By Branko Milanovic
Economists from Adam Smith to Joseph Schumpeter have long defined capitalism by the existence of two classes: one that earns its income through labor and the other whose income derives from property. Some economic thinkers, notably Karl Marx, saw the relationship between these classes as necessarily antagonistic and leading to conflict. Others, such as Frédéric Bastiat in France and John Bates Clark in the United States, viewed the classes as collaborating toward the greatest possible output. But none doubted that these two large groups of people existed or that they differed from each other.
But the past 40 years have produced a profound change in that dichotomous picture. In the “new”—or, as I have called it in my book Capitalism, Alone, liberal—capitalism, and especially in the United States, an increasing percentage of people are rich in terms of both labor and capital incomes. I called this phenomenon “
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