4 ms·

"...considering the exponential distribution of wealth." _That_ is the point

Enginerrrd 7y ago
What is the point exactly? No policy is going to change the fact that the natural equilibrium for such systems is a Pareto distribution, AKA it follows a power law. We can definitely hope to change the constants of the distribution, but to fundamentally change such a distribution would really be a fool's errand.
- richardwhiuk 7y ago
  Is there any theoretical reasoning for expecting a Pareto distribution to result? Would a distribution closer to normal not be equally valid?
  - Enginerrrd 7y ago
    Well for starters, such a curve would be fundamentally impossible. You draw such a curve by sorting the data points from wealthiest to least. But I suppose, adding no additional logic you could have one half of a normal distribution, normalized by multiplying everything by 2 to account for that. However, that doesn't strike me as a very natural distribution for a self-organized system with some randomness, and exponential growth. Power and wealth always seems to find its way to some type of power law distribution. You could only enforce such a distribution by concentrating power to the most extreme limit of a power distribution to exert control over the rest. And it's likely that for any definition of wealth you could come up with, people would just find a proxy for wealth that isn't counted by which they could start to exert more control.
  - sharpneli 7y ago
    Depends on the kind of system obviously. Power law is reasonably easy to get. Even with identical starting wealth just having chance + compound interest is enough to produce it. No need for anything more complex than that.
  - username90 7y ago
    The distribution looks like it does because you often can't substitute quality with quantity, so the money gets dis-proportionally funneled to the top few. So for example if we in the future figure out good ways to collaborate so ten average people can replace a top CEO then you'd see CEO pay go down the drain.
  - rklaehn 7y ago
    Write a simulation where you have n entities with an equal amount of resources. Now choose two entities at random and let them "trade", where the outcome is random but fair. You will get a "wealth distribution" that is not a gaussian normal around the average but more like a poisson distribution. And this is even with no difference in competence of the market participants. You can add various corrective terms to make get "equality of outcome", but to get to a gaussian distribution around the average you need really drastic/totalitarian measures. The best system from a pure math POV would be a flat tax combined with universal basic income. But unfortunately it is naive to assume that this is politically viable. Politics largely is selling a particular group an advantage over the general population in exchange for votes. And a flat tax / basic income system is just too simple for that.
- VeninVidiaVicii 7y ago
  As someone who holds a master's degree in economics, and is getting a PhD in genetics, I can tell you virtually everyone studying the "soft" sciences conflates observations with natural laws. There is nothing stating that a Pareto distribution is optimal. It's only a distribution based on observation, and it just happens. The underlying mechanisms are not immutable.
  - throw0932 7y ago
    Eh, what are you saying is mutable here, exactly? The only way of getting a 0.5 Gini ("absolute equality") is if everyone is earning the same, which is ridiculous. As soon as you throw any randomness in there, well, all of a sudden you get inequality. Next, there are the (totally reasonable) winner-take-all mechanics of skilled labor. Are you a better CEO (where "better" here could just mean better at pitching/selling/hiring/picking a market)? Then you can end up capturing all of the market share vs your competitors. That ends up paying nicely. You still could have rent-seekers and people who cheat, but from the article itself, the top driver is differentiation based on skills. Don't like winner-take-all mechanics? Introduce income pooling. But I wouldn't expect that to be the revolutionary change people are looking for, just a way to guarantee people on the same skill ladder end up in roughly the same outcome bracket. I don't think "guarantee top ivy leaguers make >$400k/yr" is what you're looking for.
    - Applejinx 7y ago
      No, you're mistaken. There's a computer simulation that's been posted here, where you run a population and each element gives 'a dollar' to a randomly chosen other element every step, if possible. For no reason: no merit, no purpose, no meaning. This produces not just 'inequality', but the power-law distribution. The only thing you can't know is which element will be the '0.01%' master of the universe, because nothing distinguishes it from the 'poor' elements as it's only a simulation. The point this establishes experimentally is that through simple value exchange you get the same distribution people associate with meritocracy and market dynamics, without any elements of choice or distinctions of merit being applied. Skill and value have nothing to do with it: the problem is purely mechanical, the system will substantially punish and reward elements in the system quite outside of any consideration of merit. Once you introduce merit, skill etc. you're only exacerbating the problem. Wealth tax, even in very tiny amounts, is quite good at turning the power-law distribution into a more random-looking distribution as one might expect it should be. And usually people aren't talking about Gini 0.5, nor does anyone aspire to that unless it's as a form of rebellion against the extreme opposite. People will tolerate an enormous amount of inequality if their own lives aren't too acutely threatened.
- hannasanarion 7y ago
  It is not a universal principle that wealth must follow a power law, and even if it was, the coefficient need not be so extreme. The wealth inequality in America is higher than it has ever been. This did not come about naturally.
  - sharpneli 7y ago
    It actually does come about ”naturally”. You just need compound interest and bit of randomness. See https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0020728 https://journals.plos.org/plosone/article?id=10.1371/journal... This does not mean it’s good. The source even presents some methods of avoiding it. But the key point is that it doesn’t need some sort of conspiracy of the rich to happen. It will happen inevitably without being anyones fault if steps are not taken to address it.
