Tuesday, May 24, 2005

The Big Idea

Plumber wants to know why wealth inequaltiy hurts GDP growth.

Abstract: If risks increase societal wealth, and people care about relative position, then when people are far apart on wealth, they will not risk as much because they won’t be able to change their social position higher and are also not afraid of having their position lowered.

Inequality represents our relative positions in society. Paris Hilton probably does not have a whole lot of better chance at survival to reproduction then Brad Plumber (and in fact may have less due to drug use and promiscuity), but she has access to many times his wealth (presumably). In theory, if she were fall ill to some obscure disease, she may be able to accelerate research in that disease somewhat, but outside of this obscure chance, there is little that her wealth can create something to personally benefit herself. Her wealth can signal that she is near the core of society. This is of advantage because the aggregate probability that humanity will survive fluctuates, as in the case of, say, the Black Death. If a world wide epidemic were to occur, Paris Hilton, or her eventual heirs will be holed up in her villa outside Naples telling sexually titillating stories to her other obscenely rich friends.

So being at the core of society will increase your chance of survival in a somewhat zero sum manner. A successful society organizes itself so that the people who increase the probability of survival for the whole society are also the people who are closest to the core of society.

People wish to maximize the survival of their genes. Maybe it would be more accurate to say that genes wish to maximize their survival (yes, I believe genes can be analyzed as quasi rational agents), and people are for the most part at the mercy of their genes.

Presume there are two distinct goods, wealth and looks. Wealth reflects a non-zero sum good that is proxy for absolute survival (survival without regard to human behavior), looks reflect a zero sum good that may improve societal standing. Suppose further that some individuals specializes in one good, and the others specializes in the other good.

If people are at approximately equal wealth and society is organized to make good bets in wealth, i.e. blowing up your neighbor’s factory is not rewarded by society (by making your factory more valuable, say), then people will invest liberally. Even if you do not expect to benefit a significant amount from an increase in your own personal chance of survival by increasing your wealth, you will attract a mate that increases your gene’s chances of survival by a significant quantum if you increase your wealth a little over your neighbor’s level. So if you take a risk by investing, you have a better chance of leapfrogging your neighbor and landing the high “looks” mate. Seeing that you are investing, they may wish to counter invest to increase their chances of getting the high “looks” mate. To which you may counter, and etcetera.

On the other hand, if there is a significant wealth disparity, the high wealth individual will not feel any threat to their social position even if the poor individual increases their wealth. The poor individual also will see that the raw increase in chance of survival from increasing their wealth good will not outweigh the costs if their investment does not turn out, and that they have little chance of leapfrogging the high wealth individual and mate get the high “looks” mate.


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