The Rise of the High Net Worth Individual (HNWI)

plutocrats

There are times in life and history when economics takes a backseat to other ways of conceiving the human experience. Not today. In second decade of the new millennium, the headlines scream of markets and mayhem, of dramatic wealth and economic disparity, of debt and dislocation, technological transformation and disruption. News shows debate not just political horse races, but economic papers of university professors and the competition to become chairman of the United States Federal Reserve. Ben Bernanke is a practically household name. Janet Yellen and Christine Lagarde are two of the most powerful women in the world. “Super” Mario Draghi is a rock star in Europe. Economics, the so-called “dismal science” is having its coming out party. Ideologues are so yesterday. In an era of financial tightrope walking, technocrats, it seems, have all the advantages.

But while central bankers try to steady the economic ship, a number of books inspired by the events of the last decade are seeking to reflect on the longer-term trends, good and bad, of our current economic challenges. Jaron Lanier’s Who Owns the Future was covered in a previous blog. The Plutocrats; The Rise of the New Global Super-Rich and the Fall of Everyone Else by Cynthia Freeland is another such example. She is a financial journalist attempting to understand the new transnational class of high net worth individuals (HNWI), billionaires and multi-millionaires who have benefited so dramatically from the upheavals of the last decade. Through her pen, we get a glimpse into a world that many of us rarely see, a culture of enormous wealth and privilege, a trans-national social class of HNWI that operate largely free of the constraints of any particular geographical country. Indeed, a HNWI in New York may have much more in common with a HNWI in London than his or her fellow New Yorkers. Ditto for a similar person in Paris, Hong Kong or Mumbai. Untethered by national boundaries, these individuals also hold great power in world affairs and their ascension is worthy of reflection for all of us.

Freeland

Chrystia Freeland

Despite the seeming implication of the book’s title, Freeland’s book is not a populist credo decrying the rise of the 1% of the 1%. She works to delve into the historical context of today’s plutocratic class, and points out that they are not necessarily the same as the robber barons and aristocrats of another era. Most are self-made and hardworking. Many come from humble circumstances. Many have adopted great charitable works, and embarked upon world-changing social enterprises. But for all of their good intentions, their rise to power has come at the same time as the rest of middle class in the developed world is feeling the economic screws tighten. This has not been, at least in the West, a rising tide that lifts all boats. Income disparity between the rich and everyone else is increasing. In what many are calling a second Gilded Age, the middle class is in danger of being hollowed out, and in the developing world that is a huge concern—not just economically, but politically and socially.

It has not always been this way. Freeland points out that the first industrial revolution transformed the economic landscape in the 19th century, creating wealth at an unprecedented scale. At the same time, it also created a new class of super-wealthy, and inspired the “first coherent political ideology of class warfare”—Marxism. That ideology was strongest in Europe, whose citizens suffered more from the economic dislocations of the time. But Marxism as applied economics was also a dramatic failure. As she points out, the working class, ironically enough, actually fared worst in those countries where Marxism succeeded. It’s a point that can hardly be overstated. In the US and Europe, various kinds of middle ground were found that negotiated the tensions between the dislocations of the market forces and the need to protect and further the gains of the industrial revolution. She calls it a “compromise between the Plutocrats and everyone else” that actually worked—at least for a time. Income disparity declined over much of the 20th century and a rising tide helped make the West eventually become the economic model for the world.

Ironically, it was partially the threat of communism, Freeland suggests, that brought the Plutocratic leaders of industry to the bargaining table during the post-war era. She refers to this time period as the “Treaty of Detroit” a term from MIT researchers Frank Levy and Peter Temin that refers to the contract between the UAW and the big three automakers in 1950. It is also “shorthand to describe the broader set of political, social and economic institutions that were established in the United States during the postwar era: strong unions, high taxes and a high minimum wage.” Freeland points out that this was a “golden age” for the middle class—in the US at least.

