Are billionaires really wealthier than half the world?

Every year, the non-profit organization Oxfam International shocks the world with a statistic about wealth distribution:
“World’s billionaires have more wealth than 4.6 billion people”
“62 people own the same as half the world”
“Just 8 men own same wealth as half the world”

Before we look into where the numbers come from, let’s put things in perspective.

According to the Forbes billionaire list, there are a total of 2,153 billionaires with a combined net worth of $8.7 trillion. The top 10 billionaires have a combined net worth of about $750 billion.

What is the total net worth of the world? That’s trickier to get a solid number on, but we can get a rough idea. Economically, net worth is the net present value of future income. For instance, company stock is valued based on the future earning potential of that company.

According to the CIA World Factbook, the total world GDP at purchasing power parity was $127.8 trillion / year in 2017 and grows by about 3% per year. Assuming this continues, and using a 5%/year long term real interest, I get a rough estimate of $6 quadrillion for the total net worth of the world.

Therefore the financial wealth of all the billionaires combined is about 0.15% of the total net worth of the world, and the wealth of the top 10 billionaires about 0.01% of the total net worth of the world.

So how is it that the 2000 or 62 or 8 billionaires own as much as half of the world? Could it be that half the world is 700x or 10000x less productive than the other half of the world? Seems unlikely.

The explanation is much simpler. It comes down to specifics of what is and what is not counted as “wealth” in these reports.

The Oxfam Foundation uses the data provided by the Global Wealth Report by Credit Suisse. Here is how Credit Suisse defines “net worth” in the report:

Net worth, or “wealth,” is defined as the value of financial assets plus real assets (principally housing) owned by households, minus their debts. This corresponds to the balance sheet that a household might draw up, listing the items which are owned, and their net value if sold. Private pension fund assets are included, but not entitlements to state pensions. Human capital is excluded altogether, along with assets and debts owned by the state (which cannot easily be assigned to individuals).

The most important part in the definition is: human capital is excluded. Perfectly reasonable for many purposes, since it is extremely hard to measure human capital at an individual level.

However it is not appropriate to exclude if you’re trying to estimate the total wealth of billions of people and compare it to financial wealth of a few people. Especially not if you’re looking at those billions of people who have no financial assets, so human capital is 100% (or more) of what they have!

As a minor point, the estimate also excludes state pensions, which in many countries form the majority of financial assets for most people.

If you’re a poor person making a few dollars per day with no savings, your human capital is all you have. You might have a few hundred dollars saved up, or you might be a few hundred dollars in debt, but this doesn’t matter that much. Either way these positive or negative financial savings are insignificant compared to your earning power, i.e. human capital. If you’re capable of earning $2500/year ($10/day) for the next 30 years, that’s an equivalent of about $38,000 in human capital (again using a 5% discount factor), which dwarfs your savings or debt.

Moreover, poor people in developing countries are not the only group of people who have no financial capital and only have human capital.

Take a middle class worker in the US that makes $80,000 per year, but is renting an apartment, has no savings, and has $5,000 in credit card debt. In the Global Wealth Report methodology, this person is poorer than most people in developing countries, despite his or her comparatively high earning power. This person’s future earning power is worth over a million dollars, but his net worth is counted as -$5,000.

Or take a Yale graduate that has $200,000 in student debt and a promising future career. This person’s earning power is many millions of dollars after she has deliberately invested in her human capital. But according to the Global Wealth Report methodology, this is one of the poorest people in the world, because we’re not looking at millions of dollars in human capital, we’re only looking at the -$200,000 debt.

Human capital matters. By ignoring it, Oxfam’s presentation of statistics suggests that we could use billionaire wealth to substantially increase the standard of living of average world citizens. The organization has also advocated this more directly. The first link above contains statements such as:

“Oxfam’s report, ‘Time to Care’, shows how our sexist economies are fuelling the inequality crisis — enabling a wealthy elite to accumulate vast fortunes at the expense of ordinary people and particularly poor women and girls”

“Our broken economies are lining the pockets of billionaires and big business at the expense of ordinary men and women. No wonder people are starting to question whether billionaires should even exist”

And these statistics have been picked up and quoted widely by politicians around the world.

Suppose we take everything the 2153 billionaires have, all of $8.7 trillion, and invest it in a giant mutual fund that earns 5% over inflation forever for the benefit of ordinary people around the world. What kind of dividend would that fund provide to an average world citizen? $56 per year. Whereas the world GDP per capita is about $11,000 / year (nominal).

Moreover, GDP grows by 3% per year over time. If we want the mutual fund to keep up with that growth, we can’t withdraw all 5% of profits. We have to withdraw 2% every year, which makes it $22 per capita per year.

Not a noticeable increase in standards of living, from $11,000 to $11,022. Everybody gets to spend an extra $0.06 per day. GDP will grow that much by itself in less than a month, without confiscating all of billionaires’ wealth.

Billionaire wealth is simply a tiny fraction of the productive capability of the world, when computed properly. It is misleading to present statistics in a way that suggests otherwise.

Details matter. Billionaires do not own as much as half the world, or anywhere close to it.