"Money, it’s a gas," says the sixties rock group Pink Floyd in their song “Money.” Indeed, physics professor Victor Yakovenko is an expert in statistical physics and studies how the flow of money and the distribution of incomes in American society resemble the flow of energy between molecules in a gas. In his lectures to be delivered on April 19 at New York University and April 20 at the New School for Social Research, Yakovenko will bring his physics-of-incomes study up to date, including a report on the correlation between levels of income inequality and the appearance of financial downturns, such as the dot-com bubble of 2000 and the more recent housing bubble of 2008.That the rich really are different is a common opinion. It turns out that the rich even have their own physics. Yakovenko, who is a professor at the University of Maryland and also a fellow of the Joint Quantum Institute*, produces a plot of the cumulative percentage of the population versus income. The graph shows that the actual income distribution (the data coming from the IRS) for the poorer 97% of reported returns follows a type of curve---the Boltzmann-Gibbs curve---that applies to the energy distribution of molecules in a gas. The curve is named for 19th century physicists Ludwig Boltzmann and J. Williard Gibbs, pioneers in statistical physics.By contrast, the upper 3 percent or so of incomes, starting at a tax-return level of about $140,000, lie along a different curve, one named for Vilfredo Pareto, an economist who studied income distributions in the 19th century. This distinction in income curves is generally attributed to the fact that the most affluent segment of society makes more of its income from investments, which are taxed at a lower rate, rather than income from labor.“A mathematical analysis of the empirical data clearly demonstrates the two-class structure of a society,” Yakovenko says. The lower-97% curve is an example of exponential behavior, while the upper-3% curve is an example of a power-law behavior....
Yakovenko’s pioneering study of the 97% was summarized in a review paper in the journal Review of Modern Physics in 2009 (**) written in collaboration with the distinguished economist J. Barkley Rosser, Jr.Joint Quantum Institute
Inequality and Investment BubblesVictor Yakovenko | Professor of Physics, University of Maryland
(h/t Clonal in the comments)
8 comments:
Tom, You forgot to add the link. However, the animations that show the changes in distribution of income and wealth in the lower 97% re very interesting, and be navigated to from here - Econophysics Research in Victor Yakovenko's group
All the papers are very interesting. Hoever, the animation is contained in "Statistical mechanics of money" and a video and presentation in "Temporal evolution of the `thermal' and `superthermal' income classes in the USA during 1983-2001"
Also useful - "Universal patterns of inequality", "Global inequality in energy consumption from 1980 to 2010" and "Colloquium: Statistical mechanics of money, wealth, and income"
It's really much simpler than that...
Assume for the moment that money circulates , ie spending circulates in a virtuous cycle (it doesn't really)...
Then a model might look like a fountain with tiers, the water flowing towards the bottom from tier-t-tier...
...except the flow will never reach the bottom...at each tier someone in the transaction chain will hold back savings and the cumulative effect will cause it to dissipate to zero.
It takes an average of 2.5 transactions for each dollar spent as a result of private investment and government spending to generate a years worth of GDP.
That implies that there is no further flow generated from those dollars, at least nothing that accrues to GDP or by extension real output or wages.
The net flow of funds is always towards savers and the bigger the incomes the higher the ability to save, or accumulate financial wealth.
Still math but it doesn't require complex analysis.
Paul, you should really look at the links in my comment above. The fit to the US and UK data is almost perfect.
Oops. Link fixed now.
"you should really look at the links in my comment above"
Clonal…I plan to. Please don't take my comment as a criticism of the post…it wasn't.
I was just trying to make the point that the findings expressed in data should be unsurprising considering the arrangement of the systems involved.
There is little possibility of any outcome that didn't result in inequality in the distribution of wealth without some form of intervention by the state.
Paul, Your observation is quite correct. The reason that the Boltzmann Gibbs works so well, is because the Boltzmann Gibbs is a pure exchange model (in Physics terms, energy exchange upon collision of particles) See Statistical Mechanics of Correlated Gases
Quote:The best-known kinetic equation is the Boltzmann equation. The Boltzmann-collision integral accounts for direct interparticle collisions only. Its equilibrium solution is the famous Boltzmann-Gibbs distribution function. This distribution function serves the needs of an initial distribution for all thermal equilibria and their disturbances, with the latter either relaxing towards the initial equilibrium or leading to instabilities.
Paul,
"That implies that there is no further flow generated from those dollars"
... within that year. Dollars are still there, received as income in many cases, ready to be spent in the next period.
"... within that year. Dollars are still there, received as income in many cases, ready to be spent in the next period."
y, yes that would seem to be the case, except the numbers and logic don't support that reality.
First, what you say was also true for any period of spending, yet there is little evidence that savings…the money we have… contributes much to GDP once we account for G and I spending (not to mention spending that comes from credit expansion).
There currently exists some $62T in the the system … GDP is ~$17T (2013). That reduces to ~$10T once G and I, which accrue directly to GDP, are accounted for. G and I are likely to lead to more spending and so on. That doesn't leave much spending to be attributed to savings.
Second, and more importantly, Savings…the money we have…can't be spent until one has exhausted all of their income**…something that is obviously not happening within the top income spectrums where savings are mainly held…if they did spend it all GDP would be massively higher than it is.
** if one spends their savings instead of their income the income not spent becomes their savings. Anyone that spends less than their income adds to their savings, they can't lower it.
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