The Pareto Principle and Wealth Inequality

This isn’t going to be a popular post, but I am not really in the business of posting for page views, popularity or any of that.  I’m really more interested in the facts.  So let’s not shoot the messenger here and try to bear in mind that I am attempting to stick to the facts of life….

Now that I have my body armor on….I was surprised when someone emailed me the video below saying I would be “shocked” to see how unequally wealth is distributed in the USA.  So I watched the video and what I was actually shocked about was not how unequal the wealth is, but by how most people seem to think it’s not all that unequal.

You can see the video below, but in essence, it shows us how roughly 85% of the wealth in the USA is owned by the top 15% of the population.  What’s interesting is that Americans think the top 20% only own the top ~40% of the wealth.  What’s even weirder is that they WISH the top 20% only owned 30% of the wealth.

The video is compelling in the way it’s argued, but it totally ignores a very well known principle in economics. The Pareto Principle (also known as the 80/20 rule) was discovered by Italian economist Vilfredo Pareto who found it alarming that 80% of Italy’s property was owned by just 20% of the population. He found that the same principle could be applied to a whole range of different things in life and in particular economics. If you’ve read a fair amount of economic, business, revenue or statistics in general, this shouldn’t surprise you one bit (though it might still anger you).

Interestingly, this isn’t even close to being an “American problem”. It’s a global issue. The Human Development Reports has found that over 80% of all global wealth is owned by the top 20% of the population. The bottom 40% of the population own about 3% of global wealth. And the top 1% of the richest global citizens own 40% of the world’s wealth, just as is shown in America, in the video. It’s also interesting to note that the average American is part of the global 1%. That is, the average American owns magnitudes more global wealth than the rest of the world does.

I’m not apologizing for this reality and I am not saying it’s optimal (Pareto famously argued the same thing), but this shouldn’t surprise ANYONE. The Pareto Principle is a well known reality that exists across a whole range of different things in our lives. It certainly doesn’t represent an optimal environment and it definitely isn’t fair. You certainly don’t have to love it, but you certainly shouldn’t be surprised by it.

 

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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