“They can't possibly spend it," quipped the marketing expert, "although God knows they're trying, and we thank the good Lord for that."1

Master Thesis Tobias Arbogast: The US Plutonomy and its Effect on the Capitalist-Labor Relation

Title: The US Plutonomy and its Effect on the Capitalist-Labor Relation Examination: Master Thesis for the MSc Political Science – Political Theory Student Name: Tobias Arbogast Student Number: 11252502 Research Project: Alternatives to Capitalism Teacher: Paul Raekstad Second reader: Michael Onyebuchi Eze Date: June 23rd 2017

Correspondence regarding this thesis should be sent to: [email protected]

1 Taken from Pizzigati, S. (2007). Selling to the plutonomy. Multinational Monitor, 28(2), 51-52. Contents 1. Introduction ...... 3 1.1. Why Study the Plutonomy? ...... 4 1.2. Brief Summary ...... 5 2. Key Definitions ...... 6 2.1. Plutonomy ...... 6 2.2. The ‘Rich’ ...... 6 2.3. Capitalists and the Profit-motive ...... 7 2.4. Labor ...... 8 3. Thesis ...... 8 3.1. Why the US? ...... 9 4. The US is a Plutonomy ...... 11 4.1. Kapur and Colleagues ...... 11 4.2. Plutonomy in the Literature ...... 12 4.3. Evidence on Wealth and Income Inequality in the US ...... 14 4.3.1. Income Inequality in the US ...... 14 4.3.2. Wealth Inequality in the US ...... 18 4.4. Income and Wealth Inequality vs. Plutonomy ...... 20 4.5. Evidence on Consumption Inequality in the US ...... 21 4.6. Objection: ‘They Can’t Possibly Consume This’ ...... 24 4.7. Summary ...... 26 5. The Effects of the US Plutonomy on the Relationship between Capitalists and Labor ...... 26 5.1. Demand Bifurcation ...... 27 5.2. Production Bifurcation ...... 31 5.2.1. Producer Hierarchy ...... 32 5.2.2. Luxury Production as Less Reliant on ‘Workers’ ...... 34 5.3. Plutonomy and Automation ...... 36 5.4. Objection: ‘Democratization of Luxury’? ...... 37 6. Conclusion ...... 38 7. Acknowledgements ...... 40 8. Bibliography ...... 41 9. Appendix ...... 47

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Abstract

This paper analyses the effect of increasing income and wealthy inequality in the US on the relationship between capital and labor. I propose the thesis that in the US, capitalists are decreasingly economically dependent on labor for their profit-making. In the first part, I examine the ‘plutonomy thesis’ that was put forward by a team of Citigroup analysts in 2005 to describe an economy where growth is largely powered by the wealthy. The plutonomy thesis will be linked to the economics literature on income and wealthy inequality as well as consumption inequality. In a second part, I investigate the consequences thereof for the relationship between capitalists and labor. I show that demand is increasingly divided up with the bulk of increase in demand coming from the consumption of luxury goods by the wealthy. I argue that production correspondingly shifts to cater to this group for profit-making. This in turn entails consequences for workers because luxury good production requires less typical workers than the production of generic goods. I conclude that in the US, capitalists are becoming less dependent on labor, in its capacity as consumer and as worker, for their profit-making.

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1. Introduction

“Americans have so far put up with inequality because they felt they could change their status. They didn't mind others being rich, as long as they had a path to move up as well. The American Dream is all about social mobility in a sense - the idea that anyone can make it”

The comment above by news anchor Fareed Zakaria (Zakaria, 2011) in the context of the famous slogan ‘We are the 99%’ by the Occupy Wall Street movement, illustrates the widespread acceptance, active or passive, of inequality in the US. The blatant inequality in the US seems at the same time incomprehensible as understandable in light of the country’s meritocratic ideals and culturally ingrained high tolerance towards social inequality1. The sheer extremeness of inequality along with recent advances in the research on (the history of) social inequality have led to renewed scholarly and public interest in the subject. Piketty’s unexpectedly popular book Capital in the Twenty-First Century provided a historically and empirically elaborate overview of the phenomenon. Not least the heightened publicity of the life- styles of the nouveau riches and the outrage provoked by hefty bonus payments to financial elites in the wake of the Great Recession have also contributed to a resurgence in the study of the upper end of the social stratum. Having the finger on the pulse, Forbes magazine updated the headlines made by Oxfam in 2014 by explaining that not 85 but 67 individuals own the same net worth as the poorest 3.5 billion people (Moreno, 2014). Of the tiny group of billionaires, 42% are from the US. This country is still the powerhouse of billionaires in the world although developing countries are quickly catching up. For example, even though the number of billionaires in the US shortly dropped after the financial crisis 2008 all-time-high of 470 billionaires, the number is back to the new ‘normal’ rate of increase with a total of 565 billionaires in 2017 (Forbes, 2012; see appendix). The Matthew effect of the rich getting richer (Merton, 1968) seems to be alive and kicking: “For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken even that which he hath” (Matthew 25:29, King James Version). Partly instigated by the substantial amount of public attention, the current global politico-economic system as such is undergoing what has been described as a legitimation crisis of capitalism, or at least of democratic capitalism. The ‘forced marriage arranged between the two’ increasingly seems to come undone (Streeck, 2014, p. 22) and raises doubts to the very future of capitalism. Of course, skepticism about the future well-being of capitalism was never shared by all parties. This became apparent when in 2005 a team of private equity analysts at financial services corporation Citigroup spoke about the phenomenon of social inequality in a more optimistic fashion. In a report titled

1 On this point, see (Marger, 2002, pp. 231-254)

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Plutonomy: buying luxury, explaining global imbalances that was not meant for the public but for investors, the authors talk about the topic in a very casual fashion (Kapur, Macleod, & Singh, 2005). Citigroup went to great length to suppress the report’s distribution on the web (Schmitt, 2011), although the original author later tried to rebut allegations that Citigroup wanted to avoid publicity of the reports (Kapur, Luk, & Samadhiya, 2009). In the report the authors put forward the new concept ‘plutonomy’ as a description of the economy of the Anglo-Saxon advanced capitalist countries. A mix of the two terms ‘plutocracy’ and ‘economy’, the concept aims to capture what the authors see as a new economic system. As they put it, “The World is dividing into two blocs - the Plutonomy and the rest. The U.S., UK, and Canada are the key Plutonomies - economies powered by the wealthy” (Kapur et al., 2005, p. 1). Essentially, the authors emphasize that the changed configuration of income and wealth distribution has lent the wealthy a highly disproportionate weight in the total investment and consumption decisions in the economy. The imbalance has become so pronounced, they argue, that there is no ‘average consumer’ anymore. Instead “[t]here are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take” (Kapur et al., 2005, p. 2). Kapur and colleagues were at pains to emphasize that they refrain from any moral judgment: “We should worry less about what the average consumer – say the 50th percentile – is going to do, when that consumer is (we think) less relevant to the aggregate data than how the wealthy feel and what they are doing. This is simply a case of mathematics, not morality.” (Kapur, Macleod, Singh, Hong, & Seybert, 2006, p. 11). They concluded that investors were best advised to adjust their equity strategy to this new consumer situation and invest in stocks of companies that cater to the wealthy few. In my thesis I put the plutonomy thesis to critical scrutiny and analyze whether the US fulfills the requirements of being a plutonomy. I then proceed to go beyond that question and ask what has implications this has for the relationship between capitalists and labor in the US. More precisely, I assert that since the US is indeed a plutonomy, capitalists will be decreasingly economically dependent on labor for their profit-making.

1.1. Why Study the Plutonomy?

Since the publication of the plutonomy reports, not only has the US witnessed the worst economic crisis since the Great Depression but also a sustained recession following the crisis. Reasons for studying the US plutonomy abound and originate both in politico-economic and academic motives. First and foremost, public demands for a change in the political economy span the whole country when Occupy Wall Street emerged. An examination of the super wealthy is imperative because extreme inequality oftentimes raises questions of legitimacy, fairness and equality with regards to the political and economic order. As has happened after the financial crisis 2008, legitimation crises can erupt when a system fails to deliver the necessary outcomes expected by those to whom it must be or seem legitimate (Fraser, 2015).

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However, there are also more academic reasons for investigating the US plutonomy. For one, there is surprisingly little research on the wealthy compared to the number of studies on the rest of the population. In most cases, conventional macroeconomic analysis indeed focuses on the average consumer, the average worker and so on. However, in an economic system in which the rich direct a very large part of GDP, it is not only instructive but imperative to study this tiny group of economic agents for an appropriate understanding of economic trends. As one prominent author in the field said: “Study the rich and powerful not the poor and powerless: the poor already know what is wrong with their lives” (George, 2015). A comprehensive analysis should look not only at the momentary picture of income and wealth distribution but also at the relationship between the economic behavior of the wealthy and the broader economy, or ‘the rest’. Focusing on the economically better-off is analytically separate from which social groups wield the political power. A closer look at the intersection of economic and political power, however, reveals that especially in the US the two are closely correlated such that on a system level, economic means can oftentimes buy votes (Confessore, Cohen, & Yourish, 2015). Thus, even from a solely political-institutional perspective should we be interested to enquire about plutonomy thesis. In a famous article, Joseph Sitglitz warned of the danger of political polarization should the inequality not stop. In 2011 he wrote: “The top 1 percent have the best houses, the best educations, the best doctors, and the best lifestyles, but there is one thing that money doesn’t seem to have bought: an understanding that their fate is bound up with how the other 99 percent live. Throughout history, this is something that the top 1 percent eventually do learn. Too late.” (Stiglitz, 2011).

1.2. Brief Summary

The main body of my thesis can be summarized as two distinct but related claims. Firstly, I attempt to prove that the US is indeed a plutonomy by adducing evidence on income and wealth inequality on the one hand and consumption inequality on the other. Secondly, and building up on this, I claim that capitalists are less economically dependent on labor in the US. This second claim will be underpinned by arguing that labor is decreasingly necessary for capitalists as consumer because demand in the US is more and more dominated by demand for luxury goods. And these goods are consumed largely by the wealthy. Labor is postulated to be also less relevant for capitalists in its capacity as worker because luxury goods production is less reliant on a mass of workers. Proving these claims will thus answer my question of what consequences a plutonomy has for the relationship between capitalists and labor. Namely, I argue that given that the US is indeed a plutonomy, capitalists will be decreasingly economically dependent on labor in their profit-making.

