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The Self-Destruction of the 1 Percent

The Grand Canal, Venice by Kevin Heggie
The Grand Canal, Venice, a photo by Kevin Heggie on Flickr.
Via Flickr:
Taken after heavy rain cleared up, providing dramatic cloud cover.

The banks of the Grand Canal are lined with more than 170 buildings, most of which date to 13th to the 18th century and demonstrate the welfare and art created by the Republic of Venice. The noble venetian families faced huge expenses to show off their richness in suitable palazzos: this contest reveals the citizens’ pride and the deep bond with the lagoon. Amongst the many are the Palazzi Barbaro, Ca' Rezzonico, Ca' d'Oro, Palazzo Dario, Ca' Foscari, Palazzo Barbarigo and to Palazzo Venier dei Leoni, housing the Peggy Guggenheim Collection. The churches along the canal include the basilica of Santa Maria della Salute. Centuries-old traditions such as the Historical Regatta are perpetuated every year along the Canal.

IN the early 14th century, Venice was one of the richest cities in Europe. At the heart of its economy was the colleganza, a basic form of joint-stock company created to finance a single trade expedition. The brilliance of the colleganza was that it opened the economy to new entrants, allowing risk-taking entrepreneurs to share in the financial upside with the established businessmen who financed their merchant voyages.

Venice’s elites were the chief beneficiaries. Like all open economies, theirs was turbulent. Today, we think of social mobility as a good thing. But if you are on top, mobility also means competition. In 1315, when the Venetian city-state was at the height of its economic powers, the upper class acted to lock in its privileges, putting a formal stop to social mobility with the publication of the Libro d’Oro, or Book of Gold, an official register of the nobility. If you weren’t on it, you couldn’t join the ruling oligarchy.

The political shift, which had begun nearly two decades earlier, was so striking a change that the Venetians gave it a name: La Serrata, or the closure. It wasn’t long before the political Serrata became an economic one, too. Under the control of the oligarchs, Venice gradually cut off commercial opportunities for new entrants. Eventually, the colleganza was banned. The reigning elites were acting in their immediate self-interest, but in the longer term, La Serrata was the beginning of the end for them, and for Venetian prosperity more generally. By 1500, Venice’s population was smaller than it had been in 1330. In the 17th and 18th centuries, as the rest of Europe grew, the city continued to shrink.

The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James A. Robinson, in their book “Why Nations Fail: The Origins of Power, Prosperity, and Poverty,” 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 are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society. Inclusive states give everyone access to economic opportunity; often, greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness.

The history of the United States can be read as one such virtuous circle. But as the story of Venice shows, virtuous circles can be broken. Elites that have prospered from inclusive systems can be tempted to pull up the ladder they climbed to the top. Eventually, their societies become extractive and their economies languish.

That was the future predicted by Karl Marx, who wrote that capitalism contained the seeds of its own destruction. And it is the danger America faces today, as the 1 percent pulls away from everyone else and pursues an economic, political and social agenda that will increase that gap even further — ultimately destroying the open system that made America rich and allowed its 1 percent to thrive in the first place.

You can see America’s creeping Serrata in the growing social and, especially, educational chasm between those at the top and everyone else. At the bottom and in the middle, American society is fraying, and the children of these struggling families are lagging the rest of the world at school.

Economists point out that the woes of the middle class are in large part a consequence of globalization and technological change. Culture may also play a role. In his recent book on the white working class, the libertarian writer Charles Murray blames the hollowed-out middle for straying from the traditional family values and old-fashioned work ethic that he says prevail among the rich (whom he castigates, but only for allowing cultural relativism to prevail).

There is some truth in both arguments. But the 1 percent cannot evade its share of responsibility for the growing gulf in American society. Economic forces may be behind the rising inequality, but as Peter R. Orszag, President Obama’s former budget chief, told me, public policy has exacerbated rather than mitigated these trends.

Even as the winner-take-all economy has enriched those at the very top, their tax burden has lightened. Tolerance for high executive compensation has increased, even as the legal powers of unions have been weakened and an intellectual case against them has been relentlessly advanced by plutocrat-financed think tanks. In the 1950s, the marginal income tax rate for those at the top of the distribution soared above 90 percent, a figure that today makes even Democrats flinch. Meanwhile, of the 400 richest taxpayers in 2009, 6 paid no federal income tax at all, and 27 paid 10 percent or less. None paid more than 35 percent.

Historically, the United States has enjoyed higher social mobility than Europe, and both left and right have identified this economic openness as an essential source of the nation’s economic vigor. But several recent studies have shown that in America today it is harder to escape the social class of your birth than it is in Europe. The Canadian economist Miles Corak has found that as income inequality increases, social mobility falls — a phenomenon Alan B. Krueger, the chairman of the White House Council of Economic Advisers, has called the Great Gatsby Curve.

