Much Ado About Sex Trafficking
Moralizing about sex trafficking has become standard practice in politics. Every headline associated with sex work has some scandalous title hinting at an evil world that is right under our noses. Women, according to several news sources, are being sex trafficked against their will by men who are sexually deranged. However, these aggressive headlines invariably lead to misinformation. For instance, in the United States Robert Kraft was accused of trafficking women into an illicit sex ring. Splashed across mainstream media, Kraft was allegedly ‘busted’ for what has been regarded as the high crime of sex trafficking. However, this opinion eventually yielded to factual reality when prosecutors conceded that no sex trafficking had actually occurred. So why was there this rush to declare that Kraft had been an immoral, sexually deranged individual? Perhaps an economic explanation would comprise the perverse incentive that exists in this market. That is, the demand for apprehending a sex trafficker is astronomically high, while the supply of sex traffickers is actually quite low.
As a result, police are incentivized to bag up potential suspects in order to meet this high demand, which is evidenced by the millions of dollars pouring into sex trafficking task forces. Of course, these perverse incentives motivate police officers to carry out actions that are questionable at best, and malpractice at worst. Character assassination is a high cost to pay for someone who was not in anyway trafficking women against their will. Sadly, media outlets aid and abet police officers in this respect by celebrating police efforts to ‘bust’ sex trafficking rings. As Elizabeth Nolan Brown, a specialist in this area, said in an interview with John Stossel “I’d say 99% of the headlines are not true.” In fact, articles claiming that these women have been ‘rescued’, are often describing women who have subsequently been imprisoned and given a criminal record.
Katylin Bailey, a former sex worker who also appeared on Stossel’s program, reinforced this point by saying that “being arrested doesn’t help you.” Naturally, she looked dismayed when she was reminded that police claim that she suffered from trafficking. Unfortunately, network television perpetuates this myth that sex trafficking is spreading like an infectious virus. After all, if sex trafficking was really so pervasive, then why would police need to engage in endless sting operations to catch an extremely small number of predators?
If sex trafficking was really as ubiquitous as media outlets make it seem, then shouldn’t we expect catching these predators to be far less elaborate? As CNN reports, police spent months busting Robert Kraft’s fictitious sex trafficking ring. Homeland Security and other governmental entities were rummaging throughout these women’s trash, monitoring their purchases at drug stores, and engaging in general surveillance for months. If these women were genuinely being sexually assaulted three or four times per day, then why would police linger around for months and let it happen? Surely, catching a predator in the act would benefit victims far more than five month long surveillance program. And surely this moral crusade, which often involves criminalizing women who engage in consensual sexual transactions, isn’t worth it on a serious analysis.
So the question then becomes: how can we fight against the anti-prostitution conservatives and supposedly anti-exploitation progressives pushing for even more illiberal prostitution laws? First, these myths may be dispelled by taking a hard look at what the data bears out. Of the many statistics that are thrown around in these discussions, perhaps the most persistent is the point that 300,000 children are at risk of being sex trafficked. While politicians and news anchors alike sing this tune from the hilltops, the facts are that this statistics has been completely discredited. The National Crimes Against Children Research Center has pleaded with people not to cite this statistic due to its misleading character. So, in short, the facts that are often cited in support of this moral panic are often false or misleading.
Second, one way of avoiding these hit-and-run attacks on women by both police and prosecutors is to decriminalize prostitution altogether. With prostitution decriminalized, the line between sex trafficking and prostitution will become much clearer to those that are concerned about women being exploited. Allowing adults to make consensual transactions is not only good theory, it is good practice. Part of believing in female empowerment is respecting, and not criminalizing, women who consensually engage in sex work.
What’s more, is that decriminalizing sex work will actually improve our chances of busting genuine sex trafficking. Once prostitution is in the realm of legality, prostitutes will feel more comfortable with reporting instances of trafficking. With this increased likelihood of crimes being reported, we will be better equipped to handle situations in which women are being abused. So, for safety reasons as well, we should decriminalize prostitution.
