Does family wealth deepen inequality?

Scrooge McDuck: a model for the world's rich families? Image: Aaran Gustafson/Flickr. License: CC BY-SA 2.0

Scrooge McDuck: a model for the world's rich families? Image: Aaran Gustafson/Flickr. License: CC BY-SA 2.0

Oxfam recently published a report in which they calculated that the richest 1% - 63 people, as they put it - now own as much as the other 99%, a trend which is quickly accelerating. They illustrated this with the graphic below.

Without for a moment denying that Oxfam does good work, this report appears to have been framed in an odd way. The idea of “63 individuals” holding all this wealth makes them sound like they are sitting on piles of money like Scrooge McDuck.

The idea of “individuals” makes the argument about inequality more vivid, but there is a bit of rhetorical sleight of hand here. It would probably be more accurate to talk about “63 families”, which would dilute the argument a little.

Or maybe not. That is, in fact, the way Oxfam chose to frame a 2014 report about inequality in the UK, writing that “just five families are now wealthier than the poorest 20% of the UK population combined”.

Wealth and power

This sounds bad, but the real question is: does it matter? Oxfam said yes, because wealth somehow equates to power, and that the existence of huge wealth leads to poor people being labelled “shirkers”.

“This inequality hasn't sprung up overnight - it's been influenced, both in policy and narrative, through connections between big businesses, wealthy individuals and successive governments,” they wrote.

This is stated, rather than argued. These things might well be related, but how this happens matters and I’d argue that you need to delve into this, not just affirm it.

A lot of questions raise themselves here, some of which we’ll have to park for now. For example, exactly how inequality of money really leads to inequality of power in a democracy.

Also, whether it is worse when wealth is held by families than individuals, and whether it is worse for families to accrue power, influence than another group doing so - unions, for example.

Or whether the calculation of wealthy individuals’ of families’ fortunes is accurate anyway.

Instead of addressing those for now, let’s assume that the basic idea is correct - that families owning lots of wealth causes inequality - and ask the basic question: does inequality matter?

It is by no means clear that it does, economically at least,. Some people argue that the pooling of capital is necessary - at least in the earlier stages of a country’s economic development - to fund new businesses, which is necessary to kick-start development and growth. So inequality is a necessary evil, on this argument.

Utilitarians like the philosopher Peter Singer have suggested that as long as the situation is improving for the rest, and there is good evidence that it is, then inequality per se is not a problem.

And there is good evidence that over the time inequality has got worse, living conditions for the world’s poorest has hugely improved. The number of people living on $1.25 a day halved between 1990 and 2010, largely because economies opened up in those places. 

So you might conclude that inequality only matters if it damages economic growth. Do does it? Well, reports by the OECD and the IMF said that large inequalities in income does damage growth, and this is becoming the orthodoxy among economists.

But things might be a little more complicated, as shown by a paper by Sutirtha Bagchi of the University of Michigan and Jan Svejnar of Columbia University (I read about this in an article on Bloomberg View by Noah Smith.)

Types of inequality

Most research in this area looks at income inequality, but Bagchi and Svejnar looked an inequality of wealth, using the Forbes rich list to calculate wealth. They found that overall wealth inequality does reduce economic growth. But they dug deeper and found that some kinds of wealth are worse than others.

Namely, wealth accrued through political contacts was associated with negative growth, while wealth accrued through business creation had no negative effect on growth. In other words, it is corruption, or cronyism, and not the existence of a wealthy 1%, which damages economic growth. That is an important finding, and works against the hypothesis that families accruing wealth is bad for growth.

So far I have only talked about equality in monetary terms, but the philosopher John Rawls argued- and many agree - that equality of opportunity is also important for a just society. 

Bagchi and Svejnar’s findings suggest that equality of opportunity leads to inequality of wealth. Perhaps a better way to frame the debate about inequality might be about finding an acceptable balance between these types of equality, and to think about how to protect the benefits of old, stable businesses - often owned by families - while also creating an environment where new businesses flourish. 

Another conclusion is that Oxfam are right to worry about inequality of power, but that equating it with inequality of wealth is wrong. If they want to improve life for the poor, they might be better off concentrating on politics, the rule of law, and reducing corruption reduction, rather than money.

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