Educational attainment, which created the American middle class, is no longer rising. The super-elite lavishes unlimited resources on its children, while public schools are starved of funding. This is the new Serrata. An elite education is increasingly available only to those already at the top. Bill Clinton and Barack Obama enrolled their daughters in an exclusive private school; I’ve done the same with mine.

At the World Economic Forum in Davos, Switzerland, earlier this year, I interviewed Ruth Simmons, then the president of Brown. She was the first African-American to lead an Ivy League university and has served on the board of Goldman Sachs. Dr. Simmons, a Harvard-trained literature scholar, worked hard to make Brown more accessible to poor students, but when I asked whether it was time to abolish legacy admissions, the Ivy League’s own Book of Gold, she shrugged me off with a laugh: “No, I have a granddaughter. It’s not time yet.”

America’s Serrata also takes a more explicit form: the tilting of the economic rules in favor of those at the top. The crony capitalism of today’s oligarchs is far subtler than Venice’s. It works in two main ways.

The first is to channel the state’s scarce resources in their own direction. This is the absurdity of Mitt Romney’s comment about the “47 percent” who are “dependent upon government.” The reality is that it is those at the top, particularly the tippy-top, of the economic pyramid who have been most effective at capturing government support — and at getting others to pay for it.

Exhibit A is the bipartisan, $700 billion rescue of Wall Street in 2008. Exhibit B is the crony recovery. The economists Emmanuel Saez and Thomas Piketty found that 93 percent of the income gains from the 2009-10 recovery went to the top 1 percent of taxpayers. The top 0.01 percent captured 37 percent of these additional earnings, gaining an average of $4.2 million per household.

The second manifestation of crony capitalism is more direct: the tax perks, trade protections and government subsidies that companies and sectors secure for themselves. Corporate pork is a truly bipartisan dish: green energy companies and the health insurers have been winners in this administration, as oil and steel companies were under George W. Bush’s.

The impulse of the powerful to make themselves even more so should come as no surprise. Competition and a level playing field are good for us collectively, but they are a hardship for individual businesses. Warren E. Buffett knows this. “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital,” he explained in his 2007 annual letter to investors. “Though capitalism’s ‘creative destruction’ is highly beneficial for society, it precludes investment certainty.” Microsoft attempted to dig its own moat by simply shutting out its competitors, until it was stopped by the courts. Even Apple, a huge beneficiary of the open-platform economy, couldn’t resist trying to impose its own inferior map app on buyers of the iPhone 5.

Businessmen like to style themselves as the defenders of the free market economy, but as Luigi Zingales, an economist at the University of Chicago Booth School of Business, argued, “Most lobbying is pro-business, in the sense that it promotes the interests of existing businesses, not pro-market in the sense of fostering truly free and open competition.”

IN the early 19th century, the United States was one of the most egalitarian societies on the planet. “We have no paupers,” Thomas Jefferson boasted in an 1814 letter. “The great mass of our population is of laborers; our rich, who can live without labor, either manual or professional, being few, and of moderate wealth. Most of the laboring class possess property, cultivate their own lands, have families, and from the demand for their labor are enabled to exact from the rich and the competent such prices as enable them to be fed abundantly, clothed above mere decency, to labor moderately and raise their families.”

For Jefferson, this equality was at the heart of American exceptionalism: “Can any condition of society be more desirable than this?”

That all changed with industrialization. As Franklin D. Roosevelt argued in a 1932 address to the Commonwealth Club, the industrial revolution was accomplished thanks to “a group of financial titans, whose methods were not scrutinized with too much care, and who were honored in proportion as they produced the results, irrespective of the means they used.” America may have needed its robber barons; Roosevelt said the United States was right to accept “the bitter with the sweet.”

But as these titans amassed wealth and power, and as America ran out of free land on its frontier, the country faced the threat of a Serrata. As Roosevelt put it, “equality of opportunity as we have known it no longer exists.” Instead, “we are steering a steady course toward economic oligarchy, if we are not there already.”

It is no accident that in America today the gap between the very rich and everyone else is wider than at any time since the Gilded Age. Now, as then, the titans are seeking an even greater political voice to match their economic power. Now, as then, the inevitable danger is that they will confuse their own self-interest with the common good. The irony of the political rise of the plutocrats is that, like Venice’s oligarchs, they threaten the system that created them.


20080711 Macau 33

Macau Venetian

Review by Paul Werner from : Chrystia Freeland. Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else. October 2012.

