Implications of Plutonomy

By—Girish Mishra

Almost two years ago, Ajay Kapur, a prominent global strategist of the Citigroup and his two associates, Niall Macleod and Narendra Singh, came out with a paper “Plutonomy: Buying Luxury, Explaining Global Imbalances.” If the formulations contained in this paper are correct, they will have far reaching implications, upsetting long-standing understanding of economists all over the world.

Ajay Kapur and his associates assert that world is getting divided into two blocs, namely, the Plutonomy and the rest. The term ‘Plutonomy’ is derived from, Plutus, the Greek god of wealth. America, Britain and Canada are the key Plutonomies, powered mainly by the wealthy. In Plutonomies, the rich dominate the economy as they account for most of the consumption expenditures, savings, current account deficits, etc. Obviously, in the Plutonomies, economic growth is powered by the wealthy. The rest of the population does not have much of a role in the economy.

Kapur and his associates claim: “Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Ages and Roaring Twenties in the U.S.” Common drivers of Plutonomy in each case have been “Disruptive technology-driven productivity gains, creative financial innovation, capitalist-friendly cooperative governments, an international dimension of immigrants and overseas conquests invigorating wealth creation, the rule of law, and patenting inventions.” These conditions benefit the rich and educated of the time because only they are in a position to exploit them. Income inequality has been a prominent feature of Plutonomy. In the present day world Plutonomies are given birth to and sustained by revolution in information and communications technology, financialization, globalization and friendly governments and their policies.

In a Plutonomy, consumers do not have their nationality. Thus there is no U.S. consumer or British consumer. Globalization has converted the entire world into a single integrated market. “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. Consensus analyses that not tease out the profound plutonomy on spending power, debt loads, savings rates (and hence current account deficits), oil price impacts etc., i.e., focus on the “average” consumer flawed from the start… Since consumption accounts for 65% of the world economy, and consumer staples and discretionary sectors for the MSCIAC World Index, understanding how the plutonomy impacts consumer is key for equity market participants.”

Kapur & Co. assert that Plutonomy is not going to go away but will get stronger and stronger, “its membership swelling from globalized enclaves in the emerging world, we think a “plutonomy basket” of stocks should continue to do well These toys for the wealthy have pricing power, and staying power.”

The share of the wealthy in the national income has been increasing. The top 1% of households in America, i.e., about one million households accounted for around 20% of overall U.S. income in 2000, slightly lower than the share of income of the bottom 60% of households put together. In other words, about one million households on the top and the bottom 60% households had almost equal share in the national pie. The top one per cent of households accounted for 40 per cent of financial net worth, more than the bottom 95 per cent of households put together.

Kapur & Co. assert: “We posit that the drivers of plutonomy in the U.S. (the UK and Canada) are likely to strengthen, entrenching and buttressing plutonomy where it exists. The six drivers of the current plutonomy: (1) an ongoing technology/biotechnology revolution, (2) capitalist friendly governments and tax regimes, (3) globalization that re-arranges global supply chains with mobile well-capitalized elites and immigrants, (4) greater financial complexity and innovation, (5) the rule of law, and (6) patent protection are well ensconced in the U.S., the UK and Canada. They are also gaining strength in the emerging world.” Further, “Eastern Europe is embracing many of these attributes, as are China, India, and Russia.”

When the top, say one per cent of households in a country see their share of income rise sharply, a Plutonomy emerges. This is witnessed often in times of frenetic technology/financial innovation driven wealth waves, accompanied by asset booms, equity and/or property. Feeling wealthier, the rich decide to consume a part of their capital gains right away. In other words, they save less from their income, the well-known wealth effect.

They claim that the rich have become the dominant drivers of demand in many economies. They have started dominating income, wealth and spending. According to a recent article by George Ip “Income Inequality Gap Widens” (The Wall Street Journal, October 12, 2007): the richest Americans have been cornering greater and greater share of the national income. The wealthiest one per cent of Americans earned 21.2 per cent of national income in 2005 while they earned 19 per cent in 2004 and 20.8 per cent in 2000. On the other hand the bottom 50 per cent earned 12.8 per cent of national income that was less than 13.4 per cent in 2004 and 13 per cent in 2000.

