The 1% and the Rest of Us

by Tim Di Muzio

  4 Those with a greater capacity to repay have the ability to borrow more money and they can use this money to make more money through business or investments.

  5 The capacity to repay debt or service interest payments is contingent upon access to energy, the majority of which now derives from fossil fuels in richer economies.

  6 The capacity to repay debt or service interest payments is also contingent on energy-dependent economic growth.

  7 The greater the amount of energy consumed in a society, the larger the money supply, the GDP, the market capitalisation of corporations and debt will be.

  8 Since money is issued as interest-bearing debt, inflation is built into the capitalist mode of power.

  9 The owners of the banks profit tremendously from their monopolisation of money creation.

  10 The way we issue money has to be changed: instead of benefiting the few, it needs to benefit the many.

  The full ramifications of this general theory will be discussed at length in a separate treatment (Di Muzio and Robbins 2015). I only note here that most scholars of political economy have largely ignored the link between energy and the way in which money is created and capitalised for the benefit of dominant owners. Whereas most people think of money as a medium to achieve stability and a decent livelihood – and the majority have no idea how it is created – for the 1% it is symbolic of their power to shape and reshape the natural and human order. It is not so much that money is power – although this is also true – as their money is their power. As the next chapter suggests, the supremacy of dominant owners is going from strength to strength despite some meagre signs of resistance to capitalist power. But the 1% do not understand their power only in monetary terms; they also display their power in acts of differential or conspicuous consumption. We turn to this topic and its consequences in the next chapter.

  4 | DIFFERENTIAL CONSUMPTION: THE RISE OF PLUTONOMY

  The central trend dominating ... has been the relentless growth of ‘plutonomy’ economics, a phenomenon that sees the wealth of the richest 1% growing far quicker than that of the general population. (Knight Frank 2012: 4)

  Richistanis like to flaunt their wealth. And never before have so many flaunted so much. (Robert Frank 2007: 120)

  History has rarely seen an era in which so much money has been made by so few people in such a short amount of time. (Jim Taylor et al. 2009: 4)

  In my last year on Wall Street my bonus was $3.6 million – and I was angry because it wasn’t big enough. I was 30 years old, had no children to raise, no debts to pay, no philanthropic goal in mind. I wanted more money for exactly the same reason an alcoholic needs another drink: I was addicted. (Sam Polk 2014)

  In the previous chapter we considered wealth, money and power and argued that the historical concern of the 1% has been the differential accumulation of money eventually expressed in the rising capitalisation of income streams. Today, differential capitalisation is symbolic of their power over other humans and over the natural world. Moreover, the magnitude of their power/wealth in the modern period was made possible by private ownership, the surplus energy of fossil fuels, and organised corporate power – for example, over the creation of money as debt. Also symbolic is the differential consumption of dominant owners, which is evidence to others of their wealth, status and power. This chapter takes a closer look at how high-net-worth individuals (HNWIs) spend their money through the lens of what Veblen (2007) called conspicuous consumption.1

  The global plutonomy

  The concept of a ‘plutonomy’ was penned by a team of global equity strategists in a 2005 report for Citigroup entitled ‘Plutonomy: buying luxury, explaining global imbalances’. A subsequent report, ‘Revisiting plutonomy: the rich getting richer’, followed a year later and largely reiterated the first report. Taken together, the main aim of the reports is to provide an analysis of current economic trends capable of informing high-net-worth investment strategies. The thesis advanced in the report is twofold. The first argument is that ‘the world is dividing into two blocs – the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest’. The second argument is far simpler: ‘the rich will keep getting richer’ (Citigroup 2006: 10). The authors then read the concept of plutonomy back into history and argue that plutonomies have existed in ‘sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S.’. Today, they argue that the United States, Canada, the UK and Australia (added in the second report) are all plutonomies powered by the differential gains made by the wealthiest 1% of income earners, or, in their words: ‘the rich now dominate income, wealth and spending in these countries’ (ibid.: 1). Their evidence for this claim is based on empirical research that shows the income share of the top 1% in these countries rising rapidly from the late 1980s to 2002 (Citigroup 2005: 6). But what is the main driver of this trend? According to the 2005 report, there are six: 1) technology enhancing productivity; 2) financial innovation; 3) cooperative governments favourable to capitalism; 4) immigration and ‘overseas conquests’; 5) the rule of law; and 6) patented inventions.2 They go on to argue that plutonomies have reshaped the global consumption map and therefore a change in our traditional thinking is required:

  In a plutonomy there is no such animal as ‘the U.S. consumer’ or ‘the UK consumer’, or indeed the ‘Russian consumer’. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the ‘non-rich’, the multitudinous many, but only accounting for surprisingly small bites of the national pie (ibid.: 2).