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2. Key Definitions

In this chapter I briefly define a number of key concepts used in my thesis. I start off with the plutonomy and proceed to clarify who ‘the rich’, that play such a central role in the plutonomy, actually are. Furthermore, in order to develop my second argument that a plutonomy leads to a decreased economic dependence of capitalists on labor for profit-making, I define what ‘capitalists’ and ‘labor’ stand for in this thesis.

2.1. Plutonomy

It is important to briefly define upfront what is to be understood as plutonomy for the following parts although I engage with the concept of plutonomy in more detail in chapter four. Broadly speaking, plutonomy has been defined by Kapur as a description of an economy “where economic growth is powered by and largely consumed by the wealthy few” (Kapur et al., 2005, p. 1; emphasis added). That is, inequality of wealth and income are so extreme that the mass of people simply do not have the money to fuel the growth in demand. Plutonomy is therefore more than mere inequality in income and wealth but describes how this translates into consumption and demand as well. It describes a situation where the share of the wealthy in national income has increased to such an extent that a good analysis of the economy cannot be based on an ‘average consumer’ anymore but has to focus on the wealthy as the key drivers of demand.

2.2. The ‘Rich’

To anticipate and clear up misunderstandings, the categorization of who ‘the rich’ are is of course not without problems. Nonetheless, there are both good reasons for why it is necessary and tools for how it is empirically possible to delineate a group of the ‘wealthy’. Although a group of, say, the top 1% in terms of income is by no means composed of homogenous individuals, the majority of them do share the common characteristic of very high income. Common taxonomies in this area of research use pre-tax incomes or wealth as classification and then look at deciles or percentiles. Alternatively, as many wealth reports do, one can focus on ‘financial wealth in investable form’ (i.e. ‘non-home’ wealth which can be readily converted into cash). For a given individual, financial wealth denotes the net worth or the total value of her monetary assets less debts and obligations (Di Muzio, 2015a, p. 25). This is a sensible definition given that, on average, wealthy individuals hold a very high share of their assets in financial form (Shorrocks, Davies, Lluberas, & Koutsoukis, 2016, p. 18). Now, obviously a rich person who holds

6 her wealth in real estate or gold will have a different relation to and effect on the economy than a rich person who holds her wealth in investable form. Not least consumption can usually be funded only through cash or liquid wealth (of course, except for credit-based consumption). When it comes to analyses of the interaction between the super rich and the broader economy, financial wealth in investable form therefore has some distinct advantages over classifications in terms of, for example, wealth without any qualifications as to what type of wealth. Nonetheless, classifications in relative terms such as the top 5%, 1% or even 0.1% are instructive because they provide insight into the distribution or concentration of income and wealth. Since the focus of my analysis is not to accurately describe these groups of wealthy individuals but rather to elucidate trends in the relationship between the wealthy and ‘the rest’, I will stick to classifications established in financial and economic research. Moreover, in most cases there is a high chance that those who earn high incomes are incidentally also among the top strata in terms of wealth as well as in terms of financial wealth in investable form. Note that when it comes to consumption, the rich use both their inflow of income and existing wealth to fund personal consumption. In the rest of this thesis, I will use the term ‘the wealthy’ or ‘the rich’ to describe the economically very well-off, be it in terms of high income, wealth or both.

2.3. Capitalists and the Profit-motive

Capitalists: In order to argue for the second claim of my thesis, that capitalists in the US are decreasingly economically dependent on labor for their profit-making, I define what I understand as ‘capitalist’ in this thesis. I take the term ‘capitalists’ to loosely stand for those individuals engaged or invested in commodity production who appropriate profits while at the same time being dominant owners of for-profit corporations. This excludes for example many managers who, albeit active in the business of profit-making, do not reap the benefits of it because they have no ownership in the firm. Even more narrowly, in this thesis I take ‘capitalists’ to describe mid-size or large corporations (i.e. ‘big capital’), both individual and institutional, whose overarching goal is profit-maximization. This definition therefore includes for example funds, even if public, that are run for-profit such as pension funds that have investments in different firms. Again, an individual worker who has his pension invested in the pension fund would not count because he weighs little in the overall fund, while the fund itself would count as capitalist. Of course on an individual level, there is substantial conceptual as well as empirical overlap between who constitutes ‘the rich’ and ‘capitalists’. Although not every rich person is a capitalist, every successful capitalist is by definition rich, except if they give away all their wealth and income. Therefore, most successful capitalists are also part of ‘the wealthy’ in their capacity as consumers. Mind that I do not aim to describe a capitalist class as such nor do I contend that ‘the rich’ should be regarded as such.

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The profit-motive: The focus of my definition of ‘capitalist’ can be seen as standing in the tradition of classical political economy. Marx, for one, described the capitalist as the head of the firm as follows: “[…] it is only in so far as the appropriation of ever more wealth in the abstract is the sole driving force behind his operations that he functions as a capitalist […]” (Marx, 1976, p. 254). I assume that capitalists’ relation to labor is such that they generally employ workers only if production is believed to generate a profit. For goods and services, this requires that there be a demand for the commodities they sell. The key function of demand in a capitalist economy, then, is to allow capitalists to realize profits (Toporowski, 2013, p. 36).

2.4. Labor

In this paper, I fully acknowledge that the term ‘labor’ is not without its problems since it is not as homogenous a group as in Marx’s times. Still, I use it to describe a relatively specific group of individuals in their capacity as workers and consumers. In this paper, labor refers to the general body of employees who earn their living through wage labor. Since I am interested in the majority of laborers, it more specifically refers to those who currently hold lower- and middle-income jobs both in the manual or service sector. I also include those individuals who are currently unemployed but are likely to join the work force – if at all – only by taking up low- or middle income jobs. I also use the term to refer to this group of people in their capacity as consumers who influence effective demand in a given economy. Thus, an individual who just lost her low-income job would still count as labor because she contributes to total consumption. I take the two functions of labor in the economy as the main ones in this paper although labor surely also has other functions for the total economy (e.g. tax payer, debtor etc.).

3. Thesis

My thesis will postulate that the US plutonomy leads to a decreased economic dependence of capitalists on labor for their profit making. The defense of this thesis will proceed in two steps: First, in chapter four I attempt to prove my claim that the US is indeed a plutonomy. That is, the first part of this paper will take up the original ‘plutonomy thesis’ put forward by Kapur and subject it to critical scrutiny. To this end, I review the studies that discussed the concept, dissect the concept analytically and link it to the empirical literature that discusses this phenomenon. Evidence on income and wealth inequality on the

8 one hand, and consumption inequality on the other will be adduced. I also address a possible objection to the possibility of the disproportionate consumption of the rich. In a second step in chapter five, I build a theoretical argument in connection with the plutonomy thesis. I claim that the US plutonomy leads to a decreased economic dependence of capitalists on labor. If consumption is increasingly driven by the wealthy, this leads demand in the US economy to divide into an upper and a lower market. Since increases in demand will come mainly from the wealthy, the production of commodities consequently shifts increasingly to catering to this more economically potent group of consumers. This in turn changes the landscape of producers, which becomes similarly divided with a focus on luxury goods. Increased production of luxury goods then has consequences for labor in its capacity as worker. Thus, I show why capitalists no longer depend on the mass of labor to make their profits given that production is geared to luxury goods and the production of these is less reliant on labor.

The specific contribution of my thesis is two-fold and dovetails with the division into an empirical and a theoretical part. On the hand, it reviews the scholarly literature on plutonomy and clarifies confusions about the concept by making analytical distinctions. Importantly, it connects the concept of plutonomy to the economic literature on consumption inequality. To my knowledge, this is the first work to link these two strands of literature. This is done in order to prepare the second theoretical contribution of this paper, which goes beyond the extant analyses of plutonomy and argues for an altered economic relationship between capitalists and labor in the US plutonomy. While with the first part I hope to add to the rather scant literature on the concept of plutonomy an overview that is comparative and a substantiation that is empirical in nature, the second part is intended to provide a theoretical elaboration on the relationship between capital and labor in the US. Although the thesis I put forward in the second part is backed by some evidence, I develop the argument largely theoretically. Owing to the research question I pose, my analysis necessarily blurs neat disciplinary lines and uses theory and research in economics, political economy and political theory. I want to emphasize that throughout this thesis I do not aim to establish mono-causal explanations or recognize clear-cut phenomena. My arguments pertain to trends in the US economy and do not exclude other trends. For example, I briefly discuss the impact of computerization on the economic relationship between capitalists and labor.

3.1. Why the US?

Extreme inequality characterizes many countries in the world but my geographical focus will be on the US. In light of the empirical evidence pointing to the Anglo-Saxon world as the main cases of stark inequality, the scope of this paper will not allow it to go beyond the prime example of inequality and

9 plutonomy: the US. On the one hand, I focus on the US because among Anglo-Saxon countries income inequality is most pronounced in the US (Figure 1) and because the US economy’s outlook has a big effects on other countries. On the other hand, this country choice is motivated by data availability reasons. Most studies and wealth reports focus on the US although in recent years emerging markets (especially in Asia) have attracted attention in the wealth management industry. Still, economies that are considered plutonomies by Kapur et al. (2005) are predominantly the Anglo-Saxon countries, where the top one percent’s historical share of income had a U-shaped trajectory in the 20th century (Figure 1).

Figure 1: Income Inequality measured by the top 1% income share of total income

Source: Graph generated with selected countries from World Wealth and Income Database (2017)

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4. The US is a Plutonomy

In this chapter, I defend the claim the US is indeed a plutonomy and is unlikely to cease being one in the near future. First, I introduce the plutonomy thesis as proposed by Kapur. I compare his perspective to the various definitions of plutonomy by scholars who took up the concept. Trying to shed light on why plutonomy is not simply income and wealth inequality, I clarify that its defining characteristic is the association between income and wealth inequality on the one hand and consumption inequality on the other. Having specified this, I review the empirical evidence on both aspects in the case of the US.

