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How the Rich Get Rich

How the Rich Get Rich
Profile photo of George Bragues

The latest issue (Jan. 22) of The Economist carries a special report on the wealthy and the state of inequality around the world. As is almost always the case with the British magazine’s special reports, “The Few” is well worth reading. Here are some of the more instructive points:

* While inequality within nations, as measured by the Gini coefficient, has risen slightly, it has declined globally since 1980. This reflects the higher growth of developing nations like China and India that have implemented market reforms.

* Insofar as inequality has risen somewhat within countries, it is up both in countries with extensive welfare states (i.e., Sweden and Germany) as  well as those with relatively smaller welfare states (i.e., the United States and Britain). In other words, recent trends in the distribution of income have little to do with the supposed retrenchment of the state in economic life over the last three decades.

* Of late, inequalities have been driven by the move towards an ever more technological society. By making cognitive skills more valuable in the marketplace, this shift has raised the wage premium for those who successfully obtain higher education credentials.  Those who earn more tend to be those who stayed in school and worked to complete one or more university degrees.

* Only 16% of the world’s rich individuals — defined as those with $1 million or more in net worth — inherited their wealth. The remaining 84% either gained their fortune by running a successful business, by securing  jobs (i.e., doctor, CEO, investment banker) that pay well, or just by living frugally and saving what they earn.

Critics of the free market say that it enables the rich to become richer and condemns the poor to become poorer. But markets have reduced inequality between human beings around the world. Nor do you have to come from wealth to become wealthy. Market exchanges permit anyone to rise to prosperity by working, studying, saving, and investing.

Blog
Profile photo of George Bragues

George Bragues teaches Business at the University of Guelph-Humber in Toronto, Canada.

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