On the social utility of fat cats

Since we have just decided to make our unofficial plutocracy official, I thought this essay I wrote in 2019 might be useful.

We need to discuss the social function of rich people. Besides the marginal entertainment and sports figures, I see two functions: administration and investment.

The social cost of administration has gone up considerably since corporations changed their nature, breaking the old postwar pact between capital and labor. Here, I am going to put to one side the growth of LBOs and private equity firms that developed new forms of looting corporations in the eighties in order to concentrate on the radical elevation in compensation for the highest levels of management. This took off in the 80s. The explanation for this, from the point of view of intellectual history, is that neoclassical economists provided a model that justified it. Then, as an instititutional addendum, business schools saw in this issue a chance to create an alliance with a trend in corporations that would pay great benefits: expanding its presence both on the campus and in the world of business. Harvard Business school in particular boasted a team of scholars who cheered on the insane compensations of the new class of CEO with arguments having to do with “aligning” the interests of the organization and the management: the famous principle-agent problem, the solution to which was to massively bribe the leader. The rationale for this was paper thin – one had only to compare the compensation for Japanese upper management in the seventies to Americans in the eighties to see that corporate productivity and return on investment did not depend on giving the CEOs carte blanche and stock options.

One must keep in mind, from a political point of view, that the lowering of the marginal tax rate as a result of bills passed in Reagan’s first two years in office was the necessary but not sufficient condition for the subsequent explosion in upper management compensation. The gesture normalized the transgression of the post war pact, which saw the worker in some relation to management. It gave boards of directors a material reason for allowing and even encouraging a practice that, at one time, would have looked like gouging or an exercise in contempt for the stakeholders in the firm. The normalization worked: in the nineties, Clinton Dems showed no inclination to take the punchbowl away from this party, thus cementing the new norm. Rich upper management types – donors! – were now consulted as oracles instead of targeted as moneybags. This, crucially, paid extra dividends once one was out of office. The shadow side of neo-liberalism was the creation of a whole new strata of well paid consultants, lobbyists, and general wheeler dealers. If corporation X could not bribe Senator Y, Senator Y’s children or spouse could perhaps be hired at excellent salaries to lobby, or perhaps to think hard at think tanks, which like business schools experienced a true boom in the eighties. These think tanks were being bankrolled by wealthy philanthropists, who, in time honored fashion, used this instrument to avoid taxes and exert power. As the CEO class became more and more entitled, there was considerable trickle down to the political class, which became abettors and scroungers at the till. Similarly, the CEO model spread to non-profits. College presidents and museum heads were soon being paid astonishing sums to do what previous college presidents and museum heads had done for considerably less. There was no visible increase in the quality of colleges or museums, but this didn’t matter: that standard was obsolete at this point.

Thomas Picketty, who studied changes in the source of wealth along with Emmanuel Saenz, targets the income derived from administration as as a major driver of income and wealth inequality in his book Capital. For a quick rundown of this, I’d recommend Mike Konczal’s excellent essay in the Boston Review in 2014.

Even so, if the exorbitant sums paid to administrators had resulted in a great increase in the pay to the median worker, it might be said that, on some level, it works. But this hasn’t happened. The very wealthy have seen their income growing by about 6 percent per year since the seventies – in fact, the starting point seems to be 1973. The middle has grown, if at all – it flatlined during most of the 00s – by one percent per year. The workers who comprise the lower eighty percent have seen their wealth, in Piketty’s phrase, “collapse”. This reverses the trends from 1945 to 1973, when it was just the opposite, with the wealthiest having less percentage gains than the middle.

The left argues that we have no reason to pay these exorbitant costs for administration. There’s no evidence that these costs have been worth it to the average worker in developed economies. On the contrary, they’ve decisively shifted power away from workers. This power is not just reflected in flatlining wages and increased debt: it is, as well, a matter of expectations, of seeing the future of one’s society as something in which one can expect justice, exert political influence, and enjoy the fruits of our greatly increased national product: making our lives more comfortable, but allowing us, too, to take risks without facing the chance of being kicked out on the street. And so on down the generations, ad gloria mundi.

Along with administration, the wealthy play a positive social role by making investments. The argument here is, it is true, circular – we need to the wealthy to invest, and that investment makes them richer, making us need them more – but it isn’t bogus. Investment means that credit is available to the masses; the making accessible and available credit to workers, beyond the mingy terms of the company store, was one of the great capitalist victories of the twentieth century. The Soviet Union died for many reasons, but one of the unheralded ones was the persistent refusal of the Soviet planners to create an internal source of credit. This devastated the economy that recovered very well from World War II, but that, by the sixties, was in desperate need of credit to renovate and take advantage of the efficiencies offered by technological progress.

