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Network logic But might there be a more general perspective – a general science that would illuminate the basic forces that lead to wealth inequity? Conventional economic theory has never managed to explain the origin of Pareto’s universal pattern. Ironically, however, a pair of physicists, venturing across interdisciplinary lines, has recently done so. To understand their thinking, forget for the moment about personal ingenuity, intelligence, entrepreneurial skills and the other factors that might clearly influence an individual’s economic destiny. Instead, take one step into the abstract and think of an economy as a network of interacting people and focus on how wealth flows about in this network. That’s the way the money goes Each of us has a certain amount of wealth and, over the days and weeks, this amount changes in one of two fundamental ways. Your employer pays you for your work; you buy groceries; you build a fence to keep in the dog; you take a holiday in Tuscany. Transactions of this sort form the bread-and-butter of our daily economic lives, and serve to transfer wealth from one person to another along the links in the network. This is one mechanism by which our wealth goes up or down. When wealth flows from one person to another, however, the total amount doesn’t change. And yet wealth can also be created or destroyed. Say you purchased a house in the UK in 1995. Today, you are probably happy to see that its value has skyrocketed in the recent real-estate boom. Your total wealth has gone up. On the other hand, in 1998, you may have invested some spare cash into the stock market – perhaps even buying shares in Enron or Worldcom – and gone on to read the daily newspapers with a sense of unfolding doom. Investments lead both to the creation and the destruction of wealth. From this extremely simple perspective, then, two basic factors control the dynamics of wealth. This is hardly contentious, and it may also seem unworthy of consideration. Yet, as physicists Jean-Philippe Bouchaud and Marc Mézard of the University of Paris have recently 108 Demos
The science of inequality shown, the interplay of these two basic forces goes a long way to determining how wealth is distributed. 5 For a network of interacting individuals, Bouchaud and Mézard formulated a set of equations that could follow wealth as it shifts from person to person, and as each person receives random gains or losses from his investments. They also included one further feature to reflect the fact that the value of wealth is relative. A single parent trying to work and raise her son might face near ruin over the loss of a £20 note; in contrast, a very rich person wouldn’t flinch after losing a few thousand. In other words, the value of a little more or less wealth depends on how much one already has. This implies that when it comes to investing, wealthy people will tend to invest proportionally more than the less wealthy. The equations that capture these basic economic processes are quite simple. However, there is a catch. For a network of many people – say, 1,000 or more – the number of equations is similarly large. For this reason, a model of this sort lies well beyond anyone’s mathematical abilities to solve (and this explains why it has not appeared in conventional economics). But the philosopher Daniel Dennett has for good reason called digital computers ‘the most important epistemological advance in scientific method since the invention of accurate timekeeping devices’ and Bouchaud’s and Mézard’s work falls into a rapidly growing area known as ‘computational economics’ which exploits the computer to discover principles of economics that one might never identify otherwise. Bouchaud and Mézard explored their model in an exhaustive series of simulations. And in every run they found the same result – after wealth flows around the network for some time, it falls into a steady pattern in which the basic shape of wealth distribution follows the form discovered by Pareto. Indeed, this happens even when every person starts with exactly the same amount of money and moneymaking skills. This pattern appears to emerge as a balance between two competing tendencies. On the one hand, transactions between people tend to spread wealth around. If one person becomes terrifically wealthy, he or she Demos 109
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Network Logic Who governs in an int
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About Demos Demos is a greenhouse f
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Open access. Some rights reserved.
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Network logic 10. Your friendship n
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