Since the wealthy appropriate most of the national income, the pattern of production is fashioned to meet their demand. It is estimated that America’s richest half-per cent consume, on an average, goods and services worth $650 billion a year. In a Plutonomy like America, “the wealthy account for a greater share of national wealth, spending, profits and economic growth … the top 20 per cent of income earners account for as much as 70 per cent of consumption in the United States. Like it or not… spending by the rich was propping up the economy, even as the middle and lower classes were struggling.” Further, “In this new plutonomy, with “rich” consumers and “everyone else,” companies that serve the rich are prospering. From department stores to hotels to automakers to homebuilders, businesses in every industry was adapting to an increasingly hour-glass-shaped economy, selling to the status-seeking rich, and the penny-pinching middle and lower middle classes.”

The Plutonomy thesis presented by Ajay Kapur & Co. implies that there will be no “realization crisis” nor will there be any need for the Keynesian prescription of an active role of the state in augmenting the volume of effective demand. In other words, no public works and welfare activities are to be undertaken wherever Plutonomy is in ascendancy. “New Deal” of Roosevelt has become irrelevant. The same is the fate of William H. Beveridge’s recommendations for creating a welfare state. Mahatma Gandhi, Nehru, and Indira Gandhi (with her slogan of ‘Garibi Hatao’) are to become irrelevant. Present day slogans like ‘Congress ka Hath Aam Adami ke Sath’ and ‘the inclusive growth’ are nothing but hollow ones.

Karl Marx was the first to point out that capitalism was bound to face “realization crisis”, i.e., capitalists might not realize the value inherent in commodities because they might find the total volume of demand falling short of the volume of supply. Thus capitalists would not be able to sell the entire volume of output. This could be due to anarchy of production and productivity increasing much faster than the wages.

Karl Marx’s claim was outright dismissed by the ruling orthodoxy because till 1929 it continued to stick to the dictum “supply creates its own demand,” based on the law of markets put forth by the French economist Jean-Baptiste Say (1767-1832) in a book published in France in 1803 (translated into English as “A Treatise on Political Economy, or the production, distribution and consumption of wealth,” and published from Philadelphia in 1855).

Say held that there could be no demand without supply. The power to purchase could get augmented only by more and more production. Hence there could be no problem of unsold commodities. If everything was normal and there was no interference by the government, trade unions and other quarters in the functioning of market, it would clear. In other words, economy would be self-regulating, provided all prices, including wages were flexible enough. A free market economy was always supposed to maintain full employment. Hence there would be no glut. This approach collapsed in 1929 when the Great Depression set in. This was the most severe and prolonged General Crisis in the history of capitalism.

Keynes tore this orthodoxy to pieces. Contrary to the assertion of Say’s followers there was mass involuntary unemployment because the realization crisis had forced the factories to down their shutters and lay off the workers. This deepened the crisis further. Keynes demonstrated that Say was wrong when he believed that there was only transaction demand for money. In fact, there were precautionary and speculative demands for money. Because of this people might not spend all their earnings on buying goods and services. The greater this leakage, the greater was the impending fear of the phenomenon of unsold commodities. He analyzed the factors behind these two motives.

Keynes suggested an active role for the state in order to augment and maintain the volume of demand to enable the market to clear and ward off the danger of realization crisis. From this arose the strategy of welfare state. In the course of time, state assumed the responsibility of creating employment opportunities and poverty reduction.

This thinking remained prominent, in spite of onslaughts by Mises, Hayek and the Chicago school, led by Milton Friedman, but the process of its burial began with the rise of Thatcher-Reagan line of thinking, the collapse of the Soviet Union and the Washington consensus-based globalization, thrust indiscriminately on the entire world. Now, it appears, the danger of realization crisis emanating from a general crisis of capitalism is almost forgotten. Extolling the virtues of consumerism and ‘shop till you fall dead’ appear to be the instrument for raising the volume of effective demand. There is, however, a catch, more so in developing countries, where the seeds of plutonomy will take a long time to germinate. The overwhelming mass of people lack employment opportunities and income to survive, but they have the power to unseat the government, notwithstanding all the propaganda about glowing future. Didn’t Keynes say, in the long run we all will be dead, so what is relevant is the present and immediate future?

Girish Mishra,