Thermodynamics of inequalities: from precariousness to economic stratification

TL;DR

This paper develops a thermodynamical framework to understand the dynamics of economic inequalities, highlighting the roles of upward mobility and precariousness, and estimating how wealth distributions relax after policy changes.

Contribution

It introduces a novel thermodynamic analogy for inequalities, formalizes the relationship between mobility and precariousness, and provides a method to analyze inequality dynamics in Markovian socioeconomic models.

Findings

Identifies upward mobility and precariousness as key drivers of inequality.

Derives a second-law inequality relating mobility and precariousness.

Estimates relaxation time of wealth distribution after policy shifts.

Abstract

Growing economic inequalities are observed in several countries throughout the world. Following Pareto, the power-law structure of these inequalities has been the subject of much theoretical and empirical work. But their nonequilibrium dynamics, e.g. after a policy change, remains incompletely understood. Here we introduce a thermodynamical theory of inequalities based on the analogy between economic stratification and statistical entropy. Within this framework we identify the combination of upward mobility with precariousness as a fundamental driver of inequality. We formalize this statement by a "second-law" inequality displaying upward mobility and precariousness as thermodynamic conjugate variables. We estimate the time scale for the "relaxation" of the wealth distribution after a sudden change of the after-tax return on capital. Our method can be generalized to gain insight into the dynamics of inequalities in any Markovian model of socioeconomic interactions.