- Wealth condensation
Wealth condensation is a theoretical process by which, in certain conditions, newly-created
wealthtends to become concentrated in the possession of already-wealthy individuals or entities. According to this theory, those who already hold wealth have the means to invest in new sources of creating wealth or to otherwise leverage the accumulation of wealth, thus are the beneficiaries of the new wealth.
Political objections to wealth condensation
Three processes that some critics claim are driving wealth condensation are:
# Cost of living is typically the same for everyone. In a free market economy, factors contributing to the cost of living will adjust so that poorest members of the society are forced to spend all their income on bare necessities (food, housing, medicine), whereas richer members will have enough excess income that they can save and invest. Thus, in a free-market capitalist economy, both savings and the investment income (Marxian
surplus value) are disproportionally accumulated in hands of wealthiest individuals.
# The process by which corporate officers are paid large salaries and bonuses, the total compensation sometimes being as much as thirty thousand times as much as that of their lower-paid employees. Critics of the corporate system have often charged that there is a substantial disconnect between a) officer performance and compensation, and b) officer compensation and worker compensation, and that officers are compensated at levels disproportionate to either performance or payroll because they are already part of the elite, and that this is a self-perpetuating methodology to maintain an elite class (see
# If the economy of any country is organized in the interests of the super-rich, or is a
plutocracyin which only the wealthy can hold government office, it should be expected that wealth condensation will follow. Some critics contend a modern example of this is the current executive of the U.S.In the view of some critics (e.g. Paul Krugman) the taxpolicies of the Bush administration vastly favor the wealthy over the poor and the middle class. The argument underlying this is that progressive taxsystems are being scrapped in favor of regressive taxsystems, driving wealth condensation (by allowing the wealthy to retain more of their wealth as disposable and investable income.)
Some advocates believe wealth condensation is common throughout
democraticcountries with free market economies, which they claim exemplify the old phrase " The rich get richer and the poor get poorer." (Although most would concede that the extent to which this is true varies from regime to regime, particularly in regard to "unearned income tax" policies.) For instance, the " law of the centralization of capital" was posited by Marxas applying to all capitalist societies.
In defense of wealth condensation
Few people have actually argued that raising wealth differentials is a good thing in itself, but whether it is inherently harmful or unjust has been questioned. For defenses of
economic inequalitysee that article or: Equality of outcome.
Some types of condensation are legitimate, others are not
Proponents of free market economics argue that this "leveraging of wealth" can be explained either by the legitimate creation of wealth by its owners or by specific instances of malfeasance. Therefore, by this line of argument, the results do not constitute a "process" or "effect", and to describe it as such could even be misleading because it would conflate two distinct sorts of behavior: one legitimate and positive, the other dishonest and harmful.
The "rising tide" argument
An argument in support of
free markets and the wealth disparity they create is that even if the gap between rich and poor widens, the poor themselves are actually better off than they would have been in the more equal state without free enterprise. This view is expressed in the proverb, a rising tide lifts all boats.
Free market supporters point out that wealth condensation theory applies less strongly to democratic countries. They argue that the
United Statesis a counter-example of the theory, on the grounds that its middle class is materially the most prosperous in recorded human history, with America's poor being as economically well off as the middle classof other, less industrialized countries.
If returns to scale are positive, or if
superstars are exponentially more valuable than the average, some argue that it is natural and efficient to reward some vastly more than others. Again; it is argued that this will lead to benefits for all, even though it will hurt the second-best in the short term.
The theoretical economic conditions for wealth condensation
The first condition is an unequal distribution in the first place. Without this there is nothing for the new wealth to 'condense' onto. This condition is surely satisfied in
developed nationsin 2005. In their wealth condensation model Bouchard & Mezard estimate that 90% of "total wealth" is owned by 5% of the population in many rich countries. They say that the distribution of wealth throughout the population is closely described by a Pareto-tails function, which decay as a power-law in wealth. (See also: Distribution of wealthand Economic inequality).
The second condition is that a small initial inequality must, over time, widen into a larger inequality. This is an example of
positive feedbackin the economic system.
A team from
Jagiellonian Universityproduced statistical model economies showing that wealth condensation can occur whether or not total wealth is growing (if it is not, this implies that the poor become poorer).
