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

by Chrystia Freeland

  Even Hoffman, who wants to be a sunny self-help guru, is too much of a scholar and an empath not to see that. “Remember: If you don’t find risk, risk will find you,” he warns in one of his book’s scarier passages. “In the past, when you thought about stable employers, you thought IBM, HP, General Motors—all stalwart companies that have been around a long time and employ hundreds of thousands of people. . . . Imagine what it must have been like for someone who thought he was a lifer at HP; his skills, experience, and network were all inextricably linked to his nine-to-five employer. And then: BOOM. He’s unemployed.”

  FIVE

  RENT-SEEKING

  They steal and steal and steal. They are stealing absolutely everything and it is impossible to stop them. But let them steal and take their property. They will become owners and decent administrators of this property.

  —Anatoly Chubais, the architect of Russian privatization, in conversation with Sergei Kovalyev, a former dissident and Russian politician

  Eating increases the appetite.

  —Russian proverb, quoted by Kovalyev in response to Chubais

  Raghuram Rajan is a professor at the University of Chicago, the intellectual home of free market economics. He is also a former chief economist of the International Monetary Fund, another institution not known for its hostility to global capitalism. A tall, slim forty-nine-year-old, Rajan favors the pressed button-down shirts and short, neat hair of an investment banker, rather than the stereotypical rumpled tweeds of a college teacher. In 2008 he returned to his native India to address the subcontinent’s most prestigious business association, the Bombay Chamber of Commerce and Industry, which, founded in 1836, was largely responsible for the first railway built in India and whose members’ wealth could buy about a third of India’s annual economic output. But Rajan was there to caution his country’s rising capitalists, rather than to rally them.

  India, he said, risked becoming “an unequal oligarchy, or worse, perhaps far sooner than we think.” One piece of evidence Rajan cited was a spreadsheet compiled by Jayant Sinha, an old classmate of his from the Indian Institute of Technology, the country’s MIT and alma mater to many of its software entrepreneurs. Sinha had calculated the number of billionaires per trillion dollars of GDP in a number of countries around the world. Russia, with eighty-seven billionaires and a national GDP of $1.3 trillion, had the highest billionaire-to-GDP ratio. India, Rajan said, was number two, with fifty-five billionaires and $1.1 trillion of GDP.

  Rajan assured his audience that he had nothing against billionaires per se: “We should certainly welcome it if businessmen make money legitimately.” But he argued that India’s high billionaire-to-GDP ratio was “alarming” because most of the country’s super-rich weren’t software pioneers or inventive manufacturers. Instead, “too many people have gotten too rich based on their proximity to the government. . . . Land, natural resources, and government contracts or licenses are the predominant sources of the wealth of our billionaires and all of these factors come from the government.

  “If Russia is an oligarchy,” Rajan warned the assembled magnates, “how long can we resist calling India one?”

  In the wake of the financial crisis, some critics have warned that America, too, risks becoming an oligarchy. Simon Johnson, another former chief economist of the IMF, has compared the bankers of the world’s superpower to emerging market oligarchs, arguing that they similarly have succeeded in diverting national resources—notably the bailout trillions—to themselves. The financiers, he says, have pulled off a “quiet coup.”

  Johnson and Rajan have a shared concern: in an age of super-wealth, we need to be constantly alert to efforts by the elite to get rich by using their political muscle to increase their share of the preexisting pie, rather than by adding value to the economy and thus increasing the size of the pie overall. As the gap between the super-rich and everyone else has grown, enrichment through reallocation—which economists call “rent-seeking”—has become a hot political issue. It is one thing for Steve Jobs, whose products are so often objects of adoration, or even Bill Gates, whose products are so often instruments of torture, to accumulate billions. It is quite another for multimillion-dollar compensation to be paid to bankers whose institutions were bailed out by taxpayer trillions, or private equity fund managers who pay 15 percent tax on most of their earnings, or for the CEOs of multinational companies to take home higher paychecks than their billion-dollar firms pay in tax in the United States.

