# Forum Post: why money trickles up

Posted 2 years ago on Jan. 15, 2012, 5:45 a.m. EST by kagiso
(1)

This content is user submitted and not an official statement

The link below gives an overview of an economic model that I recently presented at a conference at Loughborough University in the UK:

http://www.econodynamics.org/sitebuildercontent/sitebuilderfiles/bullets.pdf

Briefly, the model appears to give a very good explanation for the formation of wealth and income distributions. The same model also gives an explanation for company size distributions, and can give models for boom and bust cycles in commodities, and macroeconomic systems as a whole.

Most intriguingly, the models gave a simple algebraic formula for the ratio of returns to labour and capital - currently a mystery of economics. The formula can actually be derived trivially from first principles. Furthermore, the formula gives a direct causal link between increasing debt and increasing income inequality.

More detailed papers are available at http://www.econodynamics.org

The abstract of the full (book length) paper is given below.

I hope you find the papers of interest.

Regards,

Geoff.

Abstract - Why Money Trickles Up

This paper combines ideas from classical economics and modern finance with Lotka-Volterra models, and also the general Lotka-Volterra models of Levy & Solomon to provide straightforward explanations of a number of economic phenomena.

Using a simple and realistic economic formulation, the distributions of both wealth and income are fully explained. Both the power tail and the log-normal like body are fully captured. It is of note that the full distribution, including the power law tail, is created via the use of absolutely identical agents. It is further demonstrated that a simple scheme of compulsory saving could eliminate poverty at little cost to the taxpayer. Such a scheme is discussed in detail and shown to be practical.

Using similar simple techniques, a second model of corporate earnings is constructed that produces a power law distribution of company size by capitalisation.

A third model is produced to model the prices of commodities such as copper. Including a delay to capital installation; normal for capital intensive industries, produces the typical cycle of short-term spikes and collapses seen in commodity prices.

The fourth model combines ideas from the first three models to produce a simple Lotka-Volterra macroeconomic model. This basic model generates endogenous boom and bust business cycles of the sort described by Minsky and Austrian economists.

From this model an exact formula for the Bowley ratio; the ratio of returns to labour to total returns, is derived. This formula is also derived trivially algebraically. This derivation is extended to a model including debt, and it suggests that excessive debt can be economically dangerous and also directly increases income inequality.

Other models are proposed with financial and non-financial sectors and also two economies trading with each other. There is a brief discussion of the role of the state and monetary systems in such economies.

The second part of the paper discusses the various background theoretical ideas on which the models are built.

This includes a discussion of the mathematics of chaotic systems, statistical mechanical systems, and systems in a dynamic equilibrium of maximum entropy production.

There is discussion of the concept of intrinsic value, and why it holds despite the apparent substantial changes of prices in real life economies. In particular there are discussions of the roles of liquidity and parallels in the fields of market-microstructure and post-Keynesian pricing theory.

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papers are available at econodynamics.org

Interesting. Will read it in leisure. Do you have any papers on this? That would be more insightful than a presentation.