You are not poor; income inequality is a myth; the middle class is doing just fine.
That seems to be the message coming from numerous right-leaning think tanks, websites and authors.
I was reminded of this yet again when I saw another attempt at telling the poor how lucky they are to be alive today. The title of the piece in question, by Donald Boudreaux in the Foundation for Economic Education, says it all: “You Are Richer than John D. Rockefeller.”
There are any number of ways to expose the fallacy of this claim, but I really want to focus on one of them: the role of luck in personal success or failure.
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Wealth, as we have observed before, is a relative concept. We measure our economic well-being by looking at our peers, not at different eras in time or geographies far away from us. The second point is that we can measure wealth in a variety of ways that are not simply based on income or financial assets: health, education, leisure time, lifespan and personal security.
Next, if we do indulge in one of these time-travel thought experiments, we must acknowledge that time is bi-directional. Thus, the richer-than-Rockefeller argument implies that the wealthiest people today should be willing to switch places with a poor person a century or two in the future, when presumably we will all live longer, healthier, happier lives with technology we can’t even imagine today – and on and on. It is a most dubious proposition.
But back to luck. This may be the biggest philosophical difference between the right-leaning think tanks and more rational, evidence-based outlooks less dependent upon a rigid belief system.
As Michael J. Mauboussin, head of global financial strategies at Credit Suisse, explains in “The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing,” skill and luck are “hopelessly entangled.” Everyone possesses different levels of skill, and we are all subject to outcomes that are based on luck. We also are not very good at distinguishing between the two. How large a role chance plays in determining outcomes may be variable but it is also significant. Once we acknowledge how much of our individual success or failure can be at the mercy of random fortune, it changes the usual assignment of causation and blame.
In other words, this has big ramifications for those who believe we live in a meritocracy.
A surprising thing I learned from interviewing some of the most successful people in finance is how frequently they credit good luck. Indeed, in most of the almost 150 Masters in Business interviews I have done, our guests mention – unprompted by me – the crucial role of serendipity. This isn’t false modesty or humility, but rather, an honest acknowledgment that chance can make a significant difference in people’s lives.
Note that the role of chance doesn’t imply successful people don’t need to be educated, smart and diligent. Rather, it recognizes that lots of insightful, intelligent, hard-working people may not achieve the same level of success as other folks with the exact same qualities – and that those who are more successful may have had lucky breaks that other didn’t get.
Once we take luck into our calculus, it creates problems for those enamored of Ayn Rand’s philosophy. It means some people succeed as a result of random chance, and that they will be mixed in with those rewarded based on merit – and that telling them apart isn’t always so easy. Similarly, by acknowledging the role of chance, we recognize why some people struggle. These people could use an assist, be it free lunches for poor kids who do much better in school when their nutritional needs are met or technical retraining for those whose industries have been displaced.
Luck matters, and those who oppose all forms of government intervention seem to ignore this.
It isn’t my job to play the role of official arbiter of erroneous reasoning on the internet; there are more interesting things to write about. However, some poorly reasoned or misleading commentary demands a response. The claim that today’s poor aren’t really poor is one of those.
Barry Ritholtz, a Bloomberg View columnist, is the founder of Ritholtz Wealth Management. He is a consultant at and former chief executive officer for FusionIQ, a quantitative research firm. email@example.com, www.ritholtz.com/blog.