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Kinetic exchange models are multi-agent dynamic models inspired by the
statistical physics Statistical physics is a branch of physics that evolved from a foundation of statistical mechanics, which uses methods of probability theory and statistics, and particularly the mathematical tools for dealing with large populations and approxim ...
of energy distribution, which try to explain the robust and universal features of income/wealth distributions. Understanding the distributions of
income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
and
wealth Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an ...
in an
economy An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...
has been a classic problem in
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analy ...
for more than a hundred years. Today it is one of the main branches of
econophysics Econophysics is a heterodox interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes and nonlinear dynam ...
.


Data and basic tools

In 1897,
Vilfredo Pareto Vilfredo Federico Damaso Pareto ( , , , ; born Wilfried Fritz Pareto; 15 July 1848 – 19 August 1923) was an Italian polymath (civil engineer, sociologist, economist, political scientist, and philosopher). He made several important contribu ...
first found a universal feature in the
distribution of wealth The distribution of wealth is a comparison of the wealth of various members or groups in a society. It shows one aspect of economic inequality or economic heterogeneity. The distribution of wealth differs from the income distribution in that ...
. After that, with some notable exceptions, this field had been dormant for many decades, although accurate data had been accumulated over this period. Considerable investigations with the real data during the last fifteen years (1995–2010) revealed that the tail (typically 5 to 10 percent of agents in any country) of the
income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...
/
wealth Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an ...
distribution indeed follows a
power law In statistics, a power law is a functional relationship between two quantities, where a relative change in one quantity results in a proportional relative change in the other quantity, independent of the initial size of those quantities: one q ...
. However, the majority of the population (i.e., the low-income population) follows a different distribution which is debated to be either Gibbs or
log-normal In probability theory, a log-normal (or lognormal) distribution is a continuous probability distribution of a random variable whose logarithm is normally distributed. Thus, if the random variable is log-normally distributed, then has a normal ...
. Basic tools used in this type of modelling are
probabilistic Probability is the branch of mathematics concerning numerical descriptions of how likely an event is to occur, or how likely it is that a proposition is true. The probability of an event is a number between 0 and 1, where, roughly speakin ...
and
statistical Statistics (from German: ''Statistik'', "description of a state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data. In applying statistics to a scientific, industri ...
methods mostly taken from the kinetic theory of
statistical physics Statistical physics is a branch of physics that evolved from a foundation of statistical mechanics, which uses methods of probability theory and statistics, and particularly the mathematical tools for dealing with large populations and approxim ...
. Monte Carlo simulations often come handy in solving these models.


Overview of the models

Since the distributions of income/wealth are the results of the interaction among many heterogeneous agents, there is an analogy with
statistical mechanics In physics, statistical mechanics is a mathematical framework that applies statistical methods and probability theory to large assemblies of microscopic entities. It does not assume or postulate any natural laws, but explains the macroscopic b ...
, where many particles interact. This similarity was noted by
Meghnad Saha Meghnad Saha (6 October 1893 – 16 February 1956) was an Indian astrophysicist who developed the Saha ionization equation, used to describe chemical and physical conditions in stars. His work allowed astronomers to accurately relate the sp ...
and B. N. Srivastava in 1931 and thirty years later by
Benoit Mandelbrot Benoit B. Mandelbrot (20 November 1924 – 14 October 2010) was a Polish-born French-American mathematician and polymath with broad interests in the practical sciences, especially regarding what he labeled as "the art of roughness" of p ...
. In 1986, an elementary version of the stochastic exchange model was first proposed by J. Angle. In the context of kinetic theory of gases, such an exchange model was first investigated by A. Dragulescu and V. Yakovenko. The main modelling effort has been put to introduce the concepts of
savings Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an ...
, and
taxation A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, o ...
in the setting of an
ideal gas An ideal gas is a theoretical gas composed of many randomly moving point particles that are not subject to interparticle interactions. The ideal gas concept is useful because it obeys the ideal gas law, a simplified equation of state, and is am ...
-like system. Basically, it assumes that in the short-run, an economy remains conserved in terms of income/wealth; therefore '' law of conservation'' for income/wealth can be applied. Millions of such conservative transactions lead to a steady state distribution of money (
gamma function In mathematics, the gamma function (represented by , the capital letter gamma from the Greek alphabet) is one commonly used extension of the factorial function to complex numbers. The gamma function is defined for all complex numbers except t ...
-like in the ''Chakraborti-Chakrabarti'' model with uniform savings, and a gamma-like bulk distribution ending with a Pareto tail in the ''Chatterjee-Chakrabarti-Manna'' model with distributed savings) and the distribution converges to it. The distributions derived thus have close resemblance with those found in
empirical Empirical evidence for a proposition is evidence, i.e. what supports or counters this proposition, that is constituted by or accessible to sense experience or experimental procedure. Empirical evidence is of central importance to the sciences ...
cases of income/wealth distributions. Though this theory had been originally derived from the entropy maximization principle of
statistical mechanics In physics, statistical mechanics is a mathematical framework that applies statistical methods and probability theory to large assemblies of microscopic entities. It does not assume or postulate any natural laws, but explains the macroscopic b ...
, it had been shown by A. S. Chakrabarti and B. K. Chakrabarti that the same could be derived from the utility maximization principle as well, following a standard exchange-model with Cobb-Douglas
utility function As a topic of economics, utility is used to model worth or value. Its usage has evolved significantly over time. The term was introduced initially as a measure of pleasure or happiness as part of the theory of utilitarianism by moral philosophe ...
. Recently it has been shown that an extension of the Cobb-Douglas utility function (in the above-mentioned Chakrabarti-Chakrabarti formulation) by adding a production savings factor leads to the desired feature of growth of the economy in conformity with some earlier phenomenologically established growth laws in the economics literature. The exact distributions produced by this class of kinetic models are known only in certain limits and extensive investigations have been made on the mathematical structures of this class of models. The general forms have not been derived so far.