  What this passage suggests is that for the equity strategists at Citigroup, there are only two types of people: rich consumers and a ‘multitudinous many’. Indeed, probably stealing a page from their hero Ayn Rand, the report claims that ‘the earth is being held up by the muscular arms of its entrepreneur-plutocrats, like it, or not’ (ibid.: 1). Meanwhile, the multitude has such a low share of overall income in plutonomies that they cannot be key drivers of increasing demand – particularly for most luxury goods. But the authors recognise that the extreme polarisation of income and wealth may not be sustainable and they question how societies may ‘disrupt plutonomy’ by expropriating wealth at the top of the income pyramid (ibid.: 22). The authors argue that expropriation can take two main forms: government taxation and tampering with property rights. However, while they understand the potential for a social backlash that may force politicians to raise taxes on the wealthiest 1% or infringe upon some of their property rights, the report largely discounts the immediate potential for such moves based on the evidence that, at the time they were writing, there were few political or social events that signalled rising popular discontent. One of the potential reasons for this, suggests the report, is that ‘enough of the electorate’ in plutonomies ‘believe they have a chance of becoming a Pluto-participant. Why kill it off, if you can join it?’ (ibid.: 24). Whether there is some truth to the idea that people consent to plutonomy because one day they fancy themselves joining the 1% of HNWIs is of course highly debatable. But the far more interesting point the report makes relates to what investors can do with their analysis of growing income inequality.

  If the wealthy have much more to spend in plutonomies than their lesser counterparts on fixed or relatively stagnant incomes, the report reasons that equity investors should target those publicly listed companies that cater to the global wealthy. Or, in their colourful words: ‘there is … a more refined way to play plutonomy, and this is to buy shares in the companies that make the toys that the Plutonomists enjoy’ (ibid.: 25). What is more, the authors of the report argue that the global rich prefer Giffen goods. Giffen goods are goods that people consume more of the more expensive they become. So, rather than soaring prices becoming a deterrent to demand, they are actually a powerful signal to the rich to acquire such goods. Towards this end, Citigroup identified a representative menu of equities from compan
ies whose earnings are almost exclusively generated from HNWIs. Calling it the ‘plutonomy basket’, there are 24 suggested securities in the index (weighed equally), ranging from the automobile maker Porsche to the private banking house of Julius Baer.

  By tracing the index back to 1985 and comparing it with the MSCI AC World Index, the authors found ‘a handsome outperformance’ (ibid.: 28).3 Up until 1996, their plutonomy basket closely trails the MSCI AC World Index, meaning that investing in their basket of stocks would not have yielded significant differential returns. However, from 1996 to 2005, the luxury stock index starts breaking away noticeably and significantly. Overall, the index generated an average return of 17.8% per annum since 1985 – greater than the 14% return for the MSCI AC World Index.4 So, returning to the example of investing US$1 billion, had we invested in the index for only one year, the return on investment would have been US$178 million. If we had invested the same amount over the entire 20-year period of the index and reinvested all the yearly returns, we would end up making US$26,479,257,870, or an overall increase of 2,548%.5 We can perhaps see why one of the conclusions of the report is that ‘there are rich consumers, and there are the rest. The rich are getting richer … and they dominate consumption’ (ibid.: 30). However, before exploring some dimensions of conspicuous consumption in the New Gilded Age, I want to briefly consider the age that gave rise to Veblen’s concept.

