Human perception is not an empty canvas for representing the external world. We shape what we see, and as a rule we see only what is in accordance with pre-existing patterns in our mind.
These patterns include a view of capitalism as an economic order that follows the rules of the market and competitive performance where anyone who puts in the effort can succeed. Even critics of capitalism have often internalized this logic to such an extent that they present their opposition to inequality as if they were asking for charity: the strong can shoulder more weight than the weak, runs a typical justification for higher taxes for the rich. The strong? “Top performers” is a typical phrase when referring to the upper echelons of the income pyramid. Alternatively, there is a call for the strong to show solidarity with the weak. Does this mean that rich equals strong? And the weaker and poorer would then be those who by nature are less talented or who simply don’t feel like making an effort?
Property is the result of work, as the liberal philosopher John Locke taught us at the dawn of the capitalist age. In this account, extensive property is the result of especially hard work or exceptionally creative work. By generously rewarding the powerful men and women who perform this work, thus advancing the economy, doesn’t capitalism ensure that we’re all better off in the end?
Whoever shares this view of the world has little reason to consider the current distribution of income and wealth unfair. How could one object to high performers having a better life than the idle who just live for the moment? In this view, the only function of government policy can be to ensure that the differences do not become excessive, thus threatening social stability. A humane approach would entail that every person, even those contributing little or nothing, has a right to have her basic needs covered. However, this also defines the limits of government redistribution: market-based distribution should not be corrected to such an extent that the motivation for personal initiative and willingness to work hard are undermined, thus endangering the crucial engine of economic development.
We’re all familiar with these images, many of us follow them in our thinking, often quite unconsciously. They make sense because they appear plausible in the everyday world that surrounds us—a world in the middle of society where most of us live. In this world, we encounter the more intelligent and the more simple-minded, the highly educated and the low-skilled, workaholics and party animals, the serious and the gamblers. Who could deny that these differences between people imply different opportunities for work, income, and wealth? But do these differences even come close to accounting for the enormous gap that exists between the small top of society and the large rest?
Is the distribution of wealth a result of competitive performance in free markets? It would be interesting to know what performance-enhancing drugs the upper ten thousand take that has made it possible for them to accumulate private wealth outstripping the combined wealth of 99 percent of humanity. When we look at the facts, no one would seriously want to defend the thesis that the increasing inequality of incomes and assets in recent years has been the result of increased performance by the few and the growing incompetence of the large majority. What then are the real causes of this growing inequality?
Let’s first have a look at the gap between those at the top and the rest of society. Did the principle ever hold that those who are talented and make an effort can make it to the top—from dishwasher to billionaire, from garage entrepreneur to boss of a global IT corporation? If this were the case, why are there such an astonishingly small number of examples for such careers, and why upon closer inspection do they lose much of their grandeur? Only the smallest number of billionaires ever started out with nothing; most of them had private or public patrons or sponsors.
In the nineteenth century, it was still considered self-evident that success could not be achieved through learning, talent, and effort. Even those who belonged to the middle class knew that they would never achieve the lifestyle of the rich. For a worker, a middle class standard of living as a rule remained an unattainable dream, never mind the luxury of the rich. In his international bestseller Capital in the Twenty-first Century, French economist Thomas Piketty points out that during the Belle Époque, the wealthiest 1 percent of Parisian citizens made on average 80–100 times the average wage. For what they received per year for being idle, it would have taken a worker a hundred years of drudgery.
This has not fundamentally changed in the twentieth and twenty-first centuries. As Piketty writes with respect to the structure of top incomes, supported by data based on tax records and other statistics: “In all countries and in all ages, the further you move up within the top ten percent, the more explicit is the decrease in the share of income from work, while the share of capital income systematically and strongly increases.”23
The difference between the past and the present is that in the nineteenth century, the wealthiest 1 percent lived almost exclusively from capital income without doing any work, whereas nowadays only the wealthiest among them live in complete idleness. In our economic order, the absolute top incomes go not to the hard working but to the wealthy. Compared to the hundreds of millions euros in dividends taken in annually by BMW heiress Susanne Klatten, BMW workers and even CEOs are paupers. The true men and women of leisure have always been at the very top in capitalism.
This does not mean that the super-rich spend their lives by the poolside in the sun, sipping cocktails brought to them by their servants all day long. It only means that this is what they could do if they wanted to. In reality, the super rich include hard-working, entrepreneurial or otherwise active individuals, some of whom may be personally modest—not just the jet-set whose lifestyle comes pretty close to the stereotype of decadent idlers. But those differences are not what matters here. The point is that, whether idle or hard-working, the millions in income at the top of society’s wealth pyramid flow regardless of work or performance.
