Wealth Distribution Can Be Unstable

 

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.

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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

1. Historical Wealth Trends – Piketty analyzed centuries of economic data and found that wealth inequality has persisted and intensified, especially in capitalist economies.
2. Capital vs. Labor – Since capital grows faster than wages, wealth accumulates among the rich, while workers struggle to keep up.
3. The Role of Inheritance – Wealth is often passed down through generations, reinforcing inequality.
4. Impact on Democracy – If unchecked, extreme wealth concentration can lead to oligarchy, where economic elites wield disproportionate influence over politics.
5. 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:

1.          “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.
2.          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]
3.          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]
4.          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.

AI inspired of the Pareto 80/20 distribution

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