Are the rich getting richer and the poor poorer?

Yes. The New Scientist (March 12, 2005) explains. (Hat tip - Amit)

The rich are getting richer while the poor remain poor. If you doubt it, ponder these numbers from the US, a country widely considered meritocratic, where talent and hard work are thought to be enough to propel anyone through the ranks of the rich. In 1979, the top 1% of the US population earned, on average, 33.1 times as much as the lowest 20%. In 2000, this multiplier had grown to 88.5. If inequality is growing in the US, what does this mean for other countries?

Almost certainly more of the same, if you believe physicists who are using new models based on simple physical laws to understand the distribution of wealth. Their studies indicate that inequality in market economies may be very hard to get rid of.

In 1897, a Paris-born engineer named Vilfredo Pareto showed that the distribution of wealth in Europe followed a simple power-law pattern, which essentially meant that the extremely rich hogged most of a nation's wealth (New Scientist print edition, 19 August 2000). Economists later realised that this law applied to just the very rich, and not necessarily to how wealth was distributed among the rest.

Now it seems that while the rich have Pareto's law to thank, the vast majority of people are governed by a completely different law. Physicist Victor Yakovenko of the University of Maryland in College Park, US, and his colleagues analysed income data from the US Internal Revenue Service from 1983 to 2001.

They found that while the income distribution among the super-wealthy - about 3% of the population - does follow Pareto's law, incomes for the remaining 97% fitted a different curve - one that also describes the spread of energies of atoms in a gas.

In the gas model, people exchange money in random interactions, much as atoms exchange energy when they collide. While economists' models traditionally regard humans as rational beings who always make intelligent decisions, econophysicists argue that in large systems the behaviour of each individual is influenced by so many factors that the net result is random, so it makes sense to treat people like atoms in a gas.                                            

The analogy also holds because money is like energy, in that it has to be conserved. "It's like a fluid that flows in interactions, it's not created or destroyed, only redistributed," says Yakovenko.

Yakovenko also found that the total income of those in the poorer part of the distribution did not change significantly with time after accounting for inflation. But incomes for those in the Pareto curve shot up nearly five times from 1983 to 2000, before declining with the US stock market crash of 2001.

A more sophisticated model developed by Bikas Chakrabarti of the SINP and his colleagues paints a slightly less bleak picture for the poor. His team adjusted the gas model to allow people to save various proportions of their money.

This model predicts both the wealth classes that Yakovenko found. It also suggests that if you save more you are more likely to end up rich, although there are no guarantees. Changing people's saving habits could be an effective way of making the wealth distribution fairer, rather than enforcing taxes, says Chakrabarti, who is one of the Kolkata conference(on the econophysics of wealth distribution) organisers.

The models are understandably simplistic to start with (they would be too difficult to model otherwise), but would need to take into account the fact that wealth (not just money) can be, and indeed is, created and destroyed - there is no law of conservation of wealth. 

I wonder how things would change if everyone was assured access to education.

Comments

[ashish]

The study says: “The rich are getting richer while the poor remain poor. If you doubt it, ponder these numbers from the US, a country widely considered meritocratic, where talent and hard work are thought to be enough to propel anyone through the ranks of the rich. In 1979, the top 1% of the US population earned, on average, 33.1 times as much as the lowest 20%. In 2000, this multiplier had grown to 88.5. If inequality is growing in the US, what does this mean for other countries?”

I don’t know how the study reached that conclusion. The mulitipler can increase from 33.1 to 88.5 even if poor are getting richer, because rich could be getting richer faster! The correct conclusion is that gap between rich and poor is increasing!

I don’t know whether you know that in US wage earners have to pay 15% in social security and medicare taxes (7.5% out of their own pocket with equal contribution by the employers). This can reduce the incentive to work hard for the poor. Also, employers are forced to give healthcare to the employees. And then there is minimum wage act. There are so many restrictions on entering various professions requiring permits, licenses and state-mandates exams etc. For example, you require a license to drive a taxi or to open a hair cutting salon. All this reduces work opportunities for the poor people. Also, public education system in US is under the control of teachers lobby. Poor people have no choice to move to a different public school if the school in their district is not performing well. Various vouchers initiatives have failed. High property, sales and import duties cause goods and services to become costly. All this may be holding poor people back. I say give everybody freedom to make their economic decisions and they will prosper!

Ashish

[Satya]

Yes, in terms of absolute income, the rich are getting richer faster than the poor and it is the gap between the poor and rich that has been increasing. The Economist in one of its articles in its recent survey on Amercia points out that "Since 1979, median family incomes have risen by 18% but the incomes of the top 1% have gone up by 200%. In 1970, according to the Census Bureau, the bottom fifth received 5.4% of America's total national income and the richest fifth got 40.9%. Twenty-five years later, the share of the bottom fifth had fallen to 4.4% but that of the top fifth had risen to 46.5%."

It seems, in terms of the share of national income, the poorest have gotten poorer.

The entire Survey on America by The Economist is very interesting and argues that there are signs that social mobility in America is dwindling.