Vilfredo Pareto
The wealth concentration that is destroying our economy is a consequence of “free market” economics. It was not caused by Barack Obama, as was observed in another comment here. Relaxing government restraints and regulations (as we did during the Reagan years) GREATLY accelerates it.
Wealth distribution is among the earliest of the “scale free” networks known to mathematicians and economists. The phenomena was first documented by Vilfredo Pareto in 1909. In fact, wealth (and income) concentration in an unregulated economy is a fundamental fact of nature. The role of responsible government is to restrain it. This has been known for more than century — the lies told by both parties about this phenomena exemplifies both the importance of education and the way that ignorance is first cultivated and then exploited by those in power. Most recently, Laszlo Baribasi documented the mechanism that produces the wealth concentration we see in his 2002 cult classic, Linked: How Everything Is Connected to Everything Else and What It Means for Business, Science, and Everyday Life.
Editors, I attempted to add a “more” tag here. It has no apparent effect.
Here, from the first link above, is a fascinating summary by Benoit Mandelbrot (emphasis mine):
One of Pareto’s equations achieved special prominence, and controversy. He was fascinated by problems of power and wealth. How do people get it? How is it distributed around society? How do those who have it use it? The gulf between rich and poor has always been part of the human condition, but Pareto resolved to measure it. He gathered reams of data on wealth and income through different centuries, through different countries: the tax records of Basel, Switzerland, from 1454 and from Augsburg, Germany, in 1471, 1498 and 1512; contemporary rental income from Paris; personal income from Britain, Prussia, Saxony, Ireland, Italy, Peru. What he found – or thought he found – was striking. When he plotted the data on graph paper, with income on one axis, and number of people with that income on the other, he saw the same picture nearly everywhere in every era. Society was not a “social pyramid” with the proportion of rich to poor sloping gently from one class to the next. Instead it was more of a “social arrow” – very fat on the bottom where the mass of men live, and very thin at the top where sit the wealthy elite. Nor was this effect by chance; the data did not remotely fit a bell curve, as one would expect if wealth were distributed randomly. “It is a social law”, he wrote: something “in the nature of man”.
We now know, from the groundbreaking work of Laszlo Barabasi (now at Northeastern), that wealth distribution is a scale-free network, and is the result of the nature of NETWORKS — not “the nature of man”. Here is how Mr. Barabasi describes the pheneomena:
During the 2009 economic crisis power laws gained a new meaning: The Occupy Wall Street Movement draw attention to the fact that in the US 1% of the population earns a disproportionate 15% of the total US income. This 1% phenomena, a signature of a profound income disparity, is again a consequence of the power-law nature of the income distribution.
I note that in this description, Mr. Barabasi is describing income concentration. In his other works, he describes wealth concentration. The two are products of the same phenomena — “preferential attachment”.
The reality is that the “free market” vision of the GOP and Ronald Reagan inevitably produces extreme wealth and income concentration. This is not because wealthy people are “evil” or poor people “noble” — it is the predictable and predicted outcome of the mathematics of networks. It is a classic example of a phenomenon that demands government intervention, because it is something that “the people” cannot resolve on their own.
Government must REGULATE the “free market”.
We always hope that our own carbon based neural network is not scale free, we have to guard against our prejudices tainting the introduction of a new thought. Always try to walk a mile in (using) another man’s hub.
and it continued with Bush and accelerated with Clinton and kept going with Obama. And it will accelerate once Mrs. Clinton takes over. It’s no longer a party division. Both heads of both parties want it this way and will go to great lengths to stop any populist uprising.
Incomes rose at all levels during his presidency.
It started when people started using currency to buy and sell goods and services. Wealth and income concentration is a consequence of how economic networks work. Read the Baribasi link I posted up-thread.