Nathan Bray is a research intern at the Adam Smith Institute.
Nelson Mandela’s legacy
Nelson was born on July 18th, 1918, and lived through South Africa’s turbulent times before his death, aged 95, in 2013. At first engaging in non-violent protest against apartheid as a member of the South African Communist Party, he later co-founded a militant group and led a sabotage campaign, for which he was arrested, convicted, and sentenced to life imprisonment.
His 27 years in prison changed him, and when President F W de Klerk released him in 1990, he worked with de Klerk to bring about reconciliation and a peaceful ending of apartheid. The two were jointly awarded the 1993 Nobel Peace Prize for their efforts. After the 1994 multiracial general election, Mandela became President and head of state, with de Klerk as one of his Deputy Presidents.
Mandela, as President, embarked on a programme to dismantle the legacy of apartheid, to end institutional racism, and to promote reconciliation between South Africa’s varied ethnic groups. One of the high moments of that campaign was his appearance at the 1995 Rugby World Cup final held in South Africa. Rugby in South Africa was traditionally a game played and enjoyed by whites, and disliked by its black people. Mandela encouraged blacks to rally behind the Springboks, attended the final himself, and wore a Springbok shirt when he walked out to present the trophy to the victors. The gesture hugely endeared him to South Africa’s white population.
His most brilliant move was to form and oversee the Truth and Reconciliation Commission to look into crimes committed on both sides during the apartheid years. People who testified honestly about what they had done and witnessed were granted amnesty. In place of tit-for-tat revenge seeking, with the victims seeking punishment for their aggressors, South Africa settled for letting the truth come out and giving people a sense of closure by letting the world know what had been done. It met from 1996-1998, exposing the bombings, torture and murders of those nightmare years. No-one was punished, and the nation was able to put those dark times behind it and look to its future.
It was a unique innovation, and one that has inspired other nations to put years of oppression, terrorism and civil wars behind them. The Northern Ireland Good Friday Agreement used similar principles to bar prosecution of terrorists, and while it has yet to offer similar protection to British troops who might have broken the law at the time, it may yet do so.
If some of the South American and other countries that have seen atrocities committed under dictatorships, were to use Mandela’s principles to reveal what took place without seeking “justice” by punishing those responsible, they might achieve the reconciliation that enables them to look forward.
Mandela made a lasting contribution to peace, and after he retired as President in 1999, he devoted himself to fighting poverty and HIV/AIDS through the charitable foundation that bears his name. Someone who had been a terrorist transformed himself into an elder statesman who became the father of his nation, and one of the most saintly figures of his century.
Embracing the CBD boom post-Brexit
We’re in the midst of a CBD boom in Britain
Everyone is talking about cannabidiol. Extracted from cannabis plants, CBD doesn’t have the psychoactivity of THC - CBD’s close cousin. In October 2016, the Medicines & Healthcare Products Regulatory Authority (MHRA) re-classified CBD in the UK as a medicinal ingredient - and people from all demographics are getting stuck into the new craze.
There is some concern that the MHRA’s current regulation of CBD, however, is too strict. The overly tight guidelines could, according to some in the industry, lead to CBD shortages as start-up companies struggle to cope with rigid guidelines. As always, it’s smaller suppliers and innovative start-ups which are hurt by tighter regulations – licenses to register CBD products as ‘traditional herbal remedies’ cost ridiculous amounts. The application itself costs £100,000 in the UK, and staff to keep up with the ever-changing regulatory landscape aren’t cheap either. Although the EU has seen phenomenal progress with the sale of CBD products in recent years, current laws are limiting growth. Perhaps it’s no wonder that markets like Switzerland – outside of aspects of EU regulation - are booming.
