Inequality and democracy

Wealth concentration, aristocracy, inequality, democracy. Some historic perspective as to the switch from aristocracy to democracy that really happened with the population of America. As described by Alex de Tocqueville, just after the French revolution…

One of the most interesting books about democracy I have read is Democracy in America by Alexis de Tocqueville. He did what a lot of young aristocrats did at the time (1831): he took a year traveling through the world before starting work.

During his travels through America, he wrote a book with observations about democracy. Alexis’ home country, France, had only recently gone through the French revolution. Studying the older democratic system in America was interesting. Aristocracy is almost forgotten nowadays, but in Alexis’ time it was still alive or fresh in memory.

In his book, Alexis observes one important difference between aristocracy and democracy. In democracy the leadership of a country can change families. In an aristocracy, an elite inherits the senior jobs and the country’s capital.

What’s more, in most aristocracies, all capital of a family was inherited by one person (the eldest son, usually). The family capital was thus held together and was allowed to grow over more generations. Alexis notes that making it obligatory to divide the inheritance amongst ALL children was a way of making sure wealth does not concentrate forever.

If it does concentrate for a long time, the country will wind up in a situation where there is a rich elite and a very large, very poor part of the people. Most aristocracies around 1700-1800 had reached this situation. Many of them succumbed to revolution.

Sometimes revolutions redistribute capital to start the process from afresh. Sometimes revolutions do not redistribute capital and the same tensions remain.

Wealth concentrates

As described in this article, capital has a tendency to concentrate. In about 100 years, most of the capital stock of a country will be in the hands of a smallish section of the people. In an aristocracy, where the inheritance stays together, this may lead to tensions and some way of redistribution will happen in the end. The cycle can be seen in history.

If an investment return of +6% for the best investors is assumed and an average investing-live expectancy of 30 years (live expectancy of 80, inheritance obtained at 50) then the total return should be 1.06^30 = 6. Meaning that the starting capital is increased 6 times. With an average of 2 children (this is the norm nowadays), the children would each inherit 3 times the starting capital of both the parents added up. So, while Tocqueville’s note about sharing inheritances is valid, it will not be enough to stop ongoing concentration over generations.

In a democracy there is another possibility: the democratic process could redistribute continuously by legislating. The people in the country would have to vote for this.

Voting behavior

In economics, it is often assumed that people make rational decisions, based on financial considerations. I know this is wrong in the short term and a lot of short term will add up to a long term. However, for the following I will make the assumption that in the long term people actually do vote according to their financial interest. I will make this assumption on the observation that this appears to be what actually happens.

The poorer part of the voters will generally vote for parties that promise redistribution (to the poor people). The richer part of the voters will generally vote for the parties that do not want to redistribute.

Taking the model from the previous article, we can calculate the percentage of voters that earns less than the average in a country.

The formula is: 

And the results plotted in a graph are:

A recipient of redistribution will vote for continuing redistribution, even if their income goes above the average (based on rational financial considerations).

It seems the state will redistribute more and more over time and the number of people receiving redistribution will grow to the vast majority.

The poorer people will pay rent/interest to the richer people. The state will then redistribute back to the poorer people.

Free money

Depending somewhat on how the redistribution is actually done, a recipient may consider this free money. When the amounts become substantial, they will take away some need to actually do work. And, as more and more people work less, the total size of the economy could shrink.

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