Sun Nov 27th, 2005 at 10:59:52 PM EST
Reading Migeru's 11/13 diary on "Division of labour and comparative advantage: what linearity hides in economics", I was reminded of another paper on macroeconomics, this one written by Jean-Philippe Bouchaud and Marc Mézard, "condensed matter" physicists who attempt to explain Pareto's principle "using both a mapping to the random `directed polymer' problem, as well as numerical simulations".
I was interested in what seemed to be the striking implications of the paper, primarily that "the basic inequality in wealth distribution seen in most societies may have little to do with differences in the backgrounds and talents of their citizens. Rather, the disparity appears to be something akin to a law of economic life that emerges naturally as an organizational feature of a network."
- a minority of people in any society will inevitably wind up with a disproportionately large amount of th wealth ("Chop off the heads of the rich, and a new rich will soon take their place");
- increasing the "temperature" of an economy (i.e. how easy it is to trade in that economy) enables "wealth to flow easily from one person to another, tending to spread money more evenly"
- increasing the "E" exponent in Pareto's law, which corresponds to a larger number of people in the society possessing more shares of the wealth, can be achieved though higher taxes that are redistributed "evenly", as well as by increasing the amount of money flowing throughthe system and how often it changes hands.
As a very very lay layperson both in economic as well as in physics, I am in no position to judge the merits, or even the novelty, of the Bouchaud and Mézard's work. I did notice, however, that after an initial spate of interest in the popular science press, it all sort of fizzed out. So naturally I wondered if perhaps the emperor had no clothes on after all.
If anyone is familiar with this paper or this work, I would be grateful to hear your opinions on them.
(I originally read about their 2000 paper, "Wealth condensation in a simple model of economy", in an article titled "That's the way the money goes" by Mark Buchanan in New Scientist and found another article titled "Wealth Distribution and the Role of Networks" also by Buchanan in HBS Working Knowledge (unfortunately, the maths in the original paper are way above my head, as was much of the more mathematical content in Migeru's diary... so sad, i know. One page that contains several useful links is Peter Kaminski's entry on Wealth Distribution.)