The New World’s Richest Man Is a Symbol of Our Broken Economy

 The world got a new richest man recently.

Though most of the press focused on the dethroning of Elon Musk, whose sweaty gyrations as the new owner of Twitter have sent the stock of his other companies, and therefore his net worth, plummeting, I found the man who replaced him just as interesting. The newest contender in the “World’s Richest Man” race is Bernard Arnault.

Arnault is very rich because he’s the head of LVMH. If, like me, you have pedestrian tastes and even more pedestrian resources, you might not be terribly familiar with this company. It stands for Louis Vuitton, Moet, and Hennessy, and it’s the biggest luxury-goods company in the world. In addition to the brands that make up its initials, LVMH owns a bunch of companies that sell expensive things to rich people: Tiffany, Bulgari, Christian Dior, Givenchy, and even a yacht company. LVMH is the most valuable company based in the EU.

Arnault’s rise to the top is mostly meaningless — the World’s Richest Man rankings are mostly based on the price fluctuations of stocks that, if these guys sold them, would quickly become less valuable — but I think it’s symbolic. It shows that much of the big money in today’s economy comes from selling very expensive things to a very small slice of the population.

If you look at the lists of the world’s wealthiest people and its most valuable companies, you’ll notice something perverse. Many of the world’s most lucrative businesses fall into one of three categories: 1) market speculation, which is how the likes of Warren Buffett and Berkshire Hathaway make their money; 2) attention-mining and advertising like Alphabet (Google) and Meta (Facebook); and making premium goods as LVMH, Tesla, and the world’s biggest company, Apple do.

(Yes, fanboys, Apple is, if not a luxury brand, certainly a “premium” one, and it markets itself as such. I agree with this post, which argues that Apple has achieved the status of an “essential luxury brand.” )

In the part of the economy that actually makes things, the money seems to be in producing expensive stuff that will make the lives of already-comfortable people a little more comfortable.

The luxury sector of the economy is booming right now. Though most companies are battening the hatches because of inflation and a potential recession, luxury firms are thriving. Rich people aren’t troubled by the fact that eggs and milk cost more than they used to, and they’re consuming like never before. Check out this passage from a CNBC report:

[Amrita Banta, managing director of Agility Research & Strategy] said there’s been a cultural shift since the recession in 2008 and that high net worth consumers today are less guilty about spending in a slowdown, and “feel entitled to spend their wealth.” She said that’s partly a reflection of people in developing countries, where wealth is growing.

Luxury companies might be noticing a spending slowdown among the 80% of their customers who are “nearly affluent,” said [Milton] Pedraza of the Luxury Institute. But he said those consumers typically account for about 30% of sales.

Instead, he said luxury brands often count on just 20% of its clientele − the ultra-wealthy and very wealthy — for the majority of their sales. And since that cadre is far more inflation and recession-resistant, luxury companies tend to experience a slowdown last, he said.

To summarize: the luxury industry is really only interested in a tiny, very wealthy sliver of the population, and, as long as they keep consuming ravenously, the industry will continue to make tons of money. Sure, those of you who are “nearly affluent” might have to stretch a bit to afford that new pair of fancy shoes in an inflationary economy, but you’re a rounding error for the industry. All that matters is that the super-rich keep acquiring stuff. Analysts predict that the luxury sector will grow by 60% between now and 2030.

Though the growth of the luxury industry is great for Bernard Arnault, it’s not great for the rest of us.

The boom in luxury goods reflects a sickness in our overall economy. It’s not that manufacturers just discovered that there are rich people; it’s that rich people are making more and more money. Since 1976, the top 10% of Americans have increased their income by 163%, adjusted for inflation, compared to 61% for the middle class. This means that most of the economic growth since the Gerald Ford administration has gone to a small sliver of the population. Companies are just following the money.

As it becomes clear that the big money comes from catering to the whims of the wealthy, more and more companies will move in this direction.

Buying luxury goods is an exercise in conspicuous, wasteful consumption. Part of the purpose of buying a Porsche instead of a Honda is to demonstrate to everyone else on the road that you had tens of thousands of dollars to flush down the toilet. It’s a big neon sign, reading “rich guy inside!” Luxury consumers are downright eager to pay stupid prices for goods; that’s sort of the point. Consequently, the luxury sector has some of the highest profit margins of any industry.

A little secret of economics is that companies like to make big profits rather than small profits. So if the big profits are in luxury, companies are going to move in that direction. Take the auto industry as an example. According to McKinsey, the 2–3% of the car market that counts as “luxury” will grow by 8–14% over the next decade. The rest of the car market won’t grow at all.

Even among cars for the rest of us, the real money seems to be in more expensive trucks and SUVs for the upper middle class, which means that carmakers are losing interest in producing affordable cars with low profit margins. A few years ago, Ford stopped making cars altogether; they just didn’t produce as much profit as trucks and SUVs, which can be marketed to a more wealthy clientele and bring in higher profits.

So get ready to see carmakers focus most of their efforts on making cars that ordinary Americans can’t afford to buy.

Our economy’s turn toward luxury isn’t sustainable. There just aren’t enough rich people to support a whole economy, which means that a system that caters to the wealthy will never really be healthy.

The American economy has been at its healthiest when companies made goods that were broadly accessible to the public, and workers were paid well to manufacture them. A classic example of this is Henry Ford’s Model T. Ford kept his car simple, and it was the first automobile that was affordable for the middle class — it cost $260 in 1924, about $4,500 in today’s money. Ford paid his workers an unprecedented $5 a day so that they could afford a Model T, too. Much of the growth of the golden age of the American economy, between World War II and the 1970s, came from companies following the Ford model — they paid their workers well to produce goods that those workers could afford to buy.

We’ve drifted a long way from those days.

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It’s not just that an economy increasingly based on catering to the wealthy is economically bad; it’s morally wrong, too. It’s just gross for companies to be laser-focused on making the affluent a little more comfortable while people all over the country — and the world — are struggling. It gives off real fall-of-Rome vibes, with the wealthy cosseted in luxury, ignoring the plight of the masses who serve their every need. And it’s worth mentioning that economic inequality is a pretty reliable driver of social upheaval and revolution.

Someday, historians will look back on the economy we’re building and wonder why we thought it was a good idea to spend so much effort producing so much luxury for so few.

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