It was Max Weber’s still influential error to identify the spirit of capitalism with the Protestant work ethic. True, capitalism needs disciplined hard workers, who preferably do not make demands for a better life but are content just to keep doing their jobs. Without such workers, capitalism would have never achieved its enormous growth rates. But they are needed at the bottom and in the middle, not at the top of society. In this respect, capitalism is about as closely related to the ethos of hard work and effort as is late French Absolutism with its nobility celebrating wild parties at the courts of Louis XV and Louis XVI.
In this light, it is hardly surprising that the liberation of capitalism over the past three decades has significantly increased the share of national income accruing to income from wealth without any work, while correspondingly reducing the share of income from employment or self-employment. In 1950, about 83 percent of the pie for distribution went to payment for work performed by employees and the self-employed, while only 17 percent flowed to income from wealth. This rate of distribution remained more or less unchanged until the early 1980s. Subsequently, the share of income from assets without work started to grow strongly, reaching one-third of total national income, i. e. twice as high as it was before 1980.
The term capitaliste appeared for the first time in France in 1753. It simply referred to a person who owns assets on the proceeds of which he lives. It is precisely in this sense that the famous Austrian economist Joseph Schumpeter put a great deal of emphasis on the distinction between an entrepreneur and a capitalist. According to Schumpeter, an entrepreneur is someone who works in his firm and who as a rule has established this enterprise himself. With his ideas, inspiration, and power, he is the centre of the enterprise, responsible for its successes and failures, and living on the income from this entrepreneurial activity. It is a very different situation from that of the capitalist who is interested in the enterprise only as an investment object.
As long as an entrepreneur continues to have a personal relationship with his firm and its production, he has not yet become a genuine capitalist. The capitalist is interested not in quality but quantity, he simply wants to get optimal growth for his money. A capitalist is therefore not simply a wealthy individual but someone who derives a large part of his living from the returns on his investments. Much like the old nobility lived on the compulsory labour of its tenants, he lives on the income generated by his capital.
Yet aren’t most of us recipients of income derived from assets, even if just from a savings account or a retirement savings plan? Except for the poorest, don’t we all possess some capital and complain about receiving hardly any interest? This is a standard argument in order to make the holders of small amounts of savings feel like they are in the same boat with those who own billions in assets, such as Bill Gates, Warren Buffet, or the Koch brothers.
This argument has little connection with reality. Interest on savings accounts represents a minimal portion of capital income. This is why the current low-interest rate period has barely affected the growth of this type of income. Even though the average citizen in fact no longer receives any interest on her money, the share of capital income in total national income continues to expand.
One of Piketty’s central theses is that the rate of return on an asset is directly related to the size of this asset. In short, the more you invest, the higher your return. It is no secret that with the size of capital holdings, there is a change into what types of investment the capital flows. The financial nobility invests in private hedge funds, shares, derivatives, real estate funds, and natural resources that are not listed on the stock exchange and aren’t open to small investors. One might assume that large capital holdings have a higher return in the short term because those investments are more high risk. But this is not the case. The differences in return occur in the long term and consistently, whereas according to conventional theory they should be lower because they would have to make up for higher losses in high-risk investments. Intuitively, this is our common sense view. Every real estate agent will tell you that the return on a condominium relative to the amount invested would be significantly higher if you could afford to buy the whole building.
It is not easy to prove this as a general rule since there are few statistics on the returns made by individual capital owners. Piketty has solved the problem by using publicly accessible data on long-term average returns of capital assets held by American universities. He demonstrates that the returns vary directly with the size of the invested capital. In the period 1980–2010, the highest rates of return, an average 10.2 percent after inflation and costs, were achieved by Harvard, Yale, and Princeton, each with several billion dollars in the capital market. Universities with at least 1 billion dollars in assets achieved a return of 8.8 percent, while universities below 100 million had to content themselves with 6.2 percent. The average savings account holder can only dream of such returns. They must be happy if the real “return” on their money—i. e. interest after inflation and bank charges—is not actually negative.
Piketty summarizes his conclusion as follows: “The higher returns of the largest endowments are not due primarily to greater risk taking but to a more sophisticated investment strategy that consistently produces better results.”24 These results explain why the capital of billionaires has been growing annually by 6–7 percent, more recently even by 8–10 percent, in sharp contrast to the assets of the middle class. The latter are currently melting away due to negative interest rates designed to deal with the public debt crisis. Clearly, assets have to shrink if the goal is to lower the debt, but nowadays only the assets of small investors are being hit.
The fact that interest rates for normal savings are close to zero is quite consistent with the thesis that capital income without work is just as integral a part of capitalism as were feudal rents for princes and dukes in the age of feudalism.
It is in the upper 10 percent of the population that capital incomes contribute significantly to personal wealth. The further we climb up in the income hierarchy, the greater the significance of capital income. However, within the stratum of the wealthiest 10 percent we still find two different worlds. One segment of these 10 percent consists of the high-income self-employed, such as doctors, consultants, and lawyers, the owner-managers of mid-sized enterprises, as well as the top managers and experts in corporations and banks. This group is wealthy and has to work hard for their income—they can pass on to their children only their wealth but not their social status or income.
