Plutonomy (n.) -  An economy that is driven by or that disproportionately benefits wealthy people, or one where the creation of wealth is the principal goal.

There’s currently a sympathy deficit regarding the very rich. Or so the rich might argue because they bear the heavy burden of spending enough to keep today’s plutonomy humming. They are getting diminishing psychological returns on their spending now that luxury brands are becoming democratized. When there are 379 Louis Vuitton and 227 Gucci stores, who cares?

America’s richest 1% of households own more than half of the nation’s stocks and control more wealth ($16 trillion) than the bottom 90%. When the richest 20% account for almost 60% of consumption, you see why rising oil prices have had so little effect on consumption. It is increasingly expensive to be rich. The Forbes CLEW index (the Cost of Living Extremely Well) has been rising much faster than the banal CPI (consumer price index). This is the outer symptom of a fascinating psychological phenomenon: Envy increases while (and perhaps even faster than) wealth does. When affluence in the material economy guarantees that a large majority can take for granted things that a few generations ago were luxuries for a small minority (a nice home, nice vacations, a second home, college education, comfortable retirement), the “positional economy” becomes more important.

Positional goods and services are inherently minority enjoyments. Time was, certain clothes, luggage, wristwatches, handbags, automobiles, etc., sufficed. But with so much money sloshing around the world, too many people can purchase them. Too many, in the sense that the value of acquiring a “positional good” is linked to the fact that all but a few people cannot acquire it.

That used to be guaranteed because supplies of many positional goods were inelastic; they were made by a small class of European craftsmen. But when they are mass-produced in developing nations, they cannot long remain such goods. When 40% of all Japanese and, Fortune reports, 94.3% of Japanese women in their 20s own a Louis Vuitton item, its positional value vanishes.

As Adam Smith wrote in “The Wealth of Nations,” for most rich people “the chief enjoyment of riches consists in the parade of riches, which in their eye is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves.”

This entry was posted on Friday, October 12th, 2007 at 2:58 pm and is filed under Money Savvy, News, Only in America, People, Personal Finance, Philanthropy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.