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

by Chrystia Freeland

  —Scott Turow, Pleading Guilty

  THE MOST FAMOUS AMERICAN ECONOMIST YOU’VE NEVER HEARD OF

  Henry George is the most famous American popular economist you’ve never heard of, a nineteenth-century cross between Michael Lewis, Howard Dean, and Ron Paul. Progress and Poverty, George’s most important book, sold three million copies and was translated into German, French, Dutch, Swedish, Danish, Spanish, Russian, Hungarian, Hebrew, and Mandarin. During his lifetime, George was probably the third best-known American, eclipsed only by Thomas Edison and Mark Twain. He was admired by foreign luminaries of the age, too—Leo Tolstoy, Sun Yat-sen, and Albert Einstein, who wrote that “men like Henry George are rare, unfortunately. One cannot imagine a more beautiful combination of intellectual keenness, artistic form and fervent love of justice.” George Bernard Shaw described his own thinking about the political economy as a continuation of the ideas of George, whom he had once heard deliver a speech.

  In 1886, the year the Statue of Liberty was erected, George came second in the New York mayoral race, attracting an official tally of 68,110 votes and beating the Republican candidate, a rambunctious young patrician named Theodore Roosevelt. George’s supporters alleged that if it were not for vote rigging by the Tammany Hall machine—whose candidate, Abram Hewitt, was the winner—George would have been elected mayor. But even as runner-up, George is credited by many with ushering in the Progressive Era in American politics. Friedrich Engels called the vote “an epoch-making day” and St. Louis labor leaders predicted it would become “the battle cry for all the enslaved toilers from the Atlantic to the Pacific.” George’s unexpected effectiveness at creating a working-class electoral coalition both inspired progressive politicians—including the twenty-eight-year-old Roosevelt—and helped convince business elites of the prudence of compromise. Abram Hewitt, son-in-law of millionaire Peter Cooper and the successful Tammany Hall man, himself recognized “that 68,000 people have deliberately declared that they have grievances which ought to be redressed.” George ran for mayor of New York again in 1897, but died four days before election day. He was given a statesman’s send-off—his coffin lay in state at Grand Central Station, where more than one hundred thousand people came to pay their respects. It was the largest crowd of mourners in New York City since Abraham Lincoln’s funeral in 1865. The New York Times quoted one George fan who said, “Not even Lincoln had a more glorious death.”

  George’s personal journey to the public arena was typical of the hard and adventurous lives of nineteenth-century Americans. Born in Philadelphia in 1839, the second in a family of ten, he left school at fourteen and took a job as a seaman on the Hindoo, a full-rigged ship of 586-ton register with a crew of twenty men and a cargo of five hundred thousand feet of lumber. The ship sailed to India, where he was struck by the poverty rather than the exotica that beguiled many of his contemporaries, and to Australia, where he discovered, and eventually imported back to America, the secret ballot. When George came home, he apprenticed as a printer, then worked his way to gold rush–frenzied San Francisco on the Shubrick, which sailed to the West Coast by way of Cape Horn. George didn’t find gold, so he supported himself and what soon grew to be a family of six by setting type, writing editorials, and—his cushiest job—working as a gas meter inspector. The family’s fortunes were often precarious. Here is how George described the day his second son, who grew up to become a New York State congressman, was born: “I stopped a man [on the street]—a stranger—and told him I wanted five dollars. He asked what I wanted it for. I told him that my wife was confined and that I had nothing to give her to eat. He gave me the money. If he had not, I think I was desperate enough to have killed him.”

  For all his peripatetic and odd-jobbing early years, intellectually George turned out to be what Isaiah Berlin would have called a hedgehog, a thinker focused intensely on a single question. For George, that question was what he saw as the central and troubling paradox of the Gilded Age, the puzzling coexistence of, as he put it in the title of his bestseller, progress and poverty.

  As he said during the 1886 mayoral campaign, the two key questions were “Why should there be such abject poverty in this city?” and “What do we propose to do about it?”