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  That’s why today rent-seeking is a favorite theme for the left. But as a field of formal study, rent-seeking was most energetically elaborated by economists on the right: it is, after all, the product of state control and distribution of wealth, something the right has been in the business of trying to decrease. And as inequality rises in twenty-first-century America, some on the right have returned to the idea that the central economic ill is rent-seeking. Speaking about “The American Idea” at the Heritage Foundation in the fall of 2011, Paul Ryan, the wonkish Wisconsin congressman, argued that, rather than raise taxes on individuals, we should “lower the amount of government spending the wealthy now receive.” The “true sources of inequity in our country,” he continued, are “corporate welfare that enriches the powerful, and empty promises that betray the powerless.” The real class warfare that threatens us, he said, is “a class of bureaucrats and connected crony capitalists trying to rise above the rest of us, call the shots, rig the rules, and preserve their place atop society.”

  Here’s another paradox: some of the most egregious examples of rent-seeking in recent decades have been the unintended consequence of liberal reforms designed to loosen the state’s grip on the economy. These range from the transformative privatizations in formerly centrally planned economies to the deregulation of the financial sectors of the Anglo-American economies.

  Rent-seeking also takes the more classic form of powerful groups using their influence to bend the rules of the economic game in their own favor. That is easiest to do, of course, when you control the state—which is why, for instance, Nicaragua’s authoritarian Somoza family and Mir Osman Ali Khan, the last hereditary prince of the Indian state of Hyderabad, both appear on lists of the richest families of the twentieth century. Finally, innovators can be rent-seekers if they become so successful their companies become monopolist. That was true of the railroad barons in the late nineteenth century and Microsoft in the late twentieth century, and surely will be of some twenty-first-century entrepreneur.

  SALE OF THE CENTURY

  October is the best month to visit Kiev. The leaves of the horse chestnut trees that line the Khreshchatyk, the wide boulevard that is the Ukrainian capital’s central artery, range from dark green to bright yellow, the average high temperature is a crisp sixty-three degrees, and the central European sun isn’t yet obscured by the clouds of November.

  But on October 24, 2005, attention was turned indoors, to an undistinguished room inside the State Property Fund, a grim Soviet-era building in the exclusive Perchersky neighborhood. On this autumn day, industrialists from as far afield as India and Luxembourg, the international press, some 150 demonstrators, and the nation’s television cameras, broadcasting live, converged on the State Property Fund to participate in an event of unlikely drama: the auction of Kryvorizhstal, Ukraine’s largest steel mill.

  The starting price was $2 billion. In a three-way fight between Mittal Steel, based in Europe and owned by the Indian Mittal dynasty; Luxembourg’s Arcelor, working in concert with eastern Ukrainian oligarchs; and the LLC Smart Group, a Dnipropetrovsk-based consortium of Russians and Ukrainians, the number quickly soared to more than double that amount.

  “Once more, I am reminding you that on the table is the package of shares for the Kryvorizhstal company,” the auctioneer, wearing an ordinary business suit, reminded the bidders and live television audience forty minutes into the proceedings. “Participant number three [Mittal Steel] bids a price of 24,200 million hryvn
ias [$4.8 billion]. Three! Sold to participant number three.”

  Recently ousted prime minister Yulia Tymoshenko, wearing her characteristic coronet of wheat-colored braids and displaying her equally characteristic sense of theater, was the first to congratulate Lakshmi Mittal, the family’s second-generation steel man and its reigning patriarch. “It was like a football game!” she said triumphantly.

  The oligarchs, she told me when we met later (and after she had been reinstalled as prime minister), “hate me—they don’t understand me because . . . they cannot buy me or scare me.” She was both right and wrong. In 2011, after Viktor Yanukovych, whose candidacy was backed by several eastern Ukrainian oligarchs, was elected president, he imprisoned Ms. Tymoshenko, in a politically motivated case redolent of Mikhail Khodorkovsky. She still isn’t scared, though, and was defiant both in the dock and in statements from jail.

