Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else
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There is, of course, a fierce debate about what is causing rising income inequality, and the most honest students of the phenomenon attribute it to a number of factors. But there is broad agreement that skill-biased technical change is a crucial, and possibly the crucial, factor. In a January 2012 speech about income inequality, Alan Krueger, a Princeton economist who now heads President Barack Obama’s Council of Economic Advisers, reported one indicator of that consensus. In the mid-1990s he polled a nonrandom group of professional economists attending a conference at the New York Fed. They overwhelmingly named technological change as the main driver of income polarization—more than 40 percent said it was the chief cause. In a touching sign of humility, the second most popular explanation was “unknown.” Third was globalization. Political shifts, like the decline in the minimum wage and the decline in unionization, came in behind these top three.
There’s another reason the rise of the intellectuals to class power in global capitalism isn’t always immediately apparent within that favored group. That’s because not all of the highly educated are prospering equally. If you have a PhD in English literature, you probably don’t feel you are a member of the ruling elite. And even within tribes whose training vaults them collectively into the 1 percent—like bankers, lawyers, or computer programmers—there’s a twist to the impact of skills-biased technological change that lessens the sense of group prosperity. This is what economists call the “superstar” effect—the tendency of both technological change and globalization to create winner-take-all economic tournaments in many sectors and companies, where being the most successful in your field delivers huge rewards, but coming in second place, and certainly in fifth or tenth, has much less economic value.
The triumph of the nerds is intuitively obvious in the postindustrial economies of the developed West, where brains have had more value than brawn for a couple of generations. But in today’s era of the twin gilded ages, the triumph of the intellectuals is a global phenomenon. The highly educated are in the vanguard of India’s outsourcing miracle; the intellectuals, especially their “technical” branch, are very much in charge in communist China; and even the Russian oligarchs, who are better known in the West for their yachts and supermodel consorts, overwhelmingly have advanced degrees in math and physics.
The rise of the geeks, particularly the super-achievers among them, is a sharp break from the postwar era, when the robust economic recovery in the United States and western Europe was driven by the rise of a vast, and culturally dominant, middle class, much of it employed in blue-collar or relatively routine midlevel clerical, administrative, and managerial jobs. The disappearance of these opportunities, at a time when the super-smart are prospering as never before, is one reason for the populist antipathy toward the nerds. The impulse is strikingly bipartisan—the conservative Tea Party is every bit as hostile toward elites as is Occupy Wall Street, which has defined itself as the forum of the 99 percent.
Ironically—and frustratingly, for those in the discontented middle—the class power of the intellectuals is such that they are rising to the top of the political heap on both the left and the right. Indeed, at a time of fierce partisan conflict, one of the striking paradoxes is how much the champions of liberals and conservatives have in common: Mitt Romney and Barack Obama are both disciplined, dogged millionaires who describe their more popular wives as their better halves, hold degrees from Harvard Law School, and have a preference for data-driven arguments rather than emotional ones. Both men struggle to connect with the grassroots of their parties, coming across as cold and robotic.
You might call it the cognitive divide—the split between an evidence-based worldview and one rooted in faith or ideology—and it is one of the most important fault lines in America today. To his critics on the right, Obama is a socialist with dangerous foreign antecedents. To his critics on the left, he is a waffler with no real point of view and a craven desire to be liked. But the best explanation is that, like the rest of the rising intellectual class to which he belongs, the president is an empiricist. He wants to do what works, not what conforms to any particular ideology or what pleases any particular constituency. His core belief is a belief in facts.
Obama the empiricist is not the man who surged from behind to win the 2008 presidential election. That candidate was the Obama of soaring rhetoric, who promised hope and change. But the pragmatist has always been there. Writing in September 2008, several weeks before the presidential elections, Cass Sunstein, who has gone on to serve in the White House, had this to say about his candidate: “Above all, Obama’s form of pragmatism is heavily empirical; he wants to know what will work.” Word crunchers found that the president’s 2009 inaugural address was the first one to use the term “data” and only the second to mention “statistics.”
