Why do the richer grow richer and the poorer stay poorer?

The November 2019 issue of Scientific American magazine included an article titled, “The Inescapable Casino,” by Bruce M. Boghosian a professor of mathematics at Tufts University, with research interests in applied dynamical systems and applied probability theory.

Professor Bruce M. Boghosian

The article purportedly reveals:

“A novel approach developed by physicists and mathematicians describing the distribution of wealth in modern economics with unprecedented accuracy.”

Economics is based mostly on psychology, which itself is a science only in the loosest application of the term. Thus, unlike most sciences, economics rarely is capable of creating reproducible tests that result in mathematical laws.

But, SA being a science magazine, Professor Boghosian’s article attempts to attach scientific credibility to economics by creating a casino-based mathematical explanation of why the rich get richer and the poor stay poorer.

His own summary of his findings is:

“1. Wealth inequality is escalating in many countries at an alarming rate, with the U.S. arguably having the highest inequality in the developed world.

“2. A remarkably simple model of wealth distribution developed by physicists and mathematicians can reproduce inequality in a range of countries with unprecedented accuracy.

“3. Surprisingly, several mathematical models of free-market economies display features of complex macroscopic physical systems such as ferromagnets, including phase transitions, symmetry breaking and duality.”

Here are a few more snippets from Professor Boghosian’s article:

Suppose you are invited to play a game. You must place some ante—say, $100—on a table, and a fair coin will be flipped. If the coin comes up heads, the casino will pay you 20 percent of what you have on the table, resulting in $120 on the table.

If the coin comes up tails, the house will take 17 percent of what you have on the table, resulting in $83 left on the table. You can keep your money on the table for as many flips of the coin as you would like.

Each time you play, you will win 20 percent of what is on the table if the coin comes up heads, and you will lose 17 percent of it if the coin comes up tails. Should you agree to play this game?

After five wins and five losses in any order, the amount of money remaining on the table will be:

1.2 x 1.2 x 1.2 x 1.2 x 1.2 x 0.83 x 0.83 x 0.83 x 0.83 x 0.83 x $100 = $98.02

so you will have lost about $2 of my original $100 ante.

The rest of the article describes the mathematics of why supposedly even exchanges between richer persons and poorer persons ultimately favor the richer persons. And mathematical examples are given of water boiling, the strength of a ferromagnet and phase transitions.

Aha. But, it’s mathematics, so it must be true — except not only does it have nothing to do with casino play, it has nothing to do with real-world economics.

First, the examples do not describe “wealth.” They seemingly describe net income, a different concept.

But far more important, although the examples are supposed to demonstrate why the richer grow richer and the poorer stay poor (or poorer), they do not.

The problem has long been known in the computer world as “GIGO,” Garbage In, Garbage Out. What is the basis for Boghosian’s 20% and 17% starting figures? There is none.  The professor arbitrarily chose numbers that “worked,” which “amazingly” multiplied to prove his point, whatever that may be.

Had he arbitrarily chosen even slightly different numbers, the results would have been vastly different. Try it yourself with ever-so-slightly different numbers.

Further, the whole concept of paying or receiving a percentage of what’s “on the table” has nothing to do with the way a casino operates, and even less to do with the way your personal finances operate.

You do not make or lose a percentage of what’s on the table. You make or lose a percentage of what you invest.

Finally, Boghosian proves his point by making predictions of the past. It’s a problem all we economists face. Unable to predict the future with any reasonable degree of accuracy, we predict the past.

We take any set of inputs and compare them to all past results, and if we can find some inputs that correspond with results, we claim to have discovered cause and effect.

It’s, for instance, the classic problem of chartists — the people who use graphs of past stock market movements to predict future stock market movements. The graphs provide perfect representations of the past — until they don’t, because the past does not perfectly create the future in psychology.

Not being an economist, Boghosian hasn’t encountered this flaw, so he is excited to have discovered this strange mathematical relationship among boiling water, ferromagnets, phase transitions, and wealth transfers.

(He also has no understanding of Monetary Sovereignty, so he speaks of taxes funding government activities, which is true only of monetarily non-sovereign governments. But that is a mere detail.)

That said, Boghosian is correct about money tending to flow upward from poorer to richer, and he is correct that it involves percentages, but not in the way he claims.

Here, in simple terms, are the three reasons why the richer grow richer and the poorer stay poorer.

  1. Richer people have higher incomes.
  2. Richer people spend a lower percentage of their higher incomes.
  3. Richer people save and invest a higher percentage of their higher incomes.