4.1. Kapur and Colleagues

As hinted at in the introduction, the plutonomy thesis was put forward as a new and analytically more appropriate way to conceptualize the modern US economy as well as other Anglo-Saxon countries. According to the authors, the thesis entails that analyzing the US economy is best accomplished by considering that it is being powered by the wealthy few2. The main goal of the report was to provide an analysis of current global economic trends capable of informing investors of how they should adapt their portfolios (Kapur et al., 2005). A second goal was to attack the risk premium on equities, grounded in skeptical voices’ predictions of a looming ‘end of the world is nigh’ (p. 25). The original report is based on the following main arguments (I quote at length to convey the frank language used by the team). Firstly, the authors argue that “[t]he world is dividing into two blocs – the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest” (p. 1). Second, they “[…] project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality […]” (p. 2). Thirdly, the contend that “[m]ost ‘Global Imbalances’ […] look less threatening when examined through the prism of plutonomy. The earth is not going to be shaken off its axis, and sucked into the cosmos by these ‘imbalances’. The earth is being held up by the muscular arms of its entrepreneur-plutocrats, like it, or not” (p. 2). Lastly and most importantly for my thesis, they argue that “[i]n a plutonomy there is no such animal as ‘the U.S. consumer’ or ‘the UK consumer’, or indeed the ‘Russian consumer’. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take” (p. 2). Briefly, Kapur and his team assert that the demand of the wealthy (‘plutonomists’ in their jargon) for luxury goods is relatively independent of high prices because

2 As pointed out in the introduction, all the reports were suppressed on the web by Citigroup. Especially the most recent report seemed to be lost without a trace and I could only get a copy by getting in touch with various researchers on the topic. I am happy to provide the original documents upon request.

11 they can afford such goods regardless of the high prices. The authors conclude their report by arguing that “[t]his is a good time to switch out of stocks that sell to the masses and back to the plutonomy basket” (p. 30). The authors asseverate to have identified a basket of 24 securities, ranging from luxury car maker Porsche to the private banking firm Julius Baer, which will outperform other stocks in the future. Hence, equity investors ought to target those companies whose earnings are mostly generated from wealthy individuals, that is, “[…] buy shares in the companies that make the toys that the Plutonomists enjoy” (p. 25), i.e. luxury products producing firms. More precisely, investors should pick stocks that benefit from the fact that the rich are getting richer. In my thesis I will pick up on this conclusion and show that in the US, one can indeed observe a shift in the share of consumption. The wealthy consume very much and this has as a consequence the segmenting of markets, on which I elaborate in chapter five. In later reports on the plutonomy thesis, Kapur and his team re-confirmed the conclusion from their first report that “[…] in the search for pricing power, we’d rather be in luxury goods, than low end consumer businesses” (Kapur, Macleod, & Singh, 2006, p. 4). They go on to argue that “[a]s the rich are accounting for an ever larger share of wealth and spending, it is their actions that are dictating economic demand, not the actions of the ‘average’ American (p. 6)”. Thus, the authors see in the plutonomy an explanation for why many seemingly dangerous problems to the economy (e.g. stagnating incomes of the middle-class) did not turn out to fundamentally threaten the health of the economy. I share the authors’ assertion that the US plutonomy leads to a shift in demand. In so doing, I also maintain their focus on luxury producing firms and argue that the increase in demand for luxury goods decreases the economic dependency of capitalists on labor in their profit-maximization.

4.2. Plutonomy in the Literature

Even though the Plutonomy reports were never widely discussed in mainstream media or popular literature3, the concept was quickly taken up in the academic community. Since in the academic literature the plutonomy thesis has sometimes been misrepresented as a normative concept or confused with income and wealth inequality as such, I review the main articles on plutonomy in this section. As pointed out in my definition of plutonomy earlier, although a necessary condition for it, income and wealth inequality are not sufficient to characterize an economy as plutonomy.

A good example to start with is Makdissi and Yazbeck’s definition of plutonomy, which is hard to distinguish from mere income and wealth inequality. They describe plutonomy as “a society where a

3 To my knowledge, the only two popular accounts on this topic are Chrystia Freeland’s Plutocrats: The rise of the new global super-rich and the fall of everyone else (Freeland, 2012) and Robert Frank’s Richistan (Frank, 2008).

12 large part of the wealth is controlled by an ever-shrinking minority. Thus, measuring plutonomy consists of focusing on the concentration of wealth or income in the hand of the few who are at the top of the distribution” (Makdissi & Yazbeck, 2015, p. 704). Seemingly politicizing the concept, for these authors plutonomy is a complaint of the masses about the stark inequality of income and wealth (p. 706). Other authors stick to the rather imprecise description of plutonomy as an economy that is characterized by a gap between the very top and the rest such that the economy is ‘powered by the wealthy’ (Murray & Peetz, 2014, p. 1). However, again, Murray and Peetz talk about income and wealth inequality at length in their chapter on plutonomy without making clear what is specific about plutonomies as opposed to income and wealth inequality as such. Taylor and Harrison even misrepresent Kapur’s plutonomy thesis by speaking almost exclusively about income and wealthy inequality (Taylor & Harrison, 2008, pp. 200- 204). The important point of the non-existence of an ‘average consumer’ is barely mentioned in between their discussion of the potential for revolutions and class warfare. However, even Kapur and colleagues themselves occasionally are inconsistent in their writing on what specifically makes an economy a plutonomy. Referring to the Anglo-Saxon world in their conclusion, they write that “[…] income inequality, [is what] we have called Plutonomy” (Kapur et al., 2005, p. 30).

Nonetheless, there are a number of authors that capture the special character of a plutonomy. More to the point, Hirschman (2011) points to the link between extreme income and wealth inequality and spending. He views the plutonomy as a two-tier economy in which economic activity is increasingly driven by the spending of the wealthy. He characterizes the plutonomy as a plutocracy, in which wealthy elites take up an ever larger share in consumer spending so that ultimately they have outsize purchasing power. Financial journalist Robert Frank also seems to have a better grip on the crucial point that distinguishes plutonomy from mere income and wealth inequality. In his Wall Street Journal article from 2010, he describes a plutonomy as an “[…] economy dependent on the spending and investing of the wealthy” Frank (2010). In their Handbook on Wealth and the Super-Rich, Hay and Beaverstock (2016) identify what they dub ‘economic control’ and ‘consumption power’ as key characteristics of the plutonomy. “Because, by definition, plutonomists dominate national income and savings pools, their decisions to spend or save overwhelm and override the actions of others” (Hay & Beaverstock, 2016, p. 81). Lastly, Di Muzio (2015b) in his book The 1% and the Rest of Us - A Political Economy of Dominant Ownership has provided the most extensive study of the plutonomy and captures the essence of the concept writing that “the multitude has such a low share of overall income in plutonomies that they cannot be key drivers of increasing consumption – particularly for most luxury goods” (p. 500). I suggest that it is this – key drivers of increasing consumption – which captures what Kapur alluded to with his phrase ‘powered by’ the wealthy few.

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Having reviewed the perspective of the original authors of plutonomy in section 4.1 as well as how it has been taken up in the academic literature in this section, it has become clear that the concept was laid out slightly analytically imprecise. There seems to be a gap in the literature as to what and how it precisely explains over and above income and wealth inequality. Furthermore, the connection of income and wealth inequality has almost never been backed up by empirical evidence in the literature. In the following I aim to ameliorate this situation. First, though, I update the data cited by Kapur and his team on income and wealth inequality, arguing that these are indeed empirically observable phenomena in the modern US. Moreover, new wealth accrues mainly to the top such that the situation is not bound too changed any time soon. Next, I elaborate on the other side of the plutonomy coin: consumption inequality. Both income and wealth inequality on the one hand and consumption inequality on the other are crucial to evaluate whether the US is indeed a plutonomy.

4.3. Evidence on Wealth and Income Inequality in the US

Since it is an important aspect of claim that in the US income and wealth have become highly concentrated at the top, this section will survey the most up-to-date evidence on income and wealth inequality in the US. This should serve to underpin the first part of the plutonomy thesis on income and wealth accruing to the top. Consumption inequality will be discussed in section 4.5. Not least, the data on the former two is more abundant and more easily accessible than on consumption inequality. The scope of this paper permits neither to discuss all the aspects of income and wealthy inequality nor the intricacies of measurement. I therefore rely on the most widely recognized studies in the field and what they highlight. The goal of this chapter is to buttress my claim that the US is a plutonomy with the empirical data pertinent to this claim.

4.3.1. Income Inequality in the US

The modern US economy is a prime example where income is a strong force in furthering the concentration of wealth at the top and hence keeping the plutonomy alive and kicking. Methods to investigate it are manifold and often stricken my data availability and measurement problems. The most widely tool to measure income inequality is the Gini coefficient (Gini, 1912), which is a measure of statistical dispersion ranging from 0 for complete equality of values to 1 for complete inequality (e.g. one person receives all income). Since re-distribution through taxes can affect the actual income levels

14 significantly, one distinguishes between pre-tax and after-tax coefficients. In 2014, it was estimated that the US had a Gini coefficient for income inequality, after taxes and transfers, of 0.394. This stands against an OECD average of 0.318. Values for the OECD range from Iceland’s 0.244 up to Chile’s 0.465, the United States ranking as the third most unequal among the OECD countries (Organisation of Economic Co-operation and Development, 2014).

The path-breaking research by Thomas Piketty’s book Capital in the Twenty-First Century is one of the most empirically rigorous sources for data on income inequality. His data on income inequality is based on national income. National income is distributed to different parties that can be grouped broadly under income to capital 4 such as profits, rents or dividends and income going to labor, namely wages (Piketty & Goldhammer, 2014, p. 45). In 1913, the United States first instituted a federal income tax, which makes it possible for Piketty to calculate incomes of various wage groups from the US income tax returns. Looking at various deciles or centiles, he compares the share of income going to each in order to shed light on the how extreme inequality is but also to quantify the number of individuals who claim a given portion of income (p. 253). Furthermore, it can be interesting to use the top decile or centile for historical analysis and compare the share of the rich over time. Starting with income inequality in the US, Piketty provides a vivid illustration of the historical trend toward a renewed increase in income inequality (Figure 2). It is clear that the highest income-earners have increased their share in the total income immensely since the 1970s. The drastic asymmetrical distribution even within the top decile strikes one at first glance. Most of the gains went to the top one percent, who increased their share immensely since the 1970s.

