The Richest 100 People Own Over Half The World

According to a report recently released by charity cum research outlet “Oxfam”, both the 85 richest people in the world and the bottom 3.5 billion have something in common: an aggregate net worth of around $1 trillion. The research, which you can read here, was part of an appeal that called for the most affluent to (1) support progressive taxation, (2) refrain from using wealth to seek political favors, (3) challenge governments to use tax revenue to provide universal healthcare, education, and social protection, and there were a few other social demands called for as well.

The report claimed that the trillion dollars in wealth wielded by the 85 richest people in the world was the result of a “power grab by wealthy elites.” The report did not cite specific behaviors that indicated any lying, cheating, or stealing on behalf of those who possess the most wealth, other than noting that tax rates have declined in almost every industrialized country since 1980 (which they attributed to the lobbying efforts of the most affluent among us).

The problem with thinking in terms of “the wealthy are oppressing the poor” is that it shows a stunning disregard for the capital formation process and it assume that wealth is built at the expense of others rather than by providing others services that they need (through your labor) and products that they want (through your ownership interests).

To use the world’s most famous investor as an example, let’s think about Warren Buffett for a moment. Depending on his particular donations and the price of Berkshire Hathaway stock at a given point in time, he has between $50 and $60 billion in total net worth. But it is not as if Warren Buffett is sitting on top of a Northern Trust bank account with $50,000,000,000 in cash in it. It is not as if he has minions depositing $10,000 into his bank account every day against their will.

Rather, his wealth is the result of an ongoing commitment to provide services and products to others. For instance, the entire Dairy Queen franchise is owned lock, stock, and barrel by Berkshire Hathaway (and Buffett owns roughly a third of Berkshire). The wealth that Buffett is able to generate from Dairy Queen is entirely reliant on giving people what they want—whether it be a cheeseburger, some chicken strips, or an ice cream treat.

When you factor in the costs of labor, rent, franchisee agreements, ingredients, and keeping the lights and heating on during the winter, that large Oreo blizzard that you buy costs Dairy Queen somewhere around $2-$3 to put together. Then, Dairy Queen slaps up a $5.50-$6 sign on the store wall and lets anyone that wants an Oreo Blizzard to decide whether paying $5.50-$6 is worth it to them. There is no oppression taking place: if you want the Oreo blizzard for $6, then you buy it and have your need satisfied. If the price is too high or you don’t want one, then you get to exercise your right to not buy it.

All the profits from the Oreo Blizzards and the other items then trickle to Omaha Headquarters to show up in the treasury owned by the Berkshire shareholders. That means $1 of the profit (pre-tax) goes to Buffett because he owns a third of the company, and the other $2 in profit generated get split up among the remaining shareholders, depending on the size of their stake. Berkshire hasn’t returned cash to shareholders in four decades, so the wealth that Warren Buffett possesses is based on what stock market investors are willing to pay for those $3 in Oreo Blizzard profits that show up to headquarters, plus the combination of Berkshire’s other holdings like Clayton Homes, GEICO, Heinz, Helzberg Diamonds, Lubrizol, Netjets, The Pampered Chef, See’s Candies, Acme Bricks, the Burlington Northern Santa Fe Railroad, Benjamin Moore paints, and dozens of others (and this isn’t even touching on Berkshire’s ownership stakes in Coca-Cola, IBM, American Express, and Wells Fargo).

Buffett’s wealth is entirely a function of delivering products and services to others that they voluntarily choose to acquire of their own free will. When you buy chocolate candy for your special someone on Valentine’s Day, Buffett gets a third cut from See’s Candies. When you decide it makes sense to use a private jet—because hey, it’s Valentine’s Day—Buffett gets a third. When you get your spouse three cans of turquoise paint as a Valentine’s Day gift, Buffett gets a third. And when your significant other throws a brick at your head in response to your idea of a romantic gift, Buffett gets a third. And when you go to Helzberg Diamonds to pick up a ring to ameliorate the damage, Buffett gets a third.

All of that wealth can be traced to two things: Buffett decided to acquire an ownership interest on those companies, and the subsequent wealth that got created is entirely the result of people exercising their free will to use their hard-earned dollars to buy the products that Buffett offers because they believe their life will be better off than not by purchasing them.