That’s why Brexit provides such an opportunity to unleash the CBD market in the UK. According to business analysts Prohibition Partners’ European Cannabis Report, even a No-Deal Brexit won’t threaten ‘the sustained development of the legal cannabis (particularly CBD) market in Britain. Indeed, there’s a strong chance that Brexit could super-charge the growing industry; Blair Gibbs, Policy Lead at the Centre for Medicinal Cannabis, said at the CBD Europe Expo last Friday that: ‘Brexit gives us a chance to diverge (from European regulation) and gain a competitive edge’ – pointing to Switzerland as a good example of the benefits of a regulatory landscape which allows CBD entrepreneurs to innovate.
Of course, regulation is important in order to protect consumer welfare – but government needs to be wary of doing what it usually does – and regulating innovation out of a flourishing market. The potential for CBD is enormous. In the United States, analysis from the Brightfield Group estimates that the CBD-hemp market alone could be worth $22 billion by 2022. Bethany Gomez, the Brightfield Group’s Research Director, points out the wide variety of issues which people are using CBD to medicate – PTSD, arthritis, sports injuries – but notes that federal regulations in the US are putting an invisible cap on the progress of the industry.
For Daragh Anglim, Managing Director at Prohibition Partners, the key issue facing the CBD market in the Brexit process is the uncertainty faced by industry leaders. He notes that investors are undoubtedly nervous about the future – but suggests that the CBD industry is one of the sectors likely to ‘emerge unscathed from the Brexit drama.’
There’s definitely a feeling that the CBD industry is only going to continue to rocket. At the CBD Europe Expo in London recently, I was amazed by just how broad the options are for the consumer. Vapes, gummies, moisturiser, muscle balm, lozenges and bath bombs – for example – mean the CBD industry is catering for consumers with all kinds of preferences or ailments.
The cannabidiol market, and the wider legal cannabis industry, is one of the most exciting prospects for the British economy – and a great example of how a lightly regulated free market can provide choice to consumers and improve standards of living for many. Post-Brexit, it could boom – provided lawmakers don’t regulate away all scope to innovate. The market for legal cannabis products is flourishing – and government should keep its hands off as much as possible.
To invoke the gravity model of trade you must understand the gravity model of trade
One of the great empirical results in economics is the gravity model of trade. Places close to each other trade more than places further away. Also, larger places do so more. So, trade tends to be with the large economies nearby. Seems logical enough after all.
However, there is a refinement here which it’s important to note when considering the political implications:
The second lesson is gravity. The flow of trade depends on both size and distance. The US and EU have similar GDPs, but we trade more with the EU because it is nearer. Indeed, our trade with individual EU countries is significantly greater than with many of the world’s largest economies. Our volume of trade with Ireland is more than 200% greater than that with India – 110% more with Germany than China.
As that doesn’t grasp the implication of this refinement. That being:
Relative size is determined by current GDP, and economic proximity is determined by trade costs – the more economically ‘distant’ the greater the trade costs.
It’s not geographic distance that we’re talking about. It’s economic distance. Which includes transport costs, obviously enough, but also such intangibles as language, habit, communications costs. We can and should also add in such things as extant trade law and tariff barriers. That last being rather important. One reason we trade more with Germany is that we’re in the Single Market where there are no legal or tariff barriers to such trade.
The implication of that is that we don’t naturally trade more with Germany, we’ve constructed the world so that we do. If we, at some point in the future, trade less with Germany that’s therefore not something unnatural, that’s again a construction.
It is economic distance that matters, not geographic.
Think on it. There was a time when Newcastle traded much more with London over sea coal - by, obviously, sea - than it did with the much closer Carlisle in anything at all over the hills and mountains. Given the transport technology of the Middle Ages Newcastle and London were economically closer to each other than Newcastle and Carlisle. Than Newcastle and Chester le Street to be honest about it. And there never would have been that North Sea economy between Frisia and our East Coast, or the Viking sea kingdoms, if land transport had been as cheap as ocean.
If we’re going to use an economic theory to enlighten our conversations about policy it’s important that we actually get the theory right. The gravity model of trade isn’t in fact about geographic proximity, it’s about economic such.
How can markets deal with kidnapping?