4 Piketty defines nunhuman capital as “ […]all forms of wealth that individuals (or groups of individuals) can own and that can be transferred or traded through the market on a permanent basis” (p. 46)

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Figure 2: Share of Various Income Groups in Total Income in the US

Source: From Piketty and Goldhammer (2014, p. 292)

Moreover, the gains of the top one percent were mostly due to their income from labor (Figure 3) Only once one enters the 0.1% of the income hierarchy, does income from capital replace income from labor as the primary source of income. Therefore, excluding their rewards from capital gains does not change the picture significantly because the top percent’s gains come largely from extremely high remunerations, what Piketty calls ‘the rise of supersalaries’ (p. 298) 5.

5 This should not be understood to downplay the significance of the contribution to income inequality from growing inequality of capital income. Since the 1980s, it still accounted for one-third of the rise in income inequality in the US. Compared to the 1920s when most of the top 1% of income-earners made their fortunes through incomes from capital as opposed to income from labor, the situation today is different.

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Figure 3: The Share of the Top 1% in Total income in the US

Source: From Piketty and Goldhammer (2014, p. 299)

Income inequality is thus largely driven by a concentration at the very top of the income distribution. These individuals are oftentimes managers with supersized salaries. Importantly, Piketty adds that the rise in income inequality was not accompanied by greater wage mobility over the course of a person’s career. Moreover, in many countries the stark income and wealth inequality seems unlikely to change and even exacerbate. For the US, Piketty argues that it appears to be a trend that has seen only a temporary damper during the Great Recession but besides this going on uninterruptedly. This trend was captured in his analysis of the enormous impact the diverging ratio between investment return (r) and economic growth (g) as summarized by the formula r > g (Piketty & Goldhammer, 2014, p. 25). In essence, if the rate of return on capital exceeds the rate of growth of output and income over a long time, this will lead to divergence in the distribution of wealth. Notably, for Piketty the locus of the problem lies in a regime of slow growth. If no political or other forces intervene, this will cause inequality to increase over time.

Other authors point to different problems as the strongest explanatory factors in the new rise in income inequality. First and foremost among these is the dissociation of the typical worker’s real wage

17 from labor productivity in general. Economic growth in terms of productivity was not accompanied by a rise in wages as in previous times. This productivity-pay gap has been observed widely and goes a long way toward explaining the disparities between the top 1% and the rest. It can be measured for example by comparing the growth of economic output with the growth in hourly wages (Figure 4). The trend of labor’s declining share in productivity can for example be measured by the declining ratio of median to average wages, which is likely to be explained by a disproportionate wage growth at the top (Schwellnus, Kappeler, & Pionnier, 2017, p. 19).

Figure 4: Productivity-Wage Gap in the US Since 1950

Source: Economic Policy Institute (2016)

4.3.2. Wealth Inequality in the US

A similarly insightful indicator of economic inequality is wealth inequality. Generally speaking the distribution of wealth is more unequal than the distribution of income (Brandmeir, Grimm, Heise, & Holzhausen, 2011, p. 49). To measure wealth inequality, the OECD uses the ratio between mean and median net wealth. Across the 18 OECD countries that are surveyed in the OECD Wealth Distribution Database mean net wealth is, on average, 2.5 times the median net wealth. In the United States this figure stands at 7 (Murtin & d’Ercole, 2015, p. 4). Again, Piketty surveys historical data to show that the top 1%

18 in the US has seen a rise in its share in total wealth in the Neoliberal era, standing now at more than 30% of total wealth (Figure 5).

Figure 5: Wealth Inequality in the US

Source: Piketty and Goldhammer (2014, p. 348)

Saez and Zucman (2016) also provide instructive illustrations of the historical trend toward increasing wealth inequality, a level almost as high as in 1929. They show that wealth concentration has become concentrated to such an extent that the top 0.1% have seen an increase in their share of the wealth from 7% in 1978 to 22% in 2012. It is not surprising then, that the wealth accumulation of this tiny group accounts for nearly half of total wealth accumulation in the US between 1986 and 2012 (p. 521). Similar trends can be gleaned from the Survey of Consumer Finance, part of the Federal Reserve Bank, cited in Domhoff (2014). He explains that in 2010 the top 5% owned a staggering 72% of all financial wealth, and even more astoundingly the tiny group of the top 1% owned 42 % of all financial wealth (p. 64). Another source for data are the Wealth Reports issued by wealth management firm Capgemini. These reports commonly look at ‘High-Net-Worth-Individuals’ (HNWI), defined as individuals with more than US$ 1million in investable or financial assets at their disposal. Typically, primary residence, consumables, collectibles and consumer durables are excluded (Capgemini, 2016, p. 3). In 2015, there were 15.4 million HNWIs in the world of which the largest part is located in North America: 4.8 million HNIWs.

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To give an idea of how wealthy this numerically tiny group already is and might become, Capgemini estimates that “[u]nder the most aggressive growth scenario, global HNWI wealth is projected to surpass US$100 trillion by 2025, nearly triple the 2006 amount” (Capgemini, 2016, p. 5). The North American HNWIs owned $16.6 trillion of financial wealth (Capgemini, 2016, p. 78). Most reports make a further distinction by introducing Ultra-HNWIs. These are individuals with investable assets worth more than $30 million. Echoing Piketty on the significant concentration of wealth even within the top 1%, globally speaking Ultra-HNWIs make up only 1.0% of all HNWIs, but account for roughly 35% of HNWI wealth (Capgemini, 2016, p. 10). In a nutshell, the inequality in the distribution of wealth in the US is highly concentrated to say the least. Considering the historical trend as well as Piketty’s explanation for why this has been the case, it seems probable the situation is going to exacerbate in the near future.

4.4. Income and Wealth Inequality vs. Plutonomy

As emphasized throughout, observing these two phenomena is only one side of the equation of plutonomy. The concentration in income and wealth need not necessarily translate into inequality in consumption although one might expect this without any ameliorating influences. This second and crucial part of the concept – consumption inequality - was barely substantiated empirically by the original Citigroup authors or by any of the academic scholars reviewed on the topic. I argue that it is the conjunction of income and wealth inequality on the one hand and consumption inequality on the other that distinguishes the concept plutonomy from mere income and wealth inequality. More specifically, as pointed out in section 2.1, growth in consumption stems mainly from the wealthy in a plutonomy. If income and wealth inequality is so drastic that, say, the lower 90% in terms of income and wealth barely have money to spend on increasing their consumption, economic growth is more likely to be fuelled by the wealthy. This situation then lends very disproportionate weight to a numerically tiny number of individuals. Total household consumption is therefore disproportionately affected by their consumption preferences and behaviors. By contrast, the share of the majority of the population in total consumption is small in comparison to their actual number. By analogy, in marketing it is common to speak of a 80-20 rule (i.e. 20 % of costumers account for 80% of revenue). This contrasts for example with a society, which albeit characterized by high income and wealth inequality, is still relatively equal in terms of consumption (e.g. through a progressive tax system or the broad provision of credit). In such a society, demand for consumption goods would still be powered by the mass of people and firms would cater to a broader consumer market for their profit-making. In the plutonomy, however, the highly disproportionate share of the wealthy in consumption means that their consumption is relatively speaking far more

20 important for total demand. One might say that plutonomy means continued economic growth, through continuing growth in consumption, despite relatively lower consumption of the mass of consumers. Plutonomy thus means some degree of independence in economic growth from consumption equality because the increase in the luxury consumption of wealthy few makes up for the stagnant consumption of the masses. Of course wealthy individuals can consume only a given quantity of basic goods. Their consumption and the increase thereof refer predominantly to the consumption of luxury goods, consumption of which seemingly can always go up (see section 4.5 for an objection).

The preceding discussion of growing income and wealth inequality serves to substantiate the first part of the plutonomy thesis, namely the claim that in the US income and wealth have become highly concentrated at the top. This seems to be a logical precondition for the assertion that a tiny group of wealthy individuals has a disproportionate effect on the rest of the economy. If income and wealth were distributed relatively evenly, the chances that one group in the economy has a high impact through its economic behavior would be small. Given that the opposite is the case in the US, it is a valid assertion that economic growth will be largely powered by the wealthy few.

4.5. Evidence on Consumption Inequality in the US

To begin with, note that in the US it was estimated that in 2016 consumer markets, measured by personal consumption expenditures, accounted for 68% of GDP (US Bureau of Economic Analysis, 2017). Thus, without a doubt personal consumption is a major component in the US economy. It is essential for my thesis to subject Kapur’s inference with regards to inequality in consumption resulting from inequality in income and wealth to critical scrutiny. This proved more difficult than one would expect given the conviction of the Citigroup analysts that the rich also account for the majority in the rise of consumption. Searching for evidence for this inference that inequality in income and wealth leads the wealthy to take on an increasing share in overall consumption, it became clear that in the economic literature this is operationalized as ‘consumption inequality’. This section reviews empirical evidence on how the share in total consumption is divided up between economic groups. Whereas Kapur and colleagues provide no evidence on the differential share in consumption of various income-brackets in their first report, they provide the following data in their third report on plutonomy (Kapur, Macleod, Singh, et al., 2006). Note that The Survey of Consumer Finances, on which it is based, excludes the exceptionally rich.

