Plutocrats by Chrystia Freeland (Book Review)


As someone who has to frequently change which projects they are working on, I am often in sympathy with (The Honourable) Chrystia Freeland who is continually given more and more portfolios in the Trudeau government. Anything that is considered mission critical gets put into her hands: dealing with Western alienation, finalizing the USMCA, being the deputy prime minister, and (when she has free time) coordinating the government’s response to COVID-19. Many Canadians are probably not aware that the now Minister of Finance was once a business journalist for the likes of the Financial Times, Reuters, and The Globe and Mail. Plutocrats, published in 2012, is Freeland’s second (and most recent) book. A year after the book was published she won a by-election in Toronto Centre with the Liberal Party.

The central hypothesis of Plutocrats is that an outsize share of global wealth and income creation has gone to a new global elite: 21st century plutocrats who have more in common with each other than they do with their fellow countrymen. These individuals go to a handful of elite schools, work at a handful of elite firms, visit the same conferences, and see themselves as global citizens. Unlike the elites of the ancien regime, today’s super-rich do not derive their wealth from land or inherited wealth but rather a hybrid worker-capitalist model. These are the Russian oligarchs who bought up privatized assets on the cheap and reaped the benefits of the commodity boom or hedge-fund managers like Steve Schwarzman who regularly take home salaries in excess of $100 million. Pointing out that today’s plutocrats are qualitatively different is not a new idea. Alain De Botton’s argued in Status Anxiety that it’s much easier to feel jealous of a successful real estate broker than the Queen as the latter obtained her wealth from mere dint of her existence. By definition a meritocracy implies that those who do not succeed must bear responsibility for their failure.

Forces beyond our control?

At various point in the book, Freeland makes it clear that some of the gains of the super-rich is ill-gotten from either rent seeking or political capture. For example, many Russian oligarchs got rich by obtaining state assets at fire-sale prices. Plutocrats also discusses other structural theories as to why the rich have gotten richer:

  1. Rosen effect
  2. Marshall effect
  3. Martin effect
  4. Matthew Effect

The Rosen effect is based on two premises. First, there is a strong imperfect substitution in demand for labour whereby small improvements in quality receive a large increase in demand (e.g. the difference in willingness to pay between a great versus an okay surgeon). Or as Alfred Marshall put it:

It is the first cause, almost alone, that enables some barristers to command very high fees; for a rich client whose reputation, or fortune, or both, are at stake will scarcely count any price too high to secure the services of the best man he can get…

Second, the “worker’s” output benefits from costless technological scaling. For example, it is just as easy for the podcast superstar Joe Rogan to make an episode for 10 listeners as it is for 10 million. The Rosen effect captures the dynamics at play for a handful of elite talent, like Joe Rogan or a professional athlete. Because sports players create most of their value through media – a medium that also has zero marginal cost – their salaries have grown over time because there are more “eyeballs on the screen” every year, and most sports watchers are only willing to watch the best players. As Kruger’s classic study noted: the MTV-era further concentrated the superstar effects of radio: between 1982 to 2003 share of concert revenue taken by top 5 percent of performers went from 62 to 84%, while the top 1 percent went from 26-53%.

The Marshall effect was noted by the famous economist almost 100 years before Rosen’s article was published. In the chapter the “General Influences of Economic Progress” he wrote:

The relative fall in the incomes to be earned by moderate ability, however carefully trained, is accentuated by the rise in those that are obtained by many men of extraordinary ability. There never was a time at which moderately good oil paintings sold more cheaply than now, and there never was a time at which first-rate paintings sold so dearly. A business man of average ability and average good fortune gets now a lower rate of profits on his capital than at any previous time; while yet the operations, in which a man exceptionally favoured by genius and good luck can take part, are so extensive as to enable him to amass a huge fortune with a rapidity hitherto unknown.

The causes of this change are chiefly two; firstly, the general growth of wealth; and secondly, the development of new facilities for communication, by which men, who have once attained a commanding position, are enabled to apply their constructive or speculative genius to undertakings vaster, and extending over a wider area, than ever before.

… [A]nd it is this again that enables jockeys and painters and musicians of exceptional ability to get very high prices. In all these occupations the highest incomes earned in our own generation are the highest that the world has yet seen. But so long as the number of persons who can be reached by a human voice is strictly limited, it is not very likely that any singer will make an advance on the £10,000, said to have been earned in a season by Mrs Billington at the beginning of last century, nearly as great as that which the business leaders of the present generation have made on those of the last.

