Follow the money

Plutocrats: The Rise of the New Global Super-Rich, by Chrystia Freeland, Allen Lane RRP£25/Penguin Press RRP$27.95, 352 pages

It is one of the oldest questions in political economy: why should another person’s mega-wealth worry you, if you are comfortably off yourself? The “Occupy Wall Streeters” think that the wealth of the 1 per cent has painful and damaging effects on the 99 per cent, beyond mere jealousy or the suffering of the poor or unemployed. Chrystia Freeland’s argument in Plutocrats is that they were right but were looking at the wrong percentages: it is the 0.1 per cent that truly matter, she says, and their wealth damages the other 99.9 per cent.

It’s a bit less snappy, but you can see her point. I recall some fairly in-your-face evidence of it while on holiday at quite a posh resort in the British Virgin Islands. Most, probably all, of those staying there would be counted as among the 1 per cent. But what everyone was talking about was a vast, sinister-looking superyacht that sailed in and dropped anchor slap in the middle of our view. This clearly belonged to one of Freeland’s 0.1 per cent.

The yacht, which resembled a surfaced submarine and brought Bond characters immediately to mind, was mysteriously called “A”. But the wonders of Google – creator of many other plutocrats – enabled us to discover that its owner was a little-known Russian oligarch called Andrey Melni-chenko, who had named the yacht after his wife, Aleksandra.

On board, gossip soon informed us (as they took over the beach for a private party), were the Hollywood couple Demi Moore and Ashton Kutcher, two examples of what Freeland describes as a “winner-takes-all” economy (though they have since separated, so are not winners in every sense).

The inequality of incomes and wealth that has been widening in virtually all western countries since the 1980s, and arrived in even more spectacular form in emerging economies such as China, India, Russia and Mexico, is an unmistakable and undeniable feature of our times. The difficulty is to know what to think – and even more important, do – about it.

Many commentators describe it as having been a central issue during the US presidential campaign, and so it was, in a way. But that way was curiously disconnected from actual policies: a little of the contest between Mitt Romney and Barack Obama concerned the right focus for tax cuts or rises, but mostly the inequality issue became just a proxy for who was more in or out of touch with ordinary voters: a super-rich former private-equity guy, or a pretty rich, rather lofty professorial type.

The problem, as Freeland, a former deputy editor of the Financial Times who now works for Thomson Reuters, outlines very capably, is that the new global super-rich have emerged alongside economic and technological forces that few would wish to bring to an end. Most of the plutocrats are not aristocrats who inherited their wealth but entrepreneurs of some sort. And everyone loves entrepreneurs, don’t they?

Well, yes and no. Ever since Adam Smith pointed out in The Wealth of Nations that capitalists are forever inclined to come up with conspiracies against the public, we have known that one rather profitable form of enterprise is the creation of monopolies or other forms of privilege, often with assistance from the state. Economists call it rent-seeking. Ordinary people call it gouging or daylight robbery.

This is where the first big problem with the plutocrats arises, and for my taste it is a bit played down by Freeland. The crucial chapter, number five out of six, is indeed entitled “Rent-Seeking”, and it is a good analysis too.

Yet that analysis follows four rather breathless and seemingly admiring chapters on the anthropology of this new global elite, all their private planes and many houses and international get-togethers and non-working wives, an anthropology that slides a little confusingly at times to and fro between the 0.1 per cent and the 1 per cent, between the billionaire owners and the multi-millionaire chief executives, bankers and superstar academics. It recounts, a tad uncritically, the plutocrats’ belief that they have made their money on merit, and so should be entitled to everything that it buys them.

For there’s the nub: what sort of merit? The merit in many cases, as Freeland knows better than most from her previous excellent study of Russia’s oligarchs, Sale of the Century (2000), is to have been more ruthless and determined than others in grabbing cheap assets and establishing privileged, often monopoly positions, by fair means or foul.

A prime case, far away from Russia’s cut-throat capitalism, is the world’s richest man, Carlos Slim. Forbes magazine estimates his wealth to total $69bn – enough, writes Freeland, to buy 6 per cent of Mexico’s annual gross domestic product or to earn an income equivalent to the average salary of 400,000 Mexicans. The owner of Telmex, Mexico’s dominant telecoms company, he made his fortune, she writes, thanks to “Mexico’s liberalisation”, part of a global shift from state to market. But that is nonsense. He made his fortune because there was no liberalisation. All that happened was that a public monopoly was turned into a private one.

The difference matters. A man your reviewer has been obsessed with for the past decade is a plutocrat called Silvio Berlusconi, who doesn’t appear in this book but is a prime example of a capitalist who made his billions largely thanks to favours from the state, established a near monopoly of commercial television in Italy and then got himself elected as prime minister, a position from which he was able to protect his monopoly and serve his business.

That is the second big problem with plutocracy. Rent-seeking, whether by Berlusconi, Slim or Bill Gates’s Microsoft during its Netscape-crushing days, damages society directly by raising prices and deterring innovation. But it does even more damage when it distorts, or destroys, democracy.

The preference given by the US Supreme Court in 2010 to the “free speech” represented by unlimited corporate spending in political campaigns has made this a serious problem in the US. So has the proliferation of lobbyists and the influence they, on behalf of their industries, especially Wall Street, have over politicians. Yet as Italy shows, the damage can be even worse if the billionaires assume power directly.

Freeland closes with a third big danger, and another Italian inspiration. It is the story of medieval Venice, and how the Mediterranean’s richest city-state destroyed its own prosperity when the elite decided in 1315 to close its doors to newcomers. It is a powerful and salutary tale. But let’s hope we deal with the rent-seeking and democracy-distorting first and don’t allow the plutocrats to get so far as to consider a repeat of the Venetian Serrata, or closure.

Bill Emmott is a former editor of The Economist. He is the author of ‘Good Italy, Bad Italy’ (Yale) and writer of a related documentary film, ‘Girlfriend in a Coma’

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