It’s that time of the year again! Oxfam has released its latest Global Inequality Report in which it is made to seem like we live in a dystopian future where all the resources are in the hand of a select few and the remainder of the world is somewhere between a Hobbesian scramble for resources and indentured servitude. Despite the flaws with Oxfam’s methodology being pointed out again and again, the report keeps gathering more attention with each passing year. It was much discussed during the Davos conference, where the world’s rich elites gather each year to complain about the fact that there are rich elites. Having thought the language in this year’s report was particularly apocalyptic it seems pertinent to lay out a comprehensive refutation to Oxfam and their misleading use of statistics.
A methodological can of worms
The way Oxfam calculates inequality is fundamentally flawed, and it is from this calculation that all other flaws flow. According to the report, the world’s eight richest people own the equivalent of the bottom 50 per cent, which is roughly 3.6 billion people. This statistic is arrived at based on one’s net worth (that is assets minus liabilities). This should send alarm bells sounding immediately, since most nations with a developed financial system allow for capable functioning despite debt, and many of the most materially wealthy individuals are incredibly indebted as they fuel their investments (especially in a low interest world) through taking on debt.
Let us consider the individual level then with net worth and see if it is an accurate portrait of unequal living standards. A recent Harvard graduate who is working an entry level job has no capital assets, a low to moderate income, and a very sizeable debt. Regardless, that debt is an investment in his future earning potential which is only currently unrealized, and nobody would be likely to call this individual deprived by any means. Now compare this to a rural Chinese farmer with a low income, but little to no debt. Given Oxfam’s calculations, the rural farmer far surpasses this indebted college graduate as it is a cross section of the economy during a given year.
While by no means are these statistics inaccurate, they are just grossly misrepresenting the relationships between individuals, and the causes of the various wealth gaps. Indebtedness is far more common in developed nations, which means that the poverty in developing nations is not adequately represented. By focusing on net wealth, Oxfam’s reports neglect the capabilities of different individuals in different areas, which means it fails to acknowledge where poverty is really extreme. At the same time, income itself in the absolute is not as relevant unless it is accounted at purchasing power parity.
Areas such as San Francisco and New York City have incredibly high earning individual’s living there, but the costs of living in these areas are at least proportionally as high. Someone working a senior level job in Silicon Valley may easily crack a six figure salary but not be able to afford as large a living space as a similarly professional person in Hungary. As a result, the absolute wealth of individuals does not adequately represent their relations to their surroundings in terms of cost of living and the relative wealth of their peers. In failing to do so, the actual quality of life of different people is not reflected.
The other issue methodologically is the presentation of wealth as somehow at the expense of others. Money is not like land, its use by someone does not deplete the stock available for all others since it is endogenously created and this creation is not restricted (despite attempts by central banks). An individual’s personal wealth does not necessarily exist at the expense of someone else, but generally arises in exchange for creating value (unless you are a Marxist or a follower of Proudhon in which case all profit is theft). Those eight individuals who are the top of Oxfam’s list, insofar as their wealth was acquired within the framework of free competition generally provided within developed nations, created a considerable amount of value for others.
The trillions of dollars possessed by the “top one per cent” is not stuffed in mattresses, but rather is invested, either through financial institutions or through the ownership of capital assets. In the first case, either new businesses are funded which create jobs and new products for consumers, or it is used to finance household debt for mortgages and other consumer purchases. As a result the wealth may nominally be in their possession, but its use is restricted to normal economic functioning which would require everyone to consume and interact with their wealth. In the latter case, their assets are the factories or shops or online marketplaces in which most people go to work, hang out with friends, consume as they please, or otherwise satisfy their needs and wants. The portrayal of ownership as necessarily exclusionary presents another problem with Oxfam’s report.
The economic reality
Over the last 150 years more people have been lifted from below subsistence levels than in all previous epochs of humanity combined. Over the last few decades the Chinese economic miracle has lifted 600 million people out of absolute poverty, thereby halving global extreme poverty levels. It is hard pressed to find an argument against the claim that we currently live in the most materially prosperous age in human history and this shows no signs of getting worse any time soon. Technological advance is improving life expectancy, reducing infant mortality, and increasing general welfare at an unparalleled rate, with the rate of improvement in technological capability looking to accelerate as new advances in artificial intelligence and the internet of things provide new alleviation from work and improved interconnectedness.
