How a flat world has yielded uneven fruits, sowing the seeds of democratic discontent

The big challenge of this new decade will be coping with the emergence of a global plutocracy – the hyper-educated, internationally-minded meritocrats who have been the chief beneficiaries of globalization and the technological revolution.

The rise of the plutocracy is an unexpected and still seldom noted consequence of the powerful political and economic changes shaping this young century. These revolutions – the collapse of communism, the spread of economic globalization, and the onset of the internet and mass computing – were, after all, about breaking barriers. The Berlin Wall fell; trade restrictions were eased; technology made information and communication free, or nearly so.

Thomas Friedman was right: as these political, economic and social barricades came down, the world really did become flatter. Older, established institutions – ranging from the music business, to traditional media, to Detroit carmakers – found themselves outmanoeuvered and outpriced by entrepreneurs in Silicon Valley, Mumbai and Shanghai.

Even in finance, which brought the phrase ‘too big to fail’ into the public discourse, smart insurgents have been outplaying – and outearning – corporate armies. Lloyd Blankfein, whose commercially brilliant leadership of Goldman Sachs earned him the Financial Times’ acknowledgment as Man of the Year, had a good war. But John Paulson, the hedge fund manager who shorted subprime, emerged from the crisis a billionaire.

We live in an age of unprecedented opportunity for the smartest, the most persistent and the most cunning among us – and, incredibly, today’s Horatio Algers are getting their start not just in Harvard dorm rooms, but also in the software centres of Bangalore and the oil fields of Siberia.

Our cultural reflex is to assume that this weakening of old hierarchies and the removal of traditional bars to economic and social entry will have an egalitarian effect: just think about the fondly recalled Little-House-on-the-Prairie equality of the American frontier, in contrast with the gently mocked My-Fair-Lady divisions of the old world. This time around, though, the same forces that have allowed the super-talented to claim a reward that is richer, and can be earned more swiftly, than ever before have also made society as a whole more unequal.

One dynamic at work is the winner-take-all effect of globalization and its enabling technologies: today, the gap between Oprah Winfrey and Chicago’s third or fourth best talk show host is far greater than it would have been 40 years ago. Nor does this superstar commercial logic apply only to media or sports celebrities. As companies become bigger, and the corporate environment more relentlessly competitive, and as the financial return on the very best decision and its execution consequently increases, the value to shareholders of hiring the best possible CEO – rather than, say, the fifth or sixth best candidate – has become greater, driving up the salaries of chief executives.

Another force at play is what one might call the premium on responding to revolution. We live in a time of swift – and possibly accelerating – change to the business environment. Rapid and disruptive technological innovation is transforming everything from manufacturing, to retail, to logistics, to telecommunications, to entertainment – and the pace of this transformation shows no sign of letting up. The collapse of communism and the subsequent economic liberalization in India and China brought equally dramatic transformations to those parts of the world, and powerful knock-on effects everywhere else. Possibly as a result of these forces, the business cycle seems to have become more violent and fast-moving: the Asian and Russian crises, and the collapse of Long-Term Capital Management in 1998, were followed just a few years later by the bursting of the technology bubble, and just a few years after that by the 2007-2008 credit crunch and financial crisis.

Our era of outsized change has created outsized opportunities for people with the temperament and savvy to seize them. Russia’s oligarchs became billionaires within a decade by spotting the possibilities created by the collapse of communism, and ruthlessly exploiting them. Software geeks smart enough to invent the latest new thing have earned fortunes almost as quickly. Hedge fund managers in Greenwich, Connecticut and London’s Mayfair with the insight to ride these revolutions have made a killing, too.

Meanwhile, the vast majority of us, who may be superbly skilled at our business-as-usual jobs, and work at them doggedly, not only miss these windfalls, but have in many cases found our professions, our companies and even our life’s savings destroyed by the same forces that have enriched and empowered the plutocracy. Both globalization and technology have had a punishing impact on those without the intellect or luck or chutzpah to profit from them: median wages have stagnated, as machines and developing world workers have pushed down the value of low-skilled labour in the West.