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Figure 6: Share in Household Consumption of Various Income Groups

Source: Kapur, Macleod, Singh, et al. (2006, p. 11)

The table above also cites the saving rate of the various income brackets in the US. Over the years, the savings rate of plutonomists declined relatively speaking because their net worth (i.e. wealth) increased absolutely speaking. In other words, their net worth as a fraction of their income has increased by 50% over the last 15 years, and hence saving from their income makes little difference to their overall net worth. Kapur, Macleod, Singh, et al. (2006) provide the following example: “[f]or someone whose net worth is 8x their income, a negative savings rate of 5% (assuming a 40% tax rate), would be equivalent to running down 0.4% of their net worth. This is a fraction of the 12.7% annual average increase in the S&P500 price index since 1982 (we have ignored dividends as these are included in income for the purposes of the savings rate calculation) “ (p. 12). Since the ratio of their net worth to income has risen substantially, plutonomists can worry less about saving from income. Put in simple terms, with the plutonomy alive and kicking, the wealthy see their wealth growing steadily and hence can tap more and more their wealth for their consumption without losing out absolutely speaking. Frank (2010) notes that “Their [the wealthy] savings rate has gone from more than 26% in 2008 to a negative 7% in the first quarter of 2010, according to the Moody’s Analytics data”. In the wake of the financial crisis, the saving rates of plutonomists doubled but relaxed over the next years as the wealthy got over the shock of the financial crisis. In fact, they saw their wealth expand through asset inflation caused by quantitative easing measures in the US (Kapur, Samadhiya, & De Silva, 2014, p. 1). “As the rich have been getting richer over the last 20 years or so – both in terms of their share of income and wealth – so too businesses that have been servicing the rich or selling to them have enjoyed a favorable operating backdrop” (p. 13). Similar trends are noted by Robert Frank, author of the Wall Street Journal’s blog The Wealth Report, who also interviewed Kapur in 2011. He cites Moody’s research that top five percent of income-earners in the US account for 37% of all consumer outlays whereas the lower 80% in terms of income barely account for 40% of consumer outlays. Putting these numbers in historical perspective, he goes on to highlight that “[i]n the third quarter of 1990, the top 5% accounted for 25% of consumer

22 outlays. That held relatively steady until the mid-1990s, when it started inching up past 30%. It dipped in 2003 and again in 2008, but started surging in 2009 […]” (Frank, 2010).

While the data referred to by Kapur gives an idea of the phenomenon, systematic empirical evidence in support of his inference seems to lack. Although it would probably be the best source for data to support his claim of a disproportionate share in consumption of the wealthy, Kapur never refer to the economics literature on consumption inequality. Therefore, in this paragraph I review some of the most authoritative studies in this field of study and how they relate consumption inequality back to income inequality. The empirical examination of consumption inequality is an intricate undertaking because available data are often times inflicted by measurement errors. The most widely used source of micro- level data on consumption, and at the same time a good example for measurement difficulties, is Consumer Expenditure Survey (CEX). Looking at both the income and consumption of one and the same sample of individuals, Fisher, Johnson, and Smeeding (2013) present evidence from the CEX that income and consumption inequality rose at nearly the same rate in the period between 1985 and 2006. Attanasio and Pistaferri (2014) largely corroborate these findings in their overview of consumption inequality over the last 50 years but note that in the two years after the Great Recession the rate of increase in consumption inequality slowed slightly all the while income inequality continued to rise (p. 125 Panel C). Similarly refining the CEX data, Aguiar and Bils (2015) looked at how rich in contrast to poorer households allocate their income across consumption goods. Specifically, they compared the relative expenditures of high- and low-income households on basic necessities in comparison to luxury goods and corroborate the finding that income inequality has been mirrored by consumption inequality. Although there has been a debate on the size of the correlation between income and consumption inequality with earlier studies pointing to a moderate relation (Heathcote, Perri, & Violante, 2010; Krueger & Perri, 2006), more recent evidence suggests that the two types of inequality have increased at a similar rate. One study employed a variety of techniques to overcome measurement error problems with the CEX and clearly showed that income inequality from 1980 to 2010 was indeed closely associated with consumption inequality over that same period (Attanasio, Hurst, & Pistaferri, 2015). Another authoritative study on the subject was conducted by Cynamon and Fazzari (2015) who show the top 5% income households account for 30% of consumer spending. This constitutes nearly a 50% increase of this group’s share over the last two decades. Although the share of personal consumption expenditures in total GDP generally rose, this trend is, again, largely due to the top 5% increasing their share of total consumer spending. Similarly, the authors argued that the spending rebound after the Great Recession was largely driven by the consumption at the top, a phenomenon noted also by chief analyst at Moody’s Mark Zandi in a written testimony before the Joint Economic Committee. In it, he affirmed that “wealthier U.S.

23 household[‘s…] spending counts for a lot; households in the top 20% of the income distribution are responsible for almost 60% of consumer purchasing“ (Zandi, 2012, p. 3). Timiraos and Hudson (2015), repeating Cynamon and Fazzari’s results, explain that “since 2009, average per household spending among the top 5% of U.S. income earners—adjusting for inflation—climbed 12% through 2012, the most recent data available. Over the same period, spending by all others fell 1% per household”. As a matter of fact, such estimates are even likely to underestimate the real consumption inequality because, as Sabelhaus et al. (2013) notes, the CEX is likely to be inflicted by reporting and non-response bias among high-income consumers. Adducing empirical evidence on consumption inequality, this section showed that inequality in income and wealth also translates into inequality of consumption, or a disproportionate share in consumption of the wealthy. Moreover, as with income and wealth inequality, consumption inequality does not seem to become less but even more pronounced over time. Thus, the modern US economy can be accurately described as a plutonomy because it exhibits both economic trends: income and wealth inequality coupled with consumption inequality.

4.6. Objection: ‘They Can’t Possibly Consume This’

While it goes beyond the scope of this paper to go into what precisely and why the wealthy consume, I want to address a common objection to the claim that the rich can make up for the lack in consumption. A prominent example of this objection was given by the now-famous billionaire Nick Hanauer who became an advocate of progressive taxes and outspoken critic of the rising levels of inequality. Simply put, he argues that a rich person cannot consume much more than an average consumer. After all, you can only wear one pair of pants at a time even if your wardrobe is full of fancy designer pants. It is relatively easy to refute this objection by showing that – as is widely recognized now – the ‘more’ that rich people consume is not to be found in the consumption of basic goods but instead in luxury goods. And luxury goods consumption is mainly explained by quality- and status-sensitivity of those consumers. They might not be able to wear more than one pair of pants at a time but can demand ever more expensive pants and hence increase their consumption qualitatively. In technical terms, luxury goods have a low ratio of functional utility to price but a high ratio of intangible or situational utility to price (Nueno & Quelch, 1998, p. 62). In this regard, conventional microeconomic theory regards luxury goods as anomalies to the theory of general demand. Luxury goods came to be viewed as ‘Veblen goods’ (Veblen, 1899). These are goods that people consume more of the more expensive they get. The effect has been explained by Veblen’s conspicuous consumption theory (Heffetz, 2011). Now, notwithstanding that

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Nick Hanauer somewhat missed the point of how consumption can increase, one might want to slightly modify Nick Hanaur’s objection to make it more powerful. While Hanauer was too quick to jump to a conclusion by making the quantitative limit of basic goods consumption the relevant criteria for why disproportionate consumption by the rich has its limits, there is a point to be made by referring to conspicuous consumption. Even if a rich person can wear ever more expensive clothes or constantly upgrade its luxury travel experiences in order to signal status, this will still be possible for only one ‘act of consumption’ at a time. If rich people demand ever-higher quality to signal ever-more status, they will still be limited in their conspicuous consumption by natural limits. You might buy two gigantic yachts to invite your friends over but you can still be only on one. Nevertheless, even this objection can be refuted in favor of the plutonomy thesis. As shown by Di Muzio (2015a), conspicuous consumption is not about signaling status per se but about signaling it to one’s relevant peer group, ‘differential intra-class competition’ as he puts it (p. 151-161). The rich consumer might be bound quantitatively in its consumption of both basic and luxury goods. However, since the status-signaling is a never-ending race given that standards of comparison adapt to one’s current peer group, a billionaire might want to upgrade his recently bought yacht if his friend just acquired an even more luxurious one. In Di Muzio’s words, the world of the wealthy is not about keeping up with the Joneses about keeping up with the Slims and Gateses of this world (p. 156). Besides, the objection can also be refuted on the grounds that for conspicuous consumption one need not currently consume the product but simply be able to show off. Other reasons for purchasing luxury products even though one might barely be able to consume them are, as one analyst at the Citigroup Symposium put it, “[…] 2) I want to explore, 3) I work hard, and deserve this and 4) I want others to ask me about this, my area of expertise (e.g. become a wine expert)” (Kapur, Macleod, Singh, et al., 2006, p. 15). One might also criticize the emphasis on US consumption inequality given that the living standard of a majority of Americans has still increased over the last decades. As problematized by Sacerdote (2017, p. 5), “Questions on the level of consumption are difficult because this requires some comparison of prices, quality, and good availability over time. The iPhone of today has more computing power than a 1990s mainframe computer. But is a poor person with an iPhone richer than a person who owned a mainframe 25 years ago?” This is certainly a fair critique to consumption inequality as such albeit beyond the point of what the effect of an unequal distribution in consumption in relative terms is on the prospects for economic growth.

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4.7. Summary

In section 4.3 I showed that both wealth and income inequality are empirical facts in the modern US. Building on this realization, the subsequent section reviewed the evidence on consumption and concludes that it, too, seems to be an empirical reality. In fact, recent evidence suggests that income inequality and consumption inequality are actually closely correlated. Moreover, at present neither of the two phenomena appears likely to reverse substantially anytime soon. Ergo, given how plutonomy was defined at the outset, namely as an economy where growth is powered and consumed mainly by the wealthy, the plutonomy thesis can be confirmed for the US case. The new US economy is driven by polarized consumer spending with the high-income group demanding increasingly luxury goods. The plutonomy thesis proposed by Citigroup analyst Kapur can thus be confirmed empirically for the US case. In what follows, I will argue that the economy in turn adapts to this in terms of demand as well as in terms of the production necessary to satisfy this demand. Specifically, I discuss the effect of plutonomy demand and production bifurcation along with a theoretical discussion of the consequences thereof for the capitalist-labor relation.

