1975 - Comanor & Smiley, Monopoly & Distribution of Wealth

Monopoly and the Distribution of Wealth
Author(s): William S. Comanor and Robert H. Smiley

Source: The Quarterly Journal of Economics, Vol. 89, No. 2 (May, 1975), pp. 177-194
Published by: Oxford University Press
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THE
QUARTERLY JOURNAL
OF ECONOMICS
Vol. LXXXIX May 1975 No. 2
MONOPOLY AND THE DISTRIBUTION OF WEALTH *
WILLIAM S. COMANOR
ROBERT H. SMILEY
A model of monopoly and wealth, 178. - Estimation of parameters, 182.-
The empirical findings, 189.- Conclusions, 194.
Although it is generally recognized that monopoly has distribu-
tive consequences, this factor is typically ignored by economists who
examine the economic impact of monopoly. Harberger, for example,
estimated the welfare costs of monopoly by subtracting monopoly
profits from the aggregate decline in consumer surplus and, on find-
ing this net loss to be small, concludes that, "we can neglect mo-
nopoly elements and still gain a very good understanding of how our
economic process works."
I
Similarly, it is argued that distributive
objectives should explicitly be ignored in the enforcement of anti-
monopoly policies.2 However, there have been few systematic studies
of the distributive effects of monopoly.
Our purpose is to estimate the impact of past and current enter-
prise monopoly profits on the distribution of household wealth in
the United States. We do not investigate here the various sources
of enterprise monopoly nor whether other desirable or undesirable
*
The authors are grateful to William F. Baxter, Marc J. Roberts, William
F. Sharpe, and George J. Stigler for helpful comments and suggestions. An
earlier version of this paper was presented at a Conference on Industrial
Organization, Southern Illinois University, Edwardsville, April 1973.
1. Arnold Harberger, "Monopoly and Resource Allocation," American
Economic Review, XLIV (May 1954), 77-87, quote on p.
87;
David R.
Kamerschen, "An Estimation of the Welfare Losses from Monopoly in the
American Economy," Western Economic Journal, IV (Summer 1966), 221-
36.
2. Oliver E. Williamson, "Economies as an Antitrust Defense," American
Economic Review, LVIII (March 1968), 18-35, esp p.
28;
Robert H. Bork,
"The Rule of Reason, and the Per Se Concept: Price Fixing and Market Divi-
sion," Yale Law Journal, LXXIV (April 1965), 775-847, esp. p. 839. See also
Richard Caves, American Industry: Structure, Conduct, Performance, 3rd
ed. (Englewood Cliffs, N. J.: Prentice Hall, 1972), especially p. 96.
178 QUARTERLY JOURNAL OF ECONOMICS
outcomes flow from them. Also we do not incorporate the effects
of excess returns, which take the form of higher input payments.
Furthermore, it should be noted that monopoly profits are those
returns that remain after deducting any costs of securing a mo-
nopoly position.3
Our focus on the distribution of wealth stems from the fre-
quently noted proposition that while monopolies extract excess pay-
ments from consumers, current owners often receive no excess re-
turns. Monopoly profits are generally capitalized into the value of
the firm at the time of the creation of the monopoly so that when
the current owners acquired their ownership rights, the price they
paid included the present value of the future stream of monopoly
returns. While the original owners of the monopoly gained, they
may have long since sold their ownership claims and therefore would
lose nothing if the monopoly was suddenly and unexpectedly dis-
solved. Wealth is created in the process of capitalizing monopoly
returns, and income gains take the form of a return on the wealth
created.
A MODEL OF MONOPOLY AND WEALTH
To isolate the distributive consequences of monopoly, we
estimate the wealth gain or loss due to monopoly for individual
wealth classes. These estimates are then subtracted from existing
wealth positions to determine hypothetical distributions of house-
hold wealth in the absence of monopoly. This procedure assumes
that the other determinants of this distribution remain unchanged.
Three basic assumptions are made. The first of these is that the
ratio of monopoly profits to gross national product has remained
constant throughout the period from 1890 through 1962. By mo-
nopoly profits we mean those profits in excess of the cost of capital,
which arise from differences between price and marginal costs that
are maintained in equilibrium. Monopolies, it is assumed, are
created and die in a steady state throughout these years.
The second assumption concerns the distribution of monopoly
gains. We assume that these gains are distributed in proportion to
current total business ownership claims. In other words, there is an
equal probability of realizing monopoly gains associated with each
3. It could be argued that, in equilibrium, the costs of securing monopoly
positions become sufficiently high so that, on balance, there are no monopoly
returns. While this may eventually be so in some cases, it is unlikely that all
such rewards are immediately eliminated, and it is the
impact
of the net
profits that remain in which we are interested.