Stepping outside the norm, a recent Econtalk episode discussed the economics of kidnapping. The question at issue was how kidnappings are often resolved without anyone suffering too greatly. The answer to this question was more or less that market forces have adjusted to such a grim reality and have created solutions accordingly.
Just as there is car insurance, or home-owners insurance, there is now kidnapping insurance. Anybody who travels into a kidnapping-prone area can have their company choose to purchase kidnapping insurance, which will safeguard them against potential peril. Of course, the fact that solutions to kidnapping situations invariably crop up is something that should give us pause. Anja Shortland, the aforementioned guest, runs through a litany of roadblocks that such solutions could face.
Among the plethora of issues that one could encounter, Shortland lists the following: the lack of receipts, the reluctance to release a witness to the crime, and the general volatility of criminal dealings. Against this backdrop, the prospect of peacefully resolving kidnapping disputes seems quite low. However, Shortland explains how markets have managed to devise an effective economic solution to kidnapping.
Put simply, her solution comprises in what she calls the ’shadow of the future.’ Kidnappers are encouraged to behave well since in the long-run they benefit more from cooperating than they do from defecting. On the one hand, if kidnappers cooperate, then they are virtually guaranteed to receive the requested money, legal concerns notwithstanding. On the other hand, if kidnappers defect (e.g. maiming or killing the hostage), then they risk not receiving the money for that particular kidnapping, but more importantly not receiving money in the future as a result of being untrustworthy. Specialist consultants in the kidnapping insurance industry are equipped with local knowledge of kidnapping gangs and are usually able to determine from past interactions whether they are trustworthy.
In practical terms this means that kidnappers are encouraged to cooperate and keep their promises because it is good business practice. Most kidnappers around today are therefore likely to cooperate, since the businesses that didn’t cooperate most likely went under. Kidnapping insurance more or less ensures that trustworthy kidnappers are kept comparatively harmless and untrustworthy, while violent kidnapping business go bankrupt. As Shortland puts it, kidnapping insurance ‘orders the market.’
Of course, there have been doubts as to how effective kidnapping insurance could be at mitigating risk, given that kidnappers could be incentivized by near-guaranteed returns. This objection, in other words, amounts to a concern that financial guarantees from insurance markets may encourage new kidnappers to enter into the market. As the critic may invariably note, incentivizing criminal behavior is not a desirable outcome. However, such a criticism overlooks how an increase in incentives to kidnap is also accompanied by a far better overall strategy for dealing with kidnappings. If the main benefit of kidnapping insurance is that 97% of kidnapping victims are returned safely, then kidnapping insurance is, on balance, a net positive. After all, our main concern with kidnapping is returning victims home safely as quickly as possible. And insofar as kidnapping insurance accomplishes this goal, kidnapping insurance is successful. By these standards, kidnapping markets have been a resounding success.
Nathan Bray is a research intern at the Adam Smith Institute.
Murder of the Tsar
It was on July 17th 1918 that the Russian Tsar, Nicholas II, was murdered by Bolsheviks while in captivity, along with his family and some retainers. The executions came on the orders of Lenin, whose Bolsheviks had staged the October Revolution of 1917. That revolution was not against the Tsar, but against the moderate provisional Menshevik government led by Kerensky. The Tsar had already abdicated following the February Revolution of 1917.
Lenin's revolution was done to put power into the hands of a small group of professional revolutionaries led by himself, with a large fringe of non-party supporters. It was called "the dictatorship of the proletariat," in Marxist terms, but it was in fact the dictatorship of the party leadership, achieved through the armed violence that Lenin had always thought essential. He established the Cheka to identify and punish "enemies of the people," consciously following the pattern of the French revolutionaries.
As the upheavals, murders and deliberate mass starvations followed, the New York Times' man in Moscow, Walter Duranty even used the French justification, "You can't make an omelet without breaking eggs." He was one of the apologists that Lenin had called "useful idiots." Millions of eggs were to be broken as the attempt to collectivize the Russian industrial economy and agriculture went ahead, ruthlessly murdering all who stood in the way, and subjecting peasant farmers to mass starvation by seizing their food supplies for the more radical urban masses. Lenin was followed by Stalin and then by others. Communist control of the Soviet Union was to last 72 years until 1989, but there was never any sign of an omelette, despite all the broken eggs.
