Capital Ideas - Summer 2013 - page 14

Summer 2013 | Capital Ideas
ifferent theories have tried to explain why wage
and income inequality have increased sharply in
recent decades. Is globalization to blame? Has corpo-
rate governance been so weak that top executives have
been able to raise their pay more than they deserve?
Have advances in technology favored skilled workers
relative to unskilled ones? Recently, researchers have
turned to the remarkable rise in incomes by those at
the very top of the income ladder—the top 1 percent
or higher—to find an explanation.
One of the papers presented at the recent annual
meeting of the American Economic Association fo-
cused on the 400 richest individuals in the country
ranked by
magazine. The paper, “Family, Edu-
cation, and Sources of Wealth Among the Richest
Americans, 1982—2012,” by Chicago Booth Profes-
Steven Neil Kaplan
and Joshua Rauh of Stanford,
found that fewer of those who made it on to the Forbes
400 list in recent years grew up wealthy than in previ-
ous decades.
Some 32 percent of the Forbes 400 in 2011 be-
longed to very rich families, down from 60 percent
in 1982. On the other hand, the share of those in the
Forbes 400 who didn’t grow up wealthy but had some
money in the family—the equivalent of the upper
middle class—rose by the about same amount. The
proportion of those in the list who grew up poor or
had little wealth remained constant at roughly 20 per-
cent throughout the same period.
Most individuals on the Forbes 400 list did not in-
herit the family business but rather made their own
fortune. Kaplan and Rauh found that 69 percent of
those on the list in 2011 started their own business,
compared with only 40 percent in 1982. In other
words, there are fewer people on the Forbes 400 list
who came from an affluent background and eventually
took over the family business, such as brothers David
and Charles Koch (Koch Industries) and the Wal-
ton siblings (Wal-Mart), and more self-made people
such as Bill Gates (Microsoft), Warren Buffet (Berk-
shire Hathaway), Philip Knight (Nike), and Stephen
Schwarzman (Blackstone Group), who had an upper
middle-class upbringing and eventually built their
own successful companies.
Kaplan and Rauh also looked at the industries the
Forbes 400 belonged to. They found that between 1982
and 2011 many more individuals involved in retail, res-
taurants, computer technology, and private finance—
including hedge funds and private equity—entered
the list than before, while fewer were in real estate and
energy. Technology has become more important even
in companies outside the computer industry—25.5
percent of the businesses run by the Forbes 400 in
2011 incorporated technology in their companies,
up from 7.3 percent in 1982.
Most of the Forbes 400 became rich by applying
their ideas in industries where new technologies al-
lowed their firms to become very large, say Kaplan and
Rauh. Jeff Bezos’s Amazon owes its success to advances
in information technology and the economies of scale
they provided. The same goes for online brokerage
firms such as Charles Schwab. Mark Zuckerberg’s
Facebook has a huge network of more than one billion
users, leaving virtually no room for competition. Long
before online social networks, Microsoft was the mas-
ter of applying the power of “network effects.”
Smart people in any industry can make their busi-
ness more efficient with new technology, even becom-
ing rich in the process. But what propels certain people
onto the billionaire’s list is applying their ideas in in-
dustries where new technology can give them a huge
return through scale. Perhaps this has exacerbated in-
equality. But at least the way to strike it rich these days
is through one’s own efforts, and increasingly less by
inheriting old money.
—Vanessa Sumo
Steven Neil Kaplan and Joshua Rauh, “Family, Education, and
Sources of Wealth Among the Richest Americans, 1982–2012,”
American Economic Review Papers & Proceedings, May 2013.
Most billionaires are
self-made, not heirs
Illustration: Getty Images
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