Author Topic: Causes of wealth inequality?  (Read 6094 times)

SHDL

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Re: Causes of wealth inequality?
« Reply #30 on: January 23, 2019, 06:10:12 PM »
If the question is why wealth inequality has been increasing over time (as opposed to, say, why it exists in the first place, or what the government can/should do about it), thereís an extremely dry answer: it is just the way the math works.

Here's why, for those who are interested:

Let W(i, t) denote the wealth of family i in generation t, and let r(i, t) denote the net return on wealth, after taxes and spending, that family i obtains between generation t and t+1.  Then for each i and t:

W(i, t+1) = (1 + r(i, t)) * W(i, t).

Suppose also that r(i, t) is independently and identically distributed across families i and generations t (and that the distribution from which it is drawn has positive variance).

Then it follows mathematically that the log variance of wealth W across families i increases linearly with generation t and therefore does not converge as t goes to infinity.  In other words, wealth inequality keeps increasing forever without ever reaching a limit.

Then we would expect the richest people to come from very old money but that isn't what we see....the four richest people are all new money:
1) Bill Gates
2) Warren Buffet
3) Jeff Bezos
4) Amancio Ortega

And this is consistent with history...think of renown rich people:

Rockefeller...born to penniless single mother
Carnegie....poor immigrant
Vanderbilt....fourth of nine children born to relatively poor family
John Jacob Astor...son of a butcher

How many rich Astors or Vanderbilts or Carnegies do you know of today? Only the Rockefellers maintained their fortune to the present day. General aphorism is shirt sleaves to shirt sleaves in 3 generations. First generation builds wealth. Second preserves and even expands it. Third squanders it. So although its possible in theory for your equation to hold...in practice that isn't how human beings or the world works. You can understand why this is difficult...if you were the son of a billionaire would you really want your whole life to be devoted to maintaining the empire someone else built?

The way to think about this is that Gates, Buffett, and other self-made billionaires got (via hard work, frugality, luck, ...) very high rís and the other dynasties that didnít last got (via gifting, misfortune, stupidity, lavish spending, ...) very low rís.

Now if thereís evidence that rich people are more likely than others to lose their wealth, Iíd be interested in seeing it. The anecdotes you mentioned suggest that there may be some at the top end, but Iím not sure. Anyway, that would be a good reason to reconsider the i.i.d. assumption.


rkbabang

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Re: Causes of wealth inequality?
« Reply #31 on: January 23, 2019, 06:30:00 PM »
We have nuclear weapons, there is no need for 900 military bases in 153 countries.

Then when something like 9/11 happens what do you do? Drop a nuke on Afganistan?

The people who did it were dead. They were after one other guy. Put a price on his head sufficient to bring him in. We spent 7 trillion dollars on the war on terror, a $5B price would have been a bargain and his head would have been on the President's desk in a month. Ron Paul actually suggested this, but Americans were too busy beating the war drums like savages to hear.

EDIT: http://ronpaulquotes.com/chapters/2001-100.html
« Last Edit: January 23, 2019, 06:37:51 PM by rkbabang »

rukawa

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Re: Causes of wealth inequality?
« Reply #32 on: January 23, 2019, 11:47:36 PM »
The way to think about this is that Gates, Buffett, and other self-made billionaires got (via hard work, frugality, luck, ...) very high rís and the other dynasties that didnít last got (via gifting, misfortune, stupidity, lavish spending, ...) very low rís.

Now if thereís evidence that rich people are more likely than others to lose their wealth, Iíd be interested in seeing it. The anecdotes you mentioned suggest that there may be some at the top end, but Iím not sure. Anyway, that would be a good reason to reconsider the i.i.d. assumption.

The original model basically predict increasing wealth skew over time due to past generational history....but why do most huge fortunes accrue to men whose families are not rich and most often happen WITHIN one generation. It doesn't really makes sense according to your model. You would expect the reverse. In other words most of the top rich people should be more like Donald Trump and less like Warren Buffett. They should be people belonging to rich families that built wealth over multiple generations but that isn't what you see. Instead you see a large number of cases where huge fortunes were built in one life-time by someone of poor to middle class background.

If your model really held true than the Astors, Vanderbilts, Rockefellers and Carnegies should still have gargantuan fortunes...in fact once a person like Bill Gates emerges...assuming iid r(i,t) his family should remain rich for many many generations. That isn't observed.