To this extent this group moves in a completely different world from the actual upper class, the “stratosphere of the ‘1 percent’”25, as Piketty calls them, a world they are rarely able to reach in spite of 16-hour days, permanent jetlag, and huge stress. “But within the 1 percent, the awareness of the different tiers of wealth is as keen as an Indian matchmaker’s sensitivity to the finer divisions of caste.”, writes Cynthia Freeland about her personal experiences with the Plutocrats, the super-rich.26 The stratification has nothing to do with personal life achievements. The road to the truly large incomes, which are based on wealth rather than work, is not one of hard work, intelligence and effort but above all depends on inheritance or marriage.
There is also the case of former entrepreneurs who initially worked and established their own enterprises, only subsequently becoming capitalist rentiers living on the work of others. In these—not very frequent—cases, membership in the upper class is not a result of either inheritance or marriage but of setting up a highly successful enterprise. Yet with the growth of the enterprise, the returns become increasingly independent of personal work, to the point where no work at all is necessary.
Piketty mentions the example of Bill Gates, whose wealth increased from 4 billion dollars to 50 billion between 1990 and 2010. Gates’s billions grew at the same speed as those of the French heiress to L’Oreal, Liliane Bettencourt, which in the same period grew from 2 billion to 25 billion. Even though Bettencourt has never worked a day in her life, she enjoyed the same growth in her wealth of 13 percent annually. When Gates left his corporation in 2008 to spare himself the pain of gainful work, his wealth kept growing apace. As Piketty concludes: “Once capital assets are in existence, their dynamic follows its own logic, and capital can increase substantially simply on account of its mere existence.”27
Capitalism betrays in its name what really matters in order to make it to the very top: capital, not work. But how then to get hold of capital? Those who continue to defend the myth of an economic order based on hard work and personal effort have to make a case for the theory that capital is the result of hard work and a frugal life. An individual who works and saves a lot, or so the story goes, will one day have as much wealth as Gates or Bettencourt. The realism of this story is such that it deserves an honorary place in the fairy tales of the Brothers Grimm, right next to Cinderella.
True, if you work hard, earn a good salary, and regularly save some of it, you may be able to accumulate a fair amount of wealth. If you buy your own home, you will own property based on your own work. The same applies to savings accounts, life insurances, and other financial investments for which those with an above average income are able to set aside part of their salary.
This kind of wealth has reached significant proportions only since the emergence of a large middle class in the second part of the twentieth century. In the nineteenth and early twentieth centuries, the idea that capital was the result of hard work and frugality would have appeared rather strange. Then, as in the more distant past, the existence of personal wealth was a privilege of the wealthiest 10 percent of the population, while 90 percent of all wealth was concentrated in the richest 1 percent. The rest owned nothing, and their low incomes forced them to live from hand to mouth.
For the poorer half of the population in the industrialized countries, this continues to be the case. To be able to save in the first place, you have to earn more than you need to cover basic living costs. The refusal to acknowledge this simple fact is the basis for all private retirement savings plans, which precisely for this reason regularly fail low-income earners.
The crucial fact is: the middle class does have money and it does own real estate. What it does not possess to any significant extent is capital. And confusing money and capital is one of the major errors that stand in the way of understanding the current economic order.
What is capital? In its simplest version, the concept of “capital” is often just equated with machines, know-how, and buildings—what is referred to as a firm’s real capital. In this view, any manufacturing employing machinery would be capitalist production. If we don’t want to return to the hoe and the horse-drawn plough, there will be no overcoming capitalism. But such a definition is nonsense.
Even individual firms do not actually record their physical capital goods as real capital, but in terms of their monetary value. This brings us closer to the heart of the matter. The term “capital” has its origins in commerce. Initially it referred to money invested or loaned, subsequently to assets such as securities, goods, and manufacturing facilities, with respect to the profit they were expected to yield.28 What distinguishes capital is therefore not the fact that it has value but its capacity to be commercialized and to produce profit.
As a matter of fact, large capital holdings have a very different composition than small ones. This is why they consistently generate much higher returns, as we saw in the previous section. Small capital holdings largely consist of money held in savings or checking accounts at banks. In mid-sized estates, home ownership as a rule accounts for more than half the total value. Things change once the capital owner has passed the million-euro threshold. In capital holdings of around 5 million the share of real estate, including rental income, is about 20 percent. In estates worth over 10 million,, less than 10 percent is made up of residential real estate. The truly wealthy possess above all shares and partnerships in corporations, as well as—primarily in the Anglo-Saxon world—derivatives and other financial products.
