Is Economic Inequality Inevitable?

Income inequality is a big problem in the U.S. and increasingly so as the chart below highlights (click to enlarge). There are many possible reasons for this, including regressive tax policies, deregulation, weaker unions, globalization, access to education, eroding transfer payments (social security and unemployment benefits), etc.    

But what if we cleared the deck and started anew, giving everyone the same starting wealth? Would we be able to mold a more egalitarian economy? No, I'm not taking about the Bolshevik model, which replaced "unequal share of blessings with equal sharing of miseries" (to quote Churchill). I'm thinking more of the "Yard Sale" model, a mathematical framework of free-market economics that, with a few tweaks, accurately predicts wealth distributions in the U.S. and Europe. Bruce Boghasian has a  fascinating article in Scientific American magazine about the economic work he and other physicists (yes, physicists) are doing. 

The Yard Sale model was introduced by Anirban Chakraborti, an Indian physicist, in 2002. It mimics real one-on-one economic transactions as the box below shows (click to enlarge) and helps explain "the movement and distribution of wealth [arising] from pairwise transactions among a collection of economic agents."  

Imagine an economy with 1,000 individuals. Assume everyone has $100 to start with. Assume a fair coin flip determines the winner/loser in any transaction as defined above. Also assume every time you "win"/"lose" in a trade your wealth rises/ falls 20%. Now "choose two agents at random and have them transact, then do the same with another two, and so on. [The] model assumes sequential transactions between randomly chosen pairs of agents...[conducting] millions or billions of such transactions in our population of 1,000."

To better approximate reality the researchers added a constraint. As Boghasian writes "people have a natural aversion to going broke, so we assume that the amount at stake, which we call Δω...is a mere fraction of the wealth of the poorer person, Shauna. That way, even if Shauna loses in a transaction with Eric, the richer person, the amount she loses is always less than her own total wealth." 

What happens? Well, after a large number of transactions, "one agent ends up holding practically all the wealth of the economy, and the other 999 end up with virtually nothing[!]" Every time! Any single agent in this economy could have become the oligarch (in that sense, there was an equality of opportunity). But only one does.

This outcome may be surprising because all the agents started off with identical wealth and were treated symmetrically (implying equal abilities and opportunities). But even in this stylized economy it boils down to the tyranny of math. "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." In another words the natural condition is trickle up economics! Now imagine our economy as it is with huge disparities between economic agents, individuals, households, companies, etc.  

To test how this framework would predict reality Boghasian and colleagues incorporate starting wealth disparity and introduce parameters such as taxes (χ) and privilege (ζ). The concept of privilege is represented by biasing coin flips in favor of wealthier individuals.   

They find that whenever the influence of wealth-attained advantage exceeds that of redistribution (taxes), you get more inequality and vice versa. Remarkably, extending the Yard Sale model by just those two-parameter (χ and ζ) the researchers were able match empirical data on U.S. and European wealth distribution between 1989 and 2016 to within 2 percent!!!

The implications are huge. If the natural tendency of wealth is to flow from the poor to the rich in a free-market economy, then public policies geared towards "trickle down" economics are futile, even under the best of intentions. But is higher income taxes the answer? Perhaps not, because taxes focus on income rather than wealth. To solve for that progressive politicians, like Warren, have proposed a wealth tax on the rich. Is that radical or new? Mosaic Law exhorts the Israelites to tithe (Deuteronomy 14:20) and the Quran obligates Muslims to pay zakat. So, no. But in fairness wealth tax, unless voluntary, is difficult to administer and enforce and complicated. So a myriad of public policies, taxes, regulation, affordable-education, etc. will likely be necessary to reverse the inequality trend.