Wealth and income distribution over time

Wealth and income distribution over time

GDP is equal to GDI (Gross Domestic Income). In a steady state economy, GDP is constant. Hence GDI is constant.

GDI is composed of income to labour and income to capital. Suppose the proportions of income to labor, and to capital are constant. Wealth from capital, as the discounted sum of incomes, will not grow.

Now suppose GDP grows at a certain rate, say two percent. If other conditions remain the same, wealth from capital will grow at two percent as well. The dividend ratio of S&P 500 is about two percent. If we further include dividend reinvestment, wealth from capital will grow at about 4% per year. However, return from S&P 500 is about 7% per year from 2000 to 2023. Longer and shorter term data have similar results. This is significantly higher than 4% per year.

The results show that high growth of wealth from capital comes from the low growth of income from the working class. Indeed, incomes from labor have been stagnant for decades while wealth from capital has been growing at a spectacular speed.

Overall, in an economy growing at a constant rate, incomes will also grow at the same constant rate. If the wealth from capital grows faster than GDP growth, then the share to capital is increasing while the share to the labor is declining. The capital is not creating wealth, but appropriating wealth from the labor.