  Like most Americans of his era—a time when the industrial revolution was coming into full flower and the American frontier was being settled—George thrilled to the self-evident progress of the times. “The present century has been marked by a prodigious increase in wealth-producing power,” he writes in the opening of Progress and Poverty. “The utilization of steam and electricity, the introduction of improved processes and labor-saving machinery, the greater subdivision and grander scale of production, the wonderful facilitation of exchanges, have multiplied enormously the effectiveness of labor.” George goes on to list some of the amazing transformations of his age: “the steamship taking the place of the sailing vessel, the railroad train of the wagon, the reaping machine of the scythe, the threshing machine of the flail . . . the great workshops where boots and shoes are turned out by the case with less labor than the old-fashioned cobbler could have put on a sole, the factories where, under the eye of a girl, cotton becomes cloth faster than hundreds of stalwart weavers could have turned it out with their hand looms.”

  Today, “the wealth-producing power” of those inventions is indisputable. Even at a time of weak economic growth, and after decades of stagnant wages, middle-class Americans enjoy a standard of living beyond the reach of the robber barons of George’s day—electricity, plumbing, hot running water, cars, jet travel, and a life expectancy that has increased by nearly thirty years for white men (and much more for blacks and women). But in March 1879, when Progress and Poverty was published, the Long Depression, a sixty-five-month-long period of economic contraction that afflicted both the United States and Europe, was just whimpering to an end. From that perspective, the perplexing reality was that the industrial revolution wasn’t delivering: “We are coming into collision with facts which there can be no mistaking. From all parts of the civilized world come complaints of industrial depression; of labor condemned to involuntary idleness; of capital massed and wasting; of pecuniary distress among businessmen; of want and suffering and anxiety among the working classes.”

  What George found most mysterious about the economic consequences of the industrial revolution was that its failure to deliver economic prosperity was not uniform; instead it had created a winner-take-all society. “Some get an infinitely better and easier living,” he wrote, “but others find it hard to get a living at all. The ‘tramp’ comes with the locomotives, and almshouses and prisons are as surely the marks of ‘material progress’ as are costly dwellings, rich warehouses and magnificent churches. Upon streets lighted with gas and patrolled by uniformed policemen, beggars wait for the passer-by, and in the shadow of college, and library, and museum, are gathering the more hideous Huns and fiercer Vandals of whom Macaulay prophesied.”

  George’s diagnosis was beguilingly simple: the fruits of innovation weren’t widely shared because they were going to the landlords. This was a very American indictment of industrial capitalism. At a time when Marx was responding to Europe’s version of progress and poverty with a wholesale denunciation of private property, George was an enthusiastic supporter of industry, free trade, and a limited role for government. His culprits were the rentier rich, the landowners who profited hugely from industrialization and urbanization but did not contribute to it.

  George had such tremendous popular appeal because he addressed the obvious inequity of nineteenth-century American capitalism without disavowing capitalism itself. George wasn’t trying to build a communist utopia. His campaign promise was to rescue America from the clutches of the robber barons and to return it to “the democracy of Thomas Jefferson.” That ideal—as much Tea Party as Occupy Wall Street—not only won support among working-class voters and their leaders, like Samuel Gompers, but also resonated with many small-business owners. Robert Ingersol
l, a Republican orator, attorney, and intellectual, was a George supporter. He urged his fellow Republicans to back his man and thereby “show that their sympathies are not given to bankers, corporations and millionaires.”

  THE WORKING RICH

  George’s popularity is an example of the appeal of the rentier critique—a vision of capitalism without the cronies. That’s something we can all subscribe to. It is also one reason coming to terms with today’s super-elite is trickier than it was in the age of the robber barons. The crony class is, of course, still alive and well. But one of the striking characteristics of modern-day plutocrats is that, in contrast with their nineteenth-century predecessors, they are largely the working rich. Even today’s rent-seeking plutocrats work for a living—Carlos Slim or the Russian oligarchs owe their fortunes to rents they captured themselves, not to estates conquered by distant ancestors.