This dynamic has been most pronounced in the US: between 1997 and 2001, the top 10 percent of US earners received 49 percent of the growth in aggregate real wages and salaries, while the top one percent received an astonishing 24 percent. All the while, the bottom 50 percent received less than 13 percent – barely half of what the top one percent got.

The rise of the super-rich is a significant historic shift: in 1971, the top 0.01 percent of Americans took home around 0.5 percent of the US’s total national wage income. That was a sharp drop from 1916, when their share had been close to 4.5 percent. But now we are again closer to the economic distribution of 1916 than that of 1970: by 1998, the top 0.01 percent, or one hundredth of a percent of the population, was collecting three percent of the national wage income, and that tiny elite’s share grew further in the subsequent decade. Robert Reich has illustrated the disparity with a vivid example: In 2005, Bill Gates was worth US $46 billion, and Warren Buffet was worth US $44 billion. That year, the combined wealth of the 120 million people who comprised the bottom 40 percent of the US population was around US $95 billion – just US $5 billion more than the sum of the fortunes of these two men.

For anyone who values openness as a core political goal, the increase in income inequality in parallel with globalization and the technological revolution is a troubling conundrum. We live in an age of unprecedented openness – of ideas, of people, of trade. But for the middle class, this age’s new opportunities have been largely theoretical; indeed, in America, social mobility has actually declined.

Until 2008, none of this seemed to matter very much. The wondrous inventions of the plutocracy – the iPhone, Google, Amazon – improved everyone’s life. And the less wondrous inventions – particularly the explosion of subprime credit – masked the rise of income inequality for many of those on the losing end of the global shift.

But the financial crisis, and the broader economic recession that it triggered, has abruptly made the gap between the super-rich and the rest of us a pressing political issue. It is one thing to lionize multi-millionaire financiers when one has a job, and has just used the exploding value of one’s house to enjoy a home-equity-loan-funded vacation; but when unemployment is at 10 percent, and house values have plummeted, Wall Street’s nearly instant return to pre-crash compensation levels suddenly seems a lot less benign.

This prickly new awareness of the plutocracy has manifested itself as a global backlash against the super-rich – particularly those whose businesses were bailed out by taxpayer billions during the crisis. In response to that public hostility, the British government has imposed a windfall tax on bankers’ bonuses, with the French promising to follow suit. In America, Kenneth Feinberg, the White House’s pay czar, has imposed tough limits on compensation at companies in which the state holds a major stake.

When Feinberg’s measures proved to be thin gruel for a US public seeking meatier measures, President Obama offered some rhetorical sustenance by describing American financiers as “fat-cat bankers.” Some of the president’s critics dismissed that linguistic flourish as pandering to the Democratic base. It was – but it was also more than that.

In fact, one sign of the sudden political salience of income inequality is that it has become a focus not just for the left, but also for the right. Sarah Palin is regularly dismissed by the chattering classes for being provincial and lightly schooled – but it is precisely these qualities that endear her to an American conservative base that has realized abruptly that it has been left behind by globalization and technological change.

Right-wing intellectuals, who before the crisis tended to deny that income inequality was increasing, or argued that it did not matter, are beginning to pay more explicit attention to the issue, too. Jim Manzi, a software entrepreneur and fellow at the Manhattan Institute, a US conservative think tank, recently asserted that conservatives have “as a rhetorical and political strategy, downplayed the problems of cohesion – problems like inequality, wage stagnation, worker displacement, and disparities in educational performance […]. [T]he conservative view fails to acknowledge the social costs of unrestrained economic innovation.”

One of Manzi’s fears is that income inequality has created a social and cultural gap between the highly educated, hard-working elite and everyone else. Manzi compares the personal and family customs of America’s new super-rich with those of the old WASP ascendancy: “Increasingly, our country is segregated into high-income groups with a tendency to bourgeois norms, and low-income groups experiencing profound social breakdown.”

