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Wednesday, December 06, 2006

Don't believe the hype

This Financial Times article with the headline "Richest 2% hold half the world's assets" has been making some waves; even Rush Limbaugh mentioned it today. It is interesting that the patently obvious observation that the world's wealth is not distributed in an egalitarian fashion can generate such a buzz.

However, there are at least three important points missing in the discussions surrounding this report. First, is the implicit claim/statement in the title of the FT story that there is some oligarchy of rich folks sitting around controlling the destiny of 98% of the world. Perhaps that is true, but it has little to do with the amount of assets in your estate and more about how many missiles are in your arsenal.

Perhaps the 2% sounds like such a small number that it invokes the images of smoke filled rooms, sweat shops, and a tyranny of the minority. However, 2% of 6 billion is...drum-roll....

6,000,000,000 x 0.02 = 120,000,000 which is read 120 million people. While 120 million is a far cry form 6 billion, it is also a stunningly huge number. Two hundred years ago, more than half the world's (admittedly limited) wealth was held in the hands of, perhaps, a few thousand monarchs, emperors, warlords, and noble families. Today, the democratization of wealth, when it is possible for individuals to accumulate wealth, should be celebrated rather than bemoaned.

Second, the value of assets, whether equities, real estate, or labor, are easier to value in the presence of well operating markets. However, in many (most?) countries well operating markets are nonexistent. While in a static sense, a relatively few countries might own a large portion of the world's (actualized) wealth, this is not because these countries or their citizens have stolen the real estate or the labor in other countries. Rather, this static measure arises because because the land, labor, and capital in other countries is often intentionally not allowed to increase in value.

A general lack of property rights, institutionalized corruption, political oppression, religious intolerance, and a large number of other problems keep individuals and other assets from realizing their potential value. This is what generates the distorted distribution of the world's wealth that seems so persistent. In many cases, this lack of growth from potential to actual value is intentionally promoted on the part of a country's leadership. This is because petty tyrants (and some not-so-petty tyrants) can only maintain their political and economic power if their "subjects" are denied their own wealth. This has nothing to do with a welder in Iowa.

Even if the top half of the world's population has more than $2,200 in assets, a much larger proportion of the world's population (approaching 100%) own assets that are potentially worth more than $2,200 - their labor. What keeps these individuals from realizing their most personal asset achieve greater value? A lack of well operating labor markets and macroeconomies.

An individual who crosses the border from Mexico into the United States does do not automatically become smarter or a better worker, yet the individual's labor doubles in value. Why? Because the institutions in the United States are that much more different than those in Mexico. Granted, these institutions are difficult to create, nurture, and understand - economists have been working on this issue for a couple of generations now. However, we are gaining ground in our understanding of what institutions matter more than others. Yet, if the Mexico-U.S. dichotomy is extended to the rest of the world, it is easy to see how a minority of the world's population can own a majority of the world's assets. Most of this minority lives in one of the few countries where property rights are well established and corruption, political oppression, and religious intolerance are all minimized.

Finally, the last paragraph of the story, which should be the first paragraph , states
Wealth is difficult to measure even in the most advanced countries, so the research was based on painstaking compilation of aggregate and survey data for the 38 countries of the world where it exists and statistical models for the rest of the world.
It is difficult to measure wealth. Indeed, in an extreme view it is impossible to determine wealth because we don't know the exact value of an asset until it is transacted. Consider you have a Nolan Ryan rookie baseball card which, on paper is worth $750. Is it really worth that much? Put it on e-bay and see what happens. Perhaps it will only sell for $700, perhaps for $800. Regardless, the point is that paper value can be higher or lower than true or actual value.

Yet, the story's fantastic headline and implicit condemnation of the wealthy, is based on a "painstaking" investigation of aggregate and survey(!?!) data from 38 of the roughly 200 countries in the world? For the other countries, say, the Democratic Republic of the Congo(?), statistical models were used.

Here's the scoop on "statistical models," if you don't already know. They can easily provide misleading inference if bad data, bad methodology, or both are involved. In the case of hard-to-measure wealth in lesser developed counties, bad data is almost guaranteed and bad methodology is always a concern.

great post--thanks...don't know if you've seen this video of Ann Coulter, but it's pretty classic:
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