Self-destruction of the top 1 per cent

Karl Marxs prediction that capitalism contains the seeds of its own destruction may be coming true

Self-destruction of the top 1 per cent

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 per cent 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 per cent 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.

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 per cent, a figure that today makes even Democrats flinch. Meanwhile, of the 400 richest taxpayers in 2009, six paid no federal income tax at all, and 27 paid 10 per cent or less. None paid more than 35 per cent.

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 vigour. 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.

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.

Explicit form

America’s Serrata also takes a more explicit form: the tilting of the economic rules in favour 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 per cent” 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 per cent of the income gains from the 2009-10 recovery went to the top 1 per cent of taxpayers. The top 0.01 percent captured 37 per cent of these additional earnings, gaining an average of $4.2 million per household.

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 labourers; our rich, who can live without labour, either manual or professional, being few, and of moderate wealth. Most of the labouring class possess property, cultivate their own lands...” 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 industrialisation. 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 honoured 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.”

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.

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