It could have been different. An industrial revolution was under way in Russia from the late 19th Century. An urban middle class had developed, one that formed the basis of several radical political parties that agitated for reform. Russia's pre-revolution aircraft production was massive. Agriculture was being transformed from a subsistence economy into one geared for the shipping of produce for sale via the new railroads that were making their way into its heartlands.
It was the first World War that tipped the balance, with poorly led and inadequately armed soldiers returning home disillusioned with the authorities, and forming a core of potential revolutionaries to aid Lenin's plans. In the absence of the Leninist coup, Russia would almost certainly have proved a fertile and profitable magnet for foreign investment, investment that would have modernized its industry and its agriculture as it did in other countries.
While hypothetical counter-factuals can be entertaining and even instructive, we have to work with the one reality we know about, the one that happened. The Soviet Union did not match the West in the production of consumer goods or in generating the wealth that enriched the whole of society. It did manage to develop military technology, but at the price of diverting for the aims of its rulers the resources that would otherwise have gone toward improving the life of its peoples. It kept its people poor, and such goods that did reach its shops were poorly-designed and of low quality.
Communist rule was maintained by a vast apparatus of terror and oppression. People disappeared into the Gulag system of labour camps, or were shot as dissidents for wanting to improve conditions. When people had finally had enough, they overthrew it, succeeding because the leaders had themselves lost their nerve and any faith in their future.
There is an epilogue. Nine years after the fall of Communisms, and 80 years to the day after their murder, on July 17th 1998, the remains of Tsar Nicholas II and his family were buried with full state honours in St Peter and Paul Cathedral in St Petersburg. The funeral was attended by Prince Michael of Kent, representing the Queen, and more than 20 ambassadors. Russian President Boris Yeltsin said, "Today is a historic day for Russia. For many years, we kept quiet about this monstrous crime, but the truth has to be spoken."
If only Polly Toynbee knew something about the tax she wants to talk about
Polly Toynbee tells us that Boris Johnson is being absurd in quoting from some obscure medieval source to justify tax cuts based upon the Laffer Curve:
The Laffer curve is a regular in his columns, though his latest pretentiousness name-checks another tax-cutting guru – an obscure 14th-century Islamic scholar, Ibn Khaldun.
A mere modicum of knowledge on the subject would explain why this particular reference is made. Here is Art Laffer himself talking about the Curve:
The Laffer Curve, by the way, was not invented by me. For example, Ibn Khaldun, a 14th century Muslim philosopher, wrote in his work The Muqaddimah: "It should be known that at the beginning of the dynasty, taxation yields a large revenue from small assessments. At the end of the dynasty, taxation yields a small revenue from large assessments."
Quoting Ibn Khaldun isn’t pretentiousness it’s recording both the intellectual history of the concept plus its obviousness. From, you know, the actual source of our modern day discussion of the point. Laffer also quotes Keynes:
When, on the contrary, I show, a little elaborately, as in the ensuing chapter, that to create wealth will increase the national income and that a large proportion of any increase in the national income will accrue to an Exchequer, amongst whose largest outgoings is the payment of incomes to those who are unemployed and whose receipts are a proportion of the incomes of those who are occupied...
Nor should the argument seem strange that taxation may be so high as to defeat its object, and that, given sufficient time to gather the fruits, a reduction of taxation will run a better chance than an increase of balancing the budget. For to take the opposite view today is to resemble a manufacturer who, running at a loss, decides to raise his price, and when his declining sales increase the loss, wrapping himself in the rectitude of plain arithmetic, decides that prudence requires him to raise the price still more--and who, when at last his account is balanced with nought on both sides, is still found righteously declaring that it would have been the act of a gambler to reduce the price when you were already making a loss.
