The Concentration

Two people can receive the same wage and inhabit different economic worlds. One begins the month with a reserve, a home owned outright and claims that continue to pay when work stops. The other begins with a rent due and a debt that must be serviced before anything can be put aside. An interruption in earnings costs the first some saving; it can cost the second the means of carrying on. The difference is the stock, and the distribution of that stock is the subject the income account alone cannot reach. Wealth carries purchasing power across years, supplies collateral, absorbs reverses and gives its holder time to refuse a bad offer. Its concentration therefore distributes more than future consumption. It distributes the capacity to wait. The question is why ownership is commonly so much more unequal than the annual earnings through which many people hope to acquire it, and why a society whose incomes have become less unequal may still possess an intensely unequal balance sheet.

The comparison first needs a common boundary. Wealth in the account used here is the market value of owned nonhuman assets, financial and nonfinancial, less debts. The trained worker’s future wages do not enter as an asset that can be sold along with the worker; a funded pension claim may enter where an unfunded promise of future public benefits does not. Those conventions matter when different kinds of security are compared. They also leave room for negative wealth: a person’s liabilities can exceed the assets counted against them. Piketty and Zucman’s historical account illustrates how far the stock can depart from the earnings distribution. Their French series near the end of its 1810–2010 coverage placed a little over sixty percent of wealth with the richest tenth; they contrasted this with the much smaller share, typically below thirty percent, received by the top tenth of labor earners. The groups need not contain the same people. The comparison concerns two distributions, and it depends on their units, populations and definitions. Age matters as well: a young worker accumulating a first reserve and a retiree spending a lifetime’s savings can stand far apart in wealth without a corresponding difference in lifetime earnings.¹

Accumulation explains part of the gap, but compounding must be stated with care. Suppose two owners hold a hundred and nine hundred. If both reinvest the same five-percent return and neither adds or withdraws anything, they end the year with a hundred and five and nine hundred and forty-five. The larger owner has gained more money; the shares remain one-tenth and nine-tenths. Equal proportional growth preserves an existing concentration. It does not by itself increase it. If each also saves ten from earnings at the year’s end, the balances become a hundred and fifteen and nine hundred and fifty-five, and the larger owner’s share falls to about eighty-nine and a quarter percent. The same addition matters more to the smaller base. The direction can reverse when additions are larger at the top, when returns differ, or when withdrawals consume a greater proportion of the smaller holding. Even a common return above the economy’s growth rate settles no distributional result by itself. In the first example, wealth growing at five percent would rise relative to an income flow growing at two, while ownership shares stayed exactly where they were. The weight of wealth in the economy and its division among owners are different quantities.²

The mechanisms that change shares work upon those unequal bases. A high wage can permit a large saving after ordinary needs have been met; an existing reserve can allow its holder to bear a risk that a household at the edge could not survive. Different portfolios earn different returns, and repeated differences multiply. A successful enterprise can make the owner of a concentrated holding very rich, while the failure of another destroys the comparable stake. Benhabib and Bisin show why such multiplication is central to theories of the long upper tail of wealth. Their account also includes the forces that interrupt it: consumption, reversals, death, division among heirs and fresh earnings entering below. A stationary distribution can emerge from the interaction of growth and restraint, while particular families move within it. The observed rich are the surviving outcomes of that process. Their holdings alone cannot reveal how much came from a larger initial position, a greater contribution, a higher exposure to risk, an exceptional return or a favorable transfer. Nor can the mechanism be reduced to the assertion that every large fortune earns a superior rate. To explain a distribution is to identify the differences and the persistence that reproduce it, together with the failures and divisions that keep it from collapsing into a single owner.³

Valuation adds another path by which ownership can pull away from earnings. A house worth a hundred with a mortgage of eighty leaves its owner equity of twenty. If the house is revalued at a hundred and twenty while the debt remains eighty, equity doubles to forty, although no extra room has been built and no wage has been saved. If its value instead falls to eighty, the equity is wiped out. The same price movement thus has different effects on an outright owner, a leveraged owner and someone who owns no house at all. Across a country, the distributional effect depends on who holds which assets and owes which debts. A rise in land values may lift the measured wealth of the owners while making entry harder for the next buyer; the national balance sheet and the prospective purchaser answer different questions about the change. This is why the distinction in The Balance matters here. A larger money value can record new resources, a different valuation of existing resources, or both. Its effect on concentration follows the pattern of ownership and liabilities, rather than the change in the aggregate alone.⁴

The concentration must finally be measured among people whose holdings are not all equally visible. Estate records observe wealth at death, and require mortality adjustments to represent the living. Tax returns on capital income observe a flow, which must be capitalized using assumptions about the return to infer the stock. Surveys can ask directly about assets and debts, yet may miss wealthy households or assets that are difficult to value. Piketty and Zucman emphasize these differences because a top share is an empirical construction, with a population and a denominator. The resulting history is nevertheless capable of refuting an easy inevitability. In the European countries they compare, the top tenth’s share was far lower around 2000–2010 than on the eve of the First World War, even though wealth remained highly concentrated. A stock can be dispersed as well as gathered. Shocks, institutions, saving and transmission alter its distribution; age and valuation alter the account in which that distribution appears. The task is to explain those changes, not to turn the persistence of wealth into a law that its concentration must always rise.⁵

The stock is concentrated for reasons that an annual wage table cannot disclose on its own. Different beginnings meet different earnings, saving, consumption, asset prices and returns; the results persist, and some are handed onward. The consequence is a distribution of security and command that can remain sharply unequal even among people whose current incomes appear close. A wealth account can show the size of those holdings. It cannot, from size alone, decide how much of a fortune rewards its holder’s work, how much reflects a service supplied through an asset, or how much comes from a position acquired without either. That inquiry requires the history of the claim. The next plate follows the most direct passage by which a balance sheet changes its owner while retaining its force: The Inheritance, the stock that survives the person who assembled it, and the question of whose contribution its continuance rewards.