478. Understanding the causes of income inequality in complex economic systems

Brendan Markey-Towler and John Foster, School of Economics Discussion Paper No. 478 May 2013, School of Economics, The University of Queensland. Australia.

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Abstract

We suggest in this paper that inequality in economic systems can be profitably analysed using complex systems analysis. We explain how we can capture, analytically, complexity in an economic system by applying graph theory in networks. We then develop a highly stylised theoretical model of how income inequality arises naturally due to the fact that a skewed income distribution necessarily arises from “preferential attachment” in a complex economic system. We characterise this process, both in the market system broadly defined and, specifically, within a firm. It is argued that such a complex systems approach (despite being vastly simplified here) provides a superior basis for understanding income inequality compared to standard economic analysis.