, founded in 1762
by Sir Francis Baring. The bank provided financing for endeavors in vari-
ous nations, including railways in North America, and had funded part of
Napoleonic Wars. However, Barings became very exposed in the decade of
the 1880s, with loans to Argentina and Uruguay. In November 1890, the
Barings Bank was on the verge of financial collapse and had to be rescued
by the Bank of England in an operation that involved also several main
British and European commercial banks, including the Rothschild, Glyn
Mills, and Morgan (Marichal 1989). The Barings Bank held a high position
in Argentinean bonds, but those bonds experienced a sharp decline in value
as the Banco Nacional at Buenos Aires had suspended debt service payments
six months earlier, following the bankruptcy of several Argentinean state
banks and even the government itself.
The rescue of the Barings Bank was intended to prevent a major destabi-
lization of the British financial market—that is, the Royal Stock Exchange—
which could have occurred if Barings had gone under. At the same time,
the governor of the Bank of England, Mr. William Lidderdale, and Lord
Rothschild put great pressure on the Argentinean government to meet at
least some of its external debt obligations, thus so transferring resources from
its treasury to the creditors’ banks, starting with Barings. This further weak-
ened the state banks of Argentina.
Economic historians consider the Baring crisis as mainly the consequence
of severe financial weakness in the Argentinean economy, which had been
a significant borrower in the international markets. In any case, this crisis is
considered less severe than, for example, the panic of 1873, which as men-
tioned earlier involved the financial centers of Vienna, Berlin, and New York
and which triggered the Long Depression. The Baring case made European
banks reluctant to lend to Latin American governments in the 1890s, and
capital inflows to the region didn’t resume until the early 1900s.
 Stories of Financial Crisis and Austerity 93

5.2.3  Crises and Economic Activity

The output losses of various economic and financial crises that affected both
these Latin American countries and others in the 1870–1913 period were sizable,
according to available empirical evidence. The average decline in output (nega-
tive percent change) during this period was nearly 6 percent in Argentina, close to
10 percent in Australia and Brazil, and almost −5 percent in Italy. Milder declines
in GDP took place in Canada, Denmark, Norway, Finland, and Sweden, with
average negative GDP growth on the order of −1 and −2 percent.9
In this first wave of globalization in the late nineteenth century and early
twentieth century, financial systems were internationally connected, so a serious
crisis in the financial core of one country almost always had a contagious effect
on other core economies, as well as on economies of the periphery. Most of the
financial crises in the periphery led to defaults in the servicing of their exter-
nal debt, to currency depreciations, depressed stock market prices, contraction
of economic activity, and a rise in unemployment. Financial crises in the core
economies shared several of these features, but they were mostly concentrated
in the banking systems and during this first wave of globalization most of them
remained on the gold standard in spite of these waves of financial instability.
In retrospect, it is apparent that the long nineteenth century and the sub-
period of the first wave of globalization were times of frequent financial cri-
sis and, often, costly adjustments. The causes of these crises were different,
but most of them were preceded by periods of abundant credit, inflated asset
prices, massive costly projects, fluctuations in the supply of gold and silver,
large capital inflows, and accommodative monetary policies. A nearly com-
mon feature for this period is some form of bailout of banks and financial
institutions. Private financiers and banks coordinated the rescue operations,
or the rescue was done by central banks, or by both.

5.3  The Interwar Years: Economic Instability,

Political Turbulence, and Deglobalization
(1913–45)
The sophisticated and financially interconnected world preceding 1914 broke
apart with the beginning of World War I.10 The war interrupted the process

9.  See Bordo (2006).

10.  This and next section draw from Solimano (1989) and Solimano (2010a).
94 Econo mic Crisis an d Instabilit y of Capitalism

of economic interdependence and of labor market and financial integration

(with its benefits and costs) that had characterized the prior period. The eco-
nomic destruction of war along with the geopolitical changes that followed
it inaugurated a period of deglobalization and economic instability. It was a
time of high inflation, exchange-rate volatility, disintegration of capital mar-
kets, and political turbulence.
After the war, the main European empires that had provided reasonable
international political stability to the world economy had disintegrated. This
was the case for the Romanov Dynasty following the Russian Revolution of
1917, the demises of the Ottoman Empire and the Austro-Hungarian Empire
of the Habsburg monarchy, and the abolishment of the Prussian monarchy
in Germany (Solimano 2001). In the years to come, recomposing a stable
economic and geopolitical equilibrium after the demise of the main empires
of the pre-World War I period and the birth of new countries proved to be
exceedingly complicated, but it was clear that British hegemony was ceding
space to American hegemony.11
Importantly, the inauguration of the League of Nations marked a new sys-
tem of power in European relations based on the quest for economic stability
and collective security. For the past three hundred years, Europe’s system had
been founded on a balance of power and alliances.12 However, the League of
Nations proved unable to fulfill that premise of collective security—the pre-
vention of war and collective resistance to aggression.13
After World War I, public finances were severely weakened in several
countries. Resorting to monetary financing of fiscal deficits led to high and
explosive inflation, along with massive depreciations of currencies in Austria,
Hungary, Germany, and Poland by the early 1920s. There were at least three

11.  In the interwar years as a consequence of revolutions, upheavals and changes in the num-
ber of nations that increased after the dismembering of empires, “political migration” became
an important feature of the international mobility of population. The Bolshevik Revolution led
significant emigration flows from Russia in the initial years of the revolution. Rising nationalism
and xenophobia in Germany led to emigration flows, mainly of the Jewish population. General
Franco’s Spain in the late 1930s also ignited massive emigration of defeated Republicans and their
families from authoritarian Spain. At the same time, on the other side of the Atlantic the United
States was restricting immigration in the late 1910s and more fully in the 1920s. In turn, Europe
was not particularly open to migration flows and refugees in the interwar years (Solimano 2010a).
12.  Polanyi (1944/2001).
13. This became evident in the League’s failure to respond to the Japanese invasion of
Manchuria in 1931, and the 1935 Italian invasion of Abyssinia, the last independent African
nation. Without an effective global security system, Germany, under the leadership of Gustav
Stresemann, Germany’s Foreign Minister and then Chancellor in 1923 until his death in 1929,
was able to successfully rearm.
 Stories of Financial Crisis and Austerity 95

main contributing factors to the hyperinflation and extreme macroeconomic

dislocation that emerged in some countries at this time:  (a)  the accumula-
tion of liquid assets by families during the war; (b) the stiff war reparations
imposed on Germany, sanctioned in the Treaties of Versailles, St. Germaine,
and Trianon (and denounced early on by John Maynard Keynes in his book
The Economic Consequences of Peace [1919/2011]); and (c) a weak socio-political
equilibrium, with emerging workers movements and strong socialist parties
and economic elites that did not want to lose their privileges or accommodate
the new realities of the postwar period. In this context, attaining consensual
economic policies was difficult.
Hyperinflation was accompanied by a flight from the domestic currency,
the destruction of an already weak financial system, the end of any contract
structure in the economy, and rapid depreciation of the currency (Solimano
1989, 1991). The stabilization of hyperinflation in Austria and Hungary
involved the creation of independent central banks in these countries, stabili-
zation of the currency, and a balancing of the budget. These policies were sup-
ported by a loan by the League of Nations. Poland followed similar policies
but stabilized its inflation without a League of Nations loan (Solimano 1991).
Interestingly, the other country that emerged from the Austro-Hungarian
Empire, Czechoslovakia, did not go through a period of hyperinflation in the
aftermath of World War I; it enjoyed a tradition of prudent macroeconomic
management that continued for generations afterward.
During the interwar period, capital flows fell dramatically as a conse-
quence of economic and political instability and the use of foreign exchange
and capital controls. The United States replaced Britain as “banker of the
world” and became the most important foreign creditor, with New York City
consolidating as a critical global financial center.14
Although economic stabilizations of hyperinflation proved successful,
they were unable to bring about an orderly exchange rate system and ensure
lasting prosperity in Europe. The economic “order” of the interwar period
was very different from that of the pre-1914 years. Attempts to restore the
gold standard failed in a political and social context in which wage flexibil-
ity and fiscal discipline were difficult to enforce; there was no feasible polit-
ical equilibrium compatible with exchange-rate stability and free capital

14.  Between 1924 and 1930, for example, the United States assumed 60 percent of global capi-
tal flows, estimated at $9 billion, and possibly as much as $11 billion, while $1.3 billion and $1.34
billion came from Britain and France, respectively. Also, during this interwar period, Germany
received the larger part of these capital exports for its reconstruction following World War
I ( James 2002, 48).
96 Econo mic Crisis an d Instabilit y of Capitalism

mobility. The political economy configurations were different from the pre-
war years: labor unions became more influential, nationalism was a virulent
political force in some European countries, demands for democratization
evident at the beginning of the century were now more difficult to steer. All
these factors made restoration of the pre-1914, laissez-faire economic order
a futile goal.
The instability of the 1920s, the stock market crash of 1929, the Great
Depression of the early 1930s in the United States, and the series of banking
failures in Europe in 1931 and the United States in 1933, were severe blows
to the capitalist system. According to Harold James, in his book Creation of
and Destruction of Value (2009), these bank failures were far more important
for subsequent events than was the stock market crash of 1929. The crises,
along with the rise in nationalist movements in Germany and Italy, fed an
anti-globalization sentiment (without that name). Conditions were inimical
to the free mobility of people and capital across national boundaries. In this
environment, there was a proliferation of immigration quotas, visa require-
ments, ethnic discriminations, tariffs and restrictions on international capi-
tal flows, competitive devaluations, and other autarkic policy interventions.
These developments represented a strong departure from the liberal eco-
nomic policies and (imperial) cosmopolitanism of the pre-1914 era.
In the early 1930s, many countries abandoned the gold standard, depre-
ciated their currencies, and imposed tighter capital controls in order to
achieve their domestic political and economic goals. Several European and
Latin American countries either defaulted or had to restructure their exter-
nal debts. This was the case for Austria, Germany, Greece, Hungary, Poland,
and Romania on the European side and Argentina, Bolivia, Brazil, Chile,
Costa Rica, Colombia, Uruguay, and others in Latin America (see Reinhart
and Rogoff 2009, chap. 6).

5.4  A New Era of Managed Capitalism: The

Bretton Woods System of 1945 to 1971–73
The unraveling of the economic and political fabric in the 1920 and 1930s
made it clear that, for capitalism to survive self-destruction, important
reforms and regulations were needed.15 After World War II, a return to the
liberal capitalism in the spirit of the nineteenth century was unfeasible. New
institutions at both domestic and international levels were needed.

15.  This section draws on Solimano (2010a).

 Stories of Financial Crisis and Austerity 97

5.4.1  New International and National Institutions

Right before the end of World War II, the British and the Americans agreed that
economic reconstruction and global stability required a new set of political and
financial institutions at the international level. The United Nations was created by
its member countries to promote world peace and boost economic development
in less advanced regions of the world. Its headquarters were to be in New York
City, reflecting the growing importance of the United States. On the economic
front, as mentioned in the introductory chapter, a new set of global financial
institutions emerged, known as the Bretton Woods Institutions. This was formed
by the International Monetary Fund (IMF) and the International Bank for
Reconstruction and Development (known as the World Bank). Both institu-
tions are located in Washington, D.C., close to the U.S. Treasury Department.
The mission and institutional details of these two organizations were
largely shaped in 1943–44 by the United States and the United Kingdom,
personified in their key representatives, Harry Dexter White and John
Maynard Keynes, respectively. The International Monetary Fund was given
the mandate of ensuring orderly payments under a system of fixed exchange
rates, and of providing external financing to countries running balance-of-
payments deficits. The IMF was also to force surplus countries to help in the
adjustment of countries running deficits, although this proviso, in practice,
was turned down by the United States, which did not want interference from
an international organization in its internal economic policies. Movements of
private capital across borders were severely restricted, given the grim record of
financial instability during the interwar period and experiences with interna-
tionally transmitted financial crises involving the gold standard.
The aim of the World Bank was to provide long-term financing for eco-
nomic reconstruction and development, chiefly through the financing of
physical infrastructure. A world trade institution was proposed, but was not
launched until much later, in the mid-1990s, with the creation of the World
Trade Organization (WTO). Instead, the International Labor Office was
founded in 1919 and still functions on the basis of tripartite representation of
labor union organizations, employer associations, and governments.
With the end of the war, the United States supported economic recon-
struction of Europe through the Marshall Plan, ensuring its access to the
European market and also exerting influence to contain rising popular move-
ments, including the Communist Parties that were important in several
European nations. The 1950s and 1960s was a new period of economic pros-
perity and stability (the “golden age of capitalism”). As shown in ­chapter 2,
income distribution became more equal in this period of regulated capitalism.
98 Econo mic Crisis an d Instabilit y of Capitalism

The income share of the top 1 percent declined steadily from the 1940s until
the 1970s in the United States, the United Kingdom, and other European
countries. Government guided the international financial system, and the pri-
vate sector played a role primarily through foreign direct investment, rather
than through short- and medium-term lending and portfolio investment.
As mentioned, the frequency of financial crises at the country level fell
sharply during the 1950–73 period. The incidence of such crises was minimal,
with no global banking crises, contagion effects, or bank panics of the type
observed in the pre-1914 period under the gold standard, in the 1930s, and
in the neoliberal era that was to follow. The following statement from late
MIT economic historian Charles Kindleberger, in his book Manias, Panics
and Crashes (2000) is instructive:

There is hardly a more conventional subject in economic literature than

financial crises. If few books on the subject appeared during the sev-
eral decades after World War II, following the spate of the 1930s, it was
because the industry of producing them is anti-cyclical in character, and
recessions from 1945–1973 were few, far in between, and mild. More
recently, with the worldwide recession of 1974–75 and the nervous
financial tension of the 1980s and the 1990s this industry picked-up. (1)

Kindleberger’s reflection on the low incidence of financial crises during the

Bretton Woods era is interesting. The restrictions on international capital
mobility and the control of banking and other financial systems worked
well to prevent large-scale crises from happening. Priority was given to pro-
mote investment, productivity, employment, and growth. This enabled a
quarter-century of rapid growth in the advanced capitalist countries and also
encouraged growth in the developing world in general.

5.5  Neoliberal Globalization Since the 1980s

As a consequence of the stagflation and the profit squeeze of the 1970s,
Keynesianism was on retreat and monetarism was on the rise. Neoliberal
economists such as Milton Friedman and Friedrich Hayek convinced policy-
makers that shared prosperity had to be sacrificed for the needs of economic
liberalization, free markets, and the impetus of international financial markets
that were hungry for new profit opportunities. As discussed in c­ hapter 1, the
power of capital was to be restored and the influence of labor unions was to
be curtailed. A new unbalanced (neoliberal) “social contract” was emerging.
 Stories of Financial Crisis and Austerity 99

A key turning point in the shift was a monetary event: abandonment of the

free convertibility of the U.S. dollar to gold in 1971. This was the “closing of the
gold window,” when the United States did not have enough gold to redeem paper
money at the parity of $35 per one ounce of gold. The years in which dollars
were “as good as gold” were clearly over, and the system was without a defined
monetary anchor. The gold window abandoned, the set of fixed exchange rates
among the main currencies was replaced with a system of floating exchange rates.
The fiscal deficits in the United States, associated with spending for the
Vietnam War, along with divergent productivity growth rates among the devel-
oped nations created exchange-rate misalignments. The recycling of oil sur-
pluses in the oil-exporting countries following the two oil shocks of the 1970s
created a new international capital market and exerted strong pressures for lib-
eralizing the international capital accounts, which also led indirectly to pres-
sures for adopting more liberal trade regimes, reducing import tariffs, lowering
quotas, and eliminating other trade restrictions, particularly in the developing
countries.
Since the 1970s and 1980s, the world economy has been more open to
capital movements and trade than during any other time since World War II.
Confidence in the global capital markets was greatly boosted with the collapse
of communism in the late 1980s and early 1990s, and there was growing enthu-
siasm for free-market economics, promoted by the U.S. government, the World
Bank, the IMF, and mainstream academia. The political economy of neoliberal
globalization can be best characterized by at least five main developments:

(i) Financial markets have increased influence over economic policymak-

ing, with the ascent of a powerful “financial elite.”
(ii) Income shares of the top 1  percent (or 0.1  percent) have risen in the
United States, United Kingdom, Russia, China, India, and other big
global economies (see ­chapter 2).
(iii) Median wages and incomes of the middle and working classes have stag-
nated in the United States and other industrial countries.
(iv) There is a growing tendency toward privatization of social services, along
with increased tuition in colleges and universities, higher medical costs,
and reduced welfare payments for the unemployed and marginalized.
(v) The power and influence of labor has declined in advanced capitalist coun-
tries (and developing countries), associated with greater international
mobility of capital (outsourcing of production in low-wage countries),
increased competition from Asia for labor-intensive manufacturing, and
rising international migration of foreign workers to rich economies.
100 Econo mic Crisis an d Instabilit y of Capitalism

The advanced economies began integrating their capital markets with

each other much more rapidly than did the developing countries. The liberal-
ization of these capital accounts in the advanced countries began in the 1970s
and was completed in the 1990s.

5.5.1  High Frequency of Financial Crises

A distinctive feature of this second wave of globalization is the high fre-
quency of financial crises in developing countries, post-socialist economies,
and mature capitalist economies. These included the Latin American debt
crisis in the 1980s, which affected Mexico, Brazil, Chile, Argentina, Peru, and
other countries. The Philippines and Turkey also experienced financial cri-
ses and debt defaults or suffered debt rescheduling in the 1980s.These events
came on the heels of heavy government borrowing in the 1970s, and in some
cases by the private sector (e.g., in Chile). The results were losses in output
and high unemployment, and so this is generally described as a “lost decade.”
Financial problems did not only hit the developing countries in the 1980s.
In the United States, there were some 1,400 savings and loan institutions
and 1,300 commercial banks that reported failures between 1984 and 1991
(Reinhart and Rogoff 2009). In October 1987, a big drop in the U.S. stock
exchange market resembled the crash of October 1929. The 1990s were marked
by episodes of financial fragility, exchange rate instability, and debt problems
in advanced economies and developing countries alike. For instance, there
were banking problems in Japan in 1989–90 and in the Scandinavian countries
in the early 1990s. Also noted for 1992–93 was the Exchange Rate Mechanism
crisis in Europe, including the run against the pound led by financier George
Soros, which forced the Bank of England to let the pound depreciate in the
face of insurmountable speculation against that currency.
In Mexico, close to the time of the presidential election and in a recurrent pat-
tern at the end of every sexenio, a currency crisis erupted in 1994–95. This was
not the only big event of 1994 in Mexico, however, as the country also witnessed
earlier that year the outbreak of the Zapatista uprising in the south and later, in
March, the assassination of candidate Luis Donaldo Colosio of the PRI (Partido
Revolucionario Institucional). That economic crisis was partially contained by a
mega-loan (at the standard of the time) of $50 billion provided by the U.S. govern-
ment, which was afraid of the consequences of deleterious political destabilization
in Mexico and the possibility of massive immigration to North America.
In 1997, the virus moved east and hit Korea, Thailand, Indonesia, and
other countries of the region in what was known as the East Asian finan-
cial crisis. In the case of Korea, the country liberalized its capital account
 Stories of Financial Crisis and Austerity 101

of balance of payments to short-term capital movements, in a conditioned

that was imposed for OECD membership. Post-Soviet Russia, dominated
by a conspicuous alliance of free-market technocracy and oil and finance oli-
garchs, saw depreciation of its ruble and was hit by a banking crisis in 1998.
Localized financial turbulence developed in the United States in the form
of the failure of the Long-Term Capital Management Fund (LTCMF) in 1998.
The hedge fund’s collapse was surprising, since LTCMF had on its payroll an
assortment of Nobel Prize winners in finance who had helped to formulate the
investment strategy, using sophisticated (but ultimately deceiving) mathemati-
cal models. Then macro and financial crises moved to South America and hit
Ecuador in 1999. Plagued by endemic macroeconomic instability, poor regula-
tion, and routine fraudulent practices, the country saw its banking system virtu-
ally collapse in 1999. This situation was exacerbated by spiraling inflation and
rapid currency depreciation toward the end of that year. In January 2000, acute
price and exchange-rate instability was contained through a drastic change in
the monetary regime of the country, which entailed replacing the sucre with the
U.S. dollar as legal tender (see Beckerman and Solimano 2002). In the middle of
this monetary reform, the government of the constitutionally elected president,
Jamil Mahuad, was toppled by army generals helped by a radicalized indigenous
movement, both nervous about the unending economic crises.
In 2001–02, financial and macroeconomic crises hit Argentina, which had
ten years previously put in place a currency system that had one-to-one par-
ity between the peso and the U.S. dollar. The currency depreciation and the
expropriation of deposits in failed banks—the corralito—was a wake-up call
for that country, realizing it was still in the Third World.
Another serious crisis hit Turkey in 2000–01, accompanied by large fiscal
deficits, a fragile banking system, high inflation, and unstable exchange rates.16
In the early 2000s, the United States was not free from ups and downs in asset
prices. In the mid- to late 1990s, the U.S. economy experienced a rapid increase
in share prices of innovative technology firms, a process that came to an abrupt
end in 2000 when the “dot-com bubble” was pricked. The policy response to
this fall in equity prices in the high-tech sector was a lowering of the interest
rate set by the Federal Reserve, along with stepped-up financial deregulation.
This led to a new price bubble, this time in real estate. Thereafter, more com-
plex financial instruments were devised (derivatives, debt equity swaps, collat-
eralized debt obligations and other instruments). These financial “innovations”
were widely presented as sophisticated mechanisms for pooling assets and
allocating risk better. In practice, though, the banks and financial institutions

16.  See Yeldan (2002) for an overview of the causes and consequences of the Turkish crisis.
10 2 Econo mic Crisis an d Instabilit y of Capitalism

had started acquiring “toxic” assets and issue mortgages to risky segments of
the housing market, considered “subprime” (low-income families, people with
unstable jobs, and those lacking financial literacy); these risky mortgages were
then bundled and sold as those new financial instruments.
During the period 2002–07, there was a spectacular increase in leverage
by financial institutions in the United States, a deterioration in the quality of
portfolios, and highly inflated housing and property values. Americans felt
they were rich, backed by overvalued housing and other assets.17 Reality set
in quickly when the bubble burst in 2007–08, triggering the worst financial
crisis since the early 1930s. This subprime mortgage crisis originated in the
United States but it spread to Europe, affecting more severely the United
Kingdom, Iceland, Spain, Portugal, Greece, and Ireland. These countries were
all presented by the international press and reputable academicians as modern
incarnations of savvy economic management, each in command of the secrets
that lead to unstoppable prosperity and wealth.

5.5.2  The Shortcomings of the IMF and Central Banks

An intriguing question behind the crisis is why the central banks, the IMF,
and the financial regulators in these countries failed to warn of an impending
crisis. In the United Kingdom, Queen Elizabeth, in the wake of the 2008–
09 crash, asked leading economists why their profession, and the Bank of
England and its ample team of Ph.D.s, failed to anticipate a crisis of this mag-
nitude and severity. After several months, a report was delivered by a team of
high-level economists. It is unclear the extent to which Queen Elizabeth was
satisfied with the explanations provided by these economists.
Before the crash, the central banks had debated for a long while whether
a bubble was developing in the real estate markets. Apparently more time was
spent in reflection than in taking forceful action. It is alarming how lax the
regulators had become in the United States and other advanced capitalist
nations. Apparently they did not want to put the brakes on a long period of
nice profits and sweet business deals for the corporate sector.

5.5.3  The Rationalizations of Economists and of Other

Experts
The delusions of the monetary authorities and regulators were matched by
the fantasies of the financial markets themselves. Carmen Reinhart and Kenneth

17.  For the role of credit in this period in the U.S., see Dell’Ariccia, Igan, and Laeven (2008)
and Bayoumi and Melander (2008).
 Stories of Financial Crisis and Austerity 10 3

Rogoff, in their impressive history of financial crises, This Time Is Different,

Eight Centuries of Financial Folly (2009), present the changing rationalizations
used by the financial markets to justify investment in certain preferred regions
and countries of the world at different periods of time.
In the 1970s, lending to Latin America was justified by strong commod-
ity prices, new profitable investment projects, strong governments (several of
them authoritarian military regimes), and new technocrats in power. In the
1990s, directing capital flows to Asia seemed the rational thing to do since these
economies were perceived as having a particularly benign combination of rapid
growth, high savings ratios, stable exchange rates, absence of serious fiscal imbal-
ances, and no recent history of debt defaults. In the 2000s, the United States
was seen as the great place to invest, owing to globalization, new technological
breakthroughs, superior organization and efficiency, securitized debts, and so
on. Ironically, none of those factors ever assured that “this time was different”
and could prevent the occurrence of debt crises, whether in the 1980s in Latin
America, in 1997–98 in East Asia, or in 2008–09 in the United States.

5.6  Common Patterns and Policy Issues After

More than a Century of Financial Crises
These episodes of financial crisis suggest some common patterns that are
worth recapitulating. These include:

• In a crisis, there are “igniting factor(s)” of a varied nature that create overly
optimistic expectations, leading to an increase in the supply of credit and
the frenetic buying of assets. In the nineteenth and early twentieth cen-
turies these igniting factors were new innovations, railway development
and urbanization, the end of war, and the discovery of a valuable natural
resource. In the late twentieth century and early twenty-first century, they
were policies of market economic liberalization, privatization, deregula-
tion, and information technology breakthroughs.
• Financial crisis seems to occur under a broad variety of monetary regimes
and fiscal policy stances. The financial crises of the first wave of globaliza-
tion developed under the gold standard, a regime that avoided “inorganic”
money creation. The U.S.  financial crisis of 2008–09 developed under
flexible exchange rates. In emerging economies and developing countries,
crises occurred under a variety of fixed exchange rates, currency boards,
and monetary union systems. Moreover, several episodes of financial crises
104 Econo mic Crisis an d Instabilit y of Capitalism

took place in countries affected by fiscal imbalances while in others that

was not the case.
• Financial crises tend to spread among countries more easily when financial
markets are internationally integrated, as in the two waves of globaliza-
tion. However, contagion effects are not always simple to understand, as
lags and leads are also at work.
• During the run-up to a crisis, there is often a period of rapid accumu-
lation of debt by households, firms, financial conglomerates, and the
government.
• Debt levels tend to increase in the boom phase of the cycle, and this debt
effect tends to make a recovery more severe and protracted.
• Central banks and governments in the boom phase of a financial cycle
seem to have serious problems assessing sustainability. Many times they
justify the overvaluation of asset prices, arguing for “changes in fun-
damentals” such as an increase in productivity and more modern and
effective economic management in the countries experiencing financial
booms. As mentioned before, in most cases the central banks refrained
from intervening in the market, arguing that either no bubble existed
and/or the bubbles were too hard to detect with certainty. This policy
paralysis by monetary authorities plays an important role in continuing
the cycle of crisis.
• In the boom phase there is often a climate of self-righteousness in the mar-
kets, often accompanied by lax supervision of bank portfolios and no rec-
ognition of mounting indebtedness and financial fragility.
• Financial crises tend to occur when there are cozy relations between poli-
ticians, bankers, and large financial intermediaries; this yields a hesitancy
to pass restrictive banking legislation that could curtail sweet deals. In the
stress and crash phase, optimistic expectations are reversed and euphoria
and confidence are replaced with anxiety, fear, and even panic. The psy-
chological factors in the behavior of markets (poorly understood by econ-
omists trained by the rational expectations school) are very important in
financial cycles.
• The resolution of crises in confidence often required injections of liquid-
ity, either by central banks or by concerted actions of commercial bankers
and large financiers. There is a variety of arrangements for the “lender of
last resort,” at national and international levels.
• Debt defaults and forced reschedulings have been common features in
the aftermath of financial crashes. Defaults and reschedulings are often
adopted after austerity policies have been tried and have failed to gener-
ate the resources needed to service large debts; these adjustments often
 Stories of Financial Crisis and Austerity 105

proved to be socially costly and ultimately unfeasible from a political

viewpoint.

