Summit, being one of the hotter MarketWorld tickets, had drawn to this cruise ship the founders or representatives of such venerable institutions as AOL, Apple, the Bitcoin Foundation, Change.org, Dropbox, Google, Modernist Cuisine, MTV, Paypal, SoulCycle, Toms Shoes, Uber, Vine, Virgin Galactic, Warby Parker, and Zappos. There were some billionaires and many millionaires on board, and lots of others who had paid a typical American’s monthly salary to attend.

And yet the stubborn facts of an age of stark inequality clouded this vision of the pocketbook-impacting approach to social justice and the use of business to unlock potential and birth transformational things. The more these entrepreneurs waxed about changing the world, the more those facts got in their way, mocking their grandiose and self-serving claims. And this was most acutely true for a subtribe hailing from Silicon Valley and the world of technology, with its audacious claims that what was good for business was great for mankind.

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Yet there was no denying that as they chewed away, these technologists were also partly responsible for prying inequality as unsustainably wide as it had gotten. How did these new barons relieve the cognitive dissonance they might have felt from claiming to improve others’ lives while noticing that their own were perhaps the only ones getting better? One day a high priest of this technology world, a leading Silicon Valley venture capitalist named Shervin Pishevar, had the crowd listening in rapt, reverent silence.

What they heard was a powerful man who seemed at pains to explain his power away and to cast himself as a man in pursuit of things nobler than money. “At the end of the day, it’s not about the money,” he said. “It’s about the love and those moments of character.” The Summit people clapped hard and whooped in recognition.

Pishevar turned to the topic of life-extending technology, which was a major focus of his work now. “Our life spans and the health of our lives are going to be longer, and it’s going to challenge the very basis of our current civilization,” Pishevar said. He was engaging in advocacy that disguised itself as prophecy, which was common among technology barons and one of the ways in which they masked the fact of their power in an age rattled by the growing anxieties of the powerless. VCs and entrepreneurs are considered by many to be thinkers these days. That people listened to their ideas gave them a chance to launder their self-interested hopes into more selfless-sounding predictions about the world.

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In the Valley, prediction has become a popular way of fighting for a particular future while claiming merely to be describing what has yet to occur. Prediction has a useful air of selflessness to it. Selecting one scenario among many possible scenarios and persuading everybody of its inevitability—and of the futility of a society’s exercising its collective choice among these futures—is a deft way to shape the future.

As he predicted the elongation of life and other such “things that are coming down the pipe,” Pishevar was in fact pushing those things down the pipe. He was part of a group of elites who had been very smart and very lucky with start-up investments, and who now got to make decisions of enormous social consequence about what to do about the human life span.

This power gave them great responsibility and exposed them to the possibility of resentment— unless they convinced people that the future they were fighting for would unfold automatically, would be the fruit of forces rather than their choices, of providence rather than power. Hence the cleverness of Pishevar’s passive framing of his own goals: “The way things are structured today are not going to be relevant to what the reality is going to be.” Longer lives for rich people were just something that happened to be coming down the pipe. Not so much a better health care system for all.

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The next question – “What are the characteristics of people who are able to do world-changing ideas?” – set Pishevar up well to present himself—and his fellow elites—as rebels up against the powerful, and not as power itself. The characteristic that world-changers have in common, Pishevar said, is a willingness to fight for the truth. It had nothing to do with their being more luckily born than you, unburdened by racial and gender discrimination and with greater access to seed capital from family and friends. It was that they were braver, bolder than you—some might say ruthless—willing to take on power, no matter the cost. “People like that who make big ideas happen don’t run away from those conflicts. They actually embrace it.”

This idea of the start-up pursuing its singular truth in this fashion was part of Pishevar’s rebellious self-conception. It is not in the rebel’s job description to worry about others who might have needs that are different from his. By Pishevar’s lights, when a company like Uber challenged regulators and unions, there were not rival interests at play so much as a singular truth vying with opposition, and insurgent rebels going up against a corrupt establishment. This became even clearer with his answer to the following question:

“How do you find the balance between morality and ambition and having to compete?”

Because Pishevar did not think himself powerful, because he refused to see the companies he invested in as powerful, he seemed not to understand the question. It takes a certain acceptance of one’s own power to see oneself as facing moral choices. If instead what you see in the mirror is a rebel outgunned by the Man, besieged, fighting for your life, you might be tempted to misinterpret the question in the way that Pishevar now did. He interpreted it as being about how he, a moral man, representing a moral company—again, he chose the example of Uber—stood up against immoral forces.

