Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (45 page)

Buffett goes on to explain that his preferred moats are being a low-cost producer or possessing a well-known worldwide brand. But favorable government regulation can create a powerful moat, too.

And taking advantage of that government moat is a business decision, not a question of ideology or morality, as we saw in hedge funder and antigovernment crusader Ken Griffin’s telling comment that CEOs’ “duties to their shareholders” justify business leaders’ opening their hands to a state “willing to hand out gifts.”

Even when the moats are created through pure entrepreneurial brilliance, they don’t always serve the greater good. Microsoft went from being one of the world’s most admired innovators to the bête noire of technology geeks because it created a very effective and very lucrative moat. That boundary made Bill Gates a billionaire; competition authorities in the United States and Europe decided it was so harmful to the rest of us they forced Microsoft to build a few bridges across it.

All businesspeople would like their own Serrata. And as they become more powerful relative to everyone else, their ability to impose one increases.

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One of the goals of the Book of Gold was to pass oligarchic privilege to the next generation. That is the second big threat posed by the surge in income inequality. Today’s plutocrats are modern-day robber barons, the beneficiaries of an era of extreme economic change. But as they pass their fortunes down to their children, today’s “working rich” plutocrats may give way to a rentier elite more similar to the sons and daughters of privilege of the Roaring Twenties, the plutocrats who were “born rich.” That transfer of privilege from one generation to the next is a gradual, cumulative, and very personal process. But as a mechanism for turning an inclusive social and economic order into an exclusive one, it could be as powerful as the more overt Serrata.

What’s at work is an economic phenomenon that Alan Krueger, the head of the president’s Council of Economic Advisers, has dubbed the Great Gatsby Curve. Based on research by Canadian economist Miles Corak, the Great Gatsby Curve traces a relationship between income inequality and social mobility: as societies grow more unequal, social mobility is choked off. That creates a particular paradox for societies that owe their surge in wealth at the top to entrepreneurial vigor unleashed by having a social starting point with high social mobility—think of Silicon Valley, with its fine public universities and government-funded research, or Venice in the age of the
commenda
. The success of these societies, which manifests itself partly in the emergence of a super-elite, threatens to destroy one of the preconditions for their rise: high social mobility.

Membership in today’s Book of Gold is more subtle than being included in a list of the aristocracy, or even inheriting a trust fund. In our increasingly complex economy, the real Book of Gold is a degree from an elite university, and those are increasingly the province of the global super-elite. Indeed, statistics have shown that graduating from college is more closely linked to having wealthy parents than it is to high test scores in high school: class matters more than going to class. This intergenerational form of rent-seeking is the hardest to oppose. It is one thing to berate bankers for lobbying for favorable regulation or Microsoft for using its market dominance to cut out competition. But who can blame the 1 percent for seeking for their children what the 99 percent seeks, too? High social mobility, after all, means some downward mobility at the top. And in a society where that gulf is a widening chasm, that can be particularly hard to stomach.

At Davos in 2012, I spoke about access to the Ivy League and social mobility with Ruth Simmons, then the president of Brown University. She is a widely respected pioneering member of the super-elite—the first African American to lead an Ivy League university—and has been rewarded with an enthusiastic embrace by the plutocrats, including that crowning prize, a seat on the board of Goldman Sachs. (That is more than a status symbol—it paid more than $300,000 a year, and when she resigned from the Goldman board in 2010, her shares were worth more than $4 million.) Simmons spoke enthusiastically about helping poor children get to Brown, and supporting them financially after they got there. But when I asked her whether the legacy system, which explicitly favors the children of alumni, should be abolished, the conversation turned personal. “No, I have a granddaughter. It’s not time yet,” she said with a laugh.

Marx understood the dangers of a capitalist Serrata—indeed he was counting on it. “The capitalist system carries within itself the seeds of its own destruction,” he famously argued. Marx predicted that the rising capitalist class, like the shortsighted Venetian elite, would overreach itself and create a system that so effectively consolidated its supremacy that it would eventually choke off economic growth and become politically unsustainable.

The most astonishing political fact of the past two centuries is that that didn’t happen. Unlike the Venetian elite, Western capitalists submitted themselves to creative destruction, to the competition of new entrants, and created ever more inclusive economic and political orders. The result is the most vigorous era of economic progress in human history.

Marx himself was one cause of that willingness of the elites to share—the fear of communist revolution was a powerful motivation for reform. It was better to give the working class an effective political voice, and a social safety net, than to risk having their Bolshevik vanguard seize power altogether.

Another reason the twentieth century was the century of inclusion was that the business elite, particularly the Americans, who were its unchallenged world leaders, understood that they could prosper only if the middle class prospered, too. The age of mass production required a mass market—as Henry Ford put it, he needed workers, including his own, to make enough money to buy his cars.

For the plutocrats, globalization may be reducing both this political incentive and this economic one to support inclusion. That’s because in today’s interconnected economy, Western democracies can import economic demand from the emerging markets, and the emerging markets can import democracy from the West. To put it another way, Western businesses are less dependent on a prosperous domestic middle class because they can now sell to the rising middle class of the emerging markets. Henry Ford needed a domestic middle class with buying power; increasingly, his successors can look to the emerging markets to supply those mass consumers.

Meanwhile, the oligarchs who prosper in extractive emerging market regimes don’t need to worry too much that repression at home is cutting them off from the innovation that democracies are better at nurturing. Communist Chinese princelings can import technology from the West; Russian oligarchs can invest directly in Silicon Valley’s hottest start-ups. And all of them can buy second homes in Manhattan and Kensington and villas on the Côte d’Azur and send their children to British boarding schools and American Ivy League universities.