That cognitive approach is one reason Obama attracted so much support, especially among the younger generation, on Wall Street and in Silicon Valley. That wasn’t some sentimental betrayal of class interests—what Lenin is said to have called the useful idiocy of the capitalists who bankrolled the Bolsheviks; it was a recognition that Obama was an almost perfect embodiment of the super-elite that rules today’s global economy. Obama is a data-driven technocrat, and so are the traders and the Internet entrepreneurs. As one insider who is equally familiar with Wall Street and with Washington, D.C., told me: “You want your money managed by people who are responsive to evidence, who care about results, and who understand that the world is an uncertain place. Obama wants to get his economic advice from the same sorts of people.”
By training, by temperament, and by life experience, Mitt Romney, too, belongs squarely to the empiricist camp; it is hard to make millions in private equity without appreciating the power of data. What looks like flip-flopping to the Republican base can equally be understood as Romney’s effort to bridge the cognitive divide.
The super-geeks don’t just rule Wall Street, Silicon Valley, Bangalore, and Beijing. They are in charge in Washington, too—no matter which party wins.
ELIZABETH BILLINGTON—DIVA FOR THE FIRST GILDED AGE
Elizabeth Billington was a diva, a celebrity—and a superstar. Today, many music scholars judge her to be the greatest English soprano; contemporary critics described her as “the Goddess of Song.” At the invitation of the king, she sang at the Naples opera house, then the most prestigious in the world, where she was the heroine of a new opera, Ines di Castro, written especially for her. Her Italian tour was such a success that after her recovery from an illness in Venice the opera house was illuminated for three nights. In Milan she was warmly received by the empress Joséphine.
At the height of her fame, Sir Joshua Reynolds, at the time Britain’s most popular portraitist, painted Mrs. Billington as Saint Cecilia, about to be crowned with laurels by one cherub, and listening to the singing of four others. The woman on the canvas has a gleaming mane of hair, a perfect oval face, and large, expressive eyes, but her fans complained that it didn’t do her justice. “How could I help it?” Reynolds is said to have challenged his critics. “I could not paint her voice.” When Haydn, a lifelong friend, saw the painting, he told Reynolds: “It is like, but there is a strange mistake. You have made her listening to the angels; you should have made the angels listening to her.”
Mrs. Billington was famous among the hoi polloi, too. When an unauthorized biography of her was published on January 14, 1792, it sold out by three p.m. The sensational highlight: intimate letters she had written to her mother, containing vivid accounts of, as Haydn described them, “her amours,” a group rumored to include the Duke of Sussex and even the Prince of Wales.
Her talent and her celebrity and the international demand for her performances gave her pricing power. In 1801, when Mrs. Billington returned to Britain after seven years in Italy, the managers of both Drury Lane and Covent Garden, London’s two most prestigious opera houses, fought a bidding war for her voice. Mrs. Billington finessed that struggle with an unprecedented compromis
e: she sang alternately at both houses, and was paid £3,000 for the season, plus a £600 bonus, and a £500 contract for her violinist brother to lead the orchestra whenever she performed. Her total income that year was believed to exceed £10,000, enough to employ five hundred farm laborers, and as much as the annual rents collected by Elizabeth Bennet’s opulently wealthy Mr. Darcy, who made his fictional debut twelve years later.
Writing nearly a century later, in 1875, Alfred Marshall, the father of modern economics, used Mrs. Billington as an example of one of the consequences of the unprecedented increase in national GDP that Britain was just beginning to experience at the turn of the nineteenth century, thanks to the industrial revolution. Growing prosperity, Marshall believed, meant richer paydays for the most skilled practitioners of every trade and profession, even as the industrial revolution drove down the incomes of ordinary artisans. He was watching the birth of the superstar economy.
