Faculty Q&A with Jan Svejnar: How Billionaires Affect the Economy

William McGuinness
February 25, 2016

Jan Svejnar was born in Czechoslovakia when it was still in the grip of a totalitarian Communist regime. Certain things worked well, such as rebuilding the country from the devastation of World War II, yet there was very little freedom. Then, in 1968, when Jan was 15, the Communist Party adopted more liberal policies, including abolishing censorship and allowing trade unions to try to bargain. Economists like Svejnar’s father were permitted to work on market-oriented reforms, and Jan himself spent the summer in England learning English. Within a few months, however, Russian tanks rolled in to quash the Prague Spring reform movement, and Svejnar’s family fled to Switzerland in 1970.

    “It was a big bifurcation in my life,” he said. “After the fall of the Berlin Wall, I went to a high school reunion and the whole evening, people were kind of looking at each other. About six or seven of us had managed to escape and the rest of them stayed behind. I thought, `Well, I probably would look like this person had I stayed,’ and they were thinking, `Well, I probably would have pursued a path like this person who left.’ It was kind of surreal seeing how life can be affected by an external force of this kind.”

    Once safely in the West, Svejnar followed in his father’s footsteps and studied economics. His immersion in the subject has led to a distinguished academic career, with a current research focus on the impact of government policy on firms, labor and markets; corporate, national and global governance; and wealth inequality. Svejnar also served as economic adviser to Czech President Vaclav Havel and in 2008, ran for president of the Czech Republic, ultimately losing to incumbent Vaclav Klaus. Svejnar said he ran because he felt Klaus “held extreme views, denying the existence of global warming and being openly europhobic.”

    “The country needed to see that there could be leaders with alternative values and world views,” he said. His most recent work examines capitalism in its many forms, including how it is implemented in different countries.

    Q. Could you explain some of your recent research on capitalism?

    A. The 20th century was a century of huge experiments in “isms”—capitalism, socialism, fascism, communism— systems that were tried for years or even decades. Capitalism emerged the winner, because it was the best—or the least bad— of all the systems, and also the most flexible. Of course, capitalism has different forms. In some countries there is a very free market-type system, and in others the state intervenes a lot. As markets were liberalized and capital started flowing around the world toward the end of the 20th century, there was a rise in the number of very rich people and suddenly the billionaires begin appearing. When I started studying as an undergraduate at Cornell in 1970, the leading hypothesis in my sociology course was that it was no longer possible to rise to riches as Carnegie, Mellon and Rockefeller had—the “American dream” was dead. American society was seen as stagnant. That has changed. What is striking, however, among today’s billionaires is that while some rose as a result of their talent and skills, others did so because of political connections, especially in countries where regulations and rule of law are not strong.

    Q. In your studies of the extremely wealthy, you have found billionaires to be different depending on where they are from. Can you elaborate?

    A. Compared to many countries, the U.S. has a much higher proportion of billionaires who made their wealth through ingenuity without depending on explicit government or political help. In that sense, this system is fairer in most people’s perception. I think there is less envy in our society than in others, where you might get a monopoly for the telephone company or some other part of the economy and become rich not because of your ingenuity but because you are politically connected.

    Q. So not all billionaires are created equal?

    A. In a number of the autocracies or younger democracies, you see oligarchs rising because they got a particular advantage at a specific point in time. My colleague [Villanova University School of Business] Professor Sutirtha Bagchi [co-author of an article in the July 15, 2015 Guardian on the relationship between billionaires and economic growth] and I wanted to see if billionaires who owe their wealth to political connections have a different effect on the economic performance of their country than those who made it without political connections. We found that politically connected billionaires had a negative effect on economic growth, while the effect of politically unconnected billionaires was neither positive nor negative. This is an interesting finding, and in some sense reassuring. Yet there is the question of why the politically unconnected billionaires do not have a clear positive effect. Many in the Western world see billionaires as exceptional. Usually they create companies that have high value, and therefore may be expected to contribute exceptionally to the GDP of the country. The fact that we do not find this merits further investigation. We’re looking to see whether, for instance, early on they might have a positive effect, when they’re innovating, and later, perhaps, a negative effect, if they are protecting an acquired monopoly. We don’t know yet, but we’re pursuing this line of research.

    Q. How did you come to focus on wealth inequality?

    A. Social science theories focus on who has control over resources, which is the distribution of wealth. Yet, there has not been good data on wealth distribution, and researchers have therefore used income distribution instead. This could lead to biased findings because a person’s income and wealth are not necessarily highly correlated. Our study is one of the first looking at wealth at the top of the pyramid.

    Q. What happens when you reframe the debate from income inequality to wealth inequality?

    A. There are several issues. One is that we want to see whether it’s wealth inequality or income inequality that drives the behavior of the economy. So we’ve done tests to see which is more important. And we’re finding that it’s wealth inequality. Then we also wanted to bring the data up to the present to see if there are changes over time, whether income and wealth distribution have become more unequal over the last several decades. I think there will be interesting analyses coming from other disciplines: for instance, to what extent is the cohesion of societies threatened if you go too far in terms of inequality. So far it looks to me as if American society is quite tolerant of inequality. There seems to be no particular extremist movement or party emerging that would successfully exploit the rising inequality of income and wealth.

    Q. Can you elaborate on the difference between income distribution and wealth distribution?

    A. From the partial data that we have we know that wealth distribution is even more unequal than income distribution. Income distribution in a way is indicating what’s going on in the economy, but the picture would be even stronger if one used wealth distribution as a measure. The two are not always perfectly correlated because you can imagine a year when a very rich person has a relatively low income but his or her wealth is high. For example, imagine a stock market downturn—the income from the stock market may be low, but the accumulated wealth is high. Or vice versa. If a lot of the wealth is in the form of stocks, the value of it can go down significantly, but if the dividends are still paid, the stream of income is still high. Income can vary a lot in the short term. Wealth is usually more steady, unless it’s badly invested.

    Q. Are there some societies where wealth inequality is less readily accepted?

    A. In some European countries where the social democratic idea is very strong, extreme inequality would be less acceptable than it is in the U.S., which is a more individualistic country. As long as the wealth is perceived to be fairly gained, Americans are happy to congratulate somebody on success rather than feeling envious, or suspecting that the wealth was gained through murky means and at the expense of others.

    Q. You ran for president of the Czech Republic. As an economist, have you considered how some of your research might be used to lessen the negative impact of global wealth inequality?

    A. When I ran for president, I stressed the fact that the Czech Republic, and more generally young democracies, should open up fully, be active in international forums, give everybody equality of opportunity in terms of education, health care and so on. You want to encourage people to excel, not to become oligarchs but rather to become the entrepreneurs who create the next Facebooks of the world.

    Q. You are director of the Center on Global Economic Governance at SIPA. Can you talk about the center’s focus?

    A. We have an active group that looks at macroeconomic policies, such as whether the Federal Reserve will raise interest rates or how the European Central Bank will lift Europe out of long-term recession. We have people working on international trade issues, at the optimal way to regulate financial markets, at how to reduce carbon footprints. By now it’s become a cliché to say the world has become global. But what that means is that quite a lot of phenomena happen beyond the boundaries of the nation-state. Before, countries among themselves could decide on something. Now a recession or financial crisis or contagion can go around the world, and it’s not a matter of two countries or even several countries signing a treaty saying we’re not going to behave this way. We have a world where one day you work here, another day you may be in Tokyo or London or Istanbul. The world is mobile.