Put those three bits of mathematics together and you can see the rather obvious solution to the title question.

Consider three classic nuclear families of two parents and two children.

In nuclear family “A” the parents together earn $30,000 a year. To pay for food, housing, clothing, taxes, entertainment, school, etc. the nuclear family just scrapes by, spending $30,000 a year, and saving/investing $0. After 10 years, they have saved $0, and their children will receive nothing when the parents die.

In nuclear family “B” the parents together earn $50,000 a year. To pay for food, housing, clothing, taxes, entertainment, school, etc. the nuclear family spends $45,000 a year, and saves/invests $5,000, about 10% of their income. After 10 years, they have saved about $50,000, more or less, depending on how well they invested, and their children may, or may not, receive a minimal amount when the parents die.

In nuclear family “C” the parents together earn $1,000,000 a year. To pay for food, housing, clothing, taxes, entertainment, school, etc. this nuclear family spends $500,000 a year, and saves/invests $500,000, about 50% of their income. After ten years they have saved about $5 million, depending on how well they invested, and their children will receive millions when the parents die.

And there it is, in simplistic terms, the reason why the richer grow richer and the poorer stay poorer, and the Gap between them widens.

Choose any set of numbers you wish, and you will find that the richer are able to save and invest not just more of their incomes, but a higher percentage of their incomes, and they are able to pass down to their children substantially more.

The pseudo-mathematical formula is:

More x More = Increasingly more.

So mathematically, the Gap between the richer and the poorer not only must grow, but it must grow at an increasing rate.

But there’s even more.

The Gap is what make the rich rich and the poor poor. Without the Gap no one would be rich or poor. We all would be the same. So to feed their desire to become richer, the rich must widen the Gap, which can be accomplished by increasing their own wealth or by decreasing the wealth of the poorer.

This desire to widen the Gap is known as “Gap Psychology.”

The rich run the politics of America. To become richer, they pay politicians to provide favorable tax laws for the rich, and to resist giving benefits to the poor. They also pay the media and university economists to disseminate false statements about Social Security, Medicare, and other social benefits becoming “unsustainable” and  “insolvent.”

In summary, the Gap between the rich and the rest naturally widens, not because of a mathematical formula involving inter-class transactions, but rather because the rich are able to retain, invest, and pass to their children a higher percentage of their higher incomes.

And that is why a nation’s overall prosperity depends on such efforts as are described in the Ten Steps to Prosperity (below).

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereignty Facebook: Rodger Malcolm Mitchell

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The most important problems in economics involve:

  1. Monetary Sovereignty describes money creation and destruction.
  2. Gap Psychology describes the common desire to distance oneself from those “below” in any socio-economic ranking, and to come nearer those “above.” The socio-economic distance is referred to as “The Gap.”

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of Monetary Sovereignty and The Ten Steps To Prosperity can grow the economy and narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded Medicare — parts A, B & D, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%”) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy and narrow the income/wealth/power Gap between the rich and the rest.

MONETARY SOVEREIGNTY

 

14 thoughts on “Why do the richer grow richer and the poorer stay poorer?

  1. It hasn’t dawned on the Rich, especially their controlled media, that if we want the monetary system to succeed we must ” somehow” make it easily available to everyone, similar to the abundance categories of food, air, water, and sunshine. Otherwise, the crime rate will only increase in direct proportion to the GAP; a rate that will also eventually consume the rich no matter how many laws are passed, police hired, or penalties levied. Without a functional “middle,” the whole cannot be sustained and must, by some means, collapse along with the 19th Century’s obsolete culprit –the scarcity model.

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    1. Indeed, the scarcity model is really an obsolete relic of the 19th century, hence the “need” for the 0.01% oligarchs to create artificial scarcity to keep their evil system going and maintain their power and control over the bottom 99% via the Gap. Ironically, we treat the free as though it were scarce, while we treat the truly scarce as though it were free.

      As for the correlation between the Gap and crime rates, that is very true as well. There is a very strong correlation between inequality and crime, well over and above any effects of poverty per se. Combine them together and there is an even worse recipe for crime. And much of the obseverd correlation between the “misery index” (i.e. the sum of the unemployment rate and the inflation rate) is most likely a result of the Gap’s pernicious influence on society as well.

