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Tyee Books

The Higher World of the Plutocrats

They fund our politics, shape our societies, outsource our jobs. Chrystia Freeland figured someone should talk to them.

By Crawford Kilian 2 Jan 2013 |

Crawford Kilian is a contributing editor of The Tyee.

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The Koch brothers: Masters at 'rent seeking' by buying politicians.

Last year the Occupy movement brought the subject of inequality into public debate, and especially the inequality between those of us in the 99 per cent and the happy few in the one per cent. But Chrystia Freeland has been studying the happy few for years, and has spent many hours talking with some of their most famous and powerful members.

The result is a book full of surprises and insights. Today's plutocrats are the latest variation on an old theme, and at the same time they're strikingly new in many ways.

Societies have supported plutocratic classes at least since ancient Rome, and the Gilded Age of the US after the Civil War presaged our own: A rising class of self-made men, imaginative exploiters of new technology and wider trade. Then it was the telegraph and the railroad; now it's the internet and the container ship.

Freeland's plutocrats are mostly self-made also, and overwhelmingly male; one very rich man suggested to her that women lack the "killer instinct" needed for real success. But they are not the idle heirs of rich parents. The "working rich" are a distinct class: smart, ambitious and often outsiders.

What's more, they represent a dramatic change from the 19th and early 20th century, Freeland argues. Then, the conflict was between capital and workers, with workers doomed to lose because they couldn't own the means of production.

The communist revolutions were supposed to transfer those means to the workers, but instead transferred them to a new class of upstart intellectuals and technical experts. She cites Milovan Djilas, Tito's second in command in communist Yugoslavia. In the 1960s Djilas wrote "The New Class" to describe this phenomenon as a corruption of communist orthodoxy; Tito threw him in jail.

Even more ironically, the same new intellectual class now runs capitalism -- with the exception of the princelings of the Chinese Communist Party, the billionaire sons and grandsons of Mao's old proletarian comrades. But elsewhere, smart young men got possession of ex-Soviet resources, or an operating system for newfangled personal computers, and within months were rich beyond imagining.

They didn't come entirely out of the blue. Freeland documents the gradual but decisive shift in fields like finance, which since the age of the superstar had been regulated to the point of boredom. This came along with a new struggle: Now it wasn't capital versus labour, but capital versus talent.

The age of the superstar

Companies were no longer stuck with local workers and their high wages. Globalization meant they could outsource the work to anywhere in the world, whether Chinese special economic zones or Mexican maquiladoras.

And by the 1970s we were in the age of the superstar: the baseball player, singer, or CEO whose talent could make the difference between corporate success and failure. Talent couldn't be bolted to the shop floor, and superstars in any field could name their price.

Hence, says Freeland, CEOs' salaries began to rise while their workers' pay stagnated or fell. Financial superstars set up their own hedge funds, and drew investors by the sheer power of their reputations. The superstar entrepreneurs thrive in a globalized economy, equally at home in Beijing, Moscow, New York or London.

In fact, they are now so rich that they form their own economy, a "plutonomy" producing goods and services just for them: private jets, monster yachts, and armies of professionals dedicated to making them comfortable.

Freeland's interest in this super-elite is infectious. They really are smart people, superbly educated and culturally sophisticated. They attended the best universities in the world and did brilliantly in fields like mathematics and physics. They understand their own success; coming often from working-class or middle-class backgrounds, they embody the old Horatio Alger dream of rags to riches. Modestly, they think anyone could have done the same, with a lucky break or two and a lot of hard work.

This is where the plutocrats really part company from the rest of us -- including the bottom 0.9 of the top one per cent. Living in their own higher world, with its own economy, they have only a fading sense of what non-plutocrats are like. Mitt Romney's famous dismissal of the 47 per cent was actually an understatement. The plutocrats don't think much even of the mere multimillionaires scrambling about in hopes of breaking into the billionaires' circle.