The next question you should be asking is: If this has always been the intrinsic nature of the relationship between those who are business owners and those who are product consumers, then why has inequality risen in the past few decades?

The short answer to that question is that almost incomprehensible shifts in technology have changed the rules of production over the past four decades in ways that make it more lucrative to be an owner of a business than ever before.

Let’s pretend, for a moment, that we are back in the 1970s, and you have managed to set aside $10,000 to invest. You live in Ohio. Looking around you, you recognize that the biggest company in your neck of the woods (Youngstown, OH) is U.S. Steel. You decide to buy several hundred shares of stock to become a part owner.

The dividends that come your way, and the earnings per share growth that you are able to experience, is going to be limited by the fact that steel production is very labor and capital intensive. A steel plant is going to require millions and millions of dollars in equipment upgrades and basic maintenance on an annual basis, and you are going to have to employ 3,000-4,000 people to produce the steel. These high “input costs” (lots of labor and lots of machinery) are going to place a drag on the total returns that you are able to experience—your investment will be lucky to make you 5% or 6% per year, because the thousands of workers and ongoing machinery costs are going to consume capital that will not reach your pockets—while it is still much more lucrative to be a part-owner rather than an employee, there are limits to the disparity in income.

In the past forty years, technological advances have gradually reduced the need for labor at the plants. Take something like Dr. Pepper, which is an excellent business in its own right (it’s not as if investment opportunities are binary—making money in the beverage industry isn’t a “Be Coca-Cola or Die” proposition). I don’t talk about it as much as Coca-Cola because Dr. Pepper does not own most of the international rights to its own brands, it does not have the diversified stable of brands that its competitors (Coca-Cola and PepsiCo) do, and its appeal tends to be a bit on the regional side.

A substantial amount of Dr. Pepper production occurs in my hometown of St. Louis. A long time ago, it took 1,500+ workers to keep the factory running and allow the soft drink to get distributed across the Midwest. Now, soda factories can be run with a few dozen employees, making the worker a much less integral ingredient in the formula than in years past.

Dr. Pepper debuted to 20+ million people at the 1904 World’s Fair in St. Louis. At the time, it took thousands of workers to crank out the carbonated soft drink to the masses. Now, it only takes a couple dozen employees to more efficiently accomplish the same ends, allowing the company to earn returns on equity of over 20%. The low costs of production, plus the brand equity, will likely enrich Dr. Pepper shareholders at a 8-12% annual rate for decades to come.

This quotation from the strike at the Mott’s apple juice plant (which is owned by Dr. Pepper) in Williamson, NY about sums it up:

“‘Companies have asked for concessions throughout the history of the labor movement because they’ve faced hard times and needed help to survive,’ said Stuart Appelbaum, president of the Retail, Wholesale and Department Store Union, which represents the Mott’s workers. ‘Dr Pepper Snapple is different. They don’t even show the respect to lie to us. They just came in and said, ‘We have no financial need for this, but we just want it anyway because we figure we can get away with it.’”

To be a business owner in the 1970s, your returns contained an informal lid because lots of machinery maintenance and upgrade costs, in addition to lots of employees, were necessary to you creating a profit. The employee element of the equation, while not eliminated, is substantially smaller than what it was twenty, thirty, forty years ago. Fewer employees necessary means two things: it alters the supply and demand curve so that employees can get paid less to do factory work that used to command higher wages, and the ability to run Dr. Pepper factories with dozens of employees rather than the steel plants with thousands of employees means that the money previously earmarked for wages can now go directly to shareholders.

The excess cash thrown off by Coca-Cola, Dr. Pepper, and PepsiCo is only going to increase in the coming years. Understanding capital formation, and the need to acquire ownership interests, is what is going to separate those who can take a page out of Uriah Heap’s “Easy Living” from those that have to continue to grind it out.

