Why there are oligarchs
Do we need them?
Years ago it seemed like Second Life was rife with libertarians claiming to be for free markets and against taxation (men with guns coming to take your money) and against regulation.
Ayn Rand was sacred almost to them.
They were saying that there never has been a free market because government has always intervened in various ways, but we should strive towards a free market in principle.
I was arguing that in principle there cannot be a free market because markets tend to concentrate all wealth in a few hands.
The argument is pretty simple. In any transaction, the person with more money or power has an advantage and over time that advantage grows so that a few people become very rich and most become poor in comparison.
At the time I read of a computer simulation that demonstrated that.
Lately I read an article by Philip Rosedale, the founder of Second Life about a simulation he wrote recently that demonstrates the idea graphically. The article is here:
and the simulation is here:
(he even shows his code:-) The simulation starts with many equal participants (represented by colored disks on the screen) that move about at random and collide with each other.
At each collision a fair transaction occurs. He tells us:
To make these transactions random and unbiased, imagine it goes like this: Pick a random amount of money that is less than the amount held by the poorer of the two. Then flip a coin to determine who gives that amount to the other. That’s all there is to it."
But there is a subtle asymmetry in the situation. He puts it this way.
"Specifically, the problem is the requirement that the amount of money to be risked (or gained) is no more that the balance of the poorer person. What this means is that the poor can gain no more than their own value in a transaction, where the rich stay rich because no one transaction will measurably decrease their spending power. Putting it another way: all else being equal, the person with more money going into a transaction will (statistically speaking) come out on top. "
Rosedale was inspired to do his simulation by an article from Scientific American that is found here:
The article is long and pretty detailed but clear. At the end it gets into some simple math.
In an extension of the simple model Rosedale worked with, the researchers
had each agent take a step toward the mean wealth in the society after each transaction. The size of the step was some fraction chi (or "chi") of his or her distance from the mean. This is equivalent to a flat wealth tax for the wealthy (with tax rate chi per unit time) and a complementary subsidy for the poor. In effect, it transfers wealth from those above the mean to those below it. We found that this simple modification stabilized the wealth distribution so that oligarchy no longer resulted.
the researchers biased the coin flip in favor of the wealthier individual by an amount proportional to a new parameter called zeta. What they found is that in their model if zeta was greater than chi"
. . . The inclusion of wealth-related bias also yields - and gives a precise mathematical definition to—the phenomenon of partial oligarchy. Whenever the influence of wealth-attained advantage exceeds that of redistribution (more precisely, whenever zeta exceeds chi), a vanishingly small fraction of people will possess a finite fraction, 1 - chi/zeta, of societal wealth.
The onset of partial oligarchy is in fact a phase transition for another model of economic transactions, as first described in 2000 by physicists Jean-Philippe Bouchaud, now at Ecole Polytechnique, and Marc Mezard of the Ecole Normale Superieure.
In our model, when zeta is less than chi, the system has only one stable state with no oligarchy; when zeta exceeds chi, a new, oligarchical state appears and becomes the stable state [see graphic on webpage].
The two-parameter (chi and zeta) extended yard sale model thus obtained can match empirical data on U.S. and European wealth distribution between 1989 and 2016 to within 1 to 2 percent.
. . . .A state with zeta less than chi is not a partial oligarchy, whereas a corresponding state reversed [that is, zeta is greater than chi] is.
. . . A plot of 14 countries served by the European Central bank in the chi-zeta plane shows most lie near the diagonal. All except one (the Netherlands) lie just above the diagonal indicating they are just slightly oligarchical. It may be that inequality naturally increases until oligarchies begin to form, at which point political pressures set in preventing further reduction of equality.
. . . The mathematical models also call attention to the enormous extent to which wealth distribution is caused by symmetry breaking, chance and early advantage (from, for example, inheritance).
And the presence of symmetry breaking puts paid to arguments for the justness of wealth inequality that appeal to "voluntariness" - the notion that individuals bear all responsibility for their economic outcomes simply because they enter into transactions voluntarily - or to 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 percent by a statistical model that completely ignores them. Luck plays a much more important role than it is usually accorded, so that the virtue commonly attributed to wealth in modern society - and, likewise, the stigma attributed to poverty - is completely unjustified.
Moreover, only a carefully designed mechanism for redistribution can compensate for the natural tendency of wealth to flow from the poor to the rich in a market economy.
Redistribution is often confused with taxes, but the two concepts ought to be kept quite separate. Taxes flow from people to their governments to finance those governments' activities.
Redistribution, in contrast, may be implemented by governments, but it is best thought of as a flow of wealth from people to people to compensate for the unfairness inherent in market economics.
In a flat redistribution scheme, all those possessing wealth below the mean would receive net funds, whereas those above the mean would pay. And precisely because current levels of inequality are so extreme, far more people would receive than would pay.
Sounds pretty close to a UBI to me.
And as a good friend points out to me, the UBI isn't really a challenge to capitalism per se. It seems to be rather a tool that can be used to make it so oligarchs don't emerge.
My hope is that it's an idea that would be corrosive to oligarchs.
I expect them to resist.
What do you think?