  We are mesmerized by the extravagance of the super-elite: the personal jet owned by hedge funder Ken Griffin, which is large enough to include its own nursery; or Microsoft cofounder Paul Allen’s 414-foot yacht, The Octopus, which is home to two helicopters, a submarine, and a swimming pool. But if their excesses seem familiar, even archaic, in other ways today’s plutocrats represent a new phenomenon. The wealthy of F. Scott Fitzgerald’s era were shaped, he wrote, by the fact that they had been “born rich.” They knew what it was to “possess and enjoy early.” These were the great-grandchildren of the rentier elite John Stuart Mill had described half a century earlier: “The ordinary progress of a society which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay incurred by themselves. They grow richer, as it were in their sleep, without working, risking, or economizing.”

  That’s not the case for much of today’s super-elite. “Fat cats who owe it to their grandfathers are not getting all of the gains,” Peter Lindert, the economic historian, told me. “A lot of it is going to innovators this time around. There is more meritocracy in Bill Gates being at the top than the Duke of Bedford.” Even Saez, the pioneering economic data jock who is deeply worried about the social and political consequences of rising income inequality, concurs that a defining quality of the current crop of plutocrats is that they are the “working rich.” He has found that in 1916 the richest 1 percent of Americans received only one-fifth of their income from paid work; in 2004, that figure had risen threefold, to 60 percent. “As a consequence, top executives (the ‘working rich’) have replaced top capital owners (the ‘rentiers’) at the top of the income hierarchy during the twentieth century,” Saez and Piketty write in their seminal paper on the subject.

  Michael Lindsay, a professor at Rice University who has interviewed more than five hundred American leaders as part of the multiyear Platinum Study of the background and behavior of the nation’s bosses, has reached the same conclusion. Speaking at a Columbia University conference on elites in the fall of 2010, Lindsay said that nowadays most of America’s business, nonprofit, and academic chiefs hadn’t inherited their money or come from privileged backgrounds.

  An October 2011 study of income inequality in the United States by the Congressional Budget Office, the nonpartisan government research unit, tells the same story of a shift at the top from income earned on capital—getting rich in your sleep—to income earned through wages. The contrast isn’t just between today’s super-elite and those of the Gilded Age; there has been a marked switch to wages since the end of the 1970s. As the gap between the top and everyone else has grown, so has the reliance of the 1 percent on wage income, rather than capital. Here’s how the CBO describes the transition:

  Capital income excluding capital gains—in other words, interest, dividends and rents—has generally been a declining source of income among the highest-income households. Its share dropped from 42 percent of market income excluding capital gains in 1979 to 21 percent in 2002. . . . The changing composition of income for the highest-income households reflects a much longer trend. Over the entire twentieth century, capital income declined sharply in importance for high-income taxpayers. The labor share of income for the top income groups was higher in 2007 than before World War II, as highly compensated workers have replaced people whose income is from property or securities at the top of the income distribution.

  This is true even at the very, very top. When three economists, one of whom works in the Office of Tax Analysis at the U.S. Treasury, crunched the numbers for 2005, they found that even among the top 0.01 percent—true plutocrats who earn at least $10 million a year—wages are far more important than rents. Salary income and business income accounted for 80 percent of their income excluding capital gains and 64 percent including capital gains. And, as with the 1 percent, the shift toward wages has coincided with the emergence of the winner-take-all economy. These figures were a quarter lower in 1979: 61 percent and 46 percent.

