A New Economic Elite

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think tank informs us that the average annual compensation of the
top 100 chief executives amounts to an astonishing $37.5 million,
which is 1000 times the pay of an average worker. The top one percent
of households reportedly earns 20 percent of all incomes and owns
33.4 percent of all net worth. The most astonishing feature of such
concentration of wealth in the hands of a tiny elite is the utter
lack of concern and comment by the American media. They apparently
find nothing wrong with such glaring inequality.

We may readily agree with the media as long as the great chasm of
income and wealth stems from great differences in economic productivity.
Surely, we cannot fault the great American entrepreneurs who in
ages past built famous enterprises employing thousands of workers
and serving millions of consumers. They discovered new methods of
production, opened new markets, and developed new sources of raw
materials throughout the world. They succeeded by serving and pleasing
consumers. Their talents of enterprise actually raised American
standards of living to one of the highest in the world. And their
labors bridged the wide legal, social, and economic gulf that separated
the social classes throughout the ages.

The economic order that developed gradually during the 20th century
gave life to yet another economic and social elite which does not
seek new methods of production and does not give employment to thousands
of workers; it shrewdly speculates on the effects of various government
policies, such as inflation, credit expansion, and new regulations
and controls. An economist who visits the new elite may actually
discern three distinct branches that cooperate as readily as they
feud with each other.

A large branch does not create new enterprises nor give employment
to a single worker. It opens no markets nor develops new products.
Its members thrive on boom-and-bust cycles which afford great opportunities
to traders who observe and understand the portentous policies of
the Federal Reserve and the U.S. Treasury. They may manage investment
trusts holding corporate stock worth billions of dollars or merely
look after their own accounts. They weigh and appraise political
intention and government intervention, always gauging the consequences,
acting in anticipation, and profiting immensely from political moves.
While many businessmen suffer painful losses during a business cycle,
they succeed in increasing their funds throughout it all.

These speculators actually render an important service. The Federal
Reserve and the U.S. Treasury frequently intrude on and disrupt
the smooth performance of markets, which then must readjust; they
actually facilitate the adjustment. They anticipate future price
movements, assume market price risk, and add liquidity and capital
to the markets. Theirs is a necessary and productive activity.

A remarkable feature of this new elite is its frequent disagreements
and altercations with the other branches of the business elite.
Its members may find frequent fault with and cast aspersions on
the elite that actually manages the production. They prefer to support
and consort with the political powers that shape the economic policies,
seeking the company of well-known politicians who in turn feel at
ease with generous nouveaux riches.

Another branch of the new elite consists of chief executives whose
compensation usually comprises a base salary and incentive options.
They earn million-dollar lucre whenever the Federal Reserve blows
stock market bubbles and corporate share prices soar to lofty price-earnings
ratios. During the 1990s-bubble they pocketed hundred-million-dollar
profits without any particular efforts of their own. They created
no new industries and opened no new markets. The corporations they
managed did not grow and corporate profits stagnated or even declined.
But stock prices soared and CEOs reaped much lucre at the expense
of their own stock holders. For every bubble profit taken is total
worth consumed. It waters the stock and diminishes the property
of all other stockholders. To remedy the situation, the corporation
must henceforth increase its assets without increasing its outstanding
shares or reduce outstanding shares without reducing assets. CEOs
probably are aware of these implications, but few, if any, have
ever returned their bubble lucre to losing stockholders.

The most powerful elite is yet another; it springs from political
power that holds authority over the body politic. It is the natural
extension of the new economic order known by various labels such
as the New Deal, the Great Society, and other Democratic and Republican
Deals. They made politics an important vocation and elevated politicians
to positions of importance and eminence. Surely, politicians have
to be ever mindful of public opinion which is shaped by the elite
of education and communication. Many master the art of political
communication and thus manage to perpetuate themselves in office.
In their footsteps their children are laboring to forge a self-perpetuating
political elite.

country is not about to degenerate into a class-based society led
by a ruling elite. Competition is a time-honored practice, a cultural
custom followed from generation to generation. But, under the influence
of collectivist ideologies, many politicians and journalists are
ever eager to strike at successful entrepreneurs who earn much more
than they do. It is difficult to ascertain their motives; it can
be simple envy which consumes many men, or it can be economic ignorance.
After all, market economics is barred from most universities and
is unknown to leading politicians and journalists. It may explain
why most politicians are ever eager to regulate industrial and commercial
activity and strike at the economic elite with confiscatory taxation.
Unfortunately, regulation and taxation tend to hamper economic activity,
inhibit productivity, and depress levels of living. But they create
ever-new profit opportunities for the new economic elite.

3, 2005

Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

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