<p>First off, dollars are not the sole determination of wealth.  People can be wealthy by having a large house and a nice car and still have \$0 in the bank.  Dollars hold wealth only because they can be exchanged for goods or services that actually do have value.  </p>

<p>With that being said, let us take a look at what you have asked: </p>

<blockquote>
  <p>I understand how it's possible where <strong>one person creates a product that everyone else purchases</strong> (creating a concentration of wealth). But, then, <strong>that person invests or saves the money, which ultimately gets circulated back into the economy.</strong> If total money is zero-sum (all saved money is spent, all received money is spent), how does any one actor in the system end up with more money than others? </p>
</blockquote>

<p>The two phrases that I have emphasized above, hold the answer to your question.  In fact, you have almost answered your question in the first phrase.  </p>

<p>The only reason that wealth has concentrated in Person A (who creates a product that everyone else purchases) is because everyone else has determined that they would rather have that product than the money that they have.  The benefits of having that product outweigh the benefits of keeping the money.  Many economists would argue that everyone is better off because the seller has improved his life by getting more money and the buyers have improved their lives by getting the better product.  </p>

<p>Now, what does Person A do with the money?  Person A does the exact same thing that everyone else did originally: <strong>he looks for products that he would rather have than money.</strong><br>
In the marketplace, Person B, Person C, and Person D are all selling unique products of their own.  Person A sees value in purchasing the products from Person B and Person D, but values his money more than the product from Person C.  So, Person A purchases from Persons B and D but not from Person C.  This means that the money flows from Person A to Person B and Person D.  </p>

<p>This cycle will continue to repeat indefinitely.<br>
As long as Persons A, B, and D continue to produce products that people value more than money, they will continue to gain wealth.<br>
On the flip side, as long as Person C does not produce a product that people value more than money, he will not gain wealth.  </p>

CC BY-SA 3.0
2017-10-19T14:59:33.437Z
2017-10-19T14:59:33.437Z
Mathematician
<p>It’s difficult to think any economy would have zero surplus. If it did, and all funds were spent as soon as they were received there’d be zero savings or surplus goods. In a primitive economy (which suits your example as applying this to modern society isn’t reasonable) there’d be a lot of barter and the usage of money would mostly be superfluous. In a developed economy, for businesses to know how much to produce or services to offer they need some type of surplus and require savings and investment.</p>

<p>How does inequality get created in a closed economy? Your thought experiment that everybody spends what they receive straight away would in theory mean there would be zero inequality but there would be those who produce and provide more goods and services than others or the government would tax more than it spends giving rise to inequality. Eliminating inequality totally is not realistic in any way. Only if you want to set up a moneyless economy but even then goods and services still have utility and their value is intrinsic. Exchange of these goods would mostly be done by barter unless everybody’s needs were met such as under an abundance economy or techno communism, etc.</p>

CC BY-SA 3.0
2017-12-27T13:55:08.133Z
2017-12-27T13:55:08.133Z
Matthew
<p>I'm a syndicated writer working on an explainer about income inequality and I realized I didn't really understand how it can possibly develop in an economy where all dollars are spent. That is, let's take a hypothetical: I understand how it's possible where one person creates a product that everyone else purchases (creating a concentration of wealth). But, then, that person invests or saves the money, which ultimately gets circulated back into the economy. If total money is zero-sum (all saved money is spent, all received money is spent), how does any one actor in the system end up with more money than others?</p>

<p>As I see it, the only mechanisms by which income inequality could increase within a group of people is if the system included globalization, where wealthy people spend money outside of the system (i.e. sending the money to other countries which were previously poor)</p>

<p>I'm open to answers that include a closed hypothetical economy (with 3 actors) or some other explanation. Thank you and let me know if I can clarify this question. </p>

<p>Update: Some have suggested its a duplicate of "how wealth is created". This is different because im asking about income (money supply and distribution), not the distribution of outputs. I get how some people might produce more. I dont understand how money concentrates in a system where all savings is invested or spent. </p>