These are well known points, sufficiently well known that Boris Johnson - not known as a great economist nor, often enough, someone greatly interested in economics - knows of them and even quotes at least one of them. Unknown to Polly Toynbee of course which is why we should perhaps regard askance her knowledge of matters taxation and economic.
Why trade wars are ultimately damaging for everyone
The restriction of industries, higher prices and a cost to growth – often for the sake of political point scoring. Trade wars, with their reactionary escalations of tariffs, are ultimately damaging. Not just for those on one side of the tensions, but for all countries involved. At most, a claimed triumph is tantamount to a Pyrrhic victory, incurring heavy losses along the way. Short-term gains for native industries do not necessarily provide solutions to their competitiveness.
The prevailing mercantilist ideas of the 18th century sought to use excise duties as a means of restricting imports and promoting exports. The belief was that imports constituted a loss of wealth, which was fixed, to other countries. Mercantilism was defended by concerns that liberalising trade would reduce Britain’s power and wealth.
That, however, was a false concern predicated on the supposition that trade was a zero sum game. Adam Smith discredited mercantilist ideas, arguing that free trade benefited both sides of the transaction, allowing global wealth to increase through specialisation and the production of goods and services.
Trade wars are often, at heart, a return to the discredited principles of mercantilist protectionism.
Whilst the heightened protectionism of trade wars can protect native industries from foreign competition, they result in excessive escalations of tariffs and the protection of firms provides no long-term solution to their inefficiencies. Governments should focus on tackling the problems these industries face, whilst also looking towards more efficient ones. And in trade wars, other industries get dragged in as tariffs become more expansive, posing a threat to firms and trade on both sides of the tensions.
Indeed, history has not looked fondly on the excessive protectionism and retaliation of trade wars. The US Smoot-Hawley Tariff Act is regarded by many as contributing to the decline in world trade in the 1930s, with 25 countries retaliating with their own tariffs. When the newly unified Italy ended its trade agreement with France in 1886 and raised tariffs to about 60%, “both countries experienced dislocation in their export markets and sources of supply.”
Trade wars frequently become embroiled in a political contest, neglecting the benefits of free trade to producers, consumers and aggregate growth. During the escalation of political tensions, disputes become a contest of who has lost out the least.
As former Prime Minister Neville Chamberlain said, “In war, whichever side may call itself the victor, there are no winners, but all are losers.”
Kaamil Kaba is the winner of our Wilson’s School essay competition, held following an Adam Smith Institute economics conference held at the school earlier this month.
Dawn of the Atomic Age
At 5.29 am on July 16th, 1945, in a test codenamed 'Trinity,' an atomic bomb was detonated at Alamogordo in New Mexico, ushering in the atomic age. The test was of a plutonium bomb, one of two types of nuclear device the Manhattan Project had pursued simultaneously. They knew that a U-235 bomb would work, but it took a long time to enrich enough uranium, so they worked on a more complex plutonium bomb as well. It was a higher tech design in which two different high explosives would surround a plutonium core, producing different speed shock waves that would compress it for long enough to produce sufficient fission in a smaller critical mass. They needed to test it, and on July 16th, the 'gadget' was successfully detonated. Weeks later the US ended World War II with a uranium "Little Boy" atomic bomb on Hiroshima, and then a plutonium "Fat Man" on Nagasaki.
There were about 80,000 dead at Hiroshima, and 40,000 at Nagasaki, and counting those who died subsequently from radiation poisoning, the total might have approached 200,000. On the other hand, a study by William Shockley for the War Secretary estimated that invading Japan would cost 1.7–4.0 million American casualties, including 400,000–800,000 fatalities, and five to ten million Japanese fatalities. Their fanatical defence of Iwo Jima and Okinawa had persuaded Truman that his primary duty was to save American lives, so he authorized the use of the atomic bombs to make an invasion unnecessary.
