The New Paradigm Papers of the Month of February

The three eras of global inequality, 1820–2020 with the focus on the past thirty years

Branko Milanovic

A new paper by renowned economist Branko Milanoviç, “The three eras of global inequality, 1820–2020 with the focus on the past thirty years,” delves into the intricacies of global economic history over the past two centuries, shedding light on significant shifts in income distribution and the emergence of a new global landscape. In essence, Milanoviç’s work unravels the intricate tapestry of global economic history, emphasizing the transformative impact of events such as the Industrial Revolution and the recent rise of Asia. It concludes that the future trajectory of global inequality hinges on the growth rates and inequality trends in India and large African countries, as well as the looming threat of climate change.

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(Successful) Democracies Breed Their Own Support

Daron Acemoglu, Nicolas Ajzenman, Cevat Giray Aksoy, Martin Fiszbein, Carlos Molina

This paper addresses growing concerns about the future viability of democracy amid global trends of dissatisfaction, misinformation, and the rise of authoritarian-leaning populist parties. The study explores whether public support for democratic institutions is influenced by their success. The authors find that individuals living under successful democratic systems tend to support democracy and oppose authoritarian rule. This effect is primarily observed among those with personal experience of democratic success in terms of economic growth, corruption control, peace, political stability, public expenditure, and inequality. Leveraging age group, country, and survey variation, the study examines whether longer exposure to successful democracies correlates with greater support for democracy. The findings also suggest that democratic institutions with citizen support perform better in facing negative shocks, shedding light on a crucial factor in shaping the future of democracy.

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Trust we lost: The impact of the Treuhand experience on political alienation in East Germany

Kim Leonie Kellermann

This study investigates the long-term impact of politically administered mass layoffs on trust and political interest, focusing on the privatization of formerly state-owned socialist firms in East Germany during the German reunification by the Treuhand. The extensive job losses and public protest during this transition period are analyzed in relation to individuals’ attitudes and political behavior. Utilizing survey data from the German Socio-economic Panel and election results, the research reveals that East Germans who experienced job loss during this privatization exhibit enduringly lower levels of trust, reduced political interest, and diminished identification with mainstream democratic parties, persisting up to three decades after reunification. Fixed-effects estimations and a placebo analysis further support the causal link between the Treuhand experience and political disenchantment, suggesting a lasting negative impact of perceived political mismanagement during a critical economic transition on individuals’ long-term political identification.

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Worker Beliefs About Outside Options

Simon Jäger, Christopher Roth, Nina Roussille, Benjamin Schoefer

This study challenges the assumption in standard labor market models that workers accurately perceive their outside options in terms of the external wage distribution. Analyzing German workers’ beliefs about outside options against objective benchmarks, the research reveals three key findings. Firstly, workers tend to anchor their beliefs about outside options on their current wage, resulting in significant underestimation of potential wage changes. Secondly, employees in low-paying firms consistently underestimate wages available elsewhere. Thirdly, when exposed to information about wages of similar workers, respondents adjust their beliefs, influencing job search and wage negotiation intentions. The study concludes by employing a simple equilibrium model, demonstrating that anchored beliefs contribute to keeping pessimistic workers in low-wage jobs, fostering monopsony power and labor market segmentation.

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On the survival of a flawed theory of capital: mainstream economics and the Cambridge capital controversies

Francisco Nunes-Pereira, Mário Graça Moura

This article delves into the enduring influence of the Cambridge controversies on capital theory, a series of debates in the 1950s that pitted heterodox economists at the University of Cambridge, UK, against mainstream economists, primarily associated with the Massachusetts Institute of Technology. Despite the controversies revealing substantial flaws in the concept of aggregate capital, contemporary macroeconomics continues to rely on the notion of homogeneous capital. The article aims to unravel this paradox by scrutinizing arguments that justify the persistent adherence to the aggregate capital approach. The authors contend that this commitment reflects an implicit adherence to instrumentalism, and they attribute the disregard for the outcomes of the Cambridge controversies to methodological conformism with potentially shaky foundations.

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