There is a reason why, when you study the track records of Benjamin Franklin and Charlie Munger, there were moments in their lives when they lived a lifestyle of nearly abject poverty, even as their means started to increase considerably. They understood that the proverbial treck from $0 in net worth to $100,000 in net worth is the hardest, and they structured their lives to reach that point as quickly as possible. Wealth is created by selling services and products to others, and the greatest way to get on that boat is to become a business owner. Because the rewards of business ownership are becoming more lucrative than ever as labor needs diminish, a good life awaits those channel their inner Franklins and Mungers to acquire a solid base of business ownerships as quickly as possible.

Originally posted 2014-01-20 12:03:19.

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22 thoughts on “The Richest 100 People Own Over Half The World

  1. 7iron10 says:

    "The problem with thinking in terms of “the wealthy are oppressing the
    poor” is that it shows a stunning disregard for the capital formation
    process and it assume that wealth is built at the expense of others
    rather than by providing others services that they need (through your
    labor) and products that they want (through your ownership interests)."

    "Because the rewards of business ownership are becoming more lucrative
    than ever as labor needs diminish, a good life awaits those channel
    their inner Franklins and Mungers to acquire a solid base of business
    ownerships as quickly as possible."
    I think you can find the irony in these two statements if you look hard enough: there is less of a need for labor, so businesses can pay less (more workers to choose from).  Eventually (I think quite some time away, but advances in robotics only accelerates the process) there will come a time where business cannot function – the exchange of money will come to a halt as the 'poor' are put out of work and cannot buy from the 'rich'. 

    This is the 'doomsday' scenario but I think it relates to the way people think, and in truth I kind of agree.  The world cannot have 7 billion business owners; we all cannot produce.  There is a definite capacity and supply and demand.  Some people can be shepherds, most have to be sheep. This relationship only works when sheep don't mind being sheep. 

    Risk, role of business and economics aside, don't you think there comes a point where people have too much money at the expense of others?  I'm not even advocating distribution of wealth, I hate paying for the next guy, a basic understanding of math shows you how big some of these ratios are.  

    Just food for thought.

    Love your articles by the way (I'm 25 and a three-year running DGI).

  2. says:

    I will echo 7iron10's concern here that at some point, if current trends hold in mechanization, working class job loss, and this
    radical difference in wealth distribution, will there simply
    be too few consumers with enough means to buy the products the
    wealth-producing companies are making? Another way to pose that
    question: "How many Oreo Blizzards can one billionaire eat in a day?"
    And can social unrest continue to be held at bay indefinitely with such a split between the ownership class and everyone else?

    love the wrong-headed paint-buyer getting his Valentine's day return
    gift in the form of a brick thrown at his head. Nice sequence!

  3. matthewriedle says:

    Yes, all capitalism is, essentially, is the enablement of
    the freedom of enterprise between individuals.
    That’s it.
    It makes no absolute difference to me if my neighbour is
    able to get more transactions than I am.It is not a zero sum game.
    This class warfare is wasted energy.Having really rich people doesn’t make more
    poor people in modern capitalist societies that function by the rule of law.
    As capitalism has spread from our shores to the world, the
    poverty rate has gone down, dramatically in fact. Of course there is more work to be done but,
    incidentally, this could by why Oxfam is starting to wage a class warfare
    campaign – absolute poverty has improved to such a degree that they have to
    move the goalposts to keep themselves ‘needed’.Ironically, they blame the instrument that has gotten billions of people
    out of poverty for the income inequality.
    It’s all quite absurd.
    see page 14.
    Even as world population has surged, the amount of people
    classified as poor has plunged.This is
    great news.
    You never hear about it though do you?

  4. says:

    7iron10 When a company maximizes efficiency for itself (thereby creating the most wealth for shareholders), the bad effect for society shows up in the employment figures. Over time, one of two things will happen: the base unemployment rate will rise (in the old days, 4-5% unemployment was considered "normal", that number might tilt towards 10% as the permanent baseline). The alternative would be a countervailing force that lowered the quality of jobs but kept them somewhat plentiful (i.e. 5% unemployment rate but more people working at McDonalds, Wal-Mart, etc. type of jobs). 

    Because forced inefficiency isn't a sticky strategy in this country (i.e. the government telling GE "you must keep 3,000 people working at this factory!"), the alternative will be the need for a more robust safety net. In other words, higher corporate taxes to fund increased welfare programs.

