The origins of the Forbes 400

Here is another interesting passage from the newly published Kaplan and Rauh paper “It’s the Market: The Broad-Based Rise in the Return to Top Talent“:

…the percent [of the Forbes 400] that grew up wealthy fell from 60 to 32 percent while the percent that grew up with some money in the family rose by a similar amount.  The percent who grew up with little or no wealth remained about flat.

That is from 1982 to 2011, by the way.  The overall tendency is this:

Overall, Figures 5 and 6 show a trend in the Forbes 400 list away from people who grew up wealthy and inherited businesses towards those who grew up with more modest wealth in the family and started their own businesses.  These changes largely occurred between 1982 and 2001…

Access to education also appears to be of increasing importance.  The share of the Forbes 400 who graduated from college rose from 77 to 87 percent between 1982 and 2011.  The share of college dropouts (like Bill Gates and Mark Zuckerberg) also rose from 6 to 8 percent.  At the same time, the share of those without any college dropped markedly from 17 to 5 percent.

I view it this way.  Generational connections now matter less and starting with lots of working capital matters less.  Smarts, drive, and education all matter more.


Up to a point, Lord Copper.

First, according to those figures, the "smarts, drive and education" of people who grew up with little or no wealth does not matter any more than it used to.

Second, even if "working capital" in narrow financial terms has become relatively less important, the wider sort of social capital such as educational and social opportunities (and including "modest wealth in the family") has become more important. That sort of social capital is heavily influenced by what you refer to as "generational connections". Indeed, family links are more important for that kind of capital: I could leave all my money to a complete stranger, but I can't leave my education and contacts in my will in the way I can to my children. In the US especially, where one's parents went to university can help with one's own university application.

Third, "working capital" in narrow financial terms clearly matters to some extent. Perhaps it has become easier to get it from sources outside the family (or harder to extract it from sources within)?

Fourth, more generally, it also depends what you mean by "matter". Growing up with a large fortune is still a very good way of ending up with at least a small fortune, even if it does not guarantee being one of the very richest people who feature on this kind of list. That fact is still something that could irk people with more smarts, more drive, more education and yet no fortune at all.

" First, according to those figures, the “smarts, drive and education” of people who grew up with little or no wealth does not matter any more than it used to."

Probably incorrect. College admissions themselves are much more egalitarian wrt SES than in the period before this.

Perhaps college admissions are much more egalitarian. But college admissions is included within the category "smarts, drive and education". My (first) point was that if that those three factors were all that mattered then the proportion of people who started with little or no wealth would have increased. But it hasn't.

While I think that demographic analyses of the Forbes 400 are an excellent idea, I would point out that there are dangers in Kaplan and Rauh's method of only looking at one year out of every decade (1982, 1992, 2001, and 2011). I've been following the Forbes 400 since 1982, and there are huge swings every few years as one sector gets hot and the recent hot sector gets cold. For example, the 1982 Forbes list (which is in Kaplan and Rauh's sample) was disproportionately dominated by J.R. Ewing-type oilmen, many of whom went broke when oil prices crashed during 1982. For instance, the oil magnate / murderer T. Cullen Davis was on the 1982 list, but within a few years, Forbes designated him the Poorest Man in America because his debts outnumbered his assets by hundreds of millions of dollars.

A few years later, as I recall, Donald Trump-style New York City real estate men were the new plutocrats. By the early 1990s recession, however, Trump and his peers were hustling to stay out of bankruptcy, and had been succeeded on the Forbes list by a new set of wunderkind.

So the methodological point is that the year 1982 is not necessarily all that representative, as Kaplan and Rauh hope, of the 1980s, just as their year 1992 isn't notably representative of the 1990s. They really need to look about every three years, not every ten years, to get a representative sample of what the Forbes 400 was like in past decades. Fortunately, these days, it's not all that hard to look up online the demographics of rich guys. So, they should put in some more work.

This is a study of 400 and has no implications for others, especially when you consider studies showing economic mobility declining in the population at large. It's not clear the study has any more significance than a study of the demographics of lottery winners.

Except that when political boosters talk about the 1% they are talking about these guys and not doctors who work their asses completely off.

I remember reading an earlier iteration of this work from this April ( Not sure the JEP paper goes through this, but the increase in the % billionaires outside of US that come from humbler upbringings increased more elsewhere than America:

"Perhaps the most striking difference between the wealthiest individuals in the US and around the world is that the share of non-US billionaires who grew up without any wealth at all has risen from under 30% in 1987 to over 50% in 2012. The share that grew up with some but not large wealth has hovered around 20%, whereas the share that grew up wealthy plummeted. While the share that grew up wealthy also fell in the US, the rise of the poorest group globally as opposed to the middle group in the US is striking. We can only speculate about the sources of these differences. Most likely is that in the US there is better access to education when the family has some wealth, and such access is increasingly important to success in the United States."

I found that – perhaps – to be the most interesting claim in the whole project. Otherwise, even in the backdrop of this unprecedented increase in inequality, that fewer billionaires came from wealth is not surprising considering the preponderance of technology as the key driver to wealth.

An important takeaway is this. When we are talking about equality the rise in super-CEO pay is important. When we are talking about equal opportunity that is less so the case.

