The causes and consequences of plutocracy

By Ryan Avent
October 17, 2012

This is the second response to an excerpt from Chrystia Freeland’s Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else, published this week by Penguin Press. The first response can be read here.

Today’s plutocracy, as described by Chrystia Freeland, can make for an ugly spectacle. It is an increasingly stateless and distant class. The very rich may sometimes dress scruffily or express an affection for common tastes, but their wealth naturally separates them from the rest of the public. It isolates them physically, as they flit from palace to palace in private jets. And it isolates them psychically, as they grow comfortable with the view that their wealth is not merely the fruit of talent and work but the mark of superiority.

Their wealth and isolation often contributes to a shortfall in empathy (or exacerbates a pre-existing condition, which may have helped raise them to plutocratic status in the first place). They are more likely to feel deserving of rewards, well-earned or ill-gotten. And they are less likely to feel a twinge of hesitation or regret when inflicting hardship on business partners or employees in the name of efficiency and profit.

Humanity has never been short of such men. The difference now, as in the Gilded Age, is in the enormous wealth those especially talented, or lucky, or ruthless few at the top have been able to accumulate. The share of national income in the United States that flows to the top 1% has reached approximately 20%, about where it was in the 1920s, with a long period of relative equality in between. The most interesting thing about today’s plutocrats is not necessarily their personal views and habits but the conditions that allow them to earn so very much more relative to the average worker than at other times in history.

As in the early 20th century, today’s billionaires benefit from changing technologies and globalization, often working in concert. The rise of a global marketplace has made it ever more lucrative to become the dominant player in a field. This is the “superstar effect,” popularized by economist Sherwin Rosen, which suggests that as markets grow larger, the very best performers in a field – the wiliest traders or most dazzling pop stars – earn financial returns much larger than those only slightly less talented. At the same time, expanded trade has allowed perhaps 1 billion participants in emerging markets to become active in the global economy, discomfiting workers in advanced economies across a range of industries. Technology has facilitated this globalization while acting as another source of labor discomfort in sectors, from retail to media, that have been turned on their heads by the accelerating pace of change in computing and communications.

Perhaps most worrying has been the way in which the financialization of the global economy has run ahead of the globalization of trade or regulatory institutions, fanned by technologies that allow firms to trade more complex securities across more markets in less time than ever – generating great wealth and great risk. But while it is tempting to observe the rise of the super-rich and the contemporaneous struggles of the middle class and conclude that the one caused the other, that isn’t necessarily true. In fact, both seem to be the product of a rapidly changing global economy – one, it’s worth noting, which has improved the lives of much of humanity over the past generation.

That’s no reason to feel complacent about the concentration of wealth or the attitudes of those who hold it. There is always a risk in a market economy that those who lose out will grow skeptical of the system itself and seek to replace it with something worse. And there is the serious worry that those who do best will use their rewards to try to secure a permanent advantage for themselves. In her book, Freeland cites the recent work “Why Nations Fail” in which acclaimed economists Daron Acemoglu and James Robinson warn of just this possibility. They describe the economic decline of Venice, brought on when the city-state’s wealthiest traders used political power to curtail institutions supporting upward mobility, reinforcing their economic power and choking off the city’s vitality.

Is the rich world, and America in particular, moving in that direction? As Freeland writes, the rich certainly aren’t happy with a Washington inclined to speak ill of the wealthy and raise their taxes. Even financial moguls only recently rescued from the abyss feel mistreated. At least some of this class has been motivated to try to bend Washington to its will. Some 80% of the torrent of Super PAC money unleashed by the Citizens United Supreme Court decision has come from just 200 individuals, according to one analysis – a striking illustration of the potential impact of concentrated wealth.

Whether that money will have the desired effect is another question. Though the ultra-rich may favor Republicans in this cycle, the plutocracy’s partisan interests – if not their policy interests – may cancel out over longer time horizons. For now, it seems difficult to imagine that billionaire money could swing an election in which fundamentals like the state of the economy and foreign affairs dictate strongly in one direction or another – though a close race, like the present one, could be a different story.

The worry must be that the current cycle of wealth concentration hasn’t reached its end. The age of the Robber Barons gave way to a Great Compression in incomes, but not without difficulty. It took a Great Depression in which equity prices collapsed almost 90%, a war whose funding drove top income tax rates to confiscatory levels, the creation of the American social welfare state, an enormous increase in educational attainment as young people began attending university in huge numbers, and the deployment of a wave of technologies that raised the return to middle-skill work in factories and offices. Maybe a wave of new technologies will restore the middle class to health and reduce the concentration of money in politics. If it doesn’t, average Americans will need to muster the societal wherewithal to protect institutions of economic mobility – or count on the benevolence of the billionaire to do it for them.

7 comments

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I was intrigued by the title of your article, but “never judge a book by its cover” seems to apply here, since the content is more of tribute to these individuals who have destroyed society before and are busily engaged in doing so again.