MONOPOLY AND THE DISTRIBUTION OF WEALTH 179
claim on business ownership. This assumption might be rather con-
servative if all monopoly gains accrued to those who provide the
original capital for the monopoly, for the supply of such capital is
likely to be distributed even more unequally than are business
ownership claims overall. However, to the extent that monopolies
are created by relatively poor people, who own few business owner-
ship claims and who receive their ownership rights as returns to
entrepreneurial talent, the distribution of monopoly gains may be
distributed more equally across wealth classes.
Note that this assumption regarding the distribution by wealth
class of monopoly gains requires implicitly that these gains are high-
ly divisible among households. When monopoly gains take the form
of large indivisible blocs, they necessarily accrue ex post to mem-
bers of the highest wealth class. What becomes important in these
circumstances is the size of the bloc relative to average wealth
holdings in various classes rather than the original wealth of the
owners of the monopoly. Since our concern is with the influence
of monopoly on the current relative wealth positions of U.S. house-
holds, this assumption probably represents a conservative view of
the distribution of the ownership of monopoly gains.
The third assumption refers to the distribution across households
of excess monopoly payments. Monopoly leads to a redistribution
of income to the original owners of the firm from consumers who pur-
chase the output of the monopolist at higher prices than would have
prevailed had the industry been competitive. Therefore, we need
to be concerned with the distribution of excess payments, as well as
with the distribution of monopoly gains. We assume that the distri-
bution of excess monopoly payments is proportional to the distribu-
tion of total consumption expenditures. What is thereby required
is that rich and poor alike pay the same proportion of total con-
sumption expenditures in the form of monopoly payments.
In effect, this assumption requires that the elasticity of mo-
nopoly payments with respect to total consumption expenditures is
unity. To the extent that this elasticity exceeds unity, so that mo-
nopolized commodities comprise a larger share of consumption
ex-
penditures in relatively wealthy individuals, we overstate the effect
of monopoly on inequality.4 For this reason, we assume alterna-
tively that this elasticity is 1.5. In the latter case, outlays
on mo-
4. It might be argued alternatively that more wealthy consumers spend
relatively more of their income on services that are supplied under competi-
tive conditions. In this case the proportion
of income spent
on monopolized
commodities would decline as wealth increases,
and the
impact
of
monopoly
is understated.
nopolized commodities are assumed to rise more than proportion-
ately with increases in total consumption expenditures.
We now proceed to a detailed description of a model that relates
the presence of monopoly returns to the distribution of wealth. Let
7rit(to-n)
be the annual flow of excess return after corporate taxes
due to monopoly in year t from monopolies created in year
(to-n).
The subscript i indicates that we are referring to that portion of
this flow which contributed to the wealth position of the original
owners who are members of the ith relative wealth class in year
(to-n).
Thus, what we mean by monopoly creation in this model
is the year in which monopoly returns are capitalized into the value
of the firm. In our notation,
to
is the current year, while n is the
number of years ago that monopoly gains were created and capital-
ized.
As indicated above, we assume that the life of a monopoly is
constant across all monopolies. Thus, monopolies generate excess
returns from year
(to-n)
to year (to-n+T-1) inclusive. This
represents a life of T years.
Let
Fit
be the flow of aggregate excess returns in year t that
supports the increased wealth of the original owners of the firm who
are members of the ith relative wealth class from all vintages of
monopoly in effect at that time. Thus,
T-1
( s) rt= 7rit (to -n) .
n=O
This summation runs over T years, since only these vintages con-
tribute to excess returns in years t.
Following our first assumption, we see that the flow of monop-
oly returns depends on the year received but not on the year that
the monopoly was created and capitalized. Moreover, these returns
are constant across vintages of monopoly for the same year received.
In other words, each of the T vintages in existence in any year
shares equally in the total monopoly returns received in that year.
