Sunday, October 30, 2011

Luck of the Wealthy

I've previously mentioned this quote from Ursula LeGuin's book The Dispossessed. It's the words of a fictional philosopher named Odo, who influenced a revolution that led to the creation of an "ambiguous utopia":

"For we each of us deserve everything, every luxury that was ever piled in the tombs of the dead Kings, and we each of us deserve nothing, not a mouthful of bread in hunger. Have we not eaten while another starved? Will you punish us for that? Will you reward us for the virtue of starving while others ate? No man earns punishment, no man earns reward. Free your mind of deserving, of the idea of earning, and you will begin to be able to think."
I've always thought that chance had a lot to do with how well any one person does, financially, in our society. Sure, there's intelligence, hard work and perseverance, but even if you have all of those, there are no guarantees. Sometimes it's being in the right place at the right time or sheer chance and butterfly effects that make someone successful.

Well, it turns out Odo and I were onto something. Today's Star Tribune contained an op-ed by local writer Greg Breining, who reports on a mathematical model developed at the University of Minnesota. The model shows that "the fabulously rich get as rich as they do by chance alone."

The model was developed by Joseph Fargione, an ecologist with the U's College of Biological Science, and has been published in a peer-reviewed journal. Breining writes,
The link between ecology and economics is not as far-fetched as it might sound. Ecologists had long thought that environmental factors and the characteristics of species would determine the evolutionary outcome of an ecosystem (just as many people insist that talent, hard work, and good decisions determine wealth). Put the same species together under the same conditions, the thinking went, and you'd get a similar result -- again and again.

But in the 1980s, James Drake, an ecologist at the University of Tennessee, repeatedly assembled "microecosystems" in five-gallon aquariums. He found he could add the same pond species in the same numbers under identical conditions -- and get a different result each time. Different species would gain ascendency and dominate the ecosystem -- as if by chance alone.
Fargione did the math and finds that wealth accumulation is like Drake's aquariums:
by the "inexorable effect of chance," and chance alone, "a small proportion of entrepreneurs come to possess essentially all of the wealth. ... The concentration of wealth occurs merely because some individuals are lucky by randomly receiving a series of high growth rates, and once they are ahead with exponentially growing capital, they tend to stay ahead."

According to Fargione, greater variation in rates of return hastened the concentration of wealth. Inequality grows with time. Wealth concentration continues despite periods of recession and depression. And splitting estates among heirs does not appreciably slow concentration.

In the real world, of course, some people are more skilled at making money than others. And business owners who are making a high rate of return, by operating highly successful companies, tend to continue earning high rates of return. And the rich have connections and other means to increase their wealth that most folks lack. "Those other factors would exacerbate the underlying pattern," says Fargione.
One thing that would break up this randomized juggernaut is a substantial estate tax, according to Fargione. Makes sense to me; why should someone be able to inherit money -- which s/he had nothing to do with acquiring -- without taxation? It seems like those who think people on "welfare" are lazy should be equally against anyone being able to live off of inherited trust funds.

In any case, it's hard to get around the argument that the type of income inequality we're experiencing in this country is unhealthy in a democratic republic and bad for the economy, too. Breining concludes with this:
According to economists Andrew G. Berg and Jonathan D. Ostry of the International Monetary Fund, "In fact equality appears to be an important ingredient in promoting and sustaining growth. The difference between countries that can sustain rapid growth for many years or even decades and the many others that see growth spurts fade quickly may be the level of inequality."

1 comment:

Cinday said...

I saw this report, too, and while not surprised, it depressed me. Am I correct in interpreting this as there being no level playing field in reality? The rich and the poor don't really start out at the same place. There is luck in the circumstance of birth. And it used to be that anyone could gain a better or higher position in life than her parents in this country. There's a big article in "Time" magazine this week about that....