Freeland is keenly aware of the impact of inequality, but she doesn't see the 99 per cent as the plutocrats' biggest enemies; it's the aspiring plutocrats who are beginning to see how the deck is stacked against them. It will be interesting to see if they decide to take serious steps against their superiors.

Those moderate Canadian plutocrats

Freeland gives sympathetic attention to former prime minister Paul Martin (himself a multimillionaire) and outgoing Bank of Canada head Mark Carney, who sympathize with the Occupy movement and support the bank regulation that most plutocrats still reject. But such attitudes are rare among the plutocracy.

In the meantime, the plutonomy is not just booming, but skewing the still-depressed economy the rest of us live in. Many of the plutocrats reflect soberly on Andrew Carnegie's comment that the man who dies rich dies disgraced. Many, including George Soros, Bill Gates, and Warren Buffett, are giving away their billions to various causes and charities.

Individually, those causes may be admirable (Soros has worked hard to promote democracy in eastern Europe). Collectively, those causes may be compromised and diverted from their original purposes by the sheer quantity of plutocratic money available. And of course many billionaires like the Koch brothers are pumping money into political causes that promise to keep their taxes low while suffocating government programs for the rest of us.

This is just one form of plutocratic "rent-seeking" -- getting one's businesses into a monopoly position, or lowering their operational costs, through favourable legislation. Every business, after all, wants to improve its own working conditions, just as every worker does.

But what is good for one's business is not always good for the country. Rent-seeking simply runs up the plutocrats' revenues while doing nothing for their customers. And it never occurs to such plutocrats that their success ultimately stems from the system created and maintained by the rest of society. As Barack Obama observed, "You didn't build that."

Freeland makes a useful contrast between plutocrats who are pro-market and those who are pro-business: In the market, companies compete, innovate, or die if they can't. This is the "creative destruction" that brings genuine improvements in living standards, and it's still at work. As one plutocrat told Freeland, the big companies used to eat the little ones. Now the swift eat the slow.

But in business, one tries to protect one's own company by eliminating the competition (and the innovation). Historically, innovators become consolidators and rent-seekers, creating a new privileged class of their children and hangers-on.

Plutocracy 2.0

That second generation, Plutocracy 2.0, is already with us, especially in the U.S. Freeland notes that until the 1970s, sizable numbers of Ivy League graduates went into science, the arts, and public service. Few went into finance, because it paid little better than most other fields. But as superstars came to dominate finance, and their incomes rose, more bright young graduates migrated to the field.

Now, she says, the median earnings for Harvard men in 2005 were $162,000. "But almost eight per cent of the men had labor market income above $1 million, putting them in the top 0.5 per cent. An important driver of the gap was the split between the bankers and everyone else, with financiers earning 195 per cent more than their classmates."

In effect, the plutonomy is drawing the next generation's best and brightest into its orbit, leaving everything else (including higher education) to the fools and saints willing to stay in the 99 per cent. More and more of those graduates are themselves the children -- bright or not -- of plutocrats.

I saw this, without understanding it, as an alumnus-recruiter for Columbia University in the 1990s. The teenage applicants I interviewed here in Vancouver were smart, well travelled, and positively placid about the cost of tuition (then around $30,000 a year; now, much more). What was more, they considered Columbia as a fallback if they couldn't get into Harvard or Yale, where the real connections could be made.

So it's the plutocracy's world; we just live in it. It funds our politics, shapes our societies, owns our universities, and outsources our jobs. Many individual plutocrats are personally admirable, but their collective efforts inevitably crowd the rest of us into poverty. Their offspring may do well, but most will regress to the mean, becoming merely rich mediocrities. Unless some talented political superstar emerges (perhaps the renegade child of a plutocrat) and turns our society around, such mediocrities will flourish for the next generation or two.

Perhaps the Chinese have the only way to limit the plutocracy. As Freeland says, "China's plutocrats don't fight the state because they are the state -- and when any of them forget that, they are treated with summary brutality: between 2003 and 2011, at least 14 Chinese billionaires were executed."  [Tyee]

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