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Deirdre McCloskey on Oxfam’s Calculation of World Wealth ‘Distribution’

Deirdre McCloskey honored me by attending my talk, sponsored by the Illinois Policy Institute, in Chicago last Thursday evening.  (By the way, thanks – so much – John, Rebecca, and everyone at IPI!)  My talk was on some myths about the ‘distribution’ of incomes in the United States.  This morning, Deirdre sent to me some of her related thoughts on Oxfam’s mismeasure of the ‘distribution’ of incomes worldwide.  I share Deirdre’s thoughts with you just below, with her kind permission:

Such was the zero-sum rhetoric of the Democrats in the U.S. in their 2014 congressional campaigns and of the Oxfam report early in 2014 noting that 85 super rich people own as much as the entire bottom half of the world population.  But would taxing or expropriating the filthy rich alleviate the misery of the bottom half? The Oxfam figure for the 85 richest was taken from the 2013 Forbes magazine list, ranging from the richest, Carlos Slim, the Mexican cell phone magnate, at $73 billion of wealth, down to the merely $11.7 billion each of the Malaysian cell phone guy, the Colombian beer king, the American hedge funder, and the Thai soft drinks fellow, tied for ranks 82-85. Together the wealth of the 85 was about $1.5 trillion.

But if the $1.5 trillion was seized and distributed to the bottom 3.5 billion people in the world it would amount to only $428 per person.  That appears at first thought a nice, 10 percent supplement to the average yearly income per person of the bottom half of something like $4,000 a year (about 8 percent of U.S. real income per person). But of course, on second thought, if distributed this way the expropriation would give nothing at all next year and the next and the next.  Expropriation of wealth can happen only once, unless we arrange somehow to make Carlos Slim into a slave who keeps slowly re-accumulating his $73 billion, to have it taken in a while again.  On the other hand, if the $1.5 trillion expropriation was invested at, say, 5 percent it would be a perpetual gain of $21.40 a year to each person in the poor half.  Good, and prudent.  But wait: it is a gain of only about half of 1 percent per year of the $4000 of present-day annual income per person, and less and less as the poor countries grow towards the blade of the hockey stick.  We can’t make the poor much better off by taking wealth or income from the rich.  We need the economies in which they work to be vastly more productive—which is what happened 1800 to the present.

Most of the income of the poor, of course, comes from their work, making voluntary deals for their labor with their customers in the local marketplace or with their bosses in field or factory, not from their investible assets such as land or donkeys or mud huts.  Yet the Forbes list tells the same story, at a rather fancier level.  There are princes and heiresses in it, to be sure, who got their wealth the old-fashioned way, by inheriting it, or stealing it through the monopoly of violence. and now sit in Riyadh or Knightsbridge clipping coupons.  But most of the billionaires earned it themselves, by buying low and selling high.  They and their customers and suppliers made voluntary deals in cell phones, oil, cosmetics, groceries, clothing, gambling, merchandising, information transmittal, chocolates, media, real estate, mining, beer, steel, candy, cement, sugar, flour, and so forth.  They didn’t inherit it or steal it from anybody, including the bottom half.  They made deals, in particular the Bourgeois one.

Yep.  A thousand times yep.

Wealth does not exist naturally; it does not rain down from the skies or bubble up from the ground.  It is, as it has always been, a flow of consumable stuff that is created by human ingenuity, enterprise, and effort.  Some people – again as always – do succeed in stealing wealth from others.  But all wealth must first be created before it can be stolen or used and enjoyed honestly.  Wealth in the vast quantities that we moderns enjoy it – quantities so vast that we moderns mostly take our prosperity for granted, mistaking it for being rather like gravity or breathable air – must be created and produced, all through incalculably huge and ceaseless outpourings of enterprise and effort.  Such wealth can’t possibly have all, or even mostly, been stolen or ‘expropriated’ unjustly.  Not even close.