Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else

by Chrystia Freeland

  That shift was particularly profound in America—one reason, perhaps, that even today the national mythology doesn’t entirely accept the existence of those “rigid castes” of industrial society that Carnegie described a hundred years ago. The America of the national foundation story—the country as it was during the American Revolution—was one of the most egalitarian societies on the planet. That was the proud declaration of the founders. In a letter from Monticello dated September 10, 1814, to Dr. Thomas Cooper, the Anglo-American polymath (he practiced law, taught both chemistry and political economics, and was a university president), Thomas Jefferson wrote, “We have no paupers. . . . The great mass of our population is of laborers; our rich, who can live without labor, either manual or professional, being few, and of moderate wealth. Most of the laboring class possess property, cultivate their own lands, have families, and from the demand for their labor are enabled to exact from the rich and the competent such prices as enable them to be fed abundantly, clothed above mere decency, to labor moderately and raise their families. . . . The wealthy, on the other hand, and those at their ease, know nothing of what the Europeans call luxury. They have only somewhat more of the comforts and decencies of life than those who furnish them. Can any condition of society be more desirable than this?”

  Jefferson contrasted this egalitarian Arcadia with an England of paupers and plutocrats: “Now, let us compute by numbers the sum of happiness of the two countries. In England, happiness is the lot of the aristocracy only; and the proportion they bear to the laborers and paupers you know better than I do. Were I to guess that they are four in every hundred, then the happiness of the nation would to its misery as one in twenty-five. In the United States, it is as eight millions to zero or as all to none.” Alexis de Tocqueville, visiting America two decades later, returned home to report that “nothing struck me more forcibly than the general equality of conditions among the people.”

  America, in the eyes of Jefferson and Tocqueville, was the Sweden of the late eighteenth and early nineteenth centuries. Data painstakingly assembled by economic historians Peter Lindert and Jeffrey Williamson have now confirmed that story. They found that the thirteen colonies, including the South and including slaves, were significantly more equal than the other countries that would also soon be the sites of some of the most vigorous manifestations of the industrial revolution: England and Wales and the Netherlands.

  “If one includes slaves in the overall income distribution, the American colonies in 1774 were still the most equal in their distribution of income among households, though by a finer margin,” Professor Lindert said.

  In addition to seeing America as egalitarian, contemporary visitors and Americans believed the colonists were richer than the folks they had left back home—that was, after all, part of the point of emigrating. Lindert and Williamson have confirmed that story, too, with one important exception. Egalitarian America was richer, apart from the super-elite. When it came to the top 2 percent of the population, even the plantation owners of Charleston were pikers compared to England’s landed gentry. Indeed, England’s 2 percent were so rich that the country’s average national income was nearly as high as that of the United States, despite the markedly greater prosperity of what today we might call the American middle class.

  “The Duke of Bedford had no counterpart in America,” Professor Lindert said. “Even the richest Charleston slave owner could not match the wealth of the landed aristocracy.”

  In egalitarian America, and even in aristocratic Europe, the industrial revolution eventually lifted all boats, but it also widened the social divide. One reason that process was traumatic was that it was pretty dreadful to be a loser—from their personal perspective, the Luddites, skilled weavers who wrecked the machines that made their trade unnecessary, had a point. But, as in all meritocratic 1 percent societies, the creative destruction of the industrial revolution was also traumatic for the many who made a good-faith effort to join the party but failed. Indeed, it was the pathos of these would-be winners that inspired Mark Twain to write the novel that gave the era its name.

  As Twain and coauthor Charles Dudley Warner explained in a preface to the London edition of their novel, The Gilded Age: “In America nearly every man has his dream, his pet scheme, whereby he is to advance himself socially or pecuniarily. It is this all-pervading speculativeness which we tried to illustrate in The Gilded Age. It is a characteristic which is both bad and good, for both the individual and the nation. Good, because it allows neither to stand still, but drives both for ever on, toward some point or other which is ahead, not behind nor at one side. Bad, because the chosen point is often badly chosen, and then the individual is wrecked; the aggregations of such cases affects the nation, and so is bad for the nation. Still, it is a trait which is of course better for a people to have and sometimes suffer from than to be without.”

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  The paradox was that even as Carnegie, America’s leading capitalist, acknowledged that the country’s economic transformation had ended the age of “social equality,” political democracy was deepening in the United States and in much of Europe. The clash between growing political equality and growing economic inequality is, in many ways, the big story of the late nineteenth century and early twentieth century in the Western world. In the United States, this conflict gave rise to the populist and progressive movements and the trust-busting, government regulation, and income tax the disgruntled 99 percent of that age successfully demanded. A couple of decades later, the Great Depression further inflamed the American masses, who imposed further constraints on their plutocrats: the Glass-Steagall Act, which separated commercial and investment banking, FDR’s New Deal social welfare program, and ever higher taxes at the very top—by 1944 the top tax rate was 94 percent. In 1897, the year of the Bradley Martin ball, incomes taxes did not yet exist.