  You can see that change in the life stories of today’s plutocrats. Pete Peterson, for example, is the son of a Greek immigrant who arrived in America at age seventeen and worked his way up to owning a diner in Nebraska; his Blackstone cofounder, Steve Schwarzman, is the son of a Philadelphia-area retailer. Leon Cooperman, a Goldman Sachs veteran and hedge fund billionaire who has become an outspoken critic of the White House, made a point of his own humble background in an open letter to the president that he circulated in the autumn of 2011: “While I have been richly rewarded by a life of hard work (and a great deal of luck), I was not to-the-manor-born. My father was a plumber who practiced his trade in the South Bronx after he and my mother emigrated from Poland. I was the first member of my family to earn a college degree. I benefited from both a good public education system (P.S. 75, Morris High School and Hunter College, all in the Bronx) and my parents’ constant prodding.”

  Forbes classifies 840 of the 1,226 people on its 2012 billionaire ranking as self-made. It’s true that few of today’s plutocrats were born into the sort of abject poverty that can close off opportunity altogether—a strong early education is pretty much a precondition, and it is very useful to have a father who is an affluent professional—but the bulk of their wealth is generally the fruit of hustle, intelligence, and a lot of luck. They are not aristocrats, by and large, but rather economic meritocrats, preoccupied not only with consuming wealth but also with creating it.

  Nor is this true only in America, with its national faith in the Horatio Alger story. The global capitalist boom has allowed some people at the bottom of even the most traditionally stratified societies to rise to the top. Consider the small but growing community of plutocratic Dalits, the Indian caste once known as the untouchables. In some parts of rural India, Dalits are still not allowed to drink from the village well, and Dalit children are segregated in a special corner of their schoolrooms, lest their spiritual taint contaminate their higher-caste classmates. But India now has Dalit multimillionaires, like Ashok Khade, owner of a company that builds and refurbishes offshore drilling rigs, and subject of a recent front-page profile in the New York Times. As one Dalit businessman told a reporter, “We are fighting the caste system with capitalism.”

  Being self-made is central to the self-image of today’s global plutocrats. It is how they justify their luxuries, status, and influence. One way to eavesdrop on the way plutocrats talk to each other is to read the glossy limited-edition magazines written just for them. An example is the rather unimaginatively titled Luxos, which calls itself “Your local guide to global luxury” and can be found in the rooms of very fancy European hotels. One recent issue included an interview with Torsten Müller-Ötvös, the CEO of Rolls-Royce. Here is what he had to say about his buyers: “We have witnessed substantial changes over the last years. The Rolls-Royce generation of today has become much younger. Our youngest Rolls-Royce customer for example is a twenty-eight-year-old entrepreneur from India. We find that many of our customers have earned their success through
their own work, and they want to reward themselves with a Rolls-Royce.”

  Indeed, if you are looking to define the archetypal member of the super-elite, he isn’t Jane Austen’s Mr. Darcy, with his gorgeous acres of Pemberley. He—and they are almost all still men—is an aggressive, intensely educated mathematician, the son of middle- or upper-middle-class parents, who made his first fortune young.

  THE RISE OF THE ALPHA GEEKS

  The rise of the alpha geeks is most obvious in Silicon Valley, a culture and an economic engine they created. But you can find them everywhere you find the plutocracy. The alpha geeks are the dominant tribe in Bangalore, the Indian city that invented technology outsourcing. In their incarnation as engineers, they overwhelmingly populate the Communist Party leadership in China, where political nous is a surer path to wealth than filing patents. The Russian oligarchs are a textbook example of crony capitalism, yet six of the original seven earned degrees in math, physics, or finance before becoming natural resource tycoons. Carlos Slim, who studied engineering in college and taught algebra and linear programming as an undergraduate, attributes his fortune to his facility with numbers. So does Steve Schwarzman, who told me he owed his success to his “ability to see patterns that other people don’t see” in large collections of numbers.

  People inside the super-elite think the rise of the data geeks is just beginning. Elliot Schrage is a member of the tech aristocracy—he was the communications director for Google when it was the hottest company in the Valley and jumped to the same role at Facebook just as it was becoming a behemoth. At a 2009 talk he gave to an internal company meeting of education and publishing executives, Schrage was asked what field we should encourage our children to study. His instant answer was statistics, because the ability to understand data would be the most powerful skill in the twenty-first century.