Note by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
The purpose of this article is to describe a universal law of wealth based on a network effect that appears to have some important implications for economic policy. According to Buchanan, the universal law of wealth is simply stated in the following way. Each time you double the amount of wealth, the number of people involved falls by a constant factor to form a Pareto curve, e.g., in the U.S. approximately 80% of the wealth is held by 20% of the people. In some other countries it might be 90% of the wealth held by 20%, or 95% held by 10%, but the point is that in any society a small percentage of the people always own a large proportion of the wealth. This Pareto curve distribution of wealth appears to be based on a network effect that is applicable across societies and has little to do with differences in backgrounds, talents, and the education of an area's citizens.
However, a network model developed by two physicists, Bouchaud and Mezard, shows how Pareto's distribution of wealth can be influenced. Their model shows that the greater the amount of money flowing through the economy, and the more often it changes hands, the greater the equality in the economic system. The model also provides some test of political justifications for various policies. For example, recent economic policy dominated by the free market ideology and government deregulation has been promoted using the argument that wealth will trickle down to the poor. The network model suggests the opposite in that increased investment without an increase in the flow of funds between people will lead to an increase in inequality - and that is exactly what happened over the past 30 years. Wealth distribution in the U.S. has become much less equitable. The model also indicates that income taxes will tend to produce a more equitable distribution of wealth if those taxes are redistributed to society in an equitable way. On the other hand, a decrease in taxes without an increase in the flow of funds between people will lead to an increase in wealth inequality.
This article was adapted for Buchanan, M. 2003. Nexus: Small Worlds and the Groundbreaking Science of Networks. W. W. Norton.
For more on the universal law of wealth see Bouchaud, J. and M. Mezard. 2000. Wealth condensation in a simple economy. http://hussonet.free.fr/wealth.pdf.
For more on income inequality see Piketty, T. 2014. Capital in the Twenty-First Century. Belknap Press. (Note and Some Reviews).
The World Economic Forum's 2011 and 2012 Global Competitiveness Reports (Summary).