On this basis,
T-1
(2)
>
7it(to-n)
=
Twit(to-n)
=1it.
n=O
Therefore,
7ri t
(3) tt(to0- )
=
-
Now let
Vito
be the wealth created by the capitalized monopoly
gains in the current year. This quantity is defined by
(4)
N
[to-n+T-1
7Tjt (to...n)
](d)(1i 1.
rto-n~m
]
?n-=O [t to-n (1+i)J )(+)[ (-iMli
j
=t-
to+n
j=011,2,
T-1,
which, from expression (3), equals
(5)
Vito
=
Y
, li,
(1 -di) 11(1
+)"[-(- mli
n=-o t~t0-n (1?i)
i
i (
i
Here, di is the dissipation rate for members of the ith class from
accumulated wealth. (1-di)
is therefore the rate by which accu-
mulated wealth is carried forward by the ith wealth class from one
year to next. As indicated in expression (5), we assume that there
is no dissipation of capitalized monopoly gains in the first year
they are created. i is the appropriate interest rate.
rto-n+,m
is the
effective rate of taxation on capital gains for year
(to-n),
where
m is the number of years after capitalization that the tax is paid.5
Where capital gains are taxed when received, m equals zero. N is
the total number of years included in the analysis.
Turning now to the negative impact of monopoly on consum-
ers, let
7rTit(to-n)
be flow of excess expenditures due to monopoly
made by members of the ith class in year t to monopolies created in
year (to-n).
Therefore,
T-1
(6) 7rTj
it(to-n)-
n=O
7rTit
are
aggregate
excess
expenditures
made
by
members of the ith
wealth class in year t to all vintages of monopoly. Again, this sum
runs over T years, since excess expenditures are made only for those
vintages.
The wealth foregone in the current year by members of the ith
wealth class due to excess expenditures is indicated by
Iito,
which
equals
N
(7) iito
=
:i 7r1tq(to-n) Si (1-di) n( 1+i) ny
n=O
where si is the saving rate in the ith wealth class. This expression
indicates that only part of these excess expenditures would have been
saved during year t.
Now let
Wito
be total accumulated household wealth in the ith
5. Let the first term in square brackets be indicated by C. Then for each
value of n, expression (5) can be written as
[C(1+i)m(1-d,)m-rt,,n.~mC]
(1+i)-m (1-d,)n-m
which indicates, perhaps more clearly, the influence of capital gains taxation.
wealth class in the current year, while
W*jt0
is the hypothetical
volume of wealth held by members of the ith wealth class in the
absence of the income transfers associated with monopoly. The dif-
ference between these two values equals
Vito-Iito,
which from the
above expressions equals
N
(8) Y,
[ (1-dj)nf(j+j)n]
n=O
{
to-n+T-1 7rit/T_(
1-
rto-n~m
)S7~~
{(t=-to-n
(I
+i)
)
(1 -di) m(1 +i)
m) (?)}
This expression can be simplified on the basis of the three as-
sumptions made above. First, let a be the proportion of GNP repre-
sented by monopoly profits, which is assumed constant over time.
Second, let pi be the proportion of business ownership claims held
by members of the ith wealth class in the current year. Third, let
p'.
be the
proportion
of total
consumption expenditures
made
by
members of the ith wealth class. These assumptions can be written
as
(9) 7rt=a GNPt
sit
=
Povrt
7rfit = Pi t.
With these assumptions, expression (8) equals
N
(10) E.
[ (1
-
di
)
( +i) n]
n=O
{aT (t
nYT-1 NI7 )(
1-
(1-d,)mn(l
j)m )-a p'jsi GNPto-n
As indicated, this expression describes the change in wealth
held by the ith wealth class due to the impact of past and present
monopoly. What is required to evaluate this expression are esti-
mates of a,
pi, p'i, si, di, rto-n+,?m,
and of course data on GNP. More-
over, a value of N must be chosen. Since the current year to for pur-
poses of this study is 1962, N is fixed at 72, which indicates that the
effects of monopoly since 1890 are included in our results. 1890 is
the year that the Sherman Antitrust Act was enacted into law. The
other required parameter is
T,
which is average monopoly life.
Since we have no way of estimating this factor, four alternate values
are chosen
-
ten years, twenty years, and forty years
-
and the
estimated effects of monopoly are reported for each.
ESTIMATION OF PARAMETERS
In this model we are concerned with the ratio of monopoly
profits to Gross National Product, and it is this ratio that is assumed
constant over time. In a study of the price effects of monopoly,
Schwartzman 6 estimated that monopoly profits in manufacturing
were approximately 1 percent of Gross National Product in 1954.
Scherer
7
extended these results to reflect monopoly gains in other
sectors and suggested that aggregate monopoly profits are on the
order of 3 percent of GNP.8
Using a different methodology and for an earlier period, 1924-
1928, Harberger
9
estimated that total excess profits in the manu-
facturing sector but before corporate taxes were about
13/4
percent
of GNP. Corporate taxes during these years varied between 11
and 12 percent of net income,10 which suggests that excess profits
after taxes were about
11/2
percent of Gross National Product. If
monopoly accounted for two thirds of this quantity rather than
the one third asserted by Harberger, the ratio of monopoly profits
in manufacturing to GNP for 1924-1928 would be precisely the same
as that estimated by Schwartzman for 1954. In this case Scherer's
suggestion of a total figure of 3 percent might be appropriate for the
earlier period as well. All that can be concluded with much con-
fidence is that we are dealing with figures of the same order of mag-
nitude.
