Wealth
Distribution Can Be Unstable
In
simple terms one can gain or lose wealth. The social/political system often
promotes differing wealth outcomes. The idea of a king with the ability to
distribute favors to those who supported him/her is a method of government that
survived for many centuries. The king most often could not do it alone, so he/she
created oligarchy that helped him/her to dominate the political process and
maintain their interests. Theoretically a democracy makes for a much more level
playing field. Over time some interests become entrenched, and they get an
outsized influence but again this is fluid. The ultra-rich of today is mostly
different from the ultra-rich of a century ago.
Social
unrest can be a major reason why wealth in equality matters. It has been at the
core of many revolutions. The following is an AI summary of Notable
Revolutions Fueled by Wealth Inequality.
- French Revolution (1789)
- Trigger:
The nobility and clergy were exempt from taxes while the Third Estate
(commoners) bore the burden.
- Outcome:
Overthrow of the monarchy, rise of radical democracy, and a reimagining
of property rights.
- Comment:
This is the textbook case—economic injustice mixed with Enlightenment
ideals created a perfect storm.
- Russian Revolution (1917)
- Trigger:
A rigid class system, landless peasants, and industrial workers facing
brutal conditions.
- Outcome:
Collapse of the Tsarist regime and rise of the Soviet Union.
- Comment:
Marxist ideology found fertile ground in a society where wealth was
hoarded by aristocrats and oligarchs.
- American Revolution
(1775–1783)
- Trigger:
While not purely economic, resentment over taxation without
representation and mercantile restrictions played a role.
- Outcome:
Independence from Britain and a new republic.
- Comment:
Economic autonomy was a key motivator, especially for colonial elites who
felt stifled by British control.
- Mexican Revolution (1910)
- Trigger:
Massive land inequality—most land was owned by a few hacendados while
peasants had none.
- Outcome:
Redistribution of land and a new constitution.
- Comment:
A classic case of rural inequality sparking a decade-long civil war.
- Arab Spring (2010–2012)
- Trigger:
High youth unemployment, rising food prices, and entrenched corruption.
- Outcome:
Regime changes in Tunisia, Egypt, Libya, and unrest across the region.
- Comment:
Economic despair, especially among the young and educated, was a major
accelerant.
- Peasants’ Revolt in
England (1381)
- Trigger:
Heavy taxation and feudal oppression after the Black Death.
- Outcome:
Though crushed, it marked a turning point in the decline of serfdom.
- Comment:
Even in medieval times, wealth gaps could shake the foundations of power.
As when
wealth piles up at the top and opportunity dries up for the rest, resentment
becomes combustible. Montesquieu warned that republics thrive on moderate
inequality—too much, and they risk collapse.
Thomas
Piketty’s capital-driven models focus on how wealth inequality
grows over time due to the dynamics of capital accumulation. His most
famous argument is encapsulated in the equation r > g, which means
that the rate of return on capital (r) exceeds the rate of economic growth
(g). This imbalance leads to increasing wealth concentration, as
those who own capital (assets like real estate, stocks, and businesses) see
their wealth grow faster than the overall economy.
Key
Ideas from Piketty’s Work
- Historical Wealth Trends
– Piketty analyzed centuries of economic data and found that wealth
inequality has persisted and intensified, especially in capitalist
economies.
- Capital vs. Labor
– Since capital grows faster than wages, wealth accumulates among the
rich, while workers struggle to keep up.
- The Role of Inheritance
– Wealth is often passed down through generations, reinforcing
inequality.
- Impact on Democracy
– If unchecked, extreme wealth concentration can lead to oligarchy,
where economic elites wield disproportionate influence over politics.
- Policy Solutions
– Piketty advocates for progressive taxation, wealth taxes, and
policies that promote economic redistribution to counteract
inequality.
His
research suggests that without intervention, capitalism naturally drifts
toward greater inequality, making it harder for lower-income groups to
accumulate wealth.
Piketty’s
critique is fundamentally important, if it is correct, because it harnesses a
“two rates contradiction,” a model of analysis that claims that a system
becomes more and more out of balance over time. In simple terms (explained
below), Piketty argues that the degree of inequality in capitalist nations,
especially in the United States, has been growing rapidly, and further that
this problem will continue to get worse because the rate of return to “capital”
exceeds the return to the rest of the economy. Workers, in particular, are
given the short end of the stick in capitalism, as an inherent feature of the
system.
