Prior to the upcoming meeting of the World Economic Forum in Davos, Switzerland, the non-profit organization Oxfam-IBIS have released their annual report on world inequality. The World Economic Forum is a meeting of powerful politicians and businessmen, spiced up with a few celebrities, who are there for no one really knows what reason. This year, Shakira will be attending.
Oxfam’s report strikingly concludes that the eight richest people in the world own as much wealth as the world’s poorest 50%. Oxfam use this figure to argue that the world is marred by inequality and the story has been picked up by several major news outlets, such as ABC News, USA Today, Newsweek, The Guardian, and others. But is the figure even correct?
Well, let’s look at a few things.
For one, Oxfam arrive at this number by looking at the net fortune of individuals. This means that an unemployed African man owning two dollars is technically richer than a medical student in Beverly Hills who is still in student debt (and thus has a negative net fortune). Since people in the developed world have access to credit and loans that people in developing countries do not have access to, many people in the developed world actually have a negative net fortune, since they have loans to finance their cars, houses, educations, or even bonds and stock portfolios. In short, net fortune is a misleading way to look at wealth. Does anyone seriously believe that someone who is soon to be a successful doctor or lawyer in the Beverly Hills area is worse off than someone in the developing world with no education and no job opportunities who just so happens to have no debt? Of course not! There are many other metrics that would give a better picture of the world’s distribution of wealth and it is hard to see how Oxfam could have chosen this metric in good faith. Especially since year after year, they release a report like this, and year after year, they are criticized by developmental economists, yet they never do much to defend their approach.
Another way to look at the silliness of Oxfam’s insistence on net fortune is an apocryphal story sometimes told about Donald Trump. One day, when Trump was one billion dollars in debt, he took a walk with his daughter, pointed to a homeless man and said: “See that bum? He has a billion dollars more than me.” In this instance, Trump and Oxfam are using the same approach to economics to arrive at spectacular conclusions like this. Technically, Trump had a negative net fortune, just like our doctor-to-be in Beverly Hills is poorer than an African villager with no job and no debt. Looking at net fortune in isolation is just completely misleading, if not to say useless, when you want to find out how the world’s wealth is distributed. It’s bad economics and ignores not only prospects and economic opportunities but also what economists call human capital, that is, an individual’s stock of knowledge, habits, talents, creativity, and so on. Every economic analysis is of course an approximation – we’re not faulting Oxfam for not having made a perfect analysis, because no analysis is – it’s just that Oxfam’s report is so far out of the ballpark as to barely qualify as an analysis at all.
Secondly, Oxfam is basing their report on data from banks, but as shown by one of the most original studies in economics in the last 10 to 15 years, namely The Mystery of Capital by the Peruvian economist Hernando de Soto, a lot of property in the third world is not registered or documented anywhere. In much of the developing world, people live in communities where everyone just knows who owns what house and what rice fields, without there ever existing any formal documents detailing that ownership. This means that many people in the developing world who actually have a positive net fortune will be registered as having no fortune. And this is of course another reason that one shouldn’t leap to spectacular conclusions like “eight people own as much as the poorest 50% of the world.”
A third point is that the executive director of Oxfam, in speaking about their report on inequality, claims that “inequality is undermining democracy.” This is a claim that often gets thrown around in economics debates by non-economists, and only very rarely is the argument corroborated by any kind of data. As we talked about in our Thomas Piketty video, economists have actually run analyses on the correlation of democracy and civil rights on the one hand and inequality and the amassment of wealth on the other. The best studies of this kind show that there is no correlation. If Oxfam has any data to suggest that there is one, they have not presented it to the public. They have simply claimed that there is a connection, and the press has bought their claim wholesale.
Now of course, the world is by no means equal. Opportunity, capital, and ability are not distributed equally amongst the people of the world. The most influential political philosopher of the 20th century, John Rawls, dedicated his major work to trying to find out how the world could be made more just and equal. There are many interesting discussions that one could have on how to do this. But most social scientists agree that it’s not as easy as it seems. And basing one’s arguments on false and misleading claims the way Oxfam does certainly doesn’t help.