A new gilded age : wealth accumulation in the modern world

Abstract

Issues of wealth inequality have been the subject of considerable public interest and inquiry in recent years. The Great Recession of 2008 in the United States (US) made many question the extent to which the global economic system not only caused economic hardship but also managed to create a class of ultra-rich in the US and across the globe. Much focus in popular discourse has centred on the degree to which a group of individuals is able to wield enormous economic influence with a concomitant concentration of wealth holdings. In general, mainstream economics has largely played down this aspect of the capitalist system; instead, the poverty aspect of wealth distribution has garnered the attention of most economists. This thesis seeks to establish the ultra-rich as an area worthy of study by focusing on various dimensions that have affected wealth accumulation and brought about an era of unprecedented concentration of wealth at a global level. As a project largely bereft of contemporary prior work, the thesis seeks to explore and establish three key elements of modern wealth accumulation, particularly in its extreme form. Firstly, what are the general trends that signify the emergence of an economic elite across the globe, how has this elite evolved, and how are they distributed across countries and sectors of the economy? Here, the analytical approach adopted is one often utilised in historical economic studies of, for example, the US Gilded Age of the late 1800s. Major findings include that the US continues to lead the world in the generation of individuals with extreme wealth holdings, followed by Western Europe. Developing countries, however, provide a substantial portion of the increases observed. Inheritance continues to play a major role in the existence of billionaires in many regions of the globe, but its role has diminished at a global level, mainly driven by the influx of nouveau riche from China and Russia, as well as from the US. The majority of new wealth is concentrated in finance and real estate, followed by the consumer discretionary sector. These trends observed both before and after the Global Financial Crisis (GFC) of 2008. Further, the data reveal a high degree of survival among the great fortunes, and especially of fortunes based on finance. Secondly, the determinants of wealth accumulation are explored. Utilising an accounting identity of household wealth, issues of savings and consumption, financialisation, the structure of top incomes, particularly the relative importance between capital and earned income are considered. Across all facets, the wealthy increasingly exhibit and exploit behaviours and actions that ensure persistence of their wealth stock while the poorest are being further disadvantaged. Thirdly, the empirical research in this thesis also considers the role of risk aversion and whether it varies with the level of wealth observed. Applying a mean-variance-based measure of relative risk aversion (RRA) to an Australian household micro panel derived from the Household, Income and Labour Dynamics in Australia1 (HILDA) survey, the level of risk aversion of Australia's household financial portfolios is estimated. Controlling for various socio-economic characteristics, the present study explores whether risk aversion heterogeneity is a function of wealth heterogeneity. In contrast to most studies, it finds evidence of very high risk aversion among the majority of poor households but vastly lower risk aversion among the high percentiles in the wealth distribution. After applying a first differences model across three survey waves spanning 2002 to 2010, risk tolerance is found to increase significantly with wealth. Risk tolerance is positively associated with mortgage payments, but rental payments have no relationship. In addition, there is no evidence that holding a university education has any discernible impact on risk aversion. The study also elicited some preliminary findings on the impact of financial advice on observed risk aversion. Financial advice is found to accentuate risk aversion, particularly among the wealthiest households. These findings have potential implications for the distribution of wealth in Australia, which has received renewed interest. Finally, the sources of wealth across seven advanced economies are explored, with particular emphasis on the role of new and inherited wealth. Despite the consistent increases in the ultra-rich across these countries, there is a significant element of heterogeneity in the degree to which inheritance or new wealth dominates in a given country or region. Further, there is an element of variation in terms of the extent of the role of certain sectors in the rise of the ultra-rich. Across North America, financial services have played the dominant role in bolstering the population of billionaires, with much of the growth in diversified financials followed by property. This thesis seeks to situate the trends within the context of the sweeping historical macroeconomic, social and institutional changes that have been wrought particularly since the end of the Second World War.

Date of Award	2016
Original language	English