  The auction was certainly a moment of high political drama for Ukrainians. The democratic Orange Revolution, which Ms. Tymoshenko helped lead, had swept to power ten months earlier partly thanks to public revulsion at the 2004 privatization of Kryvorizhstal, for just $800 million, to a consortium that included the then president’s son-in-law. The 2005 reprivatization, at a price that was six times higher, was both a fulfillment of one of the Orange Revolution’s central promises and a vindication of one of its chief complaints.

  But the Kryvorizhstal auction is also the central drama in an even bigger story. Of all the state-owned assets in the entire former Soviet Union sold to private owners since 1991, when the USSR collapsed, the one with the very highest price tag is Kryvorizhstal. That is an astonishing fact. In the two decades since the end of Soviet communism, the successor states have privatized oil companies that control around one hundred billion barrels of crude oil reserves, a mine that produced 25 percent of the world’s nickel, a major diamond producer, and a vast aluminum industry. But it is a Stalin-era steel mill in a grim and anonymous city in southern Ukraine that, if cost is any measure of value, turns out to have been the crown jewel in the former Soviet Union’s natural resource and industrial patrimony.

  That, of course, is absurd. Which is why the real story of Kryvorizhstal isn’t the successful multibillion-dollar sale of a Ukrainian steel mill to an Indian magnate, it is how it dramatizes the vast giveaway of the rest of the assets of the former Soviet Union. That shift from state to private ownership is probably the single largest transfer of assets in human history. When it comes to the creation of twenty-first-century billionaires, the USSR’s sale of the century is also the most powerful driver, more important than Silicon Valley’s technology revolution or the flourishing of finance on Wall Street and in the City of London. Just consider: of the 1,226 billionaires on the Forbes 2012 rich list, 111 were oligarchs from the former Soviet Union, 90 were technologists, and 77 were financiers. The number of billionaires relative to the size of the economy and the gap between the billionaires and everyone else are even more striking: The fortunes of Russia’s billionaires could buy roughly a fifth of the country’s annual economic output. Compare that with the United States, whose 424 billionaires could buy just over 10 percent of their country’s annual economic output, or South Korea, whose 20 billionaires could afford just 4 percent of their country’s yearly economic output. Forbes declared that in 2012, Moscow was the world’s “top city” for billionaires, boasting 78 of them, compared with just 58 in New York, and nearly double London’s 39. Indeed, economic historians have found that Russia’s oligarchs have done so well for themselves that inequality today is higher than it was under the tsars.

  The fire sale of the assets of the former Soviet Union stands out because it marked such a sharp shift from nearly total state ownership, because the loot that was privatized was so valuable, and because the transition was so swift. But it was also part of a wider global trend. If you ever doubt that ideas matter, consider the astonishing, bloodless victory of liberal economic thinking and its concrete impact around the world in the last two decades of the twentieth century. The two great behemoths of state ownership—the former Soviet Union and China—shifted vast assets into private hands. Mixed economies in the developing world like India, Mexico, and Brazil sold off state companies and natural resources. Western capitalist countries, led by Britain, sold off companies that had once been considered natural monopolies and spun off the provision of many services that had once been thought best performed by the state.

  Everywhere, the goal was to get the government out. But the irony of the victory of the liberal economic idea is that putting it into practice delivered the greatest rent-seeking windfall in economic history—the state, after all, was in charge of privatization. Influencing that one-off division of the spoils was one of the surest ways to join today’s global super-elite.

  WHO WAS THE RICHEST MAN IN HISTORY?

  In fact, according to calculations by Branko Milanovic, the richest man who ever lived isn’t a Russian oligarch, but he does owe much of his fortune to the great wave of liberalization that swept the world when Soviet communism collapsed.

