Reviewing intellectual ideas is often hard work, involving slogging through numerous references and deep contemplation of the author’s contentions. That is why it is a true joy to occasionally come across work so egregiously chowder-headed that we can gleefully have at it without too much work at all.
Just such work was brought to our attention recently, when our malicious gaze was directed to an article in The New Scientist entitled “That’s the way the money goes.” The author of the article, Mark Buchanan, is highlighting the work of two physicists, Jean-Philippe Bouchaud and Marc Mézard, who have decided that it might be fun to play economists for a spell. They have set out to “explain” the “mystery” of the distribution of wealth. It’s the kind of piece that could easily prompt a review much longer than the original article, as almost every sentence cries out for correction. However, the constraints of time and space only allow us to explore the deepest canyons of this intellectual Mariana Trench.
The article doesn’t wait long to head down into those canyons. It opens with the following:
Life’s so unfair. The rich get richer, while the rest of us just scrape by. Is society to blame or are deeper forces at work...
In three brief sentences we are treated first to a trite cliché -- “Life’s so unfair.” This is followed by an empirical falsehood -- “the rest of us just scrape by” -- when, after all, the standard of living under market economies, for even the poorest, has been steadily rising for several centuries. (Incidentally, we wonder in what sense Buchanan is just scraping by. Does he “do lunch” with his editor in the same eateries patronized by the average sweatshop worker?) Next comes invalid anthropomorphism -- society is not a person or moral agent, and cannot be the target of blame. Lastly, it’s not even demonstrated that there is something for which to blame someone. After all, if the rich are justly getting richer, then the issue of blame doesn’t even arise.
These physicists’ stunning new contribution to a science they apparently know nothing about is to “have discovered a link between the physics of materials and the movements of money, a link that explains why wealth is distributed in much the same way in all modern economies.” Since the author is here conflating “wealth” and “money” -- the long-discredited mercantilist doctrine -- we expected that this “link” would involve some discussion of prices, as pieces of paper with presidential portraits are rather ill suited to satisfy directly most human desires.
However, we were sadly mistaken, for the nature of this link is that Bouchaud and Mézard simply made up some equations that could conceivably describe the distribution of wealth in an economy, then found that these equations happened to be like those describing the movement of something called a “directed polymer” across a bumpy surface. With a “rigorous” criterion like this for having found a link, we guarantee that we could discover a “link” between Babe Ruth’s batting average in 1929 and the October stock market crash.
Buchanan proceeds to introduce us to Pareto’s law:
In the 19th century, economists were certain that each society would have a unique distribution of wealth, depending on the details of its economic structure. But they were dumbfounded in 1897 by the claim of a Paris-born engineer named Vilfredo Pareto. The statistics, he insisted, prove otherwise. Not only do a filthy-rich minority always hog most of the wealth, but the mathematical form of the distribution is the same everywhere.
Economists who felt economies would have “a unique distribution of wealth,” depending on the “details of its economic structure,” had no reason to be “dumbfounded” by Pareto’s statistical discovery, notwithstanding his insistence to the contrary. It could simply be that the “details” of each country are such that each yields the unique outcome that Pareto documented, unique outcomes which are all somewhat similar. If, for example, wealth tends to be concentrated in the hands of the most productive, there is no reason to expect that this “outcome” will differ much from country to country.
Let’s review Pareto’s “law”: He found that wealth is distributed according to 1/W^E, where E is “always between 2 and 3 for every European country [Pareto] looked at.”
Well shiver our timbers. Can you imagine if a physicist announced a “law” for which a constant was “always between two and three,” but only for the European countries (i.e. not the third world laboratories) in which the experiments had been conducted? If one allows this much leeway in curve fitting, all sorts of surprising “laws” can be found.
