Exploring the role of luck in wealth inequality.
The Chancy Islands
A Land of Equally Capable People,
but with Unequal Luck
What If Everyone Had an Equal Chance?
There is a myth that income and wealth are determined completely by one’s own effort, perseverance, and choices. This is clearly not true.
But what if everyone in a society started with the same wealth, was equally prepared, had the same opportunities, worked just as hard as everyone else, and was just as skilled and talented? What if the only differences among people were random setbacks caused by illnesses, accidents, and natural disasters (tornadoes, hurricanes, wildfires, floods, etc.)? Would this lead to a society of equal wealth?
Can a society of equals become unequal simply because of bad luck?
We decided to find out by building a spreadsheet model of a very simple society in which everyone was equally wealthy and capable. In 50 years, would random acts of bad luck cause some people to become rich and others poor, or would it all balance out over time?
It turns out that even with absolutely no differences in talent or effort, severe inequality can still arise just from the random shocks of wealth-depleting natural events such as serious illnesses, bad accidents, and natural disasters. Some lucky households will amass vast fortunes without having done anything to justify their windfall; others, suffering from a series of unfortunate circumstances, will slide into poverty and homelessness without having done anything to warrant their impoverishment. Without some sort of intervention, a society of equals will quickly stratify, with the accumulated wealth of those fortunate to be blessed by lucky happenstance soaring above the meager wealth (or debt) of those cursed by hardship, trauma, or tragedy.
It also turns out that a few simple mitigation measures can almost completely rebalance a lopsided society, essentially eliminating any long-term inequality.
Come journey with us to the Chancy Islands and see what we found:
- Welcome to the Chancy Islands
- Flat Island – Equal and Uniform Luck
- Rugged Island – Lots of Luck
- Debt Island – Borrowing to Meet Needs
- Mercy Island – Merciful Bankruptcy Relief
- Combo Island – Add a Tax and Bonus
- Parity Island – Striving for Equality
- Skewed Island – Beginning with a Very Unequal Society
- Numerical Results
The race is not [always] to the swift, nor the battle to the strong, nor bread to the wise, nor riches to the intelligent, nor favor to the skillful; but time and chance happen to them all. —
In the past 40 years, the United States has become a much more unequal society than it was in mid-century. The top 1% of households now own as much wealth as the bottom 90%. Economists Edward N. Wolff, Emmanuel Saez, and Gabriel Zucman have documented these changes:
Wealth Inequality in the United States since 1913: Evidence from Capitalized Income Tax Data, by Emmanuel Saez and Gabriel Zucman, The Quarterly Journal of Economics, 131:2, May 1, 2016, pp. 519–578.
This careful academic analysis shows wealth inequality is high and rising fast in the United States: the top 0.1% share has increased from 7% in the late 1970s to 22% in 2012. In contrast, the wealth share of the middle-class has followed an inverted-U evolution over the course of the twentieth century: it is no higher today than in 1940.
The richest 1 percent now owns more of the country’s wealth than at any time in the past 50 years, by Christopher Ingraham, Wonkblog, Washington Post, December 6, 2017.
A good summary of the work of economist Edward N. Wolff. “… Today, the top 1 percent of households own more wealth than the bottom 90 percent combined. That gap, between the ultrawealthy and everyone else, has only become wider in the past several decades. …”
A variety of studies show that much of this difference is determined by factors other than individual merit. See, for example:
The Inheritance of Inequality, by Samuel Bowles and Herbert Gintis, Journal of Economic Perspectives 16:3 (Summer 2002), pp. 3–30.
Parental income and wealth are strong predictors of the likely economic status of the next generation.
The Meritocracy Myth, Fourth Edition, by Stephen J. McNamee, Rowman and Littlefield, 2018.
Do people advance based solely on individual merit? This book examines talent, attitude, work ethic, and character as elements of merit and evaluates the effect of nonmerit factors such as family background, social connections, market conditions, unequal educational opportunities, discrimination, and luck.
For more references on luck and economic disparity, see Additional Resources.