“My biggest thing is existing structures and monopolies—one example is the taxi cartels—that is a very real thing,” he said. “I’ve been in meetings where I’ve been threatened by those types of characters from that world. I’ve seen them beating drivers in Italy. You see the riots in France, and flipping over cars and throwing stones. I took my daughter to Disney. We were in the middle of that. We had to drive our Uber away from basically the war zone that was happening.

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“So from a moral perspective, anything that’s fighting against morally corrupt, ingrained systems that are based on decades and decades of graft within cities, within city councils, with mayors, etcetera—all those things, they are real, actual things that are threatened by new technologies and innovations like Uber and other companies in that space. So from that perspective, bring it on. That is something we should be fighting. And from a moral perspective, we have a responsibility to fight those types of pockets of control. And they exist at all levels—in the city level to the state, and even at the national and global.”

Pishevar was not only casting venture capitalists and billionaire company founders as rebels against the establishment, fighting the powers that be on behalf of ordinary people. He was also maligning the very institutions that are meant to care for ordinary people and promote equality. He referred to unions as “cartels.” He cast protests, which were a fairly standard feature of labour movements, as a “war zone.” He spoke of taxi drivers and their representatives in the language of the corrupt, mafioso Other: “those types of characters from that world.”

Here was a leading investor in a company, Uber, that had sought to shatter democratically enacted regulations and evade the unions that have a record of actually, and not just rhetorically, fighting for the little guy, and he was proudly portraying himself as the one who was truly fighting for the people against the corrupt power structure. “In the era when political power corrupts, social and crowdsourced power cleanses,” Pishevar once wrote. “We must stir the hornet’s nest to build immunity to the sting of corruption.”

Speaking of the regulations he didn’t like and unions he didn’t like, Pishevar said, “Finding companies that can disrupt those is one way of having some kind of ethical philosophy of saying, ‘We are going to use our capacity and our knowledge to improve our world by getting rid of some of those points of control.’” In short, technological disruption was the venture capitalist’s way of making the world a better place for everyone’s benefit.

An edited extract from Winners Take All by Anand Giridharadas

***

The distinction between a deserving and undeserving poor is more venerable than many imagine, and it remains a contemporary one. A feckless and fecund ‘underclass’, binging on junk food, junk TV, drink or drugs is often juxtaposed –not least in the junk media – against the respectable working class.

In the Middle Ages, poverty was not regarded as a vice provided one bore it meekly, and voluntary poverty like that of the Franciscans was the apogee of virtue. Parasitic idleness was seen as the gateway to crime, though ‘avarice’ or material greed, a vice of the rich, was a much greater sin because it was seen as a form of spiritual lassitude.

The idea that the poor can be categorised in terms of moral failings was an Elizabethan rather than a Victorian one, though in this area as in that of butterflies and moths, their contribution was scientising and taxonomic.

The dissolution of the monasteries between 1536 and 1540 eradicated one of main refuges for the poor, while swelling their ranks by rendering monks and nuns homeless. Land enclosure to raise sheep created bigger farms requiring fewer labourers, while the poor lost customary rights to fish, fowl and fuel. A 25% population increase during the Elizabethan era, a series of poor harvests, and an increase in what we would call ‘drifters’, prompted Elizabethan governments to legislate a series of Poor Laws between 1563 and 1601. The 1601 Poor Law formed the template for legislation in this field until the 1834 Poor Law Reform Act.

The Elizabethans established mechanisms for dealing with the poor, partly because they feared civil unrest. Justices of the peace assessed local needs and then made the rich pay a tax which in 1598 came to be called the rates. Centrally issued Books of Orders instructed JPs how to deal with outbreaks of dearth or disease.

The Elizabethans also distinguished between the ‘deserving poor’, who were too young, old or sick to work, and who subsisted on ‘outdoor relief’ (donations of food, clothing and money). Next were the ‘deserving unemployed’ who were victims of what was gradually viewed as what we would call cyclical unemployment. Since they were able and willing to work, they received ‘indoor relief’ in almshouses, orphanages, and the new workhouses, with the justices supplying flax or hemp to work over.

The first of these ‘Bridewells’ (as they were generically known) was established in Henry VIII’s eponymous palace on the capital’s River Fleet. Since it doubled up as a home for orphans and a jail for petty offenders, it can be seen as the forerunner of the Victorian Workhouses. Last but not least, the Elizabethans dealt harshly with the ‘undeserving poor’ or ‘sturdy beggars’. If they were not locals, they were whipped until they reached the stones marking a parish boundary where they were ejected. If they returned they would be jailed or hanged. The growth of Puritanism accentuated the moral aspects of these distinctions since a wider range of human behaviours were deemed to be sins. This reinforced the view that there was something inherently sinful about the lives of the ‘undeserving’ poor.