Interestingly, access to company assets shows a similar distribution today as it did in the nineteenth century. In Germany, more than 90 percent of company assets are owned by the wealthiest 10 percent of all families, the largest share of which in turn is owned by the wealthiest 1 percent. The latter own almost 80 percent of all privately held shares, while 90 percent of the population do not own any share capital. In the Anglo-Saxon countries, share ownership is somewhat more widespread due to partially privatized old age security, but the really large portfolios are in the hands of the super-rich.
It has become common usage to subsume a life insurance or a family home under the same category of “capital” as a company with 10,000 employees. But there are significant differences between the two. A life insurance is taken out to be used up at some time point. A family home is a place to live. Capital designated to be consumed at some point does not represent capital. Capital is invested in order to make a return. Below a certain minimum threshold—generally significantly above one million—it is therefore not capital. Only above this threshold, as we have seen, can significant returns be realized.
Some upper middle-class households may own rental property or hold shares in their portfolio, but these usually represent savings not for the purpose of generating returns (which are rarely high enough for a living) but rather as a nest egg to protect against inflation, which can be cashed in in an emergency. This is the reason why about 90 percent of Germans do not touch shares. Share portfolios are profitable for those interested in the returns but extremely hazardous if one is forced to sell the shares at some point. Savings can quickly lose half their value or more.
The situation is similar in the case of owners and managers of small and mid-sized enterprises who control the working capital of their firms. But this capital is simply the basis of their work, just like the home they own is the place they live. It is not an investment that was made to turn a profit. Mid-sized firms rarely distribute significant amounts of capital income.
There are additional differences between assets and capital. An individual who has invested money in an enterprise with thousands of employees has power over the lives of these people and their families, as well as the future of an entire region. If this enterprise goes bankrupt as a result of bad decisions, it will have far-reaching consequences. By contrast, if an individual owns an old palace and due to incompetence or lack of interest lets it fall into disrepair, this will be of interest only to the cultural heritage agency. Thus capital entails power, whereas assets as such do not.
There is a third important difference: we accumulate assets primarily by savings from our working income. It would be a futile undertaking to try to accumulate capital in this way. The average German family has annual savings of just 1,300 euros. Based on current zero interest rates, it would take almost a thousand years to save the first million. Even individuals with higher incomes are far from earning enough to accumulate significant amounts of capital. Capital does not grow out of savings from working incomes but is a result of reinvesting the returns of already existing capital. It thus originates not in personal work but in the work of others. Joseph Schumpeter noted that you cannot attain the status of a capital owner by living frugally and saving large portions of your wage. “The bulk of accumulation comes from profits and hence presupposes profits—this is in fact the sound reason for distinguishing saving from accumulating.”29
The fact that large holdings of capital do not originate in working income is also indicated by the fact that everywhere in the world capital ownership has a much more unequal distribution than working income. While the working income of the top 10 percent of earners rarely exceeds 2530 percent of all incomes, the share of the richest 10 percent in capital assets is more than twice as high.
The situation is most evident at the very top. The capital assets of the 500 richest Germans add up to 625 billion euros. Even the 500 top executives with annual salaries of 20 million euros each would have to work to a ripe old age while saving all of their salaries in order to accumulate this capital. Never mind 500 average earners who would have had to start in the Stone Age 20,000 years ago, when Central Europe was largely unsettled, living on nothing but air and the wild berries of the forest.
In 2013 the ten wealthiest German families received a total of 2.4 billion euros in dividends. Even in the absence of a modest lifestyle, enough will be left over for reinvestment. In large corporations with a majority ownership in the hands of a family dynasty, a significant portion of profits is not even distributed but accumulated directly in the company.
Further evidence for the independence of capital accumulation from savings is the fact that since the 1980s stock markets in industrialized countries have had a negative financial balance. This means that through dividend payments and share buybacks, corporations distributed more money to their investors than the total they collected by issuing new shares or increasing their capital stock. Internal capital accumulation in share companies has been occurring for a long time completely independent of external financing. Instead it is based on the reinvestment of part of their profits. This is precisely the process that Schumpeter describes.
Thus savings are unrelated to capital and interest payments on savings are unrelated to capital income. The average saver does not have the privilege of living comfortably on the work of others.
The model of capitalism that emerged in the second half of the twentieth century differed from its precursors (as well as from its current form) above all in the fact that, even for children of poor parents, it was possible to rise to the middle class, and even to the upper middle class. The democratization of education, tuition-free university, workers’ rights through union struggle, financial improvements for industrial workers, the expansion of public services—all contributed to the growth of the middle class, and for many the personal experience of advancement.
For the middle class it really was true at the time that whoever was talented, worked hard, and was not afflicted by particularly bad luck was able to advance and live significantly better than their parents or grandparents. Family wealth and inheritance were no longer the only route to prosperity. Good education, talent, and commitment also opened up real opportunities to the children of less privileged families for a career and prosperity.
