October 13, 2017 - 11:50 AMT
PanARMENIAN.Net - Seven years ago, the combined wealth of 388 billionaires equaled that of the poorest half of humanity, according to Oxfam International. This past January the equation was even more unbalanced: it took only eight billionaires, marking an unmistakable march toward increased concentration of wealth. Today that number has been reduced to five billionaires.
Trying to understand such growing inequality is usually the purview of economists, but Bruce Boghosian, a professor of mathematics of Armenian descent, thinks he has found another explanation—and a warning, Tufts Now says.
Using a mathematical model devised to mimic a simplified version of the free market, he and colleagues are finding that, without redistribution, wealth becomes increasingly more concentrated, and inequality grows until almost all assets are held by an extremely small percent of people.
“Our work refutes the idea that free markets, by virtually leaving people up to their own devices, will be fair,” he said. “Our model, which is able to explain the form of the actual wealth distribution with remarkable accuracy, also shows that free markets cannot be stable without redistribution mechanisms. The reality is precisely the opposite of what so-called ‘market fundamentalists’ would have us believe.”
While economists use math for their models, they seek to show that an economy governed by supply and demand will result in a steady state or equilibrium, while Boghosian’s efforts “don’t try to engineer a supply-demand equilibrium, and we don’t find one,” he said.
Boghosian was first intrigued by this question when he spent four years living in Armenia, starting in 2010, as president of the American University of Armenia. With an unfettered free market after the fall of Soviet rule, he saw Armenia increasingly become a country with a very small number of rich people, and a great number of poor people, he said.
At the same time, Boghosian 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.
Boghosian and his colleagues continued to refine the model, publishing papers on their work in journals such as Physical Review and Physica A. Over time, they added three parameters to the model, he said. “One is for how redistributive the society is, another is for how biased the transactions are in favor of wealthier agents, what we call the wealth-attained advantage, and the third one measures how far ‘underwater’ the poorest agents are,” meaning the extent to which their debts exceed the value of their assets, like real estate.
It’s easy to imagine how wealth-attained advantage works in real life. “The people with that advantage receive better returns on their investments, lower interest rates on loans, and better financial advice,” said Boghosian. “Conversely, as Barbara Ehrenreich famously observed, it is expensive to be poor. If you are working two jobs, you don’t have time to shop for the best bargains. If you can’t afford the security deposit demanded by most landlords, you may end up staying in a motel at inflated prices.”