Last night I dreamt of Nick van Rowe again. I asked my Dutch ancestor what he thought would happen to the distribution of wealth in the future.
According to Dutch Capital Theory, "capital" is just the name we give to land that we have made ourselves in the past. The rent on an acre of land equals the value marginal product of that acre of land. But the price of land depends on both the rent (and expected future rents) and the rate of interest. And (one plus) the rate of interest equals people's marginal willingness to trade-off future consumption for present consumption.
We can imagine an economy where the aggregate stock of land, population, technology, preferences, output, wages, and land rents, are all constant over time, but where the price of land and inequality of wealth will grow over time.
"How can that be?" I asked my ancestor. He explained it to me:
With the stock of land staying constant by assumption (because the sea is too deep to drain more land), investment is zero, and so saving must be zero too. But it is only aggregate saving that must be zero; one individual can save, by buying more land, if another individual dissaves, by selling land. And if different people have different preferences, and face the same rate of interest, some will save and some will dissave. So inequality in ownership in land will grow over time. And as the more patient accumulate more and more land, and have a higher and higher share of the same aggregate income, their preferences will have a bigger and bigger influence on the rate of interest, and so the rate of interest will fall over time, and so the price of land will rise over time, so the wealthy get even wealthier. They own more and more land, and each acre of land is worth more and more.
"But that sounds terrible!" I said. "Is there nothing that could prevent this continuing forever, until one person owns all the land, and each acre of land is infinitely valuable?". He said it depends:
What happens to people's marginal time preference as they get richer? They might get either more or less willing to trade-off future for present consumption at the margin, as both their present and future consumption rises. If they foresee future satiation, they will become less patient; if not, they won't. We don't have to assume homothetic preferences, where everything scales up in proportion.
And people do not live forever. They die and leave their land to their children. Will they leave it equally to their children? Will they practise primogeniture? Or will they give a bigger share of their land to their weaker children? And how many children will the wealthy have compared to the poor? And will the rich always marry the rich, or will they sometimes marry the poor? And will the children of the rich be as patient as their parents, or will they regress to the mean?
And stuff happens. Taxation, theft, fraud, war, illness, charitable impulses, weather, gambling, alcohol, a love of horses or crackpot religions: the sum total of unlucky events and foolish decisions that reduce the value or quantity of one person's land (and raise that of another's). When you've got something you've got something to lose; and many things can make you lose it. All stones eventually roll.
He shrugged his shoulders, and I woke from my dream.
I never got the chance to ask if he had read Piketty.