They Don’t Just Hide Their Money. Economist Says Most of Billionaire Wealth is Unearned.

The concentration of wealth from rent-seeking

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By Didier Jacobs

The 62 richest people in the world own as much wealth as half of humanity. Such extreme wealth conjures images of both fat cats and deserving entrepreneurs. So where did so much money come from?

It turns out, three-fourths of extreme wealth in the US falls on the fat cat side.

A key empirical question in the inequality debate is to what extent rich people derive their wealth from “rents”, which is windfall income they did not produce, as opposed to activities creating true economic benefit.

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Economists define “rent” as the difference between what people are paid and what they would have to be paid to do the work anyway. The classical example is the farmer who owns particularly fertile land. With the same effort, she can produce more than other farmers working on land of average productivity. The extra income she gets is a rent. Monopolists also get rent by overcharging customers as compared to what they could charge in competitive markets. More generally, economists have identified a series of “market failures”, which are situations where full competition does not prevail and where someone can therefore overcharge – they would be ready to do the work for less, but lack of competition allows them to make a quick extra buck. Government can alleviate market failures through proper economic regulation; or it can make them worse. Political scientists define “rent-seeking” as influencing government to get special privileges, such as subsidies or exclusive production licenses, to capture income and wealth produced by others.

So how much of extreme wealth derives from rents? It’s a pretty divisive debate, but one that can be resolved with data.

On one hand, Lawrence Mishel and Josh Bivens argue that the income of the top one percent richest Americans comes mainly from executive pay and the financial industry, two sources of income notorious for the market failure of imperfect information between buyers and sellers. CEOs have more information about their company than shareholders and portfolio managers than investors, which allows them to dramatically overcharge.

On the other hand, Steven Kaplan and Joshua Rauh claim that the fast growth of income at the top is broad-based and is better explained by rising returns to talent induced by technological progress and globalization.

Both camps use largely the same data to support rather divergent narratives, and in truth extreme inequality is driven by more than one phenomenon.

Data limitations do not allow us to compute rents anywhere close to accurately. But if I had to give a single number to settle the debate, it is this: when it comes to the very richest Americans (Forbes’ billionaires), 74% of their wealth is derived from rents.

I recently explored this issue in my paper Extreme Wealth Is Not Merited, and found that American industries that produce more billionaire wealth than average relative to their size share one of three characteristics:

  • They depend heavily on the state whether through government procurement, licenses, or subsidies, and are therefore prone to rent-seeking. This category includes for instance oil, gas and mining, gambling, or forestry.
  • They are plagued by market failures such as imperfect information, like finance, or by the combination of intellectual property and so-called “network externalities”, which create monopolies like those that pervade the IT industry and industries prone to fads like fashion and music.
  • The billionaire wealth they have generated is largely inherited.

Building on that finding, I calculate that the billionaire wealth generated by these industries in excess of what other industries (considered here as competitive industries) generate represents 74% of America’s billionaire wealth. The table below shows that the industries that are neither dependent on the state nor prone to market failures have a self-made “billionaire wealth intensity” (that is, non-inherited billionaire wealth divided by industry value added – a measure of industry size) of 3%. (So the self-made billionaire wealth we observe in the competitive industries equals 3% of annual production in those industries, or in other words you might say that it has taken 33 years-worth of production to generate today’s billionaire wealth in the competitive industries.) If the whole economy had produced billionaire wealth at that rate, the total American billionaire wealth would have been $427 billion in 2012 instead $1,626 billion, or just 26% as high.Screen Shot 2016-04-08 at 12.34.13 PM

Sources: Author’s calculations based on data from Forbes and US Bureau of Economic Analysis. See Extreme Wealth Is Not Merited for methodological details and data for each industry.

1 Industries of the cronyism index, namely: casinos; forestry; defense; real estate and construction; ports, airports, infrastructure and pipelines; oil, gas, coal and mining; steel and other metals; utilities and telecoms. Although also in the cronyism index, banking is in the market failure-prone industries.
2 Industries prone to asymmetries of information, namely finance, health care services, and law, and industries prone to network externalities, namely IT, apparel retail, art dealing, broadcasting, motion picture and music, and sports.
3 All other industries.
4 Assuming that all industries had a billionaire wealth intensity equal to the self-made billionaire wealth intensity of competitive industries, namely 3%.
5 Assuming that diversified wealth is invested in each industry according to its weight in GDP.