In terms of material access, recent years have even diminished the differences in the quality of life between rich and poor within developed nations. It is no longer the case that access to new innovations is restricted to the rich, with the cost of consumer technology at all-time lows relative to incomes. This has greatly improved the purchasing power of the poor and enabled improved capabilities across the socio-economic spectrum. Whereas it was once only the rich could afford a car, now the rich just have nicer cars, once only the rich could afford computers, now the most powerful computing technologies (aside from those built for specialized purposes) are available to all either through low prices or through communal outlets such as libraries. You’d be hard pressed to find working individual’s in the UK or US without smartphones. The access to technology of the vast majority in the developed world is a massive improvement over the inflation adjusted £1 a day the average Briton lived on before the industrial revolution.
Money is not like land. Its use by someone does not deplete the stock available for all others since it is endogenously created and this creation is not restricted.
Innovations such as the internet have also enabled global interconnectivity, breaking down barriers of information and relationships. Travel is cheaper and more accessible than it ever was, and middle class families generally do not see a family vacation as some unattainable luxury. If one looks only at one lacks, it becomes easy to forget all that the modern world has afforded the average person.
One of the misrepresentations of the Oxfam report stems from their desire to fix statistical values. Of course the richest one per cent of people seem unbelievable wealthy, you are looking only at the richest one per cent of people. Of course a small group of people own as much as the bottom 50 per cent, you are looking at the bottom 50 per cent. If you fix numbers such as one per cent or top 100, there will always be that many people in them, and they will always be at the bottom or the top by definition. However, if you look at the amount of people earning above $50,000 at purchasing power parity, that number rises with economic growth. If you look at the number of millionaires in the world, it is not a fixed number and has since the 1980’s risen rapidly.
Similarly, the composition of the top 100 is rarely given treatment, but it is worth considering. Unlike in Europe, the United States with its relatively more dynamic economy does not have a very dynastic class regarding wealth. Wealth is created and destroyed, and those in the rich rotate in and out of that category continuously. If you follow individuals in the United States, it is a general trend that most individuals have an increase in income that outstrips inflation, with the lower quintile being a combination of those who have fallen on hard times, failed businessmen, new immigrants, and yes, also those who have remained poor intergenerationally, though they by no means make up the whole of the poor. The dynamism of modern market economies is a wonder to be beheld, not some oppressive system to be scorned.
Now this is not to claim that we should embrace some Whig history or believe Pinker’s claims in Better Angels of Our Nature. The world may be materially wealthy today, but that does not mean problems do not exist, or that there is some teleological means of improvement. In the western world, prosperity has been driven by our relative liberties and the strength of the rule of law, which has limited arbitrary power to any select group. There are however scores of countries in which liberty and the rule of law are non-existent. These nations are not on some necessary path to improvement and corruption does plague and ruin the lives of many. While there are no longer many natural famines, man-made one’s continue to be a problem in countries with arbitrary power.
It is also not a large consolation to know that statistically extreme poverty is at its lowest rate in history if the absolute number of people in poverty is not continually declining. Individuals cannot be reduced to statistics, and the quality of life of each individual must be given adequate concern. Poverty, arbitrary power, and lack of autonomy are problems that are still afflicting far too many people and should be rallied against. It is however pertinent to acknowledge what the real cause of these problems are instead of blaming the rich.
As the rich get richer, it is also clear that the vast majority are getting richer with them. While the global economic stagnation triggered by the financial crisis is negatively affecting the wealth of many, it is important to understand what can be done about this in a way that does not randomly assign blame. Most of the world’s rich got rich through entrepreneurship or growing businesses, which in turn created the value that improved people’s lives. The opportunity for people to create further value and jobs, to innovate, to engage in commerce, are the means by which global economic growth can return and the quality of people’s lives once again improve.
What about inequality?
Another issue with the Oxfam report is that it assumes because there is inequality that this is some social ill that must be solved. Now this is itself a philosophical issue because it goes from what is, a certain state affairs, to a claim about what ought to be, that this state of affairs is bad, without adequately explaining where this jump came from. It is generally prima facie assumed that inequality is bad, but this claim should be given some more comprehensive treatment.
