Pareto's Principle

I wrote this essay years ago in response to a dear friend's rant about the evils of income inequality. I decided to publish it here for no reason other than to preserve the effort I put into it.

Vilfredo Pareto (1848-1923) was an Italian economist and social scientist whose work is predicated on the axiom that people are physically, intellectually and morally unequal. Pareto maintained that in society as a whole, some people are more gifted than others.

Radical concept, eh?

 

Pareto is best known for his "Pareto's Principle" of income distribution. He created a mathematical formula that describes his ideas. For those who are math literate, I reproduce the formula. Those who are not, do not worry I will explain the meaning.

 

His formula: log N = log A + m log X

 

Pretty little thing isn't it. N and X are the important elements. It basically says that there is always a number, N, who earn more than X. The precise numbers depend on m and A, but they are unchanging constants.

 

But what does it mean? Well, when formulating his rule, Pareto studied the economic data of his time. He found that 20% of the people in his study always controlled 80% of the wealth. 20% of landowners controlled 80% of the land. The "rule of thumb" shortcut for his formula is what we today call the 80/20 Rule. In almost any human endeavor, 80% of the results come from 20% of the causes. Any factors which distort that are at best temporary and local.

 

He formulated this idea in the late 1800s based on an exhaustive study of European and Italian economic data.

Today we hear a lot about "income inequality." We are told that the evil 1% are cornering more and more, leaving less and less to the rest. Actual economic data says that this is not so. The Pareto distribution curve is NOT changing.

 

We see in fact, just as Pareto predicts, 80% of the wealth is controlled by 20%. And if you take that 80% and parse it out, 80% of THAT number will be controlled by 20% of the second number, or 4%, will control 64%. Likewise, 20% of the 4%, or 0.8%, will control 80% of the 64%, or 51%. This is the very nature of wealth and power, as was formulated over 100 years ago and as it has been all along.

 

This phenomenon is not just an economic rule. It covers almost every field of human endeavor. The most talented win the marbles. Government intervention can change the winner by giving advantage to the politically connected, but it cannot change the underlying distribution in any meaningful way, and whatever change thus forced will rebound, one way or another.

So next time you hear some avowed socialist pontificating about "income inequality" ask yourself:

If they get their way,

WHO WILL BE THEIR 1%??

There will always be a 1%. That is an immutable law of nature. But who will be the 1% and by what means will they achieve that status?  That is the question.