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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 state of nature 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 will surely be much discussed at the upcoming Davos conference, where the world’s rich elites gather each year to complain about the fact that there are rich elites. Oxfam has addressed some of the critiques people like myself have made before, but not enough to avoid another rejoinder.
METHODOLOGICAL CRITIQUE
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 42 richest people own the equivalent of the bottom 50%, which is roughly 3.6 billion people. This statistic is arrived at based on one’s net worth, i.e 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.
Oxfam supposedly addressed this issue in their latest report by adding in another statistic, which discounts those who are net debtors. When they do this, they find that the wealth of 128 billionaires, instead of 42, equals the bottom half of the world’s population. This statistic does nothing, however, to address the methodological problem of a net wealth calculation. It is not just that a Harvard graduate is not as poor as a rural Chinese farmer; it is that they are objectively better off. By simply getting rid of those people who are numerically in debt, but in reality doing well, Oxfam is not fixing their method, they are making it conform to their ideological biases.
These statistics are not necessarily inaccurate (more on that below), but they are 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 account for this, 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 42 individual’s 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 1%” 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.
Individual net assets also does not account for the various pension claims that individuals have, which represent a sizeable chunk of the global economy. According to Willis Towers Watson, a consultancy, the share of collective GDP for 22 major economies accounted for by pension funds is 62%. This number continues to grow year on year, mainly fuelled by rapid expansion in pension investments by the Chinese government and private funds. The large capital shared controlled by institutional investors such as pension funds may be problematic for a host of reasons, but in terms of inequality, suggests that capital ownership isn’t as concentrated as Oxfam makes out.
Oxfam did attempt to address another methodological critique that had to do with their data set, though this reveals more problems than it answers. Throughout 2017, Oxfam claimed that just 8 people had a claim to half of global wealth, which struck a lot of its critics as off. Oxfam revised its 2017 estimate to 61 people, thereby saying that despite 42 people owning half of global wealth today, the trend of “widening inequality” persists. Considering the massive global interventionism of their policy proposals such as cap of executive pay, limits on shareholder returns, a global wealth tax, among others, this is not a trivial error. The “improved” data set suggests that there is still some room for error left, and their prescriptions should be taken with a grain of salt.
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. You would be 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. New advances in artificial intelligence and the internet of things provide alleviation from work and improved interconnectedness, while improving the general levels of productivity.
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 individuals 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.
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 what 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 1% of people seem unbelievably wealthy, you are looking only at the richest 1% percent of people. Of course a small group of people own as much as the bottom 50%, you are looking at the bottom 50%. If you fix numbers such as 1% 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. 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?
To criticise the methodology and findings of Oxfam’s report is not to deny the importance of addressing inequality or the extent of the problem. The gulf between rich and poor in terms capital ownership and income potential persists, and for many is institutionalised. Addressing this, however, does not require the prescriptions Oxfam puts forth, since the nature of inequality is mischaracterised in their report.
Oxfam’s report for example uses an aggregate of global inequality, which is not as relevant to individual well-being. Decades of behavioural economics research has shown that inequality within socio-economic groups is 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. This issue, however, is not treated at the global level, but at the local one. It requires more powers for local government actors as well as community bonds, rather than centralised policy prescriptions.
Other findings, such as those of a research project led by David Autor of MIT have found that income inequality is generally not a result of the gap between employers and employees within firms, but between everyone at certain “superstar firms” and all those who work anywhere else. This growing body of research on “superstar firms” such as the Big 5 Tech companies, most of whom have lean labour forces relative to traditional firms, shows that their market concentration is a major driving force behind inequality. Remedying this type of inequality does not require wealth redistribtuion or salary caps, but increasing competition, which would eat into the market share of the dominant companies and spur employment.
The very type of crony capitalism that Oxfam detests is the one that would be fuelled by the interventionist policies the organisations support. The more you leave decision making powers to centralised supranational actors, the less accountable to the people these decisions will be. This lack of accountability enables regulatory capture by Big Business and special interest groups that distort the economy and erect barriers to entry. Oxfam’s suggestions then would exacerbate rather than address the problems of global inequality today.
CONCLUSION
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.
This post was originally published by the author on his personal blog: https://medium.com/@ryankhurana/oxfam-and-misleading-statistics-ff10b9c3e9a0
