Selected Chapters from:
Wealthy Elites, Crises and Economic Democracy. New Alternatives Beyond Neoliberal
Capitalism
Andrés Solimano
*Do not cite or reproduce without the author’s permission
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Chapter 1. Introduction and Guide to the Book
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Since the 1980s and 1990s we live in a variant of capitalism --dominant in the US, the UK,
Russia, to an extent in China, Chile and a score of other countries -- that embraced policies of
privatization, market deregulation, globalization, denationalization and financialization as the
engines for growth and modernization. This variety of capitalism, often called neoliberalism,
shows the following main features: (i) in prevalence, in really existing capitalism, of
monopolistic markets, dominated by oligopolies and big conglomerates in key economic
activities, (ii) the legitimation of the profit motive over other motivations such as solidarity and
altruism as the fundamental mechanism to encourage wealth creation and redistribution , (iii) a
reduced role of the state as producer, regulator and redistributive agent, (iv) a significant
concentration of economic power and political influence in small but powerful economic elites,
in other words a strong dominance of capital, (v) a weakening of the influence of labor unions
and a decline of labor shares in national income, (vi) a control of the mass media and other
mechanisms of knowledge production and dissemination by private interests and economic
conglomerates, (vii) a democratic process of low intensity with reduced citizen participation and
strongly permeated by the influence of big money and interest groups.
The adoption of neoliberal policies has been accompanied, in the economic and social
realms, by irregular growth paths, large inequality of income and wealth, a sharp internal
differentiation of the middle class generally considered as a stabilizing segment in society, the
fragmentation of entrepreneurship, an increase in the frequency of economic and financial crises,
the globalization of elites and a rise of migration in highly segmented global labor markets.
The leading actor of the new play is rich economic elites. This segment, popularized as
“billionaires” by publications such as Forbes magazine or the top 1 percent, has strived in
dynamic sectors of the economy such as technology, finance, telecommunications, energy,
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media, entertainment and others. In today´s capitalism, the very rich control most of the
productive and financial wealth of society. Their influence not only reaches the material realm of
the economy but is also extended to the sphere of ideas, culture and the production of a
“common sense” aligned with the views of the elites. As mentioned before, private
conglomerates have dominant ownership of the mass media (TV, newspapers, radio networks)
and other centers of production and dissemination of knowledge and cultural contents that shape
social behavior and political views that are functional to the status-quo.
A countermovement to the increasing power of economic elites in the new global capitalism
has been the emergence of national and global social movements that are critical of corporate-led
globalization, social inequality and exclusion, unemployment, corruption and the failures of
representative democracy captured by interest groups and self-reproducing political and
technocratic elites. We live in fragile and complex times. On one side, there are unprecedented
technological breakthroughs and new productive possibilities to raise living standards and, on the
other side, we experience uneven growth, social tension in divided societies, ecological fragility
and climate change.
The growing influence of the rich economic elites on democracy is a source of concern.
Given their unparalleled capacity to appropriate the economic surplus generated in an economy
with new and more productive technologies these elites are able to mobilize ample financial
resources to influence the working of political institutions and, thus, block or neutralize, real or
perceived, social demands for higher taxation, and regulation of big business and, even,
nationalization of the assets concentrated by the elites, although some “business friendly”
nationalization of banks in the US and UK actually took place during the financial crisis of 20082009.
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There are several channels through which the money of the elites exerts a decisive influence
on democracy. To cite the most important: (i) contributions by corporations and rich individuals
to political campaigns, (ii) lobby activities to affect legislation, (iii) the ownership, funding and
shaping of messages by the mass media and the advertisement industry, (iv) the mobilization of
public intellectuals and academics to provide technical arguments in favor of pro-elite policies.
Nowadays the most important corporate decisions concerning investment, remunerations of
CEOs, middle rank managers and workers, location of firms are made in the opacity of corporate
boardrooms, which are accountable only to a small group of dominant stockholders. The lack of
economic democracy of current society is, indeed, large. Consumers, workers and community
members are, notably, outside the small circle of decision makers, although they are, of course,
directly affected by the decisions made by economic and political elites.
This book examines the main impacts of neoliberal capitalism on the formation and
consolidation of business and financial elites, the fragmentation of the middle class, the
diminished role of labor, the frequency of financial crisis, the increased globalization of elites
and talent mobility along with the rise of social and protest movements around the globe. The
book also explores the scope for greater economic democracy as an alternative to elitedominated capitalism.
1. The Different Phases of Capitalism since the 19th century: Laissez-Faire, Regulated and
Neoliberal Capitalism
From an historical perspective, capitalism has undergone different phases in the last two
centuries or so. In the “long 19th century”, say from around 1815 up to 1913 right before the First
World War, in Europe and the New World (USA, Canada, Australia, New Zealand) the dominant
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form of capitalism was laissez-faire: unregulated, relying on self-correcting markets operating in
the framework of a liberal state of low taxation, reduced business regulation and the gold
standard (at least in the later decades of the 19th century in several countries). In its international
dimension this was a global capitalism that promoted free trade, unrestricted capital mobility
and, to a large extent, free migration.
In the long 19th century, the hegemonic power was Great Britain that practiced a sort of
“imperial free trade” based in its colonial system, better technology, economic power and naval
superiority and liberal economic doctrine. As noted by Karl Polanyi the period from 1815 to
1913 was historically unprecedented as it yielded, on the whole, international peace in Europe
based on a balance of power system among various empires.
Nevertheless, the outbreak of World War I completely shattered the world-system of liberal
capitalism. The breakdown of the previous economic and political order brought about by war
was followed by more than two decades, until the end of World War II, of economic and
political turbulence. The early 1920s were characterized by very severe inflation in Austria,
Hungary and Germany and by a difficult return to the gold standard. The attempts to restore
orderly trade and capital mobility were ultimately futile. A severe financial crash took place in
1929, followed then by the Great Depression and an uneven and bumpy recovery that only
consolidated through the economic stimulus provided by the war effort. The 1920s and 1930s
were two decades of social turbulence characterized by the emergence of virulent and destructive
nationalisms, xenophobia and intolerance in the forms of Fascism and Nazism.
Towards the end of World War II, the USA and the UK, the two main global powers, gave
priority to a new political and institutional settlement oriented to stabilize global capitalism,
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curbing its most self-destructive tendencies and consolidating international peace with the help
of the newly formed United Nations, whose headquarters were placed in New York City. In turn,
international monetary stability and orderly adjustment to balance of payments disequilibria was
the mission of the new International Monetary Fund (IMF) with headquarters in Washington DC.
In turn, assistance for economic development and reconstruction would come from the World
Bank. The IMF and World Bank became part of the Bretton Woods system, under the strong
influence of the US government. The Bretton Woods system, however, was not truly global as it
did not include the presence of the USSR and the full new socialist block.
At national level, the post-World War II economic and social priorities in industrial countries
were the provision of jobs for all, (full employment), economic security and social protection.
These new priorities also reflected the demands of a population exhausted by the instability,
turmoil and economic insecurity of the 1920s and 1930s.
The specifics of the new social contract of regulated capitalism varied from country to
country. In the United States there were the policies of the New Deal led by President Franklin
Delano Roosevelt in the 1930s, and continued, decades later, by the “Great Society” programs of
President Lyndon Johnson in the 1960s. The New Deal included a series of legislation and
commitments by government to ensure full employment, deposit insurance relief to those
affected by the Great Depression, farm support, public work programs and the creation of
institutions to promote housing acquisition by the middle and working class. New labor
legislation came to place and a Federal system of social security was created to provide income
for retirement along with affordable health services.1
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The programs existing before were only of partial coverage and in charge of local governments.
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In Europe, several models of social welfare and policies oriented to ensure full employment
were also developed. In Britain the Labor Party, in government after 1945, adopted the
recommendations of the Inter-Departmental Committee on Social Affairs Report, known as the
“Beveridge Report” and expanded the National Insurance System covering pensions,
unemployment transfers and other social benefits, including a labor and tenant covenant and the
National Health System; these programs constituted the bulk of what was the welfare state
system in the UK. In France, in 1944, the National Council of the Resistance (or Conseil
National de la Resistance, CNR) opposed to the Vichy regime and composed by a range of
progressive parties and social movements, including the communists, draw a government
program to be applied after liberation that included the nationalization of energy, insurance
companies and banks, social security, the need for state planning and policies oriented to
guarantee the independence of trade unions. In West Germany, in 1949, after the end of World
War II, the social market economy was led by the Christian Democratic Union under the
leadership of both Economic Minister Ludwig Erhard and Chancellor Konrad Adenauer. This
was a model that combined market capitalism with social insurance. The social balance was to be
guaranteed by the combination of active trade unions to countervail the power of capital. The
German model was intended to be a third way between laissez fair capitalism of the 19th century
and state-socialism and collectivism of the sort implemented in soviet Russia since the second
half of the 1920s following the Bolshevik revolution of 1917.2
We can summarize the new system of regulated capitalism put in place in America and
Europa after World War II in four main pillars:
2
Decades later, British Prime Tony Blair tried a new “third way” in the UK although this was a sort of
“neoliberalism with human face” not very different, in substance, from Thatcherist policies.
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(i) Keynesian policies oriented to reduce the economic fluctuations of the business cycle and
ensure full employment.
(ii) The welfare state oriented to provide social protection and access to education, health,
housing and pensions to the majority of the population.
(iii) Controlled private capital markets at national and international levels.
(iv) A reasonable balance of power between organizations representing the interests of
capital and labor unions.
In advanced capitalist countries the regulated system worked fairly well up to the early
1970s. This period was termed as the “golden age of capitalism” due to its economic dynamism
and degree of social stability. In fact, the regulated capitalism was able to achieve reasonably
high rates of economic growth, reduce inequality, maintain macroeconomic equilibrium and
avoid acute social tensions and recurrent financial crises. However, the system was not
completely problems–free either. In fact, by the 1960s the US economy was incubating fiscal
imbalances and divergences between productivity growth and wage increases, which eventually
contributed to seal the fate of the Bretton Woods parity of the US dollar with respect to gold and
opened the door for a crisis of the prevailing monetary system.
2. The Ascent of Neoliberalism.
The term neoliberalism, as mentioned before, denotes an economic paradigm and political
project centered on privatization, market deregulation, reduced economic role of the state,
financialization and globalization. Its historical origins are associated with the search, in the
1930s and 1940s, of a new liberalism more suitable for a different world to the long 19th century.
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In fact, conservative academic and political circles were disappointed with the dismal economic
performance of the 1920s and 1930s, by the rise of economic nationalism, the growing influence
of Keynesian economics and the rapid industrialization of the Soviet Union. Thus, they decided
to reexamine the conceptual and practical premises of classic liberalism and tried to adapt them
to the new economic and political challenges of the time.
As a first step, a group of liberals gathered in Paris in 1938 at the Walter Lippmann
colloquium to exchange views and organize like-minded people around the quest for a new
liberal approach. Later on, in 1947, the Mont Pelerine Society was formed in a village of that
name near Lake Geneva in Switzerland. Members of that Society included figures such as
Friedrich Hayek, Wilhelm Roepke, Raymond Aaron, Fritz Machlup, Willem Roepke, Milton
Friedman and others. It is fair to say that neoliberalism was, in the 1940s, 1950s and 1960s, a
quite marginalized current of economic thinking with little influence on public policy, even on
conservative governments.
