Many people have heard about the 20-80 rule. This is Pareto’s famous law.
Vilfredo Pareto was an Italian economist teaching in Switzerland in the late 19th century. In what remains the most important economics book never translated English, published in 1897, Pareto observed that the distribution of wealth in every European country he examined revealed that approximately 20% of the population owned about 80% of the capital of the country.
This distribution, known as a power law, operates in many fields outside of income distribution and wealth distribution. There is no clear explanation by any economist or other social theorist on why this distribution exists. This is one of the reasons why economists rarely discuss it in detail. It seems to fly in the face of statistical reality: the bell-shaped curve. But it is so universal, and has been for so long, that anyone who dismisses it as irrelevant is probably making a mistake.
One of the criticisms of capitalism, whether of the free market variety of 1900 or the variety today, is that it creates massive wealth inequality. Here is the problem. We are told that we are living in an era of increasing wealth inequality. But do statistics bear this out? Has thete been a significant change?
Here’s an example of a piece of propaganda that relies on a study of wealth inequality that is utterly oblivious to what Pareto discovered in the late 19th century. In a recent article on income inequality, which appeared in the perennial Left-wing British newspaper, The Guardian. It summarizes a report issued by a Left-wing organization, Oxfam. We are informed of the following:
This “capture of opportunities” by the rich at the expense of the poor and middle classes has led to a situation where 70% of the world’s population live in countries where inequality has increased since the 1980s and 1% of families own 46% of global wealth — almost £70tn.
I have no doubt that something like this distribution is true. What it proves is the following: over the last century there may have been a decrease in inequality.
Let me explain the statistics of the Pareto power curve. The same 20-80 distribution appears all the way up. So, if 20% of the population owns 80% of the wealth, then 4% of the population, meaning 20% of 20%, owns 64% of the wealth (80% times .8). Let us carry this up one step further. This means that .8% of the population, meaning 4% of 20%, owns about 51% of the wealth (64% times .8). The normal Pareto distribution indicates that 1% of the population should own something in the range of 55% of the wealth, not 46%. Therefore, the 46% figure points to a decrease in inequality.
The Pareto distribution can change a little — nation to nation, generation to generation — but it does not change much.
(For the rest of my article, click the link.)