The causes and consequences of plutocracy
This is the second response to an excerpt from Chrystia Freeland‚Äôs 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‚Äôs 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‚Äôs 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‚Äôs 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 ‚Äúsuperstar effect,‚ÄĚ popularized by economist Sherwin Rosen, which suggests that as markets grow larger, the very best performers in a field ‚Äď the wiliest traders or most dazzling pop stars ‚Äď 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 ‚Äď 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‚Äôt necessarily true. In fact, both seem to be the product of a rapidly changing global economy ‚Äď one, it‚Äôs worth noting, which has improved the lives of much of humanity over the past generation.
That‚Äôs 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 ‚ÄúWhy Nations Fail‚ÄĚ 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‚Äôs wealthiest traders used political power to curtail institutions supporting upward mobility, reinforcing their economic power and choking off the city‚Äôs vitality.
Is the rich world, and America in particular, moving in that direction? As Freeland writes, the rich certainly aren‚Äôt 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 ‚Äď 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‚Äôs partisan interests ‚Äď if not their policy interests ‚Äď 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 ‚Äď 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‚Äôt 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‚Äôt, average Americans will need to muster the societal wherewithal to protect institutions of economic mobility ‚Äď or count on the benevolence of the billionaire to do it for them.