5.6.1  The Pitfalls of Central Banks: Narrow Objectives

and the “Great Moderation”
Complacency during times of tranquil macroeconomic conditions and mis-
judgment of incubating financial crises preceded the crash of 2008–09.
Advanced capitalist countries largely underestimated the possibility of large-
scale financial crises in their own countries. They were “different” from the
developing countries and emerging economies, which were marked by financial
turbulence, exchange-rate instability, and volatile asset and commodity prices.
As stated at the outset of this chapter, the prevailing view among the central
bankers, ministries of finance, and mainstream macroeconomists18 was that the
global economy was enjoying a “great moderation.” But this view neglected see-
ing the financial fragility beneath that “strong” macro equilibrium.
The main policy blueprint that guided the central banks and the fiscal
action in mature, developed economies and several emerging economies in
the years before the 2008–09 crash was led by the following guidelines and
beliefs:19

• Central banks should care, above all, about keeping inflation low and
prices stable through a monetary policy of “inflation targeting.”
• The stabilization of asset prices and the exchange rate should not be, nec-
essarily, an explicit objective of central banks.
• Ensuring low inflation indirectly helps to reduce output variability.
• Fiscal policy must take a back seat, since for countercyclical purposes it is
generally less effective, and politically more contentious, to formulate and
implement than monetary policy.
• Financial markets could be considered efficient mechanisms for allocat-
ing savings into productive investment and for managing risk. We should
trust market participants to adequately weigh costs, benefits, and risks in
their lending and borrowing decisions.

18.  Often close to financial institutions through well-paid consulting work and speech circuits.
19.  Solimano (2010b).
106 Econo mic Crisis an d Instabilit y of Capitalism

• The self-regulation of banks and financial intermediaries is a good idea;

accordingly, prudential regulation of banks in the United States and sev-
eral European countries was severely weakened before 2008–09.
• The growth of hedge funds, derivatives, debt equity swaps, and other
“financial innovations” does not pose obvious macroeconomic risks. Most
financial innovation is welfare increasing, and the financial markets, eco-
nomic agents, and regulators should face no problems in understanding
and effectively using these new (complex) instruments.
• In a world of high capital mobility, exchange rate regimes such as currency
boards, dollarization, unified currency, and flexible exchange rates (the
so-called corner solutions) are better than are intermediate options, such
as crawling pegs and exchange rate bands.20

The role of the IMF in actively endorsing (or even promoting) this largely
misleading policy framework is an open question. The IMF started a cautious
reassessment of the consensus (see Blanchard et al. 2010). Such revisionism
also allows the Fund to distance itself from its responsibility (action or omis-
sion) for the financial crisis. Outside the Fund, criticism of the consensus has
been less guarded.21 In regard to the developing countries, Frenkel and Rapetti
(2009) have called attention to the dual need for regulation of the financial
sector and consistent macroeconomic policies. They have also criticized the
lack of conceptual clarity shown by international organizations based in
Washington, D.C., in defining what constitutes a sustainable macroeconomic
framework for guiding decisions of macro and financial policy in the emerg-
ing economies and developing countries.

5.6.2  The Pitfalls of Austerity

Two phases can be distinguished in the handling of the 2008–09 financial
crisis. First, there was a period from late 2008 to early 2010 during which
expansionary fiscal crisis was recommended by the IMF and was adopted by
several governments to counteract the adverse effects of the crisis on output
and employment. Then, since 2010, there was a shift to austerity policies to
reduce public debt and stop the expansion of public spending. Output and
employment were now less important than curbing deficits and debt.

20.  Frankel (2009).

21.  See Sachs (2009); Krugman (2009); and the Special Issue of the Cambridge Journal of
Economics edited by Blanckenburg and Palma (2009).
 Stories of Financial Crisis and Austerity 107

Austerity came under different guises. It was self-adopted by the

neo-conservative U.K.  government, and it was imposed by the financial
troika—the European Commission, the IMF, and the European Central
Bank—on Greece, Spain, Ireland, and Portugal. Between 2010 and 2012,
more than 500 billion euros have been provided in new debt to four coun-
tries: Greece (240 billion), Portugal, (78 billion), Ireland (85 billion). In June
2012, a rescue of 100 billion euros was directed to Spanish banks and financial
institutions facing liquidity and solvency problems, granted by the European
Financial Stability Fund. Scandals such as that of Bankia (a merger of various
Spanish savings and loan cajas) have erupted.22
Austerity measures include increases in taxes, lay-off of public-sector
employees, postponement of retirement age, cuts in wages, and other restric-
tive and contractionary policies. As said, these austerity packages try to solve
debt problems not by directly reducing debt levels but by inducing the gov-
ernments of the distressed countries to institute “adjustments” (cuts in expen-
diture) and take on further public borrowing to pay foreign creditors with
public money, all at the cost of resources for education, health, housing, and
pensions. As a result of such austerity policies there has been cumulative nega-
tive GDP growth in Spain, Portugal, Greece, and Italy and only modest posi-
tive growth in the United Kingdom between 2010 and 2013. The euro zone
expanded by 2 percent in 2009–10, and it expected to expand by a meager
0.4 percent between 2010 and 2013.23
The effects on unemployment have been severe, with Greece and Spain
having more than a quarter of their labor forces out of work and with youth
unemployment over 50 percent. The austerity policies have been self-defeating
in terms of reducing debt levels in proportion to GDP, as well. The net debt
to GDP ratio increased in Portugal from 62 percent in 2006 to 108 percent in
2012; in Ireland, it increased from 24.8 percent in 2007 to 106.4 percent in
2012. In Greece, the net debt to GDP ratio went up from 106 percent in 2007
to 170 percent in 2012. In all these cases, interest rates on ten-year bonds went
up in spite (or perhaps due) to the austerity policies.24

22.  The president of Bankia was Rodrigo Rato, a former Economy Minister of Spain and for-
mer Director-General of the IMF. Mr. Rato resigned in May 2012, after disclosure that the
bank had a deficit of over 20 billion euros after having shown on its official balance sheet profits
in 2011. Ironically two former heads of the IMF (Rodrigo Rato and Dominique Strauss-Khan)
were involved in either financial or sex scandals.
23.  See Wolf (2013).
24.  See Blyth (2013).
10 8 Econo mic Crisis an d Instabilit y of Capitalism

5.7  Concluding Remarks

The history of financial crises is certainly a vast topic. No crisis is equal to
another, but some common causes and propagation mechanisms seem to be
present in most. The most recent wave of financial crises in Europe (Greece,
Ireland, Portugal, Spain) has several ingredients, such as financial speculation,
over-lending by commercial banks, and overvaluation of asset prices, in addi-
tion to fiscal imbalances in some but not all cases (more serious in Greece
than in Spain and Ireland). The inability to anticipate or prevention of these
big crises is surprising, and suggests serious shortcomings in the conceptual
frameworks adopted by the economics professionals, central banks, IMF, and
financial regulators during the neoliberal era. Particularly misguided were
the notions of a “great moderation” and the imposition on several European
countries of destructive “austerity” policies since 2010.
The 2008–09 crisis, as well as many other episodes in history, makes clear
the need to revise the belief that efficiency and self-regulation in the financial
markets is able to diversify risk without producing macroeconomic disasters.
A sensible macro-financial research agenda in the years ahead should focus on
recognizing the growing importance of financial factors in macroeconomics,
the role played by financial accelerators, changes in expectations, bounded
rationality, and herd behavior in propagating boom-and-bust cycles. It needs
also to consider the reversion toward recession, financial distress, and crash.
The behavior of hedge funds and the proliferation of derivatives deserve fur-
ther attention as well.
There is a need to revise the teaching of economics and the research of the
last thirty years, which has become dominated by highly unrealistic theories,
so that it is replaced with an understanding of the working of the real world.
With the perspective of three decades of financial cycles and crises, it is clear
we need to move beyond the narrow tools of macroeconomic policy guided
by inflation targeting and neutral fiscal policy. The role of credit booms in
generating asset price bubbles, external imbalances, and financial crises is a
lesson to be learned. As this chapter has shown, central banks need to focus
on broader goals in the conduct of monetary policy than holding inflation
low. There needs to be more democratic control of “independent” and tech-
nocratic central banks as well. The call for more conceptual transparency and
analytical pluralism by the IMF is also clear.
The history of crisis resolution shows that large financial intermediaries
tend to be protected by bailouts and other forms of government support,
on the grounds that they are “too big to fail”, say they may conduct to the
 Stories of Financial Crisis and Austerity 109

bankruptcy of solvent but illiquid firms and create excessive output losses and
unemployment (the negative externality argument). The power of the finan-
cial elites is enormous, stemming from their capacity to manage resources
and influence policymakers, regulators, and the central banks. They invest
substantial money to make sure the monetary and financial authorities don’t
interfere with their operations and excursions, particularly during a boom
phase of the financial cycle. Ironically, however, they require rescue packages
when the boom stops. Their political power is one of the reasons austerity
policies are imposed, making the working and middle classes pay for their
excesses. And yet the financial sector blames the welfare state for the crisis.
Repeated bailouts of banks and large financial institutions have reduced
the legitimacy of financial capitalism, which is increasingly viewed as a system
in which accrued profits are privatized and losses are absorbed by the state; it’s
a pattern resembling “financial socialism.”
 6

Making Sense of Crises in Capitalism

An Overview of Theories and Approaches

Capitalism is a system with substantial capacity to create wealth and

technical innovations, but it also generates waste, inequality, and recurrent
economic and financial crises. Recessions, booms, growth cycles, crashes,
depressions, and financial stress are the staples of (unregulated) capitalism.
The previous chapter illustrated, with several examples drawn from past his-
tory and recent events, the crisis-prone nature of the capitalist system, par-
ticularly in its liberal and neoliberal variants.
Great economists such as Marx, Schumpeter, and Keynes all had an
appreciation of the dynamism of capitalism, its capacity to revolution-
ize modes of production that are less productive. Capitalism can pro-
vide the material base for potentially higher living standards. However,
unlike utopian views of the market held by the neoclassic and neolib-
eral economics, Marx, Schumpeter, Keynes, and others were well aware
of the self-destructive tendencies of capitalism. Five main detractions of
capitalism are:

(a) A tendency to generate business cycles of different intensity, some severe,

as in the case of depressions and financial crashes.
(b) Chronic unemployment.
(c) Financial instability.
(d) Inequality of income and wealth.
(e) Damage to the environment and overuse of natural resources.

There are, roughly, two broad schools of thought regarding the causes
of economic crises or macroeconomic and financial instability. One school
assumes that instability is exogenous to the system and that a capitalist market
 Making Sense of Crises in Capitalism 111

economy is essentially a stable system.1 The other school assumes that instabil-
ity is a structural feature of capitalism–an endogenous trait—and that markets
generate frequent cycles of boom and boost characterized by bouts of opti-
mism and euphoria, followed by pessimism, fear, and panic; and that these
cycles can be profoundly destabilizing.

6.1  Macroeconomics with Exogenous Instability

and Market Efficiency
The classic (Smith, Jevons), neoclassic (Edgeworth, Walras, Pigou), and new clas-
sic schools (Lucas, Wallace, Sargent, Barro) in macroeconomics all assume, with
different emphases, methodological individualism and individual rationality; they
often hold a view of markets as mechanisms that bring unmistakable prosperity
and welfare. Capitalism is viewed as a largely efficient and productive economic
system in which economic cycles and crises are just “lapses” (using the Pigou term).
The title of Pigou’s book Lapses from Full Employment (Pigou 1945/1978) denotes
the idea: cyclical surprises are often of a transient nature. Different authors may
differ on the roles they attach to monetary shocks (demand) and real shocks (sup-
ply) as sources of these disturbances, but they all share a vision of an economic
system that has the proper mechanisms (wages, prices, interest rates) to correct
disequilibria and move an economy toward full employment and price stability,
often seen as the normal state of affairs of an economy.
The Austrian school of Von Mises, Hayek, and others identify business
cycles and financial crises as the consequence of often-misguided actions by
central banks, rather than the result of spontaneous market forces. An invest-
ment boom is created when the central bank or monetary policy keeps the
interest rate below the “natural rate,” a concept developed by Swedish econo-
mist Knut Wicksell. The natural interest rate balances the demand for loans
(investment) with the supply of funds (savings).

6.1.1  Modern Versions

The modern equivalent of these views, with some variations, developed
an orthodox consensus that has prevailed in the last three to four decades
in U.S. academia and has then been extended globally. At an analytical and

1.  Free-market thinkers such as Milton Friedman and Friedrich Hayek placed big faith in the
capacity of markets and capitalism to self-correct imbalances and produce the stability needed
for inducing economic agents to engage in productive activities.
112 Econo mic Crisis an d Instabilit y of Capitalism

policy level, we can distinguish the following views that have shaped neolib-
eral economics, with some counterarguments following each:

(a) The efficient markets hypothesis (EMH) and financial markets as self-equil-
ibrating mechanisms. In spite of ample historical and current evidence of
irrationality and erratic behavior in the financial markets, since the 1970s
financial theorists have looked for ways to demonstrate that financial
markets are essentially efficient and that there are rational mechanisms
of resource allocation in the economy.2 The efficient markets hypothesis
was well received in (mainstream) academic circles, by central banks, and
by financial regulators, and it became a theoretical justification for the
deregulation and development of global capital markets ushered in dur-
ing the neoliberal era.

A basic proposition of the EMH is that, in buying and selling assets, inves-
tors and market participants use all the relevant information available (a simi-
lar claim made by the rational expectations school). Thus, variations in asset
prices are expected to follow a pattern known as a “random walk”: they do
not have a systematic component that the market can easily anticipate (other-
wise, profit opportunities would be unexploited, which is inefficient and irra-
tional). In this context, nobody—including government—can systematically
outperform the market. In line with the EMH, financial markets are expected
to make socially efficient use of all relevant information, leading to correct
asset pricing and to adequate diversification and pooling of risk.3
At the policy level, the EMH (and the theories of equilibrium macroeco-
nomics) gives analytical support to the notion, promoted among others by
Alan Greenspan, chairman of the U.S. Federal Reserve between 1987 and 2006,
that financial markets have strong self-equilibrating mechanisms. According to
this view, the central banks (and regulators) do better by staying aside and leav-
ing the financial markets alone to perform their roles of allocating savings to
sound investment projects and to pricing risk adequately.4 The massive market

2.  This rationalization of financial markets, also present in the initial decades of the twentieth
century, was strongly contested by John Maynard Keynes, himself a highly successful partici-
pant in the stock market.
3.  For a review, see Beechey et al. (2000).
4.  Before being elevated to the category of “dogma” in financial markets analysis, the EMH was a
fairly technical hypothesis associated with the work of Eugene Fama (1970), Paul Samuelson (1965),
and others. It was a hypothesis for testing some propositions, such as the “random walk” for iden-
tifying the behavior of asset prices and the use of information by participants in financial markets.
 Making Sense of Crises in Capitalism 113

failures of 2007–08 in the advanced capitalist countries of North America and

Europe have, unsurprisingly, reduced the credibility of this theory.5

(b) The new classical macroeconomics. The new classical macroeconomics (Lucas,
Sargent, Wallace, Barro, and others) developed in the 1970s and 1980s as an
agenda strongly critical of traditional Keynesianism. The emerging school
sought to “reconstruct” macroeconomic theory around the straitjackets of
market clearing, rational expectations, optimizing behavior, and general
equilibrium. The new school emphasized the dominant role of real shocks,
such as changes in productivity and efficiency in generating business cycles
(the “real” business cycle theory) that were thought to be of a transitory
nature. The natural tendency for the economy is to gravitate around full
employment. The new classical school also was a strong adherent of free
markets and distrusted government intervention and regulation. In this
view, governments—not markets—play the most important role in gen-
erating economic disequilibria through policies that are often dynamically
inconsistent and that disappoint expectations in the private sector. These
propositions, formulated in mathematically sophisticated albeit simplified
models of the macro economy, are in line with the ideas of older free-market
authors such as Milton Friedman and Friedrich Hayek. The latter, as seen
in ­chapter 1, were influential in the design of economic policies during the
Reagan administration in the United States, the Thatcher government in
the U.K., and the Pinochet regime in Chile (see Solimano 2012b).

In the new classical macroeconomics, markets are assumed to clear most of

the time (continuous market-clearing). In turn, economic agents are assumed
to have (an unrealistic) capacity to process and make sense of diverse (and
often contradictory) economic information that many times is too complex to
absorb and understand. Real-world problems of asymmetric information and
the sheer confusion of economic agents when price signals are erratic are com-
plications often swept under the rug. This tradition took a different approach
to Hayek, who saw the acquisition and processing of information as a main task

5.  In retrospect, it is worth noting that some of the early proponents of the efficient markets
hypothesis, such as Paul Samuelson, were careful not to make the policywide implication that
self-regulated financial markets deliver a socially efficient equilibrium. Nobel Prize winner Paul
Krugman (2009), in an interesting article, traced the rise of a “Panglossian macroeconomics”
(i.e., a rather rosy macroeconomic view of the world) in the 1990s and 2000s to a belief in ratio-
nal behavior and optimal financial markets that leaves little room for real-world features such
as herding behavior, bounded rationality, and cognitive dissonance, which generate the sub-
optimal market equilibrium and destabilizing dynamics that are the staples of financial crises.
114 Econo mic Crisis an d Instabilit y of Capitalism

of markets and who assumed that reaching market equilibrium was a process
that simply took time and resources, and was not an automatic result of the
equality between demand and supply, as postulated by the neoclassic and new
classic authors.
Clearly this theoretical model portrays the workings of a capitalist econ-
omy very different from what John Maynard Keynes described in his General
Theory of Employment, Interest, and Money (1936/1998). Keynes’s vision
emphasized involuntary unemployment, disequilibrium in the goods and
labor markets, irreversible investment, fundamental uncertainty, and volatile
financial markets—all features that the new classicists consider either nonex-
istent, irrelevant, or part of a very distant past.

(c) Macroeconomics and finance at the IMF and central banks. A chief role of
the International Monetary Fund is to prevent crises from occurring by
alerting member countries of macro and financial imbalances and advis-
ing them on how to correct them (a “trusted advisor” in IMF´s self-con-
gratulatory terminology).
When a crisis erupts, the Fund provides financing for correcting the bal-
ance of payments and fiscal budget of the deficit country. At an analytical
level, the IMF conducts substantial work on credit booms, crashes, reces-
sions, and financial crises. The results of this research are consistent with
various propositions about the instability of finance, the imperfections
of financial markets, behaviors of finance, and the financial accelerator
advanced by various schools of macroeconomic thought.

The Fund’s research is by far more open to mainstream approaches

(monetarism, new classical economics, and efficient markets schools of
thought), leaving largely overlooked and unrecognized the heterodox
views on macro and finance (Keynes, Minsky, let alone Marx´s and other
approaches). These biases seem to reflect, among other things, the lack of a
tradition in studying alternative schools of economic analysis and eschew-
ing the history of economic thought. It is apparent that most IMF econo-
mists are unfamiliar with these approaches, as they were not taught during
their professional training (and apparently did not study them afterwards).
IMF research would gain credibility if the Fund would openly and explicitly
admit that its frameworks need revision to better understand and anticipate
these repeated financial crises and large recessions.
Recent in-house evaluations conducted by the Internal Evaluation Office
(IEO) of the Fund, that report directly to the Board of the Fund, have raised
 Making Sense of Crises in Capitalism 115

concerns about the IMF’s lack of diversity in conceptual approaches. They

also note a deeply ingrained in-house corporate culture that is not open to
other approaches in macroeconomics, as well as an absence of systematic
exchange of ideas with a wide variety of economists and social scientists. For
example, an analysis of the research (working papers, books) conducted at the
Fund shows that IMF research on macroeconomics and finance before the
crisis of 2008–09 shows that Hyman Minsky was rarely cited in papers up to
2007–08.6
Financial crises were considered more as outside events than as endog-
enous outcomes of market economies with insufficiently regulated financial
systems. It is apparent, given the current record of financial crises, that the
IMF should give more attention to the view that financial markets are inher-
ently unstable, since a core part of its responsibility is to work with economies
in disequilibrium, facing macro imbalances, instability, fragilities, and recur-
rent financial crises.7

6.1.2  Central Banks

As noted in c­ hapter 5, several central banks in the neoliberal era have adopted
the narrow view that they should only be concerned with the control of infla-
tion in regard to prices of goods and services. Full employment, the manage-
ment of real exchange-rate misalignments, bubbles in asset prices, and overall
financial stability become opaque goals (or not goals at all) for many central
banks, in both advanced and emerging countries. This reduces their flexibility
and paves the way for important policy mistakes.

6.  Though the IMF conducts significant work on financial crises and financial fragility, the
Fund refrained from explicitly warning, clear and loud, that financial crises were a real possibil-
ity in mature economies such as those of the U.S., the U.K., and Spain—countries that were
accumulating increasing levels of internal (and external) debt.
7.  A clearly underresearched topic at the IMF is the political implications of regulation of the
financial industry. Though the political power of the financial industry seems to have been largely
ignored by the IMF research agenda in 1999–2008, an outstanding exception in this regard is Igan
et al. (2009). This study provides an empirical analysis of the linkages between lobbying activities
and housing lending in the run-up to the crisis of 2008 in the United States. One of the main con-
tributions of this study is its use of information on political contributions, lobbying expenditures,
lending standards, and other variables, and the testing of some relations among these variables.
The authors recognize that theirs is the first systematic effort at the Fund to explore the political
influence that the financial sector has on policy formulation and policymaking in the United
States. This pioneering research could be expanded to cover other mechanisms of political influ-
ence wielded by “big money”: job rotation between government and financial institutions; the
funding of research favorable to anti-regulation stances by think tanks and universities; and the
influence of Wall Street on the media for the propagation of similar ideas.
116 Econo mic Crisis an d Instabilit y of Capitalism

Macroeconomic research at the central banks is largely dominated by

dynamic stochastic general equilibrium (DSGE) models, which are not the
most appropriate tools for analyzing cycles of financial destabilization and
crisis. This family of macro models is based on “first principles,” confirming
assumptions of optimizing behavior, forward-looking agents, rational expec-
tations, and market clearing a set of assumptions bearing little resemblance of
any real-world economy; sometimes (light) Keynesian features, such as price
stickiness and nominal rigidities, are added to make the models more realistic.
The DSGE strategy of modeling and empirical calibration has the follow-
ing drawbacks. First, it is apparent that using rational expectations, optimiz-
ing, and an equilibrium framework could be more relevant for simulating
incremental policy changes and small shocks than for exploring the causes
and consequences of boom-and-bust cycles, recessions, and financial crises.
The latter constitute large disturbances or are endogenous results that occur
when the whole economy or large markets are out of equilibrium. Second,
it is unclear how well these models deal with volatile expectations, herding
effects, large departures of asset prices from fundamentals, and other disequi-
librium paths.8 Third, this family of models has a strong built-in tendency to
quickly restore equilibrium in the wake of shocks.9 Because of these reasons
their suitability to inform policy making may be impaired.

6.2  Macroeconomics with Endogenous

Instability: Marx, Keynes, Minsky, and Others
Let us move in this section to alternative theories in the tradition of Marx,
Keynes, Minsky, and others. A common feature of these approaches and theo-
ries is that crises reflect the internal workings of the capitalist economic system,
rather than being only responses to outside shocks and events (such as war,

8.  Critical assessments of the usefulness of DSGE models come both from Keynesian econ-
omists such as Alex Leijonhufvud (2009) and from central bankers such as Sir John Gieve
(2009), former deputy governor of the Bank of England. Leijonhufvud argues that a main
weakness of DSGE models is their treatment of uncertainty and risk: these two fundamental
(Keynesian and Knightian) problems tend to be assumed away by the view that agents are
forward looking and (on average) have correct expectations (the rational expectations assump-
tion). As argued above, this view is very limiting when considering, among other things,
tail-risk situations such as financial crises. Gieve asserts that the treatment of the financial sec-
tor in DSGE models in general seems not to do justice to the sector’s increasing importance in
explaining macro failures.
9.  It would be interesting to compare the actual duration of recessions (with or without a
financial crisis accompanying the process) to the actual paths of macro variables in cycles of
boost and bust with those simulated in DSGE models.
 Making Sense of Crises in Capitalism 117

natural disasters, discovery of gold and mineral resources, commodity price

shocks, and so on). Of course, those shocks also generate economic responses,
often of a cyclical nature, that can lead to a boom and then a bust, and to crises.
Marx, Keynes, Minsky, and others adopted a view of the world that sharply
departs from the market-clearing, rational, and optimizing behavior.

