Posted on 03/12/2005 3:57:43 PM PST by snarks_when_bored
Why it is hard to share the wealth
* 09:15 12 March 2005
* Exclusive from New Scientist Print Edition
* Jenny Hogan
|
|
The rich are getting richer while the poor remain poor. If you doubt it, ponder these numbers from the US, a country widely considered meritocratic, where talent and hard work are thought to be enough to propel anyone through the ranks of the rich. In 1979, the top 1% of the US population earned, on average, 33.1 times as much as the lowest 20%. In 2000, this multiplier had grown to 88.5. If inequality is growing in the US, what does this mean for other countries?
Almost certainly more of the same, if you believe physicists who are using new models based on simple physical laws to understand the distribution of wealth. Their studies indicate that inequality in market economies may be very hard to get rid of.
Economists will join physicists to discuss these issues next week in Kolkata, India, at the first ever conference on the "econophysics" of wealth distribution. "We are interested in understanding whether there is some kind of social injustice behind this skewed distribution," says Sudhakar Yarlagadda of the Saha Institute of Nuclear Physics (SINP) in Kolkata.
It is well known that wealth is shared out unfairly. "People on the whole have normally distributed attributes, talents and motivations, yet we finish up with wealth distributions that are much more unequal than that," says Robin Marris, emeritus professor of economics at Birkbeck, University of London.
Pareto's law
In 1897, a Paris-born engineer named Vilfredo Pareto showed that the distribution of wealth in Europe followed a simple power-law pattern, which essentially meant that the extremely rich hogged most of a nation's wealth (New Scientist print edition, 19 August 2000). Economists later realised that this law applied to just the very rich, and not necessarily to how wealth was distributed among the rest.
Now it seems that while the rich have Pareto's law to thank, the vast majority of people are governed by a completely different law. Physicist Victor Yakovenko of the University of Maryland in College Park, US, and his colleagues analysed income data from the US Internal Revenue Service from 1983 to 2001.
They found that while the income distribution among the super-wealthy - about 3% of the population - does follow Pareto's law, incomes for the remaining 97% fitted a different curve - one that also describes the spread of energies of atoms in a gas (see graphic).
Gas analogy
In the gas model, people exchange money in random interactions, much as atoms exchange energy when they collide. While economists' models traditionally regard humans as rational beings who always make intelligent decisions, econophysicists argue that in large systems the behaviour of each individual is influenced by so many factors that the net result is random, so it makes sense to treat people like atoms in a gas.
The analogy also holds because money is like energy, in that it has to be conserved. "It's like a fluid that flows in interactions, it's not created or destroyed, only redistributed," says Yakovenko.
Yakovenko also found that the total income of those in the poorer part of the distribution did not change significantly with time after accounting for inflation. But incomes for those in the Pareto curve shot up nearly five times from 1983 to 2000, before declining with the US stock market crash of 2001.
Class jumping
This, along with research data from other countries, suggests that there are two economic classes. In one, the rich grow richer while in the other the poor stay poor. Yakovenko explains this by going back to the analogy of atoms in a gas.
The atoms assume an exponential distribution of energy when they are in thermal equilibrium, and pushing the gas away from this state takes a lot of energy and it could prove similarly difficult to shift an economy to a different state. Randomness in the model does, however, mean that individuals can jump from one class to another.
"It suggests that any kind of policy will be very inefficient," says Yakovenko. It would be very difficult to impose a policy to redistribute wealth "short of getting Stalin", says Yakovenko, who will talk in Kolkata next week.
Saving plans
A more sophisticated model developed by Bikas Chakrabarti of the SINP and his colleagues paints a slightly less bleak picture for the poor. His team adjusted the gas model to allow people to save various proportions of their money.
This model predicts both the wealth classes that Yakovenko found. It also suggests that if you save more you are more likely to end up rich, although there are no guarantees. Changing people's saving habits could be an effective way of making the wealth distribution fairer, rather than enforcing taxes, says Chakrabarti, who is one of the Kolkata conference organisers.
Macroeconomist Makoto Nirei at Utah State University in Logan, US, whose own work will be presented at the conference, is supportive of the physicists' work but he has reservations about how they model the exchange of money. "The model seems to me not like an economic exchange process, but more like a burglar process. People randomly meet and one just beats up the other and takes their money."
Other economists warn it is too early to use such models to inform policies. "The models are too abstract," says Thomas Lux, an economist at the University of Kiel in Germany. But J. Doyne Farmer, a physicist from the Santa Fe Institute in New Mexico, US, points out that these models have their place: "Many economic theories don't even come close to producing the wealth distribution we see, and if you can't produce that you're dead in the water."
Macroeconomist Makoto Nirei at Utah State University in Logan, US, whose own work will be presented at the conference, is supportive of the physicists' work but he has reservations about how they model the exchange of money. "The model seems to me not like an economic exchange process, but more like a burglar process. People randomly meet and one just beats up the other and takes their money."