When the Soviets acquired the bomb in 1949, using information their spies had delivered from the American project, the prospect of war became costly to both sides, resulting in the "nuclear peace" that deterred a European or World War until the Soviet Union collapsed from internal and economic contradictions, and the desire of their captive peoples to be free. The Campaign for Nuclear Disarmament, if successful, would have made war more, not less, likely by reducing the cost to themselves of a Soviet attack. Even today, those who oppose the UK's nuclear deterrent would, if they succeeded, reduce the UK's ability to prevent lunatics in North Korea or Tehran from attacking British interests. The Labour leader, Jeremy Corbyn, is on record with his opposition to both NATO and nuclear arms by Britain and the West.
The Atomic Age never delivered the plentiful and cheap energy it promised. The United States Atomic Energy Commission predicted in 1973 that, by the turn of the 21st century, one thousand reactors would be producing electricity for homes and businesses across the US. It never happened, largely because of public concerns over safety and the costs of decommissioning. Lessons have been learned, though, and it is unlikely that more reactors will be built in areas susceptible to earthquakes and tsunamis, or that poorly trained technicans will be allowed to conduct high risk tests on badly-designed nuclear facilities.
France embraced nuclear technology, and produces 75 percent of its power from nuclear stations. It is also true that Green opposition to nuclear is diminishing. Their scare stories are being replaced by an acceptance that nuclear has a role to play in non-fossil-fuel power production, as part of a non-carbon programme that includes renewables.
The tantalising prospect of non-polluting nuclear fusion still remains only a prospect, despite decades of research. It might happen, just as there might be some new and totally unexpected source of energy developed by research facilities. Meanwhile, over two generations of humankind have learned to live, if somewhat uneasily, with nuclear weapons and nuclear power. It is unlikely that the genie which came out of the bottle in July 1945, can ever be put back, but the world has learned how to achieve some degree of nuclear disarmament, and is still learning how to make nuclear power safer.
Inheritance is mostly overrated as a reason for wealth
Perhaps more than ever before, people claim that almost the only way to join the ranks of the rich is through inheritance. Apparently, in the good old days, it was still possible build a fortune from the ground up—but not anymore. Such claims discourage people who have set themselves the goal of becoming wealthy as entrepreneurs or investors. The message, whether explicit or unspoken, is as clear as it is sad: “Don’t even bother trying—those days are long gone.” There are even so-called classism researchers who criticise the media for reporting on people who have ascended from humble beginnings to become rich. Such articles, the researchers claim, only perpetuate a false illusion that capitalism, in reality, can never live up to.
67% of The Forbes 400 Are Self-Made
Forbes has proved that this is simply not the case. In fact, the opposite is true: In 1984, less than half the people on The Forbes 400 list of richest Americans were self-made. By 2018, in stark contrast, this same figure had risen to 67%! Forbes’ analysis is based on a scoring system in which each member of The Forbes 400 is given a score on a scale from 1 to 10. A 1 is awarded to people who have inherited their entire fortune and have done nothing to increase their wealth. A 10 means that someone has pulled themselves up by their bootstraps to build their incredible wealth in the face of substantial obstacles. Anyone on The Forbes 400 who merits a score of between 6 and 10 is rated as having truly made it on their own.
The Buddenbrooks: An Exemplary Tale
The importance of inheritance is overestimated because, in reality, most heirs are unable to preserve let alone expand their assets. In 1901, the German writer Thomas Mann published one of his most celebrated novels, Buddenbrooks: The Decline of a Family, which tells the story of how a rich merchant family, the Buddenbrooks, slowly but surely squandered its fortune over the course of four generations. As is so often the case, fact mirrors fiction, as demonstrated by the scientists Robert Arnott, William Bernstein and Lillian Wu in their research paper “The Myth of Dynastic Wealth: The Rich Get Poorer.” Their key findings include the following: “The average wealth erosion for the 10 wealthiest families of 1930, 1957, and 1968… was 6.6 percent, 5.3 percent, and 8.7 percent, respectively. These figures correspond to a half-life of wealth—the length of time it takes for half of the family fortune to be redistributed within society through taxation, spending, and charitable giving—of 10 years, 13 years, and (remarkably) 8 years, respectively.”