On the other hand, the rents earned by blue-blooded professions like finance or law which are driven by credentialing are offenders on both counts.

We KNOW that smarts and drive result in education. Bill Gates only dropped out to pursue a better offer. So, who large are the arrows?

To be blunt, how can we have post after post discussing some obvious percentage of a spurious correlation to education (see the post right after this one!) and then one paragraph over we just accept education "access" as a cause rather than mostly effect?

"The share of the Forbes 400 who graduated from college rose from 77 to 87 percent between 1982 and 2011"

That's probably a smaller increase than the percentage of the overall population who graduated from college in those years, respectively. Lots of people graduate from college, virtually none become billionaires. Of those who are billionaires, many did not graduate from college. It's pretty ridiculous to say that graduating from college had anything to do with becoming a billionaire.

Also, these statements: "Generational connections now matter less and starting with lots of working capital matters less. Smarts, drive, and education all matter more." seem to assume that if inherited wealth isn't as much of a factor then these other things (things you want to believe are the causes) must be the causes. Because all they really showed was the first part, and it was assumed that the latter part naturally follows. Instead, it could just be dumb luck and first mover advantage, or other not-so-warm-fuzzy things like ruthlessness, combined with the increasingly winner-take-all environment fueled by modern technology.

That’s probably a smaller increase than the percentage of the overall population who graduated from college in those years, respectively.

Sort of. Look at it the other way, and it's from 1/4 to 1/8 didn't graduate., which is a larger change.

what it could also be is hidden wealth bankrolling the supposed 'unconnected' folks.

history has numerous examples of same.

You made a logic error in your analysis.

Re: "I view it this way. Generational connections now matter less and starting with lots of working capital matters less. Smarts, drive, and education all matter more."

1. Generational connections can be made through intermediary institutions that increase network access, not just directly from inheriting the business or wealth. Your dad went to Harvard, you go to Harvard and network meeting the person who later hires you. You get admitted because you can pay. Its a generational connection that got you in there.

2. "Education matters more," agreed, but what school you get into also is related to your family and their contribution history, so it is generationally connected, not only for the education, but also for the networks you create in college.

3. Wealth gets divided exponentially as successive generations inherit...the next generation naturally get smaller shares. If it were more meritoric, the drop off would be larger and faster.


Drop item three. The fact that it has not dropped off as fast might also be due to trusts that escape the full effect of inheritance taxes, but nevertheless you would expect drop off due to generations splitting wealth over time.

If the average family has two children, and children of wealthy families generally marry other children of wealthy families, the wealth does not get divided by inheritance much, it just gets shuffled. Except for the tax man's take.

However, notice that Tyler said generational connections and starting capital matter less. Not that they don't matter at all. Aside from Sailer's criticism that too few (and possibly unrepresentative) sample points were taken, I think it's clear that entry into the Forbes 400 has gotten easier for those who didn't grow up rich.

A little secret: all those Forbes list are just marketing for Forbes. People who have worked for Forbes have revealed how shoddy they are done. There's a lot of guessing.

An even better secret: There's a lot of guessing in almost everything.

With a few exceptions, almost every human endeavor is revealed to be a bit of a mess when you see how the sausage is made.

“I view it this way. Generational connections now matter less and starting with lots of working capital matters less. Smarts, drive, and education all matter more.”

What makes study of this so difficult is that Smarts, Drive and Education are all very closely linked to generational connections through genes, learned discipline, and networking.

The idea that starting off with the most working capital matters less is probably true, as capital is available to people with really good, really big ideas now more than in the past, thanks to better potential returns to venture projects, which in turn is due to the ability to better leverage great ideas into huge mounds of cash. One impact of this could be that a rich paternal figure is probably more likely to invest in a great company on behalf of alcoholic nephew Joe as opposed to giving Joe money to start a company.

It's too bad that this more efficient capital market is run by those filthy finance guys who keep collecting rents on legitimate operations and in aggregate add no real value to the economy.

Luck remains a big factor.

Plus willingness to break the law and/or engage in activities with zero social return. That's a key factor.

It isn't talent, it's institutional scale.

If the economy favors large economies of scale then the number of top spots gets smaller and the share of the economy attributable to those top spots get larger. Any warm body at the top of the pyramid has the ability, more or less unchecked, to reap the benefits of that economic institution. The fact that somebody holds a top stop does establish a certain level of talent but doesn't establish that that person is particularly more talented than twenty other people who could have been just as successful or better at the job. Ultimately, somebody gets the job and that person prospers while equally talented people who don't do not prosper.

Conflating access to the resources of large institutions with talent is a fallacy. We seem to recognize that in the case of elected officials, but not in the case of corporate executives and law firm partners.

Confusingly, pure intellectual and interpersonal talent probably is rewarded better now than it once was, but institutional scale and not rewards to talent is what is driving the trend in income and wealth concentration that we observe.

Speaking of the origins of the Forbes 400, here's an article from Haaretz on analysis of the origins of the Forbes 400:

...if anyone was wondering how the study defined "grew up with some wealth", here's what the paper refers to (right under figure 6. graph):

[" ...In coding the data, we view
the “some wealth” category as the equivalent of an upper middle class upbringing."]

I think it's important to keep things in perspective here, don't you think ?

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