The rich are getting richer. That’s the conclusion of the World Wealth Report, the landmark annual study of the world’s millionaires, which was released this week by RBC Wealth Management and Capgemini Financial Services.
The report found that the number of people in the world with more than $1 million to invest soared to a record of 12 million in 2012, a 9.2 percent increase over 2011. The aggregate wealth of this group hit a new high, too — $46.2 trillion — a 10 percent increase over the previous year.
What is particularly striking is that even within this rich group, the very, very rich are doing best of all. The ranks of the ultrarich, whom the report defines as people with investable assets of at least $30 million, surged 11 percent, an even greater rate than the mere millionaires. This small sliver of the global population — 111,000 people — accounted for 35.2 percent of the entire wealth of all the world’s millionaires taken together.
What are the winner-take-all forces driving this extreme concentration of wealth at the top? One explanation was offered earlier this month by Alan Krueger, the Princeton economist and departing chairman of President Barack Obama’s Council of Economic Advisors. Drawing on his own previously published academic work, Krueger used the economics of what he calls “the rock and roll industry” to illustrate the forces more broadly at work in the world economy.
“We are increasingly becoming a ‘winner-take-all’ economy, a phenomenon that the music industry has long experienced,” Krueger argued in a speech in Cleveland. “Over recent decades, technological change, globalization and an erosion of the institutions and practices that support shared prosperity in the U.S. have put the middle class under increasing stress. The lucky and the talented — and it is often hard to tell the difference — have been doing better and better, while the vast majority has struggled to keep up.”
The classic free-market capitalist answer to this has been, “So what?”
N. Gregory Mankiw, a professor of economics at Harvard University, thoughtfully makes that case in “Defending the One Percent,” a paper to appear in the summer issue of the Journal of Economic Perspectives, which will showcase a number of studies on the rise of the global 1 percent.
Mankiw begins his argument with a thought experiment, in which an imagined “egalitarian utopia” is disrupted “by an entrepreneur with an idea for a new product.”
“Think of the entrepreneur as Steve Jobs as he develops the iPod, J.K. Rowling as she writes her Harry Potter books, or Steven Spielberg as he directs his blockbuster movies. When the entrepreneur’s product is introduced, everyone in society wants to buy it. They each part with, say, $100. The transaction is a voluntary exchange, so it must make both the buyer and the seller better off. But because there are many buyers and only one seller, the distribution of economic well-being is now vastly unequal. The new product makes the entrepreneur much richer than everyone else.”
Mankiw argues that this imagined scenario “captures, in an extreme and stylized way, what has happened to U.S. society over the past several decades,” and it forms the basis of his self-described defense of the winner-take-all economy.
Of course, as Mankiw himself realizes, this stylized story of the rise of the 1 percent presents the group in their most attractive guise. It doesn’t include the commodities barons who have become rich by securing control of natural resources, or the bankers who have benefited from the heads-I-win-tails-you-lose deregulation of the financial services industry, or the CEOs who haven’t invented anything but have profited from a culture of soaring executive pay.
Yet, even with those caveats, Mankiw makes an essential point, and one that anyone who is worried about rising income inequality needs to reckon with: Many of the ultra-high-net-worth individuals flourishing in today’s global economy are admirable entrepreneurs, and we would all be poorer without them.
What, then is the problem?
(Chrystia Freeland is a Reuters columnist. Any opinions expressed are her own.)
(Chrystia Freeland is the managing director and editor, Consumer News at Thomson Reuters. Prior, she was U.S. managing editor of the Financial Times. Before that, Freeland was deputy editor of the Financial Times, in London, editor of the FT’s Weekend edition, editor of FT.com, UK News editor, Moscow bureau chief and Eastern Europe correspondent. From 1999 to 2001, Freeland served as deputy editor of The Globe and Mail, Canada’s national newspaper. Freeland began her career working as a stringer in Ukraine, writing for the FT, The Washington Post and The Economist.
She is the author of two books: “Plutocrats: The Rise of the New Global Super-rich and the Fall of Everyone Else,” published by Penguin in 2012 and “Sale of the Century: The Inside Story of the Second Russian Revolution,” published by Crown Publishing books in 2000.)