Who dominates the global economy – and why that matters for you and me!
I recently saw the word ‘plutonomy’ in the title of an international relations academic article. It’s an intriguing and unfamiliar word, and its definition is causing me to ask some probing questions about our global economic order.
For those uninitiated like me, plutonomy describes an economy where the share of consumption and economic activity by the rich dwarfs everyone else. It’s a system where a small minority control most of the wealth and income, and consume nearly all the goods and services. Some might argue that the U.S., the UK and Canada approximate plutonomies.
However, I think that plutonomy transcends any one country, and that the world itself is a global plutonomy. There’s some evidence for this. As Oxfam and others have shown, the bulk of the world’s wealth is concentrated into just a few number of hands. Most people on the planet either have no wealth, or very little. Those making up the world’s super rich also consume a disproportionate amount.
They consume so much that a few Citibank researchers recommended the financial giant create ‘plutonomy baskets’ filled with things the ultra-rich buy as an equity strategy for investors. What do the filthy rich spend their dollars buying? According to these plutonomy baskets, the rich seek out Giffen Goods. These are products people consume more of as their price increases – defying the laws of demand. In fact, the term plutonomy first gained prominence from this research. The rationale for the strategy was their conclusion that the world is dividing into two discrete blocks: “the plutonomy and the rest” (the multitude of “non-rich” accounting for a meager slice of global income and consumption). This strategy also wagers inequality will become worse, and that such plutonomy baskets will be even more profitable as wealth continues amassing into fewer hands.
Of course, plutonomies are inherently dangerous. By their nature, the activities of the richest few can create instability and volatility in the economy, with far reaching consequences for everyone else. Recent IMF research confirms the danger of an economic system based on plutonomy.
Looking at the causes of the Great Recession, the standard narrative is that American middle classes reacted to years of stagnant wages by over borrowing from the excess savings of the rich, whose incomes were thriving. The drop in demand and onset of recession after the mortgage- backed security bust is largely attributed to the drying up of credit among these households.
Yet, this research from the IMF shows consumption patterns of the rich mirrored the middle and lower classes during the run up to the crisis. Like them, the rich consumed more as their wealth increased during the boom years and then less as their wealth declined. What has been missed is that since the rich account for such a significant share of total economic activity, the dip in wealth they experienced after the crisis had a profound impact on overall global consumption, spurring on the depths of the recession.
Compared to the bottom 90 per cent, the rich accounted for more than half (approximately 55 per cent) of the increase in consumption between 1993 and 2003. Over the past ten years, the share grew to 71 per cent.
Instead of blaming the middle classes for the recession, we need to acknowledge that the rich played a significantly more important role. The crux of this volatility is a global economic system that’s become a plutonomy. We should be concerned that rising wealth concentration only makes this condition even stronger.
The debates regarding the causes and consequences of inequality are percolating in many surprising places. Though bewildering, it seems inequality may be the issue in the 2016 US presidential election. Yet, significantly less attention is being paid to the instability of our global economy wrought by such extreme inequality.
The pursuit of measures to curb growing wealth inequality include Thomas Piketty’s now famous global wealth tax. However, commenters argue such an effort may be too difficult to pull off. I wonder if readers have suggestions for how to reverse today’s global plutonomy?