Piketty’s
argument consists of two parts: an empirical claim (vast increases in
inequality) and a theoretical explanation (capital has a higher return than
labor). Each of the two components has crippling flaws, so the Piketty model
fails, on its own terms. There are four reasons for this failure:
- “Capital”
is not homogenous. Some capital is invested in new and
profitable applications, and some is invested in declining industries. Karl Marx claimed that capital was
“barren,” and he was wrong about that. But Piketty claims that
capital is all the same, and that each investment earns the same average
return, regardless of how it is invested. That is wrong, also.
- Even
if capital were (more) homogenous, the depreciation of capital is
not fully offset by increased saving by the wealthy. Perhaps more
importantly, excessive saving is not a problem for the wealthy in the
first place. Even the very wealthy, after a generation or two, dissipate
their wealth by excessive consumption, and find that the value of
investments has fallen dramatically, partly because of depreciation, but
also because of simple inattention.[45] No stable
“one percent” of individuals owns an increasing share of wealth.[46] But the
empirical evidence on both depreciation and the need for higher
reinvestment returns turn out to contradict Piketty’s conclusion that
capital will always have the equal or rising returns.. Using plausible
definitions of depreciation reverses the predictions of the model.[47]
- Nearly
half of what Piketty calls capital is tied up in the value of dwellings,
and the land on which dwellings are placed. The rate of increase in the
value of homes, and urban land, has more to do with progressive land use
regulations than with capitalism.[48] Housing
prices do not factor into the rate of return on capital for entrepreneurs.
Importantly, when accounting for the
wealth held in homes by middle-class people, actual inequality is
substantially less than is implied by Piketty’s income-based measures.[49]
- Finally,
wealth held as real estate, or other physical forms of capital structure,
are complements to labor, not substitute. Piketty’s argument relies on
notion that capital can be substituted for labor in the production
process, because otherwise the diminishing returns to capital investment
at the margin would actually predict less inequality, not more. Capital
must be able to displace labor, while capturing all of the
productivity that labor used to contribute. The problem for Piketty is
that the professional literature on this question shows the “perfect
substitutes” argument is unsupportable If, as appears more plausible,
capital is generally a complement to labor, Piketty’s own theory
implies decreasing, not increasing, inequality over the long
term.
These
counterarguments are varied, complex, and confusing. But taken as a whole, this
extensive body of work means that neither component of Piketty’s central claim
is persuasive. The level of inequality in the US and other developed nations
has varied, but it has not shown a large and consistent increase. And the rates
of return to capital and labor, when properly calculated, do not indicate that
an increase in inequality is inevitable, or even likely in the
future.
Thus,
while Piketty’s work has been heavily employed as a focus of inequality and
“social justice” research, Piketty’s conclusions are mostly misguided. Any
policy responses based on them will be, too. Inequality and poverty are
significant problems, and the sense of precariousness felt by many Americans is
real. Unfortunately, the exaggerations and excessively pessimistic claims made
by Piketty and those whom he has persuaded to follow his arguments have likely
made the problems harder, not easier, to solve.
- By most measures, general
inequality has not increased. The Gini coefficient (a statistical measure
of economic inequality) of the US was .38 in 1963, and .40 in 2021, the
most recent year for which data are available.[12] The Gini
measure has been as high as .42, and as low as .35, over that period of
nearly 60 years, but there is no evidence of any widespread concentration
of wealth in the US.
- On the other hand,
public perceptions of increased concentration of wealth at the very
top of the income distribution are supported by
the evidence. That may be why Piketty’s thesis is attractive. The top
one-tenth of one percent of the income distribution held 3.4 percent of US
private income in 1980, and today that proportion approaches ten percent,
a near tripling of the share of the very wealthiest elites.[13]
That
does, superficially at least, as if “the rich are getting richer.”
Understanding Thomas Piketty’s Capital in
the 21st Century | AIER https://aier.org/article/understanding-thomas-pikettys-capital-in-the-21st-century?
Why consider
a study with flaws? Many studies have flaws but provide a framework to consider
the problem. The goal of this website is “to describe what is”. Consideration
of wealth distribution is flawed but the solution is elusive. Unless one is in
a static economic system where inheritance and/or economic favoritism are
distributed rather than earned, wealth tends to shift. This has been true even
in static systems where ability and luck can make one of modest means wealthy.
Central to this discussion are property rights which will be the next topic.
