It never ends. We are besieged by articles on today’s increasing economic inequality. These articles have three things in common:
1. Each one has a favorite explanation/boogeyman.
2. Each one calls for political reforms to make things more equal.
3. Each one fails to mention Pareto’s 20/80 law.
Here is the main problem with these articles: economic inequality has not increased since at least 1897 — the year that Vilfredo Pareto published his discovery: about 20% of the people in every European nation he studied owned about 80% of the wealth.
Every year, when about 1,500 of the richest people in the world meet at Davos, Switzerland to attend the World Economic Forum, a Left-wing group called Oxfam issues a report. The group rewrites the annual report and the accompanying press release, but it is always conveys the same message: about 1% of the rich own 50% of the world’s wealth. I wrote a response to Oxfam and its report in 2014: “Envy Never Sleeps: Attacking the Rich.” I did this again in 2015: “Pareto Statistic: The Wealthiest 1% Will Soon Own 50% of the World’s Wealth.”
The Right also indulges in similar expressions of outrage. Here is an example.
A PARETO PYRAMID
This was offered by Charles Hugh Smith. I like it because it includes a pair of graphics. Both of them are tied to the underlying image of a pyramid: straight sides, with the same angle all the way up, from base to capstone. The image is pure Pareto.
We are supposed to be aghast.
I am not.
The Pareto law is a power law. The same 20/80 rule applies all the way up. This is why it is a pyramid.
1. 20% of the population owns 80% of the wealth.
2. 4% (.2 x 20%) of the population owns 64% (.8 x 80%) of the wealth.
3. 0.8% (.2 x 4%) of the population owns 51% (.8 x 64%) of the wealth.
Smith’s pyramid shows that 0.7% of the population owns 45% of the wealth.
This sounds about right. As we say, it’s close enough for government work.
Smith blames this pyramid on the Federal Reserve System.
(For the rest of my article, click the link.)