We know that inequality is on the rise *1 around the world: The richest 1 percent command almost half the planet's household wealth, while the poorest half have less than 1 percent. We know a lot less about why this is happening, and where it might ( 1 ).
Some argue that technological advancement drives income disproportionately to those with the right knowledge and skills. Others ( 2 ) to the explosive growth in the financial sector. What if *2 we could shed all our political prejudices and ( 3 ) a more scientific approach, setting up an experimental world where we could test our thinking about what drives inequality?
Imagine a world like our own, only greatly simplified. Everyone has equal talent and starts out with the same wealth. Each person can gain or lose wealth by interacting and exchanging goods and services with others, or by making investments that earn uncertain returns over time.
More than a decade ago some scientists set up such a world, in a computer, and used it to run simulations examining fundamental aspects of wealth dynamics. They found several surprising things.
First, inequality was unavoidable: A small fraction of individuals (say 20 percent) always came to possess a large fraction (say 80 percent) of the total wealth. This happened because some individuals were luckier than others. By chance alone, some peoples' investments ( 4 ) off many times in a row. The more wealth they had, the more they could invest, ( 5 ) bigger future gains even more likely.
For those who worry about the destructive effects of wealth inequality on social cohesion and democracy, the idea that it ( 6 ) almost undeniably from the most basic features of modern economies might be frightening. *3 But there it is. A small fraction owning most of everything is just as natural as having mountains on a planet with plate tectonics.
Suppose *4 we reach into this experimental world and, by adjusting tax incentives or other means, ( 7 ) the role of financial investment relative to simple economic exchange. What happens then? The distribution of wealth becomes more unequal: The wealth share of the top 20 percent goes from, say, 80 percent to 90 percent.
If you keep promoting the role of finance and investment, something surprising happens. Inequality doesn't just keep growing in a gradual and continuous way. Rather, the economy crosses an abrupt tipping point. Suddenly, a few individuals ( 8 ) up owning everything.
This would be a profoundly different world. It's one thing to have much of the wealth belonging to a small fraction of the population ― 1 percent is still about 70 million people. It's entirely another if a small number of people ― say, five or eight ― hold most of the wealth. With such a gap between the poor and rich, the idea that a person could go from one group to the other in a lifetime, or even in a number of generations, becomes absurd. The sheer numbers make the probability vanishingly small.
Are we headed toward such a world? Well, data from Bloomberg and the bank Credit Suisse suggest that the planet's 138 richest people currently command more wealth than the roughly 3. 5 billion who make up the poorest half of the population. Of course, nobody can say whether that means we've ( 9 ) a tipping point or are nearing one.
Our experimental world ( 10 ) that today's vast wealth inequality probably isn't the result of any economic conspiracy, or of vast differences in human skills. It's more likely the ordinary outcome of a fairly mechanical process ― one that, unless we find some way to alter its course, could easily carry us into a place where most of us would rather not be.
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