5. The Effects of the US Plutonomy on the Relationship between Capitalists and Labor

In this chapter, I start off from the previously defended assertion that the US currently fulfills all the requirements for being considered a plutonomy. Moreover, I showed that the evidence appears to indicate that this situation seems at the very least likely to stay, more likely though to exacerbate. Here, I ask what the consequences of this situation are for the economic relationship between capitalists and labor. I argue that the plutonomy leads to a decreased economic dependence of capitalists on labor for profit-making. To elaborate this argument, I describe two effects through which I posit this effect to be mediated: demand bifurcation and production bifurcation. More precisely, I first contend that since in the US plutonomy, consumption, and the growth thereof, is largely powered by the wealthy, demand becomes increasingly divided into an upper market segment servicing the rich and a lower market segment for the rest. Growth in profits will come from the former, which is why firms increasingly cater to the demand of the wealthy. Secondly, the shift in the sources of demand is mirrored in a shift in production. Companies focusing on the demand of the wealthy will adapt their workforce to this production by laying off workers not suited or necessary for this production. Put

26 differently, market segmentation in demand leads to market segmentation in production. Demand bifurcation, in turn, makes labor less important as consumer, whereas production bifurcation corresponds to the decreased relevance of labor as workers. From this, I conclude that in the US plutonomy capitalists are becoming less economically dependent on labor for their profit-making.

I briefly want to address two crucial points here. Consumption inequality does not entail that no more profits can be made by selling to low- and middle income consumers. Instead, it means that continued profit-maximization through an increase in demand on the side of consumers is unlikely to come from those individuals, given their wage constraints. Prospects for increasing profits through supplying products for an increasing demand thus focus mainly on the wealthy and hence on the production of luxury goods. After all, Wal-Mart still makes profit but the majority of this profit is unlikely to stem from increased spending by the lower- and middle income consumers. What lower- market producers and retailers instead frequently engage in is a race to the bottom in their production costs instead of raising prices to make more profit or undersell competitors (Foster & McChesney, 2012, pp. 126-127). Secondly, the concept of plutonomy does not include a description of the effect of income, wealth and consumption inequality on production. At most, Kapur’s advice for investors to invest in luxury stocks can be taken to imply that he expects the profits of those firms to grow. My argument, therefore, builds on the plutonomy thesis but goes beyond it. Whereas research on the link between rising income inequality and changes in the labor market has flourished in recent years, the effects of consumption inequality on labor markets has received scant attention. Therefore, my argument is constructed theoretically and building on the little data that is available. Given how important this link potentially is and how significant the impact of consumption on the labor market can be, it is imperative that this gap in the available research be filled. My thesis aspires to give a first impulse for this.

5.1. Demand Bifurcation

In section 4.5, I elaborated on the second crucial characteristic of a plutonomy, which is the assertion that in the US the wealthy indeed account for a disproportionately big share of consumption. It became clear that the wealthy dominate the current consumption distribution as well as the growth in consumption. Taking stock of how consumption is divided up between income-groups is one thing, identifying where growth in demand is likely to come from another. This section will assert that in the US, labor is decreasingly relevant for capitalists in its capacity as consumer to fuel growth of consumption. I proceed by showing how demand has become divided up and the bulk of growth in demand stems from the demand of wealthy consumers for the upper market segment, i.e. luxury goods. If

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I am successful in proving my claim that demand shifts toward the consumption of luxury goods, and that it is the wealthy who consume these, this supports my argument of a decreased dependence of capitalists on labor in the US plutonomy. Given that I defined labor as those individuals who hold lower- and middle-income jobs, the stagnant real wages of these individuals (see section 4.3.1) are usually not sufficient to substantially boost an increase in demand. Quite in contrast, the wealthy see their incomes and wealth rise steadily. The majority of labor thus cannot fuel an increase in demand, while the wealthy are in a financial position to do so. The economy shifts in response to the low incomes of the masses from mass consumption toward an economy geared toward the wealthy. Wilmers (forthcoming) calls this process of demand becoming divided up the ‘bifurcation of demand’. It describes the phenomenon that the market is increasingly segmented into high quality- and status products on one side and generic goods on the other. Naturally, it is overwhelmingly high-income earners who consume the majority of the former while the rest of workers content themselves with consuming generic goods. Whereas a market that produces mainly for mass consumption is by the same token a market for labor as consumers, a segmented market where demand has become bifurcated does not allow the majority of labor to significantly participate in the consumption of upper-market goods. If consumer spending power shifts to being concentrated among high-income consumers, demand - and by extension the price of - high-quality goods goes up. For lower-quality goods, the opposite is true (Wilmers, forthcoming, p. 11). The shift to a heightened demand of luxury goods in the economy was aptly captured by Matthews (2014). Commenting on the state of consumer spending in the US, he affirms that many generic retailers will probably see a drop in their sales because most consumers simply do not have the incomes to consume more and are wary of debt-financed consumption after the financial crisis. He remarks that “[u]nless your business caters to the richest of the rich, opportunities for real growth are scarce” (Matthews, 2014). Others voice add to this that both companies servicing the luxury and the bottom market segment are winning while the middle is losing (Messina, 2016). In order to survive, companies adapt to a faltering middle-tier while low- and high-end market are booming (Winston, 2015). This situation stands in contrast to other periods such as the last century when a strong middle-class was an important part in keeping up demand for personal consumption goods.

As alluded to in section 4.5, high-income consumers are more willing to pay higher prices for Veblen and high-quality goods because they can signal status through consuming such products (Heffetz, 2011; Veblen, 1899). The increase in demand by the wealthy is thus not driven by a desire to accumulate various basic goods but by the demand for special items, that is, luxury goods (Yeoman, 2011, p. 48). The wealthy clearly consume luxury goods of ever increasing prestige, prices and quality for reasons other than basic need satisfaction. The bifurcation of demand, then, can be explained by evaluating the two

28 segmented consumer markets according to the demand for their products and the relative growth rate of these markets. Here, I show that demand for luxury goods is growing while demand for generic goods remains weak6. A good starting point for examining changes in demand in the consumer markets in the US is retail since it is major part of (the change in) total demand in the US economy. In 2015, for example, Timiraos and Hudson (2015) contrasted the poor performance of mid-tier retailers with luxury retailers. The growth in demand for luxury goods on the one hand is for example reflected in the numbers of multinational luxury goods company LVMH: record revenues of $37.6 billion in 2016 (LVMH, 2017). The case of retail in the US bears testimony to the market segmentation in demand and where growth in demand lies. While mid-tier retailers experience little growth, thanks to their specialization on rich consumers luxury retailers continue growing and performing well. As early as 1998, Nueno and Quelch (1998, p. 61) note a bifurcation in the retail sector between luxury and discount retailers. Even more significant than retail for consumer demand in the US, however, is the housing market. For most US Americans this constitutes the biggest purchase they make in their lifetime. In this sector, entry-level buyers have become less profitable for construction firms. These firms increasingly concentrate on servicing wealthy households for their profit-making. After the market hit a low in 2011, the “[…] sales of new homes priced above $600,000 have tripled, while sales below $400,000 are down 16% […]. Builders boost profits selling more expensive homes. But less construction overall means fewer new jobs and reduced total spending” (Timiraos & Hudson, 2015). Glenn Kelman, chief executive of Redfin, a real-estate brokerage in Seattle formulated the differential demand in terms of a two-tier economy: “There is a high-end market that is absolutely booming. And then there’s everyone in the middle class. They don’t have much hope of wage growth” (Timiraos & Hudson, 2015). The trend that demand has become bifurcated was also noted by former chairman of BMW AG Helmut Panke who characterized the U.S. market akin to an hourglass: high demand for luxury brands but little in between (Timiraos & Hudson, 2015). In their World Wealth Report 2016, Capgemini notes that defying the temporal slump in High- Net-Worth-Individuals’ portfolios during the Great Recession, investments of passion 7 have recovered as a core pillar of their portfolios (Capgemini, 2016). More than that, they note that such investments are not only for enjoyment purposes but also because investments of passion can help to hedge against market fluctuations (p. 26). Luxury good’s function of being a store of value next to their enjoyable character is commonly recognized by the wealthy as Hoffmann and Coste-Manière (2012, pp. 56-57) emphasize.

6 Note that although I speak of luxury ‘goods’ most of the time, luxury consumption also includes services and ‘experiences’ such as luxury travel 7 In wealth reports, investments in luxury goods are dubbed ‘investments of passion’ and include investments jewelry, gems, watches, art, luxury cars, yachts, wine, coins, and sports teams (Capgemini and RBC Wealth Management, 2015, p. 19).

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They also point out that throughout the Great Recession demand for very luxurious goods (e.g. mega- yachts, big-cabin private jets) not only remained steady but actually rose in many cases.

The increase in demand for luxury goods dovetails with the performance of luxury firms more generally. Deloitte points to the generally relatively good performance of luxury firms in comparison to regular consumer product companies. This again supports the assertion that demand becomes bifurcated and the markets by extension segmented. In their Global Powers of Luxury Goods 2014 report they write that “[d]espite this troubled economic backdrop, luxury goods companies fared better in the aggregate than consumer products companies and economies generally. Composite, currency-adjusted luxury goods sales growth for the world’s 75 largest luxury goods companies was 12.6 percent in 2012, compared with 5.1 percent growth achieved in 2012 by the world’s top 250 consumers products companies” (Deloitte, 2014, p. 12). Indeed, globally speaking the shares of luxury firms outperformed the S&P 500 quite remarkably until very recently (Figure 7). The recent reversal of the trend is likely due to global instabilities such as Brexit, the US presidential election and terrorism, all of which have lowered consumer confidence in general and has likely less to do with a reversal of the plutonomy demand bifurcation. As shown above, it is by now relatively undisputed that in recent years the increases in consumption generally have been rather small except for luxury goods. The demand for the latter, quite on the contrary, has been stoked up in recent years. It is similarly clear that while most consumers in the US oftentimes struggled to make ends meet, it was the group of the wealthy who accounted for this increase in demand of luxury goods. Therefore, it is reasonable to say that the increase in consumption is fostered mainly by the increased demand for luxury goods of the wealthy.

Figure 7: S&P Global Luxury Index Compared to the S&P500

Source: Standard & Poor's Financial Services LLC (2017)

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In this section I have argued how in the US plutonomy the interplay between income and wealth inequality and consumption inequality leads to a bifurcation in demand, polarizing demand between luxury goods and basic goods for the masses. I have made clear that it is the (wealthy) consumers at the upper end of the market who have the purchasing power to fuel growth. Next, I have shown to what extent this trend is already observable in the US, by focusing on the already visible market segmentation and the discernible growth trends in the near future. Labor therefore partly loses its significance as consumers because workers do not have the money to fuel growth in consumption on the one hand. From this perspective, therefore, it seems reasonable to conclude that capitalists are less dependent for their profit-making on labor as consumers. The rich are making up for this by boosting the demand for luxury goods. The next section will look at the effects the bifurcation of demand has on production.

