Throwing Money Again

It’s been a while since I last posted in this blog. In the last post, months ago, I promised you a new model, and here I am writing about throwing money again. What happened?

Two things. First, I built that new model. It’s about building teams, cooperation, and organizational effectiveness. And in the next few posts, I’m going to walk you through it. But also, I received some questions about the last posts in my Throwing Money series. People wanted to know what was going on, and why the results panned out the way they did. So I decided that one more post on the topic was in order to make things clear. After that, it’s game theory time.

As you may recall, this series was about what building a very simple model of an economy in which agents hand money around almost at random. We saw that it had a lot in common with the notion of entropy in physics. We also saw that interesting things happened when you started adding in factors like individual talent and the advantages of family wealth. Our conclusion was that prior wealth mattered a hell of a lot more if you were rich, and that all things being equal, we should expect the top members of society to be there more out of luck than skill. This despite the fact that overall, skill seemed to make more of a difference to success than money.

“How does that work?” was the question I received. So I decided to make a fresh version of the sim to explain. In the sim below, I calculate at the overall talent and prior wealth of each tranche of twenty agents and plot the relative values. That way, you can see the distributions of family advantage and talent over the distribution of wealth. I invite you to click on it to see what happens.

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As you’ll see if you let the sim run for long enough, we end up with an upward curve for both prior wealth and talent across the population. However, those two curves are not the same shape. Talent forms a gentle wobbling slope. Prior wealth effects stay mostly level until you reach about the top twenty-five percent of the population, at which point they kick into a high gear. By the time you get to the top ten percent of society, they are dominating.

This doesn’t happen all at once. For a while, as the simulation runs, talent is making more of a difference. It’s only after the consequences of wealth inequality kick in that we see the effects reverse themselves. At that point, you’re not dealing with the same kind of society that you started with.

Are there lessons here? Certainly. The first is that wealth inequality increases, different sociological effects kick in. Secondly, if you believe in an Ayn Rand style model of society, in which excellence should be given room to play itself out, the best thing you can do to facilitate that is to tax the top ten percent of society and spread that money out among the poor. That way, you maintain the conditions under which excellence stands a chance of beating out historical accident.

If there’s one thing I love about models, it’s the way that they explode our assumptions about how the world works with so little investment of effort. Personally, I’d like everyone running for political office to have to complete a course on complex systems before they can stand. Who’s with me?

Written on September 23, 2017 by Alex Lamb