with E.J. Nell
Abstract. We build a transformational growth model of non-linearly interacting markets, each of which endogenously generates log-normal or Pareto-distributed unequal societies as time evolves. If inequality is generated by the Market (with a capital "M"), then 'class' is just the name you give to a socially generated partition of certain collections of certain bins in the histogram of overall earnings at some period of time. We know that the histogram of income at a given period of time is highly skewed is developed countries (See Drăgulescu and Yakovenko, 2001, pg. 585, for examples). In this study, we aver that markets do not exist primarily to allocate resources efficiently–––Markets represent the ebb and flow of goods and services to winners and losers over time. Through competition in all its forms, markets generate surpluses that go to the successful, who carry these gains forward through time and use them to their own advantage. These knock-on effects alter the distribution of wealth in the system, especially when we take account of the presence of inter-sectoral feedbacks. Trading behaviour makes markets unstable because of the ever-present cost pressures from competing economic entities, which, although richer traders are partially insulated from these cost problems in the short run, will affect all members of the sector eventually.
This model captures several stylized facts of the real economy.
1. Economic agents are differently abled, for many reasons. It is natural to model this difference as differences in natural ability, access to resources, and opportunities. A good example might be the naturally gifted child from who can go to a private school because of their parents' wealth and who is accepted for a scholarship to a prestigious university, who sells their labour for a higher amount than others in the labour market and so 'wins' in our schema.
2. Wealth, in the form of claims to units of a homogenous capital good, is transferred from agent to agent in a bidding process.
3. Those agents that do not find jobs in the labour market do not die: a 'dole' is provided for them by a government, allowing them to survive until the next period. This creates the 'tail' of the distribution we see in empirical studies of income distribution (Yakovenko et al, 2004, Sinha, 2005) across both developed and undeveloped countries.
4. Gains made in the labour market and gains made in the capital market affect the individuals inside the model very differently.
5. We see persistent dispersion of income across income bins.
Paper Presented at the 2007 Eastern Economics Association Conference. We thank Matt Hart, Jason Barr, Mauro Gallagatti and Troy Tasier for helpful comments on an earlier draft.