The premise that “the free market” will produce a fair and just distribution of wealth is failed. It is simply incorrect. The piece by Laszlo Barabasi shows how and why. In the early days of communications networking, people thought networks would be “random” — the analogous dogma was there is some “average” number of connections per node, that the actual distribution of nodes in an actual network follows a “normal” distribution around that average, and that network traffic on the networks can be predicted and supported based on that model.
We learned, the hard way, that the model is WRONG. It is the difference between a map of the interstate highway system and a map of airline connections between cities. The first is a “regular” network. The second is a “scale-free” network.
The airline map has a small number of “hubs” where hundreds of flights arrive and depart per day. For each of those hubs, there are hundreds of cities that have just one or two flights arriving and departing each day.
The web is another scale-free network. There are a handful of hubs, like google.com, that are connected to an ENORMOUS number of other sites. There are an enormous number of sites that have just one or two links from others.
Wealth and income distribution is, without external regulation, also a scale free network. That means there will be a handful of people with ENORMOUS wealth or income, and an enormous number of people with little nor no wealth or income.
Whether it started with Jimmy Carter or Ronald Reagan is irrelevant. During the immediate postwar years, America had tax rates (both income tax and especially gift/estate tax) that restrained the natural tendency of wealth and income to concentrate. Over the past 40-odd years, we have removed those constraints citing “the free market”.
I want to absolutely clear about something: Far too many AMERICANS remain attached to the failed dogma of “the free market”. It is like believing that heavy objects fall faster than light objects — it might make “common” sense, and it is utterly wrong.
Economists and mathematicians have known it was wrong for a very long time. Mr. Barabasi laid out, in very straightforward detail, precisely HOW the wealth and income concentration happens and what must be done to change it (we literally frob the analogous knobs to those used to manage internet traffic).
The heads of our parties want it this way because too many VOTERS want it this way. Too many VOTERS want it this way because the one percent has spent the last forty years dumbing them down and telling them lies.
We need to change our culture. Our political leaders will follow.
…of how free is the market, really. So often when I hear free market rhetoric what is really meant is they want the market to be free for those who employee or produce, but not for those who labor or consume. It’s not truly a free market when you stick with a job just for the health insurance. It’s not truly a free market when I’m forced to purchase a cable package which includes a bunch of channels I’ll never touch rather than a la carte. Sometimes I think, you know, I would take your free market rhetoric a lot more seriously if I thought you actually believed it.
Mr. Barabasi presents a mathematical model. I use the term “free market” to mean unrestrained by government (or other) regulation.
In that context, I think “free market” means something different than your examples suggest. If Comcast has built out cable capabilities, and chooses to bundle them in some way that is profitable to them, then the “free market” in the sense I’m using it means that they are completely able to do that. In a “free market”, employers are able to offer whatever jobs they choose at whatever compensation they choose with whatever benefits they choose. The fact that you don’t like the result doesn’t mean it isn’t free (where I mean “free” as in “free speech” rather than “free” as in “free beer”).
I’m not sure what you mean by my “free market rhetoric” or whether or not I “actually [believe] it”.
I think that the “free market” envisioned by the GOP and even our own “free market” proponents is something we do NOT want here.
I think we Democrats, and we progressives, need to:
1. Be much more clear about our understanding of the mechanisms that produce wealth and income concentration, and
2. Be much more clear (and honest) about our proposed interventions to prevent it, and
3. Be much more disciplined about stating clear and measurable goals and benchmarks for measuring the results we propose to obtain.
So long as we perpetuate a he-said-she-said back-and-forth argument, whether that argument be between “Democrat” and “Republican”, “Conservative” or “Liberal”, or “Upper class” and “Lower class”, we are just prolonging the pain and suffering.
For generations, physicians treated stomach ulcers as a “lifestyle” disease and used the symptoms and suffering of the patients to coerce a rich variety of diets, stress-management programs, counseling, and all sorts of other things. It turns out that stomach ulcers are caused by Helicobactor Pylori, a bacterial infection that is readily treated by antibiotics. The medical community was not immediately welcoming to this insight — lots of doctors made lots of money through the witchcraft that had been passing as medicine.