So there’s that. One can accept that the sphere of financial circulation is necessary, however, without accepting the premium that is now being paid for investment is necessary or efficient – or accepting the massive shadow banking system that has developed according to a logic of its own. The proliferation of financial instruments whose sole purpose is a quick return – basically, the casino-ization of the banking system – has only been a bad thing. Although it has been an excellent thing for the very rich.

Our tax system mirrors the priorities of the very wealthy – hence, the flat tax on capital gains. This is a scandal, and everytime it is pointed out that it is a scandal, everyone is scandalized, and the moment passes. Here, the wealthy have been very successful at telling a story that is the opposite of what Adam Smith, John Stuart Mill, and Karl Marx told. It is perhaps the most successful propaganda ever to spread in America, if we discount the pseudo-science flogged by cigarette companies to keep regulation from happening in the fifties and sixties. The success of the cig companies can be measured in the obituary columns and the hospitals year after year. The success of the entrepreneur myth can be measured in bankruptcies, debt, and the decline in public investment is occurring not only in the U.S., but everywhere in the developed world save China.

The story made up by Schumpeter, and other conservative economists, went like this: wealth comes about because some risktaker seizes on an idea – a new invention or service, or a common one that can be done more efficiently, etc. – and founds a company. The company hires people, meaning that our risktaker is spreading the wealth. We need this person! And so the richer he is, the more he deserves our gratitude for graciously making such wealth for others.

This fairy tale is very popular on the right, and hardly disputed anymore on the left. Yet it is simply bogus. The wealth of the risktaker depends entirely on the services and commodities produced by the workers. The rightwing tale completely and neatly inverts reality. There’s no Gates, Jobs, or Bezos without the workers that embodied and carried forth the tasks that made them rich. All honor to their ideas – but they are ideas built on the labor, services and ideas of others. The indispensibility of the entrepreneur isn’t even believed by the banker class, which mouths this propaganda. As any glance at the history of the tech industry – where the myth of the wealthmaking wealthy is particularly strong – shows, when the idea of the risktaker becomes an actual company, his funders – those VC angels – in the majority of cases replace him. The VC angels have no sentimentality about the “entrepreneur”. They know he’s a replaceable cog. Unless, of course, it is the man at the top of some Venture Capital company – then he’s an irreplaceable genius.

So, to put it in one sentence: the entrepreneur myth inverts cause and effect, for the malign purpose of justifying an unnecessary premium to the administrator.

But to return to the social function of the wealthy, it is at the convergence of administration and investment that we see the need, such as there is, for a wealthy strata. That need is not, however, for an uber-wealthy strata. We need to allow a premium for investment and for the higher administrative tasks. At least, given the present form of our economic system. But a premium can really be limited, and its limits should be defined empirically, not with an ideological elevator speech about freedom. In the fifties, the wealthiest level of Americans, the top 1 percent, owned 9 percent of the national wealth. They now own 35 percent. The bottom 80 percent own ten percent. This has happened in my lifetime. In my son’s lifetime, if global warming is seriously addressed and there is an America left, we can correct this. In my utopia, the top 1 percent would own five percent of the wealth, and the bottom 80 percent would own at least 50 to 60 percent of the wealth – leaving the next 19 percent with the spoils. That 19 percent is composed of administrators, professionals and people in the Finance, Insurance, and Real Estate sectors. These people have seen their incomes and wealth grow, but not in proportion to the freakishly wealthy upper 1 percent. That one percent – and even more the .01 percent – dominate the chart.

I’m conceding to the social function of the wealthy much that depends on the current system. That system itself has to adjust in a major way to the catastrophe it has generated and refused to confront – and who can predict just how that adjustment will be accomplished? But it should be pointed out that ecocide is not just a capitalist product – there was no country and system more devoted to ecocide than the U.S.S.R. As long as we refuse to rethink the treadmill of production, we will keep going the way of the Dead Planet. However, the acceleration in ecocide coincides, and not accidentally, with the increase in wealth inequality we have seen around the world. Economists, bizarrely, love to brag that really excessive poverty is decreasing, as if they had anything to do with it. This means, basically, that there are more families living on more than 2 dollars a day. Victory! But one can ask whether the price – a .001 percent that are living on 50 million dollars per day – is worth it. I for one say no. Inequality and the present system of industry are both factors in the same death march. One we can stop. And we can do that without rich people missing a single ten course lunch. The right will always complain it is a choice between the billionaire and the Gulag, but that is a false choice. We can choose to keep the wealthy without creating a wealth aristocracy. That’s the real choice.