Jean-Philippe Bouchaud and Marc Mezard, two French econophysicists, believe that wealth falling into the hands of a minority is not just a fact of life, but a law of nature. They have discovered a connection between the physics of materials and the movements of money, a link that could revolutionise the way we think about the distribution of wealth in society. It could also provide a mathematical basis to theories of free trade and competition.
That wealth is unevenly distributed is now widely accepted: in the US, 20 per cent of the people own 80 per cent of the wealth, and similar figures apply throughout western Europe. Economists have always struggled to explain this seemingly universal trend, with most simply putting it down to the distribution of people's abilities. Bouchaud and Mezard started their analysis from the simplest possible basis, ignoring any economic theories and assumptions of previous years. Their one assumption was that life is unpredictable: returns on investments are random, trading is haphazard, profit and loss could come at any moment.
While investigating the simple equations that make up an economy (of which there are millions, because there are millions of people), Bouchaud and Mezard discovered that they could bring their knowledge of 'condensed matter' physics into play. For there is a model used in this area of physics concerned with 'ill-condensed' matter which is called a directed polymer. This model involves the imagining of a long wire lying on a landscape that undulates at random. The wire, which represents the polymer, is tethered at one end. Two forces then compete with one another: gravity wishing to pull the wire into the valleys of the landscape and the wire's desire to stay straight. The resultant path that the wire takes is a compromise between the two, and there is no 'best path' for it to take. Added in to this model is a third key factor of temperature: the hotter the temperature, the more the wire is buffeted by air molecules. The level of the temperature (and therefore the level of the buffeting) determines exactly how the wire manages its compromise between going straight across the landscape and staying in the valleys below.
Bouchaud and Mezard have now discovered that this physics model corresponds exactly to their economic model. The wire now represents the path of a quantity of money as it moves from person to person (with the number of wires crossing over a particular point representing the wealth of a particular person at that point). The irregularity of returns from investments is represented in the landscape: deep valleys correspond to places of more money, while peaks are where investors lose money and fare badly. And temperature is analogous to the vigour of trade, or how easily money moves between people.
This shows, for example, that when trading is easy the economy is 'hot' and is not very strongly affected by the landscape below. Thus vigorous trading enables wealth to flow easily from person to person which tends to spread money more easily. By contrast, if an economy is 'cold', by which is meant restricted trading and highly irregular returns, then wealth flows far less easily between people as it follows a path dictated almost entirely by the landscape. Wealth becomes even less fairly distributed, as its natural diffusion is overcome by the disparities of the economic landscape.
It follows, therefore, that a more equal society can not only be achieved through taxation and redistribution, but through the encouragement of freer and fairer trade, competition and exchange. The hotter the temperature of an economy, the more vigorous the rate and number of people trading, the more equal a society will become. This fits with most economists' experiences and expectations, but has now been given a mathematical basis. Also, the econophysicists' theory should mean that internet trading proves to be an enemy of inequality, as more and more people take part in the random flows and movements of wealth.
For related articles and economic papers, see the website of the econophysicists: www.unifr.ch/econophysics.
Summarised from an article by Mark Buchanan, entitled 'That's The Way Money Goes', in New Scientist (August 19th 2000; New Scientist subs £97 or $140, tel 44 [0] 1622 778000).
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