Inequality is simply a natural state of being. Not all people were born with the same skill sets, identical interests, to equally prosperous families, and certainly did not grow up with the same life experiences. There are some inequalities we simply cannot do anything about; there is an unequal placement of water across the globe, is this geographic inequality an issue to be dealt with? Such a proposition would be absurd. Despite these inequalities, the western legal framework is predicated upon the equal treatments of all individuals before the law, irrespective of any inequalities between them that are otherwise apparent.
Now to seek perfect equality between all would be a disastrously totalitarian endeavor as many inequalities, such as in education and income, come from conscious choices and decisions. Someone who seeks to be a doctor does so acknowledging the capital investment and returns, similarly for someone who goes into the family business, or decides to work in construction. Skill based requirements and personal likes and dislikes factor into the decisions we make, and since these decisions involve opportunity costs, the fact that we do not all make the same decisions means some inequality will necessarily exist.
To respond to this a common line of critique is that perfect equality is not the desired goal, but rather that our current levels of inequality are unacceptable. This has to be advanced for some reason as well, and there does not seem to be strong evidence in favor of the negatives that come from inequality. The claims that inequality reduces economic growth or prevents innovation have little to no supporting economic evidence.
The dynamism of modern market economies is a wonder to be beheld, not some oppressive system to be scorned.
Now there are certain schools of thought that would apply a negative to inequality based on their philosophical framework regardless of the overt lack of detriments seen. For example, Marxists would claim that the lack of material desperation of the working class in modern society does not mean that they are actually doing well, and that any level of contentedness in their current lives is the result of false consciousness. Similarly, someone in the tradition of Foucault could analyze social degradation and mental illness in a political and economic context, saying that a high level of inequality serves to reproduce power structures that are psychologically oppressive and is thereby undesirable. Comprehensive critiques of both of these positions are available in a plethora of other texts so will not be considered here.
It is however not possible to claim that inequality has no effects, just that not all inequality has effects. Inequality within socio-economic groups has shown to be considerably more detrimental than inequality between groups. For example, from the perspective of someone in my socio-economic group, a rich banker having purchased a new Ferrari has no impact on the quality of their life, but their neighbor purchasing one might. Growing inequalities within groups lead to social discord, envy, and possibly the disintegration of the group itself which may lead to negative psychological effects, reduced productivity, and a lower quality of life. If this issue is to be treated, social cohesion becomes a more important input than general inequality.
Otherwise the issues surrounding inequality require a more substantial ethical treatment than is presented by Oxfam.
More ideology than "science"
The recent fascination with inequality since the financial crisis has many possible causes. Studies have shown that Americans generally do not have a negative view of specific wealthy people such as Bill Gates, but rather of classes of wealthy people such as bankers and lawyers. This suggests that dislike of those in higher income groups is not based necessarily based on their higher socio-economic status, but rather the belief that such a status is unearned. With much media commotion about those who have inherited their wealth or bankers that have gotten away with millions after wrecking the economy, this may have propagated a feeling that those who earned their income are a minority among a sea of unearned exploiters.
It is also possible that our current system of lemon socialism, in which gains have been privatized and losses socialized, has led to an incentive framework that favors individuals with low concern about the social costs to their actions, and has lowered risk accounting in general. This system may be at the heart of the hyper-individualism of today’s world, since when one is responsible for one’s failures as well as successes, making strong social connections and building communities becomes essential to long term personal prosperity. In such a case, while the individuals who have succeeded in the system may be of questionable moral character, it is that socialization of losses that must be criticized most heavily.
Oxfam’s report however gives little to no treatment about causality and vilifies the wealthy as a result of their wealth. This lack of consideration for system design, for the nature of wealth accumulation, and for the gains to the poor that have come along with inequality suggest that there is more of an ideological motivation to the reporting than simply a scientific investigation into inequality. That’s probably why political “scientists” and virtue signalers find it so appealing. TMM
Ryan Khurana is president of the Students for Liberty Manchester society. You can read more of Ryan’s work on his personal blog and can contact him via email