My jaw is on the ground after reading a short article in the November Scientific American titled “The Inescapable Casino.”
In a market economy, slight imbalances in prices will inexorably accumulate all the chips into the hands of a few – oligarchy. As I understand it, the authors’ simple mathematical model describes actual inequality around the world to .33%.
Imagine a group of people at a yard sale all starting with $100 in wealth. They then begin random transactions with each other which have a moderate imbalance – they either gain or lose a bit more than the real value of an object.
Flipping a coin, we either gain 20% or lose 17% of our total wealth in a given transaction. All of us would take that bet, no? But watch what happens, on average, in ten transactions: 1.2x1.2x1.2x1.2x1.2x.83x.83x.83x.83x.83 = 98. After ten transactions, we retain 98% of our $100 wealth, which is true on average for everybody at the yard sale. As I understand it, the $2 loss flows to a few people who get lucky (or slightly enhance their luck by inventing Microsoft) – rinse and repeat through trillions of transactions.
The authors’ mathematical model very closely describes wealth redistribution after the collapse of the Soviet Union. Remarkably quickly oligarchy arose with huge imbalances of wealth.
If we are the lucky bear positioned at the fastest part of the stream where we benefit from the greatest volume of transactions, we will be the Walmart of salmon fishing.
The authors argue that the natural flow of wealth upwards can achieve phase changes similar to water boiling. “the presence of symmetry breaking . . . . [denies] the idea that wealth accumulation must be the result of cleverness and industriousness. It is true that an individual’s location on the wealth spectrum correlates to some extent with such attributes, but the overall shape of that spectrum can be explained to better than 0.33% by a statistical model that completely ignores them.”
“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.” Go Bernie.