    - hannasanarion 7y ago
      What you also need is self-multiplying investments and a lack of wealth, income, and capital gains taxes. The current financial system didn't happen by accident. It was intentionally built in the 1980s by the Reagan administration, at the behest of rich Republican donors. It was not inevitable, it was engineered.
      - sharpneli 7y ago
        It will just slow it a bit. A non progressive capital gains tax even at 99.999% will still lead to power law distribution. And I don’t think anyone would say a tax that high is exactly done at behest of the rich. (EDIT: compound interest literally is self multiplying investment) One has to rather specifically design a progressive taxation system to avoid a power law. Read the paper. The conditions for power law are very simple. I live in Finland. A place one hardly can say is friendly to the rich. Yet we too have a power law, just with different constants than what US has.
        peteradio 7y ago
- conception 7y ago
  The point is that extreme wealth distributions push towards non-democratic societies. You like democracy, you like policies that promote it. Also, “you can never change how it is!” is a nirvana fallacy; you certainly can make things better. It’s been done before.
  - Enginerrrd 7y ago
    I'm fine with changing the alpha value, and finding an optimal alpha value is actually what we should be doing IMO. But we can't act like it's not gonna still be close to some type of power law distribution at the end of the day.
    - zxcmx 7y ago
      The wealth distributions we see have a mathematical flavour to them but are the result of a system created and governed by humans. In fact vast disparities in wealth can only be created and sustained through significant social effort. It takes an incredible degree of social co-ordination for multi billionaires to exist. Outside of a strong rule of law you have be to a strongman or warlord to keep your hands on all that stuff. As a society we could choose to cap wealth. For example we could say "it's illegal for an individual to own more than a billion dollars worth of assets". The excess would effectively be tax. I can immediately think of a huge number of problems with this (oh no, all the multi billionaires leave!, offshoring, transfers between family members, "schemes" in general) but it's obviously possible to pass this kind of law, were there the social will to do it. It is not possible to amass huge assets without deep support from society at large. Police, judges, guards and the goodwill of the public are ensuring the safety of the billionaire's property.
      - Chinjut 7y ago
        Indeed, the very concept of asset ownership exists only by virtue of social recognition. We make up the rules that define ownership/property/wealth/etc, they are not handed down by God, and we could just as well define/design them differently (as your example of a wealth cap astutely illustrates).
- avanderveen 7y ago
  Are you suggesting that it's not possible to revise and enforce tax laws? I can see the argument that, if a country attempts to close the gap with taxes, they will just lose a great deal of wealthy citizens and successful businesses, but that can change too. Nations can make new trade deals and treaties.

What is the point exactly? No policy is going to change the fact that the natural equilibrium for such systems is a Pareto distribution, AKA it follows a power law. We can definitely hope to change the constants of the distribution, but to fundamentally change such a distribution would really be a fool's errand.

richardwhiuk 7y ago
Is there any theoretical reasoning for expecting a Pareto distribution to result? Would a distribution closer to normal not be equally valid?
- Enginerrrd 7y ago
  Well for starters, such a curve would be fundamentally impossible. You draw such a curve by sorting the data points from wealthiest to least. But I suppose, adding no additional logic you could have one half of a normal distribution, normalized by multiplying everything by 2 to account for that. However, that doesn't strike me as a very natural distribution for a self-organized system with some randomness, and exponential growth. Power and wealth always seems to find its way to some type of power law distribution. You could only enforce such a distribution by concentrating power to the most extreme limit of a power distribution to exert control over the rest. And it's likely that for any definition of wealth you could come up with, people would just find a proxy for wealth that isn't counted by which they could start to exert more control.
- sharpneli 7y ago
  Depends on the kind of system obviously. Power law is reasonably easy to get. Even with identical starting wealth just having chance + compound interest is enough to produce it. No need for anything more complex than that.
- username90 7y ago
  The distribution looks like it does because you often can't substitute quality with quantity, so the money gets dis-proportionally funneled to the top few. So for example if we in the future figure out good ways to collaborate so ten average people can replace a top CEO then you'd see CEO pay go down the drain.
- rklaehn 7y ago
  Write a simulation where you have n entities with an equal amount of resources. Now choose two entities at random and let them "trade", where the outcome is random but fair. You will get a "wealth distribution" that is not a gaussian normal around the average but more like a poisson distribution. And this is even with no difference in competence of the market participants. You can add various corrective terms to make get "equality of outcome", but to get to a gaussian distribution around the average you need really drastic/totalitarian measures. The best system from a pure math POV would be a flat tax combined with universal basic income. But unfortunately it is naive to assume that this is politically viable. Politics largely is selling a particular group an advantage over the general population in exchange for votes. And a flat tax / basic income system is just too simple for that.
VeninVidiaVicii 7y ago
As someone who holds a master's degree in economics, and is getting a PhD in genetics, I can tell you virtually everyone studying the "soft" sciences conflates observations with natural laws. There is nothing stating that a Pareto distribution is optimal. It's only a distribution based on observation, and it just happens. The underlying mechanisms are not immutable.
