The Mathematics of Oligarchy | Bruce Boghosian | TEDxTufts
URL: https://www.youtube.com/watch?v=q_S3rULyN8Q Video ID: q_S3rULyN8Q ============================================================ Transcriber: My Linh Reviewer: Annet Johnson My quest to find the mathematical roots to inequality began at an early age when my parents gave me a game of Monopoly. I think they wanted to teach me the skills needed to become a successful businessman, but I learned these two things instead. First, monopoly requires luck. True, you needed some skill in order to manage your wealth in the game. But if the roll of the dice did not go your way or if that chance card you picked up resulted in you going to jail, you were likely to lose the game. Second, monopoly is a "winner-take-all" proposition. Even though everybody started with the same amount of money, you won the game when you took all their money and all their properties so that they had nothing and you had everything. In the end, I did not become a businessman. But the messiness of Monopoly left a burning question in my mind. And later on in my career as a professor of mathematics, this question inspired some of my research. Specifically, what causes individuals, households, and corporations to form complex economies with such staggering inequality? One of our research groups most critical realizations is that the core ideas driving our dialogue regarding wealth economics are based on bad assumptions. Let me explain. Neoclassical economic theory assumes economic agents are perfectly rational and always choose to increase their happiness, or in economic terms their utility, as long as they do not decrease that of others. All agents have the same information about what is being bought and sold. In this world prices are naturally determined by supply and demand. Your outcome depends only on your choices, and therefore you bear all responsibility for your own success or failure. This kind of thinking dominates American dialogue surrounding wealth economics to this day. Now, in real life, the assumptions of neoclassical economics do not hold. None of us think about how to maximize our utility before each purchase. Buyers and sellers do not always have access to the same information and not every transaction benefits both parties. So considering this disconnect, what happens when we base our economic dialogue and policies off of fiction? Well, let me show you. Between 2010 and 2014, I lived in the former Soviet Union where I served as president of an American university. I saw the endgame of what is happening to us now; a superpower that ignored reality in favor of economic ideology and it is not an encouraging sight. After its collapse, the former Soviet Union was forced to adopt a market economy very quickly by sudden privatization and deregulation in a process that came to be known as "shock therapy" economics. Like the end of a game of monopoly, wealth rapidly concentrated into the hands of a small oligarchy. For much of the rest of the population this meant economic destruction, mass emigration, a spike in the suicide rate, reduced life expectancy, and staggering of levels of wealth inequality. I witnessed houses of oligarchs perched on hills overlooking villages steeped in poverty. These two houses you see here are a two-hour drive apart, but they might as well be on two different planets. When my research group at Tufts University began studying models with transacting agents who behave more like real people with emotions and irrationality, we found a system much more like monopoly or post-Soviet oligarchy than a state of balance and equity. We found that wealth typically concentrates in a "winner-take-all" fashion into the hands of a single person. To prevent this, we found it necessary to continuously intervene to redistribute wealth. Like the fabled story of Robin Hood, we began to take from the rich to give to the poor. This resulted in stable wealth distribution that match those in the real world with surprising accuracy. At the root of it all, however, was a completely unstable model economy that was stabilized only by imposed redistribution - no supply demand balance, nothing like neoclassical economics. We were led to the conclusion that it was only redistribution that prevented oligarchies from forming. So how did we figure this out? To answer that, we need to understand how mathematicians represent wealth distribution by looking at Lorenz curves. On the horizontal axis, we have the percentage of people in the population ordered by wealth, ranging from 0 percent to 100 percent. On the vertical axis, we have the percentage of wealth that they hold, also ranging from 0 to 100 percent. Because zero percent of the people hold zero percent of wealth, the Lorenz curve starts at the blue dot in the lower left-hand corner. And because 100 percent of people hold 100 percent of wealth, it ends at the blue dot in the upper right-hand corner. It's the path that it takes between those two extremes that's important. So imagine a society where everyone has the same amount of wealth. This is unrealistic, but bear with me. In such a society, 20 percent of the population has 20 percent of the wealth and 60 percent of the population has 60 percent of the wealth. So the Lorenz curve is just a straight line. Now I want to juxtapose this Lorenz curve with a different way of representing this same wealth distribution. I've added green columns representing the wealth of each decile of the population; so the bottom 10 percent have an amount of wealth represented by the height of the first column, the next 10 percent by the height of the second column, etc. Of course, since everybody in this economy has the same amount of wealth, all the columns have the same height. Now, as we all know, a state of perfect equality is not the situation in real economies. So let's introduce some inequality in the society, perhaps by slowly reducing redistribution. Note that the Lorenz curve moves downward. In the society we've just created, 40 percent of households now own only five percent of the wealth. We can keep going until we come as close as we can to the Lorenz curve of the United States today. This curve is actually not a bad approximation to real U.S. wealth data. If we kept going, we would eventually reach a point where all the wealth would be held by just one or a few people. That's also unrealistic, but let's go ahead and do that to see what happens. Notice that the Lorenz curve becomes vertical