Michael Battalio


Friday, June 26, 2015

Discussions on Wealth (part 7): Chapter 4: summary 1

This discussion on wealth is an offshoot of  Serious Conversations parts 53 and 54.  We are considering the book  The Origin of Wealth by Eric D. Beinhocker.  (I do not profit from clicks).  (Ed.:  we will be taking the general format of outlining the major points of the chapter and then discussing what we believe to be important or intriguing points.)

A simple computer model (Sugar-scape) was developed by Epstein and Axtell to understand how economies form.  This model created an environment with an island of sugar and consumers that moved across the fictional land that must eat the sugar to survive.  A simple set of mathematical rules determined how much each “agent” harvested, consumed, stored, and required during each time step.  Abilities of metabolism (how quickly each agent consumed sugar) and vision (how far away the modeled person could see the sugar) as well as location of “birth” (either on the island of sugar or in deserts outside of the main deposits of sugar) were randomly assigned.  Additionally, all occupants of the Sugar-scape could store a given amount of sugar for use if they encountered an area devoid of sugar.  Finally, if an agent ran out of sugar, they died and were removed from the model.
Due to random distribution of talent and location, the wealth decently fit a bell curve at the beginning of the simulation.  However, over time a few agents became super wealthy.  The middle class (the peak of the bell curve at the beginning) was destroyed, and the poor greatly outnumbered the middle and upper classes.  This distribution fits the Pareto distribution, whereby 80% of the wealth is owned by 20% of the people and is close to the distribution of wealth in the real world.

The reason that the skewing of the distribution occurs is not because of any one property of the system.  The genetic qualities or location alone do not determine the final state of wealth.  It is a combination of factors including and especially luck.  Two identically gifted agents can have different outcomes depending on the luck of their first moves.  One could embark randomly in the direction of a far away large deposit of sugar outside of their range of vision and the other one could move away it.  This spreading of outcomes is called horizontal inequality (and is not realized in traditional economics [two identical agents should end up with identical wealth]).  Here, randomness sends the agents in two different directions, but due to how the system is devised, those different directions diverge quickly (i.e. one agent gets wealthy because they migrated toward the sugar and one dies because they moved away from the sugar), which leads to skewed result.  (This is a chaotic result [ed. see future entires on Chapter 5].)  

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