There are, of course, all sorts of reasons why billionaire wealth intensity varies across industries, not all of which involve rents. However, Joseph Stiglitz counters that the very existence of extreme wealth is an indicator of rents. Competition drives profit down, such that it might be impossible to become extremely rich without market failures. Every good business strategy seeks to exploit one market failure or the other in order to generate excess profit. I discuss in my paper how some of these strategies are more or less harmful than others. While not all the excess billionaire wealth generated by state-dependent or market failure-prone industries may be due to rents, it is also possible that my figure underestimates the proportion of rent in billionaire wealth. After all, the perfect competition of economics textbooks rarely exists in reality and there must be many pockets of rents in what I call the “competitive industries” as well. Given the current state of research in the field, 74% is the best estimate of the proportion of US billionaire wealth derived from rents.

The bottom-line is that extreme wealth is not broad-based: it is disproportionately generated by a small portion of the economy. Economic theory predicts that activities that are prone to rent-seeking or market failures will concentrate wealth, and that is what we observe.

This finding has important moral, economic, and policy implications. To the extent that it is driven by rents as opposed to productive activities, the extreme concentration of wealth we observe is not fair according to a meritocratic conception of social justice. Moreover, because rents do not compensate productive activities, redistributing them through taxes or regulation does not harm the economy, and could even boost economic growth. As wealth inequality has become so extreme, even modest redistribution could have significant positive impact for the poor and the middle class.

This piece was originally published on the Center for Popular Economics Blog.

2016 April 8

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  • Pamela Collins


  • Duncan Cairncross

    Excellent analysis!

  • Servio Escudrojo

    I recomend Blog Escudrojo at http// with more coments on the issue (in Spanish)

  • Define rent seeking – implement a rent seeking tax.

  • Swami

    I approached this topic extremely skeptically, but after reading Jacob’s full linked paper, I agree he makes some excellent points.

    At the billionaire level, there is a great deal of cronyism, inheritance, capitalizing on market failure or superstar winner-takes-all payoffs. I agree that to the extent we need taxes to pay for public goods, that a wealth tax is probably reasonable above an extremely high cutoff (wealth above a billion dollars?), compared to alternative sources of taxes (sales, corporate, income, property, VAT etc).

    The devil is of course in the details. What keeps billionaires from fleeing? How do we coordinate such a tax among nations? What keeps the state from just increasing rates of taxes endlessly? Once established, what is to keep those wishing to gain by redistributing to continuously lower the threshold, effectively assuming control over fellow humans?. In other words it is a dangerous precedent, where the cure is potentially worse than the malady which it tries to address. Potentially.

    Note to those not reading the full paper, billionaires are not CEO’s, financial traders, lawyers, doctors entertainers or superstar athletes. These are just high earners (big millionaires, not billionaires). I am fine with addressing their gains via progressive taxes (which we already have – the average one percenter in America pays more income taxes than 400 bottom quintile families).

    The paper makes a good case that progressive taxation could be supplemented with a billionaire wealth tax, if we could figure out how to do it without causing more damage in the process. A big if, granted.

    • I confess I have only skimmed the paper, but it strikes me that it paints with too broad a brush when describing types of wealth as unearned. For example inheritance may well have been earned by the predecessor, wealth from industries enmeshed with the state may have been earned despite such a connection not because of it and wealth related to monopolies needs to distinguish between monopolies granted by the state and those that result from creating a new market (e.g. MS Windows).

      That being said, I think it likely that being wealthy is not sufficient evidence that the wealth was acquired in socially beneficial ways. Out focus should be on trying to make that the case, however.

      • Swami

        I TOTALLY agree with you, DWA. I had to put aside my distaste for the earned and unearned dichotomy written throughout the paper. In the middle of the paper (which really is full of interesting and economically balanced data) he supplies the Hayek quote which correctly explains that economies don’t reward merit, they act as signaling and incentive devices:

        “T]he importance for the functioning of the market order of particular prices or wages, and therefore of the incomes of the different groups and individuals, is … due … to the effects of the prices on those for whom they act as signals to change the direction of their efforts. Their function is not so much to reward people for what they have done as to tell them what in their own as well as in general interest they ought to do. … [T]o hold out a sufficient incentive for those movements which are required to maintain a market order, it will often be necessary that the return of people’s efforts do not correspond to recognizable

        I agree with Hayek. Looking for merit is to misunderstand the system and how it works. I am not sure why the author continues with the earned/unearned thing after pointing out the paradigm explaining away its irrelevance.

        That said, taxes can distort how the system works, but I see value in taxes to pay for public goods. Thus I would look for sources and systems of taxation which are less distortion are with fewer negative side effects. I think progressive income taxation (like we have in extreme in the US) and a billionaire wealth tax (in theory) would be acceptable means of collecting taxes.

