This is inline with my reasoning. Certain circles say that the affluent are causation for capital markets operating efficiently. More specifically, that the purchasing power of the affluent are the source or "spring" from which economic activity is generated. It's just not true.

Economic activity is generated by the act of expenditure. The act is a threshold behavior relative to the an economic agent's ratio of liquid assets to fixed costs. "Hey, the rich spend a lot of the cash and pump the economy!". "Hey, conversely, the debt to income ratio of Bob will always disincentivize him against market participation!".

Back to your point. The financial system favors the wealthy because it's capitalism. Capital is power and power is influence. That influence has systemically skewed political and financial institutions to favor those with aggregations of wealth. This is also true in free enterprise markets where consolidation is a natural result of the economic cycle and economies of scale.

But, I wholeheartedly disagree with posing personal wealth inequality as a core driver of economic inequality in the US. I honestly see this as a symptom of vast market consolidation occurring since the 1950's. Bigger business structures eliminate structural redundancies in a market which can reduce costs for the consumer. But, the side effect is income hierarchies are stratified and flattened at a market level creating economic caste systems. And, being a vibrant and faithful patron of the free market system becomes a lot harder for normal guys like Bob.

>>Economic activity is generated by the act of expenditure.

The tendency toward expending money for products is not a scarce economic resource. It is always abundant, and leads to almost everything produced being consumed, as it reaches its market clearing price.

What's scarce is capital and production, and only the profit-motivated investment that emerges when people are secure in their right to their private property has been shown to rapidly make it less scarce. Witness China before and after its market reforms.

The facet I'm viewing economic activity from is the magnitude, distribution, and probability of expenditure based on the differential between an individual's cost of living and luxury purchases.

The aggregation of wealth in a subset of individuals, with respect to the cost of living, will leave them more free or willing to make nonessential purchases which generate an expansion in economic activity. I'm getting at the point that distributing those liquid assets across more individuals will lead to an increase in the magnitude, distribution, and frequency of aggregate economic expenditure (i.e. monetary velocity). It's tricky because, as you referenced, there are markets for fixed resources which could be negatively impacted if that debt to income ratio gets too large for the majority of market participants. Although I think the trajectory of consumer markets further favors my view point as purchases are transitioning from physical goods to services and digital goods.

In that same vein, I believe profit-motivated investment is only reinforced by a greater diffusion of economic expenditure. The diffusion only increases the frequency of opportunity available for firms to enter an arbitrary market.

But finite life expectancies effectively act as a cap on that process. In the very best case, you only have about half a century to compound wealth.

Modern America is not very conducive to preserving intergenerational wealth. Of the top ten richest Americans, only one is not a first-generation billionaire. Rockefeller despite amassing an enormous fortune, equivalent to $400 billion today, does not have any heirs in the top 100 a century later.

There's a number of factors at play here. First, US estate taxes tend to be consistently high around 35%+ and pretty hard to avoid. Second, unlike traditional aristocracies, the scions of American capitalism rarely arrange marriages with other prominent families. Consequently dynastic wealth almost always gets diluted by 50% or more every generation. Third, US GDP growth has historically averaged pretty high around 3% per annum. The relative size of a fortune to the broader economy is constantly shrinking per year.

These factors combine to make the relative size of a dynastic fortune shrink by about 85% per generation. Assuming a generation gap of 30 years, you'd have to achieve consistent real returns of 7% a year. And that's assuming no loss of capital due to consumption, philanthropy, divorce, capital gains tax, dividend taxes or fraud.

Over the past century, equities have only averaged a 6% real rate of return. Unless you have significant financial or business acumen, sustainably beating the stock market on a large portfolio over decades is virtually impossible. On an inter-generational basis that talent is very unlikely to be present in every scion. A dynasty with a penchant for risk-taking is far more likely to blow their fortune by some idiot son along the way.

What you say is simply not true - we know this because the fundamental measure - concentration of wealth - is continually increasing.

Intergenerational mobility, particularly at the very top, is interesting, but ultimately irrelevant to most people. What is relevant are the vast quantities of people who suffer from poverty and grotesque inequality.

Imagine explaining to some homeless person that society was pretty fine actually because in several generations somebody will have overtaken Bezos.

Put another way - you don't make an unfair ladder fair by rapidly re-arranging people on it as much as possible (aka "social mobility" or "opportunity") you make it fair by flattening the ladder (inequality reduction) and making the bottom of the ladder a less unpleasant place to be (poverty reduction).

Rockefeller had a tax rate more than twice what today’s tax rate on the super wealthy is.

