Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (44 page)

And we wear spectacles shaded not only by our self-interest, but also by that of our friends. “We are deeply social animals,” Professor Ariely told me. “We see things from the perspective of our friends, not of strangers. One of the things that inequality does is it creates not a single society, but it creates multiple societies. It might be that inequality is creating another layer of separation between the in group and the out group.”

J
OHN
D
ASHWOOD’S
H
ALF
S
ISTERS

Jane Austen lived at the dawn of the industrial revolution, before the leisured, landed gentry faced the coming full assault on its position from the rising meritocrats of manufacturing and commerce. But even then, and without the assistance of experimental setups like Ariely’s, she was an acute observer of this human tendency to self-justification.

Recall the opening scene of her 1811 novel
Sense and Sensibility
. John Dashwood promises his father on his deathbed to treat his stepmother and three half sisters generously. At the time, he sincerely intends to do so. “‘Yes, he would give them three thousand pounds: it would be liberal and handsome! It would be enough to make them completely easy. Three thousand pounds! He could spare so considerable a sum with little inconvenience.’ He thought of it all day long, and for many days successively, and he did not repent.”

But as the newly minted squire of Norland Park talks it over with his wife in the ensuing weeks, John gradually reduces the intended amount: “Perhaps, then, it would be better for all parties if the sum were diminished by one half.—Five hundred pounds would be a prodigious increase to their fortunes!” Note that the reduction is in the interests of “all parties.”

Then John wonders whether an annuity, paid solely to his stepmother, might not be best: “A hundred a year would make them all perfectly comfortable.”

Upon further thought, he decides that would be excessive, too. “I believe you are right, my love,” he tells his wife. “It will be better that there should be no annuity in the case; whatever I may give them occasionally will be of far greater assistance than a yearly allowance, because they would only enlarge their style of living if they felt sure of a larger income, and would not be sixpence the richer for it at the end of the year. It will certainly be much the best way. A present of fifty pounds, now and then, will prevent their ever being distressed for money, and will, I think, be amply discharging my promise to my father.”

By the end, John decides that even this is too much: “He finally resolved, that it would be absolutely unnecessary, if not highly indecorous, to do more for the widow and children of his father, than such kind of neighborly acts as his own wife pointed out.”

CONCLUSION

We may have democracy, or we may have wealth concentrated in the hands of the few, but we cannot have both.

—Louis Brandeis

The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both.

—Milton Friedman

T
he lagoons off the north Adriatic coast that eventually became Venice were first settled by refugees from more salubrious inland cities fleeing successive invasions by the Huns and sundry Germanic tribes. These marshy islands, plagued by fog in the winters and insects in the summer, made a good hiding spot—not only were they hard to reach, they were so grim and inhospitable there was no point in sacking them.

But by the early fourteenth century, Venice had become the richest city in Europe, three times the size of London and as big as Paris. Venice was an imperial power—the republic financed the Fourth Crusade and established suzerainty over the fertile plains to the north, reaching Lake Garda and the river Adda to the north and west, along the Dalmatian coast deep into what is today Croatia, into the Mediterranean, where it controlled Cyprus, and into the Aegean, where it ruled Crete.

La Serenissima’s true power and vocation was commerce. At the republic’s zenith, it dispatched thirty-six thousand sailors and thirty-three hundred ships into the world’s maritime trade routes. Venice dominated the salt business—the oil of that era—and trade with Byzantium and the Near East. A Venetian merchant, Marco Polo played a central role in introducing China to western Europe, with his pioneering account of his visit to the Middle Kingdom; his father, also a trader, had done business with the Golden Horde of the Tatars. Francesco Petrarca, sitting at a Venetian window overlooking the Basin of St. Mark and writing a letter to a friend in the fourteenth century, was awed by the trading prowess of the Venetians and the commercial ambitions that drove it: “If you’d seen this vessel, you would have said it was not a boat but a mountain swimming on the surface of the sea. . . . It is setting out for the river Don, for this is as far as our ships can sail on the Black Sea, but many of those on board will disembark and journey on, not stopping until they have crossed the Ganges and the Caucasus to India, then on to farthest China and the Eastern ocean. What is the source of this insatiable thirst for wealth that seizes men’s minds?”

Venice owed its might and money to the super-elites of that age, and to an economic and political system that nurtured them. At the heart of the Venetian economy was the
commenda
, a basic form of joint-stock company that lasted for a single trading mission. The brilliance of the commenda was that it opened the economy to new entrants. It was a partnership between a “sedentary” investor, who financed the trip, and a traveler, who did the hard and risky work of making the journey. If the sedentary partner paid for the entire mission, he received 75 percent of the profits; if he financed two-thirds of the voyage, he got half. The commenda was a powerful engine of both economic growth and social mobility—historians studying government documents from AD 960, 971, and 982 found that new names accounted for respectively 69 percent, 81 percent, and 65 percent of all the elite citizens cited.