- throw0932 7y ago
  Eh, what are you saying is mutable here, exactly? The only way of getting a 0.5 Gini ("absolute equality") is if everyone is earning the same, which is ridiculous. As soon as you throw any randomness in there, well, all of a sudden you get inequality. Next, there are the (totally reasonable) winner-take-all mechanics of skilled labor. Are you a better CEO (where "better" here could just mean better at pitching/selling/hiring/picking a market)? Then you can end up capturing all of the market share vs your competitors. That ends up paying nicely. You still could have rent-seekers and people who cheat, but from the article itself, the top driver is differentiation based on skills. Don't like winner-take-all mechanics? Introduce income pooling. But I wouldn't expect that to be the revolutionary change people are looking for, just a way to guarantee people on the same skill ladder end up in roughly the same outcome bracket. I don't think "guarantee top ivy leaguers make >$400k/yr" is what you're looking for.
  - Applejinx 7y ago
    No, you're mistaken. There's a computer simulation that's been posted here, where you run a population and each element gives 'a dollar' to a randomly chosen other element every step, if possible. For no reason: no merit, no purpose, no meaning. This produces not just 'inequality', but the power-law distribution. The only thing you can't know is which element will be the '0.01%' master of the universe, because nothing distinguishes it from the 'poor' elements as it's only a simulation. The point this establishes experimentally is that through simple value exchange you get the same distribution people associate with meritocracy and market dynamics, without any elements of choice or distinctions of merit being applied. Skill and value have nothing to do with it: the problem is purely mechanical, the system will substantially punish and reward elements in the system quite outside of any consideration of merit. Once you introduce merit, skill etc. you're only exacerbating the problem. Wealth tax, even in very tiny amounts, is quite good at turning the power-law distribution into a more random-looking distribution as one might expect it should be. And usually people aren't talking about Gini 0.5, nor does anyone aspire to that unless it's as a form of rebellion against the extreme opposite. People will tolerate an enormous amount of inequality if their own lives aren't too acutely threatened.
hannasanarion 7y ago
It is not a universal principle that wealth must follow a power law, and even if it was, the coefficient need not be so extreme. The wealth inequality in America is higher than it has ever been. This did not come about naturally.
- sharpneli 7y ago
  It actually does come about ”naturally”. You just need compound interest and bit of randomness. See https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0020728 https://journals.plos.org/plosone/article?id=10.1371/journal... This does not mean it’s good. The source even presents some methods of avoiding it. But the key point is that it doesn’t need some sort of conspiracy of the rich to happen. It will happen inevitably without being anyones fault if steps are not taken to address it.
  - hannasanarion 7y ago
    What you also need is self-multiplying investments and a lack of wealth, income, and capital gains taxes. The current financial system didn't happen by accident. It was intentionally built in the 1980s by the Reagan administration, at the behest of rich Republican donors. It was not inevitable, it was engineered.
    - sharpneli 7y ago
      It will just slow it a bit. A non progressive capital gains tax even at 99.999% will still lead to power law distribution. And I don’t think anyone would say a tax that high is exactly done at behest of the rich. (EDIT: compound interest literally is self multiplying investment) One has to rather specifically design a progressive taxation system to avoid a power law. Read the paper. The conditions for power law are very simple. I live in Finland. A place one hardly can say is friendly to the rich. Yet we too have a power law, just with different constants than what US has.
      - peteradio 7y ago
conception 7y ago
The point is that extreme wealth distributions push towards non-democratic societies. You like democracy, you like policies that promote it. Also, “you can never change how it is!” is a nirvana fallacy; you certainly can make things better. It’s been done before.
- Enginerrrd 7y ago
  I'm fine with changing the alpha value, and finding an optimal alpha value is actually what we should be doing IMO. But we can't act like it's not gonna still be close to some type of power law distribution at the end of the day.
  - zxcmx 7y ago
    The wealth distributions we see have a mathematical flavour to them but are the result of a system created and governed by humans. In fact vast disparities in wealth can only be created and sustained through significant social effort. It takes an incredible degree of social co-ordination for multi billionaires to exist. Outside of a strong rule of law you have be to a strongman or warlord to keep your hands on all that stuff. As a society we could choose to cap wealth. For example we could say "it's illegal for an individual to own more than a billion dollars worth of assets". The excess would effectively be tax. I can immediately think of a huge number of problems with this (oh no, all the multi billionaires leave!, offshoring, transfers between family members, "schemes" in general) but it's obviously possible to pass this kind of law, were there the social will to do it. It is not possible to amass huge assets without deep support from society at large. Police, judges, guards and the goodwill of the public are ensuring the safety of the billionaire's property.
    - Chinjut 7y ago
      Indeed, the very concept of asset ownership exists only by virtue of social recognition. We make up the rules that define ownership/property/wealth/etc, they are not handed down by God, and we could just as well define/design them differently (as your example of a wealth cap astutely illustrates).
avanderveen 7y ago
Are you suggesting that it's not possible to revise and enforce tax laws? I can see the argument that, if a country attempts to close the gap with taxes, they will just lose a great deal of wealthy citizens and successful businesses, but that can change too. Nations can make new trade deals and treaties.