As that great Marxist Warren Buffett used to say, a receding tide exposes the wrecks, and right now we’re witnessing the massive intellectual wreckage of the New York Times and the ideology it stands for. The wreckage was there all along, but times are tough and lying just isn’t what it used to be, now that any boor with a search engine can expose it for what it is.
Still, we can’t fault the Times for trying. On October 14 they published an essay adapted from a soon-to-be-published book, and I will assume the essay tells me what I need to know about the book in question: it’s written by the author who, as I charitably assume, is a moral notch above a presidential candidate in that the synopsis she gives in the Times actually matches the argument of her own book. Freeland's opening narrative is, that a city like Venice went into steep economic decline after 1350, when the Venetian elite “cut off commercial opportunities for new entrants…. [This] was the beginning of the end…for Venetian prosperity.” Therefore, goes her argument, we should beware a similar situation in our own day, when the "new" rich are selfishly depriving all the rest of us of opportunities to get rich as well.
I can appreciate the urgency behind the evidence, since the rich don’t seem too keen to give anything back any time soon; but I snorted bricks when I read the following:
This was the future predicted by Karl Marx, who wrote that capitalism contained the seeds of its own destruction.
Nope. Marx didn’t think the destruction of capitalism came about because the rich finally decided not to share after all those centuries of generosity and kindness. Marx knew damn well that boom-and-bust cycles were integral to capitalism, they were crises that by their periodical return put the existence of the entire bourgeois society on trial, each time more threateningly. And the seeds of the destruction of capital didn’t come, in the last instance, from the capitalists but from those whose livelihoods the capitalists can’t help destroying, including those failed entrepreneurs who sink gradually into the proletariat. Still, I have to admire those pseudo-scholars who, after claiming that Marx simplifies History by reducing it all to a single motivating dynamic, misquote Marx to support a thesis as linear and simple-minded as dental floss. The field of Economic History is known for its inanity, even among historians and economists; and there’s no more inane enterprise than the attempts of economic historians to explain the Middle Ages in terms of capitalist theories that weren’t even a gleam on the shield of a knight-errant. As the author of a standard textbook explained, the economic theories of the Late Middle Ages don’t make sense because the princes and nobles who followed them actually made out quite well when they weren’t supposed to do so according to real, scientific economic theory that wins a Nobel Prize today. So who you gonna believe, the economists, the author and the New York Times, or your lyin’ eyes that tell you, even today, of the continued economic, cultural and social achievements of the Venetian Republic? Can our economists explain how and why the selfish masters of the collapsing Venetian economy financed the building of La Salute, or the social centers known as scuole, or the palaces of the Veneto? And how does Freeland explain the rise of cultural entrepreneurs like Titian, Palladio, Nicolas Jenson, Aldus Manutius and Tiepolo? For a certain type of economic historian (and for Freeland, once an an editor at the Financial Times), all of this cultural, artistic splendor just goes to show how decadent Venice and Florence and Rome really were to begin with – it’s called the Lopez Thesis, by the way. There are a few, highly respected economic historians who do rely on the evidence; and they pretty much debunk the Lopez Thesis; but Freeland doesn’t even have the basic command of facts that would entitle her to take sides.
Here’s an example: as proof of the fact that the imputed collapse of the Venetian economy was due to the closing out of small entrepreneurs, Freeland points out that “By 1500, Venice’s population was smaller than it had been in 1330.” That’s the kind of statement that gets undergraduates flunked, unless they go forth to get published in the New York Times, which is to the Eastern Establishment Intellectual what a Gentleman’s C was to Dubya. Because there’s a basic, straightforward explanation for that population shift, as any History major knows: in 1347 the Black Death spread over Europe, wiping out a third of the population. Whatever entrepreneurs were left after that were far more likely to be hampered by the high cost of labor than by restrictive laws; and the laws themselves were more likely intended to keep the lower classes in check, not to impede the development of capital; but of course if you're coming at this problem from the fantasy that the eternal function of capital formation is not to control the lower classes but to help them become capitalists themselves, you'll project your fantasy, proleptically, into any historical narrative that comes along.
Freeland is not up to the task. The argument that the rich should give up their billions because otherwise society might go into decline is weak enough in itself, but if you can’t even buttress it with solid argumentation you’re in trouble. What’s truly frightening about all this, is that Freeland is a Harvard graduate and a Rhodes scholar. Then again, her screed is not against the 1% in general, it’s against those new-rich rich, the nasty new rich who, unlike the elites who own the Times and go to Harvard (the Sulzbergers and the Romneys and the Walter Lippmann Elites), don’t care to share. Now suppose you were to argue that the rich should give up their money before they find their heads at the tip of a pike? Not nice, but a lot more persuasive. And at least there’s historic precedent.

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