LETTERS TO THE EDITORS
Mathematics and the Market
Mathematics and the Market To the Editors:
I expect that a scientific magazine will contain controversial ideas whose truth is hotly debated. I do not expect it to contain political slogans whose untruth is patently obvious.
Brian Hayes's article in the September–October issue (Computing Science) contains the line, "The rich get richer and the poor get poorer," and claims that this maxim has been frequently "confirmed by experience." Actually, the claim that poor people are made poorer by the modern market economy is blatantly false and is repeated only by economically illiterate politicians bent on class warfare.
Mr. Hayes ignores the reality of progress. The poor of 2002 are immensely better off than the poor of 1902, 1952 or even 1982. The $10 all-you-can-eat buffet contains a variety and quantity of foods that would have amazed the robber barons of the early 20th century—and they would have been even more amazed to see coal miners and factory workers able to afford such a feast several nights a week. Few poor women spend entire days bent over a washboard; no child begins work in a factory at age 8. The American poor of 2002 lead lives of unimaginable wealth compared with their ancestors.
Mr. Hayes's article then goes on to describe computer simulations of "yard sale economies," in which no wealth is created, and a person can become rich only by impoverishing the poor. Again, this mirrors the rhetoric of reality-challenged left-wing politicians. However, an economic model that does not include the creation of wealth is about as valuable as an ecological model that does not include reproduction or predation. Sure, it might be "easy to implement," but the outcome has nothing to do with reality in either case.
Mr. Hayes admits some of the limitations at the end of his article, but does not include the fatal zero-sum nature of the models as one of them. The authors and editors of American Scientist would do well to confine themselves to science and leave vapid and demonstrably false political rhetoric to our elected leaders.
Seattle, Washington To the Editors:
Although "Follow the Money" by Brian Hayes was interesting and even amusing, investors and social planners would be ill advised to adopt any of the strategies discussed.
Economics is an aspect of human behavior. As such, it is no more amenable to mathematical modeling than is such behavior itself. When the proposed models do not even consider production and consumption, which most observers believe are fundamental processes in the economic system, they are hardly likely to produce usable results.
Except for certain enthusiasts of totally unregulated markets, it is generally believed that such markets do not produce an adequate supply of public goods, nor do they produce an equitable distribution of income. (Even Adam Smith did not believe that totally free markets could perform those highly desirable functions.) Instead they are more likely to produce massive transfers of income to the richest from everyone else, as they have in the United States since about 1973. On the other hand, in the period from 1945 to 1973, the standard of living of almost all Americans rose rapidly and more uniformly across the entire income distribution despite much more regulation than we now have. The rising tide did indeed lift all boats under these conditions, but it has not done so for the years following 1973.
Recent upheavals in the market and revelations of what many corporate officers appear to have done to take improper advantage of lax regulation may, perhaps, produce a climate of opinion that will move us away from an economic system based mainly on greed.
William F. Schreiber
Cambridge, Massachusetts Mr. Hayes replies:
Several of the economic models I discussed in "Follow the Money" assume the conservation of wealth, ignoring the production of new wealth as well as any consumption or loss of wealth. Evidently this aspect of the models troubled many readers. Although I mentioned in the article that the omission of production and consumption represents a serious weakness of the models, I should have stated more clearly and more emphatically that conservation of wealth is not to be taken seriously as a feature of real economies. In the models it serves as a convenient fiction, adopted as a way of isolating and emphasizing one particular kind of economic activity—the exchange of assets. Many other economic models make the opposite simplification: By assuming that all transactions take place at exactly the right price, they eliminate any effects that price disparities in trade might have on the distribution of wealth. They describe a "frictionless" economy, whereas the asset-exchange models focus on the friction. Neither approach gives the whole picture. I would not trust the quantitative predictions of any such models, but they are useful conceptual tools in the appropriate domain.
As for Robert Lyman's argument that the $10 all-you-can-eat buffet signals the eradication of poverty: According to the World Bank, 2.8 billion people live on less than $2 a day. They are not invited to the buffet.