Wealth condensation is a theoretical process by which, in certain conditions, newly-created wealth tends 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. Wealth derives from the old English word weal, which meant well-being or welfare. The term was originally an adjective to describe the possession of such qualities. ... Equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and funds in anticipation of income from dividends and capital gain as the value of the stock rises. ...

Political objections to wealth condensation

Two processes that some critics ^{[citation needed]} claim are driving wealth condensation are:

1. 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 ^{[citation needed]} 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 neofeudalism).
2. If the economy of any country is organized in the interests of the super-rich, or is a plutocracy in which only the wealthy can hold government office, it should be expected that wealth condensation will follow. Some critics ^{[citation needed]} say a modern example of this is the current executive of the U.S. In the view of some critics (e.g. Paul Krugman) the tax policies of the Bush administration vastly favor the wealthy over the poor and the middle class. The argument underlying this is that progressive tax systems are being scrapped in favor of regressive tax systems, driving wealth condensation (by allowing the wealthy to retain more of their wealth as disposable and investible income.)

Some advocates believe wealth condensation is common throughout democratic countries 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 Marx as applying to all capitalist societies. Neofeudalism is a pejorative term used by some critics to describe the policies of various right-wing politicians, particularly those in the American Republican Party. ... This article or section does not cite its references or sources. ... For other uses, see United States (disambiguation) and US (disambiguation). ... Paul Krugman Paul Robin Krugman (born February 28, 1953) is an economist who has written several books and since 2000 has written a twice-weekly op-ed column for The New York Times. ... A tax (also known as a duty) is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e. ... George Walker Bush (born July 6, 1946) is an American businessman and politician, was elected in 2000 as the 43rd President of the United States of America, re-elected in 2004, and is currently serving his second term in that office. ... A progressive tax, or graduated tax, is a tax that is larger as a percentage of income for those with larger incomes. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... Democracy is a form of government under which the power to alter the laws and structures of government lies, ultimately, with the citizenry. ... Poverty describes a wide range of circumstances associated with need, hardship and lack of resources. ... Marx is a common German surname. ... In economics, a capitalist is someone who owns capital, presumably within the economic system of capitalism. ...

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 inequality see that article or: Equality of outcome. A poster printed by the Industrial Workers of the World, dramatising economic inequality under capitalism and aiming to gain support for Industrial unionism. ... Equality of outcome is a basic form of egalitarianism which seeks to reduce or eliminate differences between individuals or households in a society. ...

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 trickle down effect

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 is a central element of the theory called the "trickle down effect". A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... In economics the trickle-down effect is believed to be an economic theory, despite the fact that, according to laissez-faire economist Thomas Sowell, no conservative economist has ever advocated such a theory [1] [2]. Indeed, in his article Preserving the Vision: Part III Sowell asserts A year ago this...

Free market supporters claim that wealth condensation theory applies less strongly to democratic countries. They point to the United States as 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 class of other, less industrialized countries. The middle class (or middle classes) comprises a social group once defined by exception as an intermediate social class between the nobility and the peasantry. ...

Critics ^{[citation needed]} of this position point out that the total wealth of the United States is vastly higher than most other nations, and that the relatively superior standard of living of the American poor is solely due to this single disparity. They argue that the relative wealth of the lower and middle class of the United States is due to a kind of global wealth condensation, which allocates global resources disproportionately to the wealthier countries.

Winner-takes-all markets

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. Skier Alain Baxter competing in the gym tests Superstars is an all-around sports competition that pits elite athletes from different sports against one another in a series of athletic challenges resembling a decathlon. ... Natural is defined as of or relating to nature; this applies to both definitions of nature: essence (ones true nature) and the untouched world (force of nature). Natural is often used meaning good, healthy, or belonging to human nature. This use can be questioned, as many freely growing plants... Economic efficiency is a general term for the value assigned to a situation by some measure designed to capture the amount of waste or friction or other undesirable economic features present. ...

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 safisfied in developed nations in 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: Economic inequality). A developed country is a country that has achieved (currently or historically) a high degree of industrialization, and which enjoys the higher standards of living which wealth and technology make possible. ... 2005 (MMV) was a common year starting on Saturday of the Gregorian calendar. ... Vilfredo Pareto (July 15, 1848 - August 19, 1923) made several important contributions to economics, sociology and moral philosophy, especially in the study of income distribution and in the analysis of individuals choices. ... A poster printed by the Industrial Workers of the World, dramatising economic inequality under capitalism and aiming to gain support for Industrial unionism. ...

A team from Jagellonian University produced statistical model economies showing that wealth condensation can occur whether or not total wealth is growing (if it isn't this means that the poor get extremely poor). Jagiellonian University (Polish: Uniwersytet Jagielloński) is a university in Krakow, Poland. ...

A correlation between being rich and earning more

Given an initial condition in which wealth is unevenly distributed, several economic mechanisms for wealth condensation have been proposed: Economics (deriving from the Greek words οίκω [okos], house, and νέμω [nemo], rules hence household management) is the social science that studies the allocation of scarce resources to satisfy unlimited wants. ...

Either:

• A correlation between being rich and being given high paid employment (oligarchy).
• A marginal propensity to consume low 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 (plutocracy).

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). Oligarchy is a form of government where most or all political power effectively rests with a small segment of society (typically the most powerful, whether by wealth, family, military strength, ruthlessness, or political influence). ... This article or section is missing references or citation of sources. ... This article or section does not cite its references or sources. ...

In a capitalist society with a marginal propensity to consume below 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... In economics, a capitalist is someone who owns capital, presumably within the economic system of capitalism. ... The marginal propensity to consume (MPC) refers to the increase in personal consumer spending (consumption) that occurs with an increase in disposable income (income after taxes and transfers). ... A wage is the amount of money paid for some specified quantity of labour. ...