A correlation between being rich and earning more
Given an initial condition in which wealth is unevenly distributed, several
economicmechanisms for wealth condensation have been proposed:
* A correlation between being rich and being given high paid employment (
marginal propensity to consumelow enough that high incomes are correlated with people who have already made themselves rich ( meritocracy).
* The ability of the rich to influence government disproportionately to their favor thereby increasing their wealth (
In the first case, being wealthy gives one the opportunity to earn more through high paid employment (e.g. by going to elite schools). In the second case, having high paid employment gives one the opportunity to become rich (by saving your money).
In a capitalist society, with a
marginal propensity to consumebelow one, these are 'automatic' causes of wealth condensation due to variable incomes. The following points relate to the concentration of wealth (capital) itself, even in the absence of variable wages.
A positive net real rate of return to capital
This condition would bring wealth condensation around more quickly than the two possibilities above (because there is so much net worth in the world). The general rate of return to capital investment is sometimes called the rental rate by
economists, but here we consider the actual private income received, after taxation.
Very roughly, the :net real rate of return = (nominal
risk-free interest rate- Inflation) - (unearned income tax, dividendtax, and other capital-gains taxes).
If this rate is positive then owners of capital (
George Orwell's " dividend-drawing class") will get richer if they neither produce or consume but simply "leave their money in the bank." It is under this condition (positive net return to capital) that widespread wealth condensation is most likely. (Wealth condensation would be inevitable in the long run in this case, unless the unearned income were consumed more rapidly that it was accumulated.)
Even if the rate of net return to capital is not positive on average, wealth condensation will also occur if the largest owners on average receive a higher return than smaller owners; this would constitute wealth condensation within the capitalist class rather than at the expense of the non-capitalist class.
Examples of Negative real returns:
* These were a long term
Japanese phenomenon, despite and because of their high rates of private saving before deflation.
* Many countries in the 1970s experienced
stagflationand surprise inflationwhich meant that the purchasing powerof savings was substantially reduced even with the interest income, (which implies a negative real rate of return to capital).
capital gainstaxes apply on nominal earningsthe net amount of wealth can decline even when the risk-free yieldis above inflation. This is why inflation is sometimes said to be a " Wealth Tax," which prevents wealth condensation. Furthermore, the tax bands are not typically inflation-adjusted, so a higher share of nominal income must be paid in tax each year even as real incomes remain flat.
Hypothetically, leaving a small amount on deposit and then sleeping for several hundred years will lead to great wealth through the action of
compound interest. Unfortunately, historical real rates of return show that the effects of taxation and inflation would likely leave you worse off than when you started (with the money on risk-free deposit).
A common econometric phenomenon throughout
developed nations since the beginning of the 1990s (and earlier) is that assets (such as housing, stocks, and bonds) are inflating faster than the consumer price indexor the commodity price index.
For instance, the money price level of bread and milk has risen by 1-5% annually in most
G7countries since the mid 1980s, but real estateprices in those same countries have inflated at least twice as fast in money terms. At the same time, business assets are becoming more expensive (as measured through decaying PE ratios in the same time frame).
* J.-P. Bouchaud and M. Mezard, 2000, "Wealth condensation in a simple model of economy". ( [http://hussonet.free.fr/wealth.pdf] ) Published in Physica A 282
* (Zdzislaw Burda and others at
Jagiellonian University), 2002" "Wealth condensation in Pareto macroeconomies" model appears in Physical Review E, vol 65
Economic Growth and Tax Relief Reconciliation Act of 2001
* [http://www.economist.com/research/Economics/alphabetic.cfm?TERM=WEALTH%20EFFECT#winner-takes-allmarkets Winner-takes-all markets defined] in the
* [http://www.iww.org Industrial Workers of the World]
* [http://www.epinet.org/content.cfm/webfeatures_snapshots_20060621 CEO-to-worker pay imbalance grows]
* [http://www.kyklosproductions.com/articles/wages.html Wages in America: The Rich Get Richer and the Rest Get Less]
last = Hogan
first = Jenny
year = 2005
month = March
newspaper = NewScientist
title = Why it is hard to share the wealth
issue = 2490
page = 6
publisher = Reed Business Information
url = http://www.newscientist.com/article.ns?id=dn7107
* cite web
last = Yakovenko
first = Victor
title = Econophysics Research, Statistical Wealth Distribution
month = November | year = 2007
url = http://www2.physics.umd.edu/~yakovenk/econophysics/
accessdate = 2007-12-17
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