I suggest that the best way to actually DO SOMETHING about our wealth and income concentration disorder is to take advantage of what we already know about what causes it and how to cure it.
The inequality goes way back. Didn’t Jesus talk about “There will always be the poor” Certainly feudal Europe, and while we’re not quite in another “Gilded Age” the gap does seem to be widening. Every now and then a super rich person sets an example (Andrew Carnegie, Bill Gates) we can be proud of. You want the philanthropy built into the system, so it gets spread around before it accumulates.
But what is your threshold? 10 mil total wealth? 50? What is the income level? More than a million a year tax at 50%?
And what do you think is the level of dissatisfaction now? This summer I went to Scussett Beach and houses rent for 4000 a week. Winapausake lake houses, 5000 a week. Hampton Beach condos 2bed,2 bath sell for 500,000. All these places were sold out. Look at the Boston real estate market, it’s crazy. It’s not just the 1% that is fueling the fire.
I’ve talked about this elsewhere here.
The “GINI coefficient” is reasonable starting point (it measures the amount of income or wealth inequality — 0 is “none”, 99 is “all”). Our first-world counterparts like Germany, France, the UK, and so on have a GINI income coefficient hovering around 30. The EU has a GINI income coefficient of about 30.6 (as I recall).
The GINI income coefficient for the US is about 45. We must do something similar for the GINI wealth coefficient.
The United States actually did a reasonable job of all this during the period from about 1950 to about 1980 (give or take), poverty in the time of Jesus notwithstanding.
The inequality that we see TODAY does NOT go “way back”. In fact, we are seeing historic levels of income and wealth inequality, and the resulting symptoms of our wealth disorder surround us — including the symptoms you observe.
Your closing sentence has it almost entirely backwards. The one percent is sucking so much wealth out of the economy that everybody else is forced into wild and distorted contortions to try and maintain themselves.
The way to rebuild a healthy, strong, and prosperous economy for EVERYONE is to recapture the excess wealth now being acquired by the 1% and return it to the larger economy.
How much? By however much is needed to restore our GINI coefficient to about 30 — comparable to the EU.
I’m not saying comparisons aren’t useful, but an arcane statistical tool is going to be a tough sell in congress (and for the DNC platform).
There are some issues in interpreting a Gini coefficient. The same value may result from many different distribution curves. The demographic structure should be taken into account. Countries with an aging population, or with a baby boom, experience an increasing pre-tax Gini coefficient even if real income distribution for working adults remains constant. Scholars have devised over a dozen variants of the Gini coefficient.
I understand it’s third world vs first world, but opponents would put on a billboard that whoever proposes GINI rating wants us to be like Bangladesh.
Gini coefficients are simple, and this simplicity can lead to oversights and can confuse the comparison of different populations; for example, while both Bangladesh (per capita income of $1,693) and the Netherlands (per capita income of $42,183) had an income Gini coefficient of 0.31 in 2010, the quality of life, economic opportunity and absolute income in these countries are very different, i.e. countries may have identical Gini coefficients, but differ greatly in wealth.
Some countries distribute benefits that are difficult to value. Countries that provide subsidized housing, medical care, education or other such services are difficult to value objectively, as it depends on quality and extent of the benefit. In absence of free markets, valuing these income transfers as household income is subjective. The theoretical model of Gini coefficient is limited to accepting correct or incorrect subjective assumptions.
I’m just wondering how you think this plays out for average joe. I just didn’t see people going into”wild and distorted contortions” on their vacations or even at home. The places were packed, the restaurants were packed, tee times were harder to get. I wonder what the GINI index would be for those inside 128 vs us out here in the sticks. We might not have ocean view but we’re not paying 30 mill for a condo in Boston.
The next recession is about two years away (imo), so the index will drop. We can examine it then.
