03/25 Open Thread: Free Market Capitalism Leads to Oligarchy
Before I get started I will admit that I am not relying upon the work of noted economists. I consider that to be a good thing. Academic/theoretical economics is a grand farce, in which theory is largely made up out of whole cloth and then exalted over reality, facts, and empirical evidence. In theory, it should be an attempt to model reality, and, hence, I am relying upon the work of those skilled at so doing, mathematicians and physicists. This is not meant to belittle industrial economists, whose projections and predictions must have some semblance of accuracy lest they lose their job, unlike their academic brethren who can be consistently wrong for decades while steadfastly maintaining that this is indicative only of some failing of the real world.
I take for my text today a Scientific American article by Bruce M. Boghosian, a math professor with research interests in applied dynamical systems and applied probability theory. The Article,Is Inequality Inevitable?, subtitled Wealth naturally trickles up in free-market economies, model suggests appeared in the November, 2019 issue of Scientific American and may be found online here: https://www.scientificamerican.com/article/is-inequality-inevitable/ .The article notes the massive (and growing) wealth economy and suggests that the origins thereof may be understood by using "agent based" modeling which begins with two party transactions in which both parties try to optimize their own financial outcome. This model is intended to mimic so-called "Free-market" capitalist systems. Specifically, he asserts:
In particular, the affine wealth model (called thus because of its mathematical properties) can describe wealth distribution among households in diverse developed countries with exquisite precision while revealing a subtle asymmetry that tends to concentrate wealth. We believe that this purely analytical approach, which resembles an x-ray in that it is used not so much to represent the messiness of the real world as to strip it away and reveal the underlying skeleton, provides deep insight into the forces acting to increase poverty and inequality today.
After further discussion of some of the who, when and where of some of these models he states (my bold):
As it turns out, many such models find wealth moving inexorably from one agent to another—even if they are based on fair exchanges between equal actors.
It should be noted that in a perfectly even, perfectly fair exchange, there will be no net transfer of wealth, but this almost never happens, In the real world, one party almost always gets a "better" deal, and receives more wealth in exchange than they tender.)
AS an example, he states that the "yard sale" model not only inexorably concentrates wealth, but invariably leads to oligarchy ( To illustrate what drives this result, he proposes a casino game, wherein players initially ante $100 and the casino begins to flip a fair coin. If the player wins, they are paid 20% of their stake, and if they lose their stake is reduced by 17%. Superficially this seems like a win for the player with probable winnings of 0.5 x ($20) + 0.5 x (-$17) = $1.50, but this only applies, if at all, to the first flip. Over a continued series of flips the player is guaranteed to lose. If this is extended to a huge number of transactions by a huge number of pairs of individuals, each risking, per transaction, only a modest percentage of their wealth, it ends, after enough iterations, with a single oligarch holding all of the wealth. And, as in the real world, the lower a persons wealth at any time, the faster that wealth is transferred away from that individual. A critical point, to which I shall return later is that;
This outcome is especially surprising because it holds even if all the agents started off with identical wealth and were treated symmetrically. Physicists describe phenomena of this kind as “symmetry breaking” [see The Physics of Inequality below]. The very first coin flip transfers money from one agent to another, setting up an imbalance between the two. And once we have some variance in wealth, however minute, succeeding transactions will systematically move a “trickle” of wealth upward from poorer agents to richer ones, amplifying inequality until the system reaches a state of oligarchy.
A Mitigating Factor in the real world is wealth redistribution mechanisms. A modified model incorporated a variable factor to represent the combined new effect of a flat rate wealth tax for the wealthy and a compensatory subsidy for the poor. Adjusting the value of this factor allowed the refined models to track US and European wealth data between 1989 and 2016 to better than 2%. Yet another refinement was introduced to account for the fact that not everybody starts off with equal wealth and those with more wealth enjoy assorted economic advantages. This corrects for the built in initial error noted in the block-quote above where agents in the model all started off on an equal footing, which hasn't been the case since the flood if not before. The additional fudge factor allows for non-oligarchic, partially oligarchic and full on oligarchic outcomes and generates models which track empirical data yet closer than without it. It also explains the almost overnight descent into oligarchy of the prior SSRs after the 1991 breakup of the USSR.
Yet More Reality So far, we have massive numbers of "fair" transactions which plunge toward oligarchy at a rate that may be slowed or even stabilized by a wealth redistribution fudge factor and exacerbated by an initial inequality plus wealth privilege factor. Only the briefest look at the number of medical bankruptcies per annum in the US, or the great real-estate bubble scam of the recent past will make it clear that "negative wealth" is a very real thing in this sorry world of ours. That doesn't even address things like those fined into ever increasing debt by predatory courts and parole systems, etc. So, yet another fudge factor was introduced to allow for the existence of said negative wealth. The final triple factor model generally matched 2010 European wealth distribution to better than one-half of a percent, and matched the US to within one-sixth of a percent over three decades.
So, with all these refinements and astounding accuracy in matching empirical data, what, pray tell is the conclusion?
We find it noteworthy that the best-fitting model for empirical wealth distribution discovered so far is one that would be completely unstable without redistribution rather than one based on a supposed equilibrium of market forces. In fact, these mathematical models demonstrate that far from wealth trickling down to the poor, the natural inclination of wealth is to flow upward, so that the “natural” wealth distribution in a free-market economy is one of complete oligarchy. It is only redistribution that sets limits on inequality.
I'm not going to belabor the point; the last four paragraphs of the article are quite telling, significant and, frankly, scary. Even the author says that the results of their studies constitute a Call to Action.
DO READ this article. Yes, there is math, and Greek letters, but it is relatively simple and direct and you don't really have to fully grok the math to comprehend what is being said and presented, how it works and all that it implies.
Piled Higher and Deeper: as is not uncommon for these articles, there is appended some suggested further reading;
A Nonstandard Description of Wealth Concentration in Large-Scale Economies. Adrian Devitt-Lee et al. in SIAM Journal on Applied Mathematics, Vol. 78, No. 2, pages 996–1008; March 2018., and
The Affine Wealth Model: An Agent-Based Model of Asset Exchange That Allows for Negative-Wealth Agents and Its Empirical Validation. Jie Li et al. in Physica A: Statistical Mechanics and Its Applications, Vol. 516, pages 423–442; February 2019.
Also, without going that far afield, suggested reading from the Scientific American archives is: A Rigged Economy. Joseph E. Stiglitz; November 2018.
have a good one
Title Image is Income)Inequality
It's an open thread, so have at it. The floor is yours