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. In economic theory, economic rent is an analytic term employed to distinguish the difference between the income earned by an input or factor of production, and the cost of the factor of production. ... An economist is an individual who studies, develops, and applies theories and concepts from economics, and writes about economic policy. ...

Very roughly, the

net real rate of return = (nominal risk-free interest rate - Inflation) - (unearned income tax, dividend tax, 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.) Net worth (sometimes net assets) is the total assets minus total liabilities of an individual or company. ... The word real has many different meanings. ... In finance, the return on investment (ROI) or just return is a calculation used to determine whether a proposed investment is wise, and how well it will repay the investor. ... Wikipedia does not yet have an article with this exact name. ... The risk-free interest rate is the interest rate that it is assumed can be obtained by investing in financial instruments with no risk. ... A dividend is the distribution or sharing of parts of profits to a companys shareholders. ... Eric Arthur Blair (June 25, 1903 – January 21, 1950), much better known by the pen name George Orwell (pronounced ), was a British author and journalist. ... A dividend is the distribution or sharing of parts of profits to a companys shareholders. ...

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 stagflation and surprise inflation which meant that the purchasing power of savings was substantially reduced even with the interest income, (which implies a negative real rate of return to capital).
• Since capital gains taxes apply on nominal earnings the net amount of wealth can decline even when the risk-free yield is 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). Deflation (economics) Deflation (data compression) Deflation is the removal of loose soil by eolian (wind) processes This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ... The 1970s decade refers to the years from 1970 to 1979, inclusive. ... Stagflation is a term in macroeconomics used to describe a period characteristic of high inflation combined with economic stagnation, unemployment, or economic recession. ... In economics, purchasing power refers to the amount of goods and services a given amount of money -- or, more generally, liquid assets -- can buy. ... In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ... Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ... Yield may mean: In economics, yield is a measure of the amount of income an investment generates over time (related to return on investment). ... Because of the broad term wealth, property tax, capital transfer taxes (inheritance tax, gift tax) and capital gains taxes are sometimes referred to as wealth taxes. // Net worth tax Some countrys governments will require declaration of the tax payers balance sheet (assets and liabilities), and from that ask for... In finance, interest has three general definitions. ...

Asset inflation

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 CPI or the commodity price index. A developed country is a country that is technologically advanced and that enjoys a relatively high standard of living. ... See also 1990s, the band The 1990s decade refers to the years from 1990 to 1999, inclusive, sometimes informally including popular culture from 2000 and 2001. ... In business and accounting an asset is anything owned which can produce future economic benefit, whether in possession or by right to take possession, by a person or a group acting together, e. ... Bonds can refer to: A financial bond (including a junk bond or a zero-coupon bond) Barry Bonds A chemical bond (including the ionic bond, covalent bond, coordinate covalent bond, metallic bond, hydrogen bond, Carbon-carbon bond, Disulfide bond and Glycosidic bond) This is a disambiguation page — a navigational aid... CPI may stand for: Center for Public Integrity Central Port Injection, see fuel injection Centre Permanent Informatique Communist Party of India Congrès paléoethnologique international Consumer price index Cour pénale internationale This is a disambiguation page — a navigational aid which lists other pages that might otherwise share the same title. ... A Commodity Price Index is a fixed-weight index of the spot or transaction prices of multiple commodities. ...

For instance, the money price level of bread and milk has risen by 1-5% annually in most G7 countries since the mid 1980s, but real estate prices 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). Monetary policy is the government or central bank process of managing money supply to achieve specific goals—such as constraining inflation, maintaining an exchange rate, achieving full employment or economic growth. ... 1983 G-7 Economic Summit in Williamsburg, Virginia (left to right) Pierre Trudeau, Gaston Thorn, Helmut Kohl, François Mitterrand, Ronald Reagan, Yasuhiro Nakasone, Margaret Thatcher, Amintore Fanfani. ... The 1980s decade refers to the years from 1980 to 1989, inclusive, informally sometimes including the years 1979, 1990 and 1991. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... In finance, the PE ratio of a stock (also called its earnings multiple, just multiple, or P/E) is used to measure how cheap or expensive share prices are. ...

If this trend continues those with "little or no net worth" will find it harder and harder to join the "ownership society" as the proportion of average salary required to buy any sort of limited asset (especially housing) increases. Ownership society is a slogan for a model of society promoted by United States President George W. Bush. ...

References

• J.-P. Bouchaud and M. Mezard, 2000, Wealth condensation in a simple model of economy. ( [1]) Published in Physica A 282
• (Zdzislaw Burda and others at Jagellonian University), 2002 "Wealth condensation in Pareto macroeconomies" model appears in Physical Review E, vol 65

This article is about the year 2000. ... Jagiellonian University (Polish: Uniwersytet Jagielloński) is a university in Krakow, Poland. ... For album titles with the same name, see 2002 (album). ...

See also

• Economic Growth and Tax Relief Reconciliation Act of 2001
• Gini coefficient
• Inequity aversion

The Economic Growth and Tax Relief Reconciliation Act of 2001 was a sweeping piece of tax legislation in the United States. ... Graphical representation of the Gini coefficient The Gini coefficient is a measure of inequality of a distribution, defined as the ratio of area between the Lorenz curve of the distribution and the curve of the uniform distribution, to the area under the uniform distribution. ... Inequity aversion is the preference for fair rewards and fairplay in Anthropology (in the sub-disciplines sociology, economics, sociobiology, psychology, Evolutionary psychology, and primate behaviourology). ...

External links

• Winner-takes-all markets defined in the Economist magazine.
• Industrial Workers of the World