It did. If you invest $1 Million but someone else invested $1 Billion, and you both made a 25% return, the wealth gap between you still widened fairly drastically. And it gets much worse when people have no investments at all.

Ok, let me rephrase: top 1% had 23% of wealth in 1989 to invest. The next 9% had 37%. If, say, all of them were equally "smart" investors (just different starting positions), for every 1 billion of investment from the top 1%, you get roughly 1.7 billion investment from the next 9%, and their returns are proportional as well. The fact that this 1.7 billion is distributed across 9x more people should not matter in the big picture.

The proportional wealth gap of these groups (not individuals in each of the groups) should stay the same, and even the absolute gap should decrease (on 25% return, one group earns 0.25 billion and the other earns 0.42 billion, thus decreasing the gap by 0.17 billion).

I could understand the argument that the top 1% are smarter investors (though my butt-feel disagrees :), or that the next 9% have less non-tied funds available for investment, but you haven't brought those arguments: you even mention the same returns on their proportionally smaller investments.

So how did the top 1 to next 9 go from 23:37 to 32:38? It does not flow from your initial or subsequent argument, or am I missing something?