U of M Study: Chance Puts Wealth in Hands of a Few
Chance consistently pushes wealth into the hands of a few, according to a new study from the University of Minnesota.
Three U of M researchers built a model that isolates the effects of chance-and they discovered that chance didn't level the playing field, but instead had the opposite effect over time.
Through the recently published study-“Entrepreneurs, chance, and the deterministic concentration of wealth”-the researchers simulated the performance of a large number of investors who started out with equal amounts of capital and realized returns annually over a number of years.
Although all investors had an equal chance at success, the simulations consistently resulted in dramatic concentration of wealth over time. Why? With compounding capital returns, some investors had a string of high returns and thus gradually accumulated an overwhelming share, the study indicated.
The researchers found that how quickly wealth concentrates depends heavily on the variation among individual return rates. When variation is high, it would take only 100 years for the top 1 percent to grow their share of the wealth from 40 percent to 90 percent.
According to the researchers, healthy economies support diverse entrepreneurial efforts, which typically lead to economic growth. But since concentration of wealth reduces diversity, “nations with diverse economies should tend to outcompete on the world stage those with large concentrations of wealth, such as monarchies, or established democracies that have allowed their wealth to concentrate,” one of the study's authors, Clarence Lehman, associate dean for research in the U's College of Biological Sciences, said in a statement.
But surprisingly, the study found that wealth concentration bears no relation to average economic growth.
“This leads to the surprising finding that wealth will concentrate due to chance alone in growing, stagnant, or shrinking economies,” author Steve Polasky, professor of applied economics in the U's College of Food, Agricultural, and Natural Resource Sciences, said in a statement.
The simulation showed wealth concentrating regardless of economic cycles of growth and recession and regardless of whether wealth is split between two offspring every generation. As wealth concentrates among a small number of people, economic growth will increasingly depend on the returns of those individuals, making the economy less resilient to disruptions in their investments, the researchers found.
“The irony is that the economic diversity that helps ensure the presence of some successful enterprises and spurs economic growth could be lost if the success of these enterprises undermines economic diversity,” Joseph Fargione-an adjunct professor of ecology, evolution, and behavior in the U's College of Biological Sciences-said in a statement. “To retain the benefits of a diverse capitalist economy, we need economic policies that counter what seems to be the innate tendency for economies to concentrate wealth and become less diverse.”