‘Free markets’ and global wealth

by Michael Roberts

In a new paper, Ricardo and Robert Fernholz have updated research on the distribution of global household wealth (Wealth distribution without redistribution, 27 February 2012, www.voxeu.org).  I have reported on this in several previous posts (Inequality: rich and poor, 10 January 2010 and 1% versus 99%, 21 October 2011).  And the Fernholzs look again at global household wealth.

They construct a model of household wealth distribution that assumes there are no redistributive mechanisms (taxation etc) to change the impact of the capitalist market on household wealth distribution.  They find that "in the absence of those, the distribution of wealth is unstable and becomes increasingly concentrated over time until virtually all wealth is held by a single household"!  In other words, free markets will automatically increase the concentration of wealth if left to their own devices.  It does not matter how skilled and educated households are or how much they try to save.  Those who start with more money or wealth accumulate more and so inequality grows.

In effect, the Fernholzs provide a mathematical (exponential) explanation of the empirical evidence on the inequality of global household wealth provided by other researchers.  The best of these is the report released in 2009 by the UN which looked at the assets of 39 countries based on data from 20 that account for 59% of the world's population and 75% of its wealth (The level and distribution of global household wealth, Economic Journal, September 2009).  That report found that the top 10% of world's households owned 71% of the world's wealth and the degree of inequality of wealth, the so-called gini coefficient, was 0.80, an extremely high level.  The top 1% of the world's households had $518,364 in assets.  The richest 1% of American households have 33% of total wealth and 'earn' 25% of all income in the US.

All these studies confirm that free markets do not deliver anything like equality of income or wealth.  More, without social intervention, they consistently increase inequalities over time.   It confirms one of Marx's main observations of capitalism: that the market leads to increased concentration and centralisation of capital.  Of course, here Marx was referring to the ownership of the means of production.  But it seems it also applies to the ownership of personal wealth too.

Billy Crystal at the Oscars: "Nothing can take the sting out of the world's economic problems like millionaires presenting each other golden statues".