French philosopher Michael Foucault, in a series of lectures given at the College of France in
1978 and 1979 and published under the title of The Birth of Geopolitics, undertook an early and
insightful analysis of several currents of neoliberalism. Foucault contrasted two forces: the logic
of the “reason of state” (raison d´Etat) prevalent in Europe since the 16th century where the state
constitutes both a pre-existing reality and a process of ongoing construction strengthened through
economic, military, demographic and diplomatic means on one side and the quest for setting
limits to the state and the Sovereign on the other. Foucault contrasted 19th century classic
liberalism and 20th century neoliberalism regarding the relative roles of markets and the state in
the economy and society and highlighted, in detail, the differences between German Ordoliberalism associated with Roepke and Erhard and the Austrian liberals in the line of Hayek and
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Von Misses and American neoliberalism associated with the Chicago School of Economics of
Milton Friedman, Gary Becker, George Stigler and others. Foucault draws a critical difference
between the German Ordo-Liberals in both approach and actual policy recommendations and the
American Neoliberals and the Austrian liberals. His accounts, somewhat surprisingly, omits
British Neoliberals.
The Ordo-Liberals saw the market as embedded in a broader framework formed by moral and
cultural constraints that pose social limits to its action. Incidentally, the issue of the
disembodiment of the market in society under liberal capitalism and its dire consequences for
society is a main theme of the classic book The Great Transformation written by Karl Polanyi,
(see chapter 9).
The German social market economy built after 1945, in which the state plays an important
role in the provision of social services and in the regulation of big business and high finance
rested on the recommendations of Ordo-Liberalism. In contrast, Hayek and the Chicago School
saw no mayor need for regulating and constraining the market and advocated for the
privatization of money (Hayek), education, health, social security and the extension of the logic
of the market to a variety of unconventional fields (for the action of the market) irrespective of
the social consequences these extensions of the market could have on the social fabric. For
Polanyi the expansion of the market to create “fictitious markets” (of labor, land and natural
resources) and to social sectors (education, health) was a main cause of social disruption in the
20th century.
In advising and supporting Margaret Thatcher in the UK, Ronald Reagan in the US and
General Augusto Pinochet in Chile in the 1970s and 1980s, Hayek and Friedman obviously
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distanced from Polanyi and completely disregarded the social consequences of promoting the
unregulated market to the largest number of possible sectors and activities for society as a whole.
Different interpretations on the nature of neoliberalism exist. In the neo-Marxian tradition3
the rise of neoliberalism since the 1970s is seen as an economic and political project oriented to
restore the power of capital (capitalist class) after a period of growing ascendancy of the labor
class in terms of strengthened trade unions, higher wages and squeezed profit rates. In this vein,
the stagnationist and inflationary tendencies of the 1970s were, largely, a consequence of the
deterioration of the power of the dominant classes to ensure adequate conditions for capital
accumulation and the appropriation of the economic surplus by the capitalists.
Neoliberalism seeks to restore the appropriate conditions for an increase in the profit rate as a
way to boost investment and growth. In the 1970s and 1980s the adverse “reaction of the
bourgeoisie” to the welfare state, taxation, labor militancy, dirigisme and inclusive social
contracts was unquestionable. Free market economics provided a useful way to revert the process
of diminished business profitability and the weakened influence of capital in setting the rule of
the game in the political and economic realms.
Both Harvey and Demenil and Levy, the main proponents of the neo-Marxian view of
neoliberalism, show the very different nature of the financial crisis starting in 2008-2009 in
advanced capitalist economies compared with the stagflations’ crises of the 1970s that also hit
the core of capitalist countries. In the 1970s the problem was slower productivity growth and
active labor militancy complicated by two oil price shocks (in 1973 and 1979) preceded by the
end of the Bretton Woods parities. In the crisis of the 1970s, the main problem was that labor
3
See Harvey, (2005, 2010) and Dumenil and Levy, (2004, 2011).
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was too strong in the new macroeconomic context of adverse supply shocks and exchange rate
instability.
In contrast, the crisis triggered in 2008-2009 reflected reflected too much of power of capital,
in particular of financial capital. In fact, financial capitalism since the 1980s promoted rapid
credit creation and debt accumulation, with both processes running freely due to a state in a sort
of “neoliberal paralysis” that prevented it to take required measures to regulate, control and stop
financial excesses and rampant speculation. Of course, that state activism would have affected
the interests of the powerful financial elites interested in making money with minimal state
interference.
In fact, since the 1980s, Wall Street, the City of London and other main financial centers
pressed governments not to regulate the loan-making process and the proliferation of new,
complex, financial instruments, a process that ultimately led to financial bubbles and the
overvaluation of asset prices that could not be sustained over time and whose correction proved
to be very costly for real economic activity, employment and the interests of working class and
middle class people.
While financial capitalism came associated with exacerbated income and wealth inequality
favoring financial elites and the super-rich, the non-rich had to incur in indebtedness to sustain
their living standards and afford the increased cost of privately-provided education, health,
housing and durable consumption.
The actual application of neoliberal policies varied among the countries upon which these
programs were implemented. In the third world, a naked and ruthless version of neoliberal
economics was applied in Chile in the 1970s, under the military rule of General Pinochet helped
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by a cohesive team of economists trained at the University of Chicago under the leadership of
Milton Friedman and company. The Chilean experiment was a radicalized version of free market
economics that managed to privatize not only a score of state-owned enterprises in industry,
energy and public utilities but also fully privatized social security (except for the pension system
of the armed forces) through a “capitalization system”. In addition, the profit motive was
extended to education, health and other social activities, a step that Margaret Thatcher was
unable to achieve in the United Kingdom. The political element was important too, as these
experiments in privatization –or “accumulation by dispossession” -- were launched in Chile
during a military regime that ruled without parliament, banned political parties, severely
restrained the action of labor unions and censored the press. The military used active stateviolence to push for the neoliberalization of the country, in a peculiar blend of “closed politics”
and “free market economics”. Furthermore, in another unexpected twist of history, neoliberalism
was further consolidated in Chile by several social-democratic governments (based on a political
alliance between Socialists and Christian Democrats and other center-left parties, excluding the
Communist party) that succeeded General Pinochet in 1990 and that stayed in power for around
twenty years after the end of the military regime (see Solimano, 2012b).
In the first world, the application of neoliberalism by the governments of Ronald Reagan in
the USA and Margaret Thatcher in the United Kingdom was somewhat more constrained by the
presence of democratic institutions, at least if we compare them with the Chilean experiment,
although the crushing of organized labor was not that gentle. Both conservative leaders
deregulated industry, privatized important sectors of the economy, particularly in the UK, and
encouraged private capital markets, curtailing labor unions and strengthening big corporations
and high finance. In the USA these policies were started by republican administrations and
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continued by two democratic Clinton administrations in the 1990s mainly in the financial sector
(the repeal of the Glass-Steagal legislation was led by two Treasury Secretaries of the Clinton
administration: Lawrence Summers and Robert Rubin). As mentioned before, in the UK the
Blair governments of “new labor” also maintained the bulk of free market, conservative policies
started by Margaret Thatcher.
It is fair to say that neoliberalism was more popular, among the policy-circles, in AngloSaxon countries than in continental Europe. Apparently, France and Germany, besides the
Netherlands did not got tempted, at least before the crisis of 2008-2009, to adopt the kind of freemarket policies followed in the USA and the UK. In the Far East, Japan also maintained, on the
whole, a healthy distance from Neoliberal policies although this country experienced a financial
bubble in the 1980s followed by a protracted period of stagnation. As we shall see in chapter 2,
inequality the concentration of income and wealth in the top 1 percent of the population has been
more acute in Anglo-Saxon than in non- Anglo Saxon countries in recent decades.
The reach of neoliberalism also extended to other corners of the world in recent decades. It
sway was strong in Latin America in the 1990 as several countries of the region moved, under
the advice of the International Monetary Fund and the World Bank, to privatize state-owned
enterprises, open their economies to international trade, foreign direct investment and private
capital flows and stabilize inflation. Within the Latin American region, Brazil and Uruguay
maintained a distance from neoliberal economics, while in the 1990s free-market economics was
adhered, with more enthusiasm, in Argentina, Mexico, Peru, Colombia and, of course, Chile. In
the 2000s, however, the political cycle changed again and the governments of Venezuela,
Bolivia, Ecuador, Brazil, Argentina and Nicaragua adopted more nationalistic and sociallyoriented policies different from the prescriptions of the Washington Consensus.
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The influence of free market ideas developed in the West also extended to the former
communist world helped by the action of the US government and the Bretton Woods institutions.
In Russia, the first post-soviet government of Boris Yelstin privatized important parts of the gas
and other natural resource activities, slashed public budgets in education, health and pensions
and fired many people from the state enterprises and ministries. At the top, the replacement of
the old communist-nomenclature elite by a new capitalist oligarchy was bold and swift, radically
altering the existing social structure of the country. The emerging new capitalism tilted the
balance of power between capital and labor in favor of the former, redressing the trend of the
soviet period that was formally a “government of the working class”, of course, ruled by a
communist leadership and bureaucracy.
Primitive accumulation to reinvent capitalism in Russia acquired unexpected new forms.
Former communist apparatchiks and enterprise directors seized very valuable state assets and
resources using obscure and non-transparent mechanisms. The voracity of the new capitalists
was not counter-balanced by the institutions of a hypothetical Russian democratic state as, in the
new ideological and political environment, the state largely resigned to play its key functions of
producer, regulator and (progressive) redistributive agent. Similar trends were observed, with the
corresponding national peculiarities, in Poland, Hungary, Czech Republic, Bulgaria and the
Baltic countries.
In China, the turn to the market since the late 1970s after the death of the father of Chinese
egalitarian communism Mao-Tse Tung was far reaching. In this case, it was the Chinese
Communist party in power that led a turn-around from near autarky and egalitarianism to a
policy of open doors to foreign multinationals coming, mainly, from the United States and
Europe. Western corporations were eager to transform China into the new “factory of the world”.
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In a few decades, the country became a main exporter of (largely light) manufacturing in global
markets taking advantage of the combination of western technologies and managerial capacities
with low local labor costs and the control of the work force provided by an authoritarian state
that could assure to the incoming multinationals a docile and disciplined labor force. Some
authors have labeled as “Neoliberalism with Chinese characteristics” to this peculiar mix of
multinational-led capitalism under communist rule.
3. Impact of Neoliberalism on the Social Structure of Capitalism
The experience, so far, with neoliberalism and globalization highlights four main impacts on
inequality and the social structure of advanced and developing countries.
(1)
A sharp concentration of income and wealth at the top. This refers to the phenomenon
discussed at the outset of this chapter and known as the “rise of the top one percent”. In countries
that were pioneers in embracing the neoliberal model such as the United States the income share
of the richest one percent is currently about 22 percent, in the United Kingdom 15 percent and in
Chile it reached a record 33 percent. As discussed before, this trend leads to a worsening of
income distribution and wealth with a sharp concentration at the top, a small group that exerts
disproportionate influence and power on the economy and society.
(2) Heterogeneity of entrepreneurship. Free market economics affected the nature of
entrepreneurship in various ways. Far from turning the economies back to the idealized 19th
century Victorian capitalism of decentralized and atomistic markets depicted in most textbooks
of economics, it has deepened the dominance of corporate- monopoly capitalism in which the
bulk of investment and production worldwide is carried-out directly, or through global
production chains, by big corporations and multinational firms. These companies, managed by
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committees rather than by individual entrepreneurs, enjoy an ample command of financial and
human resources, upgraded technologies, and political influence both at national and
international levels. In contrast, small and medium size enterprises have a lower contribution to
output generation, albeit they are more labor intensive. Entrepreneurship is quite heterogeneous:
on one hand, we have highly successful technological entrepreneurs like the late Steve Jobs, Bill
Gates, and Jeff Bezos, Sergei Brin, Larry Page and others. However, besides the super-stars, we
have a large middle range of “opportunity entrepreneurs”, which create firms and engage in new
endeavors facing limited access to credit, markets and technologies and the harsh competition
and barriers posed by oligopolies and big corporations. In addition, there is a segment of
“necessity entrepreneurs” that operate, mainly, in the service sector and micro-firms, with
reduced financial and technological requirements and very tight access to funding. Necessity
entrepreneurs often earn a rate of return that is not very different from the wage of a middle rank
employee in the formal sector but subject to greater uncertainty and vulnerability. This type of
entrepreneurship is certainly different from the classic “Schumpeterian entrepreneur” and
resembles more an economic survival strategy at times of diminished employment possibilities,
low wages and social exclusion typical of third world countries. Nevertheless, currently,
necessity entrepreneurs are also present, in increasing degree, in core advanced capitalist
economies and peripheral European economies such as Greece, Portugal, Ireland, Spain and Italy
affected by severe economic crises, high unemployment and the destructive effects of austerity
policies.