In the late 70’s the Treaty of Detroit gave way to the “Washington Consensus”—cutting taxes, reining in unions, globalization, cutting social sending, reforming regulation, privatization—trends that have reflected the last few decades of international politics and certainly are found in both parties in the US. The collapse of communism gave tremendous weight and validation to this approach and it has arguably been critical in helping to lead the economic rise of the rest of the world. Freeland suggests that as the rest of the globalizing world goes through there own version of the 19th century industrial revolution, they are experiencing what is in essence their own Gilded Age, even as the industrialized world is going through a second Gilded Age. And it is the complex interaction between these twin Gilded Ages in the globalizing world economy that is producing the unprecedented rise of a new plutocratic class and raising a host of questions and issues that policy makers will be struggling with for the next decades.

Two points in The Plutocrats particularly stood out in my reading. First, rent-seeking behavior must be actively discouraged. Rent-seeking means that one is achieving wealth almost entirely through political connections. Crony capitalism is another name for similar behavior and its corrosive affect on society hardly needs repeating, though it is easier to complain about than to effectively respond to. Rent-seeking is entirely different than wealth achieved by creating new products, businesses, technologies and market efficiencies. The latter is likely welcome in any economy no matter what billionaires are or are not created in the process. This difference between growing the overall economic pie and appropriating it to oneself through political muscle is everything when it comes to social impact of the plutocratic class.

This leads to a second critical point in Freeland’s analysis, which is that, once established, there is a natural tendency for any plutocratic class to seek to political power. There is nothing wrong with that in and of itself. Former New York mayor, Michael Bloomberg, energy titan David Koch and financier George Soros are just a few of the examples on different sides of the political spectrum. But legitimate political activity can quickly lead to inappropriate forms of political influence. Freeland is well traveled in this territory. Her first book, Sale of the Century: the Inside Story of the Russian Revolution chronicled the rise of the Russian plutocrats and the way they plundered state resources through political connections. And even if power and wealth is achieved through playing the economic game fairly, once in power, the tendency can be overwhelming to use that power and influence to tilt the rules toward plutocratic favor.  Even a completely meritocratic rise of a plutocratic class can morph into crony capitalism. Indeed, what started out as a legitimate and socially respected rise to wealth and power can lead to the creation of a privileged class whose opportunities dwarf the rest of the society. Americans have always been kind to meritocratic plutocrats, but the antipathy to protected privilege is also deeply felt in this country and can cause all kinds of social and political backlashes. Given the deep relationship between politics and money today, these trends are all the more important to pay attention to.

Freeland’s book is cautionary but not pessimistic. In some ways, the plutocratic class is neither good not bad, but raises a host of issues that society must grapple with. Are these economic transformations merely a balancing out of West vs. East, an inevitable corrective to years of the West’s economic superiority? Are we all, in a sense, slowly meeting in the middle? Or does the rise of income disparity represent a dangerous degradation of our economic system? Or perhaps it is simply the temporary consequence of impersonal and historical economic forces, beyond the reach of even the most able technocrats and policy makers? These are the issues and questions that are naturally raised as she travels through the worlds of the 1%—interviewing, wondering, questioning and seeking answers.

Like Lanier, Freeland points out that many of the great advances of our century have been dependent upon the health of the developed world’s middle class. Problems with the middle class are indicative of problems with modernity itself.  All of us, including the new plutocrats, need to take heed. How do we shape the rise of extraordinary new wealth in the developing world and simultaneously moderate the difficult economic issues facing the developed world—Europe, America, and Japan? How do we accurately diagnose, much less respond effectively to the issues of income inequality, which involve so many factors and are by nature, multi-dimensional and touch upon economic issues, but also sociological, psychological, historical and cultural factors. The Plutocrats provides yet another informational piece of this critical puzzle. Let’s hope at least a few of the best minds of our generations (and the next) are paying attention.

A rising tide that lifts all boats is the dream and the true aspirational potential of modernist capitalism, but we must not assume this beneficent outcome is inevitable. Like generations before, it will be up to enlightened policymakers to make those choices (even if they are choices of restraint) that look far into the future, moderate the political extremes that accompany any Gilded Age, and respond to the desire for life, liberty, fairness and opportunity—for a few and for all.