on the right side of the plot. In this case, which we call a total oligarchy, there is one person whose wealth is literally off the chart in such a way that it's inappropriate to include them in the top decile. So we represent their wealth separately by the size of the circle in the lower right, containing the picture of our favorite oligarch. Returning to the case that was closest to the U.S. economy on the left here, I want to emphasize that there is a key difference between this curve and that of the United States. The model we used assumed a level playing field for all members of the economy. In reality, the playing field is tilted towards the wealthy. Wealthier people attain higher percentage returns on investments, receive better financial advice, and evade taxation more effectively than poorer people. Poorer people have less time to shop for the best prices, pay higher interest rates on loans, and it's been documented that they pay higher rent on equivalent real estate. In the words of the American essayist James Baldwin, anyone who has ever struggled with poverty knows how extremely expensive it is to be poor. So now let's return to a society with strong redistribution in this new version of the graph on the right and let's redo this exercise with a tilted playing field. We will once again reduce redistribution slowly until things match the U.S. case as closely as possible. Before we get to that point, however, a new and interesting feature will appear. To see it, keep your eye on the upper right-hand corner of the Lorenz plot. Thanks to the tilted playing field, an important difference has emerged. In the first animation I showed you, the Lorenz curve rose smoothly and steadily to the upper right-hand corner. There were rich people and poor people, but no Elon Musk. In the new animation, though the Lorenz curve is not terribly different from the first one, it jumps abruptly from 70 percent to 100 percent on the right side. This means that 30 percent of total societal wealth is held by a fraction of people so small as to be nearly invisible on the plot. So we've reintroduced a circle whose size represents their wealth. When such a small number of people have such a large fraction of total wealth, they must be incredibly wealthy. And so we call this situation a partial oligarchy and it arises from this tilting of the playing field. Remarkably, while both plots are not bad approximations to real U.S. wealth data, the second plot is a significantly better fit than the first one. Here is the actual Lorenz curve of the U.S. in 2016, and you can see that nearly 30 percent of societal wealth is held by a fraction of the population too small to be noticeable on the graph. So we see that oligarchy does not happen just in former Soviet Republic. This plot shows that 30 percent of U.S. household wealth is currently held by such a small fraction of the population that it can only be characterized as an oligarchy. The Lorenz curve is nearly vertical in the upper right. The fraction of the population who are oligarchs is extremely small, but the amount of wealth they each hold is extremely large, in such a way that the product of those two things is a substantial fraction of societal wealth. From this perspective, we can see a clear difference between the extremely rich oligarchy and the mere multimillionaires. The existence of oligarchs is not due to normal market forces and it is certainly not due to meritocracy. It is due to a breakdown in normal market forces at the very top of the wealth spectrum. The wealthiest 400 people in the U.S. currently hold about 3.5 trillion dollars in household wealth; that's more than the bottom 60 percent of the population. In other words, it's more than the bottom 200 million people. That is the reality of oligarchy. We saw that the Lorenz curves with and without oligarchy looked very similar and indeed a small decrease in redistribution or a slight increase in policies favoring the wealthy can easily distort the first Lorenz curve into the second. When that happens, vast amounts of wealth pour into the hands of the extremely rich, which creates oligarchy. That is what happened to the former Soviet Union and it's also what is happening in the U.S. today. In fact, this phenomenon has arisen across human history, creating political and ethical issues whenever it does. From the time of the Egyptian pharaohs to the European monarchies, the enormous inequality caused by oligarchy has always been justified by a litany of ideologies. Back then, to justify serfdom, kings spoke of their divine right to power. Today, to justify shocking wealth disparities, oligarchs are credited for every innovation and every job created. Don't misunderstand me; people do deserve to reap the benefits of their hard work, but not to this extent. So how do we fix all this? There is only one viable solution and that is some well thought-out program of redistribution of wealth. It is time to bring this idea to the forefront of political and economic discussion in order to create a true meritocracy, one that does not tilt the playing field in favor of those at the very top. One extremely simple redistribution plan would move every household towards the average by an equal proportion. Currently, the average wealth for U.S. households is about 749,000 dollars and 85 percent of American households fall below this average amount. These households would actually become more wealthy under this redistribution plan and receive a check in the mail. Only 15 percent of U.S. households would lose wealth and even the majority of them would lose very little. We could do this, if only we could muster the political will. Neoclassical economic theory is mathematically beautiful. It would be wonderful if the world worked that way, but it does not. It was perfected at the peak of the Cold War, when communism was a popular economic ideology in the developing world and the West needed a competing ideology in order to win hearts and minds. Thirty years ago, we watched the Soviet Union ignore communism flaws, make too fast a shift to free market economics and follow it off a cliff. Today, we must decide whether or not we will do the same with our own flawed economic ideology. If we continue to ignore empirical reality and refuse to acknowledge the problem of inequality, we will not live up to our own economic potential. Life does not have to be like a game of Monopoly. A more equitable future is mathematically possible. Thank you.