Newspaper readers have recently been offered a new source of sensation: a sombre-looking bloke in glasses and beard, from London EC4. Not Melinda Messenger, but Gavyn Davies. Not sex, but money.
The occasion for this interest was the announcement that the New York investment bank Goldman Sachs is to transform itself from a partnership into a company quoted on the stock market, putting between ?50m and ?100m in the hands of each of its 34 London-based partners. The most prominent of these is Davies, its chief economist, a long-standing Labour supporter and friend of Gordon Brown.
Davies's appearance on the front pages was another reminder of the return of the "super-rich." The number of very, very rich people is probably as high now as it has been since the mid-19th century. Hollywood stars and the giants of rock music, opera and sport were the early pace-setters in the amassing of multi-million pound annual earnings. Now the rewards (and penalties) of stardom have spread to entrepreneurs, barristers, tax lawyers and investment bankers, putting Gavyn in the earnings and publicity premier league alongside Gazza. Why is this happening now, what are its effects and what, if anything, should we do about it?
TECHNOLOGY and the super-rich
The prediction that the modern economy would produce a new layer of superstars was made a few years ago by two American academics, Robert Frank and Philip Cook. In The Winner-Take-All Society they build on the earlier work of Sherwin Rosen, describing how technology allows a few stars to corner most of the earnings available in a particular market. Take the film industry. At any time there are only a few actors who can command millions of dollars to appear in a new film; only a few who are household names across the western world. The second rank comes far behind them in earning power, and behind them trail the resting members of the profession, scraping by on waitressing and the odd commercial. The range of income is extreme; distribution is an extraordinary pyramid with a tiny tip and a wide bottom.
This pattern marks a dramatic change in the acting profession. Before the days of movies, when actors worked in theatres, there was a notably more equal distribution of earnings. The technology of film made two differences. First, any individual performer could reach a huge audience at almost no extra effort and cost: you only have to act once on set-and distribute more copies of the film. Thus a mass market came within reach at almost zero marginal cost. Second, consumers quickly came to prefer known faces whom they could now see at their local cinema for no more than it cost to see an unknown-less risky than trying out a new hero or heroine every time they go out to the pictures. It makes no difference that the star may be only a tiny bit more talented than the second best.
In fact, the effect of technology may be even more pronounced. Fashion is a pervasive force in economics and human behaviour-we may want to see a particular actor just because other people do too. And in certain sectors, especially electronics and computers, fashion and technology combine to produce what the economist Brian Arthur has called "networking" effects. Often, two or three versions of a network technology battle it out until one begins to dominate, at which point its stock rises dramatically (no one wants to be left with Betamax when everyone is using VHS).
But the main focus of winner-takes-all markets is labour, not product, markets. Frank and Cook quote Rabo Karabeckian, the only moderately good painter in Kurt Vonnegut's 1987 novel Bluebeard: "...simply moderate giftedness has been made worthless by the printing press and radio and television and satellites and all that. A moderately gifted person who would have been a community treasure a thousand years ago has to give up, has to go into some other line of work, since modern communications has put him or her into daily competition with nothing but the world's champions... The entire planet can get along nicely now with maybe a dozen champion performers in each area of human giftedness."
Now that most of the music we listen to is pre-recorded, the world's best soprano can be everywhere at once. "And since it costs no more to stamp out compact discs from Kathleen Battle's master recording of the Mozart arias than from her understudy's, most of us listen to Battle. Millions of us are willing to pay a few cents extra to hear her rather than another singer who is only marginally less able; this allows Battle to write her own ticket." (Frank and Cook, Employment Policy Institute report, January 1997).
The spread of winner-takes-all markets is not only caused by the spread of new technology. It is prompted by all the changes-some regulatory, some behavioural-which erode boundaries (often geographical) between one market and another. The Goldman Sachs partners are as rich as they are because they own a firm which has been able to exploit global economies of scale. This is the result of worldwide financial deregulation as much as it is of the revolution in telephony and computing.
The economic and social consequences
Does this matter? The increasing pervasiveness of winner-takes-all markets may have consequences we would want to resist. Economically, such markets are wasteful. Disproportionate rewards at the top may tempt too many people into some labour markets, whereas society would benefit if they were more productively employed elsewhere (think of all those resting actresses wasting their talents on waitressing). Frank and Cook argue that this will lead to a serious misallocation of resource-in this case, a misallocation of talent-which will be costly for society at large.
Another problem is the impact on the public sector. If extremely high private sector incomes are acceptable because they reward hard work and because anybody can have a go at becoming wealthy, what will happen in those professions where hard work is not rewarded and there is no opportunity to make a lot of money? The classic public sector jobs, teaching and nursing, are certainly not winner-takes-all professions. Even though the government is edging towards the introduction of much wider pay scales, star teachers and nurses will still not be looking at serious money. Will a sense of public service and vocation be enough to keep our health and education services running?
In Victorian and Edwardian Britain such jobs were filled by a reserve army of labour-women, to whom other opportunities were denied. In Macmillan's "never had it so good" years the reserve labour force was made up of Commonwealth immigrants. Thus, in the past, there have always been two separate labour markets: one involving the full-blooded scramble for money; the other characterised by a less competitive ethos. As the winner-takes-all phenomenon spreads through the economy, the destruction of a sense of vocation in work might turn out to be the highest social price we pay.
