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.



Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

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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  • SMOB

    Mr. Roche,

    You are correct and I don’t see why any one would be surprised by your post. My question is why are you correct? Why is the 80/20 principe a reality? Is it a natural ‘thing’ or a by product of compound interest (usury) and how a sovereign chooses to have ‘most’ of its own currency created via private banks?

    What if we time travelled to a parallel universe in which the government issued its own currency without the self imposed mechanic of needing to borrow it from private institutions and what if I. That she parallel universe compound interest had never been ‘invented?’

  • Sean

    The last paragraph is pretty poor proof. You should isolate the sample, I’m sure the US does well in terms of inequality against poor countries, where a select few elites control most of the wealth, but I don’t think that this is the standard that you want to compare to. How will the US fare against a group of rich countries like the OECD? Not sure, but it would be more interesting than the comparison that you’ve given.

  • cc

    yes, it is a global issue. politics is an expensive game which most people can’t afford to play (political contribution, lobbying, campaign….), and how can middle-class and below win the game?

  • Sean

    Sorry, I meant second to last paragraph.

  • Cullen Roche

    Well, these are the questions I am more interested in. Why does this happen? Is it a bad thing? Should it be fixed? Can it be fixed? I generally just stick to the facts here at PC so maybe you guys should duke this out. I honestly don’t have all the answers, but I am certainly eager to here the smart readers here chime in….