Why is Inequality Bad?

Inequalities reverberate and compound because the markets that make up an economy are interconnected, and the actors within each market don’t listen to people’s voices directly.

We all know that today’s economic inequality is bad—we can feel it—but we don’t have a clear way to articulate why this is, unless we appeal to morality. The field of economics doesn’t offer a compelling narrative, which is a major shortcoming. Don’t get me wrong, there are many brilliant economists out there doing important work and publishing insightful individual studies. But the overarching paradigms of the field of economics can’t pull together the results of these individual works in a way that convincingly condemns massive and persistent economic inequality.

I would like to introduce you to a different paradigm—Complexity Economics—that can help us reason through why inequality is, in fact, bad for the economy.

Intuitively, try to imagine yourself as an entrepreneur. Your goal is pretty simple: find a way to make money. Specifically, you want to set up a business where you earn more money than you’ll end up spending as you go about trying to earn it.

Let’s say you are considering three options for what could be your business model:

  • Find one person willing to pay you $100,000
  • Find one thousand people willing to pay you $100
  • Find one million people willing to pay you $0.10

Each business model would earn you $100,000… but which of them sounds the easiest and cheapest to pull off?

Certainly not the third! Only a few kinds of companies have ever managed to make a profit off of micro-transactions, and they are intensely expensive to set up. Massive infrastructure is required. A minute of pay-as-you-go calling costs about 10 cents, for instance, but even a postage stamp is 55 cents these days.

Diagram of computational social science
From our friends at the SAGE Ocean blog: Carolina Mattson on the theory and tools in the age of big data (click on image)

So, what about the second—making money by selling something decently valuable to a few thousand people? Well, how easy this would be really depends on how the middle class is doing. If most people are looking for fun things to spend $100 on, you could open a trendy restaurant with a cool bar that caters to couples looking for a nice date spot. You could offer piano lessons. But either way, convincing many people to pay you $100 for whatever you have to offer would be far harder if most everyone is pinching pennies trying to pay rent or service their mortgage.

And then what about the first? Again, this kind of depends. In today’s world there are more than a few people who have $100,000 just lying around, so it becomes a question of what they want. Some billionaires have set up charitable foundations that give out grants. Other billionaires fund venture capital firms that bet on startup pitches. A few of them are willing to support activists with a particular political aim.

You’d have to gauge the odds.   

Economic inequality is bad because it shifts these odds against real markets.

Rising inequality makes it more and more likely that the easiest way to start a business, sustain a business, or make a living is to pander to the whims of the very richest individuals among us. This twists the engine of innovation away from (efficient!) markets for the goods and services used and enjoyed by everyone.

The fundamental idea here is that what we pay for tells the economy what we want more of. Existing companies jockey with entrepreneurs, testing out different ways to make money selling us what they think we want. They create new products or services to offer along with variations on already successful ones. Whatever makes money gets amplified, whether that is a clever design, an efficient supply chain, or a successful marketing strategy. Whatever doesn’t make money doesn’t stick around.

This logic has an emergent, evolutionary ring to it. That suggests it could be useful to study the economy as if it were a dynamic system in a perpetual state of change, more of an ecology than a machine. Quite useful, indeed; very useful.

Thankfully, we are beginning to understand these kinds of systems—complex systems—on a fundamental level. Perspectives in network science, data science, and complexity science offer us rich new scientific ideas with which to study economies.

Soccer memorabilia
Evidence of being the biggest fan, or just the richest?

A key insight here is that the interdependencies between markets are especially important to understand. Take, for instance, the sports memorabilia market: the biggest buyers will be those with both a strong desire for memorabilia and an ability to pay handsomely for it. These aren’t necessarily the biggest fans, but rather the biggest fans with the biggest pocketbooks. Interconnections between markets are what turn the competitive pressures driving one market into the forces affecting the economy as a whole. The outputs of one market become the inputs of another; the winners in the stock market become the buyers in the memorabilia market.

Inequalities reverberate and compound because the markets that make up an economy are interconnected, and the actors within each market don’t listen to people’s voices directly. They can’t afford to! Businesses need to make money. Individuals need to make money. Even governments need to make money. So, people’s wants and needs are conveyed to the larger economy by their dollars.

This gives us a clear, scientific reason to combat rising inequality: good business models that serve many people are becoming less profitable. Solid entrepreneurial ideas that would benefit everyone get passed over when there are easier opportunities to make money by catering to a few individuals with a whole lot of dollars to spend. As inequality gets worse, economic growth begins to chase the whims of billionaires rather than aggregating together everyone’s preferences. And so, an increasingly unequal economy eventually stops listening to itself.

This also gives us a clear, scientific understanding of the problem of poverty: every dollar is equally loud, and so poor communities have to navigate an economy that is deaf to its needs. Further scientific study of the adaptive, networked process underlying economic growth can open new doors for development policy. This will, of course, take time. But it will be worth it—we need to understand economic dynamics at a fundamental level, because, as a society, we absolutely have the power to change the environment in which our economy evolves.

One last thing, while I’ve got your attention. Does anyone know a well-meaning billionaire who is looking for some world-changing research to fund? I have a few ideas that could transform our understanding of economic inequality and I could do some damage with, you know, $100,000 or so. What do you say? 

Carolina Mattsson

Carolina Mattsson is a PhD candidate in network science and an NSF Graduate Research Fellow in the Lazer Lab at Northeastern University. She develops network analysis tools for financial transaction records and modeling frameworks for monetary flow. Mattsson holds a BS in physics and a BA in international relations from Lehigh University. She tweets @CarolinaMttssn

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