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  2. Concerning the ten steps, I am puzzled how with the Gov’mt making all of these proposed payments, taxing the rich is necessary to the system. If taxes don’t fund gov’t and disappear when collected, and taxing the rich only removes investment money from the economy, how can the rich tax be anything but a punishment for success? Also, I am still unclear how inflation works in this case of huge amounts of money creation and its effect on domestic and international business

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    1. Good questions. Clearly,, you understand a primary fact of Monetary Sovereignty: Federal taxes don’t fund federal spending. So why tax the rich? Answer: To help narrow the Gap between the rich and the rest (which also is the primary purpose of the other nine steps.)

      Money creation is accomplished primarily by private lending and federal spending. The private sector creates dollars with such efforts as home mortgages and car loans (usually indicating a strong real estate, auto market) and by business borrowing (usually indicating business growth).

      So private-sector money creation, on balance, indicates a strong, growing economy.
      Federal money creation occurs when the federal government buys goods and services, both of which help the economy grow. Historically, all money creation (which is different from currency “printing”) indicates a strong and healthy economy.

      By contrast, during hyperinflations, which always are caused by shortages (usually shortages of food and/or energy), some governments have responded by printing currency, which exacerbates the hyperinflation.

      To cure the hyperinflation, the government should invest in curing the shortages, rather than just printing currency. Note that such investment creates dollars, but by curing shortages, inflations are prevented and cured.

      Since 1940, the federal government has created about $20 trillion dollars by purchasing goods and services. The federal debt has grown more than 50,000%, but inflation has averaged about 2.5%, close to the Fed’s target level.

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      1. I better understand the inflation part now. Food or fuel shortages don’t seem to be looming. Thanks for that.
        I guess I am now trying to understand the mechanism of how taxing the rich betters the rest. Say the rich are taxed to a level of the median income, how the does that or any money get to the rest. Is the money distributed via the Ten Steps to Prosperity? Where does the rich money come from? If rich money results in the divestment of assets to pay the tax how does that help? Still many questions for me.
        Thanks for your cogent reply.
        Cheers,

        ( A small rant: An interpretation of a conservative point of view would suggest that all the handouts will make for a lazy “give me more” citizenry in spite of the obvious benefits of healthy and educated people. To impose a life long debt burden for overpriced education or bankruptcy for astronomical medical bills (or no health care due to costs) just seems wrong to me. And yet I can see a connection between struggle and making a better life from that struggle. No need to reply to this).

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        1. The money does not “get to the rest.” Merely narrowing the Gap, between the rich and the rest, is beneficial.

          Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

          Visualize all the ways a wide Gap exacerbates the power dynamic between the richer and poorer.

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        2. As for the “lazy give me more” citizenry, the conservatives try to spread the false notion that the rich work harder than do the poor. By every measure, the poor struggle much more, just to survive.

          The rich want the world to believe that the poor “deserve” to be poor, and being given the necessities of life will take away their desire not to be poor.

          It is pure rubbish.

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  3. “Economics is based mostly on psychology, which itself is a science only in the loosest application of the term.” is rather an indictment of economics. The sentence that follows “Thus, unlike most sciences, economics rarely is capable of creating reproducible tests that result in mathematical laws.” could well be read as an excuse.

    The rest of this piece comes across as mostly hand-waving – unfortunate, because there is some useful info. And interestingly, this article does seem to somewhat agree with the Boghosian article, as to there being a significant problem. Also some of the reasons it exists, and what can be done to address it.

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    1. The entire 1st paragraph is an indictment of economics. Think about it: How many so-called economists understand, and are willing to talk about, the realities of Monetary Sovereignty? Far too few.

      And I’ll keep waving my hands about it.

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      1. OK… but the rest of this article seems to indict Boghosian, et al – for not being economists?

        “Not being an economist, Boghosian hasn’t encountered this flaw…” Given the experience of the authors, this seems unlikely. Moreover, the authors clearly state that this appears to be a useful model to consider – not that it predicts the future.

        And ‘arbitrarily chose numbers that “worked”’ – although the authors point out that “increasing or decreasing Δω will just extend the time scale so that more transactions will be required before we can see the ultimate result, which will remain unaltered.”

        This article does seems to have some useful info to get people’s attention about – which would be better served by specifics vs. hand-waving.

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  4. Try changing the numbers from 1.2 and .83 to 1.3 and .8 and see what happens.

    In any event, what is the purpose of this “great mathematical discovery.” What economic programs does it suggest? What can be done about it?

    Here’s another “amazing” bit of maths showing why the rich always win: If you go into a casino, and your first bet wins, and you keep letting it ride, eventually you will lose everything. So?

    It’s a long article revealing the most basic of maths as some sort of remarkable discovery that has no useful function in economics.

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