Here’s how Marshall, the first truly sympathetic student of the economic impact of the industrial revolution, described what was happening: “The relative fall in the incomes to be earned by moderate ability . . . is accentuated by the rise in those that are obtained by men of extraordinary ability. There was never a time at which moderately good oil paintings sold more cheaply than now, and . . . at which first-rate paintings sold so dearly.”
One cause of this premium on super-talent, Marshall believed, was the “general growth of wealth” created by the industrial revolution. The national tide was rising, and the boats of the superstars were rising the most quickly with it. This broader economic transformation, Marshall argued, “enables some barristers to command very high fees; for a rich client whose reputation, or fortune, or both, are at stake will scarcely count any price too high to secure the services of the best man he can get: and it is this again that enables jockeys and painters and musicians of exceptional ability to get very high prices.”
Of course, the painters, musicians, jockeys, and barristers Marshall describes weren’t the first talented artists and professionals to command a premium for their talents. China’s Ming Dynasty, which ruled the Middle Kingdom from the fourteenth to the seventeenth centuries, prized painting; Qiu Ying was once paid one hundred ounces of silver to paint a long hand scroll as an eightieth-birthday gift for the mother of a wealthy patron. Artists were the superstars of Renaissance Italy, profiting from the rise of a new commercial elite much as Mrs. Billington did. Nor has culture been the only arena in which the superstars can earn huge rewards: the lords and princes of the Middle Ages bid for the services of Europe’s best mercenary knights; modernizing Russian sovereigns, such as Peter and Catherine, paid top ruble for Western technical and military expertise.
But Marshall was one of the first to point out that the industrial revolution had made superstars shine more brightly than ever, both by increasing the prices top talent could command and by pushing down the relative wages of many of the artisans and professionals lower down the ladder, through new technologies and more widely diffused skills.
As the industrial revolution gathered strength, the later phenomenon was part of the conventional wisdom about what was happening in English society. One of Marshall’s examples—sound familiar?—was the declining wages of the clerical class: “A striking instance is that of writing . . . when all can write, the work of copying, which used to earn higher wages than almost any kind of manual labour, will rank among unskilled trades.” Most of us are more familiar with a more violent episode in the redundancy of once valuable skills—the machine-busting revolt of the Luddites, hand-loom weavers who protested the introduction of wide-framed, automated looms that made their trade pointless. The Luddite protests began in 1811, a decade after Mrs. Billington’s £10,000 triumph.
Marshall had the brilliance to understand that the two processes were connected—the mechanization that put the hand-loom weavers out of work was a tragedy for those individuals, but it was part of a broader economic transformation that greatly enriched the country as a whole. Among the beneficiaries of that growing national wealth were superstars like Mrs. Billington.
Already in the nineteenth century, the most successful superstars capitalized on—and, indeed, cultivated—an international market for their services: Mrs. Billington started her serious professional career in Ireland, and then made the jump back home to London. Her debut in Italy, the most prestigious music market in the world at the time, was carefully orchestrated with the help of the aristocratic English friends her London fame had won her. Mrs. Billington’s subsequent Italian success increased her cachet even further, and when she returned to London she was able to command a much higher fee.
But even though Mrs. Billington was a beneficiary of globalization, Marshall believed there was a physical limit to how much she, or any other superstar, could capitalize on the international market for her services. After all, as he observed with the asperity of someone pointing out the obvious, “The number of persons who can be reached by a human voice is strictly limited.”
Marshall’s remark about the natural constraint on the income Mrs. Billington and her successors could demand is just a footnote on page 728 of his magnum opus. But it has had a much cited afterlife in the economic literature because it is the rousing conclusion to a seminal 1981 paper by University of Chicago economist Sherwin Rosen, in which he explained how the twentieth-century technology revolution had further magnified the income of superstars. After quoting Marshall’s reference to Mrs. Billington and the impossibility of scaling her work, Rosen argued: “Even adjusted for 1981 prices, Mrs. Billington must be a pale shadow beside Pavarotti. Imagine her income had radio and phonograph records existed in 1801!”
