> If we equalise wealth, however, such that both have $4,899.13, then in 50 years Jane will have $34,816.57 and Jo will have $13,186.44, for a total wealth pool of $48,003.01
Have you considered second order effects here? What if additional wealth allows "Jo" to increase their per annum return because they invest it in a business or education?
> In this sense there is hence a direct tradeoff between economic growth and wealth transfers from richer to poorer in the long term (all other things being equal).
I have a BA in Economics as well, and ceteris paribus models stop being useful past the 2nd year of study. I don't think they're ever useful except to illustrate the most basic concepts to freshmen and laymen. When you apply such models to the real world, you end up with a situation I described in the 1st paragraph.
In this case, the condition assumes that the rate of wealth creation is fixed and unalterable on a scale of 50 years. It also falsely assumes (just world fallacy) that wealth is already allocated in such a way as to belong to people with high (unalterable) wealth creation potential.
The person must be trading with others somehow to be gaining those 4% returns; they could only end up with all the wealth if literally nobody else saved any money. And if nobody else saved any money, there'd be no economic growth at all if not for the person with all the wealth.
>Have you considered second order effects here? What if additional wealth allows "Jo" to increase their per annum return because they invest it in a business or education?
Jo started with the same amount of wealth as Jane; he had no less opportunity to invest it in a business/education, invest it in something to increase in something that increased his investment returns, than she did.
>In this case, the condition assumes that the rate of wealth creation is fixed and unalterable on a scale of 50 years. It also falsely assumes (just world fallacy) that wealth is already allocated in such a way as to belong to people with high (unalterable) wealth creation potential.
It doesn't assume the latter, it assumes Jane and Jo started with the same amount of wealth, and shows that given this condition it will result in more wealth being allocated to the people with more wealth creation potential. Starting from the same point, Jane and Jo have equal chance to increase their ability to create wealth.
Assuming there is no wealth redistribution then you had Joe and Jane have $19.128.28 and $69,330.20 respectively. Lets say they both die on the same day and leave all their wealth to Joe Junior ($19,128.28) and Jenny ($69,330.20).
Now it turns out that Joe Junior works hard and is really smart. He can get a 5% per annum return. Meanwhile Jenny is a bit of a flake but can still get 1% per annum from her investment.
After 50 years Joe Junior has $219,351.63 and Jenny has $114,022.65. So the hardworking Joe has turned his more modest beginning around and overtaken the less hardworking Jenny. The total wealth pool is now $333,374.28.
However if we had equalised their wealth on the death of their parents so that they had both started with $34,816.57. Jackie would then have ended up on $57,260.44 while Joe Junior would be on $399,255.53 for a combined wealth of $456,515.97 - significantly more than if wealth equalisation had not taken place
So that is one way it makes sense for the economy a a whole to redistribute wealth. Another is the fact that both Joe Junior and Jackie may have seen fixed costs (Medical bills?) on their life journeys. Jackies initial capital advantage measn she could weather those a lot more efficently then Joe Junior even if the return on her wealth she is generating is less.
And of course the same is true without having to wait for the next generation. Just because person A made good use of their resources for 10 years is no indication that they will always continue to do so and so are going to generate the best return on those resources - and the opposite is also true. That said while past performance is no indicator of future success it is a whole lot better then nothing.
TL;DR While completely flat wealth distribution is obviously a daft idea a simple argument shows some level of movement seems to be in the best interest of the economy as a whole.
>Assuming there is no wealth redistribution then you had Joe and Jane have $19.128.28 and $69,330.20 respectively. Lets say they both die on the same day and leave all their wealth to Joe Junior ($19,128.28) and Jenny ($69,330.20).
I'd argue this is a categorically different case as it's taking wealth from a dead person. From economic perspective I agree there's less of an argument that this reduces growth.
>And of course the same is true without having to wait for the next generation. Just because person A made good use of their resources for 10 years is no indication that they will always continue to do so and so are going to generate the best return on those resources - and the opposite is also true. That said while past performance is no indicator of future success it is a whole lot better then nothing.
If past performance is some indicator of future success, then would it be fair to say that if a redistribution policy ignores this, and takes into account no other factors correlated with potential future returns in determining whom to redistribute to, then on average it will still result in transfer from better investors to worse investors? An opposed to e.g. redistribution in the form of scholarships to poor but well-performing students, which could increase overall growth.
Now, some heretics might suggest that it's better to stop the government doing people favours, instead of semi-blindly taxing Jane's gains for Jo's benefit and hoping most of it came from government favours (never mind that Jo is now extracting a kind of favour from the government herself), but such ideas don't get a lot purchase.
To illustrate, imagine they both start with $1000 each. The total wealth pool is hence $2000, and they both have 50% each, perfect equality. Now, let's look 50 years in the future, assuming the previously mentioned interest rates per annum compounding annually. According tohttp://www.moneychimp.com/calculator/compound_interest_calcu..., Jo will have $2,691.59 and Jane will have $7,106.68. The total wealth pool is $9,798.27. Jo hence now has 27.47%, and Jane has 72.53%. They're both less equal, but they're also both wealthier, and the overall wealth pool has increased.
Now, let's look ahead another 50 years. If no wealth transfer occurs, Jane will have $50,504.92 and Jo will have $7,244.65, with the total wealth pool being $57,749.57. If we equalise wealth, however, such that both have $4,899.13, then in 50 years Jane will have $34,816.57 and Jo will have $13,186.44, for a total wealth pool of $48,003.01. This is 83.12% of the total wealth pool that there would be if no wealth transfer took place. This effect is applies similarly if wealth redistribution happens every year through redistribution of income.
In this sense there is hence a direct tradeoff between economic growth and wealth transfers from richer to poorer in the long term (all other things being equal).