Rent-Seeking Drives Inequality

In 2010, the world’s 62 richest billionaires collectively held $1.1 trillion in wealth. At the same time, the poorest half of the world’s population held wealth amounting to $2.6 trillion. Just six years later, in 2016, those 62 billionaires had amassed a further $660 billion, and the poorest half had been stripped of the equivalent of more than $800 billion.

This should be the dying breath of trickle-down economics. Ahead of the World Economic Forum earlier this year, Oxfam Great Britain chief executive Mark Goldring said that “it is no longer good enough for the richest to pretend that their wealth benefits the rest of us when the facts show that the recent explosion in the wealth of the super-rich has come at the expense of the poorest.”

Oxfam senior economist and former special adviser to President Obama Didier Jacobs published a discussion paper in November 2015, called Extreme Wealth is Not Merited, in which he detailed the “six rungs” of the rent-seeking ladder: crime, cronyism, inheritance, monopoly, globalization, and technology.

He argues that few, if any, of these rungs allow a person to become extremely wealthy based on merit, and that “meritocracy calls for talented people to be rich, but not extremely so”. In an analysis of the wealth portfolios of the Forbes list of billionaires, Jacobs offers insight into the relative importance of each rung:

“Fifty percent of the world’s billionaire wealth is found to be non-meritocratic owing to either inheritance or a high presumption of cronyism. Another 15 percent is not meritocratic owing to presumption of monopoly. All of it is non-meritocratic owing to globalization.”

 

Photo: Ravi_Shah 168/366 – Classic via photopin (license)

According to Jacobs, for the world’s richest, wealth begets wealth, and clearly the most prosperous avenues to enormous wealth are through currying favor with politicians or simply receiving a fortune as a hereditary right. All billionaires have benefited from globalization, population, and economic growth. Jacobs suggests that the world will inevitably see its first trillionaire in coming decades, and it will be the result not of some extraordinary talent but of continued growth in the global economy.

In a February 2016 interview with Inequality.org, Jacobs compared modern wealth with the merit of Johan Gutenberg. “He invented the printing press in 1439. Most of us would agree, I think, that the printing press amounts to an invention as least as important as Google. Yet Gutenberg did not become a billionaire…because the world economy in the fifteenth century was simply too small and too fragmented to support any billionaire fortunes.”

Jacobs says the idea of meritocracy makes sense for the middle class, and “an outstanding nurse is likely to make more money than an average one and would deserve that extra income”. But the kind of extreme inequality of wealth we see today cannot be justified by the same concepts of meritocracy, as these fortunes are so dependent on collective resources.

Henry George’s definition of land was actually very broad, encompassing “all natural forces and opportunities”. In this way, we can see applications of his principle of shared utility to not just land and natural resources, but to intellectual property, and the forces of globalization and ongoing economic growth. That we should begin to see the existence of trillionaires while so many still struggle to live on wages and are taxed on their labor is a great injustice.

George promoted the idea of the Land Value Tax as a way to fairly distribute economic rent, what would otherwise be unearned wealth, concentrated in the hands of the mega-rich. He also advocated a guaranteed basic income or citizens’ dividend, and a policy of this nature should be funded by taxing the economic rent from land. This way, when public initiatives and global systems create added value for businesses and the rich, that value will be returned to the public instead of being lost to further private stockpiling.

Jacobs says that today, every single billionaire’s wealth “depends on having access to a large population that’s linked through a globalized economy”. Those massive increases in wealth are crystallized in high land values, especially in ritzy locations in major global cities like New York and London. The rich can’t take their land with them to the Switzerland or the Cayman islands.

“The more this global economy grows, the richer our billionaires get. This growth happens independently from any one individual’s effort and talent, so we can’t say that billionaires deserve the profits that go hand in hand with economic growth.” Much of what appears on the balance sheets as profits for productive activities is really land holdings in global hubs. By simply taxing the value of land, we could capture that surplus, without taxing any earned wealth or reducing productive incentives. There would be enough to fund all healthcare, schools, transportation systems, etc without any taxes on normal people. We could have all of the wealth creation of a purely capitalist system while realizing the noble dreams of socialism.

 

Featured photo: FraVal Imaging Malaga muelle uno via photopin (license)

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