This line – “I’m not sure what you mean by my “free market rhetoric” or whether or not I “actually [believe] it”. was addressed to a generic rhetorical “you” addressing anyone who might be inclined to make such arguments, not you, SomervilleTom, specifically.
I guess I think that unregulated is not truly free in the same sense that in some cases of injustice remaining “neutral” means in effect taking the side of the oppressor. If there is not an inherent level playing field between labor and management or producer and consumer the market is not really free for all involved. In the case of cable our options are limited and I can’t just decide on a whim to switch to another provider one month.
I’m not sure you’ve read the link I posted to the paper by Laszlo Barabasi. If you had, I think it would be more apparent that I mean “free market” in the sense of “without external interference”.
The point is that the premise of the various “free market” proponents is that the natural tendency of an unregulated economy is to distribute wealth in a “fair” way. The work I’ve cited here demonstrates that this premise is failed.
The various kinds of interventions you describe address something different from what I am describing. In an abstract mathematical model of a network of buyers and sellers, there is no notion of “level playing field”.
The point is, instead, that parties who already have money are more likely to attract parties who want to buy and sell — the rich get richer. This “preferential attachment” is the key dynamic characteristic of a scale-free network.
If we want something different from the 1%/99% distribution that an unregulated economy tends to, we must actively intervene.
That’s the point though. I am arguing that it shouldn’t be and the current usage almost amounts to false advertising IMO.
The least free market oriented Republican candidate won his party’s nomination running away from about 40 years of conservative economic orthodoxy. 60% of the voters in our party say they oppose free market capitalism. So, it’ll be interesting to see how these trends develop. Ironically, the scores of finance types coming to the DNC (they boycotted the RNC) all said they recognize they will be regulated and welcome that regulation. The fear of Trump could force them to play nice with a Clinton administration. Especially with Warren still in the Senate with subpoena power.
The longer term question is how do we fix this economy and what does it look like? I am not sure what the answers are. I like the German ordoliberal model that emphasizes worker cooperatives, worker representation on boards (which our platform now endorses), strong social insurance, and free public education at all levels. I still think there will be gaps and basic income will become more and more of a viable option in the decades ahead.
I’m not sure it’s meaningfully possible to perform any sort of rational analysis on the utterances of Donald Trump, because they are so irrational, so disconnected from facts, truth, and reality, and so clearly intended to pander to his audience of the moment.
Even Donald Trump supporters clamor for “smaller government”. The Tea Party does the same. The GOP has driven an “austerity” agenda in Congress for eight long years, premised on the same failed dogma.
The complaint about Ms. Clinton is that she is too supportive of free market capitalism — the “free market” in the sense we use it here is, I think, synonymous with the “Wall Street” brickbats.
I enthusiastically agree with your specific proposals in your final paragraph, especially regarding a guaranteed annual income.
I’m suggesting that one way or another, regulation of the behavior of the free market to prevent the wealth and income concentration that it otherwise produces should become the core of our national economic policy. I’m suggesting that we change both the specific programs and also our political language about them.
I’m suggesting that we find ways to educate the public about the importance of government regulation, the benefits it provides, and the consequences that we’ve all already felt when we tried dismantling those regulations.
At the core, I suggest that we must repudiate the philosophy of Max Weber that has dominated our political sphere since the Reagan — and perhaps even the Carter — era. The implicit, and sometimes explicit, result of this philosophy and theology is a narrative something along the lines of the following:
1. The pursuit of wealth is noble and positive behavior
2. Great wealth means that God has blessed the recipient
3. Poverty means that God has condemned the recipient
4. The wealthy are therefore good and glorious, the poor are therefore bad and sinful
5. The vigorous pursuit of wealth in a minimally-regulated economy is the most fair way to distribute the wealth of that economy
6. The prosperity of America means that God has blessed the American way.
I suggest that the facts of how the free market actually behaves destroy this narrative.
We need a new narrative.