6.2.1  Karl Marx

Marx saw capitalism as a system in constant motion, subject to irreversible
changes in time and with contradictions whose resolution involves changes
in the mode of production and the social relations surrounding that produc-
tion. Marx’s economics involves concepts of productive forces, the labor the-
ory of value, the reproduction and expansion of capital, and its never-ending
quest for growing profits and other elements.10 In Marx, economic crises are
a by-product of the internal contradictions of capitalism and not the result of
outside factors. We can distinguish three channels for “overproduction cri-
ses,” (see Box 5.1) emphasized in Marx’s schemes:

(a) The tendency for a falling rate of profit (the FROP hypothesis). The
built-in feature in capitalism of a propensity of the system toward
“unlimited accumulation” stressed by Marx had the counterpart of a long
run tendency to falling profitability of capital (profit squeeze) leading to
lower accumulation and cyclical crises.
(b) A  tendency for underconsumption and periodic realization crises. This
amounts to a failure of aggregate demand (in modern parlance) owing
to lack of purchasing power by the majority of the working class that
is not compensated by expenditure of surplus appropriated by the capi-
talist class. The result is unused productive capacity and unemployment
(“overproduction”).
(c) A disproportionality crisis in the relationship between Department I (the
sector of the economy producing capital goods) and Department II (the
sector producing consumer goods). While one sector overexpands (over-
investment) and fails to sell the goods produced in that sector, the other
underinvests and underproduces relative to demand.11

10.  Marx’s main presentation of his theories can be found in Capital (1867), vols. I, II, and III.
11.  Good references of Marx’s theory of crises are Foley (1986, chap. 9) and Hollander (2008,
chaps. 4, 5, 10, and 11). See also Howard and King (1989) and Harvey (2010).
118 Econo mic Crisis an d Instabilit y of Capitalism

Marx saw overproduction as an irrational feature of the working of capital-

ism. Productive resources are wasted in spite of unfilled human needs, poverty,
and destitution. As a result of the mechanisms listed in (a)–(c), the more com-
mon indicator that a crisis is incubating, or is already developing, is the fall in
the rate of profits. The restoration of profitability and the resumption of capital
accumulation may require changes in the socioeconomic parameters of society.
There are several options for restoring adequate conditions for capitalist
accumulation. The export of goods to foreign markets and the export of capi-
tal as foreign direct investment are two mechanisms for overcoming internal
stagnationist tendencies. Lenin’s famous imperialist phase of capitalism is
a case at hand. (Incidentally, the main ideas of Vladimir Lenin were largely
inspired by the work of British economist J. A. Hobson, noted in his book
Imperialism: A Study [1902/2011].) Both Hobson and Lenin emphasized the
ability to secure external markets by using colonialist and imperial practices.
In the Marxist tradition, Rosa Luxembourg argued that capitalism has
structural difficulties in absorbing the output generated in either Department
I or Department II, and that chronic lack of aggregate demand is difficult to
overcome. Luxembourg identified the production for export as an important
mechanism for expanding aggregate demand and avoiding realization and
disproportionality crises.
Another way to restore capital profitability is by expanding the labor supply
(through immigration from abroad and/or rural-urban internal migration) and
reducing the ability of labor unions to demand higher wages and more social ben-
efits. Neoliberal globalization was aimed at restoring the profitability and power
of capital as ways to overcome the “profit squeeze” of the 1960s and 1970s that
was associated with a drift toward increased power and influence of labor, which
was reflected in higher wages, increased labor activism, and more social benefits
backed by the welfare state. As discussed previously, the chief tools for reassert-
ing the power of capital and restoring the profit margins diminished by FROP
dynamics was the rollback of the state, reducing taxes on higher incomes and cor-
porations, deregulation of business, and the globalization of production.
Globalization allowed U.S. and European firms to relocate production (and
obtain parts and processes) in low-wage countries such as China, where there
were large supplies of cheap labor and where work was performed in disciplined
conditions enforced by a generally authoritative state. The manufacturing export
capacities of China introduced, indirectly, a wage discipline to mature capital-
ist economies coming from the double pressure of local companies outsourcing
to take advantage of those low labor costs (thus creating jobs abroad but not
at home) and competition from imports of manufactured goods produced in
 Making Sense of Crises in Capitalism 119

low-wage China. In a world of mobile capital and new contingents of cheap labor,
capital profitability was able to be restored and the power of capital strengthened.
Another mechanism to avoid underconsumptionist tendencies and dispro-
portionalities is “financialization.” This process was noted as far back as the early
twentieth century by some Marxist authors, such as Rudolph Hilferding in his
book Finance Capital (1910/1981). The book elaborates on the trend, already
noted by Marx, and also on the increasing “concentration and centralization”
of capital. Hilferding lived in the period of growing importance of banks and
the financial sector in providing the credit and financing for capital accumula-
tion by big firms (corporations), which complemented their internal sources
of funding (reinvested profits). In the second phase of globalization, in the late
twentieth and early twenty-first centuries, financialization has played an impor-
tant role in keeping private consumption and aggregate demand high, in spite
of growing inequality—at least up until the crash of 2008–09. Nevertheless,
expansion of the financial sector led to climbing consumer debt and the pro-
liferation of credit and debit cards, housing loans, student loans, and retail
credit. It also led to a plethora of sophisticated instruments and derivatives, as
described in the previous chapter, that played a major role in triggering the last
crisis. As Foster and McChesney (2012) show, the financialization of capitalism
that intensified in the last three decades or so has reduced the importance of
directly productive activities such as manufacturing and its contribution toward
generating total employment. In contrast, the importance of the so-called FIRE
sector (finance, insurance, and real estate) has increased in the U.S. economy.
Summing up, we see that Marx’s theory of crisis, although not simple in its
original formulations, underscores the endogeniety of crises in capitalism. In
addition, it offers insights into how the economic system, institutional contours,
and accompanying social relations evolve over time by developing ways to over-
come the tendencies for profit margins to fall, for underconsumption, and for dis-
proportionalities crises—the three key crisis mechanisms in Marx’s economics.

6.2.2  John Maynard Keynes

Probably the most important economist of the twentieth century, John
Maynard Keynes appreciated the productive potential of capitalism but was
also aware of its self-destructive tendencies. He lived through a period that
stretched from the apparent stability, prosperity, and sophistication of the gold
standard up to 1913, on through the turbulent interwar period of the interna-
tional economy in the 1920s and 1930s and into the reconstruction plans of a
new international monetary system in the early 1940s (Keynes died in 1946).
120 Econo mic Crisis an d Instabilit y of Capitalism

Keynes, refuting the classic economists, developed the theory that the
market’s self-correcting mechanism of the price system was weak at best and
would take too long to operate before the system destabilizes and falls into
recession or inflation crisis. As discussed in c­ hapter  3, Keynes also stressed
that intrinsic uncertainty surrounding production and investment brings
about bouts of instability and makes efficient and sustainable intertemporal
allocation of capital a difficult task for decentralized markets. Keynes was
witness to the attempts at restoring stability and compensation after the war
that had had been forced on Germany (denounced by him in the Economic
Consequences of Peace). He also observed and wrote about a series of episodes,
such as the hyperinflation and exchange-rate collapses in Germany, Hungary,
and Austria in the early 1920s, as well as the financial crash of 1929 and sub-
sequent depression, unemployment, and massive bankruptcies, up to the first
half of the 1940s.
In his General Theory, Keynes identified fluctuations in private invest-
ment as a main source of macroeconomic instability, and he showed that
the Say’s law—in which supply automatically created demand—was not a
plausible one to explain economic realities. By ruling out the full utilization
of capital and full employment of labor as normal states of equilibrium in
the economy, Keynes made the important point that the “general”—say, the
normal state of a capitalist economy—is an underemployment equilibrium
(in which there is waste of productive capital and some human resources
remain idle).
The main innovation presented in the General Theory was to show that
the determination of the underemployment equilibrium is driven by the level
of effective demand, rather than by the availability of productive factors. As
already mentioned, Keynes developed the metaphor of “animal spirits” as
what drives investment—a process that takes place over time and involves a
mismatch between capital formation and earned profits—to underscore the
importance of passions, guesses, and expectations, which are not always fully
rational, in the behavior of the investment community. Keynes also stressed
the importance of liquidity as a cushion against uncertainty and irreversibil-
ity, and commented amply on the unstable features of financial markets and
stock markets and their limited role in guiding and financing investment.
Unlike Marx, who sought to replace capitalism with another system,
Keynes wanted to preserve capitalism and reform it through domestic state
action, international cooperation, and global institution building. An exam-
ple of that goal was the Bretton Woods system, which he contributed deci-
sively to shape in its initial stage.
 Making Sense of Crises in Capitalism 121

6.2.2  Hyman Minsky

After the crash of 2007–08, the economics professionals and the financial ana-
lysts started to turn their attention to the work of Hyman Minsky, a U.S. profes-
sor of economics and finance. Minsky was, for a long while, a largely marginalized
figure in the mainstream academia of the United States, until his death in the
mid-1980s. In his writings, Minsky took seriously the issues of endogenous
instability. He followed and expanded on Keynes in his insistence upon the role
of change in private investment in generating the macroeconomic cycles. He
stressed the role of institutions and called attention to the fact that markets—in
particular, financial markets—in the real world can be very different from their
textbook descriptions. His books Stabilizing an Unstable Economy (1986) and
Can “It” Happen Again? (1963/1982) emphasized the importance of the finan-
cial structure of corporations in creating financial fragility and instability.
Minsky’s work displays two main features:  (1)  his analysis of financial
behavior was based mainly on empirical observation of reality rather than on
adoption of principles of neoclassic rationality and deductive maximization
theory; and (2) his original reading of the theories of John Maynard Keynes.
In particular, Minsky was critical of the Hicks-Hansen synthesis of the IS-LM
model that cast Keynes’s equilibrium theory as devoid of the complexities of
uncertainty and imperfect knowledge. He developed further the analysis of
the financial dimension of investment, which Keynes had identified as the
most unstable component of aggregate demand (see “Financial Theory of
Investment,” chap. 5 of John Maynard Keynes; Minsky 1976/2008).12
Minsky held a dialectical view of economic change, in which “stability is
destabilizing”; that is, periods of prosperity and reasonable stability, such as
during the two decades after World War II (roughly up to 1966), generate
internal forces leading to inflationary pressures, deficit financing, and financial
instability. He argued that the postwar institutional settlement in advanced
economies, which combined “big government” (in charge of countercycli-
cal macro policies) and “big bank” (the central bank as lender of last resort),
prevented large financial crises from occurring, but nevertheless created an
underlying inflationary bias in the conduct of macroeconomic policies.
Minsky identified three mechanisms of (outside) funding for corporation
investment and production: (a) hedge financing, (b) speculative financing,
and (c) Ponzi financing.

12.  After the crash of 2008, this author was rediscovered by the financial press and by part of
the economics profession.
12 2 Econo mic Crisis an d Instabilit y of Capitalism

In hedge financing, cash flows are often enough to cover interest payments
on outside debt. In speculative financing, the profile of debt payments may
lead net incomes at times to fall short of interest payments on debt, becoming
potentially destabilizing. In Ponzi financing, debt servicing exceeds, systemati-
cally, net income and cash flows, leading to explosive debt accumulation and,
eventually, to bankruptcy. If the mix of speculative and Ponzi financing starts to
dominate corporate financial positions, then the economy becomes financially
fragile and instability sets in. The result may be depression and financial crash.
Minsky held the view that markets are structurally prone to instability and
that they generate tendencies toward unemployment, inequality, and infla-
tion. He was critical of big government devoted to fine-tuning (such as dur-
ing the Kennedy-Johnson era in the U.S., in the 1960s) that generates undue
risk-taking in the expectation of bailout. He wrote this as long ago as the
1960s, but this insight proved relevant for understanding the 1970s, 1980s,
1990s, and 2000s. Minsky proposed a permanent role of government as one
of creating employment, ensuring the regulation of banks and corporations,
and correcting wage inequality—but all while leaving space for individual cre-
ativity and entrepreneurship.

6.2.3  Irving Fisher and Charles Kindleberger

An early and influential article on financial crisis was “The Debt-Deflation
Theory of Great Depressions,” written by Irving Fisher and published in 1933
in the journal Econometrica. Fisher’s work built on the work of French math-
ematician Henri Bachelier, a student of Henri Poincaré, who at the turn of the
twentieth century analyzed stock price fluctuations in the French stock mar-
ket and developed a theory close in spirit to the “random walk” hypothesis.13
Irving Fisher was an original and virtuous theoretician, but he failed to antici-
pate the financial crash of 1929. In his writings, Fisher stressed that the accu-
mulation of debt in the boom phase of the economic cycle invites subsequent
phases of distress and crash and may even turn a recession into a depression.
As debt is the counterpart of credit, Fisher highlighted the interaction
between credit crunches (sharp contractions in the supply of credit) and falls
in asset prices, profits, and the general price level in generating a dynamic of
deflation and crisis. At times of fear and uncertainty, Fisher indicated, the
credit mechanism needs to be maintained to arrest a depression. As banks offer
credit, they need to be reasonably certain that the credit they are providing

13.  See Fox (2009), chap. 1.

 Making Sense of Crises in Capitalism 123

will be paid back. Slow growth, low sales, falling wages, and unemployment—
all features of a severe downturn or a depression—conspire against the willing-
ness of banks to provide credit. It is important to note that this bank response
tends to reinforce the downward spiral in economic activity, confidence, and
asset prices and makes a recession more severe and protracted. The policy chal-
lenge, then, is how to halt this mechanism before it is too late.
In the 1970s, Charles Kindleberger, a long-time student of financial cri-
ses, wrote an important and influential book entitled Manias, Panics, and
Crashes (2000). Alas, this book was more popular in academia than among
policymakers. Kindleberger applied, with wit and insight, Fisher’s and
Minsky’s ideas to understand the dynamics of actual financial crises across
different countries and in several historical episodes. He was critical of the
assumption of rational behavior and “stabilizing speculation” à la Friedman to
understand financial crises, feeling they were at odds with historical evidence.
Kindleberger’s theories, like Minsky’s, were a clear case of economics based
on observation of actual events rather than construction of abstract theories
based on axiomatic “first principles.”
Kindleberger identified several phases of a cycle, including boom, stress,
crash, and contagion, as affecting the real sector and other national econo-
mies. He stressed also the role played by credit and debt, along with psy-
chological factors that do not fit well with the rationality assumptions used
by neoclassical economists, in fueling the booms to leverage acquisition of
speculative assets. He noted that indebtedness by households, corporations,
and the government often delays the recovery from crashes and recessions and
turns business cycles into more complex and protracted periods of economic
malady and social pain.
The historical analysis of Kindleberger is consistent with the predictions
of Fisher and Minsky that debt amplifies cycles and complicates a recovery
from recession. Kindleberger posed that in order to understand episodes of
financial crisis, one must abandon assumptions of stable expectations and
fully rational behavior in financial markets (albeit in the long run he admit-
ted that markets were somewhat closer to the rational ideal). In episodes of
speculative mania, people acquire a variety of assets and objects (such as pre-
cious metals, land, real estate, commodities, gold, and foreign exchange) in
their search for capital gains. In so doing, they find that asset prices climb
well above fundamentals, monetary and credit policy is largely accommoda-
tive, expectations are overly optimistic, regulation is lax, and governments
do not want to stop the party. However, the fun does not last forever. Bad
news, a financial scandal, a negative external shock, or a political event may
124 Econo mic Crisis an d Instabilit y of Capitalism

be enough to trigger the reversal of speculative mania. In the phase of distress

and crisis, the asset prices collapse, banks cut credit sharply, liquidity disap-
pears, and confidence plummets.
Kindleberger also aptly describes how the collapse of a single but impor-
tant bank may spread a crisis of confidence to other banks and financial insti-
tutions in a contagion of domestic and often international proportion. The
financial crisis is then transmitted to the real sector, affecting employment,
production, and sales. The mechanism often involves a credit crunch, pessi-
mistic expectations that reduce private investment, and the firing of workers
and employees by corporations seeking to cut labor costs.
The appealing feature of Kindleberger’s nonmathematical models of finan-
cial crises is that they tell a persuasive story of the origin and propagation of
such crises, and his predictions fit nicely through history. His theory is also
relevant to understanding the crash of 2008–09 and many others in the last
thirty years that have occurred in emerging markets, developing countries,
and post-socialist economies.

6.2.4  The Role of Credit and Imperfect Capital

Markets Theories
In the 1970s and 1980s, in contrast with the main conclusions of the efficient
market hypothesis, authors such as George Akerloff, Joseph Stiglitz, Ben
Bernanke (latter turned more orthodox at the helm of the Federal Reserve),
and others showed that optimal market-clearing behavior in the credit mar-
kets was not the rule and derived several “inefficiency results,” rendering
suboptimal the equilibrium in financial markets.14 To explain the failures
in credit markets, they appealed to problems of asymmetric information,
principal-agent interactions, bounded rationality, and other departures from
perfect market clearing that characterize real-world capitalist economies. This
line of research has identified the differences between external financing, such
as bank credit, bonds, and equity (more costly) and internal finance (retained
profits); the monitoring costs of asymmetric information between borrowers
and lenders; and the practice of credit rationing.
Recently, work on behavioral finance has been applied to explain macroeco-
nomic puzzles, including low savings rates, short horizons, myopic expectations,
and financial destabilization (Akerloff and Shiller 2009). A  main macroeco-
nomic implication of the work on imperfect capital markets is that the wisdom

14.  See Akerloff and Shiller (2009).

 Making Sense of Crises in Capitalism 125

of credit markets for properly allocating credit and pricing risk is far less effective
than suggested by the EMH—and especially by the interests of financial-market
participants pressing for deregulation. Macroeconomically, the imperfect mar-
ket view identified a much larger role for the financial markets in transmitting
disturbances to the real side of the economy, and in transmitting feedback from
the real economy to the financial positions of households and firms.
Authors such as Bernanke, Blinder, Gertler, and others have emphasized
the credit channel and the financial accelerator in their analyses of recessions
and depressions. Bernanke applied these ideas to explain the slump of the
1930s and stressed the nonmonetary causes of the Great Depression, in con-
trast to the monetary explanations of Milton Friedman and Anna Schwarz.15
The “nonmonetary character” of the Great Recession in Bernanke’s interpre-
tation refers to the role of credit as different from high-powered money in
generating and, above all, in amplifying the recession.

6.3  Concluding Remarks: Evaluation and

Synthesis
This overview of the theories of crises suggests the existence of very dif-
ferent views and schools of thought on the causes of these economic and
financial crises. On one side, orthodox theories based in free-market
models such as the efficient market hypothesis, the new classical eco-
nomics, and older classical schools consider economic and financial cri-
ses as unexpected events in a world of omniscient producers, consumers,
and financiers. Later on, macroeconomic models using highly unrealistic
assumptions of “representative (optimizing) agents” with forward-looking
expectations and full information make more difficult to accommodate
these crises in their standard models. These theories “represent” reality in
abstract and unrealistic ways.
A surprising development in the recent history of economic ideas and
their adoption is that, in spite of the lack of realism in these theories, their
proponents have become very influential in important institutions such as
the IMF and the central banks during the last two to three decades. It is fair
to say that by adopting these frameworks, these institutions diminished their
capacity to understand and anticipate crises at both national and interna-
tional levels. In turn, how analysis of the 2008–09 crisis will change the way

15.  See Bernanke (2007) for a synthesis of this work; also Bernanke and Gertler (1989).
126 Econo mic Crisis an d Instabilit y of Capitalism

economists think, and how this can affect the views of policymakers, is an
open question.16
Most macroeconomic models treat instability as the result of some exog-
enous shocks: in the 1970s, oil and food price shocks were destabilizing factors
that, interacting with wage formation, monetary accommodation, and infla-
tionary expectations, gave rise to a period of stagflation in the advanced econ-
omies. In the developing countries, increases in international interest rates in
the early 1980s and a cut in capital inflows gave rise to the debt problems par-
ticularly encountered in Latin America. In the 2000s, the dot-com bubble and
then the real estate bubble were responsible for their respective crashes.
The intellectual history of interactions among money, credit, asset prices,
inflation, expectations, and business cycles includes the work of the Swedish
school of Wicksell and of the Austrian economics associated with Von Mises
and Hayek. It also includes analysis by Fisher regarding risk, money, prices,
debt deflation, and crises, as well as the work of Keynes on uncertainty and
underemployment equilibrium, the behavior of investment, “animal spirits,”
and incomplete and volatile financial markets. Added to that is subsequent
work on financial crises by Kindleberger.
Alternative theories of crises associated with Marx, Keynes, Minsky, and
others departed from the assumption that capitalism is an inherently stable
system with powerful mechanisms for correcting disequilibria and accom-
modating external disturbances. The content of these theories varies, of
course. Marx stressed the internal contradictions of a system based on private
property, the profit motive, and class divisions. The specific mechanisms for
triggering an overproduction crisis were the falling rate of profit, undercon-
sumption tendencies, and disproportionality problems in the allocation of
capital between the sector producing capital goods (to reproduce capital) and
the sector producing consumption goods (for enabling the “reproduction” of
labor). In Keynes, unemployment and excess capacity crises originate in fail-
ures of aggregate demand, a somewhat close concept to the underconsump-
tion tendencies emphasized by Marx, albeit for different reasons.

16.  The macroeconomic models of the last three decades or so have emphasized the impor-
tance of modeling expectations. “Static,” “backward looking” expectations were replaced by
“forward looking” (or rational) expectations that use all relevant information in predicting
future variables. The principle sounds reasonable on the surface, as discarding information is
irrational; however, at the same time the new fashion overestimated the actual capacity of most
people to gather, store, process, and interpret information, given the changing and at times
highly technical nature of that information. Once this is taken into account, it starts to make
more sense why people look at past history to form future expectations than as simple, foolish-
ness, or irrational behavior.
 Making Sense of Crises in Capitalism 127

Keynes also stressed the weakness of the wage-price mechanism for cor-
recting an excess of supply over demand (unemployment) in the labor market
and a lack of demand in goods markets. Keynes highlighted the importance
of uncertainty as a source of economic instability and noted the poor job
that financial markets often perform in ensuring an effective inter-temporal
allocation of capital in a market economy. Minsky developed his theories of
financial fragility and expanded Keynes’s analysis of the ways firms obtain
their financing and how the financial mix can be important for the stability of
investment and the economy as a whole. He also provided important clues to
how stability can be destabilizing and other metaphors underlying the endo-
geneity of crisis in a capitalist economy.
Baran and Sweezy adapted the thesis of “financialization of capitalism”
inspired in Marx but applied it to monopoly (corporate) capitalism.17 For
these authors, modern capitalism suffers a chronic tendency toward insuffi-
cient aggregate demand, cartelization, monopoly power, and appropriation of
economic surplus in the hands of a capitalist class that is unable to consume
and productively invest the economic surplus, driving the economy to waste
and finding military adventures to absorb surplus capital. According to Baran
and Sweezy, the prosperity of the post–World War II period lasting until
the early 1970s was due, in part, to attempts to improve income distribution
(“shared prosperity”), which helped increase consumption by the non-rich.
In contrast, neoliberal globalization shifted income to the top-income earn-
ers, high-level executives, capitalists, and financiers and kept median incomes
and worker incomes stagnant. In the last two to three decades, the expansion
of credit, debt, and “financialization of capitalism” have been new stimulants
of current consumption and real estate housing; however, the effects of these
“stimulants” is what led to the crisis of 2008–09.

17.  A clear exposition of this view appears in Foster and Magdoff (2009), chap. 4.
 PA RT T H R E E

Elites, Diaspora Migration and

Social Movements in Global
Capitalism
 7

The International Circulation of Elites

and Global Social Movements

Free migration of people is much more resisted by governments of rich

countries than are free trade and capital mobility. Current (neoliberal) glo-
balization, therefore, is incomplete and asymmetric in various ways. Along
with “globalization from above” led by corporations and banks, there is “glo-
balization from below,” which represents social movements that are critical of
the consequences that neoliberalism has on inequality, unemployment, eco-
nomic justice, the environment, and the way democracy works.
This chapter deals with both the transnationalization of economic and
knowledge elites and the rise of global social movements. The concept of elite
referred to (see also ­chapter 2) includes not only the owners of capital (rang-
ing from big corporations to individual entrepreneurs) but also the people with
special knowledge in scientific and technological fields and professionals in
the private and public sectors. We stress in this chapter the increasing mobility
and differentiation among the different types of elites that characterize global
capitalism in the twenty-first century. The chapter also presents and discusses
empirical evidence on the mobility of those people with high knowledge, cre-
ative powers, and entrepreneurial capabilities, coupled with some suggestive evi-
dence on the mobility of politicians, still a largely unexplored field of analysis.

7.1  Transnationalization of Economic Elites and

Entrepreneurs
In ­chapter 2, the economic elites and the super-rich were identified, empiri-
cally, as associated with two measures of concentration of economic power at
the top: (1) the income share of the richest top 1 percent; and (2) the holding
132 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

of very high levels of wealth (drawn, for example, from the list of billionaires
published in Forbes magazine).
The transnationalization of the elites has taken place within the overall
process of globalization. Elites have become a cosmopolitan segment that
conducts business in various countries. The privileged position of the eco-
nomic elites at global level requires access to and influence of governments,
international organizations, and the media as a means for consolidating their
power base and helping to open new business opportunities wherever inter-
national production and investments are located and conducted.
The internationalization of capital follows various circuits of varying eco-
nomic importance, size, and characteristics. One circuit is the multinational
corporations (MNCs) that account for the bulk of global trade and global
production. Currently, the MNCs carry out near 80 percent of global trade
in intermediate parts and inputs, which is the dominant form of international
trade these days.1 The MNCs are a relatively small group of very big companies
that have operations in several countries and whose headquarters are often in
an advanced capitalist economy (typically the U.S., Europe, or Japan), although
a relatively recent phenomenon is the rise of multinational corporations (pub-
lic or private) emanating from emerging economies—the “multinationals of
the south.” Here included are the internationalized public companies from
China and the multi-Latinas—say, private conglomerates owned and run by
nationals of a Latin American country. These companies display an important
capacity to mobilize capital, managerial capacities, and distribution systems.
The multi-Latinas are able to extend their operations to other nations besides
their country of origin (expansion is often to another Latin American country,
but they also engage in operations in other regions of the world).
Increasingly, most of the assets, sales, and employment of the MNCs are
generated outside the home country. For example, in 2008, up to 53 percent
of General Electric’s employments were generated by foreign affiliates outside
the United States. For that same year, 86 percent of the total workforce of
Coca-Cola was employed by its foreign affiliates (Foster and McChesney
2012). Several big MNCs have a level of individual sales above the GDP of
several low- and middle-income countries. The advantages gained by the
MNCs for growing and consolidating lie in their superior extended access
to finance, markets, technologies, and prime human resources. In addition,
they often have privileged political connections and receive help from the
governments of their home countries in various ways.

1.  UNCTAD (2013).

 The International Circulation of Elites 133

Like in the big national corporations in the multinational world, a

prominent role is played by a “global technostructure,” composed by
high-level executives, financial and technical experts, lawyers, and other
professionals who work for the MNCs. The global technostructure is
internationally mobile.
Another circuit is the international mobility of independent entrepreneurs.
They try their fortunes in other countries but without the protections pro-
vided by big productive or financial conglomerates. Historically, the migration
of people with entrepreneurial capacities has contributed to business creation,
resource mobilization, and economic growth in their countries of destination.
In the Atlantic-based economy of the nineteenth and early twentieth centuries,
successful entrepreneurs and bankers, such as Mellon, Vanderbilt, Carnegie, and
Rockefeller, were foreign born or first-generation descendants of immigrants to
the United States. In that period, Argentina was also a main recipient of immi-
grants with entrepreneurial skills and workers, primarily from Spain and Italy, and
their arrival came along with the inflow of capital from England and Germany.
In the East, the Chinese economic elite, fleeing the Communist revolution of
1949, was an important source of entrepreneurship in South-east Asia. In South
America, various countries welcomed entrepreneurs from Palestine and Syria. In
the late twentieth and early twenty-first centuries, entrepreneurial immigrants
from India, Taiwan, Israel, and China have provided an important human resource
to support the creation of high-technology industries in California’s Silicon Valley
(United States), while also connecting them with technological industries in their
home countries. These foreign-born entrepreneurs often traveled to study in the
United States and Europe before becoming entrepreneurs active in both their new
and home countries. Their locations and mobility have helped also to develop
technological industries in those developing nations that have traditionally been
importers of high-tech goods (see Saxenian 2006a; Solimano 2008).
In ­chapter  3, a distinction was made between entrepreneurs of opportu-
nity,2 who perceive business opportunities and have the capacity to mobi-
lize resources (credit, people, technology) for seizing those opportunities,
and entrepreneurs of necessity, who aim to make a living in independent con-
cerns, at home or abroad, such as retail trade and shops, small workshops
and micro-enterprises, because employment options are less available.3 The
relationship between entrepreneurship and levels of economic development

2.  See Gaglio and Katz (2001), Baron (2004).

3.  Another category is that of social entrepreneurs, whose motivations tend to be altruistic and
tied to social commitment.
134 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

for a cross section of countries is shown in ­figure 7.1.4 The U-shaped form

of this relationship has been explained by both types of entrepreneur-
ship:  while high-income countries, such as the United States, Japan, and
European Union countries, show a positive relationship between entre-
preneurial activity and income level (right-hand-shaded area), low- and
middle-income countries present a negative relationship between the two
variables (left-hand-shaded area). The positive slope can be interpreted as
showing the relevance of opportunity entrepreneurship, which is more fre-
quent at higher per capita income levels and is associated with the develop-
ment of new markets and products. On the other hand, the portion of the
curve with a negative slope corresponds to necessity entrepreneurship, in
low- and middle-income countries and involving underemployed and unem-
ployed people trying to meet their daily needs through small-scale entre-
preneurial activities. This type of entrepreneurship is often associated with
lower capital requirements and tends to be more volatile, with a high rate of
entrepreneurial exit.

