Wealth happens.

Abstract

The economic world is full of patterns, and one of the most controversial is the distribution of wealth. You might expect the balance between rich and poor to vary widely from country to country. But back in 1897, Vilfredo Pareto discovered a pattern of wealth distribution that appears to be universal. Whenever you double the amount of wealth within a country, the number of people in each successively higher wealth bracket falls by a constant factor. The factor varies among countries, but the pattern remains essentially the same. From a mathematical standpoint, Pareto's distribution has stubbornly defied explanation. But recently, researchers were able to replicate the curve by applying the principles of network organization. They began with two simple assumptions. First, wealth accumulates either by transfers from person to person or through investment returns, positive or negative. Second, rich people invest more money than poor people. Starting with a hypothetical group of 1,000 people of equal wealth and abilities, the model always produces Pareto's wealth distribution no matter how the links in the network are organized or how the balance between interpersonal transactions and investment returns are set. The model also indicates that the degree of wealth concentration can be influenced. Increasing the number of links in the network or the total amount of money flowing through an economy tends to decrease wealth disparities; increasing investment returns or volatility tends to increase it. Replete with public policy implications, the model is only one example of how network analysis can reshape our understanding of complex economic and social systems, which may have less to do with the behavior of individual members than with impersonal and seemingly insignificant forces.