But even during the happy days of what in Germany was called the “Rhenish model” of capitalism, the rule applied that the higher the level of income, the thinner the air would become and the smaller the number of those making it who did not come from a “good home”. Michael Hartmann, a sociologist of elites, sums it up as follows: “While the expansion of the education system made it easier for the offspring of the popular classes to acquire a doctorate, it did not open up access to the top executive level of the German economy.”30
The old tradition has remained unchanged: origin counts more than talent, family background beats performance. The statistics have remained surprisingly stable over many decades. Of the top executives of Germany’s 100 largest companies, roughly half are from the upper class. Another third have an upper middle class background, and only 15 percent emerged from the middle or working classes. The position of Chairman of the Board is almost exclusively the domain of descendants of the upper middle and upper classes, which, according to Hartmann’s classification, represent the wealthiest 3.5 percent of the population.31
Conditions are similar in other European countries. Hartmann believes that this is due primarily to “the obvious importance of family clans in the economy”.32 This of course applies above all to large enterprises still owned by family dynasties, which in Germany, Italy, and the Netherlands play a prominent role in the economy. In such enterprises, top positions are directly inherited. However, in corporations that are not owned by a single family, recruitment mechanisms also tend to follow the classic feudal pattern.
How this works could recently be observed in the case of Volkswagen, a corporation with strong employee representation on the board and the state of Lower Saxony as a shareholder with veto powers. When Ferdinand Piëch and his wife resigned their board positions as a result of disagreements with the former CEO Martin Winterkorn, the Volkswagen board nominated two nieces of company patriarch Piëch as new members of the board. What aside from blood ties qualified the two women to be involved in corporate strategy of the world’s largest carmaker, with almost 600,000 employees and 200 billion euros in annual sales, remains a well-kept secret. Even their uncle Ferdinand seems to have had some doubts.
According to Hartmann, only in public and cooperative enterprises, or in those with the state as majority owner, can a different selection method for top positions be observed. Career prospects are twice as high for candidates from the general population. Correspondingly, the economic elite in countries where the state plays a greater role, for example in Scandinavia, is slightly less determined by family background than in Germany. To the extent that changes can be observed over recent years in Europe as a whole, the trend is towards even further closure among the upper ranks.
According to statistics presented by Piketty, in the nineteenth and early twentieth centuries, 80 to 90 percent of all private wealth was inherited. It was not until the decades following World War II that the working middle class was in a position to accumulate personal wealth—to the point that in the 1970s, the share of the upper class in total wealth had declined to about 30 percent. This period was the first time in recent history that more than half of all wealth was not passed down from previous generations.
This heyday of the performance principle, however, lasted less than a decade. In the early 1980s, inheritances had regained their dominant position, registering further gains in subsequent years. In 2010, more than two-thirds of all wealth was inherited from previous generations. The distribution of wealth has since changed once again in favour of the richest. Only 40 percent of all wealth in industrialized countries belongs to middle-class families.
Summing up his findings, Piketty states that “[t]he very high concentration of capital is explained mainly by the importance of inherited wealth and its cumulative effects”.33 He mentions another interesting figure in this context. Guess how large is the share of the population in every generation who inherit more than the lower half of the population earns during a lifetime? In the year 1870 it was 10 percent, today it is 15 percent. This figure shows that by now, inheritance plays a major role in the upper middle class. Far beyond the reach of even high earners, however, are the hundreds of millions or even billions in capital that in the upper class are passed down from one generation to the next, as a rule without being subject to significant taxation.
At the top of the wealth pyramid, where we are dealing not only with wealth but with capital, the changes in the relevance of inherited wealth just described never occurred: capital is owned by those who inherit it. This has been the rule since the nineteenth century, everything else is the exception. Of course the first-generation Rockefellers and Fords, the Jobs’, Gates’, Bezos’, and Zuckerbergs who started with little and are leaving their descendants billion-dollar empires did and do exist. Cases of such careers, however, almost never happen in established markets but only in newly emerging markets where enterprises can in fact start out with little capital and grow very rapidly. Such cases are much rarer than such fabulous stories of self-made billionaires seem to suggest.
The German business daily Handelsblatt recently published calculations according to which among the country’s wealthiest business families, merely 10 percent are first generation. This means that 90 percent have not built up their own enterprises but took them over from their parents.34 The surest and best way to become a capital owner continues to be the choice of the right parents.
Marriage may also make it possible to start a career as capital owner. Among the women in Germany nowadays regarded as “major business personalities”, several are from modest backgrounds. Liz Mohn, ruler over Bertelsmann, started out as a dental assistant, Friede Springer as a nanny. The recently deceased Johanna Quandt, a major BMW shareholder, was originally a secretary, while Maria-Elisabeth Schaeffler, owner of the Schaeffler Group, started out as a student who failed to complete any of her university programs. All the women just mentioned today play in the billionaires’ league. Of course, there are also a few men who have managed to gain access to the exclusive club of capital owners through marriage.
