We are used to inequality. There is inequality of height, weight, shoe size, intelligence – in fact every human characteristic you can think of. But most of these characteristics follow a normal distribution, which looks (at least roughly) like a bell-shaped curve. Here, for example, is the way that height is distributed.
Only about 4% of people are less than 163 cm tall, and only about 2% are more than 193 cm tall. The tallest man in the world was Robert Wadlow, whose height was verified at 272 cm. Literally nobody is taller than that, and his height is far less than double the most frequent height of 178 cm.
If you repeated this analysis with shoe size, you would get the same kind of result. Nobody has feet which are 4 foot long.
Statisticians and policy-makers are also used to this kind of distribution, in which the three principal kinds of average are all very close. In the case of height, these are:
- the mode – the most frequent value – which as you can see from the graph is 178 cm;
- the median – the value of the person in the middle of the distribution – which is 176.5cm; and
- the mean – the value you get if you add everybody’s height by the number of people – which is again 178cm.
That is the kind of inequality we can get our minds around.
But wealth is different. The distribution of wealth is so strange that it is hard for us to get our minds around it. And it is so extreme that it distorts the functioning of our democracy.
Why wealth distribution is hard to get our minds around
Here are data on wealth inequality in the UK, presented as a frequency distribution (not including the wealthiest 10%, who are off the scale).
In this distribution, the three kinds of average are dramatically different:
- the mode is between zero and £50,000;
- the median is around £300,000;
- the mean is around £560,000.
The three kinds of average tell completely different stories. The mode tells us that it is far more common to have household wealth of £0-£50,000 than any other equivalent band. The median tells us that a household in the middle of the distribution has total wealth of a about £300,000 – six times more. And the mean tells us that there is so much wealth in the upper part of the distribution that if it were equally divided, everyone would have almost double what the median household has today.
To help us get our minds around this kind of inequality, two metaphors are very helpful. The first is due to the Dutch economist Jan Pen and the second to Nassim Nicholas Taleb. I have adapted them both to relate to UK data.
Let us imagine a world in which everyone’s height is proportional to their wealth. As in our world, the median height in this world is 178 cm. Next imagine lining up the population of the other world’s equivalent of the UK in order of wealth: poorest first, richest last. Now imagine this line of people passing your window at a rate of about 200,000 people per minute. The entire population of the other world’s UK would parade past your window in approximately five hours.
And this is what you would see. For the first three minutes, you would see some extraordinary creatures which had a negative height. They would be followed by tiny humans, less than 30 cm high who would take up the rest of the first quarter of an hour. Gradually the height would rise until, after a little over 2 ½ hours, there would come what we think of as the normal human being – 178 cm tall.
And the height would continue to increase: after three hours, you would be seeing people 230 cm tall; after four hours, they would be 456 cm tall; and after five hours, the people would be around 12m tall! Even if you were in an upstairs window, you would have to crane your neck to look at their faces.
But we still have not got to the exciting part of the parade. In the last three minutes, the people would average over 50 m in height. And the last 171 people – the UK’s billionaires – would all be over 6 km high. Finally, bringing up the rear of these gigantic creatures, would come Jim Ratcliffe, who was until recently, the UK’s richest man, who would be over 150 km tall. This makes him 17 times taller than Mount Everest.
Ratcliffe has now moved to Monaco to avoid UK taxes. In our hypothetical world, if he stood up straight, he would still be visible from London.
How much of this inequality is simply a reflection of hard work and intelligence? Well, these things are distributed normally: the average IQ is 100, and no one has an IQ of 300; the average working week is 40 hours, and no one works 160 hours; the average number of years worked is 40 and no one works for 100 years. So on the basis of a reward for effort and intelligence, we might expect the wealthiest to be about 30 times richer than the median. In the UK, the ratio is around 80,000 – over 2,500 times more.
If Jim Radcliffe’s wealth were simply a proportionate reflection of his intelligence and hard work, it would not be more than £9 million. (Of course, if everyone’s wealth were a proportionate reflection of intelligence and hard work, wealth would be far more evenly distributed than it is today and the median wealth would be nearly twice as high, so the wealthiest would be able to accrue up to about £18 million).
But, you may be wondering, does this really matter? A few individuals are extremely wealthy, certainly – but what does that have to do with the rest of us? From a policy perspective, shouldn’t we ignore these people as being merely unrepresentative outliers?
This is where our second metaphor can help.
Taleb’s Football Stadium
Wembley Stadium has a capacity of 90,000. If it were filled with a random selection of the UK’s population, their average height would be 178 cm and their average (mean) household wealth would be around £560,000.
If Robert Wadlow walked into the stadium, the average height would rise by much less than a millimetre. The change would be undetectable.
if Jim Ratcliffe walked into the stadium, the average wealth would rise by over £270,000 – an increase of 50%.
We are used to dealing with distributions in which it makes sense to ignore the outliers because, as with Robert Wadlow walking into the stadium, their impact is so small that we can safely ignore them.
When it comes to wealth inequality, the disparities are so great that we cannot ignore them – not even singly. Both normal people and professional policy-makers find it hard to get their minds around how extreme wealth inequality is, and ignore the top of the distribution as being ‘outliers.’
As Taleb’s stadium shows, this is an error.
How excessive wealth concentration undermines democracy
Making very large amounts of money is about playing a game: the game of capitalism. Like any game, of course, ability to play the game depends on skill and effort. Unlike most other games, ability to play the game of capitalism is also heavily determined by the social circles you move in (“it’s not what you know, it’s who you know”) and by the amount of money you have available as you start the game. It is also strongly influenced by whether or not you are in a position to rewrite the rules of the game in your own favour. These dynamics are summarised in the diagram below.
Making money from business investments requires a) that you are aware of an investment opportunity and have access to the individuals who control it; b) that you have capital to invest and c) that you either have the skill to manage the investment yourself or can buy these skills in. Starting with a large amount of capital is a big advantage in playing this game. It helps you with all three requirements.
The top part of the diagram illustrates these dynamics and shows that there are two critical self-reinforcing chains of cause and effect. These dynamics – although they are self-reinforcing and tend to lead to the phenomenon of the rich getting richer faster than the poor can hope to – do not pose any direct threat to democracy.
The bottom part of the diagram in is less obvious and is where the challenges to the democratic ideal arise. There are four key levers of power which are easier to pull if you are extremely rich:
- Access to elite education
- Access to social circles of the rich and powerful
- Access to policymakers and politicians
- Ownership of major media outlets.
Mixing in the social circles of the rich and powerful gives access to politicians and policymakers and enables one – especially if one is also a major political donor – to have a direct influence on policy drafting as well as on the way that legislators will vote on draft bills which are presented to the house.
With extreme wealth comes the option to own major media outlets, which strengthens access to politicians and policymakers but also gives the owner control of the dominant narrative in society and therefore the ability to influence the votes of millions.
The media empire of Rupert Murdoch, for example, has included the UK newspapers The Sun, The News of the World, The Times and The Sunday Times as well as a large shareholding in the BSkyB. In the United States, among others, he controlled The New York Post, 20th Century Fox (including Fox News), DirecTV, Intermix Media, and Dow Jones which owns The Wall Street Journal, Barron’s Magazine and SmartMoney.
These media outlets have not been shy of trying to influence political outcomes. On Saturday 11 April 1992, The Sun famously claimed to have determined the result of the then recent general election in the United Kingdom.
All this enables the wealthiest individuals to shape policy in the interests of their own businesses, for example by encouraging the government to sell public assets at below intrinsic value, by creating tax breaks and perpetuating loopholes and by reducing regulation. It allows them to undermine democracy. And they do.
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