All others things being equal (the economist’s standard disclaimer) is capital fundamentally entropic or extropic? Is the fundamental direction of capital movement towards diffusion, where the theoretical endpoint is everyone has an equal amount of capital, or concentration, where the theoretical endpoint is one person has all the capital? (And yes, I realize this isn’t what the terms mean in physics - it’s a metaphor.)
I’m going to say it is a dynamic, uneven field with strange attractors. Some strange attractors will have some basic, shared characteristics (i.e. people with a keen sense of how markets work and how to deal with money) and be stable, while others will wax and wane (i.e. the Christmas “It” toy or mortgage-backed securities). It think there will be an overall tendency for the entire field to grow and everyone will have some capital, but there will be foci of people who will always have more than others.
And it’s entirely possible for government policies to create channels that either direct the flow of capital downward or upward. The trend since about 1980 has been for it to flow upward, largely thanks to government deliberately setting the channels up that way.
You used the word “fundamentally” in your question so I would map “capital” to its more fundamental origin: human preferences.
So now, we can ask your question substituting “preferences” like this:
Is the fundamental direction of preferences movement towards diffusion, where the theoretical endpoint is everyone attracts an equal amount of preference, or concentration, where the theoretical endpoint is one person commands all the preferences?
The direction is definitely not equal diffusion. However, it’s also not concentration to just one person, but a smaller group than the majority. The key is that the particular people in smaller group will change because the change in majority groups aggregate preferences. (Before, we use to prefer chariot races, now we watch at NASCAR. These days, we don’t value people who can steer horses has much as those who can steer horseless-carriages. )
I’m not sure how the concept of preferences works. The movement of capital can be mapped but obviously the capital itself has no preferences on whether or not it moves or where it goes. Its motion is caused by people pushing and pulling at it.
I can see support for either endpoint. Diffusion would be supported by the concept of diminishing returns - a person with nothing is more motivated to make a dollar than a person who already has a million dollars. Concentration would be supported by the idea that a person who’s made a million dollars has demonstrated his superior money-making ability.
I would say that capital tends to accumlate with those who manage it most effectively. You can give two people ten million dollars and one will become Warrent Buffett while the other will become M C Hammer.
If you look at the Gini coefficient, that’s been the trend since before 1980s. It’s been the trend since the mid 70s.
From my understanding, capital seeks the highest return on investment for a given amount of risk. So an equilibrium state would be one in which every possible investment would return the same “interest rate” for a given amount of risk.
The reason for capital to concentrate seems to be based on a desire by people to own it. When capital is over-concentrated, it can lose value if its value is based on the cooperation of non-owners. Also if capital is concentrated in a way that the desire of non-owners to own it overwhelms the ability of the owner to keep it, it will redistribute. That probably isn’t an equal redistribution though. There are probably enough factors like desire, cooperation, and maintaining ownership to keep capital more concentrated then distributed.
Say that we have ten people. Person 1 gets capital, uses it to make a new technology that he sells to persons 2-10. Some number of the people in the world, seeing the wonderful things that can be done now that there is such technology, each raise capital to make technology based on the technology that person 1 produced. This, again, leads to a random sample of our people coming up with a third generation of technology, etc.
Assuming that all is equal – i.e. each of our people is equally capable of coming up with uses of capital and equally skilled at managing it – capital is extropic. It benefits everyone and raises the level of everyone.
Capital tends to concentrate because with more capital you can purchase the levers of power to game the system to work in your benefit. You have the capital to corner markets, but you also have the capital to pressure political leaders to pass laws which favor your business but make it harder for up and coming competitors.
Plus with more capital you can buy up the levers of influence (religion, military, politics, media) and use them to pressure the economic and social system to service your interests.
So I would say concentration since capital buys influence and power which can be used to intimidate competition and game the system. I don’t know of many nations that don’t descend into aristocracy, plutocracy, kleptocracy, etc unless they are on guard against it.
In part. There is also the element of luck and being in the right place at the right time. Would the railroad tycoons have been rich in Silicon valley? Would Bill gates have gotten rich on the fur trade? What separates Gates and Steve Jobs from the thousands of other entrepreneurs who failed?
Then you have the fact that many of the richest people merely inherited money from their parents or grandparents. So its not just management it is also genetics.
Sam Walton gets rich via walmart
He leaves money to his children
Some of his children fund think tanks and media outlets whose job is to convince voters that supply side economics are good
Those people vote for politicians who support supply side economics
Sam Walton’s kids get a tax cut
So in a way you are right, the ones who know how to use the power of capital can gain more of it. Sam Walton gets rich and uses the power of walmart to overcome competition (bulk purchasing power that other distributors cannot match as an example, or running prices at a loss until local competitors are bankrupt). Then his kids use the capital to pressure politicians to slant the economy their way. We will probably get single payer universal health care in this country when large corporate interests and wealthy individuals realize they save money under that system.
But you can’t really have a conversation about whether capital accumulates or disperses w/o talking about all the indirect ways capital can and is used to manipulate the system.