« Last Edit: January 23, 2019, 11:49:23 PM by rukawa »

Cardboard

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Re: Causes of wealth inequality?
« Reply #33 on: January 24, 2019, 05:23:47 AM »
"If your model really held true than the Astors, Vanderbilts, Rockefellers and Carnegies should still have gargantuan fortunes...in fact once a person like Bill Gates emerges...assuming iid r(i,t) his family should remain rich for many many generations. That isn't observed. "

Agree. The equation also does not explain what happened between the 20's and 70's when top 1% income share of U.S. went from 23.9% down to 8.9% (courtesy of LC chart)?

Cardboard

SHDL

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Re: Causes of wealth inequality?
« Reply #34 on: January 24, 2019, 06:36:18 AM »
If your model really held true than the Astors, Vanderbilts, Rockefellers and Carnegies should still have gargantuan fortunes...in fact once a person like Bill Gates emerges...assuming iid r(i,t) his family should remain rich for many many generations.

I'd be interested in learning more about what happened to these dynasties.  Do you know how these guys lost their fortunes?

That said though, there's technically nothing in the model that directly contradicts these stories.  If you start with a 10 billion fortune and pay 2 billion in taxes, give away 3 billion to charity, spend 1 billion yourself, and lose 3 billion due to bad investing, you're down to 1 billion in one generation.  r=-0.9 in that case.  Split it between multiple siblings and each one is no longer even a billionaire.  I.i.d. per se doesn't rule that out.

rkbabang

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Re: Causes of wealth inequality?
« Reply #35 on: January 24, 2019, 06:46:57 AM »
"If your model really held true than the Astors, Vanderbilts, Rockefellers and Carnegies should still have gargantuan fortunes...in fact once a person like Bill Gates emerges...assuming iid r(i,t) his family should remain rich for many many generations. That isn't observed. "

Agree. The equation also does not explain what happened between the 20's and 70's when top 1% income share of U.S. went from 23.9% down to 8.9% (courtesy of LC chart)?

Cardboard

The top one percent is gaining more and more wealth, but the top 1% isn't made up of the same people/families from generation to generation.  New people creating new wealth are able to create more of it than in past generations.   Individuals move up and down the wealth categories.  I made more at 25 years old than my Dad ever made in one year in his life, whereas it isn't clear that my children will make as much as I do (time will tell).
The same goes for really rich people.  A Billion dollar fortune is spread between all of the children in generation 1, then all of their children in generation 2, then whatever is left of it after gen2 squanders it is being spread out among even more heirs in gen 3 and so on.  It only grows when an heir is talented enough to grow it, which is more of the exception rather than the rule.  So self-made men are able to amass larger fortunes than was possible in the past, maybe because our economy is so much larger, but it is always different people cycling in, not some kind of aristocracy as the charts make it seem.
 

Cigarbutt

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Re: Causes of wealth inequality?
« Reply #36 on: January 24, 2019, 07:12:58 AM »
If your model really held true than the Astors, Vanderbilts, Rockefellers and Carnegies should still have gargantuan fortunes...in fact once a person like Bill Gates emerges...assuming iid r(i,t) his family should remain rich for many many generations.

I'd be interested in learning more about what happened to these dynasties.  Do you know how these guys lost their fortunes?

That said though, there's technically nothing in the model that directly contradicts these stories.  If you start with a 10 billion fortune and pay 2 billion in taxes, give away 3 billion to charity, spend 1 billion yourself, and lose 3 billion due to bad investing, you're down to 1 billion in one generation.  r=-0.9 in that case.  Split it between multiple siblings and each one is no longer even a billionaire.  I.i.d. per se doesn't rule that out.
You may then be interested in reading the following (p.24 to end):
http://www.theboxisthereforareason.com/wp-content/uploads/2016/05/cj-v35n3-1_0.pdf

Mr. Piketty has written a lot about the topic but his work is not flawless and the above link is a good rebuttal.

An aspect that is not covered well by the link is the growing inequality, reaching very high levels and its classic association with decreased inter-generational mobility (the Great Gatsby curve) and the convincing data showing how mobility has been decreasing steadily and significantly in many developed countries, including in the US.

When we analyze companies, in some cases, as value investors, we have to decide how temporary difficulties will be resolved. Sometimes, firms can reform from within but when managers become entitled and maintained by an ossified Board, the stickiness may require a form of activism. When societies move towards plutocraty and poor governance, if reform cannot be achieved from within, a form of populism may be required.
« Last Edit: January 24, 2019, 07:15:21 AM by Cigarbutt »

SHDL

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Re: Causes of wealth inequality?
« Reply #37 on: January 24, 2019, 07:15:44 AM »
Thanks, Cigarbutt!

meiroy

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Re: Causes of wealth inequality?
« Reply #38 on: January 25, 2019, 12:35:16 AM »
In my experience, the answer is choice.  Life is the sum of all your choices said Albert Camus.

