Monday, May 19, 2014

Network Effects Create Disparities, No Matter the Scale-Free Network

If differences among persons in capacities to produce economic values are accompanied by differences in capacities to produce values through the political process, the market and the collective-decision structure would tend to generate roughly the same results in all cases.
“Equality as Fact and Norm”Moral Science and Moral Order, Vol. 17 of The Collected Works of James M. Buchanan

What Buchanan is identifying here is network effects that exist regardless of the kind of social network with which one is concerned. Yes, free markets, being scale-free, self-organizing network processes, will create wealth disparities. The top 20% will have about 80% of the wealth. However, this is going to be true of any social network, whether it be a free market economy, the artistic order, or the political order. About 20% of the creative writers will have about 80% of the canon of great works. And if wealth is determined by the political order, you may rest assured that you will end up with 20% of the population having about 80% of the wealth.

What, then, is the difference? Well, the main difference -- and this is certainly a difference that makes a huge difference -- is that the free market is wealth-creating, meaning the wealth of the top 20% increases, but so, too, does the wealth of the bottom 80%. However, the political economy is not wealth-creating. It is riches-distributing, meaning it is in fact wealth-destroying. Thus, the top 20% become wealthier by the bottom 80% becoming poorer. The wealth disparities will continue to exist, whether one becomes wealthy through the market economy or through the political economy -- however, only one will create ever-more wealth for the poor to be better off as well.

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