[tt] wealth distribution follows pareto only for 3%

[Eugen Leitl]

(looking at the graph in the original article is recommended --
wonder how the curve looks in 2008)

http://www.newscientist.com/article.ns?id=mg18524904.300

Why it is hard to share the wealth

    * 12 March 2005 * NewScientist.com news service * Jenny Hogan

THE rich are getting richer while the poor remain poor. If you doubt it,
ponder these numbers from the US, a country widely considered meritocratic,
where talent and hard work are thought to be enough to propel anyone through
the ranks of the rich. In 1979, the top 1 per cent of the US population
earned, on average, 33.1 times as much as the lowest 20 per cent. In 2000,
this multiplier had grown to 88.5. If inequality is growing in the US, what
does this mean for other countries?

Almost certainly more of the same, if you believe physicists who are using
new models based on simple physical laws to understand the distribution of
wealth. Their studies indicate that inequality in market economies may be
very hard to get rid of.

Economists will join physicists to discuss these issues next week in Kolkata,
India, at the first ever conference on the "econophysics" of wealth
distribution. "We are interested in understanding whether there is some kind
of social injustice behind this skewed distribution," says Sudhakar
Yarlagadda of the Saha Institute of Nuclear Physics (SINP) in Kolkata.

It is well known that wealth is shared out unfairly. "People on the whole
have normally distributed attributes, talents and motivations, yet we finish
up with wealth distributions that are much more unequal than that," says
Robin Marris, emeritus professor of economics at Birkbeck, University of
London.

In 1897, a Paris-born engineer named Vilfredo Pareto showed that the
distribution of wealth in Europe followed a simple power-law pattern, which
essentially meant that the extremely rich hogged most of a nation's wealth
(New Scientist, 19 August 2000, p 22). Economists later realised that this
law applied to just the very rich, and not necessarily to how wealth was
distributed among the rest.

Now it seems that while the rich have Pareto's law to thank, the vast
majority of people are governed by a completely different law. Physicist
Victor Yakovenko of the University of Maryland in College Park and his
colleagues analysed income data from the US Internal Revenue Service from
1983 to 2001. They found that while the income distribution among the
super-wealthy - about 3 per cent of the population - does follow Pareto's
law, incomes for the remaining 97 per cent fitted a different curve - one
that also describes the spread of energies of atoms in a gas (see Graph).

In the gas model, people exchange money in random interactions, much as atoms
exchange energy when they collide. While economists' models traditionally
regard humans as rational beings who always make intelligent decisions,
econophysicists argue that in large systems the behaviour of each individual
is influenced by so many factors that the net result is random, so it makes
sense to treat people like atoms in a gas. The analogy also holds because
money is like energy, in that it has to be conserved. "It's like a fluid that
flows in interactions, it's not created or destroyed, only redistributed,"
says Yakovenko.

Yakovenko also found that the total income of those in the poorer part of the
distribution did not change significantly with time after accounting for
inflation. But incomes for those in the Pareto curve shot up nearly five
times from 1983 to 2000, before declining with the US stock market crash of
2001.

This, along with research data from other countries, suggests that there are
two economic classes. In one, the rich grow richer while in the other the
poor stay poor. Yakovenko explains this by going back to the analogy of atoms
in a gas. The atoms assume an exponential distribution of energy when they
are in thermal equilibrium, and pushing the gas away from this state takes a
lot of energy and it could prove similarly difficult to shift an economy to a
different state. Randomness in the model does, however, mean that individuals
can jump from one class to another.

"It suggests that any kind of policy will be very inefficient," says
Yakovenko. It would be very difficult to impose a policy to redistribute
wealth "short of getting Stalin", says Yakovenko, who will talk in Kolkata
next week.

A more sophisticated model developed by Bikas Chakrabarti of the SINP and his
colleagues paints a slightly less bleak picture for the poor. His team
adjusted the gas model to allow people to save various proportions of their
money. This model predicts both the wealth classes that Yakovenko found. It
also suggests that if you save more you are more likely to end up rich,
although there are no guarantees. Changing people's saving habits could be an
effective way of making the wealth distribution fairer, rather than enforcing
taxes, says Chakrabarti, who is one of the Kolkata conference organisers.

Macroeconomist Makoto Nirei at Utah State University in Logan, whose own work
will be presented at the conference, is supportive of the physicists' work
but he has reservations about how they model the exchange of money. "The
model seems to me not like an economic exchange process, but more like a
burglar process. People randomly meet and one just beats up the other and
takes their money."

Other economists warn it is too early to use such models to inform policies.
"The models are too abstract," says Thomas Lux, an economist at the
University of Kiel in Germany. But J. Doyne Farmer, a physicist from the
Santa Fe Institute in New Mexico, points out that these models have their
place: "Many economic theories don't even come close to producing the wealth
distribution we see, and if you can't produce that you're dead in the water."