    When taxes rise, one of two things will happen: corporations will re-locate, moving their HQ out of the U.S. and shifting even more jobs and economic production overseas. Or, you'll see more clever accounting (i.e. Johnson & Johnson might store its profits in Ireland where taxes are minimal, and take on debt in the United States to fund very strong buybacks and so-so dividend growth). Think of the Facebook executives that take on millions of dollars in loans against their FB stock holdings to avoid capital gains taxes for a personal analogy to this type of corporate policy. 

    If dividend taxes go up to 35-40% to fund social safety programs, there is no way the executive board at AT&T would focus on dividend growth. In the earlier 20th century, they would continue to grow their dividend because they had no other options. But buybacks have become a viable alternative in the past 30 years. We haven't really seen sharply rising dividend taxes since buybacks have become mainstream, and my expectation is that more companies would follow the Disney, IBM, and ExxonMobil capital allocation models of growing the dividend but dedicating large chunks of money to hearty buybacks if corporate taxes rose substantially. 

    The problem with raising taxes is that they change the incentives, and people respond more to incentives than you realize. A couple years ago, New Jersey passed its "millionaire's tax" that increased taxes on the most affluent in the state. The effect? Businessmen and businesswoman just crossed borders to Connecticut and lord knows where else. New Jersey ended up collecting less tax revenue AFTER the millionaire tax increase than before it was implemented. 

    People take their money seriously. Every hour they work represents an hour they are not with their family, relaxing, or doing something they love. Every dollar they invest always carries a business risk of bankruptcy. When governments try to take more of it, people will adjust their behavior to try and keep more of it. 

    The threat of higher taxes isn't that people will stop working. It's that they will take their work elsewhere.

  5. 7iron10 says:

    Again, not disagreeing with you.  I don't like seeing my taxes go up just as much as the next guy.  I'm just thinking about the long-term effects of mechanization, lower wages, etc.  It's a two-pronged road if you ask me.

  6. Elle_Navorski says:

    Tim proposed above: "All of [Warren Buffett's] wealth can be traced to two
    things: Buffett decided to acquire an ownership interest on those companies, and
    [people buying products they think will benefit them]"

    But Elizabeth
    Warren observed: "There is nobody in this country who got rich on their own.
    Nobody. You built a factory out there – good for you. But I want to be clear.
    You moved your goods to market on roads the rest of us paid for. You hired
    workers the rest of us paid to educate. You were safe in your factory because of
    police forces and fire forces that the rest of us paid for. You didn't have to
    worry that marauding bands would come and seize everything at your factory…
    Now look. You built a factory and it turned into something terrific or a great
    idea – God bless! Keep a hunk of it. But part of the underlying social contract
    is you take a hunk of that and pay forward for the next kid who comes along.”
    When Tim notes the claim that the affluent have successfully lobbied for
    lower tax rates, I think Tim pays short shrift to reality. Still let's go with
    Tim's contention as quoted above. Former Harvard Law Professor and Senator Liz Warren's melodic riff of facts could be said to show signs of communism. Strike what she said. 
    Instead consider the hazard of which economists have spoken when gross income
    inequality prevails. For the sound bite version, turn to the French
    Revolution. It turns out those having no decent wages and turning to crime to
    feed their families do have something to contribute: Wealth destruction. And don't think law enforcement is going to be eager
    to help. United States prisons are already overflowing. How should business
    owners deal with this? Easy. Do not to get stuck in that particular cycle of
    humankind where the poor have /had it./ Because there are way more of them than
    you; see the first sentence of Tim's article. Bonne chance. More importantly,
    maybe this comment will increase page views.

  7. matthewriedle says:

    Mechanization has been going on for over a hundred years. This process is not unique to our time.
    I disagree with Tim on his prognostications with regards to an increase in structural unemployment because of automation. Someone needs to design the processes and intellectual property. Put another way, San Francisco in the 2000's is not less well off than Detroit in the 1950's. What will, and has, increase long term unemployment and decreasesin the participation rate is bad government. That is where we are at now. I agree with Tim that we should all strive to be owners. That is why the stock market is such a beautiful thing and it is also why the best charity you can contribute to to alleviate third world poverty is the micro finance charities.

