Lift-off of the super-rich

The rise of an unfeasibly wealthy over-class could have a negative impact on the functioning of capitalism if a sense of unfairness takes hold.

by Richard Reeves
Last Updated: 31 Aug 2010

George W Bush once addressed a group of wealthy Republican donors as 'the haves and the have-mores'. The quip revealed something about his grasp of his political constituency, but it also describes what is happening in both the American and British workplace.

The haves, those in the middle of the pack, financially speaking, have seen their incomes rise modestly over the past decade, while the have-mores have simply got more, and more, and more. Last year, the average pay for Britain's leading chief executives rose by 37% to £2.85m apiece. The pay of the typical boss is a hundred times greater than the average worker's; 10 years ago the ratio was closer to 50:1.

If the incomes of the top fifth of all households are compared to those of the bottom fifth, inequality has remained essentially unchanged since John Major came to power. Last year, the gap widened slightly. But the apparent stability of inequality disguises the true picture. It is not that the middle class are pulling away from the working poor; if anything, the gap between middle and bottom has narrowed. It is that the overclass is pulling away from the rest of society. All the action is in the top 1%, or even 0.1%, of the population.

City bonuses last year amounted to £14bn - more than the transport budget for the entire nation. The average big-company director now has a pension pot of over £3m by the time he or she reaches 60. It is, as the Observer columnist Will Hutton puts it, a 'Caligulan spectacle'. While ordinary couples struggle to get into the housing market, the overclass ponder which Caribbean island would provide the best location for their eighth home.

The figures on inequality also cloud the impact of the tax and benefit system, because they are typically based on post-tax, post-benefit household incomes. The state is working harder to redistribute money to the poor, but because the initial inequalities are rising quickly, this leaves the gap unchanged - according to work by Professor Howard Glennerster at the London School of Economics. The welfare state is running faster simply to stand still. The situation now is that we have more redistribution but also more inequality. The most savage irony of all is that the super-rich - the ones distorting the whole nation's income distribution - rarely pay much tax: it is the quite-rich who carry the can.

Faced with these trends, three questions present themselves. First, who cares? At an institutional and political level, almost nobody. Brendan Barber of the TUC rails against the 'boardroom bonanza', but he is an isolated voice. Labour politicians are now embarrassed by such outdated language. In the 1980s, when levels of inequality were much lower than they are today, there was a constant political fight about it. Now, silence reigns. But on a personal level, and in the media, some real anger is growing. When the Daily Mail starts campaigning on boardroom greed, you know something's up.

Second, does it matter? This is a hard question. It is vital to discount heavily for the effects of envy on this debate. Who wouldn't want the freedoms and power that come with such wealth? If they are gained lawfully and entrepreneurially, why should we begrudge it? It is true that high levels of inequality are associated with lots of bad outcomes, such as lower social mobility, poorer health and weaker results in education. But it is difficult to prove cause and effect: poor health, bad schooling and lack of ambition all fuel inequality, too.

There is a point, though, where the lift-off of the rich onto a different financial planet begins to influence negatively the workings of capitalism. One of the key functions of the labour market is to distribute national income. If it begins to do this in a way that does not pass the 'feels fair' test, the legitimacy of that market is threatened. If the vast wealth starts to appear unearned, difficulties will follow. In the 19th century, John Stuart Mill attacked landowners for making money from the mere fact of having inherited large chunks of land - 'growing richer in their sleep'. The new wealthy, by contrast, are getting richer, asleep or awake, simply because their money grows on capital markets around the world. The money-owners, rather than the landowners, are the new aristocracy.

The new aristocrats also lack what little sense of responsibility to their nations and communities the old landowners possessed. There are exceptions, of course - Bill Gates and Warren Buffett spring to mind - but they prove the rule. In the 1840s, Rothschild and Baring set up a fund to send money to the starving Irish: where are the City equivalents today?

If the feeling grows that a handful of people are scooping an ever-growing portion of economic output in the disguise of free-market competition, and using that money just to make more for themselves, paying as little tax as possible and with little sense of responsibility to others, while average and low incomes flat-line, we should not be surprised if the majority of British workers report themselves to be detached from their jobs. There is nothing wrong with wealth-creation. But there is something wrong with irresponsible, self-serving, unaccountable wealth accumulation. That used to be a deeply left-wing thought. Now I'm not so sure.

- Richard Reeves is director of Intelligence Agency, an ideas consultancy; e-mail:

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