Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (20 page)

We still don’t have a perfect answer to the problem of fit—female readers can sigh here—but there was a tipping point in 1941, when, in a government project funded to employ casualties of the Great Depression, the U.S. Department of Agriculture measured almost fifteen thousand women and published the results, creating the first standard dress sizes. Industrial sewing technology made advances, too, and by the 1950s a factory-made dress could be produced in a fraction of the time it took for a lone seamstress using a sewing machine.

As Yves Saint Laurent realized, these two innovations made it possible for superstar designers to benefit from economies of scale. More than acting or singing or cooking, modern fashion design (as opposed to mere dressmaking) was invented as a very expensive service for the Gilded Age elite. Saint Laurent understood that his move into ready-to-wear was a break with that paradigm, and he sought to make his populism a virtue. Fashion, he liked to say, would be incredibly upset if its sole purpose was to dress rich women. (Note, however: the first highly visible client of Rive Gauche, the YSL ready-to-wear was Catherine Deneuve. And in 1987, a few days after the Black Monday stock market crash, the collection included a $100,000 jeweled jacket.)

Many of Saint Laurent’s fellow elite couturiers were horrified. Emanuel Ungaro wrote that the opening of Rive Gauche saddened him greatly. Pierre Cardin, who had experimented with, then abandoned his own foray into, ready-to-wear a year earlier, warned that by leveling and standardizing, we are going to fabricate a world where “we will die of boredom.”

Before long, however, it became clear that by producing both an haute couture line and a prêt-à-porter line—offering very costly personal service to the super-rich, and using technology to scale their talent—the fashion designers at the very height of their profession could benefit from both Marshall and Rosen effects. In 1975, Yves Saint Laurent earned $25 million, a hundred times what Charles Worth earned at the peak of his career (when taking inflation into account). Worth was richer than his French seamstresses; YSL, however, is a veritable plutocrat compared with the foreign garment workers who sewed his prêt-à-porter line. As in the law, the performing arts, and cooking, in fashion the chasm between the superstars and everyone else is only getting bigger.

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FFECT—
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ALENT VS.
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APITAL

The Marshall superstars and the Rosen superstars—and those who benefit from both effects—are getting richer in two ways.

The first is because they are being served from a larger pie—their super-rich clients are richer than ever, and economies of scale now allow them to reach a mass audience. The second is because they are getting a bigger share of the pie relative to their less elite peers (whether those peers are any less talented is open to debate). Their clients—both the super-rich and the masses—prefer to listen to the “very best” singer, and wear clothes created by the “very best” designer. Even where the service can’t be scaled—as in a courtroom appearance or an original painting—the same force is at work.

Roger Martin, a management consultant and business school dean, thinks that over the past three decades another force has come into play: superstars aren’t just earning more from their clients, they are increasingly able to extract a greater amount of the value of their work from their employers. In Martin’s view, this dynamic, which he describes as the struggle between talent and capital, is tilted in favor of the “talent,” or the superstars. Just as the fight between labor and capital defined the first stage of industrial capitalism in the nineteenth and twentieth centuries, Martin argues that the battle between capital and talent is the central tension in the knowledge-based postindustrial capitalism of the twenty-first century.

Here is how Martin laid out his theory in the
Harvard Business Review
: “For much of the twentieth century, labor and capital fought violently for control of the industrialized economy and, in many countries, control of the government and society as well. Now . . . a fresh conflict has erupted. Capital and talent are falling out, this time over the profits from the knowledge economy. While business won a resounding victory over the trade unions in the previous century, it may not be as easy for shareholders to stop the knowledge worker–led revolution in business.”

Martin’s thesis helps explain one of the most striking contrasts between today’s super-elite and their Gilded Age equivalents: the rise, today, of the “working rich.” As Emmanuel Saez found, the wealthiest Americans these days are getting most of their income from work—almost two-thirds—compared to a fraction of that, roughly one-fifth, a century ago.