(3) Growing internal differentiation within the middle class. The middle class is also a social
segment that has been affected, in various ways, by the turn to the free market, the rise of
inequality and the enhanced power of economic elites. The general trend is toward increased
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differentiation within the middle class with some segments of the middle class benefitting from
the new capitalism, while others failing to advance in the free market. On the one hand, we
observe a thriving upper middle class segment composed by a brand of highly educated and
well-connected top managers and professionals such as lawyers, financial experts, economists,
and technology experts working for banks, big corporations and independent professionals firms.
This new “technostructure”, borrowing the highly suggestive term coined by the late American
economist John Kenneth Galbraith, often earns very good salaries and has access to preferential
stock options and bonuses. They make the main decisions within corporations and face appealing
opportunities for upward social mobility in the corporate sector, in government or in the financial
sector.
On the other hand, the new capitalism enlarges a less fortunate segment of the middle class,
composed by school teachers, employees of ministries and public agencies, clerical workers,
salespeople in retail stores for whom free market economics has often meant stagnant wages and
slim chances for economic progress in an increasingly segmented and elitist society. This is a
segment particularly vulnerable to shocks in the labor market (including recurrent waves of job
cuts in the public sector), shocks in financial markets (indebtedness) and, unaffordable, health
contingencies that can be very harmful for their financial position of vulnerable households.
In some countries such as China, India and some Latin American countries social statistics
show that millions of people have left poverty (as measured by income-based poverty lines) and
joined the ranks of the “middle class”. However, in many instances, the new entrants to the
middle class (itself a complex concept to define and measure as we shall see in chapter 3) are
vulnerable to fall again below the poverty line should an adverse shock take place. Moreover, an
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increase in income does not necessarily imply greater economic security, empowerment and
political influence of this “new middle class”.
(4) Fragmentation and Marginalization of Labor. Probably the main losers, in terms of
relative economic position and influence in the economic and political process in the last three
decades, have been manual workers and their organizations. The anti-labor stance of the early
experiments with neoliberalism in the 1970s and 1980s under Reagan in the USA, Thatcher in
the UK and Pinochet in Chile was evident. These governments severely distrusted labor and
engaged often in repressive policies to working class movements. They blamed the alleged
combination of strong labor unions and “large government”, for the slowdown in productivity
growth, squeeze in profit rates, inflationary pressures and macroeconomic instability that marked
the end, in the 1970s, of the post-world war II consensus of regulated capitalism.
A number of changes in the global economy related with international trade, the structure of
production, technological change and the dynamics and institutions of labor markets have
affected the position of labor. We can highlight six major factors at work: First, the increased
globalization of capital such as foreign direct investment and multinationals directing their
operations towards low-wage countries; Second, important changes in the international location
of the production process and the development of global value chains that has encouraged
production and outsourcing of intermediate parts and inputs in cost-competitive nations along
with the externalization of services such as call-centers and accounting; Third
raising
immigration of skilled and unskilled workers towards high income nations in North America
and Europe coming from developing countries and former communist nations. This immigration
flows have increased the supply of labor of various qualifications in host countries bringing
outside competition from foreign workers and professionals; Fourth the penetration of labor20
intensive manufacturing imports produced in low-wage countries that has moderated wage
growth; Fifth, the information technology revolution that has encouraged the adoption of laborsaving, skill-intensive technologies and reduced the price of investment goods leading to a
substitution of labor for capital equipment including computers,
; Sixth, the diminished
bargaining power of labor unions associated with the de-unionization process . These trends have
had the effect of moderating the growth of wages of workers and middle rank employees,
displaced jobs away from industrial nations, increased wage disparities between CEOs and the
rest of the labor force and increased global inequality. Ian important effect has been the global
reduction of the labor share in national income. Empirical studies are showing that in at least 42
countries during the period 1975 and 2012 there have been a decline in labor shares of the order
of five percentages points, in contrast with the near stability of that share in the four decades
after World War II. Moreover, this decline in the labor share has taken place in the four largest
economies of the world: the USA, China, Germany and Japan. These trends provide evidence of
a regressive distributive shift against labor during the neoliberal era. It is important to note that
this decline in the labor share may underestimate the true increase in inequality in this period if
we consider the sharp rise in remuneration of top income earners (CEO and other senior
managers) that are also part of labor incomes (see chapter 2). In the USA the decline in the
overall labor share in the last 25 years is around 6 percent but if consider the labor share of the
bottom 99 percent taxpayers that decline is 10 percent.4
4. Economic and Financial Crises and Austerity Policies
4
See Karabarbonuis and Neiman (2013) for the evolution of global shares and Elsby, Hobijn and Sahin (2012) for
the labor share in the USA.
21
Besides these effects on the social and economic structure of countries, during the last
decades of the 20th century and the early 21st century we have been living in a period of
macroeconomic volatility and repeated financial crises. Large-scale financial crises were more
frequent in the periphery of the world economy—the “global south”— in the 1970s, 1980s and
1990s although advanced economies also experienced financial crises such as the case of the
Savings and Loans crisis of the 1980s in the USA, the banking crisis of some Scandinavian
countries in the early 1990s, the debacle of the Long Term Capital Markets Fund in the late
1990s, to cite some instances of financial crisis in developed economies. However, now the
epicenter of large scale financial crises shifted north and since 2008-2009 the core of the world
economy composed by the United States and several European countries have been at the center
of severe, large-scale, financial crises that have led to stagnation, unemployment, diminished
expectations for future generations and financial fragility. In a historical perspective this
confirms that global capitalism when accompanied by unregulated financial markets at national
and global levels becomes very prone to experience financial crises of different degrees of
virulence and intensity. As we show in chapter 5, historically, financial crisis of big proportions
and with international ramifications were very uncommon only in the Bretton Woods period.
They were present in the first wave of globalization of late 19th century and early 20th century
affecting both the center (Europe and the US) and the periphery of the world economy with
financial links with the center; also in the 1920s and 1930s and then, again, in the period of
neoliberal globalization started in the 1980s.
These crises raise important questions on the role of economists and the effectiveness (or the
lack of it) of existing international financial institutions such as the IMF and monetary authorities
such as Central Banks. In particular, an obvious question is why the mainstream economics
22
profession, Central Banks and the International Monetary Fund, with their large teams of
sophisticated economists having Ph.Ds. in economics, failed to anticipate these crises and/or
prevent these crises to occur? It is also relevant to ask the role played by the economic theories
these economists and the organizations that they were working for, used to understand reality
and influence it. Particularly miscarried theories were the efficient market hypothesis, new
classical macroeconomics and the rational expectations school that provide very unrealistic
depictions of how the real world works and that can misguide governments and economic and
financial authorities. An additional question is the role economists have played in generating this
general conceptual confusion?
Besides ideas, interests also matter. The public policy climate existing before the 2008-2009
crises and the type of rescue packages put forward in their aftermath, underscore the big
influence that financial sector elites (bankers, big investors, hedge fund owners and managers
and so on) had on Central Banks, Finance Ministries and governments. These financial sector
elites pushed for weak regulation and a hands-off approach of the financial markets and
promoted the notion that these markets could effectively self-regulate them. However, when the
crises occurred, Central Banks and the Treasury provided quick relief to financial intermediaries
and bailed-out these institutions, on the grounds that they were “too- big- to fail”. As a
consequence of those massive rescue packages the national debt of the crisis countries has
climbed, passing the cost of financial irresponsibility to future generations.
It is apparent that during the booming phase of the financial cycle, gains were privatized.
However, in asymmetric fashion, during the crisis phase of the cycle losses were socialized. In
the financial binge, the “discipline of the market”, in which gains and losses of private
transactions are borne by the market participants, has been conspicuously absent. In turn, the
23
“remedies” to the crises –through the adoption of austerity policies-- have been also very
controversial. Initially, in 2009 and part of 2010, the US and European countries attempted
expansionary fiscal policies to counteract the effects of the decline in private investment and the
slowdown in private consumption on economic activity. This policy, however, was abandoned in
2010 and policy priorities shifted from defending employment and growth to the containment of
fiscal deficits and public debt. As a consequence, economic growth in Europe and America
stalled, increasing unemployment and, along the way, debt to output ratios. Austerity policies
have been particularly detrimental for countries of the European periphery such as Portugal,
Spain, Greece and Ireland. Those nations have experienced record unemployment levels and cuts
in social benefits. A sense of despair is pervasive among the population of these countries. The
full consequences for democracy of the protracted economic crisis remain to be seen.
4.
5. Global Elites, Migration and Social Movements
In late 20th century and early 21st century, the migration of workers is by far more restricted
than trade in goods and services, financial capital mobility and foreign direct investment
(Solimano, 2010). We live now in a world in which multinational corporations and knowledge
elites have become more global in their scope of activities than in the past. People with higher
education levels, knowledge capabilities, social status, connections and access to capital have
become more internationally mobile along various circuits and networks in global labor markets
and global capital markets. International investors move financial capital around the world,
including placing them in fiscal paradises, with relatively little restrictions from governments or
supra-national authorities. There is also an internationally mobile “global technostructure”
composed by high level executives, financial and technical experts, economists and engineers,
lawyers and other professionals that work for multinational corporations (MNCs) in the private
24
sector or for international organizations such as the IMF, the World Bank, the OECD, the
United Nations and others in the international public sector. In these international bureaucracies
incomes are tax-free and employees enjoy a privileged status. Besides the international circuit of
big private or public organizations there is also a degree of mobility of independent
entrepreneurs that do not have the backing of big international corporations and that try their
fortunes in other countries the best they can. As in many things in life, some succeed while
others do not.
Globalization has led also to a significant geographical concentration of individuals with high
education and special talents in rich OECD countries. However, the economic crises of the first
world triggered in 2008-09 and the faster rates of economic growth we observe in several
emerging and developing countries may lead to reversals in the direction of migration of
technological entrepreneurs, professionals, technical experts, medical doctors, graduate students,
scholars and others away from the labor markets in rich countries. Global job markets are
changing fast in response to changes in job opportunities and demographic trends.
At the same time, along with these trends of globalization, concentration of third world talent
in rich countries and denationalization of economic activities we find also immigrant´s
Diasporas that have left their home countries for a variety of factors such as war and internal
conflict, political and ethnic prosecution, economic stagnation and other push-factors. A
distinctive feature of the Diaspora, compared with purely economically motivated migration is
their commitment and attachment to their home countries. Diasporas contribute to maintain
historical identities at times of an increasingly rootless global capitalism. Moreover, as Diasporas
prosper in the host countries they become also a valuable source of savings, capital, knowledge,
wealth, access to technologies and international contacts for their home nations. Remittances are
25
the most visible and important vehicle for transferring financial resources to the source countries
but this is not the only asset that Diasporas can transfer to their home nations. Market contacts,
knowledge and fresh capital accumulated by diaspora members are also valuable factors for
development. However, the mobilization of these assets for the national development of the
home country is not always automatic and needs some activism by governments and civil society
organizations in the home nation.
