Why the rich want the super-rich to be restrained
A new book critiquing the lives and antics of plutocrats reveals just how widespread the discomfort with rapid economic growth has become.
How do mere millionaires feel about the increasing number and power of billionaires in the world? A proper answer to this question provides many revealing insights into contemporary politics.
It is not only those with normal bank balances who have a vicarious interest in the lives of the super-rich. While television programmes such as Dallas and Downton Abbey are popular among the general public, the affluent are if anything more obsessed with how the even-more-affluent live. Publications such as the Financial Times (FT) and the Wall Street Journal often run features on lifestyles that are way beyond most of their readers.
Plutocrats is an attempt to show what life is like inside what its author calls ‘the House of Have’. Chrystia Freeland, digital editor at Thomson Reuters and a former US managing editor of the FT, is well placed to write such a book. She makes it clear that she spends much of her working life talking to the merely wealthy and sometimes even to the super-rich. Sale of the Century (Crown, 2000), her previous book on Russia’s transition to capitalism, also qualifies her to write on oligarchs.
Her book is not nearly as vivid as Robert Frank’s Richistan (Crown, 2007) (reviewed on spiked here http://dev.spiked-online.com/index.php/site/reviewofbooks_article/3752). While he opted for descriptions of the succulent lifestyles of the super-rich, from enormous mansions to armies of domestic staff, Freeland’s goal is more ambitious: she wants to explain how they have prospered in recent years and suggest how their power might be curbed.
Although Plutocrats is her own work, the impressive list of acknowledgements suggests it represents mainstream views on this subject. These include newspaper editors and proprietors, top-ranking economic thinkers, several Nobel Prize winners, and even a few plutocrats.
Freeland concedes that her explanation of the rise of the plutocracy since the 1970s is not particularly novel. In her view, it is the result of a combination of three forces. First, there is technological advance, particularly in the sphere of information technology. Second, there is globalisation, with the world becoming a more integrated place. Together, these two forces have, among other things, triggered a huge burst of growth in the developing world.
And third, there is the shift from what Freeland calls the ‘Treaty of Detroit’ (a reference to the five-year contract signed in 1950 by the United Auto Workers Union and the three big Detroit car manufacturers) and the Washington Consensus. In other words, a transition from a society based on social cooperation to one built on free-market norms. America, in particular, has moved from being a relatively egalitarian society in the postwar period to a highly unequal one, Freeland says.
She argues that the result of all these forces is a confluence of two ‘Gilded Ages’ of prosperity. The second Gilded Age of the developed world, following the first in the late nineteenth century, is meeting what for the emerging economies is their first Gilded Age.
In her view, there are both similarities and differences between the Gilded Ages of the late nineteenth century and today. The earlier era also saw the rise of the super-rich, such as Andrew Carnegie and JP Morgan, and rising social inequality. But today’s super-rich are different in several ways. They are more likely to have earned their wealth rather than inherited it, and they are more highly educated and more internationally mobile.
The archetypal member of today’s super-elite is nothing like Jane Austen’s Mr Darcy, with his ownership of the Pemberley estate and a handsome inherited income. Instead, he is an ‘Alpha Geek’: ‘an aggressive, intensely educated mathematician, the son of middle- or upper-class parents, who made his first fortune young’.
However, in Freeland’s view, there is a big problem with the rise of the super-rich in any circumstances. They tend to engage in what economists misleadingly call ‘rent-seeking’. In other words, they make much of their money by manipulating the political process and rules to their advantage.
Although the term might not be familiar, campaigns against rent-seeking have become central to contemporary political debate. Think about bankers on Wall Street or in London’s City who allegedly conspired to ensure the government bailed out their institutions when they got into trouble. Or the heads of ‘Big Pharma’ or ‘Big Oil’, who through expensive lobbying ‘capture’ the regulatory system and ensure it works in their favour. Then there are the rich chief executives who, with the help of highly paid advisers, exploit legal loopholes, allowing them to pay next to no tax in their home countries.
In that sense, campaigns such as Occupy and UK Uncut are focused on rent-seeking even if they do not use the phrase. They are calling for tougher state controls on business rather than upholding the quintessentially socialist ideals of abolishing social hierarchy or bringing about greater prosperity for all. Although the concept of rent-seeking was developed by free-market economists, it is nowadays often associated with those who identify as being on the left.
Freeland, too, is arguing for what is sometimes referred to as a progressivist response to the super-rich. She wants a world in which capitalists engage in value creation instead of enriching themselves through extracting rents. A capitalism without oligarchs or cronies. There would be a place for responsible plutocrats, such as Bill Gates or the late Steve Jobs, but the behaviour of the oligarchs would be curbed.
She is not proposing social equality, but a world that is better geared to the affluent middle class rather than rapacious billionaires; a society based on a philosophy she refers to as ‘long-term greed’ rather than one geared towards short-term avarice.
There are many problems with Freeland’s analysis; two in particular stand out.
Her explanation of widening inequality since the 1970s, and the associated increase in the number of super-rich, is lacking. It did not happen in an era of rapid economic growth, at least in the West, or of technological dynamism. On the contrary, the increase in inequality happened during a period of relatively sluggish growth and little innovation in the developed world. Growth was much faster in the more egalitarian 1950s and 1960s.
A key part of the story of rising inequality is the surge in finance that coincided with the onset of sluggish economic growth in the West in the 1970s. Many of the super-rich worked within the financial sector itself and benefitted from its increasingly bloated character. Outside of financial institutions, many top executives made a lot of their money from surging asset prices. For instance, a large part of their incomes often consisted of share options or realised gains from rising share prices. Typically, salaries only accounted for a small proportion of their total income.
Increasing inequality was therefore deeply rooted in developments within capitalism at the time. As finance became more corpulent, some individuals were able to make fantastic gains.
There are problems, too, with the ‘progressivist’ solutions that Freeland proposes. Essentially, she is arguing that the merely affluent, perhaps with some help from more socially responsible billionaires, should wrest back control of the state from the oligarchs. The state would then be in a better position to enforce a more cohesive society akin perhaps to America in the 1950s or contemporary Canada (where Freeland happens to come from).
In practice, such demands simply legitimise more state regulation of the economy. They lead to the imposition of more restraint on what are already chronically sluggish economies. Rather than promoting desperately needed prosperity, they are motivated by an exaggerated fear of the potentially damaging consequences of rapid economic growth.
The worldview of an affluent middle-class clique dominates contemporary political debate. It is high time that discussion of social inequality and the economy as a whole were viewed from a broader perspective.
Daniel Ben-Ami is a journalist and author based in London. Visit his website here. An expanded version of latest book, Ferraris For All: In Defence of Economic Progress, is published by Policy Press. (Buy this book from Amazon (UK).)