Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (4 page)

Living as he did during the first gilded age, Carnegie intuitively understood better than most of us today how remarkable that chasm was, compared to the way people had lived in previous centuries. “The conditions of human life,” he wrote, “have not only been changed, but revolutionized, within the past few hundred years. In former days there was little difference between the dwelling, dress, food, and environment of the chief and those of his retainers. The Indians are to-day where civilized man then was. When visiting the Sioux, I was led to the wigwam of the chief. It was like the others in external appearance, and even within the difference was trifling between it and those of the poorest of his braves. The contrast between the palace of the millionaire and the cottage of the laborer with us to-day measures the change which has come with civilization.”

Carnegie, himself an immigrant who rose from bobbin boy to the top of America’s first plutocracy, understood that the distance between palace and cottage was merely the outward sign of the gap between rich and poor—the scoreboard, if you will.

The change in power relations started in the workplace, and that is where it was most intensely felt: “Formerly, articles were manufactured at the domestic hearth, or in small shops which formed part of the household. The master and his apprentices worked side by side, the latter living with the master, and therefore subject to the same conditions. When these apprentices rose to be masters, there was little or no change in their mode of life, and they, in turn, educated succeeding apprentices in the same routine. There was, substantially, social equality, and even political equality, for those engaged in industrial pursuits had then little or no voice in the State.”

Before the industrial revolution, we were all pretty equal. But that changed with the first gilded age. Today, Carnegie continued, “we assemble thousands of operatives in the factory, and in the mine, of whom the employer can know little or nothing, and to whom he is little better than a myth. All intercourse between them is at an end. Rigid castes are formed, and, as usual, mutual ignorance breeds mutual distrust. Each caste is without sympathy with the other, and ready to credit anything disparaging in regard to it.”

That shift was particularly profound in America—one reason, perhaps, that even today the national mythology doesn’t entirely accept the existence of those “rigid castes” of industrial society that Carnegie described a hundred years ago. The America of the national foundation story—the country as it was during the American Revolution—was one of the most egalitarian societies on the planet. That was the proud declaration of the founders. In a letter from Monticello dated September 10, 1814, to Dr. Thomas Cooper, the Anglo-American polymath (he practiced law, taught both chemistry and political economics, and was a university president), Thomas Jefferson wrote, “We have no paupers. . . . 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. . . . The wealthy, on the other hand, and those at their ease, know nothing of what the Europeans call luxury. They have only somewhat more of the comforts and decencies of life than those who furnish them. Can any condition of society be more desirable than this?”

Jefferson contrasted this egalitarian Arcadia with an England of paupers and plutocrats: “Now, let us compute by numbers the sum of happiness of the two countries. In England, happiness is the lot of the aristocracy only; and the proportion they bear to the laborers and paupers you know better than I do. Were I to guess that they are four in every hundred, then the happiness of the nation would to its misery as one in twenty-five. In the United States, it is as eight millions to zero or as all to none.” Alexis de Tocqueville, visiting America two decades later, returned home to report that “nothing struck me more forcibly than the general equality of conditions among the people.”

America, in the eyes of Jefferson and Tocqueville, was the Sweden of the late eighteenth and early nineteenth centuries. Data painstakingly assembled by economic historians Peter Lindert and Jeffrey Williamson have now confirmed that story. They found that the thirteen colonies, including the South and including slaves, were significantly more equal than the other countries that would also soon be the sites of some of the most vigorous manifestations of the industrial revolution: England and Wales and the Netherlands.

“If one includes slaves in the overall income distribution, the American colonies in 1774 were still the most equal in their distribution of income among households, though by a finer margin,” Professor Lindert said.

In addition to seeing America as egalitarian, contemporary visitors and Americans believed the colonists were richer than the folks they had left back home—that was, after all, part of the point of emigrating. Lindert and Williamson have confirmed that story, too, with one important exception. Egalitarian America was richer, apart from the super-elite. When it came to the top 2 percent of the population, even the plantation owners of Charleston were pikers compared to England’s landed gentry. Indeed, England’s 2 percent were so rich that the country’s average national income was nearly as high as that of the United States, despite the markedly greater prosperity of what today we might call the American middle class.

“The Duke of Bedford had no counterpart in America,” Professor Lindert said. “Even the richest Charleston slave owner could not match the wealth of the landed aristocracy.”

In egalitarian America, and even in aristocratic Europe, the industrial revolution eventually lifted all boats, but it also widened the social divide. One reason that process was traumatic was that it was pretty dreadful to be a loser—from their personal perspective, the Luddites, skilled weavers who wrecked the machines that made their trade unnecessary, had a point. But, as in all meritocratic 1 percent societies, the creative destruction of the industrial revolution was also traumatic for the many who made a good-faith effort to join the party but failed. Indeed, it was the pathos of these would-be winners that inspired Mark Twain to write the novel that gave the era its name.

As Twain and coauthor Charles Dudley Warner explained in a preface to the London edition of their novel,
The Gilded Age
: “In America nearly every man has his dream, his pet scheme, whereby he is to advance himself socially or pecuniarily. It is this all-pervading speculativeness which we tried to illustrate in
The Gilded Age
. It is a characteristic which is both bad and good, for both the individual and the nation. Good, because it allows neither to stand still, but drives both for ever on, toward some point or other which is ahead, not behind nor at one side. Bad, because the chosen point is often badly chosen, and then the individual is wrecked; the aggregations of such cases affects the nation, and so is bad for the nation. Still, it is a trait which is of course better for a people to have and sometimes suffer from than to be without.”

