The Rich Get Richer

This comes from Network Theory, a newish branch of mathematics. Network theory studies networks of nodes--it's a branch of Graph Theory. It studies the behaviour of complex networks, which turn out to pop up everywhere: computer networks, transportation networks, social networks, ecologies, and, of course, economies.

There are a bunch of interesting points stemming from network theory. Here, though, I'll confine myself to one key insight: The rich, in complex networks, tend to get richer.

I should go into more detail, but for now, I'll just give some examples.

Computer Networks
Imagine that there are two pages on the web with a similar topic. Both would like to be more popular. The only difference is, one site (call it A) has twice as many links, on the internet at large, pointing at it. Which one will grow? Well, since one has more links, people are more likely to find it. Since the number of visitors at A is larger than at B, more people will tend to link to A. The more new links it gets, the more it will tend to get.

What happens to site B? Well...actually, it depends where it starts off. If it's above some critical threshold, it will also tend to grow--but A will still have a head start. If it is below the threshold, it will just fail to achieve critical mass. It will fade or die. It's worth noting that A will probably usually have a dampening effect on B, making it more likely to fail.

Google exacerbates this; it explicitly ranks by link count. More popular pages tend, again, to get more hits, and thus more links, and thus a higher ranking, and so on.

Other examples: Who would you rather peer with, an ISP with many links, or an ISP with few? ISPs who already have many links will tend to gain more links.

Other Networks
There is a well-known problem with airport hubs being too busy. Why? In looking for the shortest, most efficient path for their customers, airlines find it necessary to land at hubs with many existing connections in order to maximize the number of destinations their customers can reach, and minimize the time it takes for them to get there. Therefore, airports with many existing connections will tend to get more connections.

In social networks, this idea is pretty intuitive: the more people you know, the more people you can meet. Generally, we meet other people through other people; a person with no friends or family will not easily meet new people. A person with many friends and family will meet many. People who are popular will tend to get more popular.

The Economy
One of the more interesting, and relevant, of the networks...

Connections can be defined as employment, investment, purchase, or sale--in short, as a business transaction of one kind or another. People who have a lot of money are able to form more connections. People with very little money must use most of it on expenses, and thus will form very few, if any, connections. Generally, they will have one to their employer, and possibly one or two other investments.

Generally speaking, connections are profitable--otherwise you wouldn't form them. Therefore, people with more money will also make more money. This is intuitive--if you had money to invest in stocks and real estate, you would generally (though maybe not right at the moment...) make money on them.

People who have money are therefore more likely to make money; more than that, though, they are also more likely to form new connections. This is, first, because they will tend to become aware of more opportunities, through their existing connections; second, because the party desiring a connection is more likely to find them than someone with few connections; third, because they have the money to invest in forming a new connection (which, in the economy, generally has an associated cost); and finally, because the third party will prefer them, since they have more money and will thus be more willing to form new connections.

Some clear examples of this: You have a great idea for a company; who do you approach for investment, some working Joe, or a well-known, rich investor? You're looking for a new CEO for your company; where do you find them, by talking to other executives and considering people you've already met, or by talking to random MBAs at a school? And finally, there's a company that seems on the brink of great success; who will benefit more, the guy who can afford 5,000 shares or the guy who can afford 1,000,000?

These examples seem trivial, but consider why: we have internalized this logic. Yes, they seem obvious, even silly. Does that make them any less likely to result in people with more money acquiring still more money?

There was a striking analysis of the interconnections between people who are executives and/or on the board of directors of the top N (where N is some reasonably large number) American corporations, compared to a normal community. They're very tight-knit. It's almost food for conspiracy, if it wasn't well-explained by network theory.

This problem is that much worse at the poverty line, since that effectively means you have no money to form new connections, since you are effectively spending it all on cost of living.

Solutions
Leaving this blank for now. Ho ho.

But note that this suggests that "In the economy, all people should be equal: they should make, and have, roughly the same amount of money." is about as valid an idea as: "On the internet, all hosts should be equal:  they should have roughly the same amount of traffic and should receive the same number of visits."

So, is that a sane idea? Maybe. But it's pretty clear that if you tried to implement that idea in any sort of naive way (i.e. shut down popular sites, bounce visits to other hosts, etc) it would be a disastrous failure. You'd need a revolutionary (hah!) new system. You'd probably need an extra layer of abstraction or three.

Note that stocks, bonds, RRSPs and investment companies, are all sorta abstractions, and they do serve to redistribute wealth a bit (middle-class folks can make money from the success of giant companies...).