Indeed, the entire research effort of Bouchaud and Mézard is akin to an attempt to explain the “dynamics of the ether” or the “fluid mechanical properties of phlogiston.” The phenomenon they are attempting to model, that of a “distribution” of wealth, does not even exist in a market economy! In the unhampered market, wealth is not distributed; that is, there is no distinct phase we could call distribution of wealth that stands apart from the creation of wealth. Bill Gates is “filthy rich,” to use the terminology favored by Mr. Buchanan, because he produced a “filthy lot of things” that a “filthy bunch of people” valued “filthy highly.” It is not through some mysterious process of money jiggling over bumps in response to the jostling of “trading molecules” that Gates got a lot of it, and the fellow on the corner begging for change didn’t. Gates produced a lot of wealth, and the other guy didn’t.
As Mises says:
Now in the market economy this alleged dualism of two independent processes, that of production and that of distribution, does not exist. There is only one process going on. Goods are not first produced and then distributed. There is no such thing as an appropriation of portions out of a stock of ownerless goods. The products come into existence as somebody’s property. If one wants to distribute them, one must first confiscate them. It is certainly very easy for the governmental apparatus of compulsion and coercion to embark upon confiscation and expropriation. But this does not prove that a durable system of economic affairs can be built upon such confiscation and expropriation.
Buchanan’s complaint is analogous to griping about the grossly unfair three-pointer distribution in the NBA: An obscene proportion of made three-pointers are hogged by the top twenty shooters!
To his credit, Buchanan does give the following caveat: “To see how the model economy and a directed polymer are related takes a little imagination.” We’ll say! For the Bouchaud and Mézard (B&M) model to be taken as a piece of meaningful economics, we’d have to imagine the world working something like this:
Wealth, in the B&M world, is not possessed by those who produce it. In fact, it is apparently not produced at all. It is simply lying around, waiting to be distributed. We can picture a valley, a bumpy one, like the little graph that Buchanan employs, filled with refrigerators, cars, bushels of wheat, finished houses, computers, and so on, in other words, wealth. A band of humans crests the surrounding hills and enters the valley. Randomly, perhaps based upon where they happen to be arrayed in the group, they each snatch up a portion of this wealth.
Now they begin to randomly exchange it. They exchange not because they perceive an advantage in the exchange, but because the “heat” of the surrounding “trading environment” causes them to do so. (It’s unclear how this “trading environment” comes into being other than through the decisions of people to exchange, but never mind.) These people’s exchanges are just as likely to be to their disadvantage as to their advantage. They never learn from this fact and improve their ability to exchange.
To Buchanan’s mind, such a model suggests that “Economic theory is about to grow up.” He says, “The model offers what might be the first lesson of economics to be firmly founded in mathematics...” Buchanan (and Bouchaud and Mézard) have fallen prey to the mystical belief that, to be “scientific,” any field of study must ape the methods of physics. Over 100 years ago the great Austrian economist Carl Menger pointed out, in Principles of Economics, the absurdity of this approach:
Past attempts to carry over the peculiarities of the natural-scientific method of investigation uncritically into economics have led to the most serious methodological errors, and to idle play with external analogies between the phenomena of economics and those of nature. [Francis] Bacon said of scholars of the description: “Magna cum vanitate et desipientia inanes similitudines et sympathias rerum describunt atque etiam quandoque affingunt”... [similitudes and sympathies of things that have no reality... they describe and sometimes invent with great vanity and folly]
As Buchanan wraps up his piece, he moves to policy recommendations. He says that if we could “change the exponent” (in the Pareto equation) to 3, then the richest 20% of the population would get only 55% of the wealth, which is “better than” the U.S. right now. This normative claim is not justified, of course, for how could physics prove anything about ideal wealth distributions?
However, this piece was not completely disagreeable. It had some neat graphs, and it gave an accurate and concise explanation of a recent advance in physics, an enterprise for which the mathematical modeling of unthinking, mechanistic processes is appropriate. It does, though, seem to be a bit of a leap to employ this tentative success in predictions of polymer behavior to engineer social changes whose desirability is based on an implicit philosophy of misguided altruism and good, old-fashioned envy.