  In Europe, whose lower social orders had never had it as good as the American colonists, the industrial revolution was so socially wrenching that it inspired the first coherent political ideology of class warfare—Marxism—and ultimately a violent revolutionary movement that would install communist regimes in Russia, eastern Europe, and China by the middle of the century. The victorious communists were influential far beyond their own borders—America’s New Deal and western Europe’s generous social welfare systems were created partly in response to the red threat. Better to compromise with the 99 percent than to risk being overthrown by them.

  Ironically, the proletariat fared worst in the states where the Bolsheviks had imposed a dictatorship in its name—the Soviet bloc, where living standards lagged behind those in the West. But in the United States and in western Europe, the compromise between the plutocrats and everyone else worked. Economic growth soared and income inequality steadily declined. Between the 1940s and 1970s in the United States the gap between the 1 percent and everyone else shrank; the income share of the top 1 percent fell from nearly 16 percent in 1940 to under 7 percent in 1970. In 1980, the average U.S. CEO made forty-two times as much as the average worker. By 2012, that ratio had skyrocketed to 380. Taxes were high—the top marginal rate was 70 percent—but robust economic growth of an average 3.7 percent per year between 1947 and 1977 created a broadly shared sense of optimism and prosperity. This was the golden age of the American middle class, and it is no accident that our popular culture remembers it so fondly. The western Europe experience was broadly similar—strong economic growth, high taxes, and an extensive social welfare network.

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  Then, in the 1970s, the world economy again began to change profoundly, and with that transformation, so did the postwar social contract. Today two terrifically powerful forces are driving economic change: the technology revolution and globalization. These twin revolutions are hardly novel—the first personal computers went on sale four decades ago—and as with everything that is familiar, it can be easy to underestimate their impact. But together they constitute a dramatic gearshift comparable in its power a
nd scale to the industrial revolution. Consider: in 2010, just two years after the biggest financial and economic crisis since the Great Depression, the global economy grew at an overall rate of more than 6 percent. That is an astonishing number when set alongside our pre-1820 averages of less than half a percentage point.

  Indeed, even compared to the post–industrial revolution average rates, it is a tremendous acceleration. If the industrial revolution was about shifting the Western economies from horse speed to car speed, today’s transformation is about accelerating the world economy from the pace of snail mail to the pace of e-mail.

  For the West and the Western offshoots, the technology revolution and globalization haven’t created a fresh surge in economic growth comparable to that of the industrial revolution (though they have helped maintain the 2 percent to 3 percent annual growth, which we now think of as our base case, but which is in fact historically exceptional).

  What these twin transformations have done is trigger an industrial revolution–sized burst of growth in much of the rest of the world—China, India, and some other parts of the developing world are now going through their own gilded ages. Consider: between 1820 and 1950, nearly a century and a half, per capita income in India and China was basically flat—precisely during the period when the West was experiencing its first great economic surge. But then Asia started to catch up. Between 1950 and 1973, per capita income in India and China increased by 68 percent. Then, between 1973 and 2002, it grew by 245 percent, and continues to grow strongly, despite the global financial crisis.

  To put that into global perspective: The American economy has grown significantly since 1950—real per capital GDP has tripled. In China, it has increased twelvefold. Before the industrial revolution, the West was a little richer than what we now call the emerging markets, but the lives of ordinary people around the world were mutually recognizable. Milanovic, the World Bank economist, surveyed the economic history literature on international earnings in the nineteenth century. He found that between 1800 and 1849 the wage of an unskilled daily laborer in India, one of the poorest countries at the time, was 30 percent that of the wage of an equivalent worker in England, one of the richest. Here’s another data point: in the 1820s, real wages in the Netherlands were just 70 percent higher than those in China’s Yangtze Valley. Those differences may seem large, but they are trivial compared to today’s. UBS, the Swiss bank, compiles a widely cited global prices and earnings report. In 2009 (the most recent year in which UBS did the full report), the nominal after-tax wage for a building laborer in New York was $16.60 an hour, compared to $0.80 in Beijing, $0.50 in Delhi, and $0.60 in Nairobi, a gap orders of magnitude greater than the one in the nineteenth century. The industrial revolution created a plutocracy—but it also enriched the Western middle class and opened up a wide gap between Western workers and those in the rest of the world. That gap is closing as the developing world embraces free market economics and is experiencing its own gilded age.

  Professor Lindert worked closely with Angus Maddison and is a fellow leader of the “deep history” school, a movement devoted to thinking about the world economy over the long term—that is to say, in the context of the entire sweep of human civilization. He believes that the global economic change we are living through today is unprecedented in its scale and impact. “Britain’s classic industrial revolution is far less impressive than what has been going on in the past thirty years,” he told me. The current productivity gains are larger, he explained, and the waves of disruptive innovation much, much faster.

  Joel Mokyr, an economist at Northwestern University and an expert on the history of technological innovation and on the industrial revolution, agrees.

  “The rate of technological change is faster than it has ever been and it is moving from sector to sector,” Mokyr told me. “It is likely that it will keep on expanding at an exponential rate. As individuals, we aren’t getting smarter, but society as a whole is accumulating more and more knowledge. Our access to information and technological assistance in going through the mountains of chaff to get to the wheat—no society has ever had that. That is huge.”