Finally, along with globalization “from above” led by corporations, banks and rich country
governments there is also a social counter-movement of “globalization from below” comprised
by workers migration and the international movement of the poor. Another phenomenon is the
rise of global, national and local social movements critical of the consequences neoliberal
capitalism on inequality, unemployment, economic justice, the environment and the way
democracy works in their own countries and also more globally.
6. Economic Democracy
The power of economic elites, inequality and the corrosive effects of big money for
democracy that characterizes early twenty-first century capitalism has led to the search of
alternatives forms of organization such as economic democracy. The quest for either more
humane and fair capitalism, or for an effective alternative system, is not new. During the 20th
century the main models for reforming (or replacing) capitalism such as communism and
“reconstructed” social democracy are not appealing any more.
The recent experience with social democratic governments in countries such as the UK,
Spain, the USA, Chile and Greece often ended up in disappointment as they ultimately
implemented public policies that were very similar to those of neoliberalism. In turn, since 2008,
26
social democratic governments in Europe have not been able to offer clear alternatives to the
socially regressive austerity policies dictated by the Troika formed by the IMF, the European
Central Bank and the European Commission. In turn, in the USA the Obama administration
refrained from adopting policies that could have diminished the power of rich financial elites and
inequality remains high.
Political democracy and economic democracy are two sides of a genuinely democratic
society. In fact, democracy will hardly flourish when economic power and the property of
productive assets, including the mass media affecting the cultural and ideological make-up of
society, is heavily concentrated in the hands of small economic elites. They have the means and
resources to influence the political process in directions to preserve the status-quo and their
privileged position in society while excluding the rest from meaningful social participation and
the fruits of material progress.
In the last part of this book we discuss a renewed agenda of Economic Democracy (ED)
that departs from neoliberal policies; this agenda, in turn, is illustrated with concrete historical
and current experiences of practices of ED includes the following principles and aims: (a)
workers and employees enhanced participation in the workplace, on issues concerning wage
setting, social benefits and working conditions, profit sharing and employee stock option
partnership extended to employees and general participation in the firm’s strategic decisions; (b)
democratic access to housing, credit, banking services and education at different levels, (c) a
more inclusive and democratic pattern of ownership of productive capital in the economy,
including workers–owned and workers-managed companies, communal property, non-for profit
organizations and cooperatives, (d) enabling labor and civil society to have effective voice in the
design and implementation of adjustment programs and austerity policies, (e) public (not
27
necessarily equal to state) ownership of natural resources and other strategic productive assets
along with the democratic distribution of economic surplus and the rents associated with the
productive exploitation of national resources and (f) the proper articulation of a broad agenda of
economic, social, cultural and political rights.
Besides ensuring the technical soundness and political feasibility of implementing these
goals, its eventual application will be crucially dependent upon solving, adequately, the “agency
problem” of finding a social group and political organization with conceptual clarity and
leadership to steer progressive social and economic change and also obtaining the support of the
population for this set of socio-economic transformations.
7. Organization of the Book
The book is organized in four parts that, overall, comprise ten chapters. Part A (chapters 2 to
4) examines the social class structure that emerges after the application of the policies of
neoliberal capitalism. Chapter 2 analyzes the nature of wealthy elites and reviews various
empirical measures trying to gauge their quantitative significance, influence and measures to
curb their power. In turn, chapter 3 discusses various theories of entrepreneurship and reviews
empirical studies related to the nature of the entrepreneur in modern capitalism. The chapter
highlights the importance of the technostructure of the big corporation for decision-making
regarding resource allocation and growth compared with the role of the independent entrepreneur
of the individual firm. Chapter 4 focuses on the fragmentation of the middle class since the
1980s (neoliberal era) between an upper middle class segment and a lower middle class group
and evaluates the potential contribution of the middle class, along with its limits, to spur growth
28
through entrepreneurship, to job creation and to political stability. Part B, comprising chapters 5
and 6 focuses on economic and financial crisis that have shaped global capitalism since the 19th
century to the present. Chapter 5 provides a review of several historical episodes of financial
crises in the 19th, 20th and 21st centuries, in both advanced capitalist countries and in developing
and emerging economies, highlighting their main causes, mechanisms of propagation and
economic and social consequences. The chapter also considers “austerity policies", as a costly
approach to foster recovery after a crisis episode. Chapter 6 then examines a variety of
alternative theories of crises including Monetarism, Rational Expectations, New Classic,
Keynesian, Marxian and eclectic approaches and provides a comparative evaluation of their
merits and shortcomings.
Part C of the book examines patterns of international mobility of capital, rich elites and
professional and knowledge elites that strive under globalization, calling attention to the rise of
global social movements that are critical of both global capitalism and low-intensity democracy
and examines the main features and potential economic impact of migration Diasporas for home
country development (Chapters 7 and 8). Finally, Part D, composed of chapters 9 and 10, focuses
on an agenda of economic democracy and post-neoliberal transformation. Chapter 9 analyzes the
concept, modalities and potential areas of application of economic democracy and chapter 10
closes summarizing the main messages of the book and highlights possible courses of reform of
21st century global capitalism.
29
PART A. Elites, Entrepreneurs and the middle Class: The top 1 percent and the Rest
Chapter 2. Economic Elites and the Super Rich in the 21st century5
The focus of this chapter is on economic elites and the super rich say a small minority that, as
discussed in the previous chapter, captures a significant share of national income (well above its
numerical importance), controls most national productive wealth and has a significant influence
on the political process and the content of public policies. The study of elites has been
traditionally the realm of sociological studies and other social scientists. Mainstream economics,
given its methodological individualism, has generally stayed away from the topic. However, the
economic importance of economic elites cannot be denied. High-income individuals are expected
to play a role in saving generation, investment, and innovation and also in speculation and rent -
5
This chapter draws and expands from Jimenez and Solimano (2012).
30
seeking. The dominant practice of the last three decades has been reducing taxes on top incomes
and the very rich (in both advanced capitalist economies and developing countries) relying on the
notion that in a market economy the rich is an engine of economic growth through their role in
capital accumulation and innovation. Lowering the return on these activities would just diminish
their productive efforts discouraging wealth creation the argument goes. The issue is obviously
controversial for various reasons. On one hand, it is not clear that the formation of top incomes
correspond always to the legitimate return to effort and talent deployed in competitive markets.
Political connections, social background, favorable tax and regulatory treatment associated with
lobby and campaign financing are all factors that also contribute to amaze big fortunes and
concentrate income and wealth.
The rise of inequality, as highlighted in the previous chapter, is contributing to create social
contempt in most societies with expressions such as the Occupy Wall Street and We the 99
percent in the USA, the Indignados movement in Spain, the student movement in Chile, protest
movements in Brazil and Turkey. These movements point to the fact that the fruits of
globalization and progress go disproportionally to a small elite while the youth face hard times to
get a job (in Spain, Greece, Portugal and other nations) and, thus, face grim prospects of genuine
economic progress.
The voices of social discontent have reached also the ears of some within the ranks of the
super wealthy. This is the case of billionaires such as Warren Buffet in the United States and
others in Europe (but apparently no billionaires in Latin America or Africa share publicly this
stand of their colleagues in advanced economies) have called themselves for a greater
contribution of the super rich to total tax collection and for more fairness in tax systems.
31
Most of the economic studies on inequality have a strong statistical focus and concentrate on
the evolution of Gini coefficients and the ratios between top and bottom deciles or quintiles.
However, relatively little conceptual and empirical work has been done so far on understanding
the motivations of the super rich, their main behavioral patterns and the impact of economic
elites on democracy. A practical obstacle for studying elites is the lack of accurate statistical
information on top incomes and top wealth holders that predictably seek to hide their assets to
avoid possible taxation. Using household surveys to track the super rich is of limited use since
respondents tend to systematically underestimate and underreport high incomes. Standard
income Gini coefficients, (calculated on data from household surveys), will deliver a downward
biased picture of the true distribution of income in society (see Box 2.2, below).
In this chapter we review the concept of elites as developed in the classical literature on the
subject associated with the work of Pareto, Mosca, Wright-Mills, considering also theories of the
capitalist class and financial elites. Then we look at recent empirical work, using data from tax
agencies conducted at the Paris School of Economics, on top incomes shares. We also examine
international evidence on wealth concentration by the super rich in advanced and developing
economies compiled by Forbes Magazine and wealth management companies.
The chapter also evaluates several mechanisms and channels through which economic elites
affect economic development and democracy discussing issues of reward to talent and
innovation, the premium to social and political connections, rent seeking, the operation of
winners take all markets effects and the effects of big money on the functioning of democracy.
Then, we examine the role of maximum wages, the regulation of compensation by executives
and taxation of high incomes as a way to correct severe inequality and conenctration of income
at the top.
32
1. Merit- Oriented Elites, Power Elites and Class-Based Theories of Elites
We can distinguish at least three approaches to elite formation: merit-oriented theories,
power-based analysis and class approaches to elites.
a. Merit-oriented Theories of Elites: The Italian Sociological School
The sociological school is concerned with elites mainly as a description on how societies
work and the way social classes and social groups are formed and interact among them. The
main representatives of the “Italian school” school, or merit-based theories of elites, were
Vilfredo Pareto (1848–1923), an economist and sociologist, and the political scientist Gaetano
Mosca (1858–1941). Pareto put forward a theory of circulation of elites and Mosca (1939)
studied the ruling class. The Italian school held a merit–oriented view of elites. Pareto (1920
[1991]) envisaged elites as “people with exceptional qualities”, thus the merit-oriented concept
of elites. Pareto then envisaged history as a circulation of elites mainly within nations6; his main
concern was not the international circulation of elites more relevant in an era of globalization. In
the Ruling Class, Mosca indicates that the main source of power for the ruling class (elites) is
their superior internal organization, enabling them to “have a disproportionate influence over the
vast majority of society despite their numerically small group”. Superior knowledge and better
organization are key elements for a group to become elite. These authors note that elite rules any
society although the members of these elites may change or “circulate” over time.
Solimano and Avanzini (2012) analyze the international mobility of entrepreneurial, knowledge and
political elites.
6
33
b. Power Elites
On the other side of the Atlantic, the American sociologist C. Wright-Mills studied the power
structure of American Society (USA) in mid-20th century and concluded that, although personal
merit could contribute for a person to be a member of elite, the defining element of elite was its
relation to power. In particular, in his book The Power Elite (1956) he distinguished the
economic, political, and military “power elite” in the United States. In Wright-Mills the
economic elite, say CEOs of industrial corporations and banks, investors and owners, were
certainly important but a more complete characterization of the compact of power should include
also the political and military elites.7 8
Wright Mills, implicitly, assumed a large degree of cohesion (in ideas, institutional
participation, lifestyles, clubs and schools attended by the children of the elites and other features
of elite membership) among the different sub-components of the power elite.
The power elite hypothesis, however, was contested both by the “pluralist school” (Dahl,
1967); and the neo-Marxist school (Sweezy, 1968).9 The “pluralists” made the distinction
between a “ruling elite” and a group with potential for political control but that may fail to
actually grab it for lack of internal cohesion (consensus) and for the effects of diversity of
7
Early on, Thorsten Veblen (1857-1929) focused on the characterization of the business elite and the importance
of symbolic (conspicuous) consumption and a culture of leisure to signal prosperity and abundance in the gilded
age in the (north) America of the late 19th century and early 20th century.
8
It is apparent the complexities of this important subject that has remained largely dormant –in spite of its
importance-- for many years. Besides the links and hierarchies between different sub-elites there is the question of
how economic elites are formed (inheritance, social and political connections, talent, access to finance, successful
seeking of new ideas and innovations with commercial value) and how elites maintain and increase their position
in the highest echelons in society.
