Trade, Prices and Social Inequality
by Manfred Füllsack
This model demonstrates the (self-organizing) emergence of prices from trade. And it simulates certain possibilities to influence prices and to accumulate an above-average share of products by traders who just by chance happen to gain early advantages. See below how it works.
Economic theory -- beginning with Aristotle -- distinguishes between the utility or use value and the exchange value of goods and services. While the utility value is individual and thus assigned by the producer or consumer of a good or service, the exchange value is said to be set by the "invisible hand" of market forces, meaning that it is determined by dynamics beyond the needs and wants of individual actors. In monetary economies, the exchange value often takes the form of prices.
Prices are of course affected by the interplay of supply and demand. And quite often, as we know, powerful market players are able to exert influence in order to alter prices according to their interests. However, quite often we tend to assume that powerful players and/or severe differences in the distribution of products are prior to the determination of prices.
This model -- in abstracting from the interplay of supply and demand at first -- demonstrates how a common exchange value, i.e. a consistent price, can emerge just from repeated attempts of individuals to exchange their products for the utility value they consider appropriate.
Pushing the <setup>-button generates a circle of potential traders (white balls). Their number can be set with the <number-traders>-slider and the number of their products with the <number-products>-slider. Products are represented by small blue <p>-ies to the left of the traders.
Traders start out to trade with a particulare notion of the appropriate price of their products, i.e. their individual utility value. This notion varies among them within a certain scope which can be set with the <price-variance>-slider and can be sensed on the oscillating <Price>-monitor and at the initial curve in the plotter <Prices>. This scope is thought to be the "phase space" for the development of prices. (Every time you push <setup> its focal point is generated anew by a random number generator).
If you push the button <go>, traders start trying to exchange their products with randomly chosen other traders. Each futile trial is represented by a thin gray line between traders. But whenever they encounter a trader with the same notion of appropriate price an exchange of products takes place. A red line appears, products (blue <p>-ies) change space and the scope of price-variance for these two traders is diminished by one. Traders thus "learn" by and by the price of the market, i.e. the exchange-value. The plotters with the title <Prices> and <Trade uncertainty> illustrate this development.
By the time a consistent price is reached products might be distributed quite unequally. The plotters <Social strata>, <Wealth distribution>, <Gini index> and <Lorenz curve> report the distribution. Gini Index and Lorenz curve are standard indices for the messurement of social inequality. The higher the Gini Index rises and the more the Lorenz curve bends below the diagonal in the plotter, the higher is the inequality of wealth in society.
If products are uneven distributed, those who own more might exert influence on the development of prices. The <influence-price>-switch alters the model's behavior accordingly. If switched on, traders who own more than their initial share can impose the currently highest notion of utility values on others. If by chance a trader stays "rich" for some time she has good chances to push up prices considerably. Note how this can influence social inequality.
Additionally, the model foresees a possible trade advantage for "rich" traders (that is traders with more products than their initial share). The <accumulate>-switch lets them repeat each successful exchange thus accumulating more than just one product in an exchange. How often exchanges are repeated can be set with the <accumulation-rate>-slider. Note how this can make the Gini Index rise even more.
The price-development algorithm of this model follows a principle that has been described under the title "double contingency" by Talcott Parsons and further considered by Niklas Luhmann. In regard to this principle, particularly Luhmann emphasized the original "ignorance" (uncertainty) actors have to cope with when first entering any kind of social interaction. Only through repetition (iteration) they are able to mutually constrain their scope of action to a degree at which the probability of interaction rises high enough to make trade (or cummuincation etc.) regular.
The <influence-price>-, as well as the <accumulate>-algorithm of this model follow a principle that, among others, has been described as Matthew-effect by Robert K. Merton. Its key predication is that small, randomly generated initial differences can accumulate to severe disparities and inequalities over time. In more details it can be studied in the Lock-In-model.
Coded by Manfred Füllsack (source code on demand), Nov. 2008 (to be improved and continued)
Lohnarbeiten unter Bedingungen des Nicht-Wissens? Überlegungen zur Arbeitswerttheorie (in German)Literature:
Aristotle (~ 350 B.C.): Politics. book One, part IX.
Füllsack, Manfred (2007):
Luhmann, Niklas (1984/1995): Social Systems, Stanford: Stanford University Press.
Marx, Karl (1868): Capital. vol. 1, chapter 2.
Merton, Robert K. (1988): The Matthew Effect in Science, II: Cumulative Advantage and the Symbolism of Intellectual Property; in: ISIS 79/1988, S. 607-623..
Parsons, Talcott (1937): The Structure of Social Action. New York.
Parsons, Talcott (1968): Interaction; in: Sills, David L. (ed.): International Encyclopedia of the Social Sciences. London-New York, vol 7, pp 429-441.