Telling the tale of the wealth tail

Jul 30, 2012

A mathematical physicist and her colleague, both from the Free University of Bozen-Bolzano, Italy, are about to publish a study in European Physical Journal B on a family of taxation and wealth redistribution models. The findings could lead to numerical simulations of potential wealth distribution scenarios playing out over the long term and could be used for policy decision making.

Maria Letizia Bertotti and Giovanni Modanese propose a mechanism of individual interaction of economic agents involved in wealth redistribution on a one-to-one level as a means of understanding their collective macroscopic behaviour. They rely on an between agents interacting in markets and well-known models of particles interacting in gases.

One of the unique aspects of their approach is that their model differentiates groups of into a of separate classes, related to their level of wealth. In the family of models they devised, the number of individuals in each class varies over time due to the payment and redistribution of taxes. They have thus created three distinct scenarios by varying the parameters of the general framework governing wealth dynamics.

The authors found that some families of models exhibit power-law tails, and some do not. Power law tails represent the part of a society consisting of a limited number of individuals who have the most wealth. Several simulations suggest that the diversity of saving propensity among the individuals plays a definite role in the formation of fat tails where a greater number of individuals enjoy high levels of wealth.

The findings of this study could ultimately help examine how the spread of individuals varies among classes when the taxation rates relative to different income classes are varied. Or the results could help devise the most desirable taxation rate to achieve a given distribution of .

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More information: M. L. Bertotti, G. Modanese (2012). Exploiting the flexibility of a family of models for taxation and redistribution. European Physical Journal B, DOI 10.1140/epjb/e2012-30239-3

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johnwbales
3.4 / 5 (5) Jul 30, 2012
Since Bertotti and Modanese's model proposes to model "wealth re-distribution" in the interactions of individuals I am curious whether their model incorporates the fact that, in a trade between individuals, the wealth of each individual is increased.

And since the most equitable distribution of wealth would have wealth remain in the hands of those who produce it I suspect the level of taxation that would achieve this result would be zero.
ryggesogn2
3.9 / 5 (7) Jul 30, 2012
How is wealth created in the model?
dnatwork
4.3 / 5 (4) Jul 30, 2012
You include at least three unfounded assumptions:
1) trade increases the wealth of both parties
2) the most equitable distribution leaves all wealth in the hands of the producer
3) taxes/government = bad.

There are many kinds of trade that decrease the wealth of one or both parties. Slavery is one, excessive CEO compensation is another: a CEO who takes short-term gains decreases the wealth of shareholders, and also reduces his own long-term potential gain.

"Equitable" and "producer" both need clear definitions. No one produces something entirely alone, unless you're talking about a stone-age hermit. The fair trade movement holds that equity means the last person who sold a good should not retain all the profits.

Taxes pays for defense, firefighters, police, teachers, roads. All individuals benefit from these government services. The last two foster economic growth, and so are the most beneficial.

Economic questions deserve to be answered with nuanced thought, not slogans.
Deathclock
2.5 / 5 (6) Jul 30, 2012
Slavery is one


Slavery is not trade...

a CEO who takes short-term gains decreases the wealth of shareholders.


This is also not trade... trade is the mutually agreed upon exchange of goods or services between two willing parties.

In an ideal world all trade would be profit-neutral, such that wealth does not transfer from either participant to the other. However valuation is difficult and subjective, so this is rarely the case.

No one produces something entirely alone, unless you're talking about a stone-age hermit.


Probably true for goods if you go all the way back to raw materials, but definitely untrue for services.

the last person who sold a good should not retain all the profits.


This is impossible without slavery, no one will agree to work without compensation.

Economic questions deserve to be answered with nuanced thought, not slogans.


Agreed.
Caliban
5 / 5 (1) Jul 30, 2012
Taxation, ie, "redistribution of wealth" in the context of this article, is for the purpose of maintaining the conditions that make the generation of wealth possible while preserving individual rights.

