The Rise of the High Net Worth Individual (HNWI)


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.


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.

Economics and Technology — Heavenly Match or Dangerous Duo?

Who Owns the FutureIn our post Great Recession world, it is difficult to think deeply about the future of culture without considering economics realities. While there are many ways to look at the economic disruptions of the last years, when it comes to understanding the deeper historical forces driving economic events, virtual reality pioneer Jaron Lanier’s quirky and brilliant book, Who Owns the Future, is a revelation. He has thought deeply about the cultural impact of the information economy and the rise of powerful companies like Google, Facebook and Amazon. His economic insights are original, his social analysis intriguing and even his more existential considerations are provocative (though that is mostly the subject of his previous book, You are Not a Gadget).

Lanier asks a question that also lurks behind today’s headlines and has never been far from the lips of thoughtful economists. Are middle classes natural? They are part of the lifeblood of capitalism, but are they an inevitable result of the rise of wealth that has accompanied modernism and the industrial revolution? Or are they more tenuous creations, dependent on fortuitous policies and politics, made possible by the wealth that capitalism’s creates, but still dependent on the moderating, shaping influence of human institutions? Lanier writes:

Marx argued that finance was inherently hopeless technology and that market systems will always degrade into the rut of plutocracy. A Keynesian economist would accept that ruts exist but would also add that falling into ruts can be staved off indefinitely with interventions in order to survive…Great wealth is a naturally persistent, generation to generation, as is deep poverty, but a middle-class status has not proven to be stable without a little help. All the examples of long-term stable middle classes we know of relied on Keynesian interventions as well as persistent mechanism like social safety nets to moderate market outcomes.

Lanier worries that the increasing speed of technological change could be tipping that tenuous balance, changing the fundamental equation, destroying middle class jobs in sector after sector of our economy at a rate that far exceeds new job creation.  The argument usually employed is that as certain sectors lose jobs as a result of technological change, new industries are simultaneously created. Buggy whips producers are long gone. Electric car battery factories are on the rise. The once mighty GM went bankrupt a few years ago, but Apple and Google are thriving. Creative destruction is all part of a healthy economy. To impede that process is to restrict the wealth creating mechanism that built modernity. That is all certainly true, but as Lanier points out the social consequences of “creative destruction” may be changing as technology moves forward. Google and Apple employ a small percentage of the people that GM did at its height. And there is concern that an information economy, despite its many significant positives, might not be able to easily sustain the job creation capacity that our industrial economy once did.

Who Owns the Future introduces us to new terms like the idea of a “siren server”. Lanier defines them as “elite computers…on a network…characterized by narcissism, hyperamplified risk aversion and extreme information asymmetry.” Think Amazon, Google, Facebook, Orbitz. The powerful influence of a siren server can create whole industries all built to work around the preferences of that information node. Entire companies are structured around Google’s search algorithms. Millions moderate their behavior to fit the parameters of Amazon’s preferences. Wal-Mart, he suggests, was siren server from a slightly earlier era.  Their success was driven, not just by the China price, or by small town economics, but by achieving unmatched market efficiencies driven by information asymmetry. Now Amazon is playing that exact game in a new decade, and improving it. Lanier points out that those who own or are very close to siren servers are making most of the great fortunes of our age. We can debate the pros and cons of these informational economic engines, but even the distinction, which he draws out over the course of the book, makes you think about the forces shaping our lives in new ways.


Lanier is also suspicious of “free” economy, pointing out that as more and more services become free, we all benefit, but we also pay a hidden cost. Music is becoming free but musicians, with the exception of celebrities and stars, struggle to make a living. News is free but journalism has suffered greatly. Education looks to be headed the same way. More and more technology companies provide free services and use advertising as their primary business model. Is that sustainable over the long run? Can an information economy built on “free” provide the islands of middle class wealth that have been so essential to the stability of the developed world? Or will the fast-rising waters of massive technological disruption swamp them?

While Lanier’s concerns are many, he is far from a Luddite. The issue for him is not whether we go forward, but how we go forward. Are there ways to best shape outcomes in the information economy in ways that produce not a race to the bottom or a winner take all economy, but the bell curve—some rich, some poor, most in the middle—that is the sign of societal health.

In the developed world, it’s easy to forget that the great advances of our century—social, political and economic—have been dependent upon the health of our unprecedented middle classes. If they begin to falter, the political implications could be far-reaching. The wrath of America’s so-called “Tea Party” and Occupy Wall Street’s activism point to kind of anger that will proliferate if a winner take all system become the norm of our economy. Lanier points out that when it last looked like capitalism might destroy the middle class and create a plutocracy, we developed policies that curtailed the disparities, bolstered the labor movement and also staved off the over-reaction of a socialist revolution—all while encouraging the forward-looking growth of our economy. The information revolution for all its many wonders and opportunities presents new but related challenges to our global policymakers. How do we embrace the future being created in technological hubs around the world while actively promoting the best possible outcomes of those changes? Lanier ‘s work is indispensable in that critical conversation.