45%
TEA (Total Entrepreneurship Activity Index, % of adult population)

40%

35%

30%

25% Quadratic Trend Line

2
y = 4E − 10x − 2E − 05x + 0.2547
R2 = 0.4935
20%

15%

A
Argentina
10%
Chile

5%

0%
- 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
GDP per capita (PPP adjusted, 2005)

Figure  7.1  Entrepreneurship and GDP:  the “U-shaped” relationship for 42 selected
countries (2005–06)
Source: Solimano and Avanzini (2012).

4.  Figure 7.1 shows the relationship between the Total Entrepreneurship Activity rate (TEA),
collected by the Global Entrepreneurship Monitor (2006) and the level GDP per capita (PPP
adjusted) as a proxy of development levels.
 The International Circulation of Elites 135

Some empirical evidence shows that, as can be observed in ­figure 7.1, new

businesses started in countries in the Left-hand-shaded area—for example,
Argentina, Brazil, China, India, Peru, and Thailand, among others—are more
likely to exit market activity before the 42 months.5
Entrepreneurs often try to find, in other nations, wider markets and more
access to funding and technology, while facing lower costs of doing business.
It seems plausible that opportunity entrepreneurs constitute a group with
a higher probability of moving internationally. Some examples come also
from the Forbes world billionaires list: the Walton family of the Wal-Mart mar-
kets chain, the Benetton family with the design and production of clothes, the
MacMillan family in the agricultural field (Cargill), John de Mol and Joop van
den Ende with their entertainment business are some examples. Most of them
are engaged in developing new businesses around the world on an international
scale, mobilizing capital and human resources to exploit market opportunities
in several countries.
The emergence of “technological entrepreneurs” who connect markets in
different countries and regions, such as Silicon Valley in the United States with
Bangalore in India, is a case of entrepreneurship of opportunity. Very often, these
entrepreneurs maintain connections with their home countries and become
vehicles of development in those home countries if they forge business connec-
tions there.6,7
Countries such as the United States, Japan, South Korea, and Switzerland
have traditionally been considered suitable places for hosting entrepreneurial
activities. In turn, other countries like Israel, China, Brazil, Mexico, and India
have made major efforts in recent years to make themselves more attractive to
entrepreneurs. The fostering and quality improvement of higher education (par-
ticularly technical education) and the investment in infrastructure, technology,

5. Time limit to consider a new business as an established one, as defined in Global

Enterpreneurship Monitor (2006).
6.  Research has emphasized the role of returning and circulating entrepreneurial elites as an
engine of economic growth and attractor of foreign investment. Saxenian (2006a) studied the
effects of these elites in Taiwan and Israel and Saxenian (2006b, 2008) examined the effect
of the adoption on the Silicon Valley model in China and India, on a case-by-case basis. On a
more aggregated basis, Docquier and Lodigiani (2008) studied the impact of skilled migration
and their networks outside sending countries on foreign direct investment inflows in send-
ing countries, finding positive network externalities effects (having a large educated diaspora
abroad stimulates physical capital accumulation).
7.  New businesses boosted by arriving entrepreneurs may threaten weak economic sectors,
absorb incipient local entrepreneurs, exploit scale economies, and dominate markets due to
superior capital availability.
136 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

and telecommunications have helped shape a more comfortable environment

for installing new enterprises, much of them outsourcers for the big transna-
tional companies. Also, some changes to law and bureaucratic procedures
have reduced administrative barriers to entry and have diminished the cost of
doing business, both relevant factors for encouraging new productive activities.
Developing countries such as Argentina and the Russian Federation are making
efforts to become more attractive to international mobile investors, overcoming
perceptions of economic and political instability in their countries.8
Necessity entrepreneurs are less likely to move abroad, as they have fewer
international connections and fewer economic resources to finance costly mobil-
ity (transport costs, costs of job searches, or business opportunity searches). Still,
there is a degree of international mobility for small-size (necessity) immigrant
entrepreneurs who open small businesses in their host countries; this is typically
the case for ethnic stores, those selling cultural goods, and remittances shops, or
carpets stores owned and run by foreigners (Solimano 2010).

7.2  Knowledge Elites and the Technostructure

A main asset in today’s capitalism is knowledge. People who generate, dissem-
inate, and apply knowledge have a special advantage over unskilled workers.
When we talk about knowledge elites, we consider a broad range of individu-
als, including independent professionals, academics, scientists, and scholars
in university and research centers, executives and managers working in mul-
tinational corporations, and professional staff of public international orga-
nizations.9 The circulation of talent helps to mobilize knowledge, ideas, and
technological innovation and directly impacts the economic activity in both
source and receiving nations. The proportion of foreign-born people with
higher education is estimated to be close to 10  percent of the world’s total
number of international migrants (20–25 million people in the mid- to late
2000s). These educated individuals are mostly concentrated in rich OECD

8.  Saxenian (2008) posits that returning entrepreneurs have accelerated the adaptation of
technology and institutions to local circumstances, transferring production to a new environ-
ment, contributing with their knowledge of the local context, and bridging the differences in
social, cultural, and institutional settings.
9. Solimano (2008) distinguishes four types of “talent” that are internationally
mobile: (a) directly productive technical, managerial, and entrepreneurial talent; (b) scientific
talent (academics, scholars, and graduate students); (c)  health talent (physicians, surgeons,
dentists, therapists, nurses, and mental health professionals); and (d) cultural and social talent
(includes artists, musicians, writers, media-related people, freethinkers, social entrepreneurs,
 The International Circulation of Elites 137

nations, and their departure from their home countries has been a permanent
source of concern for “brain drain” by the developing countries.10
The job crisis in Europe since 2008–09, and the more rapid growth of the
global south (China, India, Latin America, and Africa), is bound to generate
a reversal in the direction of talent mobility, contributing to an erosion of the
technological superiority of OECD countries.
An indicator of talent concentration across nations is that Nobel Prize
winners are concentrated mostly in high-income countries of the global
north (Solimano 2010). In fact, almost 63 percent of the Nobel Prize win-
ners in science have been researchers and scientists who did their work in the
United States, of which 23  percent corresponds to foreign-born individu-
als who earned prizes for their contributions made during their stays in the
United States. Residents of the United Kingdom and Germany together hold
8.26 percent of the Nobel Prizes.
Publications, intellectual property rights, and patents registered by resi-
dents and nonresidents are also concentrated in high-income countries, with
Japan and the United States accounting for more than 50 percent of patents
registered around the world.11 Moreover, the data shows that expenditures in
research and development in the OECD countries to be more than double,
on average, the R&D expenditures by developing countries.12 Talent-receiving

and other social-change promoters). The motivations for moving internationally vary across
the different actors. Corporations and entrepreneurs move internationally in search for higher
profits, new markets, access to new technologies, and more favorable conditions to do business.
Managers and technical people tend to move within-companies (intra-firm employee trans-
fers) or across companies in different countries. Cross-country wage differentials (and com-
pensation schemes such as bonuses and benefits) are important drivers of executive mobility.
In contrast, scientists are motivated, when deciding to move to countries, by research facilities
and budgets, more access to publish, and better salaries. Health-sector professionals react to
professional and ethical challenges, wage differentials, and career possibilities. Cultural talent
also looks at the possibilities for greater recognition and interaction with peers abroad.
10.  The bulk of international mobility of talent takes place between advanced economies and
from several developing countries (e.g., China, India, Russia, Poland, Latin American and
Caribbean countries, the Philippines, and Sub-Saharan African nations) to North America,
Europe, and other southern destinations.
11.  Countries such as Japan, Germany, the Russian Federation, and France have a predominant
registration of patents by residents, associated with home-country production of knowledge,
while countries such as Canada, China, and Australia have an increasing share of nonresident
patent registrations, indicating that those countries are more likely to be the receivers and
adopters of new technologies.
12.  Grossmann and Stadelmann (2008).
13 8 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

countries tend to increase their investments in R&D and infrastructure while

talent-sending economies tend to curtail that.13

7.3  Political Elites and Social Movements

Political elites show a degree of internationalization. Four mechanisms seem
to be at work:

(a) Individuals who later become national leaders in their home countries
had acquired their higher education in foreign countries.
(b) Some in the political class get international exposure through postings as
international diplomatic representatives.
(c) Political leaders are often members of international networks (social
democrats, liberals, socialists, and communists).
(d) Exile from the home country following military coups, civil war, internal
conflict, and the installation of authoritarian regimes is a push factor for
the international mobility of political leaders.14

The empirical evidence supporting these four mechanisms is scant.

An empirical study of the patterns of higher education of foreign leaders
(Spilimbergo 2007), relevant to (a) above, shows that more than half of the
political leaders who had relevant positions in their countries of origin in the
1990s chose to study abroad, with preferred destinations being the United
States, the United Kingdom, France, and Russia. Their having political and
historical connections with the country of origin and/or the country of des-
tination (e.g., colonies) helps to explain those choices by international stu-
dents. Political leaders also tend to move to places with political, cultural, and
historical links with the home country.15 Examples of historical connections
relevant to (d) above would be the exile of members of the government of the

13.  Executive and managerial talent moves across borders mainly in the intra-company modal-
ity. Many companies move their people from their offices in peripheral countries to their head-
quarters in U.S., Japan, Germany, France, or the U.K., “draining” local managerial and technical
talent, attracting them with job promotions and better economic conditions and also better
education opportunities for their children (executive packages for executives who move abroad
often include benefits for children to pursue studies in the receiving country).
14.  Solimano and Avanzini (2012).
15.  In this context, it is not strange that people coming from Eastern Europe during the social-
ist period chose the Soviet Union as a place to study. In turn, students from former colonies in
Africa prefer the U.K. and France to follow their education.
 The International Circulation of Elites 139

Spanish Republic, led by Manuel Azaña, after the Republicans lost the civil
war in 1939; the flight of many Nazi leaders at the end of World War II; the
exile of Guatemala’s President Jacobo Arbenz in 1956 after a U.S.-led coup
d’état; the exile in Spain of Argentinean leader Juan Domingo Peron in 1955,
until his return to Argentina in early 1973 (Solimano and Avanzini 2012).
So far we have considered the internationalization of individuals and cor-
porations. However, collective action can also be internationalized through
social movements. A social movement is different from a political party or
interest group; it usually holds a “flat” organizational structure, decisions are
often products of assemblies, and there may, or may not, be easily recogniz-
able leaders. The informal nature of social movements renders them more
amenable to extra-institutional conflict. In contrast, political parties and
interest groups act through parliaments and other formal institutions.
Some authors have developed a framework for the stages of a social move-
ment or the lifecycle of a movement, with four phases:  (i)  emergence, (ii)
coalescence, (iii) bureaucratization, and (iv) decline. Among the causes of the
decline of a social movement that may lead to its vanishing are (a) success,
(b) organizational failure, (c) co-optation, (d) repression, (e) corruption, and
(f ) assimilation (entrance into the mainstream).16
In the last decade or so, social movements have developed an agenda that is
critical of the power of the economic elites and points to the failures of represen-
tative democracy. This agenda focuses on issues of global and domestic inequal-
ity, of high unemployment, and of the iconic manifestations of globalization,
such as fast-food chains and low-pay sweat shops in the Third World, of global
mass media that carry cultural homogenization, and of the spread of corruption
and environmental degradation, to cite some of the more salient issues.
A concrete example of a social movement in the last decade or so is the
anti-globalization protest movement, active during meetings of the World
Trade Organization in Seattle 1999 and IMF–World Bank meetings in sub-
sequent years. Also, there was the general peace movement against the Iraq
War in the early 2000s; protests against the wave of anti-austerity move-
ments in Europe since 2009; the indignados (outraged) movement in Spain
in 2010–11; the student protest movement in Chile since 2011; the Occupy
Wall Street (and Occupy Boston, and other cities) movement in the United
States; the pro-democracy Arab spring movements in 2011; the pro-democracy,
anti-corruption movement in Brazil in 2013; and so on.

16.  See Christiansen (2009) and Macionis (2001).

140 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

These movements have erupted more or less coincidentally, in various coun-

tries, and they coordinate their actions taking advantage of the technological
improvements of the global age, such as the Internet, social networks and other
communications technology devices. The new social movements are often com-
posed of youth and their strategies and tactics are autonomous; for the most part,
they are not openly manipulated by traditional political parties or governments.
A recent empirical study on “World Protests” (Ortiz et al. 2013), supported
by the German Ebert Foundation and the Initiative for Policy Dialogue at
Columbia University, sheds some useful quantitative and qualitative light
on this complex phenomenon. The study follows a methodology of “protest
event analysis” (based on a variety of press reports and direct observation)
identifying 843 protests in 84 countries taking place during the period 2006
to 2013. The study classifies the main grievances/demands of the protest-
ers under four headings:  (a)  Economic Justice/Anti-Austerity, (b)  Failure
of Political Representation and Political Systems, (c)  Global Justice, and
(d)  Respect (or the lack of it) for Human, Labor, and Social Rights. The
results show that protests are more prevalent in higher-income countries, fol-
lowed by Latin America and the Caribbean, East Asia and the Pacific, and
Sub-Saharan Africa. The study also points out that protests in the Middle
East and North Africa were prevalent before the “Arab Spring.”
The “World Protests” report shows that injustices of different sorts and an
entrenched distrust of global institutions and corporations, as well as the exces-
sive power of rich elites, drive a variety of protest movements around the world.
Highlighted are a wide range of actors, including middle-class people, students,
labor unions, and civic organizations behind these protest movements. The
agenda of global/national issues includes free trade, investment regimes, aus-
terity policies, jobs, public services, and environmental justice. The protesters
often target organizations such as the IMF, the World Bank, the World Trade
Organization, the G-20, and multinational corporations/employers associations.
At the national level, governments and the political establishment are
often objectives of criticism. On the other side, protests can be aimed at
foreign migrants and other minorities. The study also documents repres-
sion, arrests, and violence surrounding the protests in a variety of countries,
whether high-income, middle-income or low-income.

7.4  Concluding Remarks

This chapter has focused on two currents of global capitalism: (i) the trans-
nationalization of economic elites and knowledge people, leading a sort of
 The International Circulation of Elites 141

“globalization from above”; and (ii) the emergence of social and protest
movements with international reach, which are largely critical of globaliza-
tion and neoliberalism and that operate at local, national, and global levels
(“globalization from below”). A  separate topic was the political elites who
also experience some degree of internationalization. Within the economic
elites, we note that multinational corporations are important vehicles for
the globalization of capital, managerial capacities, technology, and political
influence. Another strand, more fragmentary and autonomous, is the mobil-
ity of technology entrepreneurs and entrepreneurs of opportunity, along with
a segment of entrepreneurs by necessity who are escaping underemployment
and labor-market marginalization in their home countries. Return migration
and circulation of technological entrepreneurs is a new feature that connects
economies and regions in ways not considered years ago.
Internationally mobile knowledge elites are favored with their possession
of specific knowledge and talent that is privately and socially useful for scien-
tific, technological, and commercial purposes. The empirical evidence shows a
high concentration of professionals, scientists, and innovators in high-income
OECD countries, reinforcing current development gaps and international
inequality in the global economy. These trends, however, are starting to reverse
owing to the diminished employment and investment possibilities in the
advanced capitalist economies most severely affected by the financial crisis of
2008–09, along with the economic dynamism displayed by the global south.
Neoliberal globalization has spurred the rise of these social movements
critical of inequality, the power of elites, corruption, unemployment, cultural
homogeneity, environmental degradation, war, and the failures of democracy.
The extent to which these criticisms and contestations will lead to effective
economic and social reforms, or if they will be absorbed, mediatized, and
accommodated by the establishment, is still an open question.
 8

Migrant Diasporas, Development, and

the Attachment to National Identity

In the previous chapter we focused on the internationalization and

mobility of elites in an increasingly rootless global capitalism.1 However, in
contrast to globalization and the denationalization of economic activities and
identities, the existence of immigrant diasporas proves there is a commitment
and attachment to national and historical identity. In addition, from an eco-
nomic perspective, these diasporas are a potential source of savings, capital,
knowledge, wealth, technology, and international contacts for their home
nations. Remittances are the most visible and important vehicle for trans-
ferring financial resources to the home countries, but diaspora populations
transfer other tangible and intangible factors as well.
Public policies, institutional design, market mechanisms, and appeals to
patriotic motivations and emotional ties can help mobilize diaspora groups
for strengthening the national development in their home countries and reaf-
firming their national identities.

8.1  The Concept of Diaspora: Nature and Size

The word diaspora comes from the Greek and means “dispersion” or “scat-
tering.” In its common usage, it refers to a community of expatriates that are
spread or dispersed around the world, outside their homeland. Expatriate
communities have different historical origins, such as forced population
movements because of war (say, after World War I and World War II in the

1.  This chapter draws on Solimano (2012a), prepared for UNCTAD.

 Migrant Diasporas, Development, and National Identity 14 3

twentieth century), persecution and expulsion as a result of religious belief

(the case of Jewish people and similar communities), famine (the Irish dias-
pora of the mid-nineteenth century), slavery and postcolonial civil wars (the
African community resettled in the Americas, mainly in the United States
and Brazil), emigration following revolutions and internal conflicts (such as
the Bolshevik revolution of 1917, the Chinese Communist revolution of 1949,
the Hungarian uprising of 1956, the Cuban revolution of 1959, the French-
Algerian civil war of the early 1960s, the Portuguese exit from Angola and
Mozambique after 1975, and so on). Nowadays, austerity polices in Europe
are triggering emigration and, accordingly, the formation of diasporas. In fact,
high-unemployment countries such as Spain and Greece have seen their youth
and many of their professionals leave those countries and settle in nations that
offer greater job opportunities and a better way of life.
The sense of national identity with and emotional attachment to the
homeland distinguishes diaspora populations from those of pure economic
migration, although the concepts are obviously related. Mobilizing these dia-
sporas, in the end, implies tapping the resources and attitudes of the migrant
communities abroad.2
In terms of size, the largest diasporas worldwide are of the Chinese, of
around 40 to 50 million people; the Indian diaspora of 30 million; the African
diaspora of near 30 million (with near 22 million coming from Sub-Saharan
African countries), and the Mexican diaspora of 20  million. Estimates (ca.
2010) put the size of diasporas from developing countries at some 161.5 mil-
lion people, of which 27.7  million come from low-income countries and
133.8 million from middle-income countries (World Bank 2011a).3
Diasporas themselves are often heterogeneous groups. The degree of cohe-
sion, shared values, and motivations may vary depending on their national

2.  According to Ancien et  al. (2009), “not all expatriates belong to a Diaspora and not all
members of a Diaspora are expatriates. A Diaspora consists of a non-resident population who
share a national, civic or ethnic identity associated with a particular homeland through either
being born in the homeland and migrating or being the descendents of emigrants.”
3. Recent literature on migration emphasizes more brain-circulation effects and win-win
situations associated with the emigration of human capital that increases the rate of return of
human capital after emigration and that enables the circulation of know-how, contacts, and
capital just mentioned above. In spite of these benign views, the certain pessimism of the old
school cannot be eschewed completely. Open and disguised unemployment, inequality, and
labor fragility in developing countries encourages emigration to higher-wage nations. In turn,
brain drain is a relevant case particularly for small economies and low-income countries in
the health sector and professionals with the capacity to work in the knowledge economy. In
addition, the evidence of benefits of migration stressed by the new migration literature is still
inconclusive (see Solimano 2010; Goldin et al. 2011).
14 4 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

origins and their histories. Some members have political and national moti-
vations and a corresponding willingness to contribute to the home country.
However, this may act both ways, and some diaspora members who emerged
as defeated from internal conflicts, exile, or persecution may be reluctant to
cooperate with their home nations if they perceive those governments are
hostile. In contrast, economic diaspora groups—for example, those formed
by transnational entrepreneurs and highly mobile professionals—can be will-
ing to and interested in cooperating with their home countries in the transfer
of capital, contacts, knowledge, and other attributes if they see conditions
there propitious and suggest commercial gain in the process.4

8.2  The Development Potential of Diasporas

The personal features of international migrants who move to unknown foreign
cities and countries to work and live, leaving behind friends, relatives, and their
national culture, suggest that migrants have a greater capacity to face risk, work
harder, and have more entrepreneurial traits than the population that remains.
Thus, migrants tend to be a self-selected group with significant economic
potential and enduring capacities bound to generate higher incomes, to save
money, invest, and acquire new knowledge. The actual economic conditions
of these migrants in their host countries will depend on their skills and educa-
tion levels, as well as available job opportunities, working environments, and
legislation in the host country. Not all migrants from developing nations go to
advanced economies; in fact, roughly two-thirds of African migration is within
Africa, and about 80 percent of Latin American migration is intra-regional.
The challenge is how the home country can mobilize the enhanced
resources that diaspora populations hold. For this mobilization to materialize,
besides the willingness of diaspora members to contribute, the home country
needs to appreciate this potential and mobilize to set up organizations and
strategies to attract the resources generated by these relocated nationals. This
requires, above other things, political will.
We can distinguish the following resources, capabilities, and assets associ-
ated with the diaspora populations: (a) as sources of income, (b) as savers,
(c) as investors and entrepreneurs, (d) as facilitators of trade, (e) as sources of
talent, skills, human capital, and knowledge.

4.  There is an overlap between the internationalization of elites and diaspora formation,
although of course not all members of diasporas are part of the economic elite and the knowl-
edge elite of the home countries.
 Migrant Diasporas, Development, and National Identity 145

The very fact that migrants move from lower-income countries to

higher-income countries, particularly in the case of migration to advanced
economies, suggests there’s an income gain for the migrants, in particular
when the host country offers higher wages, greater productivity, better orga-
nizational capacities, and more advanced technologies. Migrants tend to send
between 10 to 20 percent of the income they generate back home as remit-
tances (Solimano 2010). Migrants also have a capacity to generate savings,
and over time, this accumulated savings can translate into higher wealth for
these diaspora members.5 Estimates of diaspora savings come close to $400
billion (see table  8.1). For low-income countries (nations with a GDP per
capita below $1,000 and with other indicators of severe underdevelopment),
the savings potential is as high as 9 percent of GDP, compared to 2.3 percent
of GDP for middle-income countries.

Table 8.1  Diaspora Savings for Developing Regions: 

Preliminary Estimates

Diaspora Diaspora Diaspora

Stock Savings Savings as %
(millions) Estimate, of Regional
2009 ($ GDP
billions)

Developing countries 161.5 397.5 2.4

East Asia & Pacific 21.7 83.9 1.3
Europe & Central Asia 43.0 72.9 2.8
Latin America & 30.2 116.0 2.9
Caribbean
Middle East 9.3 18.9 3.5
North Africa 8.7 22.3 4.3
Sub-Saharan Africa 21.8 30.4 3.2
South Asia 26.7 53.2 3.3
Low-income countries 27.7 34.4 9.0
Middle-income countries 133.8 363.1 1.3
Source: World Bank’s Migration and Remittances Factbook 2011.

5.  In addition to the savings transferred by the diaspora, households that receive remittances
in the home country can generate extra savings. An econometric study (Adams 2005)  for
Guatemala detected statistically lower marginal propensities to spend—thus higher marginal
propensities to save—for families that do receive remittances from international migrants.
14 6 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

Of course, it is important to note that this is just potential savings, from

the viewpoint of those home nations. The home nations need to be able to
attract those savings and find an outlet, or vehicle, for them to be invested
in. This savings can be channeled as either portfolio investments and/or as
Diaspora Direct Investment (DDI).6 The point has been made that the cost of
capital in mobilizing diaspora savings through portfolio investment and DDI
can be lower than the cost of capital raised in international capital markets,
irrespective of national origin of market participants. The diaspora members
have, generally, superior knowledge of national risk and economic conditions
in their home countries, and this would explain the expected differential in
the cost of capital. Individual countries that have issued diaspora bonds7 for
a long time, such as Israel, have paid a lower interest rate than that demanded
by foreign investors. However, it is estimated that issuance of diaspora bonds
in some regions, such as Sub-Saharan countries, could face nontrivial costs of
marketing and retailing that might offset the lower interest rate paid to those
bond holders. Moreover, estimates of the potential fund mobilization for these
bonds are to raise between $5 and $10 billion annually, not a small amount.8
Entrepreneurial diaspora members have played an important role in
building knowledge-based industries in India, China, Taiwan, Israel, and
Ireland in the last two decades or so. The cycle of entrepreneurial transfer
has been roughly the following: the home country sends graduate students to
developed countries, chiefly the United States and some European countries,
to obtain degrees in fields such as engineering, information technology, and
mathematics. Some of these students after graduation are hired in executive
and technical positions in corporations in the host country; those companies,
in turn, buy software and parts from companies located overseas, generally in
the home country of the foreign-hired staff. This pattern helped develop the
technological industries in India, Taiwan, and Israel, for example.
Some of those executives eventually leave their companies in the host coun-
try and undertake start-ups, especially setting up new businesses in technology
sectors. Once the businesses are in operation and are taking advantage of local

6.  Portfolio investment comprises financial instruments such as deposits, bonds, and mutual
funds. The point is how to induce diaspora members to choose financial instruments issued by
financial institutions in the home country. Another possibility, not mutually exclusive, is for
diaspora members to engage in direct investment in the home economy. This may take various
forms, such as a capital contribution to family business, acquisition of shares in publicly traded
firms, and other forms of DDI (Terrazas 2010; Newland and Tanaka 2010).
7.  A diaspora bond is a retail savings instrument marketed only to members of a diaspora.
8.  Ratha et al. (2009).
 Migrant Diasporas, Development, and National Identity 147

contacts at home, they outsource the acquisition of parts, hardware, and soft-
ware to their home countries (Saxenian 2006a). A lesson from these experiences
is that technological entrepreneurs overseas not only play an important role in
helping develop technological firms in the home countries but can serve as a
link for obtaining market knowledge, connections, and technological transfer.
In the least developed countries, this process may perhaps hold less promise in
the short run, however, since they have a more limited base of human capital
and venture capital to develop those technological industries at home.
Entrepreneurial diasporas operating in light manufacturing sectors can
help develop similar industries at home through the contacts, know-how, and
other valuable inputs and capabilities that they develop in their host coun-
tries. They also can contribute to upgrading the managerial and innovating
capabilities of industries in their home countries.9
As mentioned in the previous chapter, globalization has significantly
increased the internationalization of the “knowledge elite.” This is a relatively
small group of internationally educated people who are able to contribute,
significantly, to new technological development, business creation, provision
of social services, and other forms of human creativity. They provide, thus, a
significant economic payoff, although these “high-value migrants” are mostly
concentrated in the advanced capitalist economies. The new global markets
for talent tend to concentrate the demand for talented individuals in the
advanced economies while an increasing part of the supply of that new talent
comes from China, India, Russia, Poland, the Philippines, Caribbean nations,
Sub-Saharan Africa, and smaller states.
Recent research on the international mobility of talent identifies at least
four main motivations that chiefly drive these flows (Solimano 2008, 2010b):

(i) Pay differentials and developmental gaps among nations.