Capital under capitalism is an exclusive good, that is, one to which most people will have no access. You would quickly find out if, without the benefit of marriage or inheritance or enough money of your own, you were to take the chance of setting up your own business and went to a bank with a good innovative idea to secure the necessary financing.
In fact, even most large enterprises got off the ground only because financing was available through family connections. In his book Patriarchs, the Swiss author Alex Capus recounts the life stories of ten Swiss enterprises that laid the groundwork for what today are global corporations: Rudolf Lindt, chocolate manufacturer; Carl Frank Bally, shoe manufacturer; Julius Maggi, king of spices; Antoine Le Coultre, maker of precision watches; Henri Nestlé, founder of the eponymous food giant; Johann Jacob Leu, banker; Fritz Hoffmann-La Roche, who established a pharmaceutical corporation based on ineffective cough medicine; Charles Brown and Walter Boveri, founders of what is now Asea Brown Boveri; Walter Gerber, inventor of processed cheese; and Emil Bührle, weapons manufacturer and supplier to the German Wehrmacht.
As different as their industries may have been, the ten individuals share one thing in common. They either came from a rich family or they married into one. The author sums up the results of his study as follows: “It is clear that the majority of the enterprises examined here would hardly have thrived after their start-up period without the money of their fathers-in-law; the other four patriarchs did not depend on their wives’ money since they themselves were wealthy. It seems that in old Europe, the classic career as a dishwasher rarely led to the top of the economic hierarchy.”35
This result is not due to the Swiss setting or the historical period in which these enterprises were established. The book Visionaries Who Succeed,36 published in 2006, portrays innovative young German entrepreneurs. We meet programmers, engineers, and pharmaceutical researchers. The same picture emerges: two of the entrepreneurs featured inherited their businesses, one started out with a bank guarantee from his stepfather, one team of founders benefited from its connection with a university hospital, and one was the beneficiary of a government start-up fund. As a rule, private banks were not willing to support the young entrepreneurs, even though they all had good ideas and a business model that turned out to be successful.
The only chance to set up a firm without the backing of wealthy fathers or in-laws is to secure private or public venture capital, which is rarely available. Private financing is usually available only for firms with short-term prospects of being listed on the stock exchange or of being sold, which forces such firms to adopt particular priorities and profit goals. Public financing or loan guarantees do help some young entrepreneurs, but especially in Germany and Europe are available only to a very limited extent. Of course you can also scrape together all your savings and put up your home as collateral. Many small firms start out in this fashion. However, both with respect to industry and growth potential, such ventures tend to face strong restrictions. Exceedingly few make it to the top in this way.
In the final analysis, inheritance accounts for the trans-generational, dynastic stability of the capitalist upper class that so much resembles the old hereditary nobility. In his classic The Reich Dissolved, the Rich Remained, Bernt Engelmann documents such striking continuities particularly in twentieth-century Germany. Based on last names, he demonstrates “that the money and power elite of the kingdom of Bavaria that was assembled in the Chamber of the Imperial Council of 1913 was able to pass on intact all of their wealth and most of the social positions to their descendants of today—notwithstanding two lost world wars, complete monetary devaluation, abolition of the nobility’s privileges, as well as attempted land and other reforms.”37
The rejection of feudal privileges was a central element of the Enlightenment. All human beings are equal and should therefore start out with the same opportunities, with talent and performance determining the social status of the individual rather than family pedigree assigned by birth. In contrast to those who call themselves liberals today, the great pioneer of liberalism in the nineteenth century, John Stuart Mill, was committed to true liberal traditions. He was a vehement opponent of inherited privileges and demanded government intervention: “Whatever fortune a parent may have inherited, or still more, may have acquired, I cannot admit that he owes to his children, merely because they are his children, to leave them rich, without the necessity of any exertion. […] Without supposing extreme cases, it may be affirmed that in a majority of instances the good not only of society but of the individuals would be better consulted by bequeathing to them a moderate, than a large provision.”38
In the middle of the twentieth century, the liberal economist Alexander Rüstow attacked the “feudal-plutocratic” inheritance law on which capitalism had been based since its inception. “The inherited inequality of opportunity is the essential institutional structural element through which feudalism continues to exist in market society, turning it into a plutocracy, the rule of the rich.”39 One might also put it as follows: It is capitalism that accounts for the survival of feudalism in the market economy. For without the current inheritance law, there would be no capital ownership concentrated in a few hands passed on from generation to generation, and without this legal basis there would be no capitalism, which rests on private ownership of the economy.
To get to the root of the problem, Rüstow continued the liberal tradition of John Stuart Mill, calling for limiting individual inheritance to an amount that a normal earner could actually accumulate in a lifetime through work and savings. In current purchasing power, and including those with higher salaries, this would amount to about one million euros per child. Thus, while the middle class would be able to pass on its wealth, big capital would not. Establishing such an inheritance law would not just be a minor reform of capitalism, but one that would deprive it of its foundation and require institutional changes in the economic property regime.