In the analysis below we use Scherer's estimate to determine
the impact of monopoly on the distribution of wealth. To be con-
servative, however, we also use an alternate estimate of 2 percent,
which probably represents a lower bound on the ratio of monopoly
profits of
GNP.'1
The interest rate used in our model is 8.4 percent, which is the
annual rate of return estimated by Lorie and Fisher 12 for an equal
investment in all common stocks listed on the New York Stock Ex-
change from January 1926 through December 1960. This is an after-
6. David Schwartzman, "The Effect of Monopoly on Price," Journal of
Political Economy, LXVII (Aug. 1959), 352-62, esp. 361.
7. F. M. Scherer, Industrial Market Structure and Economic Performance,
(Chicago: Rand McNally, 1970), p. 409.
8. The corporate income tax rate has generally increased over time. To
the extent that it was lower during the early part of the period studied, the
use of end-period figures overstates the amount of taxes paid and understates
monopoly profits.
9. Harberger, op. cit., p. 83.
10. Ralph C. Epstein, Industrial Profits in the United States (New York:
National Bureau of Economic Research, 1937), pp. 624-34.
11. In an extensive study of monopoly in the consumer goods manufac-
turing sector recently completed by one of the authors, the total monopoly
transfer was estimated at 2.3 percent of aggregate value added in 'this sector.
William S. Comanor and Thomas A. Wilson, Advertising and Market Power
(Cambridge: Harvard University Press, 1974).
12. J. H. Lorie and L. Fisher, "Rates of Return on Investment in Com-
mon Stocks," Journal of Business, XXXVII (Jan. 1964), 1-21.
tax rate of return for a man in the $10,000 bracket in 1960. For
years prior to 1960 Lorie and Fisher apply a tax rate for someone
who held the same relative position in the income distribution. The
same rate is used for all wealth classes. Although tax rates are
higher for wealthier individuals, rates of return may also be higher
than for the rest of the population to the extent that unit costs of
obtaining investment information are lower.
The esimated values of
pi
are given in the second column in
Table I. As can be seen, the degree of inequality in the distribution
TABLE I
DISTRIBUTIONS OF NET WORTH, BUSINESS OWNERSHIP CLAIMS,
AND CONSUMPTION EXPENDITURES
1962
Percentage of
Percentage of Percentage of business Percentage of consumption
Wealth consumer units a ownership claims b net worth C expenditures
Class (1) (2) (3) (4)
1. 28.25 0.78 0 19.94
2. 17.33 2.07 2.41 15.38
3. 14.58 4.03 5.26 13.92
4. 22.30 11.96 17.74 23.52
5. 10.82 15.18 19.05 12.85
6. 4.28 14.54 14.84 6.60
7. 1.22 8.01 8.07 3.24
8. 0.95 15.71 14.09 2.49
9. 0.27 27.94 18.53 2.07
100.00 100.00 100.00 100.00
Totals may not add due to rounding.
a. Consumer units are ordered by net worth.
b. This distribution refers to wealth rather than net worth classes. Moreover, the first
class refers only to those households with positive wealth. Households with zero or negative
wealth are assumed to hold no business ownership claims.
c. The mean net worth of households in the first class is negative. For purposes of
this distribution the percentage figure is set at zero.
Sources: Dorothy S. Projector and Gertrude S. Weiss, Survey of Financial Characteris-
tics of Consumers, Federal Reserve Technical Paper, 1966; Dorothy S. Projector, Survey of
Changes in Family Finances, Federal Reserve Technical Paper, 1968.
of business ownership claims is even greater than that of the distri-
bution of net worth. Thus, the 158,000 consumer units with net
worth exceeding $500,000 are merely 0.27 percent of the total num-
ber of consumer units in the population but control 18.53 percent
of aggregate net worth. Moreover, they control nearly 30 percent
of total business ownership claims.