The history of Revolution is the history of the struggle to prevent the accumulation of wealth by the few through force of arms, and hence the suppression of individual rights.
ryggesogn2
3 / 5 (10) Jul 30, 2012
"The case for free trade is ultimately based on three principles. First, comparative advantage. Trade allows men to capitalize on differences in natural abilities and physical surroundings (climate, location, natural resources). Second, gains from trade. Trade is always beneficial to both partiestrade never harms one party at the expense of the other. And third, freedom itself. The freedom to trade is natural and moral; to prohibit two willing parties to freely trade is unnatural and immoral. These are the principles elaborated on throughout Georges book."
http://mises.org/...y-George

To the socialist, free trade is endangers their existence, but they do understand it is the only way they can create the wealth they need to plunder.

Economic questions deserve to be answered with nuanced thought, not slogans.

No, not NUANCED thought but sound, principles demonstrated to be true.
alfie_null
4 / 5 (1) Jul 31, 2012
No, not NUANCED thought but sound, principles demonstrated to be true.

Making decisions solely based on empirical knowledge is expensive. What if, for instance, this were done in medical practice? Nuclear weapons research? Aerospace? etc.

As I read the usual comments against any initiative that seems to threaten economic status quo (heavy on rhetoric, light on thoughtful incisive arguments), I can understand reluctance on the part of the authors to engage in this, traditionally scientific, process.
Deathclock
2.3 / 5 (3) Jul 31, 2012
No, not NUANCED thought but sound, principles demonstrated to be true.

Making decisions solely based on empirical knowledge is expensive. What if, for instance, this were done in medical practice? Nuclear weapons research? Aerospace? etc.


I'm confused why you would choose these examples, since most of the developments in these fields was based on empirical study and experimentation...
Satene
2 / 5 (3) Jul 31, 2012
in a trade between individuals, the wealth of each individual is increased
The trade itself cannot lead to generation of private property. This is just a mistake of naive neomercantillism and postkeynesians, the consequences of which we are facing by now: the faster trade just enables the faster depletion of natural resources. Whenever these resources are depleted, the evolution of civilization stops. Which is the reason, why people are working and doing business frenetically by now, but they have no money for cosmic flights anymore.
Vendicar_Decarian
2.6 / 5 (5) Jul 31, 2012
Certainly it is.

"Slavery is not trade..." - DeathTard

The slave trades his/her labor for his/her life.

Prostitution is another example of trade in which overall wealth does not increase. The same is true of every other form of entertainment.

Can you explain to me how lawn maintenance or raking leaves increases the wealth of the party contracting the maintenance?

How about flying to Paris for brunch. Can you explain to us how this increases the overall wealth of everyone involved?

How about renting an E-book?

Doesn't providing old people with clean water decrease the value of society?

Vendicar_Decarian
3.7 / 5 (6) Jul 31, 2012
One of the reason why Mises is such a spectacular failure, and why therefore Libertarian/Randite has proven to be such a failure wherever is has been tried, is because, natural comparative advantage, while real, is a minor component to overall advantage.

Mises existed in an era where barriers to production and trade were primarily physical constraints.

Today the rate at which products and manufacturing can be moved from place to place makes geographic location, resource location, and market location largely irrelevant.

Having the billions needed to move a manufacturing facility to Bangladesh is now vastly more important than producing a product near it's target market.

Setting up a call center in India is no more difficult than setting one up anywhere else, so "comparative advantage" in this case translates to lowest wage possible.

"Trade allows men to capitalize on differences in natural abilities and physical surroundings" - Mises

Cont
ryggesogn2
3 / 5 (10) Jul 31, 2012
Making decisions solely based on empirical knowledge is expensive.

What other knowledge can you acquire from emergent systems like an economy?
Vendicar_Decarian
3.7 / 5 (6) Jul 31, 2012
And this is where Libertarian/Randite economic ideology has left America.