Attempts to map and coerce the ‘undeserving poor’ also antedate the Victorians. A leading Glasgow merchant called Patrick Colquhoun became a magistrate in Shoreditch and in 1798 one of the founders of the Thames Police. He distinguished between poverty and indigence. The useful poor should be helped to work, the genuinely indigent (the sick, old and very young) simply helped by the state. The criminal and culpably indigent should be coerced.

By Colquhoun’s reckoning, there were 115,000 criminals on the loose in London alone. He proposed a gradated series of institutions to correct the behavior of the criminal and culpably indigent. The very worst malefactors would do forced labour on prison hulks, decommissioned navy warships moored at Deptford, Woolwich and Portsmouth, while each county (Essex, Kent, Middlesex and Surrey) would have two large penitential workhouses for males and females. The work included treadmills to drive machinery, stone crushing or sawing, and picking over oakum and hemp. The general aim was to ‘excite a general terror’ among the delinquent classes, but for those poor through no fault of their own, Colquhoun suggested soup kitchens and subscription insurance schemes. In fact, the 1834 Poor Law Amendment generalised the workhouse model so as to offer only deterrent indoor relief. Families were segregated and subjected to forced labour in the dire conditions described by Dickens, and moreover men who had once met the property owning threshold lost were disenfranchised.

The inherited distinction between the deserving and undeserving poor survived into the Edwardian era, though the new Eugenics Society (founded in 1907) led to the redefinition of what Charles Booth called the ‘residuum’ as a quasi-genetic problem amenable to isolation and sterilisation. Others however were convinced that it was no longer adequate to view poverty as a moral, let alone a medical failing. One can see these tensions in the Majority and Minority reports of the 1909 Royal Commission on the Poor Laws and the Relief of Distress. Whereas the Majority wished to perpetuate the old Poor Law in a modern guise, the Minority led by Beatrice Webb and the Fabians wanted the state to adopt preventative measures and to establish minimal social services to replace often inefficient and overlapping charities. Much of this thinking inspired William Beveridge.

It would be much harder to chart a similar genealogy of the deserving and undeserving rich though aristocratic parasitism versus bourgeois industriousness, or the differences between productive and unproductive capital have their own histories.

> This is the second part of a three-part series – following up yesterday’s analysis of escalating CEO pay

78% of Americans and 76% of Brits believe “the economy of my country is rigged to advantage the rich and the powerful”.[1.  Global Trends. Fragmentation, Cohesion and Uncertainty, Ipsos, 2017] Over 70% of Germans, Australians, Canadians and the French agree. The financial crisis exposed a fundamental flaw in today’s capitalist model: it favours an undeserving rich. Capitalism is in crisis because people no longer believe it works for the many.

The bankers responsible for the crash have not been punished

When the financial sector imploded due to the reckless behaviour of some bankers, serious consequences were expected. The public understood the immediate need to stabilise the financial system (more people than not believe the crash would have been worse without the bailouts),[2.  Tim Montgomerie, What the world thinks of capitalism. YouGov’s seven nation opinion poll for the Legatum Institute, 3 November 2015] but they also expected those responsible to be held to account. Wrongdoing, it is commonly understood, should be punished. Instead, while the banks received billions of taxpayers’ money and senior executives generous exit payments, millions of those taxpayers lost their jobs, their homes and their life savings.

The top five executives at Lehman Brothers and Bear Stearns, two investment banks that collapsed, were paid around $2.4 billion between 2000 and 2008. Harvard academics who analysed this eye-watering pay concluded that while the executives made considerable personal losses when their firms failed, these losses were outweighed by the huge “performance” bonuses they had already received.[3.  Lucian Bebchuk, Alma Cohen and Holger Spamann, ‘The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008’, Yale Journal on Regulation, 2010] Richard Fuld, CEO of Lehman Brothers, earned $466 million in the eight years before the 158-year-old bank filed for bankruptcy.[4.  Sarah Anderson, Scott Klinger and Sam Pizzigati, ‘Bailed Out, Booted, Busted: A 20-year review of America’s top-paid CEOs’, The Institute for Policy Studies, 28 August 2013] He took home over $61.5 million in cash bonuses alone between 2000 and 2008. James Cayne, who as CEO of Bear Stearns presided over a £1.7 billion loss, received almost $390 million between 2000 and 2007 – over $87.5 million in cash bonuses.[5.  Lucian Bebchuk, Alma Cohen and Holger Spamann, ‘The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008’, Yale Journal on Regulation, 2010]

Almost a decade on, those involved in precipitating one of the biggest recessions in history appear to have got off scot-free. In the US, just one Wall Street banker, a senior trader at Credit Suisse, has been jailed for his actions. As yet, not a single UK banker has been jailed as a result of the crash. Prosecutors have argued that poor judgement, or immoral behaviour, does not mean laws have been broken. But questions are rightly being asked about their willingness to press charges. The authorities in Iceland have successfully jailed 26 bankers, including the most senior executives.

