Inequality Is “Natural” – Get Over It

    Authored by Nicholas Colas via DataTrekResearch.com,

    Perusing one of our favorite information sources – the “Most read” articles on the website for the Proceedings of the National Academy of Sciences (PNAS) – we found the following tidbits:

    • Women live longer than men, even during periods of severe famines and epidemics. Moreover, their competitive advantage starts young. Baby girls are much tougher than baby boys.

    • You can’t necessarily feel it, but your eardrums actually move when your eyes move. This allows you to identify the sources of sounds more quickly.

    • We’ve included links to both papers at the end of this note.

    The paper that really caught my eye, and what we want to review briefly today, is called “Inequality in Nature and Society”. Income and wealth inequality are large and growing topics at the moment, and it is spreading into discussions related to a raft of capital markets issues. In the past week I have spent more time talking to press and financial television anchors about wealth inequality than volatility or valuation. This is a conversation that will not go away, so it is worth getting smarter about it.

    The most appealing thing about the paper is its simple message: “Inequality” happens across nature in the same way we see it in national Gini coefficients and the yacht harbor in Monaco. The relative wealth of the world’s billionaires closely resembles the distribution of tree types in the Amazon. Put another way, a few people have a lot of wealth, and a few types of trees dominate the South American rain forest. Also, a few species of animal and plant life tend to dominate natural communities around the globe, just as a small number of the world’s citizens make incomes far higher than the median.

    Now, humans aren’t trees or plants, so when wealth inequality becomes too great societies tend to self-correct. War and revolution are history’s favorite ways to readjust things. More recently, social movements like trade unions and government programs also perform some of the re-adjustment.

    The authors also note that inequality tends to grow – and society’s ability to combat it lessens – during periods of “Societal upscaling”. The relevant example here is the growing power of technology to connect people in the 21st century. Prior, but analogous, case studies would be the opening of the West in America, or the revolutions brought by railroads, and media such as print (1800s) radio (1920s) and television (1950s). In all cases, the benefits of growth went to a relatively small number of people.

    These periods of “upscaling” tend to increase inequality because returns on intellectual or physical capital both skyrocket and compound for long periods. A few people, by luck or skill (or both) see their investments grow by +1000% or more for 5-10 years. Most do not. The authors of the paper note that Western Europe has seen this phenomenon repeat itself for 1,000 years. It is not new to 2018.

    The authors outline 2 ways inequality diminishes: suppressing the dominant players, or pulling up the broad lower end of the distribution. In nature, the former is common. Humans tend to prefer the latter.

    In the end, the most important point I took away from the paper was this: we are likely living in the greatest age of “societal upscaling” the world has ever known, so it is no surprise that inequality is a major topic of interest.It may be small comfort that all this is “natural”. But it is important to remember that it is. The next recession or stock market crash won’t really change it. Natural forces are hard to shift once momentum builds.

    *  *  *

    Inequality in Nature and Society: http://www.pnas.org/content/114/50/13154

    Women live longer than men: http://www.pnas.org/content/115/4/E832

    Ears and eyes: http://www.pnas.org/content/115/6/E1309

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