Bankrupt. In a near depression. With most of it's manufacturing sector outsourced to foreign nations, and attempting to exist on a service economy like Greece.

It's just one Mises Failure after another.
Vendicar_Decarian
3.4 / 5 (5) Jul 31, 2012
No economy is "emergent".

All economies are planned, either by Frauds like Mises, Huxters like Comcast, Exxon, ADM, etc., Bankers, or Governments/

"What other knowledge can you acquire from emergent systems like an economy?" - RyggTard

The only economic decision that plebes like RyggTard are allowed to make are things like what color tie to wear to his wage slave job, or which chicken to purchase for dinner.
Deathclock
3.2 / 5 (9) Jul 31, 2012
Wow VD, it's like you've never taken an Econ course in your life...

Certainly it is. The slave trades his/her labor for his/her life.


This is stupid, the term "trade" has meaning in the study of economics, and it does not mean what you think it does. Trade is a mutually agreed upon exchange of goods and/or services between two WILLING parties... this precludes instances where one party is under threat or coercion.

Can you explain to me how lawn maintenance or raking leaves increases the wealth of the party contracting the maintenance


Because their time is more valuable than the time of the yard workers, so they give them value that is worth less than the time saved, while the yard workers time is worth less than the value they receive from their employer. Both parties gain wealth, because time is money and the value of time is different to different individuals.

Any other stupid questions that could be answered in Econ 101?
Bewia
1 / 5 (1) Jul 31, 2012
What other knowledge can you acquire from emergent systems like an economy?
Particle models are emergent too and they're leading into many predictions - which is why they're used in many simulations.
ryggesogn2
3.2 / 5 (9) Jul 31, 2012
The 'progressive' era, akd socialism,started in the USA over 100 years ago with govt regulations, creation of the federal reserve and the federal income tax.
100 years of socialism has finally worn down the previous few decades of free market capitalism.
Some socialists understand how wealth is created. The Swedes cut their wealth tax, the Cubans are being to allow trade and the Chinese understood they needed free trade to create wealth. But all socialists understand they have a tiger by the tail and if they let go, socialism will be overpowered by free markets.
ryggesogn2
3.5 / 5 (10) Jul 31, 2012
What other knowledge can you acquire from emergent systems like an economy?
Particle models are emergent too and they're leading into many predictions - which is why they're used in many simulations.

How do you model the thousands of needs and wants of billions of individuals trading hundreds of times a day?
Centrally planned economies only succeed in plundering the wealth and stifling growth.
ryggesogn2
3.7 / 5 (9) Jul 31, 2012
"No doubt because of his continued popularity, the left has tried to tie Friedman and his principles of free trade, low tax rates and deregulation to the global financial meltdown in 2008. Economist Joseph Stiglitz charged that Friedman's "Chicago School bears the blame for providing a seeming intellectual foundation" for the "idea that markets are self-adjusting and the best role for government is to do nothing.""
{Trouble is the govt didn't 'do nothing'}
"Friedman opposed the government spending spree in the 2000s. He hated the government-sponsored enterprises like housing lenders Fannie Mae and Freddie Mac."
"As the world embraced free-market policies, living standards rose sharply while life expectancy, educational attainment, and democracy improved and absolute poverty declined." "
http://online.wsj..._LEADTop
ryggesogn2
3.3 / 5 (9) Jul 31, 2012
"China's cabinet called Monday for stepped up innovation and an increased role for private investment in state-dominated industries, warning the country's economy was under intensifying pressure."
{Sounds good so far.}

"With the domestic economy under increasing downward pressure, the timely adoption of effective policy measures" is needed, the State Council, or cabinet, said in a statement."

The cabinet called on officials to prioritize guiding private investment into key industries including railways, municipal administration, energy, telecommunications, finance, health and education."
{And this is why it will fail, 'guiding' 'private' investment.}

http://www.terrad...999.html