Socially, the effect of winner-takes-all markets is more obvious. The new markets go some way towards explaining the recent widening of income distributions in the US and Britain. This has happened within every section and sub-section of the job market. It is not only that the earnings of lawyers or executives as a whole are even higher above the average than they used to be, rather that some lawyers and executives have started to make even more serious money than the rest of their professions. They are the stars of their own universes, the people who can "write their own tickets."
Whatever people feel about the swelling ranks of star earners, or about the extremes of income inequality, they do not, on the whole, want to bring back confiscatory tax regimes. Inequality has become socially acceptable, even if poverty has not. Popular and political concern is thus focused on alleviating poverty and improving incomes at the bottom of the ladder.
This seems sensible. An outbreak of millionairedom will do little social harm-and could do a lot of economic good-provided that the barriers to creating great wealth are not too high. In the present generation this is clearly the case. The new millionaires come from a wide range of backgrounds, and there is nothing to stop anybody aspiring to become a Gazza or a Gavyn. This helps to explain why there is both a huge fascination with and relatively little resentment of great wealth. Few people, for example, begrudge Richard Branson his estimated $1.9 billion.
There is a new concept informing the debate: the deserving rich. One manifestation is this year's list of the world's billionaires, recently published by Forbes magazine: it struck out monarchs, dictators and aristocrats and was entitled "The World's Working Rich." This Forbes decision picked up on comments by management writer Peter Drucker, who noted that the power of today's super-rich does not derive from their money: "They are important and influential because their businesses are important and influential. The moment they stop working, that is, the moment they enjoy their money, they rapidly fade from sight. That is why the overwhelming majority of the world's super-rich will be working full time and many, apparently, working harder now than they did before they had quite so much money."
The reason, he argues, is that even the largest of today's fortunes pales into insignificance when compared with the size of the modern economy. JP Morgan's personal fortune when he died in 1911 was reckoned sufficient to finance all America's investment needs for four months. Bill Gates's $51 billion (on paper, depending on how well Wall Street is doing) would finance perhaps two weeks' worth; and Gates is the world's richest working billionaire by a wide margin. It would take the top 60 super-rich to finance as much of total US investment as JP Morgan could have funded by himself.
If today's billionaires stopped working they would stop being powerful capitalists. "Individually unprecedented wealth is small change for the economy as a whole. In every developed country the economy has outgrown individual wealth," declared Drucker.
The role of philanthropy
With the new fortunes won in the winner- takes-all markets comes a revival of the idea that wealth brings responsibilities. The main responsibility is to give some of this wealth away. A winner-takes-all society will be a stable society only if the rich rediscover charity. The evidence is that they are doing so, albeit to a modest extent. The most recent figures comparable across countries (dating from 1990) show that a higher share of revenue in the "not for profit" sector of the economy comes from private donations in the US and Britain than in other countries: 12 per cent in Britain and 19 per cent in the US, compared to just 7 per cent in France and 4 per cent in Germany, where the public sector remains more important.
America is the model and trend-setter. In 1997 Americans donated $143 billion to non-profit organisations, which now account for 8 per cent of GDP. Three-quarters of this money ($109 billion) came from living individuals. There are many spectacular examples of giving by the super-rich, such as Ted Turner's $1 billion donation to the United Nations, or George Soros's $500m plus to various foundations in the former communist world. Yet much charitable giving in the US comes from the non-rich. This is partly because people get something back in the US: any charitable donation can be deducted from income subject to tax. It is also because most of the money goes to local institutions which impinge directly on many people's lives, and have traditionally depended on charity. Religious institutions account for nearly half of all giving; education (especially universities) is the next largest recipient, followed by health and the arts.
Notwithstanding these large sums there is, according to The Economist, a crisis of philanthropy in the US. Only one of the top ten foundations is not based on an old industry. The trouble with most of the super-rich entrepreneurs in the new industries is that they are too busy making money to give it away. Perhaps modern wealth, based on overvalued stock markets and fast-moving industries, still feels dangerously ephemeral to its owners.
Should Britain try to adopt the American system? Giving is rising in Britain. It is coming from fewer households, which implies that the better off are giving more, but total cash donations for 1997 was still less than ?6 billion. Corporate giving has also been rising, but again the amounts are relatively small. The top 500 corporate donors gave about ?200m last year in cash donations-only 0.22 per cent of pre-tax profits. US-style tax breaks would certainly help to raise the level of individual donation, but it is hard to say how much donations would rise or how much the state's tax revenues would decline (the Charities Aid Foundation and the Institute of Fiscal Studies are undertaking a large research project to discover these implications).
It is one thing to encourage more giving by the newly rich. Deciding what we want them to pay for is much more difficult. Given the squeeze on the state's tax revenues, this must include some of the things which the state has financed itself in the past. If the touchstone is social cohesion, then services such as health and education should stay firmly within the public sector. Would we really want to see charity hospitals or schools, rather than the occasional donated piece of equipment? The most obvious candidates for the new rich to care for are the arts and universities. There is no popular support for higher subsidies for the Royal Opera House and the Arts Council, yet it is mainly the better off who enjoy their services. And as the universities are gradually privatised, the charitable foundations of the super-rich could, as in the US, ensure that bright children from poorer backgrounds continue to get a good education for nothing. They will then be ready to try their luck in the winner-takes-all markets of the future.