If the physicists are able to get this right, they might render even more implausible current theories of re-distributive justice (buh-bye to John Rawls).
The top 3% are not the "super-wealthy."
Maybe the top 0.03%
I'm inclined to agree that 3% seems a bit high for the 'super-wealthy'. I'd like to see their cut-off point for that classification.
And if other countries wanted to eliminate their poverty the same way, the pathway is open to them. But that never gets reported.
As long as they disclose the definitions they are using, they can define "super wealthy" any way they want to.
"People on the whole have normally distributed attributes, talents and motivations, yet we finish up with wealth distributions that are much more unequal than that,"
This is exactly the reason there are so many unemployed and homeless anesthesiologists on the streets of America. They are such an EYESORE!!!
Exactly our poor for example can afford so much food that they have an epidemic level of obesity.
Also we've been putting in wealth redistribution schemes and socialism for a generation. In that generation the long term trend of the poor rising in living standards relative to the rich, basically reversed.
All these taxes hurt the middle class not the rich, who have a million ways out of them - and the contacts to win the big government contracts. And they actually prevent average people from becoming rich, as its very difficult to overcome all of the barriers put in place.
Mao, Pol Pot and Stalin did a great job of fighting this horrible concentration of wealth.
Under their enlightened stewardship, 99% of their people had equal wealth.
So? Why would we want to? Bill Gates 43 billion does not make my share any less so why should I care.
I have enough for my needs and many of my wants. His having more does not mean that I have less. It just means that he has more.
That's a lot of lotto winners to increase the number of wealthy.
The premise that getting rid of economic inequality would be a "good thing" is naive and even nuts, but typical of socialists.
The fact is that economic inequality is a VERY good thing. It is an essential thing, a fundamental thing, and a natural thing; it is a thing to be welcomed, celebrated and gloried in.
In all societies, including the most brutal dictatorships, there are tops, bottoms and in=betweens. In a free society, the people in those categories change, and the changes are largely based on merit. In unfree societies, only the labels change. (Consider the lack of progress for most people in Russia when their category changed from "serf" to "comrade.")
Congressman Billybob
It is well known that wealth is shared out unfairly. "People on the whole have normally distributed attributes, talents and motivations, yet we finish up with wealth distributions that are much more unequal than that," says Robin Marris, emeritus professor of economics at Birkbeck, University of London.
----
what an idiot... it is not 'talent' nor 'motivation' but REAL ECONOMIC VALUE ADDED that should determine *INCOME*.
The fact that the top 1% makes say 88 times the top X% may be perfectly fair... if Garth Brooks has 88 times the audience of the Austin Geezenslaws, yes, he *deserves* that much more in income.
SO THE REAL FOCUS SHOULD BE ON ECONOMIC VALUE ADDED.
For example, if they can determine the economic value add of a good CEO of a Fortune 500 company... or the economic value add of A-Rod, or of Madonna, or Jerry Seinfeld, or a top heart surgeon, etc. *then* they'd be getting somewhere.
Wealth is accumulated capital via either work income or investment income, which can further take you from the equalization of 'talent' and 'motivation', since much is determined by habits of SAVINGS and INVESTMENT. ... His above comment is utter nonsense.
The old zero sum game. Wealth can be and is created.
It doesn't take a physicist nor economist to see that the rich have it better than the poor. The rich can use money to make money. The poor can't, unless they barely subsist in order to save over a long period of time.
The secret is to keep the playing field level so that each is equal under the law and has equal opportunity to use whatever individual talents he may have.
If even one poor person becomes rich that is proof that many could given the opportunity and effort. It is certainly not fair to tax most of it away after his having achieved so much. Even those who inherit deserve to keep what someone worked hard to earn and willingly left it to them.
bookmark
Horsepucky.
People are unique and have widely varying combinations of atributes, talents, motivations, etc. It is difficult to see how these can be "normalized" except in the frenzied brain of a socialist acedemic. The real world does not see it the way Mr. Marris does, and hence it does not respond with a wealth distribution curve fitting Mr. Marris' notions.
Viva the real world!
Their studies indicate that inequality in market economies may be very hard to get rid of.So? Why would we want to? Bill Gates 43 billion does not make my share any less so why should I care.
I have enough for my needs and many of my wants. His having more does not mean that I have less. It just means that he has more.
You put your finger on something there. If wealth is a conserved and unchanging quantity (such as the energy of a gas in a perfectly isolated container), then the level of wealth accumulation of Bill Gates does in fact diminish your opportunity to accumulate wealth. However, if wealth is being continually created, it's a different picture. The analogy with the gas might be that the container is being heated by an external energy source.
Is that wealth creation? Or maybe poop creation? (laugh)
It's only how we keep score.
If someone from the street could break into Bill Gates' house and steal all his money, in six months Gates would be rich, and the thief would be poor.
It's the same if the government does the stealing.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.