5.2. Production Bifurcation

As shown above, the consumption inequality in the US plutonomy entails a bifurcation in demand. Increasing demand for consumption goods comes mostly from upper-market products, the consumption of which is fuelled not by labor as consumer but by the rich. In this section, I claim that this development of demand bifurcation has an effect on production and consequently on labor in its capacity as workers. First, I discuss the effects on producers and their segmentation into those catering to the wealthy and those catering to the rest. In short, production catering to the wealthy means production of high-status and high-quality goods. Next, I therefore discuss the specificity of luxury production, followed by an exploration of what effect luxury production as opposed to production of generic goods has on workers. Unfortunately, the effects of bifurcated demand on production and the labor market have been barely researched for the case of the US. Similarly, research on the production chains of US luxury firms is almost non-existent, which is why I sometimes resort to comparable luxury firms located elsewhere. Although, I occasionally point to official communications by luxury firms, the purpose of this section is to construct a theoretical argument building on the empirically observable phenomenon of demand bifurcation.

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5.2.1. Producer Hierarchy

In the previous section on demand bifurcation I fleshed out how the plutonomy in the US has led to an hour-glass picture in demand. As argued before, the main prospects for profit-making through an increase in demand lie in the upper-market8. More specifically, an increasing number of companies will shift their production to cater to the wealthy because they are the ones who are still able to increases their consumption. Previously, I already explained that if the wealthy increase their consumption this is usually directed at luxury goods. What does it mean if companies increasingly shift their production toward luxury goods? As Wilmers (forthcoming) described, the relation between demand bifurcation and production can be conceived of as process of markets becoming segmented. The inequality among buyers, or rather a heightened dependence on high-income consumers, translates into inequality among producers (p. 4). More specifically, high-income consumers segment out high-quality from low-quality producers, which entails inequality among producers. Such producer inequality has been theorized as a ‘hierarchy of producers’. The transformation of consumer demand allows some producers to cater to an up-market of high-income consumers, while others serve down-market segments of less affluent consumers. This phenomenon has been noted already in earlier decades, for example, by Kalleberg, Wallace, and Althauser (1981) in their theory of economic segmentation. In their theory, ‘economic segmentation’ describes those features of production among firms that can lead to a segmentation of the labor force (p. 652). In modern economic sociology, such features are assumed to arise, for example, from differences in consumer’s willingness to pay for quality and status. This in turn orders producers hierarchically corresponding to the differentiation in quality and status (Wilmers, forthcoming, p. 7). To be sure, this is not simply a division of labor between firms due to developing specialization in certain products. It is rather that only the upper market is really providing specialized and individualized products out of which a growth of profits can be generated since only this segment of the market sees significant increases in demand. Wilmers (forthcoming) denotes this effect of unequal spending patterns splitting producers into up-market and down-market segments as a ‘winner-take-all dynamic’ among up- market producers (p. 11). A potential market segmentation of producers was also noted by the Citigroup plutonomy authors: “While Asprey are clearly appealing to the prestige market, Mariella Burani has moved more into the mass-affluence area of affordable fashion. While they think that the mid-market is dead, they believe that the mass market of aspirational buyers is very much alive, but the key is to have very strong brand integrity and use only suppliers that themselves use high quality materials and highly skilled labor” (Kapur, Macleod, Singh, et al., 2006, p. 15, emphasis added). Thus, compelled by market

8 Again, note that I limit my discussion to profit through increased demand. Low-tier producers will be unlikely to have this option and oftentimes revert to lowering production costs to increase their profits.

32 forces and the survival of the most profitable, many producers adapt to this new configuration of demand by catering increasingly to the needs of the wealthy. If the wealthy are the prime focus of growth in consumption, and therefore also the prime focus of profit-making, what exactly characterizes the goods they desire and how does their production look like? Answering this question can shed light on how capitalists engaged in the production of such goods stand in relation to their workers. In the following, I therefore take a look at luxury goods as such in order to then argue that their production is less reliant on labor than the production of generic goods. I divide luxury goods into three main categories corresponding to the ways in which they are ‘luxurious’. Note that in none of these three cases of premium pricing does a higher price of a luxury good require a mass of workers.

Luxury through status-signaling: For those luxury products which achieve their luxuriousness through status-signaling (i.e. high prices), the manufacturing labor input costs are relatively low in comparison to the profits made (Unger, 2014). That is, their price is high not because the production required expensive labor inputs but because they are Veblen goods, demand for which increases simply because of the high prices. Analysts price items based not on production costs but on what they predict consumers are willing to pay. Moreover, costs are often driven by advertising (Rugman, 2005, p. 93), which require different labor inputs than conventional low- and middle-income labor. It follows that for a given profit, less labor (as defined in 2.4) is needed in producing a Veblen good than for the production of mass consumption goods for which labor costs significantly factor into the sales prices. In line with this, luxury products generally have a very high profit margin (p. 92). Luxury through scarcity: Some luxury goods are demanded for conspicuous consumption simply because they are scarce. Examples include goods which are naturally scarce (e.g. paintings) or goods for which artificial scarcity is created through limited production and waiting lists, a common marketing trick in luxury sales. Luxury through high-quality: Usually, luxury products achieve at least part of their luxurious appeal through their premium quality (Nueno & Quelch, 1998, p. 62). Some luxury goods become luxurious by means of their production culture, craftsmanship or artisan manufacture. Kapferer and Bastien (2012) single this out as the true luxurious aspect because both the usage-values (i.e. functionality) as well as the exchange-value (i.e. price) are of inferior importance to the true luxury product: “The luxury of the product is demonstrated through the guarantee of the means implemented upstream, by an imaginary attached to the production process that speaks of excellence, non-substitutability and rarity” (p. 81-82).

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5.2.2. Luxury Production as Less Reliant on ‘Workers’

In this section, I argue that the shift toward the production of luxury goods has implications for labor in its capacity as worker. Luxury production does not require workers to the extent that generic good production does because the sheer number of workers necessary for luxury production in contrast to generic goods production is significantly smaller. Capitalists are therefore not only less dependent for profit-maximization on labor in its capacity as consumer but also in its capacity as worker. Production for an upper market is generally differently configured than the production for generic goods. The production for the former requires generally fewer but often more high-skilled labor. One reason is that luxury production is a low volume production, i.e. it generates fewer goods as output per given profit than generic production. I already noted above that this comes with the very nature of luxury production in modern economies because luxury firms want to maintain a certain exclusivity. As quoted above with regards to home-building in the US (Timiraos & Hudson, 2015), the focus on luxury homes means less construction overall and therefore fewer jobs. Another example is the market for super-yachts, described by Hoffmann and Coste-Manière (2012) as a category of ‘luxury toys’ that see incredible growth in revenues while being a tiny segment. In 2010, 195 units were produced with prices ranging from a mere $5 million up to more than $300 million, generating revenues of in the order of $4-5 billion (p. 58-59). Another example the authors give are Swiss fine watches (retail price over CHF 18,000). “Fine watches alone, with a share of less than one percent in units and an estimated average retail price of over 60,000 Swiss Francs, constitute almost 40 percent of total exports” (p. 63-64). The small number of products lies in the nature of luxury because if it were not restricted to a select group of consumers it would almost by definition not be luxury anymore. To be sure, there are some companies that also market toward the mass consumer. However, these are the exception rather than the rule and even these companies have to pay attention not to lose the exclusivity appeal of luxury goods. The significantly smaller number of goods produced requires generally fewer workers, and if it does require workers they are mostly high-skilled artisans. Thus, very few luxury products are as mass-produced as are generic goods for retail sales because this would hurt their luxury status in many cases (Deloitte, 2014, p. 10). It follows that the profits made are distributed over a smaller number of goods in comparison to the profits made by selling generic goods. A significant part of the workforce will become dispensable if production shifts increasingly toward luxury goods as this type of production requires fewer workers.

Not only do capitalists engaged in luxury production need fewer workers for it, but the ones that they do need are not typical of ‘labor’ as define in chapter two. Since wealthy consumers generally demand higher-quality and higher-status products, upper-market producers require workers with the necessary abilities, skills and the status for the production of such goods. Especially the provision of high-

34 quality services oftentimes requires high-skilled laborers. Taylor and Harrison (2008) provide vivid illustrations of how plutonomy markets and the market for ‘everyone else’ diverge. For example, instead of a general demand for health care creating a general supply of doctors, the demand on the side of high- income earners stimulated a market in specialized high-quality health care, namely ‘concierge doctors’ (p. 215-220). This trend was also observed by Leonardi (2009) with regards to the US and the UK. They observe that in both countries the more educated and affluent consumers demand more of very low skill- intensive goods and services (e.g. cleaning) as well as very high skill-intensive services (e.g. education). Thus, even in the service economy highly-trained workers are rewarded with well-remunerated jobs in finance, health care, and information technology (Lieberman, 2011). The production model of generic goods, on the other hand, is based on minimal service, lower prices and low wages (Bernhardt, 1999). In addition to that, the costs of losing high-skilled labor in contrast to those of losing generic labor are higher for capitalists, a point which I briefly want to elaborate on. A final difference between mass and luxury production is that in the former case outsourcing of labor has become a common way to cut costs and increase marginal revenues. Whereas Deloitte (2014, p. 8) emphasize that Producers of luxury goods “continue to do it the old-fashioned way, [because they are] satisfied with their healthy profit margins […]”, it is more likely that for luxury firms outsourcing is problematic due to potential damage to the brand’s reputation (Kapferer & Bastien, 2012, p. 174).