The top three classes in the distribution, those with net worth
exceeding $100,000, amount to 2.44 percent of the total number of
consumer units but control just over 40 percent of aggregate
net
worth and over 51 percent of total business ownership claims. The
degree of inequality in business ownership claims is striking, even
though the indirect control of such claims through retirement plans
and life insurance assets is included in the total.13
In this model we use the same values of pi, applicable to 1962,
for every year since 1890. Whether this leads to an under- or over-
statement of the distributive effects of monopoly depends on what
has happened over time to the distribution of business ownership
claims. If this distribution were unchanged, no biases would be in-
troduced by this procedure. While there is no information available
on the distribution of business ownership claims in earlier years,
there are various estimates available of the distribution of wealth
in 1890.14 While there are discrepancies between the reported dis-
tributions, each of them shows a higher degree of inequality for
1890 than was the case in 1962. These results suggest thereby that
the distribution of wealth has become slightly less unequal in the
seventy-two years between 1890 and 1962.15
If the distribution of wealth has progressively become more
equal since 1890, it is probable that the distribution of business
ownership claims has similarly become more equal. In this case the
vector of pi in 1962 probably understates the degree of inequality
in the distribution of business ownership claims in earlier years.
To this extent the use of constant
pi's
based on 1962 data should
understate the true impact of monopoly in inequality in the distri-
bution of wealth.
A vector of
p'i
is also used in our estimating model. These
parameters are founded on the relative distribution of consumption
expenditures by net worth classes and are given in the fourth
13. The following claims are included in this definition: business or pro-
fession assets, beneficial interest in trust, all publicly traded stock, investment
in real estate, business not managed by unit, life insurance assets, and retire-
ment plans.
14. See Charles V. Spahr, An
Essay
on the Present Distribution of Wealth
in the United States (New York, 1896); W. I. King, The Wealth and Income
of the People of the United States (New York: Macmillan,
1915); George K.
Holmes, "The Concentration of Wealth," Political Science
Quarterl4y, VIII
(Sept. 1893), 589-600; Robert E. Gallman, "Trends in the Size Distribution of
Wealth in the Nineteenth Century: Some Speculations," Six Papers on the
Size Distribution of Wealth and Income, Lee Soltow, ed. (New York: Colum-
bia University Press, 1969).
15. This conclusion is consistent with Lampman's finding that the pro-
portion of wealth held by the top 2 percent of families in the United States
declined slightly from 1922 to 1953. Robert J. Lampman, The Share of Top
Wealth-Holders in National Wealth, 1922-1956 (Princeton: Princeton Uni-
versity Press, 1962). Pryor also notes that the inequality of wealth has de-
clined since the turn of the century. Frederick L. Pryor, "Simulation of the
Impact of Social and Economic Institutions on the Size Distributions of In-
come and Wealth," American Economic Review, LXIII (March 1973), 50-72,
esp. 66.
column in Table I. This distribution is also somewhat unequal, in
that the most wealthy 2.4 percent of the nation's households ac-
count for nearly 8 percent of total consumption expenditures. How-
ever, as can be seen, consumption expenditures are distributed far
more equally than either net worth or business ownership claims.
Indeed, it is the considerable discrepancy between the distributions
in columns (2) and (4) that suggests that monopoly may have a
major impact on the degree of inequality in the distribution of
wealth. If these distributions were identical, there would be little
impact. Again, we use the distribution for 1962 for all preceding
years.'6
We also require an estimate of
si,
which is the saving ratio from
disposable income. While there are different approaches to the
estimation of this parameter, it is often argued that the proportion
of income saved is independent of income.'7 Consistent with this
view, we use the same saving ratio for all wealth classes. Moreover,
since there is some evidence that saving ratios have been fairly con-
stant over time in the United States, we use the same ratio for each
year in the analysis.'8 The ratio, which is estimated from data for
1963, is 16.6 percent.19
As noted above,
di
is the proportion of aggregate wealth held
by members of the ith relative net worth class that is dissipated in a
given year. The dissipation of accumulated wealth has two com-
ponents: first, dissipation that takes place during the lifetime of the
members of the family; and second, dissipation that takes place at
the death of one or more members of the family.20 The first element
of
di
is the ratio of aggregate dissaving to aggregate wealth within
the ith class. This component of
di
is readily estimated from avail-
able data.
16. Since the distribution of income has become somewhat more equal
since 1890, this procedure understates the correct volume of consumption ex-
penditures in earlier years by the more wealthy households. As a result, these
households probably have made a larger share of excess payments due to
monopoly than is accounted for by these estimates.
17. Franco Modigliani and Richard Brumberg, "Utility Analysis and the
Consumption Function: An Interpretation of Cross-Section Data," Post-
Keynesian Economics, Kenneth K. Kurihara, ed. (New Brunswick, N.J.: Rut-
gers University Press, 1955), p. 430.