      • acuvox

        Inheritance is the most extreme example of un-earned income. Heirs do ZERO for society, they get the wealth passively by being born, and it motivates them to live an idle life.

        MS Windows is a terrible example. The financial success was based on exploiting a narrow market period in the shifting from high price, low volume to high volume and negligible price, as Android for example is free.

        The graphical user interfaces of the 1980s were all copied from Xerox, Englebart and other forgotten inventors rather than innovated at Apple and Microsoft. At least one critical piece of Windows technology, HIDOS and EM386, were outright stolen from RYBS Electronics to make Win 3 the most successful product to date after three prior versions sold essentially zero units to end users.

        On top of that, Windows is the worst operating system in history measured by speed, memory consumption, hard disk space and uptime.

        • The inheritance point is answered in the original post and the statements with respect to heirs seem to reflect prejudice rather than actual data.

          While we disagree on the utility of MS WIndows, that example is not essential to the point– which is the any innovative product produces some level of monopolistic profits. Often the greater the innovation, the greater the amount of such profits.

          • acuvox

            Since Edison invented the industrial research organization, it has been very rare that the technical innovators reap the rewards. Edison’s thousand odd patents were created by his employees, but they signed away their financial rights and credit in exchange for a salary, while Edison and his investors got rich, the latter passively.

            Heirs may work hard at maintaining or expanding their fortune, but skimming labor and monetizing inventions do not benefit society – this is mostly a negative sum game.

            I say this because we live on a finite planet on which real wealth is biological productivity and diversity. The ecosphere makes the air we breathe, the food we eat and purifies the water that makes it all possible. The net results of the Industrial Revolution, mining, manufacturing, chemical based agriculture and capitalism decreased the bio-mass by half and kills dozens of species a day.

            All the comfort, convenience and shiny objects counted as financial progress by economists will mean nothing when the eco-sphere collapses under the weight of excess human population. Under a ecological accounting, sustainable growth is a physical impossibility so interest is a temporary delusion.

    • Soren Gillaspy

      I think that the point is to balance out our wealth. Some billionaires would like it here. The ones who earn their wealth would, according to their study. I also don’t care for the oil and gas industries having as much of a hold on our economy. Those industries are dangerous. I would like green energy billionaires to stay around. I would like people working online to stay around. I’m not a fan of the imbalance in the wealth of people in finance. I also think that if luck currently plays to much into how much wealth you have – Trump is a good example of this.

  • Productive or Profiteering is the question. Regulation seems to encourage Profiteering. Value is always the true measure of Profit. Productive value is a better measure in the long term of sustainable marketplaces. JDS

    • Kache

      Regulation will of course to encourage profiteering if said regulation is dictated by profiteer’s lobbyists. But without regulation profiteering would be even worse because markets naturally produce monopolies since no two competitors share all information.

      • It would seem regulations are required at some level. Regulation are okay because without regulation it would be worst. So let’s all turn the blind eye to profiteer’s whilst they destroy the entire world economy. A large BUT that must have a better answer than damned if you do or damned if you don’t. That seems to me the age old argument to do nothing..

    • JW

      What makes a marketplace ‘sustainable’?

      • In my view as an Empathetic Capitalist sustainability comes from” the suppliers ability to add value”. I study R.B.Fuller and work as a capitalist, Fuller’s philosophy of supplying Ever More with Ever Less (EMEL) is my demand everyday I open my doors to trade in the marketplace. EMEL requires that my products take less “Space-Energy-Material-Time-Money”.Bursting Bubbles of economies is just ridiculous a marketplace ebbs and flows that have bubbles that burst and become something else. example the horse and cart-cars and trucks. The marketplace did not go away……. It evolved to do EMEL the bubble burst on the horse and card. Result “less horse shit on the New Yorker’s foot path” less material to clean-up…. and the market goes on…… Pollution is always looking for a solutions…JDS

  • Kal E

    Never underestimate people’s creativity in devising moral ways to spend other people’s money. The only rent-seeking that is happening is how economists (incl. myself) regularly bamboozle policy-makers into thinking that our pseudo-science could be used to discover some unquestionable truth- always supported by sophisticated math and science, so as to borrow from its credibility. Fascinating.

    • Kevin Crowley

      Care to expand on that? It’s hard for me to accept that no greater understanding or truth can be produced by economists, or those who study economies. Also; how do you consider the arguments in this article to advocate, or allude in any way to, spending others money?