What Marshall wrote reads true today. If one reads the whole chapter, Marshall foreshadows The Race Between Education and Technology and Skill-Biased Technological Change. The third structural factor in today’s “working rich” is the (Roger) Martin Effect, in which capital is in competition with talent, rather than labour, in the digital economy. For example, the bottlenecks a high-tech company like Google faces is being able to hire enough skilled engineers to build profitable technologies on their platform. The company does not a face a problem raising capital. In the era of the Robber barons, by contrast, capital was the limiting factor even for monopolist firms like the railway or telegraph companies. A continued focus on capital being the limiting factor in production is partly a hangover from the Bretton-Woods era where high inflation, exchange controls, and financial repression all made the cost of financing high. Much like a society whose problem of hunger is replaced by that of obesity, developed economies today are experiencing a savings glut, with too many dollars chasing too few productive investment opportunities.

The Rosen, Marshal, and Martin effect are all structural theories that explain growing inequalities as a function of changing fundamentals. The Matthew Effect is different in that it makes an argument of political economy: the rich tend to get richer through entrenching their privileges. There are different mechanisms for how this calcification could occur. The rich can afford to the large human capital investments in their children that enable them to get the best jobs and life opportunities. But the combination of wealth and position also make state capture that much easier. As a result, government policies are enacted that reduce income mobility over time. Making distinctions between those forces which are based on exogenous fundamentals (e.g. technology) versus public policy may be useful in understanding their origin, but I am sceptical in endorsing the former as inevitable or somehow more legitimate. As an institutionalist, I ultimately believe that economics follows politics, rather than the other way around.

To provide an example of how these effects can be dominated by history, culture, and politics consider the Manhattan Project. There were truly only a handful of men (they were mainly men in that era) at the time with sufficient knowledge of nuclear physics to be able to develop atomic weaponry; men like Robert Oppenheimer and Enrico Fermi (imperfect substitutes if there ever was). And yet, these scientists saw their labour no differently from the GIs storming the beaches at Normandy: a duty. They were not fantastically wealthy men at the end of the war. Before the era of Silicon Valley billionaires, there were intellectual founders of the computer age like Vannevar Bush or Alan Turing. These pioneers extracted a pittance of the social value of the technology they created. One could argue that public-spiritedness is bound to be defeated by the desire for commercialization. But a shift in the cultural ethos was required to overturn an approach to research and innovation that remained unchanged for decades. In other words, while the conditions of imperfect substitution and technology-driven economies of scale may be necessary conditions for the Rosen effect, I do not think they are sufficient.

Good billionaires, bad billionaires

The origin of all billionaires’ wealth is dubious, but some is more dubious that others. Freeland views the sector composition of the super-rich’s businesses as a barometer for how good that society’s billionaires are. She compares the billionaires of the West that made their money from building companies from scratch in competitive markets (e.g. Jobs and Buffett) to the likes of Carlos Slim and the Russian Oligarchs whose net worth derives from state-granted privilege. Slim was the CEO of Telmex, a privatized telecommunication firm that owned more than 80% of the all the telephone lines in the country and was the richest man in the world until 2013. Slim’s net worth was halved in a single year after Mexico implemented telecommunications reforms which removed limits on foreign investment and opened up the telecommunications infrastructure to competitors. Slim is still a very rich man, but it’s clear that his firm benefited immensely from economic regulations. The case of the Russian Oligarchs is more well-known and clear cut: the vast majority of the economic assets of the Soviet Union ended up in the hands of a few dozen men. Freeland has written about this subject in her other book. Russia’s institutions today remain as rotten as they were in the era of communism.

One must be careful not to see a Manichean world of deserving and undeserving billionaires. It is universally agreed that Chinese billionaires are allowed to keep their wealth only by the grace of the Chinese Communist Party. Though the country has been minting billionaires at a remarkable rate since 1999, when the super-rich step out of line, they are punished (consider the case recent of Jack Ma).

China’s plutocrats don’t fight the state because they are the state.

As Plutocrats points out, between 2003 to 2011, at least fourteen Chinese billionaire businessmen were executed. Having billionaires derive their gains from political connections is undesirable. Yet as the writer Nassim Taleb has repeatedly pointed out, for elites to be morally justifiable they have to have as much, if not more, risk then the plebeians they tower over. Taleb noted that criticizing Donald Trump for going bankrupt was a foolish political strategy because most citizens respect wealthy individuals who have both upside and downside risk. For most of the political, media, and academic elites, the goal in life is accumulate stable financial assets and index-linked pensions. They are baffled why anyone would want to leverage themselves and risk bankruptcy.

Just as the king who leads his troops into battle earns more respect from soldiers, one must admit a grudging respect for the Chinese billionaires who live with a Sword of Damocles over their heads. Freeland does not discuss the value in having downwards, as well as upwards, mobility. By definition, to have (relative) upwards mobility, there has to be a corresponding degree of (relative) downwards mobility. If we are interested in undoing the Matthew effect, it is worth considering how many of today’s elites are likely to be bankrupt in a generation’s time.