That doesn't seem to matter, though. To extend the parent's example:

Bob and Fred both die at age 43 (18 + 25). During their life, they both married and had children, Barbara and Felicia, respectively. While the US system is not conductive to preserving intergenerational wealth, it's still true that the wealthier can pass on more than the less wealthy.

So at their age of 18, Barbra starts with 20 units of utility, and Fiona with 8. Sure, Bob has passed on much smaller percentage of their wealth than Fred, but his descendant is still better off than Fred's.

Or they come from wealth. It does not require a massive inheritance to get ahead here - it requires enough to be exposed to the market, which most Americans don’t get.

The 10% above is to make this example clear and easy, not a specific asset class.

We can discuss to what extent people receive opportunities to gain significant personal income, but I strongly disagree that personal conduct and talent are the primary factor. The number one rule of the world is “people respond to incentives” - there are massive structural deltas in incentive landscape and opportunity exposure as a function of background. You can have amazing parents who do right by you, and grow up poor and stay poor for want of exposure to opportunities and the market.

Because year-over-year growth is runaway, time in the market is of extreme importance too. In a very real sense - every second you don’t have more assets in the market than the next person, they are pulling away from you in literally exponential manner.

A huge amount of it is society, and there’s a lot of light between “let’s try to make society better by preventing the gravity-like accumulation of capital entirely into a modern feudalist state” and “communist slavery”.

There just aren't enough people who come from wealth for it to matter.

>The most significant structural factor that creates wealth inequality is personal conduct and talent, and the second is that some people have crappy parents. Third is location.

If this is true then how come despite people being richer today than in the past they are still less wealthy from a relative perspective? Your statement is obviously incompatible with our current world and fails to explain why we had less inequality in the past where people had less talent and worse personal conduct.

>None of it is society [1], unless you consider refraining from forcibly conscripting everybody into communist slavery to be a structural factor.

I don't know where you get these crazy ideas but the conventional solution to high unemployment is to just increase consumer inflation which makes it lucrative for everyone to work and whatever inflation we have right now is clearly benefiting existing wealth holders at the expensive of workers.

Decreasing wealth inequality is quite simple. Just increase wealth at the bottom. If poor people at the bottom have $100 to their name and Bill Gates has $100 billion then he is a billion times richer but if you made sure everyone at the bottom had $200 then Bill Gate's relative wealth would basically be cut in half and he would only be half a billion times richer.

It's pretty obvious that there are fundamental problems in modern economies and a lot of them relate to government policy.

If you're mad that Bill Gates is rich, you aren't really interested in helping the poor.

>>This is a simple thought experiment that I hope illuminates something important: in an economy where there is year over year growth, inequality grows by default as a function of exposure to the market.

This is not true. Investment rates of return are much higher when you have smaller amounts of capital to invest, ceteris paribus.

Can you provide a citation for this? I appreciate that it is a bit unfair to ask for one here, but I fundamentally disagree with your point and would like to learn more about why you believe it to be true. While I concede that at the extreme high end, there are limited ways to invest without distorting the market yourself, it’s just not the case that returns are higher with less money. If anything, returns are lower, because Fred in this example must pick more conservative investments with his single unit of investable utility - he has only the one to lose! By contrast, Bob is free to make riskier bets with higher payoffs, as his asset portfolio starts with ten units of utility.

One example of returns being greater with less capital is your gains are taxed at a lower rate. 0% for gains less than $15,000 for example.

> Fred in this example must pick more conservative investments with his single unit of investable utility - he has only the one to lose!

Must? Clearly not, as lottery "investments" skew heavily towards lower income people, and the lottery is a terrible investment as it has a negative net rate of return.

Most investments are not $50k into an ice cream stand but $50k into the stock market. Also someone with $50 million can still invest into an ice cream stand but someone with $50k cannot be an early investor into a tech company.

Small businesses are a huge target of investments. As for stocks, micro-caps have historically outperformed large-caps, and micro-caps individually are limited in how much investment capital they can efficiently utilize.

>Also someone with $50 million can still invest into an ice cream stand but someone with $50k cannot be an early investor into a tech company.

That is mostly due to regulatory restrictions on public offerings, and yes, that contributes to greater income inequality.

In a free market however, you'd see low-friction token sales, with thousands of contributors, providing the tech company with its initial capital, not a small cadre of VCs.

The comment you're replying to is a simplification, but so is yours. Returns on your investments are pretty much zero, if, like a disturbingly large number of people, you don't have any money left at the end of the month to invest and an unexpected expenditure of a few hundred dollars requires you to take on debt.

I did say 'ceteris paribus'.