9
See Gilbert (2008).
34
interests within the elite. The pluralists were skeptical of such cohesion in the tripartite elite
scheme of Wright Mills in the America of the 1950s and 1960s. In turn, Paul Sweezy (1960)
argues that the military and political elites are ultimately dependent of the economic elites (in
particular of the capitalist class) that owns most of productive wealth and derives of income from
that. Sweezy states that the ultimate ruling class is the one that owns and controls national
productive wealth. For him, the distinction between separate and autonomous corporate, military
and political elites would eventually vanish as the economic elite –more to the point, the
capitalist elite -- would be the dominant one.
In a generally sympathetic but at times harsh review of Mills’s The Power Elite, Paul Sweezy
states:
“Perhaps the greatest merit of the Power Elite is that it boldly breaks the taboo which
respectable intellectual society has imposed on any serious discussion of how and by whom
America is ruled. ……[However], because he [Wright-Mills] blurs the whole problem of class
and class relations, Mills fails to throw any but incidental light on the dynamics of the class
system–how people lose high-class status, how new members of the ruling class are co-opted,
and so on. In this connection, he completely fails to understand the role of preparatory schools
and colleges as recruiters for the ruling class, sucking upwards the ablest elements of the lower
classes and thus performing the double function of infusing new brains into the ruling class and
weakening the potential leadership of the working class. It is this aspect of the American
Educational System, involving as it does fairly generous scholarships and other forms of
assistance for the bright poor, which is most often and least deservedly praised as democratic”
(Sweezy, 1960, pp.20, 28) .
35
c. Class-based theories of Elites
The two more influential figures in the analysis of social classes were Karl Marx (18181883) and Max Weber (1864-1920). Marx defined social classes in terms of people’s ownership
of productive assets and their relation to the “modes of production” (e.g. feudalism, capitalism,
socialism, cooperativism and so on) a concept that entailed social relations, technology and
different patterns of ownership of the means of production. Social classes also develop views of
the world or ideologies in function of their place in society and the economic process. Marx, who
wrote mostly in the second half of the 19th century, stressed the existence of two main social
classes: the bourgeoisie (capitalists) who own the means of production and control wealth, shape
institutions and political power and the proletarians that own their labor power and are
disenfranchised. Although Marx did not conduct his analysis explicitly in terms of “elites”,
according to him capitalism would lead to increasing polarization and social differentiation
between wealthy owners of capital on one side and the rest of society on the other.
Max Weber, writing in early 20th century, shared Marx´s notion that social classes were
important and largely determined by their role in production and the ownership of productive
assets. However, Weber created a more complex concept of social class in which prestige, status,
occupation and mobility played an important role. For Weber social class were the main
determinant of the “life chances” of people say their capacity to enjoy a good, secure, prestigious
and enjoyable life style, in contrast with a life of hardship, insecurity and anonymity. Modern
analysis of stratification and social class is eclectic and use insights of Marx, Weber and other
authors. Stratification and class analysis tend to follow a multi-variable approach in which
income, occupation, education level, status and prestige, values, thinking and life-style are used
to define social classes. These variables tend to show a high empirical correlation among them.
36
2. Financial Elites
In the last three decades or so the financial sector (banking, insurance, and real estate) has
displaced the industrial sector, in terms of economic importance, as leading sector in several
advanced capitalist countries and emerging economies. Along with the change in importance of
the financial sector, the new financial elite composed by bankers, investors, managers and the
techno-structure of the financial sector has acquired a leading economic and political influence in
society. In a sense there is a “financialization of the capitalist class” or, in another terms, a
“financialization of economic elites”.
Historically the “money trust” of the late 19th century and early 20th century was also
important in providing funding to the consolidation of corporate capitalism.10 Main financiers,
such as J.P. Morgan, played a critical role in stabilizing the panic of 1907 before the Federal
Reserve System was created in the United States, showing their direct influence in public policy
making. As chapter 4 shows the financial sector elite played an important role in the making of
the crisis of 2008-2009 and also influenced the terms of the rescue programs for banks and
financial institutions in the aftermath of the crisis.
3. Inside Economic Elites: Defining and Measuring the Rich
An important issue for the purpose of analyzing economic elites is how to define, in a
statistical sense, the rich. Box 1 provides some alternatives definitions based on either wealth or
income.
Box 2.1. Defining the Rich
10
Bellamy Foster and Holleman (2010).
37
There are several absolute and relative definitions of the rich based on income (flow) or wealth
(a stock) or both. Affluence lines and wealth cut-offs are absolute definitions. Top deciles or
percentiles are, in turn, relative definitions.
Affluence lines. Similar to the procedure of establishing a poverty line, covering the lower tail of
the distribution of income, we can concentrate in the upper tail of the distribution and define the
proportion of people considered as rich using an “affluence line” above some cut off criteria for
income or wealth (see Sen, 1988). Those above the affluence line can be considered as rich. Like
in the case of poverty lines we can also use a head-count measure of the rich.
Wealth cut-offs. Atkinson (2006) defines the rich as those individuals, or households, whose
wealth is 30 times the mean income per person (e.g. the GDP per capita). The choice of 30 is
based on a rate of return of 3.5 percent per year (long run return on assets). This level of wealth
would generate a stream of interest equal to the mean income per person, enabling a person to
live off the interest (return) on his wealth at an average standard of living. Incidentally, this cut
off level of wealth is similar to the used by wealth-managing companies such as Cap Gemini that
define a rich person as one with a level of liquid wealth (excluding real estate property, cars and
so on) equal to one million dollar. In turn, the super-rich is an individuals whose wealth is equal
to 30 x 30 times the mean income (people would live out of the interest of the interests) and the
mega rich as those with 30 x 30 x 30 times mean income per person. The mega rich in
Atkinson’s definition is approximately equivalent to the billionaires of the Forbes Magazine list.
38
Top deciles, vengtiles or percentiles. This is a relative definition of the rich. Some empirical
applications identify the rich as those located in the upper tail of the income distribution curve:
say at top 10 percent and the top 5 percent. The top 1 percent or the 0.1 percent would be better
characterized as super rich.
Box 2.2. The Gini Coefficient with Very High Income Individuals
Very high-income individuals are often statistically insignificant in numbers (say as a share
of the total population of a country) but their share of national income is significant indeed,
particularly in very unequal countries. In addition, household surveys tend to severely
underestimate the share of top incomes. The Gini coefficient, a widely used measure of
inequality, has the property of being very insensitive to changes at the tails of the distribution; in
contrast, the coefficient is more sensitive to changes in the middle of the distribution. Atkinson
(2007) derived a formula that takes into account the share of the super rich (or top income
individuals) treating them as infinitesimal in numbers. Defining the parameter S as the income
share of top income individuals (say the top 1 percent) and G* the Gini of the rest of the
population (say the Gini of the bottom 99 percent), it can be shown that the “true”, or corrected
total Gini, is approximately equal to G*(1- S) + S.
Alvaredo (2010) using the Atkinson
formulation and data for the United States and Argentina shows that the increases of the Gini in
both countries in recent decades can be largely explained by the increase in the income shares of
the very rich that has taken place in both countries. This confirms the sensitivity of the total Gini
to top incomes in spite of the almost nil importance in numbers (but not in income shares) of the
group of the very rich. Therefore using Gini coefficients obtained from household surveys data
39
that typically ignore top incomes depicts a potentially misleading picture of the true evolution of
the income distribution in countries. In practice, the corrected Gini coefficient can be several
points higher than the standard Gini when income concentration at the top is large and
increasing.
4. Recent work on top incomes
Among recent empirical work on the rich we have the effort done by The Paris School of
Economics, PSE for short, looking at the level and evolution of the (pre-tax) share in income of
the top 10, 5, 1 and 0.1 percent using time series data for a large group of advanced (OECD)
economies; the analysis has been also extended to developing countries and emerging
economies. These high brackets would compose the “top incomes shares“.11 Top income shares
provide a measure of the concentration at the top of the income distribution. A novelty of the
PSE- project on top incomes is the use of data on tax incomes released by Tax Authorities
(Internal Revenue Service) in various countries. Tax-based data is not easy to obtain and in some
regions (e.g. Latin America), tax agencies seem reluctant to share this information with
researchers and the population at large. The use of tax data can be considered as an improvement
for gauging greater accuracy in the data on top incomes compared with using household surveys,
although the practice of tax-evasion and tax-avoidance makes tax-based data not completely
problem-free either.
A full summary of the PSE project findings is provided in Atkinson, Piketty and Saez (2011).
Some highlights follow:
11
See Atkinson, Piketty and Saez, (2011).
40
(a) An important part of the concentration of income distribution across countries and over
time is not in the top 10 percent or the top 5 percent of the distribution but in the top percentile or
the top 1 percent or even the top 0.1 percent.
(b) During the first half of the 20th century, the USA and UK experienced a fall in top income
shares (with certain ups and downs in the first three decades of the century), followed by a
stabilization in that share until the 1970s. Since then, say in the neoliberal era, the trend is
reversed towards greater income concentration at the top.
(c) Countries in continental Europe (France, Germany, the Netherland and Switzerland),
besides Japan, avoided, in general, the rise of the top income shares of the last 30 years of the
neoliberal era.
(d) The rise of income concentration at the top also was experienced in large emerging
economies such as China and India that have followed market-oriented and liberalization
policies. A similar trend was also observed in this latter period in Argentina, Portugal and Spain.
(e) Across countries there are substantial differences in the income shares of the top 0.1, top
1 percent and the next 4 percent. A group in which the top 1 percent has an income share over 12
percent (around 2005) includes the United States (above 20 percent), the United Kingdom,
Argentina, Canada and Singapore (see table 2.1). Income shares for the top 1 percent between 5
and 10 percent contain Netherlands, India, Australia, New Zealand, Switzerland, France, Japan,
Finland, Sweden, Spain, Portugal, Italy and China.
(f) Evidence from the PSE project, and other sources, shows that an important part of the
reported increase in inequality in incomes is due to the explosive raise of the compensation of
CEOs of corporations since the early 1980s. Higher salaries, stock options available to
41
executives, bonuses, profit-sharing and other schemes are behind the raise in executive
compensation. This has created a wider gap between average CEO pay and the salaries of midlevel employees and workers. This trend has been especially serious in the USA and the UK (see
Irwin, 2008).
Table 2.1 Comparative Top Income Shares (Around 2005)
Country
Top 0.1%
Top 1%
Next 4%
Top 5%
Argentina
7.02
16.75
--
--
--
10.3
--
--
Netherlands
1.08
5.38
11.79 (1999)
17.08
India
3.64
8.95
--
--
Germany
4.4
11.1
13.1 (1998)
24.2
United Kingdom
5.19
14.26
14.5
28.7
Australia
2.68
8.79
11.2 (2002)
20
USA
7.7
17.42
15.2
32.6
Canada
5.23
13.56
15.4 (2000)
29
Singapore
4.29
13.28
14.6
27.9
New Zealand
2.51
8.76
12.7
21.5
Switzerland
2.67
7.76
11.5 (1955)
19.3
France
2.48
8.73
13
21.7
Norway
5.59
11.82
11.3
23.1
Japan
2.4
9.2
16.1
25.3
Finland
2.65
7.08
9.5 (2004)
16.1
Sweden
1.91
6.28
11.1
17.4
Spain
2.62
8.79
13.4
22.2
Portugal
2.26
9.13
15.4 (2003)
24.5
Italy
2.55
9.03
12.3 (2004)
21.3
China
1.2
5.87
11.9 (2003)
17.8
Ireland
Source: Tanzi (2011), Adopted from tables in Atkinson et al, 2011
42
5. Divergent Evolution of Top Income Shares between Anglo-Saxon versus French Capitalism.
From the late 1920s to the early 21st century a contrasting dynamics of top income shares is
observed among three main capitalist economies: the United States, France and the United
Kingdom (see table 2.2). In the mid to late 1920s, before the onset of the financial crash of 1929,
the top income share experienced a peak, higher in the Anglo- Saxon countries (USA and UK)
than in France, with the highest share observed in the United States (24 percent). Then a steady
decline takes place in a long period covering the Great Depression, World War II and the
decades of “shared prosperity” (from the late 1940s to the early 1970s). This trend starts to be
reversed, however, in the USA and UK after the neoliberal revolutions of Margaret Thatcher and
Ronald Reagan. The subsequent democratic administrations in the USA (Clinton) and postThatcher Labor governments in the UK (Tony Blair and Gordon Brown) did not abate the new
trend towards higher inequality. In contrast, France since the 1940s under different governments
(either socialist or conservative) has avoided an increase in the income share of the top percentile
that has remained stable around 8 percent (the share in the USA was over 20 percent in 2007 and
close to 15 percent in the UK in the same year). It is apparent that different types of capitalism
may have very distinct patterns of concentration of incomes at the top of the distribution.