What you say is not worth my time to give you a reasoned response, nor could I fashion one that would pass the censorship imposed for anyone telling the truth about these people.

Posted by Gordon2352 | Report as abusive

Ryan’s remarks and logic become mush in the last couple of paragraphs as he characterizes the establishment of a social safety net as “welfare state”, the top marginal tax rates of the postwar period (our nation’s most prosperous) as “confiscatory”, opines that it is difficult to imagine billionaire money swinging an election — except the present one — and suggests that “a wave of new technologies” might “restore the middle class to health and reduce the concentration of money in politics”.

Ryan’s final sentence can be rephrased as saying that if some new technology does not emerge to magically restore the middle class, the middle class will have to restore itself through political means or leave that to the “benevolence” of billionaires. How such a political development might be brought about by a middle class after the “benevolent” billionaires have sapped it of political power is not indicated by Ryan.

Posted by bcrawf | Report as abusive

Last year Freeland wrote that “we need” the super-rich and that today’s plutocrats are mainly self-made. It was a laughable position and it is unclear whether she still maintains it.

I couldn’t find any argument at all in Freeland’s excerpt or this rejoinder.

What, exactly is the thesis?

Posted by Eericsonjr | Report as abusive

It is false to assume that plutocrats have a right to exist, especially in any particular society. Their continued presence is subject to the tolerance of the public. That is why the USA has attracted plutocrats from all around the world. Their home countries are much less submissive to abusive wealth.

All that it takes to deal with the plutocratic class is to take their money and property from them, and then permanently expel them. All wealth is held at the pleasure of the State, and all law is but decree. This is a single sentence summary of the American system as it currently operates. If the public desires, this it can do and in the process sweep away those who wish those rules to only be applied by themselves and not by the people.

The State must at least pretend to be fair.

Posted by usagadfly | Report as abusive

“count on the benevolence of the billionaire to protect the economic mobility of the american middle class”

what a joke – “economic mobility” is a reality distortion field for neo-feudal slavery

the plutocracy is downgrading the us middle class into a foxconn generation,

aka. part-time sweatshops

be grateful for being part of the “big apple”

Posted by scythe | Report as abusive

This might seem out of place, but for every gallon of gasoline burned, 1 gallon of water is created. 26 lbs of oxygen is taken out of the air and 24 lbs of CO2 is created. Plants use 1 gallon of water, 16 lbs of CO2, and sunlight turn into 14 lbs of plant cellulose, 7.4 lbs of oxygen and 3.7lbs of water.

It takes a plant, 4 gallons of water to turn out enough oxygen to replace the oxygen consumed in burning a gallon of gasoline. Every year we consume 16 billion “tonnes” of oxgyen from the air we breathe using fossil fuels world wide per year. I have checked these figures with a PHD in Chemistry, and he felt the chemical equations are correct. A water temperature inversion which kills aquatic life, does happen to air temperature, too. We might find that one day, a sudden cold change in temperature will suffocate large numbers of people. Just a different kind of pollution. Point is, “Rich people will suffocate too.” We need solar and wind power, electric cars as soon as possible.

WINJC

Posted by crocodilebobies | Report as abusive

No group of humans has ever had a society without an “-ocracy” or “-archy” of some kind (except, perhaps in the imaginations of libertarian philosophers). Our historical experience is that some individuals have a greater ability than others to call on available resources. This also appears to be the case (though possibly to a lesser extent) in gorilla and chimpanzee societies, so there may be a basis for believing it to be hard-wired. Indeed, the concept of a “society” suggests an organizing principle. It is difficult to imagine an organizing principle that does not place constraints on the organized, and it is also difficult to imagine an organization of any complexity at all in which the constraints were not differentiated between or among the organized individuals.

So what? Well, it appears to be that we will always have an “-ocracy” or “-archy” of some kind, and it may not always make a lot of difference whether to the average guy what the prefix is. A plutocracy appears to be a type of oligarchy; that is, a society in which access to resources is controlled by a subset of the members of the society. Plutocracy appears to be differentiated from other forms of oligarchy in that the external manifestation of the control over resources takes the form of money. In other forms of oligarchy, such as medieval feudalism or the modern police state, control may be manifested in other ways, such as the use of violence to constrain the behavior of non-members of the control group. Indeed, some people today view the modern concept of obligations of the “State” (whatever that is) as the modern survival of the concept of noblesse oblige, pursuant to which medieval and renaissance oligarchs were viewed as having an obligation to do certain things for the rest of society, in exchange for the oligarchy’s near monopoly on access to resources.

I admit that I wish I had a lot of money, and I also admit that I think the ideal form of government would be an absolute dictatorship with me as the absolute dictator. In the absence of great wealth or such an ideal form of government, however, it is not clear to me that a plutocracy is the worst type of society imaginable. I’d rather have someone shoving a Rolex watch or other luxury goods in my face than have to deal with demands for the exercise of droit du seigneur, etc. by the local strongman.

Posted by Bob9999 | Report as abusive