(ii) Complementarities between talent, capital, and technology.
(iii) Distorted rewards for talent in home country.
(iv) Selective immigration policies for attracting foreign talent in
high-income destination nations.

The allure for migrating takes different forms:  better salaries and more
challenging working conditions in the foreign country; more secure property

9.  Diaspora members can also contribute to facilitate trade between source and host nations.
A  positive empirical correlation has been found between the degree of international trade
between source and destination countries and the size of the migrant community in both
nations. The dominance of language, culture, and knowledge of customer and supplier markets
14 8 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

rights for entrepreneurs; more resources and possibilities for merit-based careers
for scientists and scholars in universities; and larger markets for the arts.
Some literature (Kuznetsov and Sabel 2008) has underscored the role of open
migration chains and diaspora networks (expatriate networks) in transmitting
information across opportunities and types of skills required in the home and host
countries, and in advancing the collective interests of diaspora populations. The
creation of a venture capital industry in Taiwan and other diaspora-led initiatives
(in Israel and other countries) to promote productive development in the home
country are practical examples of diaspora-induced productive development.
In the era of neoliberal capitalism, there is ongoing competition for talented
professionals and capital among the advanced capitalist countries. In addition,
the global south often lags in the design and implementation of policies to retain
their home-based talent. Rich countries such as Canada, the United Kingdom,
the United States, Australia, Singapore, and the European Union have developed
a variety of visas, including those for investors, skilled workers, students, H-B1 visa
(visas for professionals, often of three year-duration, renewable), and “outstanding
abilities.” The blue card initiative attracts qualified personnel and students from
abroad who can contribute to the productive development, academic research and
teaching, development of science, and improvement of health and social sectors.
Countries such as Scotland and New Zealand have developed “family pack-
ages” for talent attraction. These packages often comprise salary, visa, housing,
and education for children, offered to “high-value migrants.” This attraction often
contrasts with the low budgets and uncompetitive wage scales offered in minis-
tries, public agencies, and public universities in developing countries, thus trig-
gering the exodus of talent in an increasingly competitive global labor markets.

8.2.1  Remittances from International Migrants

The most important financial resource that diaspora populations and migrants
send back to their home countries is their remittances. This is a private trans-
action between sender and recipient, therefore the home governments can
influence this process only indirectly. Remittances provide extra resources
(foreign exchange) to complement the income for poor and middle-class
families in the home countries.10 The motives for sending these remittances

are all factors that help to develop trade relations among nations, and the diaspora communi-
ties can be specially positioned to perform that role.
10.  Poverty induces emigration, although the very poor do not emigrate since they cannot afford
the costs involved (transportation, search costs, and so on). A cross-sectional study of a sample of
74 middle-income developing countries (Adams and Page 2005) shows that both international
 Migrant Diasporas, Development, and National Identity 149

are a mix of philanthropy, selfishness, family solidarity, and financial diversifi-

cation of a family’s portfolio (Solimano 2010b).11
The remittances have several macroeconomic and microeconomic effects.
In general, they increase total savings and international reserves and they
support consumption, education, health, and housing expenditures.12,13 The
remittances can also help people to pull themselves out of poverty, albeit they
also tend to create a culture of dependency. In fact, not all effects of remit-
tances are an unqualified benefit. As shown below, large inflows of remittances

migration (measured as the proportion of a country’s population living abroad) and the level of
international remittances (as a proportion of GDP) have a statistically significant effect on pov-
erty reduction. On average, a 10 percent increase in the proportion of remittances of GDP leads
to a 3.5 percent reduction in the proportion of people living below the poverty line.
Econometric evidence suggests that remittances have reduced poverty in Africa as well. A 10 per-
cent increase in official international remittances as a share of GDP led to a 2.9 percent decline
in the share of people living in poverty, shown in a sample of 33 African countries for 1990–2005
(Anyanwu and Erhijakpor 2010). The evidence on the effects of remittances on inequality is
complex to interpret, for the same reasons that it is difficult to make causality inferences of
the impact of remittances on growth and poverty. Double causality effects are serious and the
channels of transmission complex to empirically gauge. Households that receive remittances in
Africa may have been richer or upper middle class to begin with (allowing a family member to
finance migration in the first place); they may also have higher incomes because of migration
and the receipt of remittances. Recent household surveys find that more than half of households
in Burkina Faso, Ghana, and Nigeria, and 30 percent of households in Senegal, receiving remit-
tances from outside Africa are in the top two consumption quintiles (World Bank 2011b).
11.  The average monthly amount sent as remittances from the United States by Latino immi-
grants fluctuates between $250 and $350; and when we consider that in several Latin American
countries the minimum wage is about $ 350, then remittances are bound to be an important addi-
tional source of income for low- to middle-income families. The average annual remittance sent
by an African emigrant household is $1,263 ($1,446 for males compared with $878 for females).
12.  A remittance study for five Latin American countries (Guatemala, Honduras, El Salvador,
Mexico, and Ecuador) found that about 72 percent of remittances, on average, are used to pay
for food, public services, rent, or mortgage payments. The “savings” category of these surveys/
studies represents an average of 7 percent of total remittance spending; education represents
6 percent; and acquisition of housing 1.8 percent. The evidence shows that poor families in
Latin American countries who receive remittance income are able to avoid taking their chil-
dren out of school, which is tantamount to increasing investment in human capital. Families
who receive foreign remittances have a higher educational level, have fewer children, and tend
to live in urban areas than families who do not receive foreign remittances (Solimano 2010).
13.  A household survey conducted by the Africa Migration Project of the World Bank found that
a significant portion of international remittances are spent on land purchases, building a house,
business, improving a farm, agricultural equipment, and other investments (as a share of total
remittances, investment in these items represented 36.4 percent in Burkina Faso, 55.3 percent in
Kenya, 57.0 percent in Nigeria, 15.5 percent in Senegal, and 20.2 percent in Uganda). The study
also makes the point that remittances serve as insurance against adverse shocks. The evidence on
the impact of remittances on health outcomes in Africa is meager. Among households in Ghana
that receive remittances from outside and within Africa, households headed by women spend
more on health care than households headed by men. Another finding is that remittance-receiving
150 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

can lead to an appreciation in the real exchange rate, harming the profitability
of nontraditional exports and tending to dampen the work effort, personal
initiative, and self-reliance of those at home.14
Macroeconomically, the remittances tend to be more stable than other
sources of foreign exchange, such as portfolio investments and foreign direct
investment; in fact, the empirical evidence for the period 1990–2008 shows
more volatility (a higher coefficient of variation) in portfolio investment and
foreign direct investment than in remittances and foreign aid flows (World Bank
2011b, chap. 2); in addition, remittances tend to be countercyclical, increasing in
periods of downturns or recession in the recipient country and pro-cyclical in
the sending country.
Remittances also provide a steady source of foreign exchange that improves
the sovereign creditworthiness of the recipient nations and increases their debt
sustainability. Proper empirical calculations of export-to-debt ratios should be
augmented to include remittances along with exports.
The effect of remittances on the rate of economic growth in the recipi-
ent countries can be positive, although empirical studies are not conclusive
on this matter. The remittances increase consumption and investment (gen-
erating a positive aggregate demand effect) and affect aggregate supply in
the medium run, owing to their effect on the physical and human capital
of the recipients of those remittances. Nevertheless, assessing these different
channels is methodologically complex and fraught with causality, specifica-
tion, and measurement issues. Some empirical studies find a positive effect of
remittances on growth, while others show a negative effect (or no effect).15

households spend a larger budget share on health and that remittances enable poorer households
to access better-quality medical care in South Africa (World Bank 2011b).
14.  The type of investment financed with remittances is generally medium or small in size (no
electrical power plant or a highway will be financed directly from remittances). It is estimated
that about 20 percent of the capital invested in 6,000 microenterprises in urban Mexico was
financed by remittances (Woodruff and Zenteno 2001). The so-called collective remittances—
those sent by immigrant associations in advanced countries—are generally used to finance
urban and social infrastructure, such as neighborhood improvement and the construction and
equipping of schools and hospitals.
15.  Solimano (2010) presents the results of a study on the effect of remittances (as a propor-
tion of GDP) on the rate of growth of GDP per capita for Ecuador and Colombia, finding
that international remittances have a positive impact on the economic growth rate of both
countries. In contrast, a study (Chami et al. 2003) suggests that remittances constitute a private
transfer of funds for confronting adverse economic situations in the immigrant’s country of
origin, and are thus counter-cyclical, thereby exhibiting a negative correlation with the GDP
per capita growth rate of remittance-recipient countries. Recent cross-section studies incorpo-
rating a remittances variable in growth equations found either mixed effects or failed to find a
statistically significant effect of this variable (Barajas et al. 2009; Catrinescu et al. 2009).
 Migrant Diasporas, Development, and National Identity 151

Figure 8.1 presents the top ten remittance-recipient countries both in absolute

terms (in U.S. dollars) and as a share of GDP. The two groups differ markedly.
The first group is represented by large and medium-size economies, such as those
of India with $64 billion, followed by China with $62, Mexico with $24 bil-
lion, and the Philippines with $23 billion (2011). In contrast, small countries and
low-income nations dominate the top ten recipient countries measured as share
of GDP. Thus, in Lesotho, remittances represented 29 percent of GDP, in Samoa
23 percent, and in Nepal 20 percent (2010). For the group of least developing
countries (as per UN definition), official remittances reached $27 billion in 2011
and the forecast for 2012 is $ 29 billion. Remittances sent to the Sub-Saharan
countries reached $23 billion and are expected to increase to $24 billion in 2012.
A few oligopolistic companies that charge significant fees for remittances
dominate the market for money transfers to developing countries. The average
cost (as a percentage of sending $200) of sending remittances to Sub-Saharan
African countries is the highest in the developing world:  23.1  percent,
compared to 14.5 percent for sending $200 to the Latin American and the
Caribbean countries and 13.1 percent to send to South Asia (see ­figure 8.2).
Moreover, remittance markets in Africa are fragmented and relatively under-
developed in terms of their financial infrastructure and they lack effective
regulation. Informal channels dominate the delivery of remittances, and a

Top 10 recipients of migrant Top 10 recipients of migrant

remittances remittances as a share of GDP

(US$ billion, 2011) (% of GDP, 2010)

64 62 31
29

23 23
21 20
20 20
17
16

24 23

14
12 12 11
9 8
Ky Sam oa
Ch a

r
Le an
a

Ba ki t

To al
Vi ria
la n

Le nga

al o
yz a
ili ico

E s

Le am

E os n
N .
ol o

do
N h
Pa yp
di

p
e
in

l S ov
ng sta

rg o
no

M oth

no
v
s
in

ep
Re
ist
de
In

Ph Mex

ige

va
do
etn
pp

ba

ba
s
jik

K
Ta

Figure 8.1  Top recipients of remittances among developing countries

Source: World Bank (2011c).
15 2 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

Average cost of sending remittances to developing regions

24 23.1

20
17.9
17.0
Percent of $200 sent

16 15.1 14.5
13.1
12

0
Sub-Saharan Middle East and East Asia Europe and Latin America South Asia
Africa North Africa and Pacific Central Asia and the Caribbean

Figure 8.2  Cost of sending remittances to developing countries

Source: World Bank (2011b).

large share of the remittances from outside Africa are controlled by a few large
international money-transfer agencies, often working in exclusive partnership
with African banks and post offices, in an environment of reduced competi-
tion because of exclusivity agreements. However, costs may still decline with
the adoption of innovative money-transfer technologies.16

8.2.2  International Practices with Diaspora

Engagement
The potential of diaspora populations for supporting the development pro-
cesses in the source countries is apparent. However, spontaneous and atomis-
tic formation of effective diaspora organizations may not always materialize,
and so help from the home country governments is needed. There are two
very interesting cases of attempts, involving Ireland and Scotland, that were
promoted at the highest political level as attempts to mobilize large diaspora
populations to support national development.
The size of the Irish diaspora can be very large, depending on the definition
used.17 In fact, Scotland and Ireland in the 2000s (prior to the crisis of 2008, which

16.  However, this effect tends to be limited mostly to intra-regional and domestic transfers
due to concerns about money laundering and terrorist financing.
17.  The population of the Irish Republic was 4.4 million in 2009 and over 70 million people
worldwide claim Irish descent; 3.2 million Irish are citizens (passport holders) and 800,000
Irish-born citizens live overseas (Ancien et al. 2009). Millions in the world also claim Scottish
descent and near 900 thousand people born in Scotland live abroad (including the U.K.).
 Migrant Diasporas, Development, and National Identity 153

hit Ireland hard) acknowledged the potential of their diasporas and were aware of
the attractiveness of home country conditions. They started a process of developing
national diaspora strategies, led by the first minister (Scotland) and the president
(Ireland). The two strategies were broadly similar but not exactly the same. Ireland
follows a sort of “light touch” strategy that is network-based, rather than a “heavy”
top-down (and bureaucratic) one. Scotland follows a more state-active strategy,
falling short of adopting a dirigiste approach of weighty state-led intervention.
The Irish strategy is multi-dimensional, built around economic, social, cul-
tural, and affinity networks. Business and economic considerations are certainly
important, but they are not the overriding concern.18 The Scottish strategy
has stressed the mobilization of Scottish business and high-skilled profession-
als abroad, along with the wider diaspora. In addition, attention has been paid
to reaching citizens of other nationalities with an affinity and appreciation of
the country (the so-called affinity networks). An officially sponsored network
called Global Scot handles the business and high-skilled community, both in the
U.K. and overseas. This effort has been complemented by a community network
of overseas Scots, called Global Friends of Scotland. The group has been helped
by other actions and initiatives, such as the Fresh Talent Initiative and Talent
Scotland and the Scottish Centre for Diaspora Studies at Edinburg University.19
In both countries, the diaspora strategies have included a broad range
of activities, from consular services (passports, visas, legal advice), welfare
support for disadvantageous citizens living abroad, nurturing of cultural
identity with the homeland, the encouragement of philanthropy,20 and sup-
port by the business and professional communities abroad, with develop-
ment of political contacts. These agencies and networks work closely with
embassies and consular networks managed by their respective ministries
of foreign affairs and trade. An effort to engage the business community
and professionals is often supported by government agencies of productive

18.  The main Irish networks and initiatives are the Irish Abroad Unit, established in 2004; and
depending on the Department of Foreign Affairs, it has a mandate to coordinate the Emigrant
Support Program, oriented toward centralizing previous support programs to the diaspora,
such as the Emigrant Advice Network, Enterprise Ireland, Culture Ireland, Emigrants News
Online, and Ireland Funds. Most of these efforts were directed initially to the Irish communi-
ties residing in the United Kingdom and the United States, but later were extended to reach
Irish communities in Australia, Canada, Argentina, South Africa, Zimbabwe, the Netherlands,
France, and, most recently, China.
19.  See Ancien et al. (2009).
20.  The Ireland Funds, International Fund for Ireland, and Atlantic Philanthropies are exam-
ples of philanthropy-oriented funds that over the past thirty years have raised more than €2
billion to be spent on projects in Ireland (Ancien et al. 2009).
154 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

and international development. The Scottish Development International

and Scottish Enterprise and the Irish Development Agency and Enterprise
Ireland are the main agencies in both countries. Interestingly, in neither
Scotland nor Ireland there is only a single agency or ministry that coordi-
nates diaspora policy.
It is important to note that a successful diaspora strategy promoted by
the home country should not be an isolated initiative. Explicit articulation
between diaspora policy, national development, and external integration is
needed. As mentioned, Scotland, Ireland, and Israel have probably carried out
this articulation to different degrees.
High-income nations such Norway, Finland, Sweden, France (Assemblée
des Français de l’étranger), and Switzerland (Organization des Suisse de
l’étranger) have recently established expatriate parliaments. Italy also has
a parliamentary representation system for nationals residing abroad. New
Zealand and Australia have been active in trying to build broad global net-
works of talented and professional diaspora members living overseas. They are
more broadly conceived than simple business networks.
New Zealand’s global network, KEA, has 25,000 subscribers in over 174
countries and fourteen international chapters in eight countries. It works
to connect the estimated 750,000 New Zealanders people living overseas
with their home country and specifically looks for talented diaspora New
Zealanders willing to share knowledge, contacts, and opportunities. The
Advance Initiative of Australia has headquarters in New York City, with over
12,000 members in sixty-three countries and chapters in fourteen countries.
These efforts are aimed at engaging Australians living overseas to use their
expertise, contacts, and positions of influence to help the development of
Australia.21

8.2.3  Diaspora Initiatives in Developing Countries

Diaspora strategies and policies vary across nations. In most cases, there is no
grand design and policies are a mix of initiatives. For example, pilot programs
for joint programs involving diaspora members and national entrepreneurs
have been used in Chile under the auspices of Chile-Global. Argentina has
focused on attracting its scientific community living abroad. Korea and India
have built their knowledge-based sectors using expatriates.

21.  Concrete activities of the Advance Initiative are to foster the creation of industry-specific
networks, establishing partners with tourist agencies in promoting tourism to Australia, and
facilitating return migration.
 Migrant Diasporas, Development, and National Identity 155

Several countries have created governmental institutions (a government

minister or full department) that coordinate the diaspora strategy around
issues such as the legal status and voting rights of the diaspora members,
their welfare and labor rights in their new locations, remittances and phi-
lanthropy, cultural and social links, and development of business relation-
ships. This more centralized model of a diaspora strategy is present in India
(Ministry of Overseas Indian Affairs), Armenia (Ministry of Diaspora),
and Jamaica (Diaspora and Consular Affairs Department in the Ministry of
Foreign Affairs and Foreign Trade), and Lithuania (Department of National
Minorities and Lithuanians Living Abroad).
In other countries, engagement with the diaspora is carried out by various
agencies and the non-for-profit sector. This is the case for Chile’s DICOEX
(Direction of Chilean Communities Abroad), a state agency set up in 2000.22
The business network called Chile-Global stands out as an active group
aimed at attracting successful Chilean entrepreneurs in advanced economies.
A new program, Start-Up Chile, is oriented toward nationals of any country
in the world; this was recently established by the industrial promotion agency
CORFO to attract foreign technological and innovative entrepreneurs to do
business with Chile and create new ventures there. This is an interesting pro-
gram that provides grants of $40,000 to prospective foreign entrepreneurs.
In addition, the inflow of foreign entrepreneurs is facilitated by a system of
(one-year) working visas granted in one week’s time.
In the case of Chile, diaspora-oriented strategies are mostly focused on its
business community abroad. In contrast, unlike other South American coun-
tries, Chileans residing abroad cannot vote in elections in their home country, a
residual restriction from the Pinochet period when scores of Chilean nationals
went into exile in the 1970s and 1980s. In the 2000s, Colombia and Argentina
started initiatives to serve their scientific community abroad, with mixed results.
In the former socialist countries, budget cuts in the university system
in the early stages of the transition to capitalism prompted the emigra-
tion of scientists and scholars. Some initiatives of the 1990s, such as the
New School of Economics in Moscow, the Central European University in
Budapest, and CERGE-EI (Center for Economic Research and Graduate
Education-Economic Institute) in Prague attempted, somewhat, to coun-
teract this trend by training economists in western-style economics. These

22.  DICOEX has been complemented by the Inter-ministry Committee for the Chilean
Community Abroad and ProChile (export promotion) and ChileGlobal; BIONEXA;
PymeGlobal; ChileTodos; EuroChile.
156 Elit es, Di aspor a Migr at ion an d So ci al Movemen ts

initiatives were led by philanthropists and private funders as a way of attract-

ing new talent to Russia, Hungary, and the Czech Republic and to train locals
in Western economics and Western business practices.
Some developing countries have established formal channels for coun-
seling their diaspora on a variety of issues. For example, Jamaica formed the
Jamaican Diaspora Advisory Board and India created the Prime Minister’s
Global Advisory Council of Overseas Indians. Another high-skill, entrepre-
neurial network is the Mexican Talent Network and the TiE entrepreneurial
network in India.23
A variety of diaspora initiatives have been developed in Africa in recent
years, showing that African middle-income countries and Sub-Saharan
African LDCs also participate in this global trend. Examples there include
the Council of Moroccan Community Abroad in Morocco, the Ethiopian
Expatriate affairs of the Ministry of Foreign Affairs, the Diaspora coordi-
nating Office in the Ministry of Capacity Building, the National Diaspora
Council of Kenya, the Senegalese Diaspora Foundation, and the Diaspora
Desk in the president’s office in Zambia.24

8.3  Concluding Remarks

Diaspora populations, given their attachment to their home nations and their
sense of national identity, provide a countervailing force to the rootless nature
of corporate-led globalization. Expatriates can make an important contribu-
tion to the productive capacities and national development of their home
countries through several channels:  remittances, trade, investment, talent
mobilization, skills and knowledge transfers, financial investment, and mech-
anisms to provide political support for particular initiatives. These productive
attributes can help to upgrade local industries and enhance the knowledge
intensity and value-added content of production.
The actual contribution of diaspora populations to development will
depend also on the existing degree of development in the home nations.

23.  Kuznetsov (2011) makes a distinction between “sophisticated” and “emerging” diaspora
facing a variety of country conditions in which countries such as China, South Korea, Taiwan,
Ireland, and Scotland belong to a first group of sophisticated diaspora/ favorable country con-
ditions, while Chile, Hungary, Slovenia, Croatia, Malaysia, and Thailand belonging to a second
group of emerging diaspora/favorable country conditions. LDCs efforts to attract diasporas
(see below) can be classified as “emerging diasporas.” National country conditions, in turn,
may vary across countries, although today we can say that the chances of having some diaspora
policy is greater than in the past.
24.  See World Bank (2011b), annex chap. 4.
 Migrant Diasporas, Development, and National Identity 157

Contributions will initially be more difficult in the less developed countries,

since these economies face structural underdevelopment conditions as they
are located low on the development ladder; nevertheless, as they start to
attract productive inflows of capital, knowledge, organizational techniques,
and talent, they can work their way up that ladder. Lack of an adequate finan-
cial infrastructure and the high cost of sending remittances to low-income
countries reduce the possibility that these remittances can be applied to the
recipient families’ expenditures and investments.
It is important to recognize the noncommercial motivations of dias-
pora populations. As stressed in this chapter, an important “capital” is their
national identity and attachment to their homeland. These patriotic senti-
ments can also be important when the goal is not strictly attracting capital
inflows and foreign direct investment. The instillation, over time, of feelings
of attachment to the homeland in the children of the diaspora members is
also important. This highlights the role of education, within and outside the
family, in this process of maintaining ties with the home nation.
 PA RT F O U R

Economic Democracy and the

99 Percent
 9

Can Capitalism Afford Economic

Democracy?

As has been shown in this book, twenty-first-century neoliberal capital-

ism has led to an increase in income and wealth concentration among the very
rich. This growing distance between the top economic elites and the rest of
the population is an importance cause for mobilization by social movements.
Inequality and economic polarization raise the importance of promoting eco-
nomic democracy.
The movement for economic democracy is intended to give greater
voice and more participation to people in their roles as consumers, workers,
asset holders, and citizens in the economic decisions that affect them. This
should not, per se, contradict anyone’s concerns for economic efficiency
and productivity. Quite on the contrary, more participation in the business
decision-making process may boost efficiency and productivity, as employees
feel more identified with the productive processes in which they are engaged.
In an age in which setting the economic rules is a task usually confined to the
technocratic and political elites, this is a relevant topic.
The irruption of the knowledge economy and the information technol-
ogy revolution are rapidly changing the ways we organize production, thereby
opening up new possibilities for less hierarchical and participatory schemes
at the enterprise level (although technology per se will never overcome the
power of the elites and capital owners).
The literature on economic democracy makes the relevant point that polit-
ical democracy and economic democracy are two sides of the same democratic
coin. Genuine political democracy will hardly flourish in a society in which
economic power and the ownership of productive assets are concentrated
in small, rich minorities who have the means to also influence the political
162 Econo mic Demo cr ac y an d t he 99 Percen t

process. Chapter 2 touched on this topic; such influence serves to preserve

the elites’ position in society.
The research on economic democracy follows several strands, including views
of monopoly capitalism as a system prone to concentrating economic power in
economic elites and a capitalist class that denies participation to the majority;
theories based on moral rights and democratic concepts; and managerial per-
spectives that see more employee participation as an incentive for greater produc-
tivity and more committed workers. Another strand considers the contrarians,
or at least the skeptics, who question the possibility of economic democracy.
A broad agenda for economic democracy includes at least the following
elements:

(a) Enhanced employee participation in the workplace concerning issues of

wages, benefits and working conditions, profit sharing and stock option
plans. Concerns of salaries and benefits should not preclude broader
demands for more democratic organization of production.
(b) Equal access to education, health services, housing, credit and other
banking services, and other social services.
(c) Equal access to the productive capital in the economy, including worker-
owned and worker-managed companies, communal property, non-for-
profit organizations, and cooperatives.
(d) Public ownership of natural resources and socially conscious distribution
of earnings thereof.
(e) Universally guaranteed economic, social, and political rights.

9.1  The Origins of Economic Democracy

The movement for economic democracy was initiated by labor unions and social
organizations as a response to a capitalist system based on private property, wage
labor, and a division of labor that often left little room for workers to have any
voice in the running of a company. The dire human and social consequences of
the factory system, affecting worker health and welfare, caused alienation in the
workplace and led to a quest for labor rights and worker benefits. Over time,
and in various countries, the idea of achieving greater economic democracy
inspired the creation of cooperatives, self-managed firms, workers councils, and
various forms of community property—all as alternatives to both the capitalist
idea and any type of central planning. Examples of these movements toward
economic democracy include the kibbutz movement in Israel, the cooperatives
in Emilia-Romagna and other regions of Italy, the Yugoslav experiment with
 Can Capitalism Afford Economic Democracy? 163

self-managed worker firms under Tito in the 1960s and 1970s, the Scandinavian
experience with labor union presence on the boards of directors of corporations,
and the credit union and cooperative system in the United States.
There were also several examples of self-managed workers councils—delibera-
tive assemblies where workers had actual control of the workplace. These were
present early on in Soviet Russia, before the bureaucratization of the economy
under Stalin. They also appeared as the embryos of worker-run factories in Spain
at the time of the revolution and civil war in the 1930s (vividly described by
George Orwell in Homage to Cataluña). Other examples of worker participation
include post-World War II experiments in northern Italy, the Hungarian revolu-
tion of 1956, France’s takeover of factories by workers in 1968, and the unions and
worker involvement in the running the nationalized factories in Chile in 1970–73
(supported by the network of coordination and protection of nationalized fac-
tories, known as the cordones industriales) during Salvador Allende’s presidency.
These are all concrete examples of attempts at economic democracy, with
different degrees of success and failure, given the historical and political cir-
cumstances under which they developed. These incipient experiments at the
factory level ended, however, when the political conditions that enabled them
disappeared, either by changeover to a nonparticipatory state bureaucracy (as
in the Soviet Union) or as a result of violent restitution of factories to the
previous owners (as in Spain after General Franco’s victory and as in Chile
after the military coup that toppled President Allende in September 1973).
Obviously, restituted owners eliminated any signs of worker democracy and
the conservative military regimes repressed any active labor movement that
challenged the capitalist rules of the game.