Venice’s elite were the chief beneficiaries of the rise of La Serenissima. But like all open economies, theirs was turbulent. We think of social mobility as an entirely good thing, but if you are already on top, mobility can also mean competition from outsider entrepreneurs. Even though this cycle of creative destruction had created the Venetian upper class, in 1315, when their city was at the height of its economic powers, they acted to lock in their privilege. Venice had prospered under a relatively open political system in which a wide swath of the people had a voice in the selection of the republic’s ruler, the doge, and successful outsiders could join the ruling class. But in 1315, the establishment, which had been gradually tightening its control over the government, put a formal stop to social mobility with the publication of the Libro D’Oro, or Book of Gold, which was an official registry of the Venetian nobility. If you weren’t in it, you couldn’t join the ruling oligarchy.

This political shift from a nascent representative democracy to an oligarchy marked such a striking change that the Venetians gave it a name: La Serrata, or the closure. And it wasn’t long before the political Serrata became an economic one, too. Under the control of the oligarchs, the Venetian state gradually cut off the commercial opportunities for new entrants. The commenda, the legal innovation that had made Venice (and other Italian city-states) rich, was banned. La Serenissima’s reigning elite were acting in their own immediate self-interest—shutting out the entrepreneurial upstarts meant the vested interests could enjoy sole control over the city’s lucrative trade routes. But in the longer term, La Serrata was the beginning of the end for the city’s oligarchs, as well as for Venetian prosperity more generally. By 1500, the population of Venice was smaller than it had been in 1330. In the seventeenth and eighteenth centuries, as the rest of Europe grew, the city that had once been its richest continued to shrink.

The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James Robinson as an illustration of their thesis that what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states, they argue, are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society and to maintain their own hold on power.

Inclusive states give everyone a say in how their society is ruled and access to economic opportunity. Inclusive societies often find themselves benefiting from a virtuous circle, in which greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness. The history of the United States, founded in a revolutionary bid for greater inclusiveness, can be read as one such virtuous circle.

But Acemoglu and Robinson cite the story of La Serrata as evidence that virtuous circles can be broken. Elites who have prospered thanks to inclusive systems can be tempted to pull up the ladder they climbed to the top. There are a lot of reasons to be worried about the rise of the plutocrats—the impact soaring inequality has on civic values, on crime rates, on morality, or even, according to some studies, on health. The big danger, though, is the one represented by La Serrata. As the people at the very top become ever richer, they have an ever greater ability to tilt the rules of the game in their favor. That power can be hard to resist.

One reason La Serrata is such a useful example is that the Venetian oligarchs who closed off their society were the products of a robust, open economy. They didn’t start out as oligarchs—they’d made themselves into oligarchs. That’s important because as soaring income inequality has become an undeniable political fact, even in societies, such as the United States, that have been squeamish about open discussions of class, a dominant response has been to try to sort the plutocrats into the white hats and the black hats. Steve Jobs is a hero; Lloyd Blankfein is a villain. Big business is bad; small business is good. Private equity is vulture lending; community banks are virtue lending. Wall Street banks are speculators who didn’t deserve their bailout; Detroit carmakers are manufacturers who did.

No one likes this approach better than the “good” plutocrats. “There’s a lot of anger in society because of what the government did to the benefit of the financial industry, because it was seen as unfair,” Eric Schmidt told me. “And you don’t find that anger against, for example, Microsoft and Bill Gates, right? Who is seen as a historic, American figure who created a global company. So I think it’s very important to distinguish between rich people who get there by taking the economic rents of the country for their own benefit versus the people who, in fact, create a new corporation or a new source of wealth.”

There’s a lot that’s right about this impulse. Dividing the plutocrats into the rent-seekers and the value creators is a good way to judge whether your economy is inclusive or extractive. And creating more opportunities for productive enterprise, and fewer for rent-seeking, is how you create an inclusive economic system. But this approach takes you only so far.

For one thing, there’s no magical sorting hat for plutocrats, and without one, figuring out who is adding value and who is rent-seeking is an inexact science. Indeed, even the exercise of trying to separate the virtuous plutocrats from the venal ones, and to treat them differently, is an invitation to precisely the sort of rent-seeking that creates the “wrong” kind of wealth in the first place.

As Emmanuel Saez, the economist who tracks the 1 percent, told me, “It’s probably true that some activities are truly creative, like a normal market, while others are more zero-sum game.” But deciding which was which was a different story: “I would say it is very hard who is going to make that case. I don’t think anyone would be comfortable having the government decide this is a good business and this is a bad business, and the bad business punish it with, say, special taxes. Because then you will have all the lobbying forces, right? . . . It’s so hard even for economists to say, ‘This is a good business. This is a bad business.’ Especially while the thing is happening, it’s extremely hard.”

More important, the difference between the good guys and the bad guys is smaller than we might like to think. Inclusive and extractive societies are very different, but the economic elites within them are driven by the same imperative to make money and win competitive advantage for themselves and their companies. Trying to slant the rules of the game in your favor isn’t an aberration, it is what all businesses seek to do. The difference isn’t between having virtuous and villainous businesspeople, it is about whether your society has the right rules and policing able to enforce them.

Consider, by way of example, how Warren Buffett, the most hallowed figure in America’s pantheon of officially virtuous billionaires, described his investing philosophy in his 2008 letter to shareholders. “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital,” Buffett explained. “Though capitalism’s ‘creative destruction’ is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.” Like the Venetians who put themselves in the Book of Gold, Buffett understands that the creative destruction of an open economy is good for the country as a whole; but smart capitalists like him prefer to be defended by uncrossable moats.