Follow the Money!

A Review of Michael Lewis’s Boomerang: Travels in the New Third World

The world of Global Finance can be maddeningly frustrating to understand. Unfortunately, its complexity is not matched by its insignificance. Indeed, the effects of decisions and actions in banks, markets and government policy circles around the world are highly consequential. They can easily enrich and impoverish, uplift or condemn, unleash or constrain the peoples of our small planet. As we saw in the recent Great Recession, obscure and only recently invented financial instruments like “Credit Default Swaps” can suddenly become central to vast global economic shifts and changes. And decisions made in Central Banks around our globe can easily trump those made in the Parliaments and Congresses of even our most robust democracies.

Given these realities, we need good guides to this territory of global finances, journalists like Michael Lewis, author of Boomerang: Travels in the New Third World. Lewis’s smart, popular style help us cut through the complexity, and even better, tells us the frightening story of what actually happens when entire countries are empowered by easy money, such as happened in first decade or our new millennium.  The author of The Big Short and Moneyball, Lewis is first and foremost a masterful storyteller and his narrative is funny and entertaining amidst his deeply disturbing recounting of the debt fueled hysteria that gripped so many countries in the last decade. His breezy and darkly humorous book is not a full accounting of our economic issues, but rather a travelogue of sorts, a recent tour through the financial disaster zones of the developed West. Like a Weather Channel journalist after big storm, he gives us an on-the-ground perspective of what happened, what was lost, what was learned, and what the future may hold. Through his eyes, we see the impact of the Great Recession on economies of Iceland, Ireland, Greece, Germany and finally back to the US.

Lewis is hardly the first to point out that one of the unintended consequences of the new Euro Zone was new access to easy (borrowed) money for much of Europe. Countries like Greece, whose currencies were once tied to the budget situation of their own country, were suddenly judged by the Eurozone overall. In practice, that meant they were judged by the pristine budgets of Germany. As crazy as it sounds in retrospect, the Greeks were able to borrow money as if they were the Germans, but spend it as if they were Greeks.  And spend it they did. The result was massive accumulation of debt. And they weren’t alone. The overall theme was repeated across Europe and America with different cultural variations. As Lewis writes:

 The tsunami of cheap credit that rolled across the planet between 2002 and 2007…wasn’t just money. It was temptation. It offered entire societies the chcance to reveal aspects of their chracters they could not normally afford to indulge. Entire coutnries were told, “the lights are out, you can do whatever you want and no one will ever know.” What they wanted to do with the money was dark and varied. Americans wanted to own homes far larger than they could afford, and to allow the strong to exploit the weak. Icelanders wanted to stop fishing and become investment bankers, and to allow their alpha males to reveal a theretofore suppressed megalomania. Germans wanted to be even more German; the Irish wanted to stop being Irish.

Very few things reveal character like easy money—lots and lots of it. This is true of individuals, but it also true of cultures. And that is perhaps the most fascinating part of Lewis’s book. Through stories, interviews, and he brings us deep into the cultural affects of what happened, and we see the fascinating, bizarre and strange rationalizations that led the Icelanders to think they were savvy investment bankers, the Greeks to think they could just lie to themselves and just about everyone else about the true state of their finances, and the Germans to wake up one day and realize, much to their dismay, that the rest of the world did not relate to money like the Germans. It is an amazing and dismaying journey and Lewis never allows the story to lag or to get bogged down in charts or numbers. The financial facts are thankfully easy to follow, but stories and the people and the cultural insight are what the reader is ultimately left with.

Boomerang is not a story with a simple beginning and ending. Today, the financial unraveling of that debt tsunami is still working its way through the global economy. And economists argue about the cultural costs of things like austerity on the European social fabric, and that easy money presents a moral hazard for the US banking and financial system. What one sees through Lewis’s journalism, however, is not just how economic policy influences cultural behavior but also the opposite: how the qualities of any given national character enormously influence their economic long term success and failure. Ultimately, he tracks the all too human tendency to profit handsomely from the bubble and then to point the fingers at others when the music stops. “Afterward, the people on Wall Street would privately bemoan the low morals of the American people who walked away from their subprime loans,” he writes, “and the American people would express outrage at the Wall Street people who paid themselves a fortune to design the bad loans.”

Lewis’s last concern is American municipalities, the cities and towns who have spent money with great profligacy in the good times, and are gasping for air not that times have turned tough. They have tied themselves into future pension obligations that are compromising existing budgets. As I read the news in my new hometown of Oakland, CA I see the reality of this every day, in budgetary challenges, for example, which have understaffed and decimated the police dept. in one of the more violent cities in the country.  The nearby San Jose is the city featured in the book. It shows us that the mismanagement of government and of our budgetary policies is not a uniquely federal issue. But Boomerang is not a call for austerity, or for less government, but a call for greater rationality in economic lives, for living within our means, for being less avaricious in the good times, and for the human character and ingenuity needed to struggle through the bad.