Table 2.2 Income Share of the top 10 and 1 percent in France, the United Kingdom and the
United States.(In percent, 1927-2007)
43
United States
France
United Kingdom
1927
24
15
18
1937
18
13
15
1942
10
8
12
1972
8
8
7
1982
12
7
8
1992
14
8
9
2002
17
8
12
2007
23
8
14
Source, Atkinson, et.al. (2011).
Source: Atkinson, et. al. (2011)
6. Top Income Shares in Emerging Economies and Developed Countries.
The trajectory of the top 1 percent income shares are shown in the charts below for advanced
countries and emerging economies, including Argentina, the only Latin American country we
have available and comparable data, so far. The diversity in the dynamics of top incomes share is
evident. As noted before, the stabilization of the share for France since the 1940s is in sharp
contrast with the steady increase since the 1980s not only in the United States but also in Sweden
albeit at a relatively more moderate level than the United States (below 10 percent). The
diversity in top shares is wide; countries such as the Netherlands show a steady decline in the
44
income share of the top 1 percent since the 1940s, reaching levels hovering around 5 percent
(since the late 1970s).
In the developing world, we observe a consistent increase in the income share of the top 1
percent in Argentina, India, China and South Africa since the 1980s and 1990s. The data suffers
discontinuities in Argentina with missing data from the mid 1970s to the late 1990s, so the
evidence for this country has to be taken with caution. In China the top 1 percent share increases
from a low 2 percent by 1986 to close to 6 percent in 2004; this is a three-fold increase in the top
income share over a period of close to thirty years following post-Mao market-oriented policies
but at levels still modest by international standards. In India the top income share doubles from
below 5 percent around 1980 to close 10 percent in 2000. This trend coincides with the adoption
of market liberalization and privatization policies in India. In turn, South Africa also suffers
missing data but a trend of rising income share for the top 1 percent is apparent in the 2000s.
Finally, increases in the top percentile income share are observed in Italy, Portugal and Spain
since the 1980s in the range of 5 to 10 percent.
45
Argentina
China
30
7
25
6
5
20
4
15
3
10
2
5
1
0
0
1932
1942
1952
1962
1972
1982
1992
2002
1986
1991
France
2001
India
25
20
20
16
15
12
10
8
5
4
0
1900
1996
0
1920
1940
1960
1980
2000
1922
1932
1942
Italy
1952
1962
1972
1982
1992
Netherlands
12
30
10
25
8
20
6
15
4
10
2
5
0
0
1974
1984
1994
2004
1914
1934
1954
1974
1994
46
Portugal
South Africa
12
25
10
20
8
15
6
10
4
5
2
0
0
1970
1980
1990
2000
1940
1955
Spain
30
9
25
8.5
20
8
15
7.5
10
7
5
6.5
1985
1990
1985
2000
Sweden
9.5
1980
1970
1995
2000
2005
0
1903
1923
1943
1963
1983
2003
United States
25
20
15
10
5
0
1913
1933
1953
1973
1993
Figure 2.1 Evolution of Top 1 percent Income Share
Source: Database, Top Incomes Project, Paris School of Economics.
47
7. Top Wealth Holders
The previous discussion focused on the evolution of the income shares of top one-percent.
Now let us turn to the inequality of wealth. The distribution of wealth is often more concentrated
(higher Gini coefficient) than the distribution of income (see Solimano, 2009 for evidence on
Lorenz curves for wealth and income for a sample of 130 countries). Unfortunately no data on
top wealth shares for the same set of countries and time periods are available from the PSE
project or from other sources.
As shown before (Box 1) the definition of high net worth individuals depends on the cut-off
used for identifying a rich person, a super rich and a mega rich person. The cut off used by
wealth-management companies that invest money for rich people can be one million dollars, 10
million, 30 million or a billion.12 As it could be expected, the number of people belonging to
each cohort shrinks as the wealth cut-off goes up.
A source of data for the levels of wealth of the mega-rich or billionaires is Forbes Magazine.
This publication has been collecting data on people with net worth above one –billion dollars as
a threshold for more than 25 years. This group of billionaires constitutes small elite that owns
disproportionate financial and productive wealth in the world economy. Forbes Magazine first
focused on the super-rich in the United States and then expanded it compilation to a number of
countries in different continents. According to this publication, there were 1,210 billionaires in
the world in 2011 that have a combined wealth of U$ 4.5 trillion. Interestingly, it is a Latin
12
An individual with a net worth of at least U$ 30 million is defined as “ultra-net worth-Individual (UNWI)” by
Wealth X an advisory firm based in Singapore (Tanzi, 2011). There are near 63,000 individuals UNWI in North
America, 54, 325 in Europe and 45,525 in Asia-Pacific.
48
American, Mr. Carlos Slim from Mexico, who heads the list of world billionaires according to
Forbes magazine over US billionaires such as Bill Gates and Warren Buffet. In contrast with the
gigantic wealth of the 1,210 Forbes billionaires we have over 2 billion individuals living with
less than 2 dollars a day. This provides an indication of the abysmal disparities in the world
economy today. The super-rich has accumulated their wealth in sectors such as the information
technology and communications industry, oil, banking and finance, real estate, entertainment and
other sectors. Apparently, the share of those who have inherited their wealth is not large. The net
worth of the super-rich includes physical and financial assets, real estate, and valuable art objects
(human capital is not included as a measure of wealth).
Table 2.3 shows a list of the 10 countries that have the highest number of billionaires in the
list of 54 countries in 2011. At the top is the United States with 412 billionaires, followed by
China (115), Russia (101) and India (55).
Note that the number of billionaires per capita is the highest in the USA followed by Russia.
Interestingly, among the top five countries there are three emerging economies in the group. It is
worth noting that the BRICS (Brazil, Russia, China and India and South Africa) are among the
top 10 countries that hold most billionaires in the world economy. It is no longer true that high
wealth is a phenomenon only of rich, OECD countries.
Table 2.3 Worldwide top 10 Billionaires by Country (2011)
49
Rank
Country/Region
Number of
billionaires
Share of world Billionaires
total (%)
per 10M
Share of world
population (%)
--
World total
1210
100
1.7
100
1
United States
412
34
13.2
4.47
2
People's Republic of China
115
10.6
0.9
19.26
3
Russia
101
8.3
7.1
2.04
4
India
55
4.5
0.5
17.3
5
Germany
52
4.3
6.4
1.17
6
Turkey
38
3.1
5.2
1.07
7
Hong Kong
36
3
51
0.1
8
United Kingdom
33
2.7
5.3
0.89
9
Brazil
30
2.5
1.6
2.75
10
Japan
26
2.1
2
1.83
Source. Forbes.com and Wikipedia.
Source: Forbes.com and Wikipedia.
In turn, in the Latin American context Brazil is the country that exhibits the largest number
of billionaires (30) followed by Mexico (11). Chile is the country with more billionaires per
capita in the region.
Table 2.4: Billionaires in Latin America per Country (2011)
50
Source: Forbes.com
Rank
Per capita
rank
Country
Number of
billionaires
Billionaires per
10M
1
2
Brazil
30
1.6
2
3
Mexico
11
1
3
1
Chile
4
2.4
4
5
Argentina
2
0.5
4
4
Venezuela
2
0.7
4
6
Colombia
2
0.4
Total
51
Source. Forbes.com
8. Critical Issues of Economic Elites: Heroes of Productive Capitalism or Economic Oligarchs?
After reviewing empirical evidence on top incomes and top wealth-holders let us turn
now to issues pertaining the origin and legitimacy of big inequality addressing the contribution
of economic elites to the process of economic development as well as its impact on inequality
and democracy.
a. Top incomes and top wealth: what is being rewarded?
A basic question is the following: Is top income and big wealth the reward provided by
competitive markets to individuals for their ingenuity, hard work, bright ideas, innovative
capacities, superb education? In other words, is richness just the proper reward to “talent and
merit” in an economy in which opportunities for economic success are fairly distributed in
society? In contrast, wealth accumulation may not only be the outcome of a clean process of
rewarding hard work and talent by decentralized markets but also the result of privileged class
51
position, social background, political connections, rent seeking and other forms of noncompetitive behavior. The rather cheerful description of capitalism in Milton Friedman´s
Capitalism and Freedom for example stresses that markets perform a good job in rewarding
those who are more talented, hardworking and successful, and that are willing to take more risks.
They naturally deserve higher pay than those who perform more routine tasks and contribute less
to the generation of value added. The stories of legendary innovators such as Bill Gates and
Steve Jobs among others would illustrate the magic of capitalism that can reward handsomely the
bright ideas and commercial acumen (and some ruthless behaviors against competitors and
consumers as well). These cases of ingenuity and success certainly do exist and is part of the
“wonder of capitalism”. However, these individuals are really outliers and their numerical
importance—albeit not the innovations and wealth creation they have brought about—are small.
b. Privatization, Accumulation by Dispossession and Political Connections
A less rosy picture of capitalism suggests that critical in the formation of economic elites
is the appropriation of valuable assets by different means including coercion in processes that are
often far from competitive and transparent. Marx in Capital discussed the process of “primitive
accumulation” as an important step in the formation of the capitalist system. Historically, this
often involved transforming communal property into private property for example taking land
through the enclosures mechanism, expelling the peasants and transforming them in landless
proletarians that would eventually work for a salary in capitalist factories located in urban
centers. The capitalist subsequently accumulates capital by extracting surplus value to workers
dispossessed of land. In recent times a new wave of primitive accumulation or “accumulation by
dispossession” in David Harvey’s (2005) terms, has taken place through the privatization of
public enterprises and common goods such as water and public land in countries that have
52
adopted neoliberal policies in the UK, Russia, China, India, Chile, Poland, Hungary, Czech
Republic and other countries around the world. Following privatization policies new economic
oligarchies have emerged very fast in several of these countries (in Post –Soviet Russia the new
oligarchs, as mentioned before, were former nomenclature members, a feature common to other
former communist countries). In particular, “inside privatization” of state-owned enterprises in
noncompetitive ways has been especially important in the rapid formation of powerful economic
elites in recent years. In these respects, a part of the building up of big wealth could be
considered also as a reward to the right political connections. Another case is the privatization in
Spain of state-owned companies and banks in the 1990s by socialist governments that led to the
formation of big multinational corporations in telecommunications, (Telefonica), oil and natural
gas: (Repsol and Gas Natural), power companies (Endesa, Iberdrola and Union Fenosa),
privately-owned banks such as Banco Santander and BBVA13 .