Capital lets you corner markets, buy political influence, intimidate competitors, write laws to your benefit or the detriment of competition, purchase media outlets to distribute POVs that are beneficial to you, etc
I think the basic raw market economy is a concentrator; as long as we are disclaiming “all other things being equal” let’s assume that each individual is EXACTLY EQUAL in money managment skill, active interest in getting rich, willingness to work hard at it, and so forth; let’s make their individual behavior irrelevant and consider ONLY the behavior of the market ITSELF. Sheer random chance will cause some to accumulate more wealth than others; having done so, they have more options and opportunities to accumulate yet more wealth. By the same sheer random chance others will become impoverished; having done so, they have makedly fewer options for accumulating wealth. And it continues to scale if you let it play on for several cycles, with the extremely wealthy being almost unable to NOT concentrate yet more wealth.
Capital has a natural tendency to flow upward and concentrate. However, in my opinion, wealth at such high concentrations is itself entropic in a more classical sense, i.e. it degrades, because it create inefficiencies because smaller and smaller segments of the economy are devoted to it (for instance, a fairly large McMansion is, oh I’d guess, half a million bucks, but make it into a slighly larger classical mansion and you’re talking several million.) Plus it creates social unrest. So the natural political tendency is for concentration, but it is somewhat kept in check by the economic tendency to limit itself. Plus, in times of technological advances, it tends to degrade because wealth itself is diffused …
Wealth, on the other hand, as opposed to concentration of wealth or concentration of capital, is mostly dependent on the diffusion of technology. If we make things more efficiently or better or create whole new classes of things then we all can partake in it. Only rarely does an invention destroy wealth in the aggregate – but sometimes destroys it in certain instances, for instance, the interstate highway system surely destroyed the aesthetic value of many homes (not to mention the one taken by eminent domain.)
The only reason there’s an upward trend in wealth from the mid-1970’s is because the mid 1970’s were an outlier. There was a sharp downward spike in wealth held by the rich in the 1970’s, probably due to inflation eroding the real value of held assets. If you plot that same trend from the mid-1960’s instead, you see that wealth has actually declined. But more fairly, if you simply draw a regression line from the start of our data in the early 20th century to now, you’ll see that the share of wealth held by the rich has been remarkably constant.
I believe that this is essentially an application of the 80/20 rule: in any given population, 20% of the people create 80% of the wealth. If you could spread the nation’s wealth around evenly tomorrow, within a decade or two 20% of the people would again have 80% of the wealth. On the other hand, if you gave all the wealth to the top 20%, very soon the bottom 80% would collect at least 20% of it.
In other words, money isn’t entropic or entropic. Rather, the distribution of money in a capitalist society roughly matches the varying abilities of the population to create it and hang on to it.
Well yes. The market doesn’t care who you are or why you happen to be the particular person at that place and time who invented whatever it is that made you wealthy.
The book Outliers has some interesting theories on why Gates became so successful with Microsoft. Gates was born into a regulur upper-middle class family. Well off, but not billionares or anything. By chance, he had an interest in computers and happened to have access to them at an early age. Also by chance, the computer industry started to take off right when he was at an age where he would be thinking about turning his interests and knowledge into a career.
It’s actually much simpler than that. It’s easier to make a million dollars if you start with ten. You don’t have to “manipulate the system” or “corner the market” or whatever other nonsense it is you think anyone with more than a million dollars in assets does to keep the poor down. All you have to do is invest it not stupidly.
More money allows you to buy a home instead of renting.
You can invest part of your earnings in stocks and other appreciating assets.
If you have more money, you can invest in rental properties and businesses.
In other words, there is a snowball effect where the more wealth you have, the more you can aquire additional wealth producing assets.
This theory does have an instinctive feel of being right to it. It would explain some apparently conflicting oberved phenomena. Sometimes capital acts entropically because it’s become too concentrated and sometimes capital acts extropically because it’s become too diffused.
And that is why capital accumulates. Like you said, if you have capital you earn interest on your money. If you do not you pay interest on your money. A wealthy person who invests gets a return whereas someone w/o capital has to pay interest on student loans, a mortgage, cars, credit cards, etc.
So capital concentrates upward for several reasons. But my point is that there are factors outside of economics that are influenced by and influence economics that are important to the process. Politics, the legal system, the social order, the media etc. which are all influenced by capital.
It doesn’t matter your political ideology either. There is a group called the Democracy Alliance made up of liberal millionaires and billionaires who started a pilot program in Colorado to try to turn the state blue. They succeeded. The state used to be deep red in 2004 and by 2008 it was blue in both state and federal elections (dem governor, dem state legislature, dem federal legislators, went for Obama in 2008). Now they are exporting the model to other states like Wisconsin and Ohio. They used their capital to manipulate the media and political system to reflect their interests.
Even ‘the divine right of kings’ is arguably just an example of someone with power and influence using religion to justify more power and influence.
If you take the recent health care legislation, several cost saving measures were stripped including a public option to compete with private insurance, reimportation from overseas and medicare negotiations. These would’ve saved several hundred billion in medical costs over a decade. But they were stripped because the wealth of the pharmaceutical and insurance industry let them buy enough influence to stop those reforms. So you make billions, then you spend a fraction of that buying political influence, and you use the influence to legislate billions more for yourself.
The same thing supposedly happens in agriculture (I say supposedly since I don’t know much about it). Wealthy and powerful interest game the system to get subsides, tax breaks and benefits directed towards them and if possible block them for the competition.
A person w/o capital can’t corner markets, or hire lobbyists to write laws, or buy media outlets, etc. A person with capital can and if their goal is to obtain more capital, they can use that power and influence to achieve it.