Martin’s theory about the growing power of “the talent” builds on the ideas of Peter Drucker, the Austrian-born scholar who laid the intellectual foundations for the academic study of management. That means you can probably blame Drucker for far too many soul-destroying PowerPoint presentations, peppy but hollow business books, and inspirational corporate “coaches” with lots of energy but no message. But Drucker also, more than half a century ago, predicted the shift to what he dubbed a “knowledge economy” and, with it, the rise of the “knowledge worker.”

Drucker made his name in America, but he was a product of the Viennese intellectual tradition—Joseph Schumpeter was a family friend and frequent guest during his boyhood—of looking for the big, underlying social and economic forces and trying to spot the moments when they changed. Accordingly, he saw the emerging knowledge worker as both the product and beneficiary of a profound shift in how capitalism operated. “In the knowledge society the employees—that is, knowledge workers—own the tools of production,” Drucker wrote in a 1994 essay in the
Atlantic
. That, he argued, was a huge shift and one that would, for the first time since the industrial revolution, shift the balance of economic power toward workers—or, rather, toward one very smart, highly educated group of them—and away from capital.

As Drucker explained: “Marx’s great insight was that the factory worker does not and cannot own the tools of production, and therefore is ‘alienated.’ There was no way, Marx pointed out, for the worker to own the steam engine and to be able to take it with him when moving from one job to another. The capitalist had to own the steam engine and control it.” Hence the power of the robber barons and the complaints of the proletariat.

But that logic collapses in the knowledge economy: “Increasingly, the true investment in the knowledge society is not in machines and tools but in the knowledge of the knowledge worker. . . . The market researcher needs a computer. But increasingly this is the researcher’s own personal computer, and it goes along where he or she goes. . . . In the knowledge society the most probable assumption for organizations . . . is that they need knowledge workers far more than knowledge workers need them.”

Here, then, is another way that some of the highly talented are catapulted into the super-elite: when it becomes possible for them to practice their profession independently. Or, to put it another way, when the tool of their trade is a personal computer, rather than a steam engine.

Of course, even during the first machine-driven thrust of the industrial revolution, there were some superstars who remained beyond the thrall of the capitalists. A painter needed only oil and canvas; a lawyer needed only his education, wits, and admission to the bar. It is no accident that it was the superstars of these two professions that Marshall, writing in 1890, singled out as benefiting disproportionately from the Western world’s economic transformation.

In the knowledge economy, more and more professions use a laptop rather than a steam engine, and that means that the superstars in these fields are earning ever greater rewards. The intellectuals are on the road to class power.

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TREET AND THE
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UPERSTARS

The biggest winners are the bankers. They did well enough, to be sure, in the industrial revolution. They were among that era’s plutocrats—think J. P. Morgan in New York, or Siegmund Warburg in the City of London. But these were the owners of capital. Their employees, the salaried financial professionals, weren’t nearly as richly rewarded. Their job was just to keep score.

In the postwar era, with the steady rise of the knowledge economy, the bankers’ role has been dramatically transformed. Instead of working for the owners of capital—whether they are industrial magnates or the shareholders of publicly traded companies—financiers have discovered they can themselves own the capital and, with it, the companies. Critically, this shift from wage earner to owner has been accomplished not just by one or two stars at the very top of the field—the Oprah Winfreys or the Lady Gagas—but by thousands. In 2012, of the 1,226 people on the
Forbes
billionaires list, 77 were financiers and 143 were investors. Of the forty thousand Americans with investable assets of more than $30 million, a group described by Merrill Lynch, which produces the premier annual study of the wealthy, as “ultra high net worth individuals,” 40 percent were in finance. Of the 0.1 percent of Americans at the top of the income distribution in 2004, 18 percent were financiers. Bankers are even more dominant at the very tip of the income pyramid. In a study of the 0.01 percent, Steven Kaplan and Joshua Rauh found Wall Street significantly outearned Main Street. Collectively, the executives at publicly traded Wall Street firms earned more than the executives of nonfinancial companies. Wall Street investors, such as hedge fund managers or private equity chiefs, did even better. “In 2004,” Kaplan and Rauh write, “nine times as many Wall Street investors earned in excess of $100 million as public company CEOs. In fact, the top twenty-five hedge fund managers combined appeared to have earned more than all five hundred S&P 500 CEOs combined.”