CHARLIE CHAPLIN—IT GETS BETTER
In fact, when it came to capitalizing on the financial potential of new technology, Pavarotti came late to the game. The shift had begun nearly a century earlier, with the invention of the phonograph, the radio, and, crucially, movies. Consider the career of Charlie Chaplin. Born in 1889, roughly 125 years after Elizabeth Billington, he was, like her, a native Londoner with a prodigy’s talent for performance. Mrs. Billington had made her debut at age nine; by the time Chaplin was nine years old he was on the road, rehearsing and performing in two or three shows a day. His appeal, too, was international—he made his first U.S. tour in 1910, traveling the country for two years. But, for all his energy, like Mrs. Billington, in his live performances he was constrained by the physical reach of the human voice and the distance the human eye could see.
But Chaplin was lucky. In 1867 American inventor William Lincoln patented a device he called “the wheel of life,” through which animated pictures could be viewed. The motion picture era really took off after 1895 (six years after Chaplin’s birth), when French brothers Louis and Auguste Lumière invented the cinématographe, the first portable motion picture camera, projector, and printer. Public adoption wasn’t immediate—a disappointed Louis Lumière fretted that “the cinema is an invention without a future”—but within a generation, the way people were entertained had been transformed. In 1900, nearly all spectator entertainment was provided by live performers. By 1938, live acts accounted for just 8 percent of all public entertainment. In the mid-1920s, before the introduction of sound in movies, Americans spent $1.33 per capita on theater, versus $3.59 on movies; by 1938, the spending had further tilted in the direction of film—down to $0.45 on live performances and up to $5.11 at the movies.
Chaplin became the first global superstar of this new medium. He had an uncertain start—Mack Sennett, Chaplin’s first studio boss, deemed the actor’s film debut in the 1914 picture Making a Living “a costly mistake.” But that same year Chaplin also created the character of “the Tramp” for a series of Keystone movies. The character and the actor almost instantly became global celebrities—elsewhere in the world the Tramp took on such names as Charlot, Der Vagabund, and Carlitos. Just two years after the Tramp’s debut, Chaplin was enough of a superstar to command $670,000 to produce a
dozen two-reel comedies over the next year for the Mutual Film Corporation. Adjusted for inflation, that was roughly double Mrs. Billington’s £10,000 fee in 1801.
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Technology had created a new way for live performers to become superstars. In Alfred Marshall’s world, superstars had emerged thanks to the increased wealth of society as a whole, particularly its richest members. That meant lawyers, doctors, jockeys, painters, and opera singers could demand higher fees of their ever wealthier clients.
But Marshall’s superstars couldn’t benefit from one of the great innovations of the industrial revolution—mass production. They were limited by the reach of the human voice. (Thanks to the printing press, writers were something of an important exception. In 1859, Anthony Trollope, a successful writer but not quite a superstar, was paid £1,000 for the novel that became Framley Parsonage, provided he could write it in six weeks.) That was why, in Marshall’s view, the bigger winners of the industrial age were businessmen. They were the ones who could take advantage of “the development of new facilities for communication, by which men, who have once attained a commanding position, are enabled to apply their constructive or speculative genius to undertakings vaster, and extending over a wider area, than ever before.”
Sherwin Rosen understood that, in the twentieth century, culture had been industrialized, too. Advances in communications technology had allowed talented individuals to take advantage of the same economies of scale: “The phenomenon of Superstars, wherein relatively small numbers of people earn enormous amounts of money and dominate the activities in which they engage, seems to be increasingly important in the modern world.” The key to the shift, Rosen argued, was “personal market scale” and the power of new technologies to increase the size of that personal market. Like nineteenth-century industrialists, the superstars of the twentieth century reached vast markets, and because technology and volume drastically reduced the cost per unit or per performance, they created new markets, too.