      • Kal E

        The problem is that buried in the economist’s “truth,” are dozens of half-truths, or even outright lies! The problem with economics is that it’s dealing with aggregates and variables which it cannot reasonably control for in a test environment- hence, it is a pseudo-science at best, or a dangerous political weapon at worst. The article’s title states that “… most billionaire wealth is unearned.” Well, as an economist, the next question is: How do we correct for this “market failure?” Even the least cunning politician can come up with a crafty way to tax and re-appropriate in the name of the “public good” – i.e., spending other people’s money.

        • “Other people’s money” assumes the very question at issue — whether unearned income rightfully belongs the usurers, rentiers and price-gouging oligopolists who disproportionately compose the top 1%.

          Earned income stops where privilege starts:

        • “Other people’s money” begs the very question at issue — whether or not unearned income rightfully belongs the usurers, rentiers and price-gouging oligopolists who disproportionately compose the top 1%.

          Earned income stops where privilege starts:

  • Michael Smith

    To rent is human; it is unavoidable and necessary given our desire to be free to choose. Let’s say our farmer has a choice to work the fertile field or the average field. Therefore, she will gain rents and overtime will have a concentration of wealth. And because there is a compounding effect, this is an exponential accumulation of wealth. Rents happen on the basketball court, choosing the most able players and for businesses big and small choosing the smartest employees first. It makes sense to continually seek rents. Rents will always exist because there will always be a statistical distribution of resources and capabilities in the economy. Rents are not the cause of inequality they are simply the barometer.

    The problem is the system. From an engineering perspective when you have an open loop system that deals with variation you need to introduce some negative feedback to keep it system parameters stable. The classic example is a thermostat. Presently, we attempt to provide negative feedback via regulation and taxation. This is not a systematic solution. Instead of using a thermostat to negatively feedback to the furnace, this is similar to us reading the thermometer then switching the furnace on or off. A better approach is to systematically benefit the community as rents are generated.

    The solution is organization. If 62 people own as much as 3 billion people, this means that 3 billion people own a lot of resources collectively. Traditionally these disparate people look to governments to redistribute wealth. How’s that working out for them? A systematic approach means that as the 62 people benefit, a portion of this wealth automatically returns to the 3 billion. But how?

    Typically the 62 people have their affairs organized in corporations. How could we organize the 3 billion people to invest and earn dividends from these corporations? Instead of taxing the 62 people more should the government own a piece of each? Then we would still have to rely on government to close the loop. Or could the 3 billion people and their communities be part of a private equity fund that partially owns these corporations? As the corporations gain rents, they are automatically distributed to their investors, some of which are the 3 billion.

    The devil is in the details but that is the idea; close the loop.

  • Misto Takis

    will have to read it many times over, and then I may possibly understand his argument

  • BryanKavanagh

    Taxing the holding of natural resources would go a long way in remedying the mechanism by which banks and individuals extort unearned incomes from society.

  • DIE_BankofAmerica_PHUKKING_DIE

    Nothing will change until the cleansing CANNIBAL ANARCHY! when the billions and billions of starving dogs turn on each other and the two or three ultra-alpha winners that seize ownership of photosynthesis and sunlight and rape humanity for every last dime.

  • acuvox

    There are three main points that fail in real world application of economics. Measuring in currency is a mistake because it is an easily manipulated construct. This distorts the market by ignoring commons, which are consistently depleted and polluted more than the profit extracted. Real wealth is biological productivity, because that provides breathable air, drinkable water, healthy food, healthy soil and a healthy sensory environment so that is a proper meter.

    We live in a finite world. This means that sustainable growth is a mathematical impossibility. Mining based economy including manufacturing with mined inputs is not sustainable because there are finite supplies of strategic minerals, after which the price climbs rapidly into unaffordability.

    Capitalism depends on growth. Steady state conditions with 100% recycling offer no opportunities for profits, interest and capital gains except from artificial bottlenecks and tollbooths in the economic structure. This brings us to the most ignored point: the entire Industrial Revolution was a net negative, with over half of the global biological productivity destroyed by build cities and factories and pursuing comfort and convenience – goals that are now proving to reduce health and shorten life, like sitting in chairs and sealed indoor climate control.

    “Wealth creation” has been negative measured in biological terms, so there is no justification for excess wealth. Rather, you can add up everything in the world and divide by 7.5 billion to obtain an average wealth. Any amount that one individual has more than average has to be balanced by an equal amount that one or more people have less than average, that is:


    There is no possible justification for creating a billion dollars worth of poverty, so tax and regulation structures have to constrict all means by which fortunes reach this size, starting with re-instatement of highly progressive estate taxes and taxing other un-earned income to high marginal rates. We once had economic booms with over 90% taxes on the top brackets, so claims of potential catastrophe from this are falsified.