Wealth at the top of the pyramid

When I first read Plutocrats I was sceptical of the idea that “the world is dividing into two blocs - the plutonomy and the rest.” Yes, income inequality has risen, but the rise in the world median income has easily outstripped the economic gains accruing to the top. I had in mind the fortune at the bottom of the pyramid.

In a plutonomy there is no such animal as ‘the US consumer’ or ‘the UK consumer’ or indeed the ‘the Russian consumer.’ There are rich consumers, few in number but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the non-rich, the multitudinous many, but only accounting for surprisingly small bites of the national pie.

When a society sees its middle class hollowing out, you get what Citigroup analyst’s call an hourglass economy. Consumer demand is bifurcated into high-end consumption and low-end discounts. This is why firms like LVHM and Dollarama have seen tremendous growth and profits. It should be noted that the hourglass economy is at partial odds with the plutonomy theory of the world, because the former considers the growing proletariat as an important investment opportunity.

As the COVID-19 crisis has continued, I am increasingly concerned that the plutonomy idea may be more true that I originally thought. Because of necessary public health measures, global economic activity contracted at a rate comparable to the Great Depression. Yet stock and real estate prices have continued to rise posthaste. A large fraction of the workforce has seamlessly moved to working from home. Those who can do their jobs from their laptops (like myself), have barely noticed a difference in our lifestyles. A decoupling of the global economy has occurred, but instead of between countries, it has happened within them. I fear that the Marxists may have been partially right: class conflict is the thread that runs through everything. As Adam Smith noted:

The proprietor of land is necessarily a citizen of the particular country in which his estate lies. The proprietor of stock is necessarily a citizen of the world, and is not necessarily attached to any particular country. He would be apt to abandon the country in which he was exposed to a vexatious inquisition, in order to be assessed to a burdensome tax, and would remove his stock to some other country where he could either carry on his business, or enjoy his fortune more at his ease.

O Canada

Like many successful Canadians, Freeland has lived abroad for most of her professional life: a degree from Harvard, a Rhodes Scholarship, deputy editor in London, bureau chief in Moscow, and so forth. Yet her decision to return to Canada to run for the Toronto Centre riding strikes me as an instance of dormant patriotism reactivated, or a sense of being able to have an outsize influence in Canada’s political arena (or both). If Freeland thought she could advance quickly, she was right. Despite her impressive rise to the top of the cabinet, the Trudeau Liberals have done little to reduce income inequality or address any of the structural issues identified in Plutocrats. Yes, there have been positive adjustments to tax policy which limited the accounting tricks high-income earners could use (although Trudeau’s own finances are somewhat murky). Yes, the Gini coefficient has declined by 1.5%. But the changes have been marginal. And the Liberals have apparently grown tired of the subject.

Since the 42nd Canadian Parliament went into session in December 2015, the owners of Canadian stocks and housing have done phenomenally well: the S&P/TSX Composite index has gone up by 50% and the CREA HPI has gone up by 62%. In contrast, Canada’s median after-tax household income has risen a paltry \$4,100 to \$86,700 (5% increase), amounting to a real income decline after adjusting for inflation.

If the Liberals are re-elected with a sizeable majority is anything likely to change? If the party’s platform is anything to go by, the answer is no. What are some ways to “tax extreme wealth inequality”?

  1. “Reviewing” government spending and tax expenditures to find ways the wealthy benefit from unfair tax breaks (i.e. commissioning a report and not acting on it)
  2. Taxing “multinational” companies and specifically “multinational tech giants” (i.e. charging HST on Netflix)
  3. Taxing foreign real estate speculators (i.e. enforcing the laws that already exist)

Apparently the best way to fight domestic income inequality is to tax foreigners.


Overall I found Plutocrats a fun book to read and Freeland does a good job outlining the economic and political theories establishing the rise of the super-rich. Canadian readers will enjoy learning about the drama between Mark Carney and Lloyd Blankfein over banking regulation. Freeland is proud to contrast Canada’s prudent oversight of the financial sector to London and New York’s regulatory race to the bottom. Yet Plutocrats gives little guidance as to how to reign in the super-rich and prevent state capture. According to the Toronto Star, “Trudeau read Freeland’s book, Plutocrats, and persuaded her that she could do more to end income unfairness inside politics than outside of it.” Plutocrats may have been an early warning sign that Trudeau & Freeland would have a strong sense that something needs to be done about income inequality, but very little sense of how to do it. When you mix good intentions with policy vapidity, you get a Liberal solution to extreme wealth inequality: “a new 10 per cent tax on luxury cars, boats, and personal aircraft over $100,000.” Visionary.

Written on April 18, 2021