I personally know at least 4 households who have heard me preach about the importance of saving money, underspending income grossly for many many years (9+), but they continue to carry massive amount of debt while living paycheck to paycheck.  1 household have additional refrigerator for all their beers, all 4 lease cars, etc. 

If we can legislate away dumb choices, we can reduce wealth inequality immensely without robbing Peter to pay Paul. 

some people decided to have babies early, even after being told how tough it's gonna be.  some people decided to be waiter/waitresses or bartender/bartenders instead of going to college...

knowing the right thing to do vs actually doing it...

I know quite a few households where the kids are doing well not because of any bright choices but because the parents have significant wealth.  I'm not even talking about better health care, better education and the *choice* to take risks, the freedom to take risks, because they have nothing to fear if they fail.  I'm talking about having easy and ready access to supply chains because the dad has leverage or how they get large chains to hold their products because they make money off the dad's products and so on. Significant wealth brings competitive advantages that can pass through the generations.  This can be easily seen in Europe, where some families maintain their wealth over several centuries.  A rich kid can make plenty of dumb choices but still end up on top because of their family's wealth.

And how does that make you feel? Envious?  Like you deserve to take what they have?   How is any of what someone does for their children your business?

So, just to pretend that you actually talked about the argument instead of your ad hominem. 

My comment was a reply to the argument that somehow poor people are poor because of their choices and rich people are rich because of their choices. I provided examples of how that is not necessarily the case.

On the macro, as I have noted, high inequality distorts competition, on the extreme can destroy the markets and lead to unfavorable political choices, i.e. Trump or a mirror candidate from the left suggesting high taxes (same cause).   

It's not a hypothetical discussion and that's why I care, I want my kids to have a better world and it's not going in the right direction.

rkbabang

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Re: Causes of wealth inequality?
« Reply #39 on: January 25, 2019, 07:31:55 AM »
In my experience, the answer is choice.  Life is the sum of all your choices said Albert Camus.

I personally know at least 4 households who have heard me preach about the importance of saving money, underspending income grossly for many many years (9+), but they continue to carry massive amount of debt while living paycheck to paycheck.  1 household have additional refrigerator for all their beers, all 4 lease cars, etc. 

If we can legislate away dumb choices, we can reduce wealth inequality immensely without robbing Peter to pay Paul. 

some people decided to have babies early, even after being told how tough it's gonna be.  some people decided to be waiter/waitresses or bartender/bartenders instead of going to college...

knowing the right thing to do vs actually doing it...

I know quite a few households where the kids are doing well not because of any bright choices but because the parents have significant wealth.  I'm not even talking about better health care, better education and the *choice* to take risks, the freedom to take risks, because they have nothing to fear if they fail.  I'm talking about having easy and ready access to supply chains because the dad has leverage or how they get large chains to hold their products because they make money off the dad's products and so on. Significant wealth brings competitive advantages that can pass through the generations.  This can be easily seen in Europe, where some families maintain their wealth over several centuries.  A rich kid can make plenty of dumb choices but still end up on top because of their family's wealth.

And how does that make you feel? Envious?  Like you deserve to take what they have?   How is any of what someone does for their children your business?

So, just to pretend that you actually talked about the argument instead of your ad hominem. 

My comment was a reply to the argument that somehow poor people are poor because of their choices and rich people are rich because of their choices. I provided examples of how that is not necessarily the case.

On the macro, as I have noted, high inequality distorts competition, on the extreme can destroy the markets and lead to unfavorable political choices, i.e. Trump or a mirror candidate from the left suggesting high taxes (same cause).   

It's not a hypothetical discussion and that's why I care, I want my kids to have a better world and it's not going in the right direction.


We all want a better world for our children.  A better world includes a much larger economy with an increase in total wealth.  The populism isn't a result of wealth inequality, it is a result of voter ignorance on topics such as wealth inequality.  Trump was elected (putting aside how awful Hilary is) due to the vast majority of people not understanding the theory of comparative advantage and thus "thinking" with their emotions/prejudices about free trade and immigration.  Likewise the support for people like Bernie or Alexandria Ocasio-Cortez is a result of complete economic ignorance on the part of the electorate who do not realize that wealth is created, not just moved around in a zero-sum game, and have no idea how markets work.  I hope someone out there right now is starting a company that will  increase our standard of living so much, create so many jobs, and expand our economy so much that he builds a Trillion Dollar fortune for himself.  In fact I hope there are 50 or 100 such people. A better world includes massive income inequality, a better standard of living, and more wealth and opportunities for all.   Reducing wealth inequality is actually making a future that is worse off for both your children and mine.  Giving into voter ignorance/envy isn't helping anyone.