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

by Chrystia Freeland

  But by the early fourteenth century, Venice had become the richest city in Europe, three times the size of London and as big as Paris. Venice was an imperial power—the republic financed the Fourth Crusade and established suzerainty over the fertile plains to the north, reaching Lake Garda and the river Adda to the north and west, along the Dalmatian coast deep into what is today Croatia, into the Mediterranean, where it controlled Cyprus, and into the Aegean, where it ruled Crete.

  La Serenissima’s true power and vocation was commerce. At the republic’s zenith, it dispatched thirty-six thousand sailors and thirty-three hundred ships into the world’s maritime trade routes. Venice dominated the salt business—the oil of that era—and trade with Byzantium and the Near East. A Venetian merchant, Marco Polo played a central role in introducing China to western Europe, with his pioneering account of his visit to the Middle Kingdom; his father, also a trader, had done business with the Golden Horde of the Tatars. Francesco Petrarca, sitting at a Venetian window overlooking the Basin of St. Mark and writing a letter to a friend in the fourteenth century, was awed by the trading prowess of the Venetians and the commercial ambitions that drove it: “If you’d seen this vessel, you would have said it was not a boat but a mountain swimming on the surface of the sea. . . . It is setting out for the river Don, for this is as far as our ships can sail on the Black Sea, but many of those on board will disembark and journey on, not stopping until they have crossed the Ganges and the Caucasus to India, then on to farthest China and the Eastern ocean. What is the source of this insatiable thirst for wealth that seizes men’s minds?”

  Venice owed its might and money to the super-elites of that age, and to an economic and political system that nurtured them. At the heart of the Venetian economy was the commenda, a basic form of joint-stock company that lasted for a single trading mission. The brilliance of the commenda was that it opened the economy to new entrants. It was a partnership between a “sedentary” investor, who financed the trip, and a traveler, who did the hard and risky work of making the journey. If the sedentary partner paid for the entire mission, he received 75 percent of the profits; if he financed two-thirds of the voyage, he got half. The commenda was a powerful engine of both economic growth and social mobility—historians studying government documents from AD 960, 971, and 982 found that new names accounted for respectively 69 percent, 81 percent, and 65 percent of all the elite citizens cited.

  Venice’s elite were the chief beneficiaries of the rise of La Serenissima. But like all open economies, theirs was turbulent. We think of social mobility as an entirely good thing, but if you are already on top, mobility can also mean competition from outsider entrepreneurs. Even though this cycle of creative destruction had created the Venetian upper class, in 1315, when their city was at the height of its economic powers, they acted to lock in their privilege. Venice had prospered under a relatively open political system in which a wide swath of the people had a voice in the selection of the republic’s ruler, the doge, and successful outsiders could join the ruling class. But in 1315, the establishment, which had been gradually tightening its control over the government, put a formal stop to social mobility with the publication of the Libro D’Oro, or Book of Gold, which was an official registry of the Venetian nobility. If you weren’t in it, you couldn’t join the ruling oligarchy.

  This political shift from a nascent representative democracy to an oligarchy marked such a striking change that the Venetians gave it a name: La Serrata, or the closure. And it wasn’t long before the political Serrata became an economic one, too. Under the control of the oligarchs, the Venetian state gradually cut off the commercial opportunities for new entrants. The commenda, the legal innovation that had made Venice (and other Italian city-states) rich, was banned. La Serenissima’s reigning elite were acting in their own immediate self-interest—shutting out the entrepreneurial upstarts meant the vested interests could enjoy sole control over the city’s lucrative trade routes. But in the longer term, La Serrata was the beginning of the end for the city’s oligarchs, as well as for Venetian prosperity more generally. By 1500, the population of Venice was smaller than it had been in 1330. In the seventeenth and eighteenth centuries, as the rest of Europe grew, the city that had once been its richest continued to shrink.

  The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James Robinson as an illustration of their thesis that what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states, they argue, are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society and to maintain their own hold on power.

  Inclusive states give everyone a say in how their society is ruled and access to economic opportunity. Inclusive societies often find themselves benefiting from a virtuous circle, in which greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness. The history of the United States, founded in a revolutionary bid for greater inclusiveness, can be read as one such virtuous circle.

  But Acemoglu and Robinson cite the story of La Serrata as evidence that virtuous circles can be broken. Elites who have prospered thanks to inclusive systems can be tempted to pull up the ladder they climbed to the top. There are a lot of reasons to be worried about the rise of the plutocrats—the impact soaring inequality has on civic values, on crime rates, on morality, or even, according to some studies, on health. The big danger, though, is the one represented by La Serrata. As the people at the very top become ever richer, they have an ever greater ability to tilt the rules of the game in their favor. That power can be hard to resist.

