When people think of the one percent, they tend to enter the realm of mythology: conjuring up images of decadent dinner parties on private islands and dogs being flown around the world in private jets. This is far from the truth. If you really want to know who they are, a good place to start is in the hidden depths of the private equity funds that have flourished with their ascent. What you’ll discover there may surprise you.
Despite its origins in the post-Second World War period, the history of private equity really begins in the Eighties, the decade in which Western countries abandoned Keynesian economic management for the small-state ethos of the neoliberal regime. Coincident with this turn was the start of a long trend of rising economic inequality. This was driven by two broad changes: the rise of the developing world, led by China, which reduced inequality between rich and poor countries. And the widening of inequality within countries, as newly liberated business owners were empowered to drive down wage bills and drive up profits. When plotted onto a graph, the result was the elephant curve. It provided a visual illustration of how, since 1980, the global one percent captured twice as much of global growth as the bottom 50%.
With ever-swelling pools of capital, this rising international class changed the way they managed their wealth. Having previously invested largely at home, spearheading the growth of national economies, the one percent globalised, shifting capital offshore to exploit the even higher returns of low-wage economies. While this stimulated the rise of a middle class in the developing world — the middle “hump” of the elephant — it also fuelled the deindustrialisation of Western countries. The working classes were shattered, one consequence being the “deaths of despair” that have been chronicled by Anne Case and Angus Deaton.
Profits, however, surged. This gave owners both more capital to invest but also, in an environment where deregulation was underway, more liberty to deploy their capital in aggressive ways. There arose a new breed of owner who was “private” in that they took over publicly-listed firms, often using borrowed money, then removed them from the stock exchange and the prying eyes of shareholders. Thereby free to do as they pleased, they could lay off workers, close shops, sell assets or transfer any debts they had used to buy the firm onto its books. The leveraged buyout was born, and the Eighties corporate raider would go on to be immortalised in the character of Wall Street’s Gordon Gekko, his “greed is good” mantra embodying the ethos of the neoliberal age.
Like the fictitious Gekko, neoliberal intellectuals maintained that enlightened self-interest, as they preferred to call it, would ultimately benefit everyone. As Bill Clinton insisted when pushing back against private equity’s critics — perhaps ominously in an interview with that celebrated do-gooder, Harvey Weinstein — private equity was helping to revive sick firms and thereby reinvigorate the economy. The story private equity’s exponents told of its virtues might have been lifted from an Ayn Rand novel, in which visionary entrepreneurs take over a moribund publicly-traded firm, get rid of the risk-averse technocrats running it, then apply the tough love it needs to turn around.
Yet there was a dark side to this new era of plutocracy. While the ascent of such barons seems reminiscent of the Gilded Age, today’s elite tend to favour a different business model from their entrepreneurial Victorian predecessors. Whereas the latter were profiting off the wrenching transition of agricultural societies into industrial ones by building things — in particular, railways — today’s elite appear parasitic by comparison. In many cases, what private equity delivers amounts to asset-stripping or consolidations that leave most people worse off, yet add little new output to the economy. This has been called “conspicuous destruction”.
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