A “helping hand” from individuals located in powerful places, through special licenses to
run monopolies, special subsidies, tariff protection or subsidized credits can make the difference
for those wanting to enter the club of the “super-rich” and the people left outside of the new
elites.
In post-socialist transitions and in other nations, a small acquiring minority has benefitted
from privatization of public enterprises and public assets accompanied by low taxes for the rich
and lax business regulation. The new rich formed after privatization now form part of the
billionaires list published by Forbes Magazine. In contrast, the majority of the population does
not enjoy these privileges and have had to suffer lower wages and the curtailment of labor rights
and social benefits accompanying privatization and economic liberalization.
13
For a detailed analysis of Spanish multinationals and foreign direct investment, see (Chislett, 2011).
53
c. Top economic elites as entrepreneurs and innovators
Sometimes the economic elites are identified as composed mainly by entrepreneurs although
it is clear that rentiers are also part of the economic elites. The entrepreneur is envisaged as an
engine of growth given its distinctive talent for combining capital, labour and for entertaining a
vision of opportunities and the prospects for profits (see Schumpeter 1934 [1989]). The critical
role of the entrepreneur according to Joseph Schumpeter is making innovations such as
introducing a new good, a new line of production; open a market in a process of “creative
destruction” in which new technologies and ways of doing business replace the old ones.
Another author that analysed the role of the entrepreneur and managers for effective production
in the presence of uncertainty was Frank Knight. Both John Maynard Keynes and Karl Marx
gave a more qualified and perhaps less benign role for the entrepreneur (the topic is dealt with, in
more detail, in chapter 3).
d. Winners-Take-All Markets
A mainstream rationalization of the very rich is related to workings of the so-called “markets
for talent” that concentrates earnings in a few, highly talented individuals. In this context, small
differences in individual abilities can generate very large differences in pay and reward due to
the presence of increasing returns to ability. This winners-take-all market theory is often applied
to explain earnings in arts, sports, entertainment and other activities involving talent. For
example, the number one tennis player in the world makes an income several times larger than
the second or third player, who can be nearly as talented as the number one who wines and
receives the main prize (and the most lucrative advertising contracts). Recently, it is has been
also applied to study the compensation of CEO and high executives (Kaplan and Rath, 2013).
54
Frank and Cook (1995), in their book Winners-take-all Markets, argued that the lure of high
earnings attracts an excessive amount of talent to these activities compared to what is socially
optimal if the true probabilities of making the big prize (say winning a tournament in tennis or
golf) were known ex ante. This theory also can be relevant for explaining behavior in financial
markets in which the expectation of making large salaries and getting preferential option shares
and large bonuses for making good deals led to excessive concentration of talent in the financial
sector. Incidentally, several billionaires come from banking, hedge funds, and investment
companies in which “financial innovations” are highly profitable. In this case large rewards do
not reflect, necessarily, a positive contribution to create genuine economic value. On the
contrary, high pay in the financial sector may be actually rewarding activities that are socially
disruptive, e.g. financial crises induced by reckless behavior of financial executives that engage
in risky behavior lured by the search for big pay. In contrast, occupations that have an important
social value but whose actual pay is comparatively modest (teachers, public employees, and
physicians in public health systems) may not lure an adequate number of domestic talents.
e. Top economic elites and inequality
High concentration of incomes and wealth in small economic elites are often associated
with significant levels of inequality and a worsening of income distribution. For the reasons
exposed before observed income and wealth distribution in capitalism can be far from socially
optimal and morally fair. In addition, the welfare implications of economic growth and
prosperity are crucially dependent on how these gains are appropriated in society. Evidence of
large gains to the top one percent or the top one- thousand in the United States, the United
Kingdom, China, India and to some extent in Argentina among other nations suggests that
changes in GDP per capita can be only a limited indicator of welfare changes in society as a
55
whole. The reality of recent decades is that economic elites have benefited disproportionally
from the benefits of growth, globalization, technological improvements and prosperity.
f. Top economic elites and democracy
The rise of small and powerful economic elites in the neoliberal era has several undesirable
effects on democracy as well. Some mechanisms through which money affects the political
process in a representative democracy have already highlighted them before in this chapter.
A representative democracy follows the principle that one-person is one vote. However,
political campaigns to elect representatives in parliament or government need money and those
who hold those financial resources have an advantage to influence the political process over the
non-rich. Candidates to elected positions in unequal societies will tend to cater those with
financial resources that enable them to be elected through generous campaign financing. This
behavior may have a greater pay-off than directing their efforts to attract the median-voter as
argued in political-economy theories. In turn, the influence of the mass media is very important
to shape views, values and affect political outcomes. A trend of concentration in the ownership
of TV stations and networks, newspapers and other media in the hands of oligarchies and
economic elites is ongoing in many countries such as the USA, the UK, Russia, Latin America
and other nations and regions. In addition, another channel through which money affects the
political process is interest groups activity and donations by corporations oriented to steer
legislation and regulations in a direction that is favorable to their concerns. Clearly, lobby
spending and money-contributions affect the way democracy works and shape the legislation
approved in parliament.
56
A study sponsored by the American Association of Political Science (“American Democracy
in an Age of High -Inequality”) identifies several mechanisms through which inequality affects
democracy: first, inequality of voter participation: the poor tends to vote less frequently than the
rich in countries such as the United States, second, the capacity to organize in lobby and interestgroup association that seek to influence policy-making is far greater for high paying professions,
managers and wealthy-owners than for workers and low income groups. As governments can be
responsive to lobby activity, policies will be more favorable to the interests of the privileged and
wealthy than to the middle class and the poor. Several of these mechanisms are bound to be
particularly serious in developing countries. 14
The great financial crisis of 2008-2009 affecting the US and Europe and the way it has been
dealt with in terms of massive bailout for banks highlighted the political power of the financial
industry. Besides lobbying congress and government other mechanisms of influence of “big
money” coming from the financial industry include job rotation between government and
financial institutions, the funding of research favorable to anti-regulation stances in think tanks
and universities; and the influence of Wall Street on the media for the propagation of similar
ideas.
9. Curbing the Power of Economic Elites
How to restraint the power of economic elites so that the benefits of economic growth,
technological change and modernization are to be widely shared in society among the whole
14
The impact of plutocracy and special interests on the rise of inequality and the working of the political system in
America is well depicted in Sachs (2011) and Stiglitz (2012).
57
population? We can identify two mechanisms for reducing excessive income concentration at the
top.
(a) Setting “maximum wages” and, more generally, regulations and caps on executive pay and
(b) Taxation of top incomes.
a. Maximum-Wages and Regulation of Excessive Executive Pay
A proposal for setting a “maximum wage” has been floated in the past and present,
particularly at times of high inequality, financial scandals and war. In the United States a cap on
top incomes was proposed in the gilded age of the early 20th century to reduce increasing
inequalities of income. In fact, during World War I, the “American Committee on War Finance ”
supported legislation to enact a 100 percent tax for incomes over U$ 100,000 (of dollars of that
time) to help finance the war effort. 15In 1942, during World War II, Franklin Delano Roosevelt,
supported by the labor unions, proposed a maximum wartime income of U$ 25,000 a year
(equivalent to approximately U$ 350,000 in current dollars). In 1944 the US congress increased
the top tax rate on income over U$ 200,000 to a record of 94 percent (Pizzigati, 2010). Personal
income tax rates for top incomes in the US remained near 90 percent for two decades (until the
mid-1960s). Afterwards, they started a steady decline to reach current levels of 35 percent. In the
1990s and 2000s the explosion of CEO and top manager´s compensation also created demands
for ceilings on top incomes. The ratio between CEO pay and average worker´s salaries before the
1980s in the United States was on the order of 30 or 40 at most. Nowadays this gap could exceed
300 or more (Anderson, Collins, Klinger and Pizzigati, 2011). In fact, the rise of corporate pay
15
In the early 1920, communist party members in the Soviet Union were subject to a maximum wage, the
partmaximum. The cap was removed in 1932 as Stalin ruling elites started to demand special perks and privileges.
58
and the role of high variable compensation schemes in encouraging excessive risk taking in the
financial sector have been attributed as a significant factor behind the financial crisis of 2007-08.
In the United Kingdom the High Pay Commission composed by academics, the private
sector, and civil society and workers representatives documented an explosive increase in the
compensation and wages of executives and board members in the 1990s and 2000s compared
with previous decades. In fact, while the ratio of compensation of high executives of
corporations and banks respect to average salaries was in the range of 13-44 in 1979-1980 that
ratio went up to the range 38-113 in the years 2009-2011.
The High Pay Commission
recommended keeping a base salary for executives and reducing to a minimum the use of
bonuses and option stocks as means of compensations to these high executives. Other observers
propose that taxpayers and workers representatives should have a seat in the boards of
corporations and therefore exercise their voice and vote in the determination of the compensation
of executives and salaries and benefits of employees and workers (the issue is discussed in
chapter 9 devoted to economic democracy).
There are several arguments against big wage gaps and in favor of income caps and
regulating excessive pay for executives that have been the “bread and butter” of big
corporation’s compensation schemes since the 1980s, mainly in the USA and the UK:
(a) Excessive wage gaps within the firm are demoralizing for the work force affecting
adversely worker´s productivity. Along these lines, both manager theoretician Peter Drucker and
financier JP Morgan argued against ratios of executive pay to worker compensation that
exceeded the ratio 20 to 1 or so.
59
(b) Big wage gaps between top management and middle rank employees and workers affect
standard norms of economic fairness in society and undermine the legitimacy of market
economies. 16
(c) In the financial sector excessive compensation to top executives induces above-normal
risk taking by ambitious managers lured by the prospect of making big bonuses and other
financial prizes. This often led to the deterioration in the quality of loan portfolios and opens the
door for financial fragility and crisis that are fiscally costly and destroy jobs and undermine
social welfare.
b. Taxation of Top Incomes
An obvious mechanism to reduce the command of resources by the very rich and
enable the state to perform some of its redistributive roles is taxation of “high net worth
individuals, HNWI”. Tanzi (2011) provides several justifications. One is the standard taxation
principle of ability to pay (the rich has a greater ability to pay taxes than the poor and therefore
should bear a greater taxation burden). Tanzi calls attention that high incomes may not be the
remuneration corresponding to “genuine and deserved incomes” in the sense of economic
fairness. In fact, HNWI are rarely atomistic players in competitive markets but actual individuals
benefitted by rules, institutions, government practices, monopolies, and restrictions to
competition that leave room for super-normal profits, rents and mega- salaries of managers and
top executives. An example in this direction, already noted, is the excessive remunerations of
CEO and managers in the banking system and hedge funds in the US in spite of their poor job in
16
For an analysis using the experience of wage regulations in major sports leagues for executive pay , see Dietl,
Duschl and Lang (2010).
60
allocating capital and taking excessive risks in the run-up to the crisis of 2008-09. Then the same
managers benefitted from bailouts and were protected economically by governments due “too
big to fail” considerations. In the Latin American and post socialist countries privileged access to
property through insider’s privatizations schemes and the granting of special tariffs and
protection against competition in several cases led to very high income and wealth of dubious
legitimacy. Tanzi makes an additional (subtle) argument for progressive taxation: the tolerance
of some extra taxation by the rich as those at the top of the income and wealth ladder are willing
to sacrifice incomes (redistributed to society through taxation) to preserve their high social status
and influence. However, those in the way to the top may be more sensitive to taxation. A
distinction can be made between taxing only very high incomes and taxation of high (but not
exorbitant) incomes. However, in practice, the line between those two categories may not be
easy to draw.