  One reason La Serrata is such a useful example is that the Venetian oligarchs who closed off their society were the products of a robust, open economy. They didn’t start out as oligarchs—they’d made themselves into oligarchs. That’s important because as soaring income inequality has become an undeniable political fact, even in societies, such as the United States, that have been squeamish about open discussions of class, a dominant response has been to try to sort the plutocrats into the white hats and the black hats. Steve Jobs is a hero; Lloyd Blankfein is a villain. Big business is bad; small business is good. Private equity is vulture lending; community banks are virtue lending. Wall Street banks are speculators who didn’t deserve their bailout; Detroit carmakers are manufacturers who did.

  No one likes this approach better than the “good” plutocrats. “There’s a lot of anger in society because of what the government did to the benefit of the financial industry, because it was seen as unfair,” Eric Schmidt told me. “And you don’t find that anger against, for example, Microsoft and Bill Gates, right? Who is seen as a historic, American figure who created a global company. So I think it’s very important to distinguish between rich people who get there by taking the economic rents of the country for their own benefit versus the people who, in fact, create a new corporation or a new source of wealth.”

  There’s a lot that’s right about this impulse. Dividing the plutocrats into the rent-seekers and the value creators is a good way to judge whether your economy is inclusive or extractive. And creating more opportunities for productive enterprise, and fewer for rent-seeking, is how you create an inclusive economic system. But this approach takes you only so far.

  For one thing, there’s no magical sorting hat for plutocrats, and without one, figuring out who is adding value and who is rent-seeking is an inexact science. Indeed, even the exercise of trying to separate the virtuous plutocrats from the venal ones, and to treat them differently, is an invitation to precisely the sort of rent-seeking that creates the “wrong” kind of wealth in the first place.

  As Emmanuel Saez, the economist who tracks the 1 percent, told me, “It’s probably true that some activities are truly creative, like a normal market, while others are more zero-sum game.” But deciding which was which was a different story: “I would say it is very hard who is going to make
that case. I don’t think anyone would be comfortable having the government decide this is a good business and this is a bad business, and the bad business punish it with, say, special taxes. Because then you will have all the lobbying forces, right? . . . It’s so hard even for economists to say, ‘This is a good business. This is a bad business.’ Especially while the thing is happening, it’s extremely hard.”

  More important, the difference between the good guys and the bad guys is smaller than we might like to think. Inclusive and extractive societies are very different, but the economic elites within them are driven by the same imperative to make money and win competitive advantage for themselves and their companies. Trying to slant the rules of the game in your favor isn’t an aberration, it is what all businesses seek to do. The difference isn’t between having virtuous and villainous businesspeople, it is about whether your society has the right rules and policing able to enforce them.

  Consider, by way of example, how Warren Buffett, the most hallowed figure in America’s pantheon of officially virtuous billionaires, described his investing philosophy in his 2008 letter to shareholders. “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital,” Buffett explained. “Though capitalism’s ‘creative destruction’ is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.” Like the Venetians who put themselves in the Book of Gold, Buffett understands that the creative destruction of an open economy is good for the country as a whole; but smart capitalists like him prefer to be defended by uncrossable moats.

  Buffett goes on to explain that his preferred moats are being a low-cost producer or possessing a well-known worldwide brand. But favorable government regulation can create a powerful moat, too.

  And taking advantage of that government moat is a business decision, not a question of ideology or morality, as we saw in hedge funder and antigovernment crusader Ken Griffin’s telling comment that CEOs’ “duties to their shareholders” justify business leaders’ opening their hands to a state “willing to hand out gifts.”

  Even when the moats are created through pure entrepreneurial brilliance, they don’t always serve the greater good. Microsoft went from being one of the world’s most admired innovators to the bête noire of technology geeks because it created a very effective and very lucrative moat. That boundary made Bill Gates a billionaire; competition authorities in the United States and Europe decided it was so harmful to the rest of us they forced Microsoft to build a few bridges across it.

  All businesspeople would like their own Serrata. And as they become more powerful relative to everyone else, their ability to impose one increases.

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  One of the goals of the Book of Gold was to pass oligarchic privilege to the next generation. That is the second big threat posed by the surge in income inequality. Today’s plutocrats are modern-day robber barons, the beneficiaries of an era of extreme economic change. But as they pass their fortunes down to their children, today’s “working rich” plutocrats may give way to a rentier elite more similar to the sons and daughters of privilege of the Roaring Twenties, the plutocrats who were “born rich.” That transfer of privilege from one generation to the next is a gradual, cumulative, and very personal process. But as a mechanism for turning an inclusive social and economic order into an exclusive one, it could be as powerful as the more overt Serrata.

  What’s at work is an economic phenomenon that Alan Krueger, the head of the president’s Council of Economic Advisers, has dubbed the Great Gatsby Curve. Based on research by Canadian economist Miles Corak, the Great Gatsby Curve traces a relationship between income inequality and social mobility: as societies grow more unequal, social mobility is choked off. That creates a particular paradox for societies that owe their surge in wealth at the top to entrepreneurial vigor unleashed by having a social starting point with high social mobility—think of Silicon Valley, with its fine public universities and government-funded research, or Venice in the age of the commenda. The success of these societies, which manifests itself partly in the emergence of a super-elite, threatens to destroy one of the preconditions for their rise: high social mobility.

