Paretoos Distribution and the Laws Of Network Organization

Abstract

Free-Market theories of economics date back to the latter half of the eighteenth century. In his book, Wealth of Nations, Adam Smith introduced the concept of the “invisible hand” and with that, he revolutionized economic thinking. Although Smith’s “invisible hand” is the very center of Western economic thinking, a new approach has recently emerged, one that addresses the complexities of economic reality rather than pushing them into the background to simplify the mathematics. The field of behavioral economics, which acknowledges the existence of human irrationality and tries to found economic theories on a more realistic appraisal of people’s behaviors, is becoming more popular among economists. These economists are stimulated by the realization that in large networks of interacting agents, the intricacies of people’s behavior may have little effect on some of the most basic economic realities. For example, economists for centuries have tried to explain Vilfredo Pareto’s pattern of unequal distribution of wealth through classical explanations of wealth distribution. From a mathematical point of view, such explanations have not been satisfactory. Physicists Jean-Philippe Bouchaud and Marc Mezard of the University of Paris formulated a set of equations trying to explain Pareto’s distribution through the laws of network organization. Bouchaud and Mezard have discovered that economic life is highly influenced by the organizational feature of a network, and that it is the network that contributes to the inequality in wealth distribution. Such a model can serve as an important tool to test political arguments of policies designed to create greater equality.