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OpEdNews Op Eds    H4'ed 10/29/19

The Slap of an Invisible Hand

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For most of the last 40 years the words "free market" have been a rallying cry for people interested in making government disappear. They represented the politicization of the idea put forth by Adam Smith in the 18th century that the outcomes in a free market (transactions by a seller not obliged to sell to a buyer under no external reason to buy), by themselves, resulted in optimum outcomes for society and perhaps for individuals as well. Smith's "invisible hand" in the marketplace gave hope that people, if just given enough freedom, would ultimately make the optimal decision all by themselves conveniently dispensing with the need for anyone, especially government, from having to tell them what to do.

This view of the economic world, sometimes called a yard-sale model of economic activity, is particularly attractive because it builds on the idea that no matter what the market power of two individuals, a transaction in an unfettered marketplace, like those of a yard sale, would end in both knowing that they got a good deal (e.g. I finally got rid of that ugly pink vase your sister gave us when we got married and I got $5 for it too, versus, I finally found a pink vase that goes perfectly in our dinning room and it only cost $5.) In other words, for the last 250 years it has been presumed that in a free-market transaction the participants are equal and that the cumulative effect of free-market transactions are optimal for society.

An article in the November edition of Scientific American, "The Inescapable Casino" by Bruce Boghosian, describes a modelling effort by a set of mathematicians to test these notions. Technically, their actual objective was--in these times of highly disproportionate distribution of wealth--to figure out the keys to how wealth is distributed to a population. In the process of discovering those key drivers they ripped the cover off of the assumptions about Smith's invisible hand.

The model they built mimics a marketplace by executing millions of transactions in the computer between an electronic population of 1,000 people who all start with the same amount of wealth. Each transaction is a bet on the outcome of flipping an electronic coin. They also account for the advantages the wealthy have in the marketplace, systems that redistribute wealth, and people who have a negative net worth. Using these three variables, after running millions of transactions the model produces a distribution of wealth across the 1,000 e-participants. The initial model, run without the three variables, always ends with one person having all the wealth, an oligopoly.

There are no nations of any size that are pure oligopolies. So, they needed to find ways to make their modelling generate results that looked more like real national wealth distributions. Their three key variables accomplished this and they were able to produce distributions with their model that nearly exactly mimicked wealth distributions in numerous national economies including the US.

The implication of their success in modelling national wealth distributions using nothing more that these three variables suggests the following:


  • Marketplaces without intervention are actually trickle-up, not trickle-down

  • Having more money than other participants in a marketplace imbalances a market transaction in favor of the wealthier person

  • Wealth accumulation is much more based on luck than on skills

  • Poverty is not a function of personal willpower, or lack thereof

  • Redistribution of wealth is a requirement to prevent the natural inclination of a market to create an oligopoly


Given our 40-year national experiment in getting rid of "constraints" on the marketplaces and in minimizing redistribution of wealth from the rich to the poor, our growing inequality seems to be a quick acid test for the results of this modelling. As Professor Boghosian points out, this all suggests that a so-called "free market" is anything but free and fair.


 

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