  8. davidhosler says:

    I don't understand your unhinged comment. What are you saying–because the poor could turn to wild violence, we should cater to their welfare demands? I don't understand what Elizabeth Warren, the prison system, or page views caused by your comment have anything to do with stock ownership.

  9. 7iron10 says:

    "Mechanization has been going on for over a hundred years. This process is not unique to our time."
    The process may not be, but the speed sure is.  All things in this world are not linear.  This has positive aspects and negative ones (especially when it involves jobs).

  10. scchan_2009 says:

    A few things I wish to comment:

    Firstly, the problem with wealth disparity is a symptom of low social mobility. That is a serious issue as that drives long term economic grow. You want the people at the bottom to be able to climb. In the developed world (not just US), real wages of middle class has not increased for like 20 some years – yet we need those people to spend to drive growth, but then they cannot make more money. So this leaves two situations – save because income has not risen, stop spending and investing because of market pessimism, deflation (like many Asian developed nations) or high consumer debt. The former is stuck of some Catch-22 (you need the guys in the middle to go out to invest and shop, but then they cannot, so there is no growth), and the latter is maxing your credit card to buy your house, iPhone or large-screen TV (and then have to default at the end). It is important to highlight that most consumers do not think as you do – they either are stuck with Keeping up with the Jones and spirals of debt or deep agony about their own finances and worries about their day jobs.

    Secondly, in which I do not agree with Oxfam report is that by focusing on top 100 folks create bad justice and picture of the whole problem. Lately, I am reviewing executive pays of various company (doing some research in mid/small caps), there are quite ludicrous (some companies even executive / board member pay that totals to 5-10% of the company capitalisation). Well, I guess this is what makes Warren and Charlie special, they pay themselves 100K each year for the last like 30 years with zero stock dilution? Some executives even pay themselves 1 buck (but you better watch out those employee stock option warrants hiding). Shareholders have let the rapid rise of absurd executive pay and stock dilution to be in place; and you know what? Most stocks holding and managed by fund managers in asset managing firms or hedge funds which pay themselves very well. One is stuck in a spiral that ridiculous executive pays are sponsored by ridiculous pay of fund managers, who only care about increasing short term profitability.

    I do agree with your solution to the problem: people need to go out invest and save more (by themselves), and need to excise their responsibility as BUSINESS OWNERS (but not the holder as a piece of paper or digital code for the stock).

  11. scchan_2009 says:

    Sorry if I feel carried away, and I may be parroting some Elizabeth Warren's words (laugh). Well being business owner wasn't that Warren's words, but the words of the other Warren (Warren Buffett – laugh).

  12. matthewriedle says:

    7iron10 The pace of change may be picking up, but that just reinforces the need to keep your skills relevant.  I think traditional education is being left behind.
    Change is the only constant in life.

  13. matthewriedle says:

    scchan_2009 You are making a presumption that the middle class is static.  It is not.  I know in my case, I went from below the poverty level to upper middle class in 20 years and I am not done yet.  People do not make the same wages over the course of the life time which these 'studies' take as a given in the way that they present the results.
    Mobility is not addressed by Oxfam other than giving you the impression that there is none.
    Something like 94% of the worlds billionaires are self made.  We want more of them, not less.
    Envy is a terrible emotion individually and creates a terrible basis for economic policy.

  14. scchan_2009 says:

    matthewriedlescchan_2009I agree with you that indeed large number of current billionaires are self-made (Bill Gates and Warren Buffett are self-made). I think I may have been unclear with one point in my original post. I think we are running a two-speed rich folk world – there are people who understand the climb, because they did the climb, and there is another class who seeks to preserve (i.e. as Buffett said the folks "who try to select Olympics athletes from who are their parents).

    Is the middle class static or it is not? In a relative sense, it was easier for Baby Boomer and Generation X generation to climb (the whole economy boomed after the War). The economy is decelerating as a whole, but people still expecting the boom that we witness between 40s and 80s.