Criticisms

This class of models has attracted criticisms from many dimensions. It has been debated for long whether the distributions derived from these models are representing the income distributions or wealth distributions. The '' law of conservation'' for income/wealth has also been a subject of criticism.


See also

*
Economic inequality There are wide varieties of economic inequality, most notably income inequality measured using the distribution of income (the amount of money people are paid) and wealth inequality measured using the distribution of wealth (the amount of ...
*
Econophysics Econophysics is a heterodox interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes and nonlinear dynam ...
*
Thermoeconomics Thermoeconomics, also referred to as biophysical economics, is a school of heterodox economics that applies the laws of statistical mechanics to economic theory. Thermoeconomics can be thought of as the statistical physics of economic value and ...
* Wealth condensation


References


Further reading

* Brian Hayes, ''Follow the money'',
American Scientist __NOTOC__ ''American Scientist'' (informally abbreviated ''AmSci'') is an American bimonthly science and technology magazine published since 1913 by Sigma Xi, The Scientific Research Society. In the beginning of 2000s the headquarters was in Ne ...
, 90:400-405 (Sept.-Oct.,2002) * Jenny Hogan, ''There's only one rule for rich'',
New Scientist ''New Scientist'' is a magazine covering all aspects of science and technology. Based in London, it publishes weekly English-language editions in the United Kingdom, the United States and Australia. An editorially separate organisation publishe ...
, 6-7 (12 March 2005) * Peter Markowich, ''Applied Partial Differential Equations''
Springer-Verlag (Berlin, 2007)
* Arnab Chatterjee, Bikas K Chakrabarti, ''Kinetic exchange models for income and wealth distribution'',
European Physical Journal The ''European Physical Journal'' (or ''EPJ'') is a joint publication of EDP Sciences, Springer Science+Business Media, and the Società Italiana di Fisica. It arose in 1998 as a merger and continuation of ''Acta Physica Hungarica'', '' Anales de ...
B, 60:135-149(2007) * Victor Yakovenko, J. B. Rosser, ''Colloquium: statistical mechanics of money, wealth and income'',
Reviews of Modern Physics ''Reviews of Modern Physics'' (abbreviated RMP) is a quarterly peer-reviewed scientific journal published by the American Physical Society. It was established in 1929 and the current editor-in-chief is Michael Thoennessen. The journal publishes r ...
81:1703-1725 (2009) * Thomas Lux, F. Westerhoff, ''Economics crisis'',
Nature Physics ''Nature Physics'' is a monthly peer-reviewed scientific journal published by Nature Portfolio. It was first published in October 2005 (volume 1, issue 1). The chief editor is Andrea Taroni, who is a full-time professional editor employed by this ...
, 5:2 (2009) * Sitabhra Sinha, Bikas K Chakrabarti
''Towards a physics of economics''
Physics News 39(2) 33-46 (April 2009) * Stephen Battersby, ''The physics of our finances'',
New Scientist ''New Scientist'' is a magazine covering all aspects of science and technology. Based in London, it publishes weekly English-language editions in the United Kingdom, the United States and Australia. An editorially separate organisation publishe ...
, p. 41 (28 July 2012) * Bikas K Chakrabarti, Anirban Chakraborti, Satya R Chakravarty, Arnab Chatterjee, ''Econophysics of Income & Wealth Distributions'',
Cambridge University Press Cambridge University Press is the university press of the University of Cambridge. Granted letters patent by King Henry VIII in 1534, it is the oldest university press in the world. It is also the King's Printer. Cambridge University Pres ...

(Cambridge 2013)
* Lorenzo Pareschi and Giuseppe Toscani, ''Interacting Multiagent Systems: Kinetic equations and Monte Carlo methods''
Oxford University Press Oxford University Press (OUP) is the university press of the University of Oxford. It is the largest university press in the world, and its printing history dates back to the 1480s. Having been officially granted the legal right to print books ...

(Oxford 2013)
* Kishore Chandra Dash, "Story of Econophysics
Cambridge Scholars Press (UK, 2019)
* Marcelo Byrro Ribeiro, ''Income Distribution Dynamics of Economic Systems: An Econophysical Approach''
Cambridge University Press (Cambridge, UK, 2020)
* Giuseppe Toscani, Parongama Sen and Soumyajyoti Biswas (Eds), "Kinetic exchange models of societies and economies
Philosophical Transactions of the Royal Society A 380: 20210170
(Special Issue, May 2022) {{Physics-footer Applied and interdisciplinary physics Distribution of wealth Schools of economic thought Statistical mechanics Interdisciplinary subfields of economics