by Tim Di Muzio
1 | THE UNUSUAL SUSPECTS: IDENTIFYING THE GLOBAL 1%
The distribution of wealth, therefore, depends on the laws and customs of society. (John Stuart Mill 2004: 86)
Domination means that the commands of a group or class are carried out with relatively little resistance, which is possible because that group or class has been able to establish the rules and customs through which everyday life is conducted. Domination, in other words, is the institutionalized outcome of great distributive power. (G. William Domhoff 2006: 199)
The accumulation of advantages at the very top parallels the vicious cycle of poverty at the very bottom. (C. Wright Mills 2000: 111)
The professor and the prince
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.1 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?
Income and wealth: a primer
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. The fact that the 1% own more income streams than the one they might get from their own labour is largely what sets the 1% apart from everyone else. 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. We will discuss Smith’s work at greater length in Chapter 3.
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. According to the Oxford English Dictionary, the turning point comes with John Stuart Mill’s 1848 Principles of Political Economy. 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.3 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 pr
eoccupation. 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? We will consider these questions in much more detail in Chapter 5, but for now we need to put forward a convincing definition of wealth from the point of view of modern finance. 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.4
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 – a measure that is deeply problematic for reasons that we will explore in Chapter 3.
A taxonomy of the global 1%
We have already uncovered that, 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 this book I will 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. For those unfamiliar with these reports, I summarise the benefits and shortcomings of each below.
The original World Wealth Report was issued by Capgemini and Merrill Lynch in 1996. After the global financial crisis, Merrill Lynch was swallowed up by Bank of America and, since 2012, the report has been co-authored with RBC Wealth Management. These reports focus on what they call ‘high-net-worth individuals’ (HNWIs), or those individuals with at least US$1 million or more in investable assets. What this means is that the report excludes ‘personal assets and property such as primary residences, collectibles, consumables and consumer durables’ (Capgemini and RBC 2013: note 1). In other words, if you own a multimillion-dollar primary residence in Malibu, California (meaning you actually live in it), have a Damien Hirst original worth millions and have US$2 million worth of luxury private vehicles but only US$500,000 in financial assets, you are not an HNWI. Similarly, if you have US$1 million in stocks and bonds and own a primary residence worth US$300,000 and a single car valued at US$80,000, you are in the category of an HNWI. The report also introduces the categories of mid-tier millionaires, who have US$5 million to US$30 million in investable assets, and ultra-high-net-worth individuals, or those with over US$30 million in investible wealth. As we can see, the cut-off of US$1 million is somewhat arbitrary, but it does at least give us a recognised benchmark for thinking about what wealth management companies, banks and consultancy firms think of when they think of the truly wealthy. The shortcoming of the report is that it considers financial wealth only from the perspective of HNWIs and therefore reflects less on how HNWIs compare with the rest of humanity and its meagre holdings.
The second oldest report began in 2007 and is issued by Knight Frank (a leading property consultancy) and, up until 2013, Citi Private Bank (a provider of banking services to the wealthy). Knight Frank’s The Wealth Report considers HNWIs to be those with US$30 million or more in net assets. This means that, unlike the World Wealth Report mentioned above, an HNWI has US$30 million in assets (including all art, cars, homes, etc.) after subtracting all liabilities. For example, if I own a home worth US$25 million and have investments worth US$10 million but owe creditors US$15 million, then I would not be considered an HNWI by Knight Frank. Once again, the decision to classify HNWIs in this way is fairly arbitrary. However, since it sets the bar rather high, it does provide an alternative perspective to Capgemini and RBC Wealth Management’s definition in the World Wealth Report. Moreover, Knight Frank boasts its expertise in assessing ‘the attitudes of the wealthy towards property and investments’, and its report for 2013 features a Prime International Residential Index and a Luxury Investment Index (Knight Frank 2013: 5).