For Manzi, the big problem with the social divide between the super-rich and the rest is that a culturally dysfunctional lower-middle class America will be unable to compete in the world economy – and that the “shrinking elite portion of the American population,” no matter how Waspish it is in habits, cannot maintain the country’s position in the global economy all by itself.

The left is also discomfited by the social and cultural gap being created by increasing income inequality – but for quite different reasons. The Spirit Level, the work of two British epidemiologists published in the US in December of last year, draws angry attention to the health rift between rich and poor even in affluent societies, and contends that wide disparities in wealth in and of themselves make us sick.

The financial crisis has inspired a political twist on this ‘two nations’ critique: the thesis that one cause of the crash was the excessive political might of the financial sector, which succeeded in pushing through deregulatory reforms that were good for banks and bankers, but disastrous for the economy as a whole. Simon Johnson, a former IMF chief economist, has gone so far as to compare America’s bankers to emerging market oligarchs, and to characterize their political success as a “quiet coup.”

Willem Buiter, the LSE professor who has just joined Citigroup as its chief economist, describes the problem not only as a matter of successful lobbying by a powerful, vested economic interest group; in his analysis, economists and policymakers, particularly in the Anglo-American world, were the subject of “cognitive capture” by business – particularly financial – elites.

Concepts like cognitive capture or the culture of the WASP ascendancy do not come up too often on Glenn Beck’s Fox News talk show, or on the blogs of the American populist left. But a sometimes inchoate sense of an elite that is increasingly separate from the rest of society – in its culture, education, health, travel and worldview – is one reason for the uncharacteristic flaring of resentment of the plutocrats on both ends of America’s political spectrum.

For the plutocracy, the political culture of the hoi polloi is equally unfathomable. That gap became particularly apparent last fall, when bankers, especially those whose institutions had successfully navigated the financial crisis, found the wholesale public anger directed at Wall Street and The City impossible to comprehend. One manifestation of that failure of understanding was public relations missteps by normally sure-footed firms: Lloyd Blankfein’s “God’s work” quip comes most irresistibly to mind.

More importantly, for the plutocrats, the political, cultural and social rift between themselves and everyone else – a separation far deeper and more tribal than mere party affiliation – has given rise to a sense that modern western democracies do not work very well anymore.

The self-made multimillionaire sees himself – and usually is – not only dramatically richer, but also more globally minded, more rigorously educated, and more able to understand the details of the latest financial or technological innovation than the ordinary citizen – and often feels a similar gap between himself and the citizenry’s elected representatives. From the plutocracy’s point of view, the big political challenges of the day are not about a conflict between interest groups or between ideologies; rather, they are about finding the ‘right,’ highly technical answer to tough questions. And, as a senior JP Morgan executive explained during a recent panel discussion in New York: “It is just so hard to educate Congress”.

This sense of a society facing huge, technically sophisticated challenges beyond the ken of ordinary folks and their elected champions accounts for the current appeal of the Chinese political model for many of the West’s own mandarins and moguls. As the distance grows between the meritocrats and everyone else, the idea of entrusting a society’s big decisions to the great unwashed starts to seem not just inefficient, but perhaps dangerous.

But if the plutocracy is sometimes tempted to sacrifice democracy for the sake of unfettered capitalism, plutocracy’s critics are all too sanguine about restricting capitalism for the sake of democracy. Wilkinson and Pickett, the British epidemiologists of Spirit Level fame, argue that “economic growth, for so long the great engine of progress, has, in the rich countries, largely finished its work […]. [W]e need to shift attention from material standards and economic growth to ways of improving the psychological and social well-being of whole societies.”

Both the yearning for authoritarianism and the vision of capitalism without growth are troubling responses to rising income inequality. But they at least have the merit of facing head-on the big challenge of liberal market democracies in the 21st century: the internal logic of global capitalism is making us richer overall, but also more unequal; the internal logic of technology-enabled democracy is already being strained by the growing gap between the very rich and everyone else. For everyone who believes in both capitalism and democracy, managing this tension – and finding ways to overcome it – is this next decade’s big political task.

Chrystia Freeland is the US Managing Editor of the Financial Times.

(Illustration: Christian Northeast)