At least at the top, capitalism has always been what Piketty refers to as a “patrimonial society”—a society in which it is primarily the size of the “paternal inheritance” that decides who will and who will not be rich.
You can’t blame former German chancellor Gerhard Schröder for failing to announce the reforms he would later implement. The cigar-smoking Social Democrat had already used the slogan “The New Middle” in the election campaign of 1998. Even if a slightly different meaning was intended at the time, a “new middle” was indeed the result of his seven years in office from 1998–2005. Liberalization of the labour market and cuts to social security and pensions (reforms known in Germany as “Hartz IV”, after Schröder’s key adviser Peter Hartz) did shift the middle of society downward, in this sense creating a new middle—one with lower incomes and a significantly less secure life.
The “old middle” consisted of millions of people in normal jobs: plumbers and flight attendants, lab managers and assistants, bus drivers and teachers, university staff and hospital doctors, programmers and engineers. As a rule, they all worked full-time, personal circumstances permitting, had permanent contracts, a good salary, and the prospect of a more or less secure old age. Many were organized in trade unions, with collective agreements ensuring that their incomes would rise, if not rapidly, at least gradually. Life was not a walk in the park, but relatively predictable and could be planned.
The decades following World War II were the time of the “old middle” when the goal of former economics minister and chancellor Ludwig Erhard was largely achieved: “to leave behind once and for all the old conservative social structure with a thin upper class and a large lower class by means of broad-based mass purchasing power.” Yet “once and for all” was not to be the case. At some point in the 1980s or 1990s, depending on the country, the worthy goal of prosperity for all was forgotten in all European countries. It happened precisely at the time when politicians like Reagan and Thatcher and their followers went to work to make capitalism once again genuinely capitalist.
In many sectors of German society the “old middle” has become a thing of the past. As a result of labour market reforms, privatization, spending cuts and job cuts in the public service, it has been replaced by a “new middle”. Low-wage workers, temporary and limited contract employees, the self-employed, and part-timers whose meagre incomes are not subject to any collective agreement. Many of them are forced to move from one short-term job to another, their lives characterized by insecurity and uncertainty.
The incomes of this “new middle” are roughly 20 percent below the level what was paid for comparable work in the year 2000. In some sectors, the decline is even more dramatic. While these changes had started prior to Gerhard Schröder’s time in office and continued after him, the so-called Agenda 2010—his government’s reform program co-written with the industrial and employer associations made up of capital income recipients—was the catalyst of this radical change.
With these changes any explanation of income differences in society’s middle in terms of the performance principle has become completely ludicrous. When in the past the doorbell rang and a delivery person dropped off a package for us, this individual was a civil servant. He had a job for life, a good income and the prospect of a decent pension. In the mid-1990s, the postal service was privatized and turned into a share company, which by the year 2000 was listed on the stock exchange. Since that time, newly-hired delivery personnel are no longer civil servants, earn significantly less, and frequently are on a limited contract.
The time came when the privatized post office was no longer content with just this form of wage dumping. In 2015 it set up a subsidiary, DHL Delivery. Its employees are not paid according to the parent company’s wage rates but receive 20 percent less. Company pensions were eliminated as well. Somewhat cynically, these delivery workers on limited contracts were then offered permanent positions in the subsidiary. Of course management was unconcerned about how these employees were supposed to pay their rent and feed their families—a lack of concern also on the part of the federal government which, with the power of the shares it controlled, could have stopped the wage squeeze.
The postal service is not an isolated case. The model just described has become a template in many sectors of the economy. The formerly state-owned airline Lufthansa, completely privatized by 1997, also follows this model. In business jargon this is referred to as the separation between brand and production. The brand is the marketing platform that the customer associates with quality. Reserving a flight with Lufhansa feels different from buying a seat from low-cost airline Ryanair. The brand name is used as a cover for setting up different individual companies—so-called platforms—with vastly different working conditions and wage rates. Lufthansa, for example, has created the subsidiary Eurowings as its own low-cost carrier. The fact that this outfit is somehow part of Lufthansa is supposed to reassure customers, while low wages and poor working conditions make for good dividends.
This “wage dumping” model reaches its state of perfection when management succeeds in having the different platforms with their varying wage rates compete with each other internally, undercutting each other in their fight for jobs. In large technology firms, departments are pitted against each other in order to produce the lowest-cost solution. Thus German engineers have to compete with engineers from Belarus, or German software developers with their Indian counterparts. To the extent that internal competition works, management and shareholders win.