—

The paradox was that even as Carnegie, America’s leading capitalist, acknowledged that the country’s economic transformation had ended the age of “social equality,” political democracy was deepening in the United States and in much of Europe. The clash between growing political equality and growing economic inequality is, in many ways, the big story of the late nineteenth century and early twentieth century in the Western world. In the United States, this conflict gave rise to the populist and progressive movements and the trust-busting, government regulation, and income tax the disgruntled 99 percent of that age successfully demanded. A couple of decades later, the Great Depression further inflamed the American masses, who imposed further constraints on their plutocrats: the Glass-Steagall Act, which separated commercial and investment banking, FDR’s New Deal social welfare program, and ever higher taxes at the very top—by 1944 the top tax rate was 94 percent. In 1897, the year of the Bradley Martin ball, incomes taxes did not yet exist.

In Europe, whose lower social orders had never had it as good as the American colonists, the industrial revolution was so socially wrenching that it inspired the first coherent political ideology of class warfare—Marxism—and ultimately a violent revolutionary movement that would install communist regimes in Russia, eastern Europe, and China by the middle of the century. The victorious communists were influential far beyond their own borders—America’s New Deal and western Europe’s generous social welfare systems were created partly in response to the red threat. Better to compromise with the 99 percent than to risk being overthrown by them.

Ironically, the proletariat fared worst in the states where the Bolsheviks had imposed a dictatorship in its name—the Soviet bloc, where living standards lagged behind those in the West. But in the United States and in western Europe, the compromise between the plutocrats and everyone else worked. Economic growth soared and income inequality steadily declined. Between the 1940s and 1970s in the United States the gap between the 1 percent and everyone else shrank; the income share of the top 1 percent fell from nearly 16 percent in 1940 to under 7 percent in 1970. In 1980, the average U.S. CEO made forty-two times as much as the average worker. By 2012, that ratio had skyrocketed to 380. Taxes were high—the top marginal rate was 70 percent—but robust economic growth of an average 3.7 percent per year between 1947 and 1977 created a broadly shared sense of optimism and prosperity. This was the golden age of the American middle class, and it is no accident that our popular culture remembers it so fondly. The western Europe experience was broadly similar—strong economic growth, high taxes, and an extensive social welfare network.

—

Then, in the 1970s, the world economy again began to change profoundly, and with that transformation, so did the postwar social contract. Today two terrifically powerful forces are driving economic change: the technology revolution and globalization. These twin revolutions are hardly novel—the first personal computers went on sale four decades ago—and as with everything that is familiar, it can be easy to underestimate their impact. But together they constitute a dramatic gearshift comparable in its power and scale to the industrial revolution. Consider: in 2010, just two years after the biggest financial and economic crisis since the Great Depression, the global economy grew at an overall rate of more than 6 percent. That is an astonishing number when set alongside our pre-1820 averages of less than half a percentage point.

Indeed, even compared to the post–industrial revolution average rates, it is a tremendous acceleration. If the industrial revolution was about shifting the Western economies from horse speed to car speed, today’s transformation is about accelerating the world economy from the pace of snail mail to the pace of e-mail.

For the West and the Western offshoots, the technology revolution and globalization haven’t created a fresh surge in economic growth comparable to that of the industrial revolution (though they have helped maintain the 2 percent to 3 percent annual growth, which we now think of as our base case, but which is in fact historically exceptional).

What these twin transformations have done is trigger an industrial revolution–sized burst of growth in much of the rest of the world—China, India, and some other parts of the developing world are now going through their own gilded ages. Consider: between 1820 and 1950, nearly a century and a half, per capita income in India and China was basically flat—precisely during the period when the West was experiencing its first great economic surge. But then Asia started to catch up. Between 1950 and 1973, per capita income in India and China increased by 68 percent. Then, between 1973 and 2002, it grew by 245 percent, and continues to grow strongly, despite the global financial crisis.

To put that into global perspective: The American economy has grown significantly since 1950—real per capital GDP has tripled. In China, it has increased twelvefold. Before the industrial revolution, the West was a little richer than what we now call the emerging markets, but the lives of ordinary people around the world were mutually recognizable. Milanovic, the World Bank economist, surveyed the economic history literature on international earnings in the nineteenth century. He found that between 1800 and 1849 the wage of an unskilled daily laborer in India, one of the poorest countries at the time, was 30 percent that of the wage of an equivalent worker in England, one of the richest. Here’s another data point: in the 1820s, real wages in the Netherlands were just 70 percent higher than those in China’s Yangtze Valley. Those differences may seem large, but they are trivial compared to today’s. UBS, the Swiss bank, compiles a widely cited global prices and earnings report. In 2009 (the most recent year in which UBS did the full report), the nominal after-tax wage for a building laborer in New York was $16.60 an hour, compared to $0.80 in Beijing, $0.50 in Delhi, and $0.60 in Nairobi, a gap orders of magnitude greater than the one in the nineteenth century. The industrial revolution created a plutocracy—but it also enriched the Western middle class and opened up a wide gap between Western workers and those in the rest of the world. That gap is closing as the developing world embraces free market economics and is experiencing its own gilded age.

Professor Lindert worked closely with Angus Maddison and is a fellow leader of the “deep history” school, a movement devoted to thinking about the world economy over the long term—that is to say, in the context of the entire sweep of human civilization. He believes that the global economic change we are living through today is unprecedented in its scale and impact. “Britain’s classic industrial revolution is far less impressive than what has been going on in the past thirty years,” he told me. The current productivity gains are larger, he explained, and the waves of disruptive innovation much, much faster.