18. After an extensive analysis of saving behavior between 1896 and 1949,
Goldsmith reports "long-term stability of aggregate personal saving at approx-
imately one-eighth of income" (R. W. Goldsmith, A Study of Saving in the
United States; Princeton: Princeton University Press, 1955, Vol. I., p. 22).
19. Note that in this model a high saving ratio tends to reduce the effect
of monopoly on the distribution of wealth.
20. Business losses can be viewed as a source of the dissipation of wealth.
However, the interest rate used in this study includes the effects of business
losses as well as gains. To include the former therefore would represent double
counting.
Estimates of
di
for 1963 are used throughout, and we need to
consider what biases are thus created. One approach to this prob-
lem is in terms of a "life cycle" theory of savings. As summarized by
Lydall,21 savings increase with incomes from marriage through
middle age. At retirement, however, incomes fall, and capital is
drawn down to maintain levels of consumption.22 In this approach
dissaving takes place largely among households headed by retired
people. To the extent, then, that the proportion of such households
has increased over time, as appears to be the case,23 dissaving rates
are likely to be higher at the end of the period studied than earlier,
and the impact of monopoly is understated.
This argument must be qualified, however, in important re-
spects. While households in 1963 with head sixty-five and over
have a larger ratio of aggregate dissaving to aggregate wealth than
those headed by persons between thirty-five and sixty-four, they
account for only 31 percent of aggregate dissaving. The reason is
that they comprise only 19 percent of total consumer units. While
households headed by younger people have lower dissaving rates,
they are sufficiently numerous that they account for over two thirds
of total dissaving. However, there is some indication that the find-
ing of a general constancy of saving behavior applies also to dis-
saving rates.24 In this case current rates by age group are appro-
priate for earlier years. Furthermore, an increase in the proportion
of consumer units headed by older people still suggests an increase in
overall dissavings rates. What is implied thereby is that 1963 values
of
di,
if anything, overstate true values for earlier years.
The second element of wealth dissipation takes place on the
death of adult members of a family. The important components of
estate taxes, funeral expenses, administrative expenses, and chari-
table contributions at the time of death are determined for 1962.
Again, this component of
di
is assumed constant over time. To some
extent, this approach is a conservative one since estate taxes were a
good deal lower in the early years of the century, although the im-
21. Harold Lydall, "The Life Cycle in Income Saving, and Asset Owner-
ship," Econometrica, XXIII (April 1955), 149, 150.
22. See also Modigliani and Brumberg, op. cit.;
and Albert Ando and
Franco Modigliani, "The 'Life Cycle' Hypothesis of Saving," American Eco-
nomic Review, LIII (March 1963), 55-84.
23. Goldsmith (op. cit., p. 17) reports that "during the fifty years since
the turn of the century the length of the retirement period has shown a rising
trend, reflecting earlier retirement as well as increased longevity."
24. After reviewing various surveys of family income and expenditures
from 1888 to 1952, Brady finds that "the relative number of families ending the
year with a surplus (net saving) or a deficit (net dissaving) shows very little
tendency to vary with the date, the place, or the population group." Dorothy
S. Brady, "Family Saving 1888 to 1950," Goldsmith, op. cit., Vol. III, p. 143.
portance of these taxes has declined somewhat since the Second
World War.25
A final element in the dissipation of accumulated wealth is
legacies made at death. In cases where a family has only a single
child or where it practices primogeniture, legacies create no prob-
lems for this analysis. The wealth of the parents is passed on to a
single child, so that in effect, the family remains intact. Where, on
the other hand, there is more than one child in the family and primo-
geniture is not practiced, so that household wealth is divided among
a number of children, there is some prospect that the children will
fall in a lower wealth class than did the parents. In this case what
occurs is not really the dissipation of household wealth as in the
case of, say, estate taxes, but rather a process by which the distribu-
tion becomes more equal.26
While there is little empirical evidence available on the effect
of inheritance on the distribution of wealth, some partial evidence
has been gathered by Projector and Weiss.27 While their data are
far from conclusive, they suggest that inheritances account for a
much higher proportion of total wealth among the wealthiest 2.4
percent of total households, which are those with wealth exceeding
$100,000 in 1962, than among the remaining 97.6 percent. More-
over, it is only among the three most wealthy classes, and perhaps
also the fourth highest, that inherited assets account for more than
a "small" proportion of the total. What this suggests is that the
division of estates into two or more parts at death may increase the
degree of equality in the distribution of wealth among the richest 2
percent or perhaps 6 percent of the; total number of households in
the country, but has little impact on the distribution of wealth be-
tween the top 4 to 6 percent and the bottom 94 or 96 percent.28
Once created, large wealth positions are likely to be maintained
within the top 2 to 6 percent of the distribution, so that the equaliz-
ing effect of inheritances across this boundary may be relatively
small. While we need to be wary of imputing too much importance
25. Lampman, op. cit., pp. 238-39.
26. The importance of this factor is examined by J. E. Stiglitz, "Distribu-
tion of Income and Wealth Among Individuals, Econometrica, XXXVII
(July 1969), 382-97;
and Pryor, op. cit.