  Conspicuous consumption in the first Gilded Age

  What is the chief end of man? – to get rich. In what way? – dishonestly if we can; honestly if we must. (Mark Twain 1871)

  The Gilded Age is well known to American history. The term was coined by Mark Twain and his co-author Charles Dudley Warner in their 1873 novel The Gilded Age: A tale of today. The title and aims of the book have been widely discussed, but in the American experience, the Gilded Age is now synonymous with a period of social transformation ushered in by the Civil War (1861–65), the mass exploitation of coal and oil and the concentration of capital into giant corporations. The era is known for its highly questionable business practices, rampant political corruption, labour violence, social unrest, corporate collusion, rising inequality and what went with it: an ostentatious display of conspicuous consumption among the newly wealthy (Carlisle 2009; Josephson 1934). The era is said to have lasted to the end of the nineteenth century but it could be argued that acts of conspicuous consumption continued on during the so-called progressive era and, of course, to this day. But whereas Twain and Warner satirised their generation, it was not until Veblen’s The Theory of the Leisure Class that the consumptive practices of the wealthy few were subject to greater, if somewhat muddled, theoretical scrutiny.

  Like Twain and Warner’s novel, Veblen’s concept of conspicuous consumption has been heavily debated by modern scholars, with one noted expert arguing that Veblen’s writing on the subject is confused and difficult to confirm empirically. For example, Campbell (1995) argues that we can in fact find three different conceptions of conspicuous consumption in The Theory of the Leisure Class: a subjective, consequentialist and substantive formulation. While conceding that Campbell is probably right about the conceptual difficulties implied by Veblen’s use of conspicuous consumption, Tilman (2006) has argued that an empirical analysis is entirely possible despite some methodological difficulties. My view is not to deny that there are different interpretations of ‘conspicuous consumption’ to be found in Veblen’s first major study; nor is it my intention in this chapter to evaluate whether we can scientifically assess whether such practices exist in the minds of the affluent.6 I merely take as a working hypothesis that dominant owners aim to consume differentially for status just as they aim to accumulate differentially for power. And just as there are benchmarks that let the rich know they are beating the average rate of accumulation, so we could make the argument that there are benchmarks when it comes to the consumption practices of HNWIs. For example, benchmarks could include the average size of a luxury yacht, the average square footage of a mansion, the average number of homes and their locations, the number of luxury cars in their possession, invitations to the right parties and auctions and so on.

  From a historical vantage point, this may not appear as something wholly new: rulers in hierarchical and more complex societies have always sought to distinguish themselves through their material practices – typically by acts of exclusion that led directly or indirectly to the extraction of tribute or the control of human flesh as in slavery or sacrifices to the ‘gods’ (De Botton 2005; Wolf 2010). What was different in the Gilded Age was the scale on which fortunes were made as well as their concentration.7 To be sure, by the end of the nineteenth century there were 4,047 millionaires in the United States out of an estimated population of about 65 million people (Beard 2009: 62).8 If we use the millionaire mark as the cut-off point during this period, then the number of millionaires represented a meagre 0.006% of the total population. But, as we saw above, there are always hierarchies enfolded within the hierarchy of the affluent. If we use the popular ‘top 400’ that were considered to be members of ‘Society’ during the Gilded Age, then the truly affluent represented 0.0006% of every man, woman and child in the US. And as the affluent grew far richer than historically imaginable, they spent more and more of their money on conspicuous consumption. While a number of artefacts and practices – from yachts, art and furniture to vacations and lavish parties – could illustrate the differential consumptive practices of dominant owners, I use the example of housing since, according to Beard, ‘houses were the most visible emblems of wealth’ (ibid.: 62).

  Mansions of unprecedented size were erected across the United States by the titans of wealth and symbolised their power and ability to sustain what Veblen (2007) called massive ‘pecuniary damage’. Referring to wealthy New Yorkers, Josephson noted the following:

  ‘nature’s noblemen’ all joined in the frenzied contest of display and consumption. Mansions and chateaux of French, Gothic, Italian, barocco and Oriental style lined both sides of upper Fifth Avenue, while shingle and jigsaw villas of huge dimensions rose above the harbor of Newport. Railroad barons and mine-owners and oil magnates vied with each other in making town houses and country villas which were imitations of everything under the sun, and were filled with what-nots, old drapery, old armor, old Tudor chests and chairs, statuettes, bronzes, shells and porcelains. One would have a bedstead of carved oak and ebony, inlaid with gold, costing $200,000. Another would decorate his walls with enamel and gold at a cost of $65,000. And nearly all ransacked the art treasures of Europe, stripped medieval castles of their carvings and tapestries, ripped whole staircases and ceilings from their place of repose through the centuries to lay them anew amid settings of a synthetic age and a simulated feudal grandeur (Josephson 1934: 234).