Great Ideas And Personality Traits Are Not Necessarily Passed On To The Next Generation
One glance at the list of the richest people in the world is enough to see that the vast majority—insofar as they have not inherited their wealth—have earned their fortunes as entrepreneurs. And according to the findings of entrepreneurship research, successful entrepreneurs become rich because they have a very specific combination of personality traits. However, these personality traits cannot simply be passed on to the next generation. The super-rich became rich because they had incredibly good ideas. Why is it that Jeff Bezos, Bill Gates, Mark Zuckerberg, Sergej Brin and Larry Page are among the richest people in the world? Because they had great ideas, founded Amazon, Microsoft, Facebook and Google and knew how to turn them into extremely profitable companies. It’s very unlikely that their children will have the same personality traits or such brilliant ideas.
The Secret Weapons Of The Super-rich?
Left-wing economists, such as the Frenchman Thomas Piketty, believe that the rich have access to particularly profitable investments—some would even call them a license to print money—which allow them to automatically increase their wealth even without their own entrepreneurial ideas. Just like left-wing anti-capitalists, family offices that earn their money by promising to increase the wealth of rich families have a vested interest in maintaining the myth that there are secret, extremely lucrative investment opportunities that are reserved only for the super-rich. This is, after all, the basis of their entire business model. But there are very good reasons to doubt that this is the case. It is more likely that most of these exclusive asset managers deliver even worse results for their super-rich clients than an average investor would achieve by investing in an index fund. For example, hedge funds have enjoyed an almost legendary reputation as the super-secret weapons of the rich for many years. And yes, some hedge funds have achieved extremely high returns, for which they have received a great deal of celebratory media attention. On average, however, they have performed worse than an index fund that absolutely anyone can buy on the internet.
In 2007, Warren Buffett entered a million-dollar bet with fund manager Protége Partners that the S&P 500 Index would outperform a portfolio of hedge funds over the next ten years. Buffett was right and donated his winnings to Girls Incorporated of Omaha. The S&P 500 Index fund in which he invested delivered a compound annual return of 7.1%, outperforming the return on the funds selected by Protégé Partners (2.2%). The extent of the difference is really put into perspective when you compare the actual monetary returns: Anyone who invested a million dollars in hedge funds before 2008 would have made a profit of $220,000 by 2017. S&P 500 investors, on the other hand, would have collected $854,000. So much for the supposed license to print money and “secret weapons” of the super-rich.
How People Inherit Money And Lose It Again
Many rich heirs could actually live very well off their inheritances if only they followed the advice Warren Buffett has already given his wife for when she inherits (a minor part) of his fortune: Simply invest the money in an index tracker fund. But most people think they are smarter and believe they can make particularly canny investments—which all too often turn out to be flops. Or they inherit a company but do not have the entrepreneurial talent of their predecessors. Others overestimate themselves, start new companies and lose money. Still others go through expensive divorces or simply spend far more each year than their inheritances would sensibly allow. There are countless examples that show just how difficult it is to manage an inheritance. Many heirs have more in common with lottery winners who, by a stroke of luck, win massive fortunes, but lose them again because they lack the requisite skills to handle money.
Welcome To The Self-Made Billionaires’ Club, Jay Z
In reality, the chances of getting rich, even at a young age or as someone who comes from a humble background, have never been so good. Recent headlines have trumpeted the fact that Jay Z, who was raised by a single working mother, has become the world’s first hip-hop billionaire and the latest member of the Self-Made Billionaires’ Club. Of course, very few people will ever make it quite so far. But what helps more? Telling someone “You have no chance anyway. If you don’t inherit money, you’ll never get rich,” or, “Forget it! Capitalism only makes the rich even richer.” Or saying, “You probably won't become a billionaire, but look at the people who started out at the very bottom and made it to the top. Seize your opportunities!”
Dr. Rainer Zitelmann is a German historian and sociologist. His is the author of 21 books including The Wealth Elite (http://the-wealth-elite.com) and The Power of Capitalism (http://the-power-of-capitalism.com/).