27. Dorothy S. Projector
and Gertrude S. Weiss, Survey of Financial
Characteristics of Consumers, Federal Reserve Technical Paper, 1966, pp. 148,
151.
28. There is some further indication that, except for the very wealthy, in-
heritances account for a small share of changes in average net worth. John B.
Lansing and John Sonquist, "A Cohort Analysis of Changes in the Distribution
of Wealth," Soltow, op. cit., pp. 64-67.
to a few scattered pieces of evidence, it may be that our results are
not greatly distorted by ignoring this component of
di.
Finally, we need to determine rates of capital gains taxation.
The rate of taxation on accrued capital gains can be viewed as com-
posed of two elements: the capital gains tax rate on realized capital
gains and the ratio of realized gains to accrued gains. This latter
factor is particularly important, since it is estimated that 84 per-
cent of total accrued capital gains on all corporate shares listed on
the New York Stock Exchange since 1922 had not been taxed by
1963.29 Since there is no reason to believe that this figure is differ-
ent in the years from 1913, when the income tax was reintroduced
into the United States, through 1921, we shall be concerned only with
the remaining 16 percent of accrued capital gains. For this 16 per-
cent we assume that these gains are realized and taxed as soon as
possible after accrual, consistent with the tax advantages of post-
poning their realization in effect at the time.30 In some years various
steps were introduced into the tax laws so that it was advantageous
to hold the unrealized gains for from one to six years. This optimal
rate of postponement, indicated by m, is also used in the analysis.3'
THE EMPIRICAL FINDINGS
The current and resulting distributions arising from the model
and estimates described above are given in Table II. The resulting
distributions here are founded on Scherer's estimate that monopoly
profits after taxes are 3 percent of Gross National Product. From
these results it appears that the presence of past and current monop-
oly has had a major impact on the degree of inequality in the cur-
rent distribution of household wealth. The size of this effect,
how-
ever, is influenced by what is assumed regarding the average life of
a monopoly. In our model longer monopoly lives indicate that re-
turns from monopoly are spread over longer periods of time. There-
fore, the longer the assumed monopoly life, the smaller the impact of
monopoly on the distribution of wealth. This
relationship
is due
to our permitting monopoly lives to vary while holding constant
the total volume of monopoly profits.
The results presented here are striking.
The most wealthy size
29. Martin David, Alternative Approaches to Capital Gains Taxation
(Washington: Brookings Institution, 1968), p. 96.
30. In this we ignore the benefits of postponing tax to receive interest
on the tax payment.
31. Data on rates of capital gains taxation were gathered from Anita
Wells, "Legislative History of Treatment of Capital Gains Under Federal
Income Tax, 1913-1948," National Tax Journal, II (March 1949), 12-32.
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class refers to all households with net worth exceeding a half million
dollars at the end of 1962. As indicated, these households account
for 0.27 percent of the total number of households. Currently, they
control 18.5 percent of total household wealth. In the absence of
monopoly and under the conditions of this model, their share of
total wealth would fall to between 3 and 10 percent of the total.
Even if we take the midpoint of this range, the share of total wealth
accounted for by the most wealthy members of society would de-
cline by nearly two thirds.
The results are somewhat less striking but still significant if
we look at the top three size classes together: those with household
wealth exceeding $100,000 in 1962. These households account for
about 2.4 percent of the total households in the country. Currently
they account for slightly more than 40 percent of total wealth. In
the absence of monopoly their share of aggregate wealth would lie
somewhere between 16.6 percent and 27.5 percent, which would
represent a decline of nearly 50 percent in their share of total house-
hold wealth.
At the bottom end of the distribution, households would be rel-
atively better off in the absence of monopoly. The mean net worth
of the bottom 28 percent would now be positive. Indeed, these re-
sults suggest that the relative wealth position of 93.3 percent of the
total households in the country would be improved in the absence
of monopoly.