CC BY-SA 3.0
2017-10-12T19:37:12.940Z
Possible duplicate of [How is wealth created?](https://economics.stackexchange.com/questions/17890/how-is-wealth-created)
Giskard
CC BY-SA 3.0
2017-10-12T19:37:42.587Z
[This question](https://economics.stackexchange.com/questions/5913/if-i-gain-then-someone-else-loses-correct?noredirect=1&lq=1) may also be of interest.
Giskard
CC BY-SA 3.0
2017-10-12T19:45:50.407Z
At the risk of sounding very rude: Why should an explainer be written by someone unfamiliar with the topic?
Michael Greinecker
CC BY-SA 3.0
2017-10-12T22:58:45.990Z
Thanks for the comments and links. its not a duplicate and i tried to explain why. thanks again for the help!
tom
CC BY-SA 3.0
2017-10-13T07:10:26.443Z
@tom Please do consider asking your boss to reassign the job. I understand that most journalists are not familiar with the topics they write about but ideally they should be. As many people do, you seem to be confusing wealth and money. The income of very rich people usually does not come in cash. https://economics.stackexchange.com/questions/15831/how-is-money-created/
Giskard
CC BY-SA 3.0
2017-10-13T08:01:27.330Z
As someone working on inequality topics, the range of answers to the question "what causes inequality to increase" is way too broad. For a start, you do not need globalisation. In a closed economy, a less progressive taxation system will lead to the pie of income be distributed more unequally.
luchonacho
CC BY-SA 3.0
2017-10-13T15:16:27.503Z
@denesp That's an interesting idea. There was one MIT economist who said that all rising inequality depended on housing costs. Are you saying that illiquid assets are the source of inequality?
tom
CC BY-SA 3.0
2017-10-13T15:17:37.893Z
@luchonacho its a more general question: if all money is circulated constantly, how do some people end up with more cash, even before taxation? Or, is the problem with how money is circulated?
tom
CC BY-SA 3.0
2018-03-27T20:26:01.443Z
One of numerous relevant explanations: 

Let's say that all cash is stolen by the government, but everyone retains the same human capital and the same physical capital.

Whoever holds more capital will earn higher income (income inequality) and accumulate more capital (wealth inequality).

This need not require that skills or abilities at the level of individuals, companies or entire countries have different production potential in the present economy.
nathanwww
<inequality>
Explaining the development of income inequality
tom
# Explaining the development of income inequality

(Asked by: username_0 on 2017-10-12)

I'm a syndicated writer working on an explainer about income inequality and I realized I didn't really understand how it can possibly develop in an economy where all dollars are spent. That is, let's take a hypothetical: I understand how it's possible where one person creates a product that everyone else purchases (creating a concentration of wealth). But, then, that person invests or saves the money, which ultimately gets circulated back into the economy. If total money is zero-sum (all saved money is spent, all received money is spent), how does any one actor in the system end up with more money than others?

As I see it, the only mechanisms by which income inequality could increase within a group of people is if the system included globalization, where wealthy people spend money outside of the system (i.e. sending the money to other countries which were previously poor)

I'm open to answers that include a closed hypothetical economy (with 3 actors) or some other explanation. Thank you and let me know if I can clarify this question.

Update: Some have suggested its a duplicate of "how wealth is created". This is different because im asking about income (money supply and distribution), not the distribution of outputs. I get how some people might produce more. I dont understand how money concentrates in a system where all savings is invested or spent.