9.1.1  Economic Democracy in the Twenty-First

Century
There are several current examples of alternatives forms for organizing pro-
duction and banking along the lines of economic democracy. The Mondragon
Corporation in Spain’s Basque country is a case at hand. This is a large coop-
erative enterprise (or conglomerate) owned and run by its workers (85 percent
of its workforce are members of the cooperative). Worker representatives have
set a maximum ratio of 9 to 1 of salaries for top managers in relation to those
lesser paid, with an average of 5 to 1 across the cooperative member units. This
is, of course, very different from the ratios in the big capitalist corporations
in the United States and the United Kingdom, where the ratio of CEO com-
pensation (including realization of earnings from stock options and bonuses)
164 Econo mic Demo cr ac y an d t he 99 Percen t

to an average worker’s salary can climb to 200 or more to 1 (see ­chapter 2).

Mondragon had, in 2009, over 85,000 employees around the world, with
seventy-five productive plants and nine corporate offices. Mondragon is
extended over various sectors of the economy, such as manufacturing, finance,
services, and the knowledge sector. Its total revenues reached close to 15 billion
euros in 2009 (OECD 2011). In 1997, Mondragon University was established,
offering programs in engineering, business, education, and the humanities.
The international cooperatives movement is also important (see box 9.1).
According to the International Cooperative Alliance (ICA), in cooperation with
the United Nations, around 1 billion people worldwide are members of a coop-
erative. Cooperatives provide close to 100 million jobs, 20 percent more than
do the multinational corporations worldwide. In India and China combined,
more than 400  million people are part of cooperatives. In Germany and the
United States, one in four people are cooperative members, while in Singapore,
50 percent of the population (1.6 million people) are cooperative members. In
Vietnam, cooperatives contribute to generate 8.6 percent of the GDP.1

Box 9.1
What Is a Cooperative?
The first modern cooperative was founded in Rodchale, England, in 1844.
Cooperatives are voluntary organizations, open to members who use their
services and are willing to accept the responsibilities, duties, and rights of
membership. They are democratic organizations in which members actively
participate in setting policies and making decisions on the operation of the
cooperative; in addition, they contribute equally to the cooperative’s capital.
Members are benefited in proportion to the business they conduct rather than
on the capital invested. Cooperatives are independent, autonomous organiza-
tions controlled and managed by their members.
There are consumer, producer, worker, purchasing/shared services, and hybrid
cooperatives. Examples of consumer cooperatives are credit unions, food coopera-
tives, health care-co-ops, and housing cooperatives. Producer cooperatives are more
common in agriculture, concerning farm commodities, or craft groups, where arti-
sans band together to process and/or market their products. Worker-owned coop-
eratives are owned and democratically governed by their employees and can be in a
variety of sectors (services, manufacturing, health care, child care).

1.  See United Nations International Year of the Cooperatives (2012).

 Can Capitalism Afford Economic Democracy? 165

In the United States, there are close to 30,000 cooperatives, approximately

4,500 not-for-profit community development corporations, more than
11,000 businesses owned in part or totality by their employees, and another
130 million Americans who are members of various rural, urban, and credit
union cooperatives (Alperovitz 2011).

9.2  Analytical Aspects of the Concept of Economic

Democracy
The concept of economic democracy recognizes that individuals simultane-
ously play several roles in society: they are citizens with political rights and
obligations; consumers in the marketplace; owners, managers, or workers in fac-
tories; and asset owners (housing, financial assets, and human capital).2 People
also develop webs of social relations with friends and acquaintances and par-
ticipate in social movements, community organizations, political parties, and
cultural and non-for-profit entities. The reality, however, is that in some of
these areas people have a much greater voice in making economic decisions.
In a political democracy, people elect governments and legislators and can
be elected for public office. In the economic realm, the capacity to choose
depends largely on the specific role a person plays, whether as consumer,
worker, manager, or capital owner, in addition to his or her income level. As a
consumer, a person can exert the power of economic choice, proportional to
one’s wealth or income, through the “exit option” (buy another good, walk out
of the store), as expressed by Albert Hirschman in his famous book Exit, Voice
and Loyalty (1970).3 American political scientist Robert Dahl (1985) among
others, noted an important empirical asymmetry between what is maintained
as legitimate for the individual as a citizen of the state and what is considered
admissible in the economy. In fact, while people are assumed to maintain their
political rights and have a voice in a democracy to elect representatives, those
rights largely disappear in the workplace. In the North American context, the
question arises: “Why do Americans, long supportive of political democracy,
have so little industrial democracy or worker self-management?”
Dahl addresses Tocqueville’s analysis of the relationships between politi-
cal equality, political liberty, and economic liberty. In particular, by support-
ing liberty, Tocqueville warns that the majority rule can bring despotism (the

2.  Dahl (1985) elaborates on the links between conditions of political democracy and eco-
nomic democracy.
3.  Hirschman (1970).
166 Econo mic Demo cr ac y an d t he 99 Percen t

tyranny of majority). Dahl, more interested in equality, argues that economic

minority rule by those who own the capital and economic resources consti-
tutes a bigger danger. In order to achieve political equality, that is, it is nec-
essary to first achieve economic equality. For Dahl, this means workplace
democracy based on the notion of a moral right to participate in the firm’s
decisions.4 This concept rests on the idea that employees in the economy are
“the moral equivalent” of citizens in a democracy. If democracy is justified
in governing the state, then it must also be justified in governing economic
enterprises.5 Moreover, Dahl (1985, 115)  goes one step further by arguing
that “citizenship in a democratic state is in one respect more voluntary than
employment in a firm,” as within a democratic country, citizens may leave
one municipality and retain or quickly acquire full rights of citizenship in
another. Yet even though the decisions of firms, like the decisions of a state,
can be enforced by severe sanctions (firing), unlike a citizen of a democratic
state, one who leaves a firm has no (automatic) right to “citizenship” (that is
employment) in another.6
In terms of a model of economic organization, Dahl (1985) proposes
“self-governing enterprises,” different from both corporate capitalism and
bureaucratic socialism, which would be more likely to provide such equal-
ity while at the same time sustaining efficiency. The model he refers to
consists of

4.  Methodologically, Dahl shifts the debate on workplace democracy from the question of
its consequences, in terms of firm’s productivity or efficiency, to the question of distributive
justice. He adopts a first principle approach (the prominence of rights). This is indeed an
approach mainly drawn from political and moral philosophy rather than from a consequen-
cialist (economic) approach.
5.  Authors have criticized the parallel between political and economic organizations because
company rules are not binding on workers in the same way as state laws are binding on citizens.
However, Dahl argues that as long as “severe sanctions” are imposed on the members of an
economic association the parallel is valid.
6.  This approach has received qualifications from two different schools of thought:  libertarian
philosophy and welfare economics. It is apparent that a hierarchy of rights is needed, as some of
them may enter in conflict. Libertarian political philosophy (see Nozick 1974) “solves” the hierar-
chy of rights problem by giving priority to property rights. Libertarians, in fact, argue that workplace
democracy that may enter into conflict with property rights that entail the owners of capital to have
discretion in the way they organize production and hire and dispose the effort of workers. In other
words, private property rights may require worker obedience to the dictates of capital owners and
managers for achieving a productive use of capital. From the perspective of welfare economics the
impact of an economic order based on economic democracy has to be judged in terms of its impact
on efficiency and productivity as it affects the level of real per capita income in the economy, and
therefore the attainable levels of welfare, compared to other forms of economic organization—say,
for example, a capitalist economy in which the rule of capital is the norm. This is, of course, a utili-
tarian criterion for judging alternative social orders, subject to the standard objections of aggregate
comparisons of welfare that often omit distributive considerations (see Solimano 1998, 2005).
 Can Capitalism Afford Economic Democracy? 167

a system of economic enterprises collectively owned and democratically

governed by all the people who work in them.. . . [W]‌ithin each enterprise
decision making would be designed so far as possible to satisfy the crite-
ria for the democratic process. . . criterion of voting equality; hence each
person employed in an enterprise is entitled to one and only one vote.. . .
Because the firm is controlled democratically, the enterprise’s citizens deter-
mine how the revenues of the firm are to be allocated.. . . [W]orkers may
influence the decisions of the enterprise by exit as well as voice. (91–92)

The practical counterpart of this would be the cooperative system discussed

in earlier.
The vision of capitalism as a free system led by the consumer was articulated
by Milton Friedman in his two classic books, Capitalism and Freedom (1962)
and Free to Choose (1980). In this view, the consumer is the sovereign who makes
economic decisions according to individual tastes, preferences, and income,
and in this way gives the signal to the economic system of what to produce and
for whom. Although not cast in the words “economic democracy,” this vision
implicitly equates freedom of the consumer as economic democracy. However,
there is a crucial difference between formal decisions in a democracy and eco-
nomic decisions in the marketplace. In a democracy, each person has one vote;
in the marketplace, one dollar (or another currency) is one “vote,” or more pre-
cisely, one preference for a certain good or service. Thus, consumer choice is not
equivalent to political choice, since the “votes” of consumers are determined by
their level of wealth, which can be quite unequally distributed under capitalism.
In addition, this freedom (and voice) as a consumer is sharply reduced in
the workplaces of most workers and employees (this is different for owners
and/or managers). Typically, the capitalist factory is organized in hierarchi-
cal fashion: on one hand, we have the owners of capital and the managers (in
­chapter 3, we elaborate on their relative roles in the big modern corporation)
who make the main decisions of what to produce, which technology to use,
who to hire and fire, and how to organize the production. It is argued, in
defense of the owners, that they assume the risk of investment and therefore
need the authority and discretion to make strategic decisions.
In a way, capital owners have both exit and voice rights (understood as influ-
ence and ultimate control) in production. In fact, entrepreneurs and capital
owners can exit a certain activity by selling the firm and putting their capital to
another use. In the public company, the shareholders can sell their shares and
invest in other companies. Workers also have, in principle, the exit option, as
they may quit their jobs if they don’t like the pay, working conditions, or manage-
ment decisions. However, as Marx stressed, workers are a class of property-less
168 Econo mic Demo cr ac y an d t he 99 Percen t

individuals (proletarians), and their own (or main) asset is their work effort.
This puts them in a disadvantageous situation regarding capital (see box 9.2).
The situation for managers is in between that of the owners and the work-
ers. They have, certainly, more voice than lower-rank workers and mid-level
employees, but they are not the owners and therefore they cannot make the
ultimate decision of exit (although they can influence this decision more than
can workers). So the ownership of productive assets is critical to the degree of
voice and influence in the workplace, and therefore to the capacity of people
to exercise economic democracy:  those who do not own productive assets
have less voice and influence than those who own those assets.
Mobility also matters. As a rule, capital is more mobile than labor, and
therefore can avoid getting stuck in a low-profitability equilibrium or being
subject to excessive worker pressure through labor unions and other means.
Moreover, in a globalized world economy, the international mobility of capi-
tal is enhanced enormously. This allows capital to avoid some of the regula-
tions and taxes set by national governments; it does that through outsourcing
and international relocation of production to countries with low wages, lower
taxes, and less burdensome regulations.
The critics of economic democracy point out those workers also have
the exit option. Occupational choice, whether at home or abroad, is open
but has human and pecuniary costs (Solimano 2010). Again, the freedom to
enter into a contract and to choose where to work is considered equivalent to
freedom and democracy in the economic realm. (As an aside, but relevant to
the discussion, note that the meaning of the term freedom is open to alterna-
tive interpretations. Philosophers usually highlight two main dimensions of
freedom: absence of constraints and availability of means.7) A market economy
based on free contract and choice, both in production and in consumption,
probably satisfies to some extent the concept of freedom or liberty (absence
of constraints), but the second sense of freedom is more problematic. The
availability of means such as income, education, wealth, and social contacts
is clearly unequal across people and depends on the distribution of income,
wealth, and other attributes in a society.
Regarding the ability of workers to move at local, regional, national, or inter-
national levels to find the most attractive jobs and to improve their economic

7.  Berlin (1969), referring to this, made a distinction between “liberty” and the “conditions
of liberty.” In turn, Rawls (1971) made the distinction in terms of “liberty” and the “worth of
liberty.” The conception of availability of means refers to “conditions of liberty” in Berlin and
“worth of liberty” in Rawls.
 Can Capitalism Afford Economic Democracy? 169

Box 9.2
Alienation and Exploitation in Capitalism (Marx)
The economic analysis of capitalism by Marx was inspired by at least five interre-
lated concepts relevant to our discussion of economic democracy: (a) the prob-
lem of alienation of work, (b) the asymmetric power of capital in dictating the
conditions of work and the organization of production in the capitalist factory,
(c) the appropriation of surplus value by capital, (d) the exploitation problem,
and (e) the minority control of the accumulation of capital and the ensuing lack
of social control of savings and capital formation by workers and society.
The theory of alienation (or estrangement of labor) posits that under capi-
talist conditions there is a progressive separation of the effort of workers from
the outcome (goods) of such work effort. That separation, however, did not
exist in pre-capitalist modes of production. A result of alienation is that work-
ers have a low degree of autonomy and almost no voice in the running of fac-
tories, creating the feeling that the fruits of their labor do not belong to them
in any meaningful sense.8 In Marx’s conception, the workers loses control over
work conditions (hours, the organization of production) and the product he
contributes to make. The product then exists outside him, independently of
him and alien to him. Workers need to work for salary but work is not really
part of a meaningful and satisfactory life. Marglin (1974), in Marx’s tradition,
discussed the organization of the factory system under capitalism and stressed
that hierarchy and the separation of labor from owners were critical to assert
the control of capital on the productive process and ensure that capital accu-
mulation accrues to the owners unimpeded by worker influence and control.
Furthermore, in his theory of exploitation, Marx argued that labor generates a
“surplus value” (the difference between the cost of labor and the market price of
the commodity produced by labor). However, that surplus does not belong to the
worker or society at large but accrues to the capitalist. Marx’s criticism is not to the
existence of an economic surplus—any dynamic economy needs a surplus to finance
capital accumulation, technology development, and economic growth—but to the
fact that the surplus is appropriated by the capitalist and is not “socially controlled.”
Finally, another piece of Marx’s theory was the concept of “primitive accumu-
lation” and the dispossession of land to workers (see c­ hapter 2) as a device needed
to release labor from agriculture and force work as wage labor in factories in cities.

8.  See Wolff (2003) and Foley (2006).

170 Econo mic Demo cr ac y an d t he 99 Percen t

welfare (the equivalent of the freedom of capital to find the most profitable loca-
tions to maximize profits) is, in practice, costly and restricted by several factors:

(a) Lack of information about job opportunities.

(b) High cost of moving (transportation costs, job search fees, emotional
dislocation and stress in the case of international migration and distant
internal migration).
(c) Restrictions on the entry of workers (barriers to immigration and stops
on other types of movement of labor).

For these reasons, the scope of effective freedom of labor is limited (the avail-
ability of means condition of freedom is weakened). In this case, democracy
and participation at the company level become almost a luxury when workers
run the risk of becoming unemployed.
The Polish economist Michael Kalecki (1943, 1971)  highlighted how the
maintenance of some level of unemployment in an economy plays the role of a
“disciplining device” for the working class, since the fear of unemployment mod-
erates wage demands and discourages labor union activism. Needless to say, this
disciplining device has been widely used during the neoliberal era, such as in the
privatization and austerity polices instituted in the early Thatcher, Reagan, and
Pinochet experiments of the late 1970s and early 1980s, as well as in European
austerity programs since 2009–10, during which time unemployment levels
reached record numbers in Spain, Portugal, and Greece (see also c­ hapter 5).
Besides unemployment, worker mobility, or lack thereof, is critically related
to variables such as knowledge, level of education, and social contacts. An edu-
cated employee, probably a specialized worker and a professional, has more
options and therefore enjoys a higher degree of economic autonomy than a
less skilled worker who can perform only routine or manual tasks (and who
is increasingly being displaced by computerization).9 As individuals spend far
more time working in a factory, a store, or an office than in shopping, their
degree of economic democracy in the workplace becomes very important.
Milton Friedman’s emphasis on “consumer sovereignty” contrasts with his
almost disdain for people as workers, especially in regard to participation in
decision making (box 9.3).10

9.  Marx wrote about the lower worker’s mobility as tied to “class membership”: the worker can
change firms but it is far more difficult to change membership in a social class; see Archer (1995).
10.  Issues of economic democracy pertain not only to consumer choice and workplace partici-
pation but also to the legal infrastructure of a market economy. Legislation regarding property
 Can Capitalism Afford Economic Democracy? 171

Box 9.3
Democratic Society or Market Society? (Polanyi)
Austrian social scientist and philosopher Karl Polanyi (1944/2001) provided
an insightful analysis of the “market society” that rests on the separation of
“economy”—as governed by the market and the profit motive—and “society”
resting on foundations such as family ties, social cooperation, community, and
cultural bonds. Polanyi was critical of extending the profit motive to social sec-
tors since the market would tear the fabric of any stable and cohesive society.
In his book The Great Transformation, Polanyi posits the importance of
society over the economy:  in fact, a democratic society should have preemi-
nence over the economy dominated by private property relations and wealth
concentration, features that are not originated by a democratic process. Polanyi
states, based on the historical experience of the nineteenth and twentieth centu-
ries until the 1930s, that an economic system largely that is controlled and regu-
lated by markets alone can be destabilizing and disruptive of the social order.
The subordination of society to the logic of the market is achieved, according
to Polanyi, through the inclusion in the market mechanism of all the essen-
tial elements of industry, including the markets for labor, land, and money, the
so-called fictitious commodities, as they were not originally produced for sale.
Another fundamental concept in Polanyi’s analysis is the so-called Double
Movement theory. Although Polanyi recognizes the improvements in mate-
rial standards achieved by economic progress, he points out that the result of
society subordination to the market is “monolithic social dislocation” that pro-
vokes a spontaneous reaction movement by society to safeguard itself through
social movements and protective social laws. According to Polanyi, the fear of
being “annihilated” by the market and the profit motive triggered a “protective
countermovement” expressed in laws such as minimum wages, prohibition of
child labor, and the welfare state.
Various social movements—such as student, ecological, and civic organiza-
tions as responses to the marketization of society–seek more democratic con-
trol of the economy before the unregulated market led by the profit motive can
squeeze social cooperation.

and workers’ rights, trust and anti-monopoly regulation, transparency and use of information,
levels and composition of taxes, rules governing the international mobility of goods, capital,
and people may seem abstract but also matter to people. At the national level these issues
are decided by legislatures and the operation of the democratic system. Global and regional
economic rules are tied to the operation of the Bretton-Woods system, the World Trade
172 Econo mic Demo cr ac y an d t he 99 Percen t

9.3  Applications of Economic Democracy

What about the practical significance of economic democracy? We have
documented several historical and more current examples of economic
democracy, such as the cooperative movement and schemes for worker par-
ticipation in enterprises. Here, we identify four areas for potential applica-
tion of the principles of economic democracy in society:

(a) Workplace democracy and firm-level participation.

(b) Democratization of ownership and enhanced financial participation.
(c) Labor voice in determining austerity programs.
(d) Citizen distribution of the income obtained from the exploitation of
natural resources.

9.3.1  Workplace Democracy and Firm-Level

Participation
Greater workplace democracy implies a shift of power from management
(and capital owners) to employees in regard to worker participation in the
decision-making process of the company. This shift is also expected to fos-
ter greater work incentives and boost cooperation, although the diminished
power of managers and owners may increase tensions and conflicts if that shift
is not well managed.
Worker participation can be developed at various levels. It can be
task-related—say, at the workstation and deal with issues such as consultative
arrangements on production processes and quality circles. The participation
can be at a strategic level—say, by enabling worker representatives to sit on the
boards of corporations and help make critical investment decisions, financial
decisions, set human resource policies, and so on. Moreover, worker partici-
pation can be communicative, consultative or negotiative;11 examples of direct
collective participation include cooperatives and workers councils, collective
bargaining through a trade union network, German-type co-determination
agreements, and joint consultation committees.
An important vehicle for worker participation is trade unions. These orga-
nizations can play an important role in ensuring that there are convenient wage

Organization, the European Union, regional development banks, and so on. Issues of develop-
ing country and citizen representation in the decision-making process of these institutions are
also relevant topics of economic democracy.
11.  Heller et al. (1998).
 Can Capitalism Afford Economic Democracy? 173

contracts, better working conditions, and respect for worker rights. Reality proves
that without trade unions, companies would appropriate most of the economic
surplus for their owners. However, union control can be captured by small labor
bureaucracies and political parties, as well; in these circumstances, the leaders fail
to represent their members’ genuine interests. Therefore, economic democracy
must extend to workers’ organizations and their governments as well.
Today, trade unions have declined in importance worldwide. The structure
of work has shifted with globalization and technological change, and there is
more part-time employment and more time-flexible jobs, which are less likely
to be covered by union contracts. In Latin America, the role of labor unions
was weakened by syndicalism repression under authoritarian governments in
the 1970s and 1980s and by the economic crises of the 1980s.12
Employee participation, in principle, can be enhanced in the knowledge
economy. Management theorist Peter Drucker (2002) often emphasized the
need to consider employees as assets rather than passive workers under the
authority of managers. His vision was that of a world increasingly driven by
knowledge flows in which corporations, to survive, compete, and succeed,
needed to grasp new knowledge and incorporate it into production, sales, and
business strategy. In this context, the “knowledge worker”—whether a spe-
cialist in a firm, an engineer, or a manual worker with specialized knowledge
and expertise—becomes crucially important. This knowledge worker, unlike
the worker in the traditional chain of production who follows well-specified
tasks, is not a passive order-taker in a hierarchical organization; that worker is
an active creator and disseminator of knowledge who needs autonomy in the
company. The traditional hierarchical, authority-driven organization, accord-
ing to Drucker, will eventually become dysfunctional and be replaced by “flat
organizations” with fewer authority layers and with more reliance on knowl-
edge workers and effective transmission of information flows within the firm.
Drucker’s vision comes closer to granting a degree of economic democ-
racy in the workplace. His argument for decentralization and participation is,
chiefly, based on the technological and managerial needs of the corporation in
a world of fragmented information coming from the shop floor and mid-level
management—information that needs to be transferred and processed

12.  The role of unions is somewhat different between advanced economies and developing
countries. Labor unions in developed countries, besides dealing with salary and benefits, also
address issues of labor’s participation in company decision making and workplace participa-
tion. In contrast, in developing countries, unions are, generally, more oriented toward bargain-
ing for wages and working conditions. Of course, the labor union movement in both advanced
and developing countries have played a broader role in shaping labor legislation and enhancing
progressive social change.
174 Econo mic Demo cr ac y an d t he 99 Percen t

without being hampered by bureaucratic and hierarchical straitjackets.13 It is a

pragmatic rather than a rights-based rationale for worker participation.

9.3.2  Democratizing Ownership and Financial

Participation
One of the critical aspects of capitalism is its concentration of property own-
ership and profits within a small economic elite. Democratizing the own-
ership of property is a basic tenet of economic democracy. Irish economist
Daryl D’Art (1992) addresses the possibility for employees to financially
participate in the company decision-making process by gaining access to the
firm’s financial assets and making claims on the company’s stream of profits.14
Two alternatives are explored: (1) profit sharing—say, by providing employ-
ees, in addition to a fix wage, a variable part of the income directly linked to
profits or some other measure of corporate financial results; and (2)  use of
employee stock ownership plans (ESOPs), a defined contribution that allows
employees to become part-owners in the company by acquiring stock in it.
Currently, elites-dominated capitalism restricts profit sharing, bonuses, and
stock options to CEOs and high-rank managers, generally neglecting access
by workers and mid-level employees.
These financial schemes are aimed at positively influencing worker motiva-
tion and increasing productivity by giving them a financial stake in the success
of the company. In addition, profit sharing and ESOP schemes can align, at least
partially, the interests of employees with owners, if that alignment is possible in
a big corporation. There are several hurdles to this alignment, however, and not
the least among them is management’s practice of hiding relevant information
about profits, debts, and assets for its own strategic benefit (as amply shown in
recent corporate scandals in the United States and other countries). This infor-
mation gap limits the ability of employees to react to adverse shocks and avoid
regressive adjustments, whose costs often fall on the workforce.

