that the Venetians gave it a name: La Serrata, or the closure. And it wasn’t long before the political Serrata became an economic one, too. Under the control of the oligarchs, the Venetian state gradually cut off the commercial opportunities for new entrants. The commenda, the legal innovation that had made Venice (and other Italian city- states) rich, was banned. La Serenissima’s reigning elite were acting in their own immediate self-interest—shutting out the entrepreneurial upstarts meant the vested interests could enjoy sole control over the city’s lucrative trade routes. But in the longer term, La Serrata was the beginning of the end for the city’s oligarchs, as well as for Venetian prosperity more generally. By 1500, the population of Venice was smaller than it had been in 1330. In the seventeenth and eighteenth centuries, as the rest of Europe grew, the city that had once been its richest continued to shrink.
The story of Venice’s rise and fall is told by the scholars Daron Acemoglu and James Robinson as an illustration of their thesis that what separates successful states from failed ones is whether their governing institutions are inclusive or extractive. Extractive states, they argue, are controlled by ruling elites whose objective is to extract as much wealth as they can from the rest of society and to maintain their own hold on power.
Inclusive states give everyone a say in how their society is ruled and access to economic opportunity. Inclusive societies often find themselves benefiting from a virtuous circle, in which greater inclusiveness creates more prosperity, which creates an incentive for ever greater inclusiveness. The history of the United States, founded in a revolutionary bid for greater inclusiveness, can be read as one such virtuous circle.
But Acemoglu and Robinson cite the story of La Serrata as evidence that virtuous circles can be broken. Elites who have prospered thanks to inclusive systems can be tempted to pull up the ladder they climbed to the top. There are a lot of reasons to be worried about the rise of the plutocrats—the impact soaring inequality has on civic values, on crime rates, on morality, or even, according to some studies, on health. The big danger, though, is the one represented by La Serrata. As the people at the very top become ever richer, they have an ever greater ability to tilt the rules of the game in their favor. That power can be hard to resist.
One reason La Serrata is such a useful example is that the Venetian oligarchs who closed off their society were the products of a robust, open economy. They didn’t start out as oligarchs—they’d made themselves into oligarchs. That’s important because as soaring income inequality has become an undeniable political fact, even in societies, such as the United States, that have been squeamish about open discussions of class, a dominant response has been to try to sort the plutocrats into the white hats and the black hats. Steve Jobs is a hero; Lloyd Blankfein is a villain. Big business is bad; small business is good. Private equity is vulture lending; community banks are virtue lending. Wall Street banks are speculators who didn’t deserve their bailout; Detroit carmakers are manufacturers who did.
No one likes this approach better than the “good” plutocrats. “There’s a lot of anger in society because of what the government did to the benefit of the financial industry, because it was seen as unfair,” Eric Schmidt told me. “And you don’t find that anger against, for example, Microsoft and Bill Gates, right? Who is seen as a historic, American figure who created a global company. So I think it’s very important to distinguish between rich people who get there by taking the economic rents of the country for their own benefit versus the people who, in fact, create a new corporation or a new source of wealth.”
There’s a lot that’s right about this impulse. Dividing the plutocrats into the rent-seekers and the value creators is a good way to judge whether your economy is inclusive or extractive. And creating more opportunities for productive enterprise, and fewer for rent-seeking, is how you create an inclusive economic system. But this approach takes you only so far.
For one thing, there’s no magical sorting hat for plutocrats, and without one, figuring out who is adding value and who is rent-seeking is an inexact science. Indeed, even the exercise of trying to separate the virtuous plutocrats from the venal ones, and to treat them differently, is an invitation to precisely the sort of rent-seeking that creates the “wrong” kind of wealth in the first place.
As Emmanuel Saez, the economist who tracks the 1 percent, told me, “It’s probably true that some activities are truly creative, like a normal market, while others are more zero-sum game.” But deciding which was which was a different story: “I would say it is very hard who is going to make that case. I don’t think anyone would be comfortable having the government decide this is a good business and this is a bad business, and the bad business punish it with, say, special taxes. Because then you will have all the lobbying forces, right?… It’s so hard even for economists to say, ‘This is a good business. This is a bad business.’ Especially while the thing is happening, it’s extremely hard.”
More important, the difference between the good guys and the bad guys is smaller than we might like to think. Inclusive and extractive societies are very different, but the economic elites within them are driven by the same imperative to make money and win competitive advantage for themselves and their companies. Trying to slant the rules of the game in your favor isn’t an aberration, it is what all businesses seek to do. The difference isn’t between having virtuous and villainous businesspeople, it is about whether your society has the right rules and policing able to enforce them.
Consider, by way of example, how Warren Buffett, the most hallowed figure in America’s pantheon of officially virtuous billionaires, described his investing philosophy in his 2008 letter to shareholders. “A truly great business must have an enduring ‘moat’ that protects excellent returns on invested capital,” Buffett explained. “Though capitalism’s ‘creative destruction’ is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.” Like the Venetians who put themselves in the Book of Gold, Buffett understands that the creative destruction of an open economy is good for the country as a whole; but smart capitalists like him prefer to be defended by uncrossable moats.
Buffett goes on to explain that his preferred moats are being a low-cost producer or possessing a well-known worldwide brand. But favorable government regulation can create a powerful moat, too.
And taking advantage of that government moat is a business decision, not a question of ideology or morality, as we saw in hedge funder and antigovernment crusader Ken Griffin’s telling comment that CEOs’ “duties to their shareholders” justify business leaders’ opening their hands to a state “willing to hand out gifts.”
Even when the moats are created through pure entrepreneurial brilliance, they don’t always serve the greater good. Microsoft went from being one of the world’s most admired innovators to the bete noire of technology geeks because it created a very effective and very lucrative moat. That boundary made Bill Gates a billionaire; competition authorities in the United States and Europe decided it was so harmful to the rest of us they forced Microsoft to build a few bridges across it.
All businesspeople would like their own Serrata. And as they become more powerful relative to everyone else, their ability to impose one increases.
One of the goals of the Book of Gold was to pass oligarchic privilege to the next generation. That is the second big threat posed by the surge in income inequality. Today’s plutocrats are modern-day robber barons, the beneficiaries of an era of extreme economic change. But as they pass their fortunes down to their children, today’s “working rich” plutocrats may give way to a rentier elite more similar to the sons and daughters of privilege of the Roaring Twenties, the plutocrats who were “born rich.” That transfer of privilege from one generation to the next is a gradual, cumulative, and very personal process. But as a mechanism for turning an inclusive social and economic order into an exclusive one, it could be as powerful as the more overt Serrata.
What’s at work is an economic phenomenon that Alan Krueger, the head of the president’s Council of Economic Advisers, has dubbed the Great Gatsby Curve. Based on research by Canadian economist Miles Corak, the Great Gatsby Curve traces a relationship between income inequality and social mobility: as societies grow more unequal, social mobility is choked off. That creates a particular paradox for societies that owe their surge in wealth at the top to entrepreneurial vigor unleashed by having a social starting point with high social mobility—think of Silicon Valley, with its fine public universities and government-funded research, or Venice in the age of the
Membership in today’s Book of Gold is more subtle than being included in a list of the aristocracy, or even inheriting a trust fund. In our increasingly complex economy, the real Book of Gold is a degree from an elite university, and those are increasingly the province of the global super-elite. Indeed, statistics have shown that graduating from college is more closely linked to having wealthy parents than it is to high test scores in high school: class matters more than going to class. This intergenerational form of rent-seeking is the hardest to oppose. It is one thing to berate bankers for lobbying for favorable regulation or Microsoft for using its market dominance to cut