    I suggest that we need to replace the mineral based economy with one that is largely vegetable based, only utilizing minerals that are plentiful on the surface, easy to recycle and bio-compatible like Aluminum, Silicon and Iron. Mining is a classic tollbooth industry because you can efficiently control the relatively few places that high grade ore is accessible. If we take this out of the equation the economy will much better express a possible future for mankind.

    Another good policy is to nationalize health care. Ransoming health is the most inflationary industry. The profit motive has corrupted the science of health and nutrition, preventing public knowledge of health maintenance. For example, keeping sugar out of the diet and doing physical labor so we get our proper exercise in utile activities can reverse the obesity and diabetes epidemics.

    The only way forward is to stop measuring in currency, shiny possessions, speed, leisure and entertainment, but rather properly value un-harvested forests and savannah with continuous migration routes, rivers free of dams, unpolluted rain and waters, healthy reefs, sunshine on our faces, long lives free of pharmaceuticals and rich experiences gathering with our tribes of friends and family.

  • John M Legge

    The conclusion may be correct but the logic has problems.

    Firstly, there is no reason to believe that a “competitive” market will deliver lower prices than a monopoly ( Unless the market is completely inelastic, economies of scale will lead the monopolist to offer lower prices than the monopolistically competitive suppliers replaced.
    Secondly, a well-known IO theorem demonstrates that a market with five or fewer suppliers and a common cost structure will settle on a joint profit maximising price. 80% of US industries are dominated by three of fewer large corporations. Such structures encourage cost-reducing innovation, since the profit maximising price for the lower cost producer is lower than that of the rest, allowing the innovator to gain market share and put its rivals under margin pressure.
    Clear examples of unearned income include interest and dividends from inherited wealth, wages and salary incomes drawn from any enterprise exceeding twenty times the average in that enterprise, and trade in real estate. Finance and insurance often do generate unearned income, but more by fraud and misrepresentation than extracting “monopoly rents”.
    Entrepreneurial profit is earned, whether or not you like Bill Gates III. So is artistic and sporting income. The fact that these may be winner-takes-all industries does not mean that the star performers did not earn their money.

  • Stephen Simpson

    In the context of rent-seeking being bad, is including wealth generated through asymmetrical information really that problematic? An insightful investor *should* make substantial profits relative to the average. Likewise, shouldn’t a talented, experienced oncologist earn substantially more than average given the difference in the value of those skills/knowledge?

    Although I’d certainly say that insider trading and high-frequency trading would fit in with rent-seeking, it seems to me that this article uses an overly-broad brush to criticize information asymmetry as rent-seeking. What am I missing?

  • Димитър Димитров

    Income tax should be proportional to the already accumulated wealth. For example, with as times the wealth exceeds the average, the same percentage is levied on income greater than average, but not more than 90%. Simple and clear rule

  • planckbrandt

    Does money creation fit into the 1st of the 3 categories? It isn’t explicitly listed. But, money creation as debt on bank computer ledgers, for which interest is paid during long lifetimes (mortgages were historically the biggest category of “credit” creation until 2008) represents a huge rent machine that build up big fortunes, who also turn out to be grantmakers and philanthropists to cultural institutions that shape our world (think Medici, and then look around at the name lists on walls in museums and universities).

  • GaryReber

    The author views the world strictly from a one-factor (people’s labor) point of view, instead of viewing economics in reality, which can be divided into two (binary) factors of productive input: human and non-human. Binary economics recognizes that there are two independent factors of production: people (labor workers who contribute manual, intellectual, creative and entrepreneurial work) and capital (land; structures; infrastructure; tools; machines; robotics; computer processing; certain intangibles that have the characteristics of property, such as patents and trade or firm names; and the like which are owned by people individually or in association with others). Fundamentally, economic value is created through human and non-human contributions.

    The problem is the monetary system that is structured so that those with past savings can dominate and monopolize the formation of wealth-creating, income-producing capital assets. The solution is to free economic growth from the slavery of past savings and empower EVERY child, woman and man to acquire personal OWNERSHIP stakes in FUTURE viable capital asset projects using INSURED, INTEREST-FREE capital credit, repayable out of the FUTURE earnings of the investments in the growth of the economy, without the requirement of past savings (denial of consumption) or any reduction in wage earnings and benefits for those employed and contributing their labor.

    This concept is relatively simple to understand. And solutions have already been thought through and proposals drafted to reform the system and create a generally affluent society of individual citizen OWNERS.

    Support the Agenda of The Just Third Way Movement at,, and

    Support Monetary Justice at

    Support the Capital Homestead Act (aka Economic Democracy Act) at,, and