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  This double-barreled economic shift has coincided with an equally consequential social and political one. MIT researchers Frank Levy and Peter Temin describe the transformation as a move from “The Treaty of Detroit” to the “Washington Consensus.” The Treaty of Detroit was the five-year contract agreed to in 1950 by the United Auto Workers and the big three manufacturers. That deal protected the carmakers from annual strikes; in exchange, it gave the workers generous health care coverage and pensions. Levy and Temin use “The Treaty of Detroit” as a shorthand to describe the broader set of political, social, and economic institutions that were established in the United States during the postwar era: strong unions, high taxes, and a high minimum wage. The Treaty of Detroit era was a golden age for the middle class, and a time when the gap between the 1 percent and everyone else shrank.

  But in the late 1970s and early 1980s, the Treaty of Detroit began to break down. This was the decade of Ronald Reagan and Margaret Thatcher. They both sharply cut taxes at the top—Reagan slashed the highest marginal tax rate from 70 percent to 28 percent and reduced the maximum capital gains tax to 20 percent—reined in trade unions, cut social welfare spending, and deregulated the economy.

  This Washington Consensus was exported abroad, too. Its greatest impact, and its greatest validation, was in communist regimes. The collapse of communism in the Soviet bloc and the adoption of market economics in communist China ended that ideology’s seventy-year-long intellectual and political challenge to capitalism, leaving the market economy as the only system anyone has come up with that works. That red threat was one reason the plutocrats accepted the Treaty of Detroit, and its even more generous European equivalents. The red surrender emboldened the advocates of the Washington Consensus and helped them to create the international institutions needed to underpin a globalized economy.

  These three transformations—the technology revolution, globalization, and the rise of the Washington Consensus—have coincided with an age of strong global economic growth, and also with the reemergence of the plutocrats, this time on a global scale. Among students of income inequality, there is a fierce debate about which of the three is the most important driver of the rise of the 1 percent. Ideology helps to shape the argument. If you are a true-faith believer in the Washington Consensus, you tend to believe rising income inequality is the product of impersonal—and largely benign—economic forces, like the technology revolution and globalization. If you are a liberal and regret the passing of the Treaty of Detroit, you tend to attribute the changed income distribution chiefly to politics—a process Jacob Hacker and Paul Pierson have powerfully described in Winner-Take-All Politics.

  This is an important argument, with real political implications. But, viewed from the summit of the plutocracy, both sides are right. Globalization and the technology revolution have allowed the 1 percent to prosper; but as the plutocrats have been getting richer and more powerful, the collapse of the Treaty of Detroit has meant we have taxed and regulated them less. It is a return to the first gilded age not only because we are living through an economic revolution, but also because the rules of the game again favor those who are winning it.

  “The bottom line: we may not be able to reverse the trend, but don’t make it worse,” Peter Orszag, President Barack Obama’s former budget chief, told me. “Most of this is coming from globalization and technological change, not from government policy. But instead of leaning against the wind, we have been putting a little more wind in the sails of rising inequality.”

  THE TWIN GILDED AGES—ENTER THE BRICS

  On a bitter evening in mid-January 2012, a group of bankers and book publishers gathered on the forty-second floor of Goldman Sachs’s global headquarters at the southern tip of Manhattan. The setting could not have been more American—the most eye-catching view was of the skyscrapers of mid
town twinkling to the north, and a jazz ensemble played softly in one corner.

  But the appetizers were an international mishmash—thumb-sized potato pancakes with sour cream and caviar, steaming Chinese dumplings, Indian samosas, Turkish kebabs. That’s because the party was in honor of the Goldman thinker who served notice to the Western investment community a decade ago that the Internet revolution wasn’t the only economic game in town. The world was also being dramatically transformed by the rise of the emerging markets, in particular the four behemoths that Jim O’Neill, then chief economist at Goldman Sachs, dubbed the BRICs: Brazil, Russia, India, China.

  In the book Mr. O’Neill launched at his January party, The Growth Map: Economic Opportunity in the BRICs and Beyond, he argues that the BRIC concept “has become the dominant story of our generation” and introduces readers to “the next eleven” emerging markets, which are joining the BRICs in transforming the world.

  The group of Goldman executives who toasted Mr. O’Neill in New York are in the vanguard of one of the consequences of the powerful economic forces he describes—the rise, in the developed Western economies, of the 1 percent and the creation of what many are now calling a new gilded age. In the nineteenth century, the industrial revolution and the opening of the American frontier created the Gilded Age and the robber barons who ruled it; today, as the world economy is being reshaped by the technology revolution and globalization, the resulting economic transformation is creating a new gilded age and a new plutocracy.

  But this time around, it really is different: we aren’t just living through a replay of the Gilded Age—we are living through two, slightly different gilded ages that are unfolding simultaneously. The industrialized West is experiencing a second gilded age; as Mr. O’Neill has documented, the emerging markets are experiencing their first gilded age.