Tag Archives: economics

Measuring Wealth

Currently, the top 2% hold over 50 % of the wealth in this country, and about the same holds true for the rest of the world. It hasn’t always been that way. A recent study published in Nature examined wealth distribution over time.

The most primitive cultures, stone age hunter/gatherer societies were quite egalitarian. Early agricultural societies were likewise egalitarian. The first large-scale shift to a wealthy class came with the domestication of animals. In early agriculture all labor was manual, an individual could only manage so much land. With a draft animal however, the amount of land that could be utilized greatly increased. Their study used archaeological records of the sizes of houses to create a Gini index of wealth distribution within various societies.

The Gini index is a number between 0 and 1. In a hypothetical society where the wealth is equally distributed the value is 0. At the other end of the spectrum, 1, would be a society where all the wealth is held by one person, hence the lower the index the more equally distributed is the wealth.

Agrarian societies at the earliest stages in both the old and new world were compared and both had Gini Indices of about 0.35. Over time, wealth inequality grew in old world Europe (Gini index 0.6) but remained flat in the new world (the Americas.) The difference was accounted for by the development and use of draft animals in the old world. With the exception of Llamas in limited use in the Andes, no draft animals existed in the New World.

Wealth in modern societies today is much more complex but Gini Indices are still relevant. The United States has an index of about 0.8, the highest in the developed world. Interestingly, we don’t think so. Chris Rock, a comedian, said “If poor people knew how rich rich people are, there would be riots in the streets.” In multiple surveys, Americans greatly underestimated the degree of inequality even while expressing that it should be more equitable than what they thought it was.

Averages from the survey suggested that people think the first quintile, the top 20%, should have 32% of the wealth, and they think that group has 60%. In reality, they own 85%. For the poorest 40%, people thought that they should have 25% of the wealth and guessed that they had 9%. They actually have a paltry 0.3%. The disparity has been widening over the last quarter century. The rich are getting richer, the middle-class share of the pie is decreasing slightly and the poor are rapidly getting poorer.

So what about the proposed tax reform being rushed through Congress? The Congressional Budget (CBO) scored the Senate bill and found that it will increase the national debt by 1.7 trillion dollars over ten years, the benefits of the tax cuts will favor the rich, and will actually burden the middle and lower class citizens. The rich will continue to get richer and the poor poorer.