  What this passage suggests is not only that the newly affluent competed to display their wealth by building private dwellings of gigantic and opulent proportions, but they also desired to emulate (and in many cases outdo) the grand mansions and estates of a feudal Europe. Names of Gilded Age mansions abound: The Breakers, Rosecliff, Beechwood Mansion, Marble House, Isaac Bell House, The Elms, Belcourt Castle, Harbour Hill, Chateau-Sur-Mer, Glessner House and Ochre Court to name some of the most renowned. But none of these mansions compares with George Washington Vanderbilt II’s Biltmore Estate in Asheville, North Carolina. G. W. Vanderbilt II inherited all of his wealth and accomplished precious little with his leisurely life other than commanding the labour of those who designed and built his home.

  Completed in 1895, Biltmore House (on Biltmore Estate) is the largest private home in the United States at 178,926 square feet, built on 4 acres of land.9 By way of comparison, consider that the average home in the US in 2010 was 2,392 square feet.10 In other words, Biltmore is about 75 times the size of an average modern dwelling. But in its own time, it was actually 300 times larger than an ordinary dwelling (Zanny 2012). According to the Biltmore’s website:

  The celebrated architect Richa
rd Morris Hunt modelled the house on three châteaux built in 16th-century France. It would feature 4 acres of floor space, 250 rooms, 34 bedrooms, 43 bathrooms, and 65 fireplaces. The basement alone would house a swimming pool, gymnasium and changing rooms, bowling alley, servants’ quarters, kitchens, and more.11

  The grounds of the Biltmore Estate – originally 140,000 acres, now ‘only’ 8,000 – were landscaped by Frederick Law Olmsted of New York Central Park fame. The estate also featured its own village housing 750 of the 2,000 inhabitants employed on the grounds or in the house. What was the cost of such a display of pecuniary damage? Biltmore cost US$5 million in 1895, or, in 2012 prices, about US$116 million to US$119 million (Foreman and Stimson 1991: 270–303). Today, the estate is still privately owned but operates as a tourist destination with an onsite luxury hotel and winery. The descendants of Vanderbilt’s private empire of wealth continue to draw an income from this ostentatious exhibition of differential power and consumption. While Biltmore could hardly compare with great palaces such as the Royal Palace of Madrid or Buckingham Palace, it is a stunning example of materialism, power and symbolism in the Gilded Age of capitalism and concentrated private wealth. If we ignore palaces and castles, Biltmore was not to be outdone until a fortune was handed to Mukesh Ambani – discussed in the next section.

  Differential consumption in the New Gilded Age

  If the first Gilded Age was distinctly American, the New Gilded Age can be considered far more global. Historians may differ on an exact date for its emergence, but Freeland has made the credible suggestion that we are in a twin New Gilded Age where a handful of emerging economies such as Russia, India and China are still going through their first Gilded Age while established plutonomies such as the United States and Canada are experiencing a second and perhaps far grander wave (Freeland 2012: 20ff; for a direct focus on the American case, see Bartels 2008; Frank 2007). By the New Gilded Age we mean a period of escalating inequality in income, wealth and life chances across a range of political communities. Although the germ of this era may extend further back, I date this period from the mid-1980s, when global gross domestic product (GDP) accelerated due to: 1) cheap fossil fuel energy after the 1973 and 1979 price spikes; 2) the introduction of new technologies – due largely to Cold War public research and development that was subsequently capitalised by the private sector; 3) the liberalisation of trade and investment regimes, which facilitated the movement of capital and commodities; 4) the creation of a more fully global labour market, which enabled firms to depress hard-won wage gains and discipline and control their workers with greater ease; and 5) the massive accumulation of debt at national, business and personal levels.12