Why the Rich Get Richer

Gordon Gekko back for the global recession

By Troy Camplin – LibertyChat.com Contributor –

Anyone who is even vaguely in tune with what is going on in contemporary economics has heard about Thomas Piketty’s book Capital in the Twenty-First Century. In it he argues that increasing wealth disparities is a social problem that needs to be solved by government intervention, particularly high taxation. The arguments I have read against Piketty’s book range from interpretative issues to data problems, but the one argument against his thesis I have not read anyone make is the fact that there are necessarily going to be wealth disparities in a free market (or even in one that approximates a free market, such as the U.S. economy) due to network effects.

A market economy is a self-organizing network process. F.A. Hayek referred to it as a “spontaneous order.” The universe is full of self-organizing network processes, from living cells to ecosystems to brains to social systems. One of the features of such a system is the existence of what are called power laws. Power laws are easy to understand. It is simply the rule that, in certain systems, you have very few large things, a medium number of medium-sized things, and a large number of small things. We see this throughout nature. There are a large number of small earthquakes, a medium number of medium-sized earthquakes, and very few very large earthquakes.

This also occurs in social systems. There are few megacorporations and many small businesses; most businesses only last a few years at most, while only a few businesses have lasted a hundred years or more. One would also expect there to be few very wealthy individuals, a medium number of middle class, and a large number of poor. But even then, the poor is going to differ over time. This is because of the nature of network effects.

To understand network effects, let me ask a simple question: why is Bill Gates incredibly wealthy and I am not? The answer is actually incredibly simple: Bill Gates engaged in more economic transactions than I have. His network of economic interactions is large, and because it is large, it keeps growing faster. I have engaged in fewer economic interactions, so I have less wealth. Yet, because I still engage in economic transactions at about the same rate over time, my wealth has remained about the same. Thus, while Bill Gates becomes wealthier in no small part because he’s already wealthy, I do not become poorer because of it. I would become poorer only if I engaged in fewer economic transactions over time, and that is not affected in any way by Gates’ economic transactions. The rich may become richer, but that does not affect whether or not the middle class become richer or poorer or stay the same, and neither one affects whether the poor do so, either.

Because of the ideological baggage tied to wealth, I also like to use a non-ideological example. We see network effects in the arts as well, including literature. Shakespeare has many more network links to his works than does probably any other artist, with the possible exception of Homer. He has a great deal of influence on literature, and he has a very large share of theater time that could be taken up by other plays by other playwrights. Who would argue that it’s not “fair” that Shakespeare’s plays are performed so much that they prevent theaters from performing plays by other playwrights? As a playwright myself, I could complain that it’s not fair that he has this “unfair advantage” and so some of his performance “wealth” ought to be redistributed my way. But let’s be honest: it just sounds silly when I say it that way. And that’s because it is silly. Would “redistributing” theater space to people like me be better or worse for theaters as a whole? I would argue that I would be worse. Shakespeare performances probably keep many theaters alive so they can in fact perform plays by people like me.

So even in what appears to be a zero-sum situation (there are only so many theaters), we see that increasing wealth by one not only does not harm others, but in fact benefits them. The same is true of economic wealth disparities when those disparities are created in the market (which is certainly a positive sum game). Bill Gates’ wealth does not harm me; rather, what he did to become wealthy enriched me and billions of others.

In other words, Thomas Piketty is concerned with the existence of a naturally occurring phenomenon. To him it’s not fair that there are elephants and whales if there are mice and shrews. But what do you suppose would happen to the global ecosystem if you got rid of the elephants and whales because you decided it was unfair that they were so much bigger than most other mammals? Whether it’s getting rid of whales or Shakespeare’s plays or Bill Gates’ wealth, the outcome is going to be the same: widespread ecological destruction. It doesn’t matter if that ecosystem is a market economy, an artistic order, or an actual ecosystem, the results will be the same.

 

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Troy Camplin is an independent interdisciplinary scholar, a writing consultant, a poet, and a playwright living in Richardson, TX.

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