Analysis by investment bank Keefe, Bruyette and Woods in 2015 found 49 financial institutions had collectively paid government entities and private individuals $190 billion in fines and settlements since 2009.[6.  William Cohan, ‘How Wall Street’s Bankers Stayed Out of Jail’, The Atlantic, September 2015] The scale of these payouts suggests pretty sizeable wrongdoing.

America’s Department of Justice has itself extracted huge financial settlements. JP Morgan Chase, for example, paid $13 billion in 2013. And in the process, like many other banks, avoided public exposure of the activities that warranted such a large payout. Fortune magazine estimates JP Morgan Chase made a profit of $22 billion that year – and the bank’s stock price rose by 30%.[7.  Stephen Gandel, ‘What JPMorgan actually earned in 2013’, Fortune, 15 January 2014] 

The idea that banking executives are ‘too big to jail’ reinforces the sense that the rich live by a different set of rules. No wonder YouGov polling for UnHerd found just 5% of Britons and 12% of Americans think those responsible for the financial crash have been appropriately punished.

The rich can’t get poorer

It is bad enough that justice has not been served. That those responsible for such catastrophic failure also remain rich is unbelievable, showing just how corrupted the current model of capitalism has become. Stan O’Neal’s firing as CEO of Merrill Lynch after announcing a $4.5 billion[8.  Scott Olster, ‘Crash of the titans: The rise and fall of Stan O’Neal’, Fortune, 4 November 2010] write down was cushioned by a $161.5 million payoff. Citigroup CEO Chuck Prince was awarded a $28 million golden goodbye. In the UK, Fred Goodwin presided over the implosion of RBS, and while waiving his right to a £1.29 million payoff, eased into unemployment with a £700,000 a year pension (accepting a reduction to £342,500 after public outcry) – made possible by a bail-out of over £65 billion in taxpayer funds.

And rewarding failure extends well beyond banking. The Institute of Policy Studies analysed the performance of 241 American corporate CEOs who had ranked in the top 25 highest paid between 1993 and 2012.[9.  Sarah Anderson, Scott Klinger and Sam Pizzigati, ‘Bailed Out, Booted, Busted: A 20-year review of America’s top-paid CEOs’, The Institute for Policy Studies, 28 August 2013] Corporate stars whose value to their firms supposedly justified their astronomical pay. In fact, nearly 40% of these highest paid CEOs were “bailed out, booted, or busted” – the latter meaning they had to pay significant fraud-related fines or settlements. Examples of CEOs fired include Hank McKinnell of Pfizer who was forced out in 2007 with a $116 million golden parachute and $82 million in retirement benefits. Pfizer stock declined 40% during KcKinnell’s five-year term.

For capitalism to work, success must be rewarded, but so too must failure be punished. The rich must be able to get poorer when they deserve to. That this isn’t happening helps explain why so many people believe the economy is rigged in favour of the elite.

Inequality is rising, and a super elite is becoming more and more detached

If capitalism perpetuates a “rigged” system, proponents of free enterprise should not be surprised that the arguments of anti-capitalists resonate. From Tsipras in Greece to Corbyn in the UK, Melenchon in France and Sanders in America, hard-left platforms have garnered mass appeal.

The reckless behaviour of those involved in the banking crash concentrated people’s anger, but it is increasing outrage at levels of inequality that has allowed socialist parties to gain traction. The disillusionment with capitalism has allowed economists like Thomas Piketty to mainstream the view that capitalism inevitably leads to deep, and destructive, inequality.

Certainly, the gap between rich and poor, both in terms of wages and wealth has been steadily increasing, driven by surging top pay, unequal savings rates and rising household debt.[10.  Emmanuel Saez and Gabriel Zucman, ‘Wealth inequality in the United States since 1913: Evidence from capitalized income tax data’, National Bureau of Economic Research, October 2014] Between 1979 and 2011, the wages of middle-earning American workers grew by just 6%, compared to 37% for the top 5%. But it is the highest-earning 1% who benefited the most. Their wages rocketed by a massive 131%.[11.  The State of Working America: Wages, Economic Policy Institute]

