In 2010, a University of Chicago law professor created a mini-firestorm on the internet when he posted a blog entry lamenting a potential increase in the taxation rate of high-income earners. The professor wrote that he and his wife made a total of US$250,000 a year but that they were not ‘wealthy’ and therefore could not afford any increase in their income taxes. The mini-firestorm ensued for a number of reasons, but many commentators tried to put things in perspective by highlighting the fact that the professor’s household income put his family in the top 1%. In actuality, his family was in the top 0.04% of global income earners. Soon after the barrage of criticism, the professor deleted his blog and apologised for his insensitivity and the derision it caused towards his family.
But despite these actions, and perhaps without knowing it, the professor demonstrated two very important points central to any global political economy of the 1%. The first is that, from a global perspective, making US$250,000 a year does indeed put you in the 0.04% of the world’s richest citizens, although, and here is the paradox, nowhere near its wealthiest. In fact, if your income is US$31,100 or the equivalent in another currency, you are in the world’s top 1% of income earners. This knowledge (or maybe lack thereof) did not stop another mini-firestorm from taking place about three years later. Saudi Prince Alwaleed bin Talal – who enriched himself through family connections, oil money and business acumen – filed a libel suit in a British court against Forbes for underreporting his wealth at a mere US$20 billion rather than (and this must matter a great deal to the prince) US$29.6 billion. One might think that a man who owns a ‘marble-filled, 420-room Riyadh palace’, a ‘private Boeing 747 equipped with a throne’ and a ‘120-acre resort on the edge of the Saudi capital with five homes, five artificial lakes and a mini-Grand Canyon’ might overlook such trivial figures. But, like the good professor, he felt aggravated about his status in the social hierarchy. This is the crucial second point revealed by the professor’s and the prince’s mini-firestorms and the beginning of our study: how might we identify the 1% when wealth appears to be a relative or subjective judgement?
Despite his household’s giant income compared with that of the global population, the professor is not considered wealthy because he and his wife derive most of their income from paid employment (wages and salaries) rather than their ownership of income-generating assets (typically called capital). And in the global hierarchy of life chances, ownership of income-generating assets is what generates additional or greater income and then wealth.
To be clear about this, consider the fact that someone making US$200,000 a year and someone making US$10 million a year, or US$3 billion, a year are all included in the top 1% of the global population by income. We can immediately note that there is a giant difference between making US$200,000 a year and making US$3 billion a year. But this takes us into the heart of the matter and one of the primary reasons for this study. From a global perspective, the professor is one of the richest people on the planet because his and his wife’s household can command much more of the world’s goods and services than his counterparts who make far, far less. If we stop to consider that most of humanity survives on US$2 a day or less, then it becomes clear that the professor’s family is considerably better off. His children will also likely have much better life chances than those born in a poorer country or those who have less affluent parents. But from his subjective and culturally embedded point of view, his household is by no means wealthy in a comparative financial sense. And the truth of the matter, despite his inability to recognise his household’s global position, is that he’s exactly right. From the perspective of the real 1%, he is not wealthy but surprisingly working class – however well remunerated for his work. And this is where we should pause and make a clear analytical distinction between income and wealth.
According to the Oxford English Dictionary, the etymology of ‘income’ can be traced to the Old English word ‘incuman’, which in the fourteenth century simply meant to enter or arrive or the beginning of something. By the seventeenth century, however, ‘income’ took on a more financial meaning: ‘that which comes in as the periodical produce of one’s work, business, lands, or investments (considered in reference to its amount, and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation; revenue’. In accounting terms today, ‘income’ can have a number of meanings, but we can generally think of it as a flow or stream of earnings quantified and measured in European numerals (1, 2, 3, etc.) and divisible by time. This numerical system was adopted in Europe from the Hindu-Arabic system in the late fifteenth century. The term ‘income tax’ originated as a war tax in Great Britain in 1799. The tax became permanent after 1842. Readers would do well to remember that the source of the income tax in Britain has its roots in financing the organised violence of an emergent capitalist and slave-trading empire.2 Last, the term ‘national income’ does not appear in the English language until 1878. Adam Smith’s Wealth of Nations makes no mention of national income but he does speak about the ‘general stock’ of a country or society.
The term ‘wealth’ is about a century older than ‘income’ and derives from Middle English. In the thirteenth century, wealth could mean the existential condition of being happy and prosperous, a spiritual well-being or a blessing and/or an abundance of possessions or ‘worldly goods’. In a world of what we would today call very little ‘economic growth’, it is small wonder that wealth was equated with the physical things one possessed.
In this work, Mill defined wealth as ‘all useful or agreeable things which possess exchangeable value; or in other words, all useful or agreeable things except those which can be obtained, in the quantity desired, without labor or sacrifice’ (Mill 2004: 11). This appears to suggest that wealth consists of things that have a price and cannot be acquired without labour or sacrifice, in keeping with classical political economy’s idea that labour is a primary source of value. Marx, too, thought along similar lines: ‘The wealth of those societies in which the capitalist mode of production prevails, presents itself as an immense accumulation of commodities, its unit being a single commodity.’ Marx famously divided commodity wealth into two categories:
use values become a reality only by use or consumption: they also constitute the substance of all wealth, whatever may be the social form of that wealth. In the form of society we are about to consider, they are, in addition, the material depositories of exchange value (Marx 1996: 26).
In this formulation, wealth is no longer simply an abundance of possessions or worldly goods but useful things associated with prices (exchange value). But it was Kirkaldy’s study of wealth (1920) and its distribution that suggested that Mill’s definition of wealth concealed abundant wealth from non-abundant wealth. In other words, we can consider goods that can be traded for money as wealth, but what matters is the proportion of wealth in the hands of different classes. In many ways this is a throwback to the heart of classical political economy and its second preoccupation. The first preoccupation concerns the source of wealth, or what we today call economic growth, although the two cannot be fully equated. Once we know how wealth is generated, the second preoccupation is: how is wealth divided and why is it divided in this way and not in others? According to Investopedia, wealth can be defined as a:
measure of the value of all of the assets of worth owned by a person, community, company or country. Wealth is found by taking the total market value of all the physical and intangible assets of the entity and then subtracting all debts.
For individuals, financial wealth is equated with net worth – or the total monetary value of assets owned minus debts and obligations owed to others. For a country, wealth is measured as gross domestic or gross national product.
At a certain level of income, many individuals who may not conceive of themselves as rich or wealthy are in the top 1% of global income earners. But to operate only in the register of income is to miss what this study considers the real global 1%: the tiny minority atop the pyramid of gross human inequality. To zero in on our unusual suspects – unusual since they make up only a tiny fraction of the world’s population – we have to zero in on wealth, since ‘wealth tends to be distributed less equally than incomes’ (Allianz 2013: 49). We should also note that, as a rule, ‘it is only when incomes have reached a certain level that systematic wealth accumulation is even possible’ (ibid.: 49). As will become apparent below, what this means is that those individuals and countries who have had historically high levels of income will also have had historically high levels of wealth. But our concern is with the distribution of wealth within and between countries rather than wealth per capita – a measure that is often used to obscure extreme patterns of wealth inequality. For this reason, and for this reason alone, our analysis will largely avoid per capita metrics. So how, then, do we identify the 1%? In The 1% and the Rest of Us I argue that the best way to identify this minuscule class – despite some methodological challenges – is to focus on how the leading financial institutions interpret them. When we consider wealth ownership, accumulation and its distribution among the global population, there are five major reports worthy of serious study – each with advantages and disadvantages.
This is an extract from The 1% and the Rest of Us by Tim Di Muzio.