Michael Battalio

Friday, July 17, 2015

Discussions on Wealth (part 8): Chapter 4: summary 2

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.)

The beginning of Chapter 4 described a model environment filled with sugar that was consumed by model agents whose location and “genetics” were randomly assigned.  After some time an initially purely random distribution (i.e. Gaussian) of wealth becomes concentrated in just a few members due to luck.  Continuing the with Ch. 4 summary:

Introducing reproduction widened the wealth gap and also led to feasts and famines.  Two agents were allowed to generate a third, new agent with combinations of talents from both parents if both parents had large enough wealth.  The population oscillated around the carrying capacity of the island of sugar.  At some times there would be an abundance of sugar due to low population, which led to a birth explosion that overwhelmed the island resources.  This in turn led of a die off only to have the cycle repeat.  Natural selection also occurred, and the vision and metabolism on average increased as the better gifted were more apt to survive, while the less gifted died during the famines.
Including a second commodity (spice) and trade between the two increased the wealth overall (as trading effectively increases the carrying capacity of the island).  The wealth gap also increased as the luck of some of the wealthy continued while others dropped from the ultra wealth due to the new spatial distribution of the second commodity.
The Sugaarscape model highlights problems in traditional economic theory.  The trading price never hits the equilibrium point where the demand and supply curves cross.  The law of one price is broken because trades must occur over time and distance, so the exchange rate of sugar to spice can be different across the model at the same time.  Sugarscape operates at less than Pareto optimality.  (e.g.  There are always trades that could have happened that would have increased the happiness of the group but didn’t due to the inaccessibility of the board to all entities simultaneously.)  This is due to the time efficiency of bilateral trading instead of auctions.  (e.g. You wouldn’t wait for an auction every time you wanted to buy milk.)
By allowing borrowing and lending, middlemen emerged who did both (they became banks), surviving off of trades rather than harvesting.  Other financial institutions evolved including institutional investors, investment banks, merchant banks.
2003-2016 Michael Battalio (michael[at]battalio.com)