**Tags:** inequality
> **Comments:**
> **username_1**: Possible duplicate of [How is wealth created?](https://economics.stackexchange.com/questions/17890/how-is-wealth-created)  
> **username_1**: [This question](https://economics.stackexchange.com/questions/5913/if-i-gain-then-someone-else-loses-correct?noredirect=1&lq=1) may also be of interest.  
> **username_2**: At the risk of sounding very rude: Why should an explainer be written by someone unfamiliar with the topic?  
> **username_0**: Thanks for the comments and links. its not a duplicate and i tried to explain why. thanks again for the help!  
> **username_1**: @tom Please do consider asking your boss to reassign the job. I understand that most journalists are not familiar with the topics they write about but ideally they should be. As many people do, you seem to be confusing wealth and money. The income of very rich people usually does not come in cash. https://economics.stackexchange.com/questions/15831/how-is-money-created/  
> **username_3**: As someone working on inequality topics, the range of answers to the question "what causes inequality to increase" is way too broad. For a start, you do not need globalisation. In a closed economy, a less progressive taxation system will lead to the pie of income be distributed more unequally.  
> **username_0**: @denesp That's an interesting idea. There was one MIT economist who said that all rising inequality depended on housing costs. Are you saying that illiquid assets are the source of inequality?  
> **username_0**: @luchonacho its a more general question: if all money is circulated constantly, how do some people end up with more cash, even before taxation? Or, is the problem with how money is circulated?  
> **username_4**: One of numerous relevant explanations:   Let's say that all cash is stolen by the government, but everyone retains the same human capital and the same physical capital.  Whoever holds more capital will earn higher income (income inequality) and accumulate more capital (wealth inequality).  This need not require that skills or abilities at the level of individuals, companies or entire countries have different production potential in the present economy.  

---

## 2 answers

### Answer by username_5 on 2017-10-19. Score: 1 | Accepted answer

First off, dollars are not the sole determination of wealth. People can be wealthy by having a large house and a nice car and still have \$0 in the bank. Dollars hold wealth only because they can be exchanged for goods or services that actually do have value.

With that being said, let us take a look at what you have asked:

> I understand how it's possible where **one person creates a product that everyone else purchases** (creating a concentration of wealth). But, then, **that person invests or saves the money, which ultimately gets circulated back into the economy.** If total money is zero-sum (all saved money is spent, all received money is spent), how does any one actor in the system end up with more money than others?

The two phrases that I have emphasized above, hold the answer to your question. In fact, you have almost answered your question in the first phrase.

The only reason that wealth has concentrated in Person A (who creates a product that everyone else purchases) is because everyone else has determined that they would rather have that product than the money that they have. The benefits of having that product outweigh the benefits of keeping the money. Many economists would argue that everyone is better off because the seller has improved his life by getting more money and the buyers have improved their lives by getting the better product.

Now, what does Person A do with the money? Person A does the exact same thing that everyone else did originally: **he looks for products that he would rather have than money.**  
In the marketplace, Person B, Person C, and Person D are all selling unique products of their own. Person A sees value in purchasing the products from Person B and Person D, but values his money more than the product from Person C. So, Person A purchases from Persons B and D but not from Person C. This means that the money flows from Person A to Person B and Person D.

This cycle will continue to repeat indefinitely.  
As long as Persons A, B, and D continue to produce products that people value more than money, they will continue to gain wealth.  
On the flip side, as long as Person C does not produce a product that people value more than money, he will not gain wealth.


---

### Answer by username_6 on 2017-12-27. Score: 0

It’s difficult to think any economy would have zero surplus. If it did, and all funds were spent as soon as they were received there’d be zero savings or surplus goods. In a primitive economy (which suits your example as applying this to modern society isn’t reasonable) there’d be a lot of barter and the usage of money would mostly be superfluous. In a developed economy, for businesses to know how much to produce or services to offer they need some type of surplus and require savings and investment.

How does inequality get created in a closed economy? Your thought experiment that everybody spends what they receive straight away would in theory mean there would be zero inequality but there would be those who produce and provide more goods and services than others or the government would tax more than it spends giving rise to inequality. Eliminating inequality totally is not realistic in any way. Only if you want to set up a moneyless economy but even then goods and services still have utility and their value is intrinsic. Exchange of these goods would mostly be done by barter unless everybody’s needs were met such as under an abundance economy or techno communism, etc.


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