For all tested models, accurate or not, wealth invariably flows to a top few, with most people winding up with less or even in poverty unless government steps in and diverts wealth flow to the top. What wealth distribution models finally show depends on what assumptions are built into them. The accurate models give a very good measure of (1) current wealth inequality, (2) the reasons for the degree of inequality and (3) the chances of winding up at the top or bottom. The fundamental insight is this: Markets are like casinos that we cannot leave and it is a proven fact that the longer a person stays and plays in a casino, the higher their chances of losing. That is the reality of market economies for everyone.
The basic wealth flow model points to a situation where, for each economic transaction a person, company, group or nation makes, both parties to the transaction are equal in all respects, including power, knowledge, ability, intelligence, social situation and everything else. Obviously that does not come close to reflecting reality, e.g., poor people have less power and usually less information than most or nearly all companies and rich people. The end result of the pristine "libertarian" model (my term, not anyone else's) is pure oligarchy where rich people have almost all the wealth and power. That seems to accord with semi-current (2010) data.
Refined market models & three truths about them
If the models are correct, wealth tends to trickle up and various factors weigh against against most people, including being born poor, i.e., markets are not fair, and success is not based on just hard work.
That raises questions:
1. Are the models just baloney and of no relevance to the real world, e.g., increasing wealth of rich people and entities does not necessarily cause wealth to trickle down?
2. If the models are right, should government help to distribute wealth down to counteract it's innate mathematical tendency to trickle up?
3. Are the scientists right that it is only redistribution by government that sets limits on inequality, or would wealthy interests limit inequality on their own, e.g., in the name of fairness and/or something else?
The researchers refined their model by incrementally including three factors. Including each factor one at a time made the models outputs more and more accurate until they were essentially the same as reality. That is about as good as it can get for models of reality.[1]
If you add to the model three factors, it predicts reality about as close as mathematical models can get. The three factors account for:
1. Taxes, subsidies and inherent advantages that wealthy people and entities have over regular people, e.g., lower cost of borrowing and more knowledge for wealthy people and legal entities compared to regular people;
2. Initial wealth advantage, e.g. a person inherits at least $400 million from dad or any other source; and
3. Negative wealth, which reflects the drag on upward economic mobility from a person owing more than their assets are worth.
With all three factors in the model, the researchers describe their results like this:
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. ..... Any single agent in this economy could have become the oligarch—in fact, all had equal odds if they began with equal wealth. In that sense, there was equality of opportunity. But only one of them did become the oligarch, and all the others saw their average wealth decrease toward zero as they conducted more and more transactions. To add insult to injury, the lower someone's wealth ranking, the faster the decrease. ..... In the long run, all participants in this economy except for the very richest one will see their wealth decay exponentially. ..... In fact, these mathematical models demonstrate that far from wealth trickling down to the poor, the natural inclination of wealth is to flow upward, so that the “natural” wealth distribution in a free-market economy is one of complete oligarchy. It is only redistribution that sets limits on inequality. 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).
If the models are correct, wealth tends to trickle up and various factors weigh against against most people, including being born poor, i.e., markets are not fair, and success is not based on just hard work.
That raises questions:
1. Are the models just baloney and of no relevance to the real world, e.g., increasing wealth of rich people and entities does not necessarily cause wealth to trickle down?
2. If the models are right, should government help to distribute wealth down to counteract it's innate mathematical tendency to trickle up?
3. Are the scientists right that it is only redistribution by government that sets limits on inequality, or would wealthy interests limit inequality on their own, e.g., in the name of fairness and/or something else?
Footnote:
1. In real life, there's usually or always a caveat(s) or exception(s). In this case, the caveat is the fact markets are a complex adaptive system, discussed here before. That means there necessarily is inherent unpredictability and even models that give great results now can, and must be, be wrong sometime in the future. That does not negate all of the value of (a) short-term predictions, or (b) modeling of data based on the past. It just injects some caution.
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