Understanding the Plutocrats: Talent vs. Capital, The Illusion of Skill, and the Winner’s Curse

In my spare time, I have been reading Chrystia Freeland’s The Plutocrats. A refreshingly nonjudgmental book, it seeks neither to condemn nor defend the super-rich, but simply to understand them. The author’s brisk, journalistic prose, with references hidden away at the end by page number, belies the fact that she has done her homework in the economic, sociological, and historical literature. The text is further enriched with material drawn from Freeland’s own interviews with many of the world’s wealthy. The result is both entertaining and full of real insights.

The Working Rich, Then and Now

One of Freeland’s central questions is why today’s super-rich have so much more money than the wealthy of old. She begins by noting that hereditary wealth has little to do with it. Our plutocrats are, by and large, the working rich. They not only show up at the office every day, but work longer hours than most of their subordinates.

Of course, working rich are not a new phenomenon, especially in America, land of the Carnegies and Rockefellers. Still, even the legendary Robber Barons were not all that wealthy by modern standards. Freeland borrows a yardstick proposed by Branko Milanovic that measures a person’s wealth according to the number of fellow citizens whose labor it could purchase. Andrew Carnegie, at his best, could command the labor of 48,000 Americans, and John D. Rockefeller 116,000. By comparison, before his arrest in 2003, Mikhail Khodorkovsky had wealth equivalent to a year’s labor of 250,000 Russians and Carlos Slim, now the world’s wealthiest person, is worth the annual income of 400,000 Mexicans.

Some plutocrats have become rich by feeding off modern states that are themselves richer than those of former times. Freeland devotes a long chapter to rent-seeking, corrupt privatization, and other forms of political parasitism. She traces at least some of the wealth of both Slim and Khodorkovsky to advantageous privatization deals, and notes that writers like Simon Johnson have rated the rent-seeking prowess of American bankers as equal to that of emerging-market oligarchs.
Without belittling political considerations, however, the parts of The Plutocrats that I found most interesting concern sources of super-wealth that arise from within the market system itself. >>>Read more