On the rise and fall of class societies

This paper develops a theoretical framework to investigate potential forces behind the rise and fall of class societies. Due to the nonconvexity of investment and credit market imperfections, only those who inherited relatively large wealth can set up firms and become employers. The equilibrium dynamics is described by the joint evolution of the wage rate, the vertical division of labor between employers and workers, and the distribution of household wealth. For some parameter values, the model predicts the rise of class societies, where the households are permanently separated into the two classes in any steady state. The rich bourgeoisie maintain a high level of wealth due to the presence of the poor proletariat, which has no choice but to work at a wage rate strictly lower than the “fair” value of labor. For other parameter values, the model predicts the fall of class societies, where job creation by the rich employers pushes up the wage rate so much that the workers will escape from the poverty and eventually catch up with the rich. Thus, the wealth created by the rich trickles down to the poor, and, in the steady state, the inequality disappears. The effects of self-employment are also discussed using this framework