Frequently, the production of personal luxury goods is what gives them their appeal. Experts on the luxury industry agree that a large part of the concept of luxury is grounded in the artisanship involved in the production. Stefania Saviolo, a luxury goods industry expert remarked that “[t]he only source of luxury is who makes the product. This is luxury today” (Sanderson, 2013). It is the special and often mysterious mixture and complexity of the production process with ingredients such as unique design, special know-how, and renowned artisan work that make the product truly luxurious. For instance, Prada writes on its website that out of 13 in-house production sites, eleven are located in Italy, one in France and one in the UK (Prada Group Website, 2016). Similarly, high fashion luxury goods manufacturer Hermès “[…] requires that all newly hired leather artisans—most of whom have graduated from one of France’s renowned leatherworking academies—spend two years as apprentices in its own schools either in Pantin or in the Vosges, in eastern France, to learn from Hermès’s senior leather craftsmen how to cut skins and sew the house’s signature saddle stitch perfectly” (Thomas, 2007, p. 150). Workers employed in the production of high-quality and high-status goods will likely have a wage premium attached to their skills and status (Wilmers, forthcoming, p. 9). Put differently, they can command higher wages for their work and although still workers in the sense of wage-labor, they are not part of the mass of labor (what I

35 defined as low- and middle-income). Moreover, such workers often have more of a common interest with management than with the rest of the workers.

Capitalist engaged in the production of luxury goods not only need generally fewer workers for their profit. The few workers that they do need are not typical low- and middle-income labor. Given that the plutonomy leads to a demand bifurcation where increases in demand come mainly from luxury goods consumers, the shift in production has consequences for the relationship between capitalists and labor. As I have argued, the production of luxury goods requires not only fewer workers but also rather untypical workers. Less and less, capitalists need labor (i.e. individuals who hold low- and middle-income jobs) for their growth of profit-making because profit is made through production of luxury goods, which requires fewer and different workers for a given profit. Therefore, in the US plutonomy capitalists are decreasingly economically dependent in their quest for profit on labor in its capacity both as consumer and as worker.

5.3. Plutonomy and Automation

The polarization of labor markets is of course not to be explained exclusively by the plutonomy thesis. It has been a persistent trend in the US since the 1990s. Jobs in the middle of the wage distribution are losing out while those at the bottom (cleaners, restaurant staff, hairdressers) and top (e.g. bankers, lawyers, architects) have seen wage gains (Van Reenen, 2011, pp. 731-733). Middle-income manufacturing workers are increasingly reallocating their labor toward low-income service jobs (David & Dorn, 2013). This de-skilling process in which high-skilled workers push low-skilled workers down the occupational ladder because the former face a decrease in demand of their labor since 2000 has also been documented elsewhere (Beaudry, Green, & Sand, 2016). One explanation for this development focuses on the effects of technology, and more specifically, computerization. In their recent article, Frey and Osborne (2017) predict “[g]rowing employment in high-income cognitive jobs and low-income manual occupations, accompanied by a hollowing-out of middle-income routine jobs” (p. 255). The effect on demand of workers being obviated by technology and hence have no wages to buy means of subsistence anymore was also noted by Marx. He writes: “The circumstance that they were 'set free' by the machinery from the means of purchase changed them from buyers into non-buyers. Hence a lessened demand for those commodities. Voila tout. If this diminution of demand is not compensated for by an increase in demand from another direction, the market price of the commodities falls” (Marx, 1976, p. 567). As I have shown, in a plutonomy there is this other direction from which an increase in demand can take place, namely the wealthy consumers. Against the background of the US plutonomy, the pressure of automation

36 and computerization on middle-income jobs thus need not fundamentally threaten the US economy because these workers cannot contribute to growth through increasing their consumption.

5.4. Objection: ‘Democratization of Luxury’?

The argumentation I put forward in this chapter so far might be criticized at a crucial point. One might object to the assertion that capitalists are less dependent on labor in its capacity as consumer. That is, one might question whether demand is really becoming bifurcated in the US and especially with regards to luxury goods consumption. While traditionally, luxury goods were the privilege of only the most affluent in society, there is a strong argument to make that luxury is increasingly becoming ‘democratized’ (Evrard & Roux, 2005). Silverstein and Fiske (2003) call the luxury goods for the masses ‘new luxury’ goods. These are luxury goods that, although pricier than generic goods, are still accessible for middle-income American. For example, high-end technology in electronics (e.g. Smartphones) has become widely used instead of being limited to a tiny consumer segment. As Seo notes, in recent years some firms in the luxury industry have expanded its customer base to include also more moderately affluent social classes (Seo & Buchanan-Oliver, 2015). On the one hand, I fully acknowledge that this is the case. However, as pointed out early on, I do not claim that all increase in demand is coming from the luxury consumption of the wealthy. In this regard, I agree with Wilmers who emphasizes that firms in the upper market production always face the dilemma of whether to reap the benefits of high-quality production or high-quantity production. In some industries, firms will continue to make more profits by focusing on quantity and hence the mass consumer instead of producing luxury for the high-income consumer only (Wilmers, forthcoming, p. 13). On the other hand, and more important to refute this objection, I take issue with the very notion of ‘democratization of luxury’. As describe earlier in this chapter, luxury goods become luxurious mainly through aspects of their production, their limited availability and by being associated with high status. If the majority of consumers start to consume luxury goods, this ‘disenchants’ them for the wealthy. Firstly, if something is mass-produced it cannot be produced uniquely anymore and quality will likely suffer. Secondly, if the luxury goods become widely available, this by definition decreases their scarcity. Moreover, some luxury goods are naturally scarce (e.g. art). Thirdly, and likely the most important point, if luxury were to become democratized this would decrease their status in the eyes of the wealthy because status is a zero-sum game. Hence, all three aspects would entail a loss of appeal of the mass-produced luxury to the wealthy consumer. What would likely happen, and often has happened in the past, is that wealthy would upgrade what they regard as luxury. The absolute level of the luxuriousness of produced goods might therefore rise slightly, but the relative level would remain skewed. Put differently, wealthy

37 consumers will make sure that they find other products through which they can stand out. The democratization of luxury goods would therefore not make my argument in this chapter weaker.

6. Conclusion

The postwar American economy was defined by the rise of mass consumption. Thus, capital and labor had to strike a deal because they were dependent on each other. More than in earlier times, capitalists were dependent on labor to buy their products. Furthermore, if labor saw a worsening of its employment situation, workers could go on strike and withdraw their labor from production. Henry Ford famously increased his worker’s wages in a move that was often depicted as strategically increasing his sales numbers. As social theorist Zygmunt Bauman writes in his Liquid Modernity, Ford’s move was of course a tongue-in-cheek move, though not so much about sales as it was about stopping labor’s mobility (Bauman, 2000). Presumably, Ford wanted to tie his workers to the company such that the investment in their training would not be lost if workers leave the company. In order to achieve this life-time work contract, Ford’s strategy aimed at immobilizing employees such that he could use up their labor power until the end (p. 147). After all, high-skilled workers were not easily substitutable. Irrespective of the true motivation behind Henry Ford’s move, it was clear that he was dependent on labor. Similarly, high- skilled labor employed in the luxury industry is much less likely to be simply dismissed than labor in the generic goods production. However, in a plutonomy capitalists are less dependent on those workers who are not among the select group of luxury goods producing employees.

I started my thesis by showing that the US is indeed a plutonomy. That is, the US economy has become so unequal in terms of income and wealth as well as consumption, that increases in demand are unlikely to come from the masses. Building on the recognition that the US is a plutonomy, I asked what the consequences of this are for the relationship between capitalists and labor. The answer to this question involved looking at how demand has become bifurcated in the US and, by consequences, how labor’s relevance as a consumer declines. In the second step, I argued that the bifurcation of demand is mirrored in production such that firms will increasingly cater to the wealthy. It is increasingly only their consumption that can bolster profits of firms through increased demand. The shift towards production for high-income consumers entails fewer employed workers because production is simply on a smaller scale and less low- and middle income (‘traditional’) workers. I concluded that labor will become eclipsed as worker, too. Therefore, my thesis that the US plutonomy leads to a decreased economic dependence of capitalists on labor for profit-making seems justified.

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Hopefully, my thesis will have cast some light on a rather confused literature on the topic of plutonomy. It stands in the tradition of the research on social inequality but went beyond the recognition and measurement of it. I drew together previously unconnected strands of literature in order to construct a theoretical argument on the assertion that the US is a plutonomy. If my thesis proves correct in the near future, this might have several severe implications. For one, the majority of labor would likely see a worsening of the general employment situation for them such as higher unemployment, underemployment and part-time work. Moreover, if capitalists are less dependent on labor for their profit-making, they might be disinterested in addressing a possible deterioration of the labor market. To be sure, the economic dependence on labor is not the only tie between capitalists and labor as labor can organize and set in motion a political movement. Kapur already pointed to this ‘danger’ for the US plutonomy but considered it unlikely to happen anytime soon since most US Americans still aspire to become wealthy themselves one day. If no counterforce acts against the trends described in my thesis, this would make US capitalism not only a worse place to live for a large part of labor but, even worse, this might not threaten capitalism as such. The economy would be producing for and the products be consumed by the wealthy, while labor is no longer having a significant share in the total pie but instead limited to the crumbles. The strength of my thesis is naturally limited by the data limitations. As pointed out before, systematic evidence on how a shift toward luxury production affects the labor market is virtually non- existent but would be crucial to examine my thesis empirically. Furthermore, it might be interesting to make a mirco-level analysis of the exact portfolios of wealthy investors and see whether there has been a shift toward luxury-producing firms. Again, this data is very difficult to obtain but a first step might be to look at High-Net-Worth-Individual’s portfolios and try to find out whether they allocate more investments in luxury firms.

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7. Acknowledgements

My special thanks for very fruitful discussions and comments goes to Liliann Fischer and Aleksander Masternak. Thanks to Paul Raekstad for his supervision process and to Enzo Rossi for his critical remarks. Also, I would like to thank Iain Hay, who despite being on leave, sent me the latest Plutonomy report by Kapur.

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9. Appendix

US 600

500

400

300 US

200 Number of billionaires

100

0 1985 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Compiled by myself from the Forbes list of the worlds billionaires

Source: https://www.forbes.com/special-report/2012/billionaires-25th-anniversary-timeline.html

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From: Global Income Inequality by the Numbers: in History and Now (Milanovic, 2013)

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