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There’s another way that globalization and its twin economic force, the technology revolution, are reducing the pressure on the plutocrats to make their societies more inclusive, or to keep them that way. That is what you might call the cultural Serrata, which is already separating the plutocrats from everyone else—even without formal political divisions like the Golden Book. As the economic gap between the plutocrats and everyone else becomes a chasm, they are coming to inhabit their own global gated community. Indeed, the gap is becoming so wide and so apparent that even the right, traditionally allergic to discussions of class, has started to take notice. Conservative sociologist Charles Murray’s big new idea is that the 1 percent and the 99 percent live in different cultures; the big issue in the 2012 Republican primary was whether Mitt Romney’s hundreds of millions put him at too far a remove from ordinary voters.

This cultural Serrata matters because it increases the political myopia of the plutocrats. Add to that ordinary greed and a society that has turned its capitalists into popular heroes and you have an economic elite primed to repeat the mistake of the Venetian merchants—to drink its own Kool-Aid (or maybe prosecco is the better metaphor) and to conflate its own self-interest with the interests of society as a whole. Low taxes, light-touch regulation, weak unions, and unlimited campaign donations are certainly in the best interests of the plutocrats, but that doesn’t mean they are the right way to maintain the economic system that created today’s super-elite.

Elites don’t sabotage the system that created them on purpose. But even smart, farsighted plutocrats can be betrayed by their own short-term self-interest into undermining the foundations of their own society’s prosperity. In 1343, La Serenissima petitioned the pope for permission to trade with the Muslim world. Here is how the city made its case: “Since, by the Grace of God, our city has grown and increased by the labors of merchants creating traffic and profits for us in diverse parts of the world by land and sea and this is our life and that of our sons, because we cannot live otherwise and know not how except by trade, therefore we must be vigilant in all our thoughts and endeavors, as our predecessors were, to make provision in every way lest so much wealth and treasure should disappear.”

Intel founder Andy Grove, with his faith in the virtue of paranoia, could not have made a better argument for the importance of trade and traders to the city’s continued prosperity. But it was this same elite who, a few decades earlier, had begun the process of economic exclusion that would eventually transform La Serenissima from a trading power to a museum. Gus Levy, who was the senior partner of Goldman Sachs between 1969 and 1976, a decade we are coming to look back on as that firm’s golden era, said his philosophy was one of “long-term greed.” If the plutocrats are smart, that’s the philosophy they’ll adopt today. But, as even Levy’s successors at mighty Goldman Sachs are learning, that can be harder than it sounds.

ACKNOWLEDGMENTS

All the errors and oversights in this book are, of course, my own. But its virtues build on the work I’ve done over the past two decades as a journalist and the people who taught me while I did it. In particular, this book draws on my work for the
Financial Times
covering Russia, Ukraine, and Eastern Europe, and on
Sale of the Century
, my book about the rise of the oligarchs. Work I did for the
Financial Times
in the United States, particularly a profile of George Soros and an essay on Canadian banks, also inform this book. My
Atlantic
cover story on the global super-elite was my first public articulation of the ideas in this book; research I did for my
Atlantic
essay on Skolkovo, the Russian Silicon Valley, also proved useful. My weekly column for Reuters and the
International Herald Tribune
was a valuable space for working out my thinking, as were Reuters video interviews and the Reuters magazine.

I am grateful to many colleagues, editors, and sparring partners. Chief among them: Martin Wolf, Alison Wolf, John Lloyd, David Hoffman, John Gapper, Felix Salmon, Jim Impoco, Jim Ledbetter, Mike Williams, Stuart Karle, Alison Smale, Anatole Kaletsky, David Rohde, David Wighton, Gary Silverman, Francesco Guerrera, John Thornhill, Alan Beattie, Krishna Guha, Robert Thomson, Annalena McAfee, Andrew Gowers, Richard Lambert, Daniel Franklin, Sebastian Mallaby, Fareed Zakaria, David Frum, Arianna Huffington, Eliot Spitzer, Steve Brill, Anya Schiffrin, Steve Clemons, Susan Glasser, and Ali Velshi. Dennis Gartman and Joshua Brown, two business thinkers whose work I admire, generously allowed me to quote their writing at length. Steve Adler, my boss, has been uniquely and crucially supportive, providing vital intellectual guidance and emotional encouragement. I owe a special debt to Don Peck, who edited my 2011
Atlantic
essay and read and improved a first draft of this book; James Bennett, who commissioned the piece; and to David Bradley.

This book draws on a vast body of academic research. Some scholars have become important sounding boards and advisers, too. They include Larry Summers, Daron Acemoglu, Emmanuel Saez, Jacob Hacker, Alan Krueger, Branko Milanovic, Daniel Kaufmann, Ian Bremmer, Peter Lindert, Michael Spence, Joe Stiglitz, Theda Skocpol, Anders Aslund, Roman Frydman, Rob Johnson, Sergei Guriev, Michael McFaul, Ernesto Zedillo, John Van Reenen, Raghuram Rajan, Shamus Khan, and the late Yegor Gaidar.

I sometimes describe my own political philosophy as being simply “Canadian,” and my Maple Leaf community has been central to my thinking. Important friends and teachers are Roger Martin, Geoff Beattie, Mark Carney, Diana Carney, Paul Martin, Dominic Barton, Mark Wiseman, David Thomson, John Stackhouse, Anne McLellan, Annalise Acorn, Don Tapscott, and Morris Rosenberg.