Thursday, October 26, 2017

Bruce Boghosian and the Cycle of Civilization

Why do we trade? Mutual advantage. One guy has a dollar, but would rather have a dollar's worth of stuff. Another guy has a dollar's worth of stuff, but would rather have a dollar. So they trade.

To the one guy, the stuff is more valuable than the money. To the other guy, the money is more valuable than the stuff. Who is right? Time will tell.

Via Reddit, at Tufts Now: The Mathematics of Inequality by Taylor McNeil:
Bruce Boghosian, a professor of mathematics, ... ran across a description of a mathematical model of market-based exchange, the Yard Sale Model. A simplified version goes something like this: Two people enter into a series of transactions, and both have the same probability of winning some amount of wealth from the other, just as in a free-market transaction. Because people cannot lose what they do not have, the amount of wealth that can be won or lost is constrained to be a fraction of the wealth of the poorer of the two agents.

This is essentially a coin toss, and you might think that in the end both sides would end up with the same amount of wealth. But it turns out those who have more keep getting more. Even if both agents have the same wealth to begin with, one will eventually begin to dominate the other, even though the coin is fair. ...

“Without redistribution of wealth, our market economy would not be stable,” said Boghosian. “One person would run away with all the wealth, and it would keep going until it came to complete oligarchy.”

And even if a society does redistribute wealth, if it’s too small an amount, “a partial oligarchy will result,” Boghosian said.

Putting aside ethical issues of growing inequality, it can also create an unhealthy economy, Boghosian said. “That’s because when wealth concentrates and the middle class is depleted too much, you may get very wealthy industrialists, very wealthy manufacturers, but to whom do they sell their products? It locks up the economy,” he said. ...

“Bruce’s work on asset exchange pushes the boundaries of conventional economic models,” said Michael Ash, professor of economics [at the University of Massachusetts at Amherst]. “In an elegant and straightforward framework, Bruce demonstrates that, contrary to the conventional model, radical inequalities can be rapidly generated from mutually acceptable, apparently equal exchanges—a reasonable approximation of many financial transactions. This is a remarkable and thought-provoking result” ...

Thought provoking? It woke me up in the middle of the night. Been a long while now, since econ woke me up.

By the way, the name Michael Ash should set off bells in your head. Thomas Herndon? ... Reinhart and Rogoff? ... The Excel error? Yeah, Michael Ash was one of Thomas Herndon's professors.

What if "mutual advantage" is an incorrect assumption? What if trade is only mutually advantageous under certain circumstances. Maybe it works like a chain letter, such that the early participants have a fair chance of making huge gains while the later participants have a good chance of making huge losses. In a zero-sum game like the chain letter, the losses and gains are equal.

> The economy is not a zero-sum game. At least, not always.

Sure, but maybe "zero-sum" is not "the certain circumstance" that matters. Bruce Boghosian is working out the circumstances with his economic models. I'm laying out a concept. The concept is that "mutual advantage" is one phase of a trade cycle. Or that there are times when mutual advantage leaves both parties better off, and there are times when it leaves only one of the parties better off. The other guy gets the best deal he can get, but it still leaves him worse off. Sort of like dealing with Sears.

What woke me up was the sudden thought that trade goes all the way back in human history. There has always been trade. There is always this force at work, concentrating wealth. And here's the thing: When wealth grows faster than it concentrates, wealth spreads. You get the upswing of an economic cycle. But when wealth concentrates faster than it grows, you get the downswing.

If you read me, you can guess where my mind takes these thoughts: A cycle ... since the beginning of human history ... measured in the concentration and distribution of wealth: A cycle of civilization.

Yeah, but trade is mutually advantageous!

Or, maybe "mutual advantage" is an illusion. No, not an illusion, but a fact that happens to be true only sometimes.

The pre‐eminent theorists of mutual advantage are Thomas Hobbes, David Hume, and Adam Smith ...

Maybe in the time of Hobbes and Hume and Smith, the growth of wealth was at its fastest, relative to concentration. And then after that, the 150 years that Keynes called "the greatest age of the inducement to investment" was the crest of the "wealth grows faster than it concentrates" era, from Adam Smith to World War One, say. After that, it was all downhill.

Nobody likes to think in terms of a cycle of civilization, but Boghosian's work is Cycle of Civilization stuff. The cyclic nature of it explains the fact that the post-Roman economy advanced as far as it did before the concentration of wealth started to give us "the end is near" chills.

How does that work again? Oh, yeah: If the growth of wealth outpaces the concentration of wealth, times are good; otherwise, not. I think that statement is a version of Piketty's r>g equation.

Time to wake up!

1 comment:

The Arthurian said...

Dietrich Vollrath in Wealth and Capital are Different Things:

"Piketty says that if r>g, where r is the return to capital, and g is the growth rate of aggregate GDP, then wealth will become more and more concentrated."

Yeah, that's it.