13.  The new knowledge-based economic system brought about the development of alterna-
tive forms of participation within companies, more direct and individualized, that aim at
employee involvement and empowerment in order to create a culture where the workforce
feels it has something to contribute and that it will be heard. Those new forms of participation
are included under human resource management (HRM) strategies. Examples include briefing
groups, attitude surveys or suggestion schemes, teamwork, and quality circles, where employ-
ees are involved as a key strategic resource to develop shared goals with management. These
new forms of workplace participation can eliminate unnecessary bureaucracy and create flatter,
less costly, and ultimately higher-performing organizations. Japan was the pioneer country in
adopting these new participative measures.
14.  See D’Art (1992).
 Can Capitalism Afford Economic Democracy? 175

A contrast is often drawn between the U.S. and Scandinavian systems for

achieving labor participation. In the United States, the emphasis is on finan-
cial schemes, whereas in the Scandinavian countries the financial component
is often complemented by cooperative relations between labor unions, corpo-
rations, and the government.
Beyond the ownership of shares, there are other assets that are important
for workers. For example, a study shows that housing is the most widespread
asset held by households in Latin America.15 In fact, for the vast majority of that
population, housing is their main asset (on average, 69 percent of households
own their own homes in Latin America); this is a percentage of home ownership
similar to that of the United States. Moreover, housing ownership is relatively
uniform across various socioeconomic levels in Latin America (see table 9.1).16
Land ownership has historically been concentrated in Latin America, although
agrarian reform has changed that in some countries. In truth, the growing urban-
ization of the region has diminished the importance of correcting land inequality.
Capital acquisition such as business assets, rental property, and stocks and bonds
are much more concentrated than is home equity at this point. As table 9.2 shows,
the highest income percentiles concentrate the ownership of financial and capital
assets in Latin America. This is an obvious area for increased democracy.
Greater opportunity for asset accumulation by the poor and the middle class
can help them mobilize their hidden productive potential to undertake invest-
ments and run productive units. The micro- and small-scale enterprise sector is, in
many countries, a main source of employment for the middle class. This expansion
of opportunity is bound to have positive effects on economic growth and social
equity. Moreover, a stronger asset position helps protect against negative shocks.17
Incomplete property rights are often considered limits on access to
capital accumulation by the poor. Segmentation in the access to credit and
high-quality education by socio-economic status prevents a more egalitarian
distribution of these assets. Also, variables such as family background, income,

15.  See Torche and Spilerman (2006).

16.  Education is another “asset,” although of different characteristics than material assets such
as housing, land, and financial assets, as it is embedded in people. In contrast, material assets are
external to the individual. In the Latin American region, education has expanded at all levels
(primary, secondary, and college). In contrast to the more extended access to “quantity educa-
tion” we have considerably more social differentiation in the access to “quality education.”
17.  From an economic perspective, assets (under certain conditions) can provide protection
against unexpected shocks, helping to reduce vulnerabilities. If a person suffers a temporary
loss of income, an asset can provide collateral to borrow against to maintain consumption. In
the event that the loss of income is of a more permanent nature, a person (or household) can
sell the asset, although this will reduce his net worth.
176 Econo mic Demo cr ac y an d t he 99 Percen t

Table 9.1  Home Tenure Status in Latin America and the U.S., ca. 2000
(percentages)

Countries Homeownership1 Renting2 Other3

Argentina 71,6 13,0 15,4

Bolivia 64,5 15,0 20,5
Brazil 71,6 15,3 13,1
Chile 71,0 15,6 13,4
Colombia 55,3 35,9 8,8
Costa Rica 74,4 15,3 10,3
Ecuador 66,7 18,1 15,2
Mexico 72,6 13,7 13,7
Paraguay 76,7 9,9 13,4
Peru 74,3 6,8 18,9
Uruguay 67,2 17,5 15,3
Latin America 69,6 16,0 14,4
US 66,3 30,7 3,0
Source: Torche and Spilerman (2006).
Notes: 1 Percentage of people who own their houses.
2
Percentage of people who rent their houses.
3
Includes housing provided by employers, family members, squatting, and other ways.
Calculations based on household surveys. All samples weighted to represent national populations.

wealth, education level of the parents, occupational status, and social connec-
tions are powerful factors that carry across generations and affect the inequal-
ity in wealth distribution, access to political power, and influence in society.18
Another argument to focus on regarding assets is of a more political economy
nature. If asset ownership is promoted on a wider scale, going beyond the stan-
dard concentration we observe in many market economies, that development can
have important stabilizing effects by giving more people a stake in the fortunes of
the economic system and the democracy. Oligarchic capitalism will be less stable
18.  There are three main impediments for a more even distribution of assets relevant in the
Latin American region and developing countries in general. One is the limited savings capacity
of low-income groups. Second, as mentioned before, for assets to be able to mobilize capi-
tal, property rights must be well defined and enforceable, an issue stressed by the Peruvian
Hernando de Soto. In Latin America, low-income groups have acquired their main asset (hous-
ing) often through nonmarket mechanisms: occupation of urban dwellings and/or subsidized
housing policies. Some house owners have titles on their property while others do not. The
legal system unfortunately is expensive and often unfriendly to the poor. In fact, the design and
enforcement of contracts is costly, and it requires some legal education and access to lawyers.
The poor often cannot afford all that. Third, capital markets are also segmented, serving better
the elites than the poor and the middle class. The traditional circuits to accumulate material
 Can Capitalism Afford Economic Democracy? 177

Table 9.2  Distribution of Investment Income in the Highest Income

Percentiles, for Type of Investment Income (percentage)

Countries Capital, Rents Rental Stock dividends Interest from

and Profits Q51 property Q52 Q53 savings and
deposits Q54

Argentina 70,3 – – –
Bolivia 75,8 73,7 98,9 80,3
Brazil 78,4 79,1 88,2 –
Chile 89,1 72,7 90,8 82,7
Colombia 75,7 50 76,1 –
Ecuador 82,5 – – –
Mexico 83,4 83,7 99,6 94,7
Paraguay 81,7 79 – –
Peru 78,5 – – –
Uruguay 81,2 85,8 99,9 96,6
Venezuela 68,1 – – –
Latin America 78,6 74,9 92,3 88,6
US 70,1 – – –
Source: Wolff (2003).
Notes:  1 Percentage of capital, rents and profits income owned by top income quintile (5); De
Ferranti et al. (2003).
2
Distribution of rental property income in the highest income quintile (5).
3
Distribution of stocks income in the highest income quintile (5).
4
Distribution of deposits and savings income in the highest income quintile (5); Torche and
Spilerman (2006: Table 6) calculations based on household surveys.

in the long run (because of distributive conflict) than capitalism in which the
ownership of productive assets is widely shared among the population (if that is
possible under capitalism).
While the literature on inequality has historically paid more attention
to the distribution of income, according to the International Association
for Research in Income and Wealth (IARIW), the world distribution of
wealth is much more unequal than that of income. As illustrated in table 9.3,
Wealth-Gini is systematically higher than income-Gini in Latin America and

assets and also to acquire higher education, such as borrowing and access to capital markets,
have been largely confined to the nonpoor (the elite hold assets that can be used as collateral
and/or have the right connections to access credit and get their children into good-quality
schools). The reform of judiciary systems to expedite the access to justice for the poor is essen-
tial if we want to make asset accumulation a more egalitarian process.
178 Econo mic Demo cr ac y an d t he 99 Percen t

Table 9.3  Income, Wealth, and Land Distribution Indicators

Country Income Gini1 Wealth Gini2 Land Gini3 (Avg

(Data circa 2000) (2000) 1970–2000)

Argentina 0,52 0,74 0,85

Bolivia 0,58 0,76 0,77
Brazil 0,59 0,78 0,85
Chile 0,58 0,78 0,84
Colombia 0,58 0,77 0,84
Costa Rica 0,47 0,73 0,81
Dominican Republic 0,52 0,72 –
Ecuador 0,54 0,76 0,84
Mexico 0,52 0,75 0,61
Paraguay 0,57 0,77 0,91
Peru 0,50 0,74 0,89
Uruguay 0,45 0,71 0,80
Venezuela, RB 0,44 0,71 0,90
Latin America 0,53 0,75 0,83
G7 0,41 0,67 –
United States 0,33 0,80 0,72
Eastern Asia 0,35 0,63 –
South Asia 0,40 0,70 0,62a
OECD 0,33 0,66 0,57a
1
Source: Own elaboration from World Bank’s WDI (2007). Closest available data to year 2000.
2
Wealth Concentration (Gini Coefficient). Wealth = Real Property + Financial Assets—Debts; own
elaboration based on Davies et al. (2006) [WIDER-UNU Project on World Wealth Distribution].
3
Land Concentration (Gini Coefficient); own elaboration from Deininger and Olinto (2000),
based on FAO World Census of Agriculture and Torche and Spilerman (2006), based on De Ferranti
et al. (2004), and UNDP (1993) based on FAO World Census of Agriculture. Average includes all
available data between 1970 and 2000. Average includes all available data between 1950 and 1990.

other regions of the world. In turn, the distribution of land is more concen-
trated than the distribution of income and the distribution of overall wealth (a
higher land-Gini coefficient than the income-Gini and wealth-Gini).

9.3.3  Labor’s Voice in Economic Austerity Programs

Another area for greater economic democracy is that of providing labor with
a voice in the design and implementation of austerity programs. As discussed
in previous chapters, these programs seek primarily to “restore confidence in
 Can Capitalism Afford Economic Democracy? 179

financial markets” so as to resume lending to the crisis countries. In reality,

however, it often leads to a contraction of output, high unemployment, cuts
in real wages, and loss of social benefits for the working and middle classes.19
A score of qualified observers, including Nobel Laureate economist Joseph
Stiglitz and social critic Noam Chomsky, have repeatedly stressed that the people
who suffer the cost of mistaken policies—namely workers—have the opportunity
to participate in how those adjustment costs are allocated across social groups. An
effective application of basic democratic principles implies not only that the peo-
ple affected by economic decisions be heard but also that they actually “have a seat
at the table.” Yet rarely do labor unions and social organizations have a voice in
decisions of the international financial institutions (the IMF is probably the more
closed and powerful of those institutions and its austerity programs may need
to be enforced through authoritarian means that hamper national sovereignty).
Stiglitz has observed that organized labor played a role in the developed econo-
mies of North America, Europe, and East Asia/Pacific to stabilize industrial rela-
tions, to contribute to preserving firm-specific knowledge and organizational
capital, and to mitigate the income inequalities that might be aggravated by the
unchecked power of employers. He has called for a broader definition of devel-
opment—that is, democratic transformation—which should promote greater
participation and involvement of workers within the workplace and at broader
political level. Stiglitz has pointed to the economic benefits of workplace democ-
racy, intended as participation in decision making, such as acceptance of change
and increased efficiency in the economic system, which results in an increased
perception of distributive justice and worker motivation.

9.3.4  Citizen Ownership and Distribution of Income from

Natural Resources
In several economies, a country’s natural resources, such as oil, copper, tim-
ber, and natural gas, are major economic assets for society and sources of
foreign exchange, fiscal revenues, and income for the population. However,
historically and also currently, in developing countries the exploitation of
natural resources has often been put in the hands of foreign multinational
corporations, which take the lion’s share of the benefits of extracting those
natural resources. (In several countries the natural resources have been
de-nationalized during the neoliberal era.) Dissatisfaction with the share of

19.  As shown in chap. 5, since the 1980s there has been an increase in the frequency and sever-
ity of economic and financial crises, mainly in developing and post-socialist countries.
18 0 Econo mic Demo cr ac y an d t he 99 Percen t

benefits that accrue to the country’s economy sometimes leads to demands

for policies of nationalization, or the passing of ownership and management
of these resources to the state, and/or the adoption of public–private exploi-
tation schemes. Public ownership of valuable natural resources can be an
important source of revenue for financing education, health, housing, and
pensions, in addition to supporting the public infrastructure.20
Another arrangement for reaping the benefits of natural resources is the
direct distribution of profits and income to the population. An interesting
example of this is provided by the U.S. state of Alaska, where eligible citizens at
least eighteen years old receive an annual paycheck from the Alaska Permanent
Fund, funded by the net income and royalties paid by private oil companies
that operate in that state. The annual dividend has been above $1,000 during
the last twenty-five years. A similar scheme has been proposed for handling
the profits of CODELCO (the Chilean state-owned copper company).21

9.4  Concluding Remarks

The claim for economic democracy arises out of disappointment with elite-based
capitalism and its sequels in concentrations of economic power and correspond-
ing disempowering of workers and employees, inequality, and financial volatil-
ity. In this chapter, we took a fresh look at the concept of economic democracy
in regard to workplace participation, extended ownership of shares, and labor’s
voice in the design of austerity programs, as well as the democratic distribution
of profits from the exploitation of natural resources. The chapter reviewed the
more relevant literature on the subject, exploring potential tradeoffs and com-
plementarities among economic and political rights, consumer and employee
voices, private property rights, distributive justice, and economic efficiency. We
also noted how the irruption of the knowledge economy that empowers people
also calls for flatter and less hierarchical companies, thereby enhancing worker
participation and autonomy without damaging, in principle, the prospects for
greater productivity and efficiency. In addition, we underscored the complemen-
tarities between economic democracy and political democracy and the inconsis-
tencies between political democracy and elites-controlled capitalism.

20.  The democratic process has to acknowledge the risks of political capture of state-owned
enterprises in natural resources that generate high rents.
21.  See Solimano (2007).
 10

Epilogue: Deconstructing Neoliberal
Capitalism

Free markets, privatization, deregulation, and unregulated capital

mobility, along with technological forces, are having profound consequences,
many of them adverse, on the economic and social structure of capitalism, the
patterns of people mobility in a global society, and the incubation of protest
movements in high-income, middle-income, and low-income nations. The
main beneficiary of the current globalization and neoliberal policies has been
the super-rich and the new billionaires who compose the wealthy elites of
today that hold the bulk of society’s net wealth and increasingly control the
democratic system. At the end, neoliberalism destabilizes capitalism.
Globalization and free-market policies have caused an increasing frag-
mentation, differentiation and polarization in the class structure of society.
The traditional middle class has segmented into an upper middle class of
managers, lawyers, financial experts, professionals, and knowledge people—a
segment that generally is successful in this new form of capitalism. The lower
middle class segment, composed of teachers, clerical workers, and service
employees, on the other hand, has seen its incomes stagnate and its members
have gone into debt to maintain their current living standards, as well as pay
for more expensive education, higher health costs, and other now-privatized
social services. In addition, in countries such as the United States and Spain,
many middle-class families have lost their homes in the foreclosure wave,
unable to service their mortgages because they lost their jobs and/or saw their
income plummet with the financial crisis of 2008–09 and its aftermath.
The effects of globalization on the traditional working class of the
advanced capitalist countries have been adverse. The delocalization of corpo-
rations toward low-wage nations, the effect of labor-saving technical changes,
182 Econo mic Demo cr ac y an d t he 99 Percen t

the de-unionization of workers, the labor competition from imports made in

low-wage countries, and the increased immigration from Third World and
former socialist countries have limited the demand for home-grown labor,
slowed any wage increases, and reduced the labor share in the national income.
Labor markets in the industrialized countries have polarized: we observe
a co-existence of relatively strong demand and high wages for executives,
professionals, and knowledge people along with expanded employment of
low-pay workers in the service sector.1 A number of middle-class and man-
ual worker jobs have been displaced by skill-based technical changes that
exchange routine administrative and clerical tasks for computer-based work.
Moreover, global production chains centered in low-wage economies have
pulled employment away from advanced capitalist economies.
In the developing world, like in advanced capitalist countries, economic
elites have grown stronger as income and wealth distribution has concen-
trated at the very top. The differentiation of the middle class into affluent
upper middle and lagging lower middle segments in this world runs along
somewhat similar lines as observed in the advanced capitalist economies.
In rapid-growth countries such as China, India, and some Latin American,
many people have left (income-based) poverty and joined the ranks of what is
called a “new middle class,” but they are prone to falling into deep indebted-
ness and are vulnerable to labor market, health, and financial shocks.
During the last three decades or so, the “rise of the rest” in the global econ-
omy has taken new and unexpected shape. In China, the egalitarian commu-
nism of the Mao era was replaced by a blend of state capitalism and massive
inflows of multinational corporations from the West. The new “factories of
the world” located in China combine Western-updated managerial methods
and new technologies with cheap labor working with minimal rights to pro-
duce goods that are very competitive in the international markets. Meanwhile,
China’s real per capita income has increased dramatically after three decades
of very rapid GDP growth. The austere communism based on the ideological
fervor of Chairman Mao is long gone, replaced by role models derived from
Western consumer-oriented society and led by a new middle class and a new
super-rich, protected by the party elite and state bureaucracy.
In Russia, communism was replaced by oligarchy-dominated capitalism
in an economy based on the exploitation of natural resources and services,
with a rapidly shrinking heavy industrial sector that was formerly the great
pride of the Soviet era. The new Russian middle class faces the challenge of

1.  Artus and Dorn (2013).

 Epilogue 183

improving its living standards and meeting new aspirations of material wel-
fare in an unstable job market, and in a society with significant inequalities of
opportunity, income, and wealth. The Russian working class has been severely
marginalized with massive closures of heavy industry, the breakup of labor
unions, and the end of the protections that had been provided by the state.
Latin American countries have enjoyed the effects of booming commod-
ity prices for copper, oil, meat, soybeans, and other mineral and agricultural
products, igniting a dynamic cycle of growth led by the natural resource and
agricultural sectors. Industrial exports and production have been maintained
in some large countries, such as Mexico, Brazil, and Argentina, but competi-
tion from low-cost goods coming from China and other East Asian countries
is fierce. In spite of certain improvements in labor income distribution in some
countries of the region, inequality remains high by international standards.
Following the neoliberal turn of the 1990s, Argentina, Bolivia, Brazil, Ecuador,
and Venezuela tried heterodox development strategies oriented toward achieving
greater national autonomy in economic and social policy. In some of these coun-
tries, the natural resources have been renationalized, and expanded social services
are financed by the revenues generated by the commodity price boom.

10.1  Crisis and Austerity: Scenarios of

Paralysis and Further Deterioration
The return to unregulated capitalism in the late twentieth century and early
twenty-first century has destabilized the global economy, with the num-
ber of debt crises rising exponentially. Examples include the economic and
financial crises in Latin America in the 1980s, in the Scandinavian countries
and the United States in the late 1980s and early 1990s, in East Asia (Korea,
Indonesia, and others) and Russia in 1997–98, in Argentina and Turkey in the
early 2000s—all to end up in the mega-crisis of 2008–09 in the United States
and Europe. The causes of these crises are multiple, and they include reckless
lending policies by commercial banks, unsustainable booms in asset prices,
and a lack of proper regulation of financial institutions by governments too
subject to the strong influence of powerful financial elites.
Sectorial interests have mattered, but also have prevailing economic
approaches and ideologies. Finance ministries, central banks, and the IMF
were increasingly attracted to unsuitable and unrealistic economic models
and paradigms, such as the rational expectations school, the new classical mac-
roeconomics, the efficient financial market hypothesis, and generally with the
broad ideas of monetarism and supply side economics. These theories, largely
184 Econo mic Demo cr ac y an d t he 99 Percen t

developed in the ivory towers of academia in the north, painted a rather mis-
leading and otherworldly view of capitalism in the late twentieth century. Free
markets and privatization concepts were elevated to the category of dogma,
and financial regulation and fiscal activism were seen almost as anathema.
Moreover, governments retreated from their critical roles as producer, regula-
tor, and redistributive agent that had guided the successful post-World War
II consensus—a consensus that was behind nearly three decades of “shared
prosperity.” Furthermore, the evident rise in inequality since the 1970s was
considered a relatively unimportant issue by a new generation of policymak-
ers enthralled by the magic and retheoric of the market. The Great Recession
was, though, a serious wake-up call to entranced policy-elite.
The neoliberal approach that replaced Keynesianism was enthusiastically
endorsed by the main financial centers of the world, such as Wall Street and
the City of London, although they were viewed with skepticism and distrust
by many intellectuals and with apprehension and hostility by labor unions.
Free-market economics enabled banks and financial intermediaries to make
big profits without the nuisance and interferences of “excessive” regulation
by monetary authorities and government. In the last three decades or so, the
interests of the financial sector have dominated matters of production, indus-
try, workers, small savers, and the middle class.
After the financial collapse of 2008–09, there was a brief flirtation with
Keynesian expansionary policies as a way to recover output and employment.
However, expansionary fiscal policies were abandoned as early as 2010. Fiscal
restraint became the norm for countries such as Ireland, Portugal, Spain,
Italy, and Greece as they adopted the harsh austerity policies imposed on
them from abroad. The IMF, the European Central Bank, and the European
Commission took over the conduct of economic policies for these crisis
countries and policymaking was dictated by memorandums and letters of
intent concocted by the international bureaucracies and unelected techno-
crats. “Surveillance missions” to verify compliance became the norm. Behind
these austerity programs were the big powers of the day: the United States,
Germany, France, and the United Kingdom. For outside observers, the lack
of independent thinking, and the absence of alternative policy proposals
by either social democratic or conservative governments of the European
countries in crisis, was startling. It was surprising indeed that these countries
accepted the very costly austerity policies without seriously pondering the
effects of this new medicine that was forced upon them.
At the same time, those austerity policies have been widely criticized by
social movements, labor unions, and society in general. External creditors,
 Epilogue 185

seconded by the national governments of the members of the European

Union, have put overriding priority on debt servicing—over the maintenance
of employment and social spending for education, health, housing, and pen-
sions. The economic and social price paid in terms of unrealized economic
activity, postponed investment, lost jobs, cuts in social benefits, and violation
of labor’s rights has been very high. The youth of these countries have been
hit particularly hard: in 2012, youth unemployment was close to 30 percent in
Ireland, 37.1 percent in Italy, 57.6 percent in Greece, 38.7 percent in Portugal,
and 56.5 percent in Spain. In addition, the crisis is spurring the emigration of
professionals, intellectuals, technical experts, academics, and entrepreneurs in
search for better conditions abroad for them and their families. The flight of
valuable human capital can have lasting adverse consequences in the medium
to long run for those countries.
What are the possible routes of escapes from the current crises in periph-
eral Europe? We can identify three courses of action (or inaction). One is
the “neoliberal solution” that includes more austerity, privatization, business
deregulation, and retrenchment of the welfare state. This option is under way
in Greece, Spain, Italy, Portugal, and Ireland. In these countries, the privatiza-
tion of local public and municipal water companies, airports, postal services,
state buildings, public energy companies, arms manufacturing, ports, and
state lotteries is being imposed as a condition of the austerity plans.
Privatization is presented as a way to raise revenues for the state so it can
pay its debts rather than as a transfer of national wealth to small but powerful
private conglomerates. The real possibility that privatization can exacerbate
wealth-concentration and inequality is apparently negelected in official dis-
cussions on the topic. Privatization is being resisted by the public and labor
unions in most of these countries, but it is supported by the IMF, by main-
stream economists, and by local and global business elites, who recognize
an attractive opportunity to acquire public assets on the cheap. The adverse
consequences of privatization, of course, are cuts in social services and pub-
lic utilities services, but these are downplayed. Examining the international
evidence on the distributive and environmental consequences of the privatiz-
ing of public assets in the 1980s and 1990s, in the United Kingdom, Latin
America, Russia, and other countries, seems unnecessary to policy designers
in this last version of austerity.
A more progressive alternative path for dealing with the crisis is to put a
ceiling on debt servicing and give priority to maintaining internal economic
growth, employment, public investment, and social spending. As discussed in
­chapter 5, the economic history of the last two centuries has examples of debt
186 Econo mic Demo cr ac y an d t he 99 Percen t

renegotiation, or even default, as a course of action adopted by many highly

indebted countries after protracted periods of slow or negative growth, social
fatigue, stagnation, and the economic destruction associated with austerity
and onerous debt servicing. The debt repudiation/debt renegotiation path
may come, however, with restrained access to capital markets for a while, and
may entail the intervention (or even nationalization) of large indebted banks
and insolvent financial institutions until a sound financial restructuring of
these institutions, financed largely with public money, restores the liquidity
and solvency of these entities. Two recent cases, among several others, that
followed this path were Iceland during its financial crisis of 2008–09 and
Argentina after the crisis of 2001–02.
A third approach for “managing” the crisis could simply be to “muddle
through” in the sense of postponing the structural problems that gave birth to
the crisis, such as an overleveraged banking system, weak public finances, and
internal and external debts, while at the same time protecting employment
and the social welfare of the population. The current stagnation of Europe
is an example of policy paralysis leading to the erosion of social cohesion, to
reduced output, high employment, and investment losses, as well as to the
emergence of extremist political parties.
The social and political consequences of the crisis should not be underesti-
mated. The frustrations brought about by protracted unemployment, massive
firing of workers in the public and private sectors, cuts in social entitlements,
and the effect of immigration is giving rise to complex political reactions. The
public frustration is exacerbated once people recognize that rich elites are
unaffected by the crisis—or even may be profiting from it.
One of the political reactions to the crisis is the emergence or consoli-
dation of radicalized right-wing parties in countries such as Greece (the
Golden Arrow), Finland (True Finns), France (the National Front), and
Italy (the Northern League). These parties have developed anti-immigration,
anti-European Union, and nationalistic agendas, and they have gathered
nonnegligible support among the demoralized and exhausted electorates in
recent elections. The lessons of the 1920s and 1930s, with their rise of nation-
alism and xenophobia at a time of serious economic crisis, social conflict, and
an ineffectual League of Nations are relevant today.
Both historically and at present, an additional way to “help” countries recover
from economic crises has been, simply, the launching of war. It is well recognized
that the economic recovery of the 1930s in the United States and Germany was
really consolidated only when military spending was well under way in the run-up
to World War II. In the 1990s and 2000s, military interventions in Kuwait, the
 Epilogue 187

Balkans, Iraq, Afghanistan, Libya, and possibly Syria showed that war is useful
for overcoming internal problems of economic stagnation and crisis, in addi-
tion to achieving certain geopolitical goals. War, in spite of its huge human and
financial toll, turns out to be a highly profitable endeavor for oil companies and
industrial providers of military parts and equipment—important interest groups
that provide various forms of support to U.S. and U.K. administrations.

10.2  Elite Mobility and Social Movements

The globalization process has increased the ability of the rich elites to extract
economic surplus from various economic and financial activities and to move
easily across national boundaries. The liberalization of financial capital move-
ment in the 1970s and the expansion of multinational corporations have
increased substantially the international movement of capital. This interna-
tionalization of capital has come along with new patterns of mobility for
executives, technological experts, and professionals. Higher education has
also become a more global process, leading to greater movement of scholars,
academics, and international students than in the past. Growth of the infor-
mation technology sector has spurred the brain drain from developing coun-
tries (e.g., India) and post-socialist countries (e.g., Russia). These trends have
led to the concentration of talent and human capital in the advanced capital-
ist countries, often widening the development gaps.
Still, some forces may operate in the opposite direction regarding money
and talent migration. The employment and financial crises of Europe and the
United States is slowing the demand for immigrant labor, although this trend
is not uniform across all sectors. High-tech companies and the financial and
health sectors still require skilled human resources so demand remains relatively
strong in spite of overall stagnation in the rest of the economy (particularly in
the construction sector and industries producing for the domestic market).
Another factor pushing for greater mobility of talent and pulling advanced
human capital away from the rich north is an effort, started a few decades
ago, by countries such as Korea, Taiwan, Singapore, and Singapore, to catch
up technologically with the advanced capitalist countries. A similar process
started later in China. Given the size of its economy, China’s demand for tal-
ent and advanced human capital to support its development process is bound
to be quite large. Yet another factor in the global flow of talent is the fact
that GDP growth in Asia, Latin America, and Sub-Saharan Africa is between
two and three times faster than the rate of growth in the global north, which
encourages reverse migration.
188 Econo mic Demo cr ac y an d t he 99 Percen t

Worldwide trends include the irruption of global social movements. The

anti-globalization movement of the late 1990s was an early signal that glo-
balization, led by corporations and supported by the governments of rich
countries, the IMF, and the World Bank, was being critically received in both
the north and the south. The current round of austerity programs has only
intensified the chance for social protests in a score of nations.
The agenda of these new globalized social movements is heterogeneous,
many-sided, and largely autonomous of political parties, past ideologies, and
clear-state influences. The spread of unemployment, the high cost of educa-
tion in countries that have privatized their social services, the limits of rep-
resentative democracy, corporate control of mass media, and corporate and
government corruption have mobilized the indignados movements in Spain,
the Occupy Wall Street movement in the United States, the student move-
ment in Chile, the social protest movement in Brazil, and so on. The reach of
and motivations for these new social movements in this global age are com-
plex and deserve further analysis and research.