You can trace this transformation of bankers from accountants and clerks to the dominant tribe in the plutocracy to three new forms of finance pioneered in the decade after the Second World War, and to three very different men who lived within five hundred miles of one another on the East Coast stretch running from Boston to Baltimore.

The first was Alfred Winslow Jones, a patrician New Yorker (his father ran GE in Australia), who invented the modern hedge fund in 1949 when, as a forty-eight-year-old journalist with two children and two homes, he decided he needed to make more money. The second was Georges Doriot, a French-born Harvard Business School professor who invented the modern venture capital business in 1946 as a way to encourage private investment in start-ups founded by returning GIs. The third was Victor Posner, the teenage school dropout son of a Baltimore grocer who pioneered the hostile takeover business (now usually known by the more genteel name of “private equity”) in the 1950s.

Together, this trio spearheaded the transformation of finance from an industry dominated by large institutions whose job was the conservative stewardship of other people’s money into a sector whose moguls were iconoclastic entrepreneurs who specialized in risk, leverage, and outsize returns. The broader economic impact of this revolution remains debatable—you could argue that these three men are the fathers of the instability of modern financial capitalism—but it was clearly crucial in the rise of the super-elite. Hedge funds, venture capital, and private equity transformed finance—previously the dependable plumbing of the capitalist economy—into an innovative frontier where smart and lucky individuals could earn nearly instant fortunes.

The biggest beneficiaries are those who strike out on their own. And the would-be masters of the universe know that. David Rubenstein, the billionaire cofounder of the Carlyle Group, one of the world’s biggest private equity firms, told me that when he visited America’s top business schools during their spring recruiting season in 2011, he discovered that everyone wants to be an entrepreneur. “When I graduated from college, you wanted to work for IBM or GE,” he told me.” Now when I talk to people graduating from business school, they want to start their own company. Everyone wants to be Mark Zuckerberg; no one wants to be a corporate CEO. They want to be entrepreneurs and make their own great wealth.” That quest starts earlier and earlier. Jones and Doriot were both nearly fifty when they started their businesses. Nowadays, would-be plutocrats want to be well on their way to their fortune by their thirtieth birthday.

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ILLIONAIRE’S
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IRCLE

But the real mass revolution sparked by the rise of entrepreneurial finance is in the way that it reshaped the big institutions it threatened to usurp. Civilians—which is to say anyone who doesn’t work on Wall Street (or maybe in Silicon Valley)—tend to think of the $68 million earned by Lloyd Blankfein in 2007, just before the crash, or the $100 million bonus earned by Andrew Hall, Citigroup’s star energy trader, in 2008—as princely fortunes. On the Street itself, though, even the most successful and lavishly compensated employees of the publicly listed firms see themselves as also-rans compared to the principals of hedge funds, venture capital firms, and private equity companies.

We got a glimpse of that way of thinking when federal agents were allowed to tap the telephones of Raj Rajaratnam, a billionaire hedge fund founder, and his network of contacts. In one of those conversations, Rajaratnam and Anil Kumar discuss their mutual friend Rajat Gupta, the Indian-born former head of McKinsey, a company that epitomizes the rise of the managerial aristocracy. Gupta was on the board of Goldman Sachs, one of the most prestigious in the world. But he had been invited to the board of KKR, one of the four biggest private equity firms. Serving on both would be a “perceived conflict of interest,” because KKR and Goldman often compete for the same business. That left Gupta with a tough decision, but he was leaning toward KKR. Here, according to Rajaratnam, is why: “My analysis of the situation is he’s enamored with Kravis [one of the three founders of KKR] and I think he wants to be in that circle. That’s a billionaire’s circle, right? Goldman is like the hundreds of millionaires’ circle, right? And I think here he sees the opportunity to make $100 million over the next five or ten years without doing a lot of work.”