Different theories have tried to explain why wage and income inequality have increased sharply in recent decades. Is globalization to blame? Has corporate 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 one percent or higher—to find an explanation.
One of the papers presented at the annual meeting of the American Economic Association earlier this month focused on the 400 richest individuals in the country ranked by Forbes magazine. The paper, by Chicago Booth Professor Steven 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 previous decades.
Some 32 percent of the Forbes 400 in 2011 belonged 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 percent throughout the same period.
Most individuals on the Forbes 400 list did not inherit 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 Walton siblings (Wal-Mart), and more self-made people such as Bill Gates (Microsoft), Warren Buffet (Berkshire 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, restaurants, 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 allowed 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 over one billion users, leaving virtually no room for competition. Long before online social networks, Microsoft was the master of applying the power of "network effects."
Smart people in any industry can make their businesses more efficient with new technology, even becoming rich in the process. But what propels certain people onto the billionaire’s list is applying their ideas in industries where new technology can give them a huge return through scale. Perhaps this has exacerbated inequality. But at least the way to strike it rich these days is through one’s own efforts, and increasingly less by inheriting old money.