A third report, entitled the Allianz Global Wealth Report, appeared in 2010. Allianz is a German multinational financial services company that specialises in insurance provision. Allianz offers no clear definition of HNWIs and instead focuses on the overall global wealth picture. In this sense it is useful, but for our purposes here – which are to provide a taxonomy of the global 1% – it is largely unhelpful. The reports from Allianz tend to focus on per capita measures as well as quintile analysis, which can be of use in some instances but in general they obscure an accurate picture of the global 1% in favour of focusing on aggregates.
A more useful approach is taken by Credit Suisse in its own Global Wealth Report series, which began in 2010. Credit Suisse works in collaboration with two well-known scholars of wealth – Anthony Shorrocks and Jim Davies. Working with these economists, Credit Suisse aims ‘to provide the most comprehensive study of world wealth’. It boasts that, unlike other studies, its report analyses ‘trends in wealth across nations, from the very bottom of the “wealth pyramid” to ultra high net worth individuals’ (Credit Suisse 2013: 3). The Zurich-based company comes close to Capgemini and RBC’s definition of HNWIs because the cut-off for consideration begins at US$1 million. However, this category extends all the way to US$50 million, crossing over into the US$30 million benchmark for ultra-high-net-worth individuals demarcated by Capgemini and RBC. For Credit Suisse, ultra-HNWIs have US$50 million and upwards (ibid.: 24). The problem is that Credit Suisse never clearly defines how it calculates wealth. For example, we do not know for certain whether art, collectibles, private vehicles, first homes and so on are included in its computation of wealth. In this sense, we are forced to take Credit Suisse at its word and consider net worth as its principal metric. Like Knight Frank, this would mean we can demarcate high-net-worth individuals (as the name suggests) by knowing whether their assets exceed their liabilities by US$1 million in the case of HNWIs or by US$50 million in the case of ultra-HNWIs.
The final report to consider is offered by a newcomer to global wealth metrics. Sponsored by UBS, the World Ultra Wealth Report was officially launched by Wealth-X in 2011. Wealth-X and its flagship yearly report aim to be the:
definitive source of intelligence on the ultra wealthy with the world’s largest collection of curated research on UHNW individuals. Our members identify, develop and enhance relationships with ultra affluent individuals as a direct result of working with Wealth-X.5
The benchmark for membership into the ultra-high-net-worth camp is a minimum of US$30 million in net worth – meaning, once again, that net assets come to US$30 million after all liabilities are subtracted.
What this brief overview of the existing world wealth reports reveals is that the attempt to analytically benchmark the extremely affluent by financial wealth or net w
orth is a bit of a subjective enterprise.6 However, there does appear to be some consensus on defining the ultra-high-net-worth class – you would need financial assets or a net worth somewhere between US$30 and US$50 million to be included. What this review also suggests is that there is a hierarchy within the pyramid of the world’s mega-affluent with those at the bottom no longer struggling to keep up with the Joneses but with the Gateses. Evidence for this claim is the billions of dollars in debt accumulated by those in the lower rungs of the hierarchy used to maintain or bolster their differential status vis-à-vis their wealthier counterparts (Frank 2007: 7).
But we do need some metric of the 1%, and it appears that we have two choices: to think of a pyramid of wealth based on financial assets or a pyramid of wealth based on net worth. Below I provide a sketch using both metrics and reveal that whichever metric we find more convincing, the real global 1% is much smaller than the Occupy movement’s politically expedient label would suggest.
The wealth pyramid by financial assets owned According to Capgemini and RBC Wealth Management’s report of 2013, there were 12 million HNWIs with a minimum of US$1 million in investable wealth in 2012. This is an increase of 1 million individuals or 9.2% from 2011. Collectively, the financial wealth of these individuals was US$46.2 trillion, which surpasses the pre-global financial crisis figure of US$40.7 trillion in 2007. The collective wealth of HNWIs is expected to grow to US$55.8 trillion by 2015. So, if all 12 million individuals had an equal share of the wealth in 2012, they would have financial holdings worth US$3.85 million each. But, of course, per capita figures tell us little about the actual distribution. Capgemini and RBC Wealth Management introduce three wealth bands, as illustrated in Figure 1.1.