10.3.  An Agenda for Economic Democracy

Reforms oriented toward increasing economic democracy are needed at both
national and international levels as an antidote to elite-dominated capitalism.
In the international realm, financial institutions such as the IMF and World
Bank that were created in the global power realities of the 1940s are inadequate
for the twenty-first century, when more than half of world’s output is generated
by non-OECD countries. The IMF’s internal governance overwhelmingly
reflects the influence and interests of the United States, the United Kingdom,
and other large Western economies. Its conceptual frameworks that guide its
actions need urgent redirection, for they reflect the academic fashions of the
last two to three decades, and therefore they severely underestimate the endog-
enous tendencies of unregulated financial sectors and free-market capitalism
to trigger costly economic and financial crises. The Fund, endowed with hun-
dreds of economists trained at top U.S. and European universities, was largely
unable to anticipate the 2008–09 crisis and also failed to compel advanced
economies such as the United States and the United Kingdom to correct their
fiscal and external imbalances, or to subject themselves to the sort of fiscal dis-
cipline and financial control that the IMF routinely imposes on Third World
nations and medium-size countries that lack international influence.
The underrepresentation of developing countries and emerging new pow-
ers in the decision making of the Bretton Woods institutions is something
 Epilogue 189

that countries of the global south are trying to redress. This is positive move-
ment in the direction of more global economic democracy, although repre-
sentation of the global south in international organizations should not be
restricted to the BRICS. The global south also includes some countries run-
ning large account surpluses that generate net savings, which can help correct
the financial imbalances of large countries and regions in the world economy.
As net savers, these economies are developing their own financial institutions
independent of the rich capitalist countries of the north.
Global economic democracy needs to embrace the south-south trade,
south-south capital mobility, and south-south migration flows. The strength-
ening of regional economic agreements and patterns of consultation in eco-
nomic, diplomatic, and security matters are necessary in a multi-polar global
system that is less dependent on the hegemonic powers of the nineteenth and
twentieth centuries.
At the national level, fundamental reforms to expand the democratiza-
tion of the economy are also needed. The excessive concentration of economic
power (ownership of capital, land, natural resources, and strategic assets) by
small business elites concentrates the use of economic surplus and corrupts
democracy. Besides using part of that surplus for their own consumption and
investment purposes, the elites mobilize their large financial resources to influ-
ence public policy, with the aim of averting movements toward redistribution
through higher taxation of top incomes and top wealth holders and through
reform of the compensation schemes of CEO and top managers in the private
sector. In other words, big money is invested in preserving the status quo, as it
is favorable to the interests of the rich elites. The mechanisms through which
money interferes with the political processes include funding for political cam-
paigns, ownership and control of the mass media; lobbying, and the funding
of economic think tanks, financial experts, and public intellectuals. In addi-
tion, the notorious lack of public participation in the political process, public
apathy, and electoral indifference help consolidate the power of the elites in
accumulating critical economic assets and controlling the political process.
This reality suggests that without a degree of deprivatization and more
public ownership (including communal, cooperative, and workers-owned
modalities) of major productive assets along with higher taxation of high
incomes and big wealth that enable democratic use of the economic surplus,
it will be difficult to shift wealth, income, and political power away from the
economic elites and toward the non-rich to enable genuine democratization
of society. At the same time, for these reforms to work it is essential to extend
the principles of economic democracy to the governance of the state, as an
190 Econo mic Demo cr ac y an d t he 99 Percen t

antidote to its capture by interest groups and political parties. In fact, the
alleged structural inefficiency of the state, captured by patronage, clientelism,
and corruption, has been one of the main arguments used by the economic
conglomerates and the technocracy to justify massive privatization of public
assets and social services in the 1980s and 1990s, in Latin America, Russia, and
the Central European countries, as well as in the 2010s in Greece, Portugal,
Spain, Italy, and other countries of Europe.
The promotion of cooperatives, municipal ownership, and communal man-
agement of water, electricity, and other basic resources as noncapitalist forms of
economic organization in various sectors of the economy is a pillar of the new
agenda for economic democracy. After three decades in which the main objec-
tive of the corporate sector has been to “maximize shareholder value,” it is clear
that the voice and vote of workers, employees, the community, and the provid-
ers of goods and services have been marginalized or excluded. There needs to be
more participation by these stakeholders in all the relevant decisions of invest-
ment, wages, social benefits, location, and technology. To restore fairness to the
big corporation, there is a need to curb the explosive increase in salaries and
compensation for high-level officers (e.g., CEOs and senior management), who
currently receive the lion’s share of the increases in corporate value after priva-
tization, deregulation, and labor demobilization are realized. New governance
and compensation structures in the private sector are called for, along with
greater participation by employees on the executive boards of corporations.
In developing countries, regaining public ownership of natural resources
and putting them under democratic control and surveillance along with more
progressive tax systems can be critical for funding social services, keeping
public finances in balance, and ensuring respect and responsibility for the
environment. Finally, political reform is essential to ensure a degree of eco-
nomic democracy. Social movements and civic organizations must take their
prominent places in societies that until now have been dominated by political
machines and technocracy influenced by the money of the economic elites.
A new social contract toward more stable, equitable, and democratic societies
is badly needed.
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Us ef u l U R L s
www.economicsecurityindex.org
www.forbes.com
 Index
19th century, 3–6, 12, 31, 56, 88–89
20th Century, 7, 15, 19, 30–31, 59, 60, 183
21st century, 25–28
Academics, 46, 136, 185, 187
Accumulation by dispossession, 9, 41–42
Advanced capitalist economies, 13, 141,
147, 182
Advanced economies, 15, 67, 100, 145,
147, 155
African Bank, 152
Age of mass migration, 88
Aggregate demand, 70, 117–119, 121, 127
Agricultural sectors, 183
Allende, Salvador, 163
Angola, 143
Anti-globalization, 96, 138, 144,
see also Deglobalization
Anti-immigration, 186
Argentina, 10–11, 27, 34, 36–37, 91, 92,
135, 154, 155, 183, 186
Armenia, 155
Atkinson, Anthony Barnes, 26, 32
Atlantic Economy, 133
Australia, 3, 31, 91, 93, 148, 154
Authoritarianism, 72–73
Authoritarian governments, 173
Authoritarian regimes, 73, 80–81, 138,
see also authoritarian governments
Bank of England, 92, 100, 102
Bankia, 107
Banking crisis, 101
Baran, Paul, 60, 127
Belgium, 91
Berlin, 89, 92
Bernanke, Ben, 124, 125
Big bank, 121
Bolshevik revolution, 5, 143
Boom, 17, 89, 108, 109, 111
Boom and bust, 108, 116
Brain drain, 137, 187
Brazil, 10, 26, 52, 64, 91, 96, 135, 188
Bretton Woods era, 96–98
Bulgaria, 11
Business cycle, 5–6, 66, 110, 113, 123
Canada, 3, 34, 50, 91, 93, 148
Capitalist countries, 6, 8, 20, 31, 61, 68,
86, 98, 105, 181, 182, 187, 189
Capitalist class, 8, 27, 31, 71, 74, 75,
127, 162
Capitalist economic system, 116,
see also Capitalist countries
Capital accumulation, 8, 25, 58, 75, 119,
169, 175
Capital flows, 10, 91, 95, 96, 103
Capital markets, 6, 10, 17, 99, 100,
124–125, 186
204 Index

Capital mobility, 3, 4, 52, 53, 88, 98, Dahl, Robert, 165, 166
106, 131, 181, 189, see also first wave Debt crisis, 100, see also crises; economic
of globalization; gold standard; crisis; financial crisis
natural resources; second wave of Debt Equity Swaps, 102, 105
globalization Deglobalization Period, 94, see also
Capital owner, 53, 60, 165, 167–168 anti-globalization; Bretton Woods era
Caribbean nations, 147 Democracy, 19–20, 44, 69, 161–174
Central banks, 16, 86, 87, 95, 102, 104, Democratic society, 19, 171
105–106, 112, 114, 115–116 Democratizing ownership, 174–178
Cheap labor, 118–119, 182 Denmark, 93
Chile, 1, 8, 9, 14, 19, 40, 91, 100 Despotism, 165–166
China, 1, 11, 15, 33, 37, 42, 53, 63, 86, 99, Destination country, 133
118–119, 132, 135, 137, 182, 187 Developed countries, 36–38, 53, 146, 147,
Chinese economic elite, 133 157
Chinese egalitarian communism, 11 Developing countries, 18, 25, 50, 69, 77,
Chinese revolution, 143 100, 154–156
Chomsky, Noam, 76, 179 Developing world, 37, 67, 98, 151, 182,
Citizenship, 79–80, 166 see also developing countries
Civil society, 46 Developmental state, 147
Civil War, 89, 138–139, 143, 163 Development gaps, 141, 187
Class dependent, 76. see also Values Diaspora, 18, 142–148
Clerical workers, 13, 80, 181 African, 143, 156
Coercive laws of competition, 56–57 Chinese, 133, 143
Collective resistance, 94 Indian, 143, 155
Colonies, 138 Irish, 143, 152
Communism, 11, 19, 99, 182 Jamaican, 143, 156
Concentration of economic power, Mexican, 143
131–132, 189 Diaspora Direct Investment, 146
Concentration of income, 10, 12, 26, Diaspora savings, 145–146
33, 64 Direction of Chilean Communities
Construction sector, 89, 187 Abroad, 155
Consumer power, 70, 79, 80 Direction of talent mobility, 137
Corporate sector, 102, 190, see also Distorted rewards, 147
enterprise sector; industrial sector; Distribution of rents, 177
financial sector; formal sector Distributive justice, 179, 180
Corruption, 2, 67, 131, 149, 188, 190 Durable consumption, 80
Cost of doing business, 136 Durable goods, 70
Creative destruction, 42–43, 57–58 Dynamic economy, 58, 169
Crises, 15–17, 71, 72, 73, 85–93,
103–104 Economic benefits, 179
Critical mass, 174 Economic crises, 13, 18, 72, 87, 101, 186
Cultural hegemony, 75, 76 Economic cycles, 111, see also financial
Czech Republic, 11, 42, 156 cycle; macroeconomic cycles
 Index
Economic democracy, 19–20, 161–180
Economic elites, 19, 25–28, 31, 41, 42, 55
Economic growth, 18, 25, 45, 70, 133
Economic insecurity, 4, 73, 80
Economic instability, 14, 93–94, 127
Economic justice, 19, 131, 140
Economic nationalism, 6
Economic oligarchies, 42
Economic progress, 13–14, 67, 171
Economic reconstruction, 97
Economic stagnation, 18, 187
Economists, 9, 13, 25, 69, 76, 86, 110, 185
Educated people, 147
Education, 6, 7, 9, 11, 30, 65–66, 76, 138,
155–156, 187
Elites, 17, 25, 28, 30–32, 43–44, 131–133,
138–140
Emerging economies, 31, 33, 36–38,
85, 103
Emigrants, 143, 153
Empires, 4, 94
Empowerment, 14, 77, 79–80
Engineers, 18
England, 92, 100, 102, 133, 164
Enterprise sector, 175
Entrepreneurs, 12–13, 20, 57, 60, 63–64,
66, 77, 133
Environmental degradation, 139, 141
Ethnic polarization, 70, 72
Europe, 3–5, 7, 13, 17, 19, 85, 87, 89, 91,
133, 184
European Central Bank, 184
European countries, 16–17, 90, 92, 96, 98,
108, 184
European Union, 49, 50, 134, 148,
184–185
Expatriates, 142–143, 156
External debts, 91, 96, 186
External financing, 87, 97, 124; see also
capital mobility
Factories, 41, 163, 165, 169, 182
Falling rate of profit, 117, 126
205
Family, 53, 63–66, 135
Family background, 63–66, 175–176
Family packages, 148
Federal Reserve System, 31, 91
Financial crisis / financial crises, 45, 47,
85, 87, 89, 91, 103
Financial cycle, 59, 104, 108
Financial sector, 10, 13, 16, 109, 119, 184
Finland, 34, 93, 154, 186, see also True
Finns
Firms, 3, 12, 13, 61, 62, 118, 147, see also
cost of doing business
First wave of globalization, 15, 85–86,
88–93, 103
Fiscal deficits, 87, 91, 99, 101
Fiscal policy, 103, 105
Fisher, Irving, 122–124
Fixed exchange rates, 97, 99, 103
Flat organizations, 173
Foreign markets, 118
Foreign talent, 147
Formal sector, 13, 62
France, 5, 35, 36, 163, 184, 186
Franco, General Francisco, 89, 163
Franklin D. Roosevelt, 4–5, 45
Free capital mobility, 88
Free market, 6, 9, 10, 12, 101, 125, 181–183
Free migration, 3, 88, 131
Free movement of capital, 187
Free trade, 3, 4, 88, 131, 140
Fresh talent, 153
Friedman, Milton, 7, 9, 40, 90, 98, 125,
167, 170
GDP, see Gross Domestic Product
Germany, 4, 5, 10, 15, 33, 85, 89, 94–95,
120, 137, 164, 184, 186–187
Gini coefficients, 26, 27
Globalization, 1–3, 6, 12, 18, 88–89, 181
Global capital markets, 17, 99, 112
Global Entrepreneur Monitor, 62
Global middle class, 68
Global society, 181
206
Global south, 15–16, 137, 141, 148, 188–189
Global trade, 132
Great Depression, 4, 35, 90, 96, 122, 125
Greece, 13, 17, 19, 26, 71, 85, 96, 106, 108,
143, 185, 186, 190, see also Golden
Arrow
Golden Arrow, 186
Gold standard, 88–93
Goods, 15, 17, 42, 70, 86, 117, 126, 183, 190
Graduate students, 18, 146
Great Britain, 4, 5, 88
Great Moderation, 86, 105–106
Gross domestic product, 79, see also per
capita income
Health contingencies, 13–14, 80
Health professionals, 136, see also health
sector
Health sector, 187
Health systems, 43
Higher wages, 8, 118, 145
High income countries, 134, 137, see also
Rich countries
High value migrants, 147, 148
Highly talented individuals, 43
Hitler, Adolf, 73
Holland, 91
Home countries, 18–19, 132, 135, 147, see also
sending countries; source countries
Hope, 65, 85
Housing, 5, 6, 9, 70, 73, 80, 107, 127, 149,
165, 175, 180, 185
Host countries, 14, 18, 136, 144, 148
Housing sector, 89
Human capital, 39, 70, 150, 165, 185, 187
Human resources, 12, 120, 132, 135, 187
Hungary, 4, 11, 42, 94–96, 120, 156
Ideas, 2, 11, 16, 29, 40, 75, 76, 123, 125, 136
Igniting factor, 103
IMF, 4, 16, 17, 115, 184, see also
International Monetary Fund
Index
Immigrant´s Diasporas, 142
Immigration, 14, 96, 118, 147, 170, 186
Immigration policies, 147
Impact of Neoliberalism, 12–15
Income concentration, 27, 33, 45
Income distribution, 12, 27, 32, 43–44,
127, 183
India, 14, 33–34, 68, 77, 99, 137, 143, 147,
151, 155–156, 164, 182
Industrial sector, 31, 182
Inequality, 1, 2, 6, 9, 15, 25, 43–44, 48
Inflation targeting, 105, 108
Instability, 4, 58, 68, 70, 83, 96, 116–117
Intellectuals, 3, 184, 185, 189, see also
talented individuals
Intergenerational mobility, 64
Internal conflict, 18, 138, 143
Internal Evaluation Office, see
International Monetary Fund
International capital mobility, 86, 98
International Cooperative Alliance, 164
International Labor Office, 97
International migration, 100, 170
International Monetary Fund, see IMF
International students, 138, 187
International trade, 10, 14, 132
Interwar period, 95, 97, 119–120, see also
Bretton Woods era
Investment, 3, 8, 10–11, 14, 17, 89, 111, 132,
150, 167, 177, 189
Ireland, 13,, 17, 85, 89, 102, 106–107, 153,
154, 185
Irish Diaspora, 143, 152–153
Israel, 133, 135, 146, 154, 162–163
Italy, 13, 38, 73, 85, 91, 93, 96, 133, 154,
184–185
Jamaica, 155, 156
Japan, 10, 15, 33, 34, 100, 132, 134, 137
Job opportunities, 18, 143, 144, 170
Jobs, 4, 12, 15, 26, 41, 68–69, 71, 74, 173,
185
 Index
Keynes, John Maynard, 43, 58, 95, 97, 112,
119, 121
Keynesian, 5, 6, 21, 116, 184
Kindleberger, Charles, 98, 122, 123, 126
Knight, Frank, 43, 56, 58
Korea, 101, 135, 154, 156, 183, 187
Knowledge elites, 17, 21, 59, 131, 136, 141
Knowledge worker, 173
Labor costs, 11, 118, 124
Labor force, 11, 15, 59, 107
Labor market, 13, 71, 80, 94, 127, 141, 182
Labor market marginalization, 14, 141
Labor market polarization, 181
Labor rights, 42, 155, 162
Labor union, 97, 163, 170, 173
Laborers, 74
Latin America, 10, 26, 44, 52, 89, 103, 173,
175, 185, 190
Law, 56, 120, 136, 166, 171
League of Nations, 94, 95, 186
Legal status, 155
Liberalization policies, 33
Lithuania, 155
Living standards, 2, 9, 110, 181, 183
London, 9, 88, 92, 184
Low income countries, 72, 143, 145, 157
Low income groups, 176
Low labor costs, 11, 118
Low skills workers, 74
Low wage countries, 14, 118, 182, see also
low wage economies; low-income
countries
Lower class, 75, 76
Lower middle class, 20, 73, 181
Macroeconomic crises, 101
Macroeconomic cycles, 121, see also
business cycle; financial cycle;
economic cycles
Manual workers, 14, see also low skills
workers
207
Manufacturing, 11, 14, 76, 100, 118, 147,
164, 185
Marginalized people, 7, 121
Markets for talent, 43, 147
Market society, 171
Marshall Plan, 97
Marx, Karl, 30, 43, 56, 75, 117
Marxian tradition, 8, 75
Mass media, 1, 3, 19, 44, 139, 188, 189
Mass migration, 88
Maximum wages, 28, 45
Mega rich, 31, 32, 38
Mexico, 39, 40, 49, 64, 100, 135, 151, 183
Middle class, 1, 13, 26, 65, 69, 73, 78, 140,
181, 184
Middle income countries, 72, 78, 81, 132,
143, 145, 156
Migration chains, 148
Migration flows, 88, 94, 189
Migrants, 136, 140, 144, 145, 148
Minsky, Hyman, 115, 121
Military coup, 73, 138, 163
Military dictatorship, 81
Military elites, 29
Military regimes, 103, 163
Mills, C. Wright, 27, 28, 29, 30, 92
Mobility, 3, 18, 64, 75, 88, 168, 187
Mobility of talent, 137, 147, 187
Mobilizing Diasporas, 143, 146
Monetarism, 21, 98, 114, 183
Monetary policy, 105, 108, 111
Money, 3, 114, 151, 187, see also remittances
Monopoly capital, 60
Monolithic social dislocation, 171
Mosca, Gaetano, 27, 28
Mozambique, 143
Multinational corporations, 17, 18, 42,
132, 136, 141, 164, 179, 182, 187
Mussolini, Benito, 73, 75
National Front, 186
Nationalist movements, 96
20 8
Natural resources, 11, 20, 110, 179, 180,
182, 189, 190
Neoliberal, 1, 9, 19, 33, 48, 61, 76, 79, 98,
108, 115, 127, 161, 181, 184, 185
Neoliberal Capitalism, 3, 19, 20, 85, 148,
161, 181
Neoliberal globalization, 16, 85, 88, 98,
118, 127, 141
Neoliberal solution, 185
Neoclassical theory / Neoclassical
economics, 57, 58, see also New
Classical Macroeconomics
Net debt, 107
Net income, 122, 180
Net worth, 38, 39, 47, 175
Netherlands, 10, 33, 34, 37, 153
New capitalism, 11, 13
New Classical Macroeconomics, 16, 113,
183
New World, 3, 88
New York, 4, 90, 92, 97, 154
New Zealand, 3, 34, 91, 148, 154
Nobel Prizes, 137
Northern League, 186
North America, 14, 29, 38, 85, 92, 100,
113, 137, 179
Norway, 34, 91, 93, 154
OECD countries, 18, 40, 47, 50, 53, 77,
137, 141, 188
Organizational capacities, 59, 145
Origin countries, 89, see also sending
countries
Outsourcing, 14, 118, 168
Overall economic insecurity, 80
Overproduction, 57, 87, 117, 118, 126
Pareto, Vilfredo, 28
Passports, 88, 153
Perón, General Juan Domingo, 139
Pax-Britannica, 88
People with exceptional qualities, 28
Index
Per capita income, 50, 70, 78, 134, 166,
182
Peripheral Europe, 185
Personal income, 48, 50, 52
Peru, 10, 52, 100, 135, 176, 177, 178
Philippines, 100, 137, 147, 151
Physicians, 43, 136
Pinochet, Augusto, 8, 9, 14, 113, 155, 170
Poland, 11, 42, 94, 95, 96, 137, 147
Policy framework, 106
Policy interventions, 96
Political connections, 26, 27, 29, 40, 41,
42, 53, 132
Political democracy, 19, 161, 165, 180
Political economy, 44, 96, 99, 176
Political elites, 3, 28, 29, 138, 141, 161
Political equality, 165, 166
Political influence, 1, 12, 14, 31, 55, 115, 141
Political instability, 70, 95, 136,
see also instability
Political power, 30, 45, 76, 109, 115, 176, 189
Political rights, 20, 79, 162, 165, 180
Political stability, 20, 72, 94
Political turbulence, 4, 93, 94
Ponzi finance, 121, 122
Populism, 72
Poor, 19, 30, 44, 65, 72, 74, 76, 127, 148,
175, 177
Portugal, 13, 17, 34, 53, 85, 91, 102, 107,
170, 184, 185, 190
Poverty, 14, 32, 65, 68, 77, 149, 182
Power elite, 28–30, 75
Power of economic elites, 2, 19, 45
Power of capital, 8, 99, 118, 119, 169
Primitive accumulation, 11, 41, 169
Private ownership, 2
Private sector, 18, 46, 68, 98, 113, 186, 190
Privatization, 1, 6, 9, 41, 42, 48, 55, 68, 76,
184, 185, 190
Prussia, 89
Profit motive, 1, 9, 76, 126, 171
Profit sharing, 19, 34, 61, 162, 174
 Index
Profit squeeze, 98, 117, 118
Protest movements, 3, 140, 141, 181
Public sector, 14, 18, 80, 107, 131,
see also state sector
Public ownership, 162, 180, 189, 190
Public policy, 7, 16, 25, 31, 79, 189
Purchasing power, 70, 74, 117
R&D, see Research and Development
Rates of economic growth, 6, 18
Rational Expectations, 16, 21, 86, 113, 116, 183
Recipient countries, 150, 151
Regulated capitalism, 2, 4, 5, 6, 88, 98
Remittances, 18, 142, 148, 150
Rent seeking, 25, 27, 40, 67
Research and Development, 61, 137
Restricted private capital mobility, 97
Return migration, 141, 154
Return of talent, 43, 187
Revolution, 5, 94, 133, 143, 163, see also
Russian revolution
Rewards to talent, 27, 53, 147
Rich countries, 18, 131, 148, 188
Romania, 96
Romanov dynasty, 94
Russia, 1, 11, 39, 42, 53, 89, 138, 147, 183,
185, 190
Russian Federation, 136, 137
Russian revolution, 94
Schumpeter, Joseph, 42, 56, 57, 58, 59,
60, 110
Schumpeterian entrepreneur, 13
Scotland, 148, 152, 153, 154
Scope of social movements, 17
Second wave of globalization, 86, 100
Self-regulating market, 105, 108
Sending countries, 135, see also origin
countries; source countries
Senior management, 55, 190
Service sector, 13, 182,
Shared prosperity, 35, 98, 127, 184
209
Silicon Valley, 133, 135
Skilled workers, 74, 148, see also skilled
professionals; skilled migrants
Small elites, 38
Small states, 147
Social classes, 28, 30, 71, 74, 75, 80
Socialist countries, 155, 182
Social cohesion, 69, 70, 85, 186
Social contacts, 168, 170
Social sector, 7, 148, 171
Social movements, 1, 5, 17, 21, 131, 139, 141,
161, 187, 190
Social networks, 63, 140
Social policy, 69, 183
Social protection, 4, 6, 85
Social reforms, 141
Social relations, 30, 75, 117, 119, 165
Social services, 7, 99, 147, 181, 188, 190
Social tension, 2, 6, see also instability
Solimano, Andrés, 10, 17, 25, 64, 94, 133,
137, 145, 168
Source countries, 18, 152, see also origin
countries; sending countries
South Africa, 1, 37, 38
South America, 101, 133, 155
South Asia, 51, 145, 151, 152, 178
South-south capital, 189
South-south trade, 189
Soviet Russia, 5, 42, 101, 163
Soviet Union, 6, 45, 138, 163
Spain, 13, 17, 19, 26, 42, 85, 107, 133, 139,
143, 163, 188, 190
Spanish banks, 107
Special talents, 18
State sector, 7, 148, 171, see also public
sector; social sector
Stiglitz, Joseph, 45, 124, 179
Stability, 6, 70, 75, 80, 94, 97, 115, 121, 127
Stagnation, 10, 16, 18, 69, 118, 186, 187
Standard of living, 32
Stresemann, Gustav, 94
Stockholder, 3
210
Sub-Saharan Africa, 50, 77, 140, 147, 151,
156, 187
Sub-Saharan countries, 146, 151
Sudden stops, 87
Sweden, 34, 36, 37, 64, 93, 154
Sweezy Paul, 29, 60, 127
Taiwan, 133, 146, 148, 156, 187
Talent concentration, 137
Talent mobility, 3, 137
Talented individuals, 43, 147
Talent Network, 156
Talented professionals, 148
Technical change, 181, 182
Technology, 2, 4, 13, 30, 57, 61, 101, 136,
146, 190
Technological entrepreneurs, 12, 18, 66,
135, 141, 147
Technology sector, 65, 146, 187
Think Tank, 45, 55, 189
Top executive, 13, 53
Top manager, 13, 53, 163, 189
Top income, 15, 25, 27, 35, 36, 46, 52, 127
Total tax, 48, 50
Tourism, 154
Trade, 4, 5, 61, 88, 99, 133, 140, 172, 189
Trade in goods, 127
Trade in intermediate parts and inputs, 132
Trade regimes, 99
Trade restrictions, 99
Trade union, 5, 8, 61, 172, 173
Transactions, 17, 62
Treaty of Versailles, 95
Trigger crises, 188
True Finns, 186
Turkey, 26, 100, 101, 183
Twin crises, 87
Underemployment, 120, 126, 141,
see also economic crisis
Unregulated market, 8, 41, 171
Index
United Kingdom, 1, 4, 5,10, 35, 46, 64,
97, 163, 188
United Nations, 4, 18, 97, 164
United States, 133, 138,
see also destination country
Universities, 55, 66, 86, 148, 188,
see also academics
Upper middle class, 13, 20, 68, 73, 75, 181
Values, 56, 71, 75, 76, 77
Vienna, 89, 92
Visas, 88, 148, 155, see also working visas
Volatile financial markets, 114, 126
Volatile investors, 58–59
Wage, 6, 15, 19, 41, 47, 54, 61, 118, 126,
174, 182
Wage contracts, 168, 173
Wage demands, 170
Wage differentials, 41, 137
Wage discipline, 118
Wage flexibility, 95
Wage gaps, 46, 47
Wage inequality, 122
Wage labor, 57, 162, 169
Wall Street, 9, 115, 139, 184
Wealth concentration, 2, 27, 161, 171,
178, 185
Wealth creation, 1, 25, 41, 57
Wealth cut-offs, 32, 38
Wealthy-owners, 30
Weber, Max, 30, 31, 71, 75
Workers, 3, 15, 133, 167, 179,
see also low skills workers; talented
individuals; talented professionals
Workers’ rights, 171, see also labor rights
Working class, 5, 9, 13, 30, 69, 74, 80, 170,
181, 183
Working visas, 155, see also visas
Workplace, 19, 162, 166, 167, 170, 173, 180
Workplace Democracy, 166, 172, 179
 Index 211

World economy, 15, 16, 38, 52, 94, 99, World War I, 4, 45, 93, 94, 95
168, 189 World War II, 4, 5, 45, 88, 96, 121, 139, 186
World Bank, 4, 10, 18, 74, 76, 97, 188
World Trade Organization, 97, 139, 140 Xenophobia, 4, 89, 186