Outsourcing jobs or entire sectors through contract work or temporary employment are playing a similar role in many firms. As a result of such arrangements, work performance and income, hard work and success, no longer bear any justifiable relation with each other. Whether on the assembly lines of German auto manufacturers, the service counters of the post office, or in the cars of German trains, people work side by side who have a similar education, do the same jobs, work equally hard, yet take home vastly different wages. Obviously a postal worker today does not put in 20 or 30 percent less work than did her predecessors with a guarantee of lifetime employment just because her wage has declined by this amount.
The Hartz IV labour reforms mentioned above provide for “subsidies for employees of reduced work capability”, a euphemism for paying public subsidies to skilled workers who lost their jobs but are re-hired on contract at half their previous wage for doing the same work. Obviously this radical wage drop that forces workers to apply for supplementary welfare payments is not due to a sudden 50 percent reduction in the skilled workers’ ability. The same has happened to employees that the privatized postal office shifted to its low-wage subsidiary DHL Delivery or who have found employment with one of its competitors whose business models are all based on low wages.
Even a good education no longer guarantees a secure life. The second largest group in Germany’s low wage sector today following the unskilled are academics. One reason is that public expenditure cuts have turned German universities into low-wage zones. The large majority who fail to secure one of the small number of sought-after full professorships are paying for their passion for research and teaching with a lifetime of poor living conditions and contract jobs.
Even access to education is today no longer primarily a matter of individual talent. In many fields the rule is: family background before talent. We are familiar with this principle from international universities that call themselves elite universities, by which they seem to suggest above all the hereditary passing on of the best education opportunities and the best positions. This principle is increasingly coming to dominate other educational institutions as well.
In the United States parental income is a fairly reliable predictor of whether or not the offspring will go to university, and if so which institution it will be. For those aiming to get into Harvard, an IQ level like that of Harvard (and Yale) graduate George W. Bush will not pose an obstacle if mom and dad make generous donations, and preferably are Harvard graduates themselves. The average annual income of the parents of students attending Harvard is around 450,000 dollars—the average income of the wealthiest 2 percent of American families.
Top European universities are only slightly more democratic. The average annual parental income of students at Sciences Po, one of the two French elite universities that are the gateway for most leadership positions in French politics and business, is estimated to be 90,000 euros. In contrast to Harvard, the offspring of the top 10 percent of earners may make it into those schools.
In Germany such exclusive—in the sense of excluding a large majority—educational institutions did not exist until a policy called “initiative for excellence” started to change things. Tuition rates at Germany’s private universities are significantly below those at Harvard or Stanford, but they are high enough to ensure that the children of the top 10 percent dominate the cohort. Even in the much-maligned “mass universities”, tuition fees and inadequate student aid are resulting in much stronger social selection than was the case in the German educational system of the 1970s and 1980s.
Much debated but still unchanged, the three-tiered German school system with its early selection process at the end of Grade 4 reinforces dependence of individual educational opportunities on family background. While this system existed in the decades after Word War II, its implications were less dramatic then than they are today simply because there was less social inequality and poor and wealthy families lived in the same neighbourhoods. As a result, the three different types of schools did not differ as much in terms of their infrastructure and level of teaching.
It is a generally recognized fact in economics, to the extent the discipline deals with such issues, that greater social inequality significantly reduces social mobility, i. e. the opportunity for social advancement. In this context, U.S. economist Alan Krueger has coined the phrase “the Great Gatsby curve” to sum up the general results of his empirically based country studies.
Movie buffs know the story of Jay Gatsby, the main character in a novel by F. Scott Fitzgerald published in 1925. There have been several cinematic treatments of the novel, the most recent in 2013 with Leonardo DiCaprio in the lead role. Gatsby lived the American dream that millions of people are still dreaming today, making it from poor beginnings to multi-millionaire—even if the black market dealings that made his career possible may not be part of the official version of the myth. But regardless of how he succeeded, for Alan Krueger the name Gatsby signifies the career opportunities a society offers. The Gatsby curve represents the probability of such a career as dependent on the degree of social inequality. Krueger is not referring to the classic career from dishwasher to millionaire, but rather the general opportunity to achieve a higher social status than one’s parents.
Krueger’s findings are clear. In countries where the gap between rich and poor is particularly wide, such as Chile or Brazil, but also the United States, the road from the bottom to the top is exceptionally steep. In contrast, egalitarian societies such as Denmark or Sweden offer greater opportunities to work your way to the top. Germany occupies a middle position, though conditions since the turn of the century and the advent of the Agenda 2010 reforms have clearly changed things for the worse.
Currently, in Germany, 1.6 million children are growing up in families dependent on social welfare payments (“Hartz IV”). Few of them will ever have any real opportunities for social improvement. Being born in poverty means a life in poverty—this brutal historical fact, true for centuries, is once again the rule for most people. It was not capitalism but welfare states with their social security and well-funded public education systems that in the second half of the twentieth century created the conditions in which many were able to realize the dream of social advancement. Those times are gone.