Creating Freedom. Raoul Martinez
richest people on Earth own as much wealth as the poorest half of the world’s population, and the richest 1 per cent now own more than the remaining 99 per cent combined.2
Disparities in wealth are so pervasive that it takes some effort of imagination to see things afresh, to understand that there is nothing inevitable about poverty or gross inequality in the modern world. There is no immutable law of nature preventing us from sharing things more equitably, so that everyone is fed, clothed, nourished, sheltered and educated. Human choices maintain the current distribution of wealth and human choices can change it.
In pre-capitalist societies, large inequalities in wealth and power were often justified by religious teachings, which claimed that the social and economic hierarchy was ordained by God, so that those with great wealth had a divine right to it. Today’s dominant justification for inequality comes not from religion but economics. Ethical considerations play little or no part in the practice and study of modern economics – you will not find a serious discussion of fairness in any standard textbook. The irony of this is striking given that the study of economics evolved as an offshoot of ethics.3 The father of Western economic thought, Adam Smith, was, after all, a moral philosopher.
The familiar justification for inequality is founded on the principle that people should be rewarded according to the value of their contribution. There is something intuitively compelling about this reasoning: you get what you give. Mainstream (neoclassical) economists tell us that this is precisely what happens in a competitive, free market. The impartial laws of the market determine the value of your contribution and reward you accordingly. If the free market rewards some people hundreds of times more than others, it can only mean the former produce hundreds of times more value than the latter. A worker who adds £50,000 of value to a company is rewarded with £50,000 in wages, so the theory goes. As we will see, this is not actually how people are rewarded but, even if it were, would it be fair?
There are different ways to contribute to the production or provision of something. Suppose we decide to bake a cake: I pay for the ingredients and let you use my kitchen, but you do all the baking. The outcome is a delicious cake but each of us has contributed something quite different. You have put in your time and skills as a chef; I’ve contributed my money and property. In a market economy, both contributions can generate an income. Some people are rewarded for what they do; others for what they own.
If something we own can be traded in a market, generating an income, economists call it ‘capital’.4 Capital includes land, real estate, industrial equipment and money. The income derived from it can take a number of forms, such as profit, rent, dividends, interest or royalties. But there are glaring problems with the principle of rewarding people according to the capital they own. Most obviously, it allows some people to grow extraordinarily rich without having to do anything at all. After all, wealth generates wealth. Between 1990 and 2010, Liliane Bettencourt, the heiress of L’Oréal, the world’s largest cosmetics company, increased her fortune from $2 billion to $25 billion without having to lift a finger (more than ever, investment decisions are made by paid experts).5
Our economic system delivers vast rewards to the rich not for what they do, but for what they own. What’s more, the greater the fortune, the faster it tends to grow. The largest fortunes can achieve rates of return two or three times larger than those earned by smaller ones (6 or 7 per cent compared with 2 or 3 per cent).6 Mainstream economists have long assumed that a natural outcome of the market is a reduction in wealth inequality, which ultimately stabilises at an acceptable level, but in reality this depends on the institutions and policies in place. Historical evidence suggests that over time, and left to their own devices, competitive free markets tend to concentrate wealth in fewer and fewer hands. In his 2013 book, Capital in the Twenty-First Century, French economist Thomas Piketty provided powerful evidence for this. One of the world’s leading researchers into inequality, he argues that unchecked capitalism tends to make the rich richer, producing extremely high levels of inequality.7 Although this may seem old news to some, it turns mainstream economic thinking on its head and does so with more data than has ever been collected on the subject, covering three centuries and over twenty countries. The lesson from history is clear: we cannot rely on the ‘invisible hand’ of the market; we must extend the reach of democracy through regulation and taxation.
Vast wealth may take on a life of its own, but how do people come to own it in the first place? One of the main ways is simply by inheriting it. Inheritance is not a peripheral economic issue. In the US, between 1970 and 1980, inherited wealth accounted for 50 to 60 per cent of total wealth – some estimates have put it as high as 80 per cent.8 Globally, inherited wealth accounts for 60 to 70 per cent of the largest fortunes. Some of these inheritances represent enormous transfers of economic power. The Walton family, for instance, is worth $152 billion.9
As capital accumulates, dynasties form and inherited wealth accounts for a larger proportion of total wealth, giving the richest heirs more wealth than the populations of some countries. This is the main reason why ownership of capital is so extremely concentrated. Historically, the wealthiest 10 per cent have always owned more than half of all capital (and sometimes as much as 90 per cent), while the poorest half owned almost nothing.10 The pattern holds true today. In most European nations, the top 10 per cent own roughly 60 per cent of the wealth, while in the US they own a little over 70 per cent of the wealth. In both cases, the poorest half of the population own less than 5 per cent.11
The impact of inheritance is felt over centuries. By tracking rare surnames, researchers in the UK found that, over the last 150 years, the effect of inheritance has consistently overcome political efforts to improve social mobility. The two economists behind the study of January 2015, Professor Gregory Clark and Dr Neil Cummins, summed up their results in simple terms: ‘To those who have, more is given.’ There was a ‘significant correlation between the wealth of families five generations apart’. In other words, ‘What your great-great-grandfather was doing is still predictive of what you are doing now.’12 Today, the descendants of the nineteenth century’s upper classes are not only richer, but more likely to live longer, attend Oxford or Cambridge and end up a doctor or lawyer. And there is no sign of any let-up in the power of inheritance to shape the world. The wealth transferred via inheritance from one generation to the next is set to break all records. A report by the Boston College Center on Wealth and Philanthropy predicts that the US is set for the largest inter-generational transfer in history: $59 trillion passed down between 2007 and 2061.13
Why should the lottery of birth have such an impact on what people own and the opportunities they enjoy? Being born to wealthy parents is a matter of blind luck. The typical argument made is that those with wealth have the right to do with it as they please, including passing it on to their children. Even if we accept this as a legitimate right, it is certainly not the only legitimate right. It ought to be balanced against other rights – most pressingly, the right of all children to enter a world of equal economic opportunity, or, at the very least, one in which they have access to clean water, food, shelter, medicine, education and dignified employment. When the two rights conflict, why should the wants of the few outweigh the needs of the many? To the younger generation, equal economic opportunities can mean the difference between health and illness, education and illiteracy, happiness and depression, even life and death. By contrast, reducing great concentrations of economic power by regulating inheritance need not threaten anyone’s health, literacy, happiness or existence.14
Inheritance isn’t the only way to acquire great wealth: much of the world’s private property was originally attained through violence and exploitation. Slavery, for instance, rapidly accelerated the accumulation of capital in eighteenth-century Britain. Historian Robin Blackburn writes: ‘The thousands of millions of hours of slave toil helped to underpin the global ascendancy of Victorian Britain.’15 Profits from this exploited labour helped to build many banks (including Barclays), extend vital credit to early industry, modernise British agriculture, finance the experiments of James Watt, and increase economic growth. When a panel of experts attempted to put a figure on the unpaid labour of the slaves who had enriched Britain, they arrived at a figure of £4 trillion.16 Dr Nick Draper from University College London estimates that as many as ‘one-fifth