  Membership in today’s Book of Gold is more subtle than being included in a list of the aristocracy, or even inheriting a trust fund. In our increasingly complex economy, the real Book of Gold is a degree from an elite university, and those are increasingly the province of the global super-elite. Indeed, statistics have shown that graduating from college is more closely linked to having wealthy parents than it is to high test scores in high school: class matters more than going to class. This intergenerational form of rent-seeking is the hardest to oppose. It is one thing to berate bankers for lobbying for favorable regulation or Microsoft for using its market dominance to cut out competition. But who can blame the 1 percent for seeking for their children what the 99 percent seeks, too? High social mobility, after all, means some downward mobility at the top. And in a society where that gulf is a widening chasm, that can be particularly hard to stomach.

  At Davos in 2012, I spoke about access to the Ivy League and social mobility with Ruth Simmons, then the president of Brown University. She is a widely respected pioneering member of the super-elite—the first African American to lead an Ivy League university—and has been rewarded with an enthusiastic embrace by the plutocrats, including that crowning prize, a seat on the board of Goldman Sachs. (That is more than a status symbol—it paid more than $300,000 a year, and when she resigned from the Goldman board in 2010, her shares were worth more than $4 million.) Simmons spoke enthusiastically about helping poor children get to Brown, and supporting them financially after they got there. But when I asked her whether the legacy system, which explicitly favors the children of alumni, should be abolished, the conversation turned personal. “No, I have a granddaughter. It’s not time yet,” she said with a laugh.

  Marx understood the dangers of a capitalist Serrata—indeed he was counting on it. “The capitalist system carries within itself the seeds of its own destruction,” he famously argued. Marx predicted that the rising capitalist class, like the shortsighted Venetian elite, would overreach itself and create a system that so effectively consolidated its supremacy that it would eventually choke off economic growth and become politically unsustainable.

  The most astonishing political fact of the past two centuries is that that didn’t happen. Unlike the Venetian elite, Western capitalists submitted themselves to creative destruction, to the competition of new entrants, and created ever more inclusive economic and political orders. The result is the most vigorous era of economic progress in human history.

  Marx himself was one cause of that willingness of the elites to share—the fear of communist revolution was a powerful motivation for reform. It was better to give the working class an effective political voice, and a social safety net, than to risk having their Bolshevik vanguard seize power altogether.

  Another reason the twentieth century was the century of inclusion was that the business elite, particularly the Americans, who were its unchallenged world leaders, understood that they could prosper only if the middle class prospered, too. The age of mass production required a mass market—as Henry Ford put it, he needed workers, including his own, to make enough money to buy his cars.

  For the plutocrats, globalization may be reducing both this political incentive and this economic one to support inclusion. That’s because in today’s interconnected economy, Western democracies can import economic demand from the emerging markets, and the emerging markets can import democracy from the West. To put it another way, Western businesses are less dependent on a prosperous domestic middle class because they can now sell to the rising middle class of the emerging markets. Henry Ford needed a domestic middle class with buying power; increasingly, his successors can look to the emerging markets to supply those mass consumers.

  Meanwhile, the oliga
rchs who prosper in extractive emerging market regimes don’t need to worry too much that repression at home is cutting them off from the innovation that democracies are better at nurturing. Communist Chinese princelings can import technology from the West; Russian oligarchs can invest directly in Silicon Valley’s hottest start-ups. And all of them can buy second homes in Manhattan and Kensington and villas on the Côte d’Azur and send their children to British boarding schools and American Ivy League universities.

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  There’s another way that globalization and its twin economic force, the technology revolution, are reducing the pressure on the plutocrats to make their societies more inclusive, or to keep them that way. That is what you might call the cultural Serrata, which is already separating the plutocrats from everyone else—even without formal political divisions like the Golden Book. As the economic gap between the plutocrats and everyone else becomes a chasm, they are coming to inhabit their own global gated community. Indeed, the gap is becoming so wide and so apparent that even the right, traditionally allergic to discussions of class, has started to take notice. Conservative sociologist Charles Murray’s big new idea is that the 1 percent and the 99 percent live in different cultures; the big issue in the 2012 Republican primary was whether Mitt Romney’s hundreds of millions put him at too far a remove from ordinary voters.

  This cultural Serrata matters because it increases the political myopia of the plutocrats. Add to that ordinary greed and a society that has turned its capitalists into popular heroes and you have an economic elite primed to repeat the mistake of the Venetian merchants—to drink its own Kool-Aid (or maybe prosecco is the better metaphor) and to conflate its own self-interest with the interests of society as a whole. Low taxes, light-touch regulation, weak unions, and unlimited campaign donations are certainly in the best interests of the plutocrats, but that doesn’t mean they are the right way to maintain the economic system that created today’s super-elite.