  Comparing income across history is hard. The conversion tools we use to make comparisons across geographies today—currency exchange rates or the more subtle measure of purchasing power parity—are ineffective when the goods we consume—horses vs. private jets or personal scribes vs. iPads—are so different. Milanovic gets around this mismatch by turning to Adam Smith. His yardstick of wealth was how much of our compatriots’ work we can buy: “A person must be rich or poor according to the quantity of labor which he can command.” Among today’s billionaires, Milanovic’s calculations favor the rich man in a poor country—he can employ more of his less well-paid compatriots. If anything, it is also a measure that overstates the wealth of the ancients—after all, no matter how rich you were in Rome or Egypt, what today are ordinary middle-class services like telephones or airplane travel were in those days luxuries that were literally unimaginable. What Milanovic’s approach may understate is the power gap between ancient oligarchs and everyone else: many owned slaves or serfs, whom they were free to beat or kill, and some could raise their own armies, which rivaled the power of the relatively weak state.

  Marcus Crassus, who lives on today as a cartoon villain in video games based on Spartacus’s slave revolt, which he helped crush, was famous in his own time as the wealthiest man in Rome. He was nicknamed “Dives” or “the Rich” and successfully defended himself when charged with the capital crime of corrupting a vestal virgin by explaining he was after the maiden’s money, not her virtue; his fellow Romans thought that account rang true to character. Plutarch estimated Crassus’s fortune at 170 million sesterces; Pliny the Elder put it a little higher, at 200 million. That second estimate was roughly the size of the entire government treasury of the Roman empire. Gauged by Milanovic’s metric, Crassus’s fortune translated into an annual return that was equal to the average yearly income of thirty-two thousand Romans.

  That’s a lot, but Crassus was handily outearned by the first generation of plutocrats, the robber barons of the Gilded Age. Andrew Carnegie’s wealth was at its apex in 1901, when he purchased U.S. Steel. His share in the company was worth $225 million, which yielded an annual income the same as that of 48,000 average Americans. John D. Rockefeller did even better: his peak fortune of $1.4 billion in 1937 yielded an annual income equal to that of 116,000 Americans.

  But all three are trumped by the man at the head of the 2012 Forbes global rich list, Mexican tycoon Carlos Slim. Forbes put Slim’s fortune that year at $69 billion, enough to earn an income equivalent to the average annual salary of more than 400,000 Mexicans. Here’s another way to see Slim’s relative economic weight in Mexico: His fortune could buy 6 percent of Mexico’s annual economic output. At his peak wealth, Rockefeller could buy less than 2 percent of the U.S. annual output. Bill Gates, America’s top dog in the twenty-first century, could afford less than 0.5 percent of the country’s yearly economic output. If you make a telephone call, smoke a
cigarette, go to the bank, take a flight, or ride a bike in Mexico, you probably pay a few pesos to Slim. His presence is so ubiquitous that one restaurant in the capital quips on its menu that it is the only place in Mexico not owned by Slim.

  Like the Russian oligarchs—as it happens, Milanovic thinks the second-richest person of all time was oil baron Mikhail Khodorkovsky, who he calculates could buy the labor of a quarter of a million Russians in 2003, the year before Khodorkovsky was arrested—Slim owes his leap from millionaire to billionaire to the wave of economic liberalization that swept the world, particularly the previously state-dominated emerging market economies, in the nineties. In Slim’s case, the windfall was telecom privatization.

  That sale was orchestrated by Carlos Salinas, a Harvard-educated technocrat determined to reform a stagnant Mexican economy whose growth was constrained in part by the dominance of inefficient, state-controlled companies. Like the liberals who spearheaded Russia’s great sell-off, Salinas was a true believer in market reforms. And he believed in Slim, whom he had befriended in the eighties. That was a rough decade—the 1982 nationalization of the country’s banks and the plummeting price of oil had provoked capital flight and weakened economic growth—but Slim, building on his family’s retailing fortune and his own balance-sheet brilliance, held his nerve and bought assets on the cheap, expanding into cigarette production and insurance. Salinas liked Slim’s commitment to the country, his ability to see opportunity at a time of peril, and his entrepreneurial verve. The pair were dubbed “Carlos and Charlie’s” after a cheap and cheerful local restaurant chain.