Wednesday, 15 October 2014

The '85 Richest People' Fallacy


Forbes tries to shock us with the news (from an Oxfam report) that The 85 Richest People In The World Have As Much Wealth As The 3.5 Billion Poorest. It’s the sort of fact that can very easily elicit cries of ‘global injustice’ and calls for greater equality in the world. The reality, though, is very different.

All this talk of 'making the world more equal' may come with noble intentions and genuine concern for the poorest people on the planet, but unfortunately the philosophy and economics that bootstraps it is mistaken. Consequently, these mistakes lead to a plethora of bad ideas and injudicious policy proposals that only hurt the people they are trying to help. Contrary to a lot of leftist propaganda, many of us want the world to be more equal, we just realise that redistributionist polices implemented by the State are much less successful than free trade (and the concomitant necessities like rule of law, property rights and a stable government that protects its citizens).

This isn't just an elaborate libertarian theory; it is empirically demonstrated by observing the progression explosion of the past 200 years and the increased real income per head that has occurred in every country that has seen the positive effects of free trade for its citizens. Yes, the rich become richer, and in some cases the wealth gap increases, but this is not really relevant - what's relevant is everyone's absolute gains because of free trade - and the most significant shifts in absolute gains are seen in the poorest people becoming less poor. Anyone who claims to care about the well-being of the worst off in society should care about what's making their absolute standard of living better, not how they compare to the richest people in the world.

The best that can be done to help the world’s poorest is to open up trade and development opportunities – this is exactly what happened to all the countries that were once impoverished and now prosperous. What's so amazing (as I touch on here) is that nothing in the entire several hundred thousand year human history has done for the material prosperity and life expectancy of the human race what capitalism and science have done in the past 200 years. Blaming capitalism for the remaining poverty and hardship in the world is like trying to throttle a goose that has already laid plenty of golden eggs, and still has plenty more still to lay.

To prove the point, consider how easily misled people are by the fact that the 85 richest people in the world have as much wealth as the 3.5 billion poorest. The way Oxfam arrived at this fact is adding up the total wealth that was attributed to the poorest 3.5 billion of the world's population (which amounted to $1.7 trillion), and compared it to the Forbes rich list, counting the aggregate wealth of the top billionaires until it matched $1.7 trillion (which turned out to take them down to number 85).

Alas, although the analysis does show that the 85 richest people in the world have as much wealth as the 3.5 billion poorest, it doesn’t really tell us anything meaningful or change-inducing. Here’s why. Suppose the redistributionists got their way and were able to steal the wealth of the 85 richest people and distribute it evenly amongst the world’s poorest 3.5 billion people. Each of them would get a mere $485. Better than a smack in the eye, you might insist, but the trouble is, nothing sustainable would have been achieved by this mass distribution. What about next year or the year after? And what use would the $485 be to those in war-torn countries, without a stable government, or in places where resources are scarce?

In fact, my redistributionism thought experiment actually goes to show precisely the principal flaw in the agenda of the Robin Hood-types who want to make the world more equal by redistribution rather than free market trade and participation in capitalism. Allocation of resources outside of trade only briefly suspends the problem, it doesn’t solve it. Once upon a time just about everyone in the UK and US was living on the poverty line. What changed for them was the industrial revolution, progression explosion and scientific enhancements as economies became vastly more productive and human prosperity increases.

The 85 richest people in the world consist of one or two heirs who inherited their fortune – but most of the people on the list made their wealth in the same way that all economic prosperity occurs, through free trade. Wealth does not come from magic fairies, nor is it created from a vacuum. It is created by the voluntary transactions and exchange of currency of millions of people every day.

* Photo courtesy of stylemagazine.com

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