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Why extreme wealth is not merited

Posted by Didier Jacobs Senior Economist at Oxfam America

30th Dec 2015

A child watches traffic in Manila, Philippines 2014

As inequality grows and the rich get richer, what are the implications of extreme wealth and is it in any way merited? Didier Jacobs, Senior Economist at Oxfam America, introduces his latest discussion paper which argues that extreme wealth is not justified, and gives us an insight into some of his key findings. 

The world's 85 (now 80) richest people own as much wealth as half of humanity according to research conducted by Oxfam which has made waves around the world. But why is it a problem? Not everyone shares the gut feeling that it can't be right for 85 people to have the same net "worth" as 3.5 billion people. Rich people create wealth and jobs for others, they argue. Redistributing that wealth would destroy it and harm the poor.

On the other side, Oxfam has been campaigning against extreme inequality because of its knock-on effects: it impedes poverty alleviation, slows economic growth, compounds gender inequality, drives inequality in health and education outcomes, undermines economic mobility over generations, fuels crime, undermines social cohesion, and harms democracy.

Oxfam America campaign against inequality and extreme wealthBut whatever its effects on politics and the economy, is extreme wealth merited in the first place? A new Oxfam Discussion Paper explores its causes and makes the ethical case against extreme wealth from the perspective of meritocracy, according to which people deserve wealth in proportion to their contribution to society.

Extreme wealth evokes images of both deserving entrepreneurs and fat cats. This paper parses them out both theoretically and empirically. It systematically reviews six sources of extreme wealth that are not meritocratic through an analytical framework dubbed "the ladder of demerit" (See Figure 1). The ladder's higher rungs are clearly not meritocratic. The lower ones reward talented people disproportionately to their productive activities:

  • Crime represents a negative contribution to society.
  • Cronyism represents a negative contribution to society as well, but less clearly so than crime because it is not always illegal, and lobbying for private interests is sometimes in the public interest.
  • Inheritance represents neither a negative nor a positive contribution to society.
  • Monopolies and other market failures create rents that do not compensate productive activities and therefore are not merited by those who capture them. However, unlike inheritance rents, it does take hard work to capture monopoly rents.
  • An entrepreneur's market returns are proportional to the intrinsic value of his or her contribution to society as well as to the size of society itself. Globalization, economic and population growth boost extreme wealth regardless of entrepreneurs' contributions to society.
  • Technology enables some professionals to reach a mass customer base. This phenomenon is fundamentally meritocratic as it boosts the returns to talent itself. However, it stretches meritocracy to its extreme and is not impervious to luck. For instance, online courses are poised to revolutionize the higher education industry and will allow a few excellent educators to become rich while many very good - or simply less lucky - educators will find themselves out of work.

Empirical evidence, computed from Forbes' list of billionaires, provides a tentative indication of the relative importance of each rung of the ladder.

It turns out that half of the world's billionaire wealth is not merited because it is either inherited or is subject to a high presumption of cronyism. Another fifteen percent of the world's billionaire wealth is derived from industries that are prone to market failures and monopoly rents like finance. Furthermore, all billionaire wealth depends on globalization, economic and population growth, there were no billionaires in today's dollars prior to the industrial revolution (besides plundering aristocrats) simply because the size and fragmentation of the global economy could not support them.

By contrast, crime and the automation of knowledge in some professions account only for negligible amounts of the world's billionaire wealth. (The technology rung of the ladder does not refer to the extreme wealth derived from the IT industry, which is accounted for in the monopoly rung, but rather to the narrow phenomenon of automation of knowledge in some professions). 71% of extreme wealth is derived from either state-dependent industries or inheritance

For developing countries alone, 71% of extreme wealth is derived from either state-dependent industries or inheritance - that is $1.65 trillion held by 470 individuals in 38 developing countries. State-dependent industries that offer opportunities of rent-seeking - like mining, telecoms and utilities - account for a whopping 56% of billionaire wealth in these countries. That wealth has a direct link to poverty: poor people are customers of telecom and utility companies and states depend on royalties from extractive industries to provide basic social services.

Neither Oxfam nor I necessarily espouse meritocracy. There are other theories of justice to assess what the right distribution of wealth ought to be. Oxfam generally advocates for a society designed from the point of view of its poorest and most marginalized members, which makes Rawls' theory of justice a closer match. However, meritocracy does have some popular appeal, and it is the number one school of thought to defend inequality. This paper demonstrates that, even based on the values of inequality's defenders, extreme wealth is hardly justified.

However, meritocracy does have some popular appeal, and it is the number one school of thought to defend inequality. This paper demonstrates that, even based on the values of inequality's defenders, extreme wealth is hardly justified.

Figure 1 

The Ladder of Demerit

Read more

Photo: A child watches traffic in Manila, Philippines 2014. Dewald Brand, Miran for Oxfam

Blog post written by Didier Jacobs

Senior Economist at Oxfam America

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