    I agree with you that we want more self-made folks. The right question to ask is … is it easier to be self-made now than it is in the past?

  15. says:

    Elle_Navorski That's true, billionaires don't get rich on their own.  They usually have a team of great employees.  But if you think that Bezos, Zuck, Sergey and Page owe you something because you paid some taxes that supported the general rule of law and paved some roads, I think you have a false sense of entitlement. 

    Fact is that in the US there is more upward mobility than ever, and we need more of these horrible billionaires to continue to progress.  When is the last time one of these socialist countries like France has made a significant contribution to progress.

  16. Elle_Navorski says:

    davidhosler and Stock Stooge, it's not about catering to anyone's "demands." It's about what people do, as a rational and factual matter, when income disparities are enormous. A study of The French Revolution, post WWI Germany, and Rwanda circa 1994 might inform you.

    My page views comment means that I think the article by itself is not worthy of page views.

  17. davidhosler says:

    Elle_Navorski Wow. A little bit harsh, don't you think? I am quite thankful that Tim takes time out of his day to share his perspective with us. If you don't like it, you shouldn't read it. And if you appreciate his work generally, then it's a disservice to be a complainypants and nitpicker. I don't understand what purpose snotty, hate-filled comments serve.

  18. wiseguy10 says:

    Elle_Navorski You do realize that if you don't find an article "worthy", you can get over yourself and simply exit out? It takes maybe one second to leave a website. You don't have to announce your discontent to everyone that reads the comments. You can always start your own website and make your preferred arguments there.

  19. scchan_2009 says:

    TimMcAleenan7iron10 I think it is very interesting you highlight the tax issue. This is an unavoidable issue with globalization. This is why companies have bases in Ireland and Hong Kong (laugh). However, I think the issue is cyclical, once there is a "tax rate spread", other nations and states will adjust their rates, and the flocking of companies into low tax nations/states have not always benefited the specific nation – Ireland had to be bailed out as government goes underwater as part of the EU crisis (and other EU nations presses Ireland to end low tax policy), and HK tax coffers were heavily dependent on local real estate market (and that is highly cyclical, and many argue a property bubble is in place now in HK).

    Back to individual tax choices, people avoiding to pay more taxes have been around for long time, and it is perfectly rational to do so. Even I write myself off on my 1040 due to US stock dividends with my foreign tax withheld in my foreign stocks and my UK salary (and I legally entitled to do so). It is the government job to enforce sound taxation and fiscal policy. I am highly disappointed to see how much money is spent on the Iraq War and the inefficiency and infighting with fiscal policy as part of the 2013 government shut down. Why would I volunteer to pay more taxes to see the clown work inside I-495?

  20. scchan_2009 says:

    7iron10matthewriedleI have always ponder how much one can extrapolate the Moore's Law out in technology power (laugh). I really don't know, but the last 100-200 years were really phenomenal in human history; no one really know can improve automation and growth are indefinite. As go the common saying, past performance is not indicative to future. We are clearly hitting road blocks like the balance of reduce air pollution is not met with viable alternative energy sources, and the coming of peak oil (Charlie Munger's favourite).

    If automation and its technology can grow indefinitely, business ownership is indeed a great hedge against job loss that may come with (Tim's favourite). Really, no one knows what will happen in the future, but only intelligent guesses can be made (and one may be wrong).

  21. Elle_Navorski says:

    wiseguy10, arguments are more effective when set in contretemps to another’s. Also Tim has the right to throw out or presumably block my posts. Free speech does not apply to private blogs, especially if the blogger’s goal is to build a club around himself of like-minded people for her or his enjoyment. More importantly, I have noticed for a few months now that Tim’s articles go back and forth, directly and indirectly, on whether to help the poor. I think he’s just starting to analyze in public what charity means on a macro scale. More should know it’s not just a feel good, Judeo-Christian-Muslim-Hindu-Ethical-yada matter. There are capitalist principles that argue for, for example, health care for all. Likewise income inequality is a subject about which the great economists write. I know my stock dividends depend on a certain level of blue collar happiness via decent housing, being able to support one’s kids, etc.

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