Wednesday, May 16, 2012

Prosperity creates poverty

“Capital is that part of wealth which is devoted to obtaining further wealth"- Alfred Marshall

Continuing from my previous post, where we saw that the same wealth distribution patterns across time and across cultures, you'd wonder what causes this. Is it a result of how we as people are, how we interact and how are economic systems function? Can we create a mathematical model that is based on human behavior as it relates to money and would it give us the same distribution?

People engaging with each other and exchanging something of value is very similar to particles bumping into each other and exchanging energy - a basic thermodynamic system that has been studied in a good amount of detail by physicists. You could run a simulation with a large number of people who all start of with the same amount of money. Then they engage with each other at random, exchanging a random amount of their money at each interaction. At the end of a number of iterations, the wealth distribution will be similar to distribution above - with the poorest 10% having 2% of the wealth and the richest 10% having 24% of the wealth. This is roughly what you'd see if you spread everyone evenly between the poorest and the richest person, that is without a huge amount of inequality.

To make the system behave more like normal people do, let's add another condition - that the richer person will never offer up for exchange more than what he could get from the poorer person. After you take this system through a number of iterations, the results are completely different - there are many poor people, with the wealth concentrated among the few rich.


Remarkably, a basic wealth maximization condition makes this system quite similar to the real world. Now that we have a sandbox that works quite like the real world, we can ask some questions, introduce certain changes and see what the results are.

Is the world really a zero sum game?
Can the poor actually carry out their wealth maximization objective?
Would forcibly removing the wealth maximization objective lead to prosperity?


2 comments:

  1. I remember you had always wanted study this phenomenon. Very interesting results. What if you added a condition that one needs to at least a minimum amount for basic survival. I think you'll find that the model skews even quicker. The amount discretionary income/wealth is key to future growth of wealth. for eg. a poor person doesn't have any savings so can't grow wealth and vice versa for a rich person

    I'm also interested in the number of iterations it takes for the skewing to occur. That could be a proxy for the number of generation or years it takes for wealth to concentrate

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  2. You're right in that if you add the condition of minimum wealth, then the wealth skew happens even faster.

    You start seeing the skew after around 300 iterations - and these iterations might be more representative of transactions, rather than generations. Interestingly, the more iterations you run, the more pronounced the distribution skew is. In the real world, generally the more developed a country is, the more wealth is concentrated amount the wealthiest.

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