During the neoliberal era personal income tax rates were reduced in the US under Reagan
and in the UK under Thatcher, a trend adopted also by other nations. In the US, marginal income
tax rates for the top incomes went down from around 70 percent in 1979 to 50 percent in 1990
and 35 percent in 2005. In the UK top income tax rates went down from over 80 percent in the
late 1970s to around 40 percent in the late 1980s and have remained at that level thereafter. A
lowering of tax rates for top incomers coincided with increases in the Gini coefficient in both
countries in the last three decades.
c. Taxation in high Inequality Regions: Latin America
Tax systems in regions of high inequality such as Latin America play a very small role in
reducing the structural inequalities of income and wealth of the region. In addition, the trend
61
towards reduced personal taxation observed in advanced economies is also present in the Latin
American region (see figure 2.2).17
Figure 2.2: Evolution of Income Tax (IT) and Value Added Tax (VAT).
(Average Latin America, 1980-2009)*
Source: Forbes.com
Note: Data for 18 países: Argentina, Bolivia, Brasil, Chile, Colombia, Costa Rica, Ecuador, El
Salvador, Guatemala, Honduras, México, Nicaragua, Panamá, Paraguay, Perú, Rep.Dominicana,
Uruguay, Venezuela.
We can identify three main features of the tax system in the Latin American that run against
a redistributive role of the state and their failure to follow fairness criteria. These features are: (i)
a comparatively low total tax burden (share of tax revenues over GDP), (ii) an unbalanced tax
structure between direct and indirect taxes, with a modest contribution of direct taxes to total tax
collection, and (iii) a low level of tax compliance (comprising both tax evasion and tax
avoidance).
17
Since 1980 to the present, in Latin America the legal income tax rates, both personal and corporate, have
experienced a major decline in line with the evolution of tax rates in several other nations around the world. The
average maximum rates of the personal income tax in Latin America decreased from 49.5 percent in 1980 to 27.3
percent in 2009. In turn, corporate income taxes rates have declined from 43.9 percent to 27.1 percent between
the same years.
62
The total average tax burden of Latin America is low, not only compared with high-income
regions, but also when compared with other regions, of relatively similar levels of economic
development. Latin America has the second lowest tax burden in the world after Developing
Asia. When comparing to developed countries, tax revenues in Latin America as a share of GDP,
are near half of the developed economies (18.4 percent of GDP in Latin America, compared with
34.8 percent of the OECD and 39.2 percent in the European Union). 18
The second aspect that limits the redistributive role of tax policy is a tax structure heavily
reliant on indirect taxes, generally less progressive in nature. Indirect taxes (as a share of GDP)
represent a similar share in Latin American (9.6 percent of GDP) as in the OECD and European
Union (11.0 percent and 11.7 percent respectively). However, when comparing direct taxes and
social security contributions, differences are enormous. The direct tax burden is more than 10
points higher in the OECD (14.7 percent) and in the European Union (16.1) than in Latin
America, where it also represents a meager 5.4 percent of GDP.19
18
However, there are profound differences between countries in the region. Brazil, Argentina and Uruguay have
tax burdens closer to the levels of developed regions, representing more than 25 percent of GDP. Meanwhile, and
despite recent efforts, in most countries of the region the tax level remains below 20 percent of GDP, with extreme
cases such as Mexico and Guatemala, where the tax burden is around 11 percent of GDP.These differences among
countries are not only due to differences in historic taxation levels, macroeconomic circumstances, tax compliance
efforts and recent reforms, but also to differences in the origin of other fiscal revenues coming from the
exploitation of non-renewable resources. Those revenues, in countries specialized in the production and trade of
commodities, (oil in Mexico, Venezuela and Ecuador, copper in Chile and so on) represent a high proportion of
total revenues reducing in some cases the incentive to get additional tax sources. In Latin America, there are eight
countries whose fiscal revenues are more dependent on such income, highlighting Bolivia, Ecuador, Mexico and
Venezuela with a share over 8 percent of GDP.
19
The main difference in the composition of income taxes between Latin America and OECD countries is in the
level of personal taxation. While the OECD collects an average 9.2 percent of GDP out of personal income taxes the
Latin American and Caribbean region collects only a pale 1.5 percent of GDP. In terms of contribution to total
income tax revenues in Latin America the share of corporate income tax is 70 percent and 30 percent for personal
income tax, while the OECD´s tax structure is the other way around: 30-70, with a much greater share of personal
income tax.
63
Furthermore, one of the characteristics of the personal income tax in the Latin American
region is its reliance on taxation of labor income. However, the greatest potential for reducing
tax evasion and tax avoidance is in non-wage incomes. The preferential treatment of capital
gains in the region limits the collection of non-wage personal income. In fact, capital gains
receive generous preferential treatment in most Latin American countries, where these earnings
are either totally exempt from taxation or are subject to very low tax rates, thus explaining the
low taxation of non-wage income. This can be an important source of taxation of top incomes.
Table 2.5: Personal Income Tax (PIT) and Corporate Income Tax (CIT). (Various Regions, Year
2009)
Taxable income of the PIT
Regions
Minimum
Maximum
(multiple of GDP per capita)
Latin America (18)
1.52
10.27
Caribbean (17)
1.47
5.99
East Asia and Pacific (32)
1.19
15.65
Central Europe and Central Asia (31)
1.08
2.16
Middle East and North Africa (21)
1.21
8.60
South Asia (8)
3.22
34.17
Sub-Saharan Africa (47)
2.55
19.11
Western Europe (20)
0.36
3.97
U.S. and Canada (2)
0.20
5.42
Tax Rate (Percentage)
PIT
(Low)
PIT
(High)
CIT
10.6
17.5
9.0
13.3
10.4
8.6
10.1
16.7
12.5
27.1
32.1
29.0
19.4
26.0
25.7
35.2
39.9
32.0
26.8
31.1
24.0
15.8
24.9
30.4
30.3
26.1
26.5
Note: numbers of countries in parenthesis
Source: Gómez Sabaini, J.C., J.P. Jiménez and D. Rossignolo (2011).
Maximum personal and corporate tax rates in Latin America starts applying at the threshold of
roughly 10 times the GDP per capita. In contrast, in most developed regions the maximum
64
income tax rate begins to take effect at levels of 3 to 5 times per capita income (see table 2.5). In
addition, the maximum personal income tax rate applicable in the region (27.10 percent) is not
only inferior to those applied in Western Europe (39.9 percent) and the United States and Canada
(32 percent), but also lower than those applied in East Asia (29 percent) and Sub-Saharan Africa
(35.2 percent).
Another important limitation to tax the rich is the low performance of property taxes in the
region. To put the performance of property taxes in Latin America into international perspective,
we compare it with the performance of other regions of the world. As shown in Table 2.6,
property taxes in developing and transitional countries raise far less revenue relative to GDP than
OECD countries. In the early 2000s property taxes in OECD countries represented 2.12 percent
of GDP, while for developing countries this figure was 0.6 percent and, for transition countries,
0.68 percent. The trend for revenues in all three groups of countries has been slightly upwards
since the 1970s. The numbers in Table 2.6 suggest that the overall performance of the property
tax in terms of revenue collection (as share of GDP) is associated with the level of economic
development; for example, OECD countries rely more on the property tax than do developing
countries. However, that relationship is not necessarily monotonic and Latin American countries
are found to perform below than the average developing country.
65
Table 2.6 Property tax Revenues in Representative Groups of Countries (Percentage of GDP)
Source: Jimenez and Solimano (2012)
1970s
0.77
(37)
1980s
0.73
(49)
1990s
0.75
(59)
2000s*
1.04
(65)
OECD countries
1.24
(16)
1.31
(18)
1.44
(16)
2.12
(18)
Transition countries
0.34
(1)
0.59
(4)
0.54
(20)
0.68
(18)
Developing countries
0.42
(20)
0.36
(27)
0.42
(23)
0.6
(29)
…
…
…
…
0.36
-8
0.37
-10
All countries
Latin American countries
* T he data for 2000s is for five years from 2000 to 2004.
Table 2.7 presents the measures of property tax performance for some Latin American
In parentheses () numbers of countries
Note: Figures in parenthesis represent the number of countries considered in each computation.
countries. Even though the reliance on the property tax is low, there is still a significant degree of
Source: Bahl and Martinez-Vazquez (2008) and ECLAC.
variation across countries. For example, in Peru property tax revenues in recent years (2005-07)
represent 0.16 percent of GDP, while in Bolivia for the same period that figure is about four
times larger, at 0.62 percent of GDP. The relative importance of property taxes has decreased
over time. There are also some cases where property tax performance has consistently increased
over time, like in Brazil, Colombia, Ecuador and Guatemala; while in Mexico property taxes
have represented 0.18 percent of GDP, without changing since the early 1990s.
Table 2.7: Property Tax revenues in Latin American Countries(Percentage of GDP)
66
Source: ECLAC on the basis of official figures.
1990-94
1995-99
2000-04
2005-07
0.65
0.62
0.59
0.44
Bolivia
…
…
0.69
0.62
Brazil
0.37
0.41
0.42
0.44
Chile
0.55
0.65
0.7
0.59
Colombia
0.25
0.46
0.48
0.54
Ecuador
0.1
0.13
0.13
0.14
Guatemala
0.09
0.07
0.14
0.16
Mexico
0.18
0.18
0.18
0.18
Paraguay
…
0.36
0.39
…
Peru
…
…
0.17
0.16
Uruguay
0.52
0.7
0.71
…
Latin American countries
0.34
0.39
0.45
0.42
Argentina
Source: ECLAC on the basis of official figures.
It is apparent the scope for rising taxes on top incomes in Latin America and elsewhere is not
small but some words of caution are needed. First, we have to consider that in a globalized world
economy with capital mobility attempts to raise personal income taxes in one country may
trigger the flight of capital and savings from the high tax countries to lower tax countries.
Second, a move in the direction of increasing top income tax rates have to be accompanied by an
improvement in the efficiency of the tax system to encourage tax compliance and prevent tax
avoidance and tax evasion. Third, the political feasibility of increasing taxes on top incomes has
to be considered. As economic elites have become more powerful in recent years their capacity
to lobby for blocking progressive tax reform should not be underestimated.
10. Concluding remarks
67
The recent formation of new economic elites has been associated with phenomena such as
globalization, economic liberalization and privatization. The new economic elites are composed
not only by capital owners but also by high-pay executives. Salaries, bonuses, and the increase in
the value of stocks owned by executives are a main factor behind the explosive rise in
compensation of top managers of corporations. The history of how top incomes and big wealth
was accumulated by different individuals in the last two to three decades around the globe
remains to be written. Rewards to talent, political connections and accumulation by
dispossession surely have played important roles in this process.
The high compensation of top executives and the concentration of incomes and wealth in the
top 1 percent or the top 0.1 percent has become an important issue in public debate in recent
years. The data presented in this chapter is showing a trend of increased shares of the incomes of
the top one percent in both Anglo-Saxon developed countries (USA and UK) as well as in large
market liberalizers such as China, India, Portugal, Spain and Italy among others. In addition, we
observe also a process of rapid formation of billionaires in Russia, China, India and a score of
other developing nations. A general trend towards the shift in economic power to capital and top
managers highlights the excessive influence of dominant shareholders in the board of directors
of corporations and banks in terms of deciding how incomes are divided among the factors of
production that contribute to generate value in firms and corporations.
The chapter also examined the scope and limits for regulating high salaries and taxing the
rich in capitalist economies. We warn that
taxation alone, in a globalized world with capital
mobility, lack of fiscal harmonization across countries and fiscal paradises may not be enough to
correct the current trends to high inequality, economic polarization and small economic elite’s
formation. A fresh look at the possibilities for income redistribution and wealth de-concentration
68
in neoliberal capitalism characterized by increased market concentration, barriers to competition,
protection of big financial conglomerates, weakening of labor unions and civil society
organization and the pervasive political power of the economic elites is badly needed.
69
70