The estimated impact of monopoly is sufficiently strong to re-
duce the average wealth position of members of the sixth wealth class
to a lower relative position when ten- and twenty-year monopoly
lives are assumed. As a result, the hypothetical distributions given
in those cases are not true frequency distributions but rather repre-
sent estimated relative wealth positions for households currently
in the positions given. For this reason, our primary focus must be
on the relative position of the most wealthy one or three classes in
the distribution in 1962.
While Scherer's estimate of 3 percent of monopoly profits seems
reasonable, we also investigate the impact of monopoly on the dis-
tribution of wealth under the alternate assumption that they ac-
count for only 2 percent of Gross National Product. The results
are given in Table III.
Since monopoly is less important here, its impact on the distri-
bution of wealth is reduced. Under these assumptions, the wealthi-
est 0.27 percent of the nation's households would account for about
13 percent of aggregate household net worth in the absence of mo-
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cr
<o.
nopoly as compared with 18.5 percent currently. The effect of
monopoly has thereby been to increase the relative share of house-
hold wealth held by the nation's wealthiest families by something
over 40 percent.
The wealthiest 2.4 percent of the total number of households now
accounts for slightly more than 40 percent of total wealth. In the
absence of monopoly their share would fall to approximately 32
percent. The effect of monopoly has thereby been to increase the
relative wealth holdings of these families by about 20 percent. Fur-
thermore, it can be observed that mean wealth holdings of the
bottom 28 percent of families are again positive in the absence of
monopoly.
What seems apparent from this analysis is that the major im-
pact of monopoly lies in its effect on the relative wealth holdings
of the very wealthy: those with household net worth exceeding a
half million dollars in 1962. In the absence of monopoly their rela-
tive wealth positions would be much reduced.
From the statistics presented in Tables II and III, we can de-
rive Lorenz curves, which describe the degree of inequality in the
current distribution of household net worth as well as for the eight
alternate distributions. What is interesting about these Lorenz
curves is that there is a complete nesting among the various curves.
None of the curves intersects with any other. The Lorenz curves
found by assuming monopoly profits at 2 percent of GNP lie inside
the current Lorenz curve, while the four curves derived by assuming
that monopoly profits are 3 percent of GNP lie closest to the diag-
onal. This property is important for it means that whichever sum-
mary measure of inequality is chosen, the same ranking of distribu-
tions is preserved.
Resulting distributions of household net worth were also com-
puted on the alternate assumption that the elasticity of outlays
on
monopolized products with respect to total expenditures equals 1.5.
In this case expenditures on monopolized products are assumed to
increase sharply as total consumption expenditures
increase. When
these distributions were obtained, however, it was found that they
were very similar to those computed on the basis of our original
as-
sumption. In no case did the proportion of household net worth ac-
counted for by a specific size class differ from the corresponding
figure presented in Tables II or III by as much as a
single percentage
point. We concluded therefore that our findings
were not greatly
influenced by our original assumption regarding the distribution of
expenditures on monopolized products.
CONCLUSIONS
Monopoly gives rise to a stream of excess payments by con-
sumers, which extends over time and which is generally capitalized
by the original owners of the firm. It thereby contributes to the
process of wealth creation. In this paper we provide a model of this
process, which is then used to estimate the effect of monopoly on the
distribution of household wealth in the United States. Using this
model, we find that past and current monopoly has had a major im-
pact on the current degree of inequality in this distribution. While
we do not pretend that our estimates are accurate to a high degree
of precision, we believe that these results represent appropriate or-
ders of magnitude. Throughout, we have tried to be conservative so
as to understate the true impact of monopoly.
To be sure, these results depend crucially on the assumptions
and parameter estimates on which our model is founded. What seems
clearly required is further empirical research on these matters. In
particular, we need to know a good deal more about the size and
pattern of ownership of newly capitalized monopoly gains. In addi-
tion, we need to look more broadly at the many distributional con-
sequences of various forms and dimensions of monopoly. Only in
this manner can a sharper picture be obtained.
Despite the primary concern of economists with the resource
allocation effects of market arrangements, political officials are more
often concerned with distributive effects. More research on the
latter issue is therefore required to provide a more stable founda-
tion for policy judgments.
UNIVERSITY OF WESTERN ONTARIO
CORNELL UNIVERSITY

1975 - Comanor & Smiley, Monopoly & Distribution of Wealth

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Author(s): William S. Comanor and Robert H. Smiley

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1975 - Comanor & Smiley, Monopoly & Distribution of Wealth

1975 - Comanor & Smiley, Monopoly & Distribution of Wealth