Wealth, or asset, inequality is more extreme, particularly in the US. Between 1983 and 2010, 38.3% of wealth growth went to the top 1%, 74.2% to the top 5%. At the same time, the bottom 60% saw their wealth decline.[12.  The State of Working America: Wealth, Economic Policy Institute] In the UK too wealth is concentrated in the hands of the few – the top 1% hold 20% of household wealth and the top 5% hold 40%.[13.  Thomas Crossley and Cormac O’Dea, The distribution of household wealth in the UK, Institute for Fiscal Studies, 19 April 2016]

But the real problem is a super elite detaching itself from even the top 1%. A 2014 paper by the National Bureau of Economic Research found that “almost all” the increase in US wealth inequality over the past three decades is due to that of the top 0.1%, whose wealth share increased from 7% in 1979 to 22% in 2012.[14.  Emmanuel Saez and Gabriel Zucman, ‘Wealth inequality in the United States since 1913: Evidence from capitalized income tax data’, National Bureau of Economic Research, October 2014]

And this extreme inequality has been exacerbated by government, reinforcing the idea of a “rigged” system. Quantitative easing and low interest rates in the wake of the crash have boosted the value of assets and lowered the cost of borrowing. The rich have become richer not through inventing new products or services, or through hard work and talent, but simply by being wealthy. At the same time, ordinary families have lived through almost a decade of austerity and lagging wages. In America, median household income rose for the first time since 2007 in 2015.[15.  Tami Luhby, ‘The middle class gets a big raise … finally!’, CNN Money, 13 September 2016] In the UK, the real wages of average full-time workers are lower than in 2004. Economic recovery has been the preserve of the wealthy.

Capitalism is unfair

Today’s model of capitalism is not living up to the fundamental principle of fairness – that people earn what they deserve. Separate from egalitarianism, it is the idea that hard work, talent and ingenuity lead to success and that wrongdoing and failure lead to loss.

This sense of fairness is core to the Anglo-Saxon capitalist model. The World Values Survey asked people whether it is fair or unfair that a secretary who is “quicker, more efficient and more reliable” earns “considerably more” than another secretary doing the same job. Just 11.1% of America respondents, 16.1% of Germans and 18.8% of Canadians thought this scenario unfair.[16.  World Values Survey Wave 5 2005-2008 OFFICIAL AGGREGATE, World Values Survey Association, 29 April 2014]

In the UK, a 2011 YouGov poll found that 85% of people agree that in a fair society income should depend on how hard someone works and how talented they are. When asked to choose between two statements defining fairness, “those who do the wrong things are punished and those who do the right things are rewarded” or “treating people equally and having equal distribution of wealth and income”, 63% chose the former, just 26% the latter.[17.  YouGov fairness polling, UK Polling Report, 26 April 2011]

Against this definition of fairness, the Great Recession exposed capitalism as wanting: people doing the wrong thing were not punished, nor had they earned their rewards. The public do not begrudge James Dyson or Bill Gates their riches – the benefits to society of their ingenuity and hard work are plain to see. YouGov polling for UnHerd found 70% of Brits and 72% of Americans believe inventors of new products and services deserve to be wealthy. That cannot be said of the financial titans who in seeking to enrich themselves have made so many families poorer. Just 17% of Brits and 30% of Americans believe senior bankers deserve their wealth.

As Will Hutton argued in The Guardian in 2010: “big rewards are justifiable if they are in proportion to big efforts – because big effort grows the economic pie for everyone”, but the banking sector was not playing ‘fair’, it was shown to be “an old-fashioned rigged market by a bunch of smart insiders who have managed to get away with it for decades because hard questions were never asked about fairness or proportionality.”[18.  Will Hutton, ‘Fairness, not capitalism, is the issue’, The Guardian, 26 February 2010] The future of capitalism depends on a willingness to ask those hard questions, and in doing so restore people’s faith in capitalism as a model for all.

This article is the second instalment in a three-part series on the challenges facing capitalism. The third part will be published tomorrow, part one was published yesterday.

Read the other three key findings in this series:

• Brits and Americans pessimistic about their future wealth, safety and happiness;
• Footballers seen as undeserving of their wealth; inventors as deserving;
• Tech giants seen as more good than bad (especially in USA).

1,859 American adults and 1,718 Britons were polled by YouGov for UnHerd.com, beginning 17 July 2017.

We published the results of the survey’s findings on the news industry last week.

Read the other three key findings in this series:

• Brits and Americans pessimistic about their future wealth, safety and happiness;
• Tech giants seen as more good than bad (especially in USA);
• Massive majorities say culprits of 2008 crash have gone unpunished

1,859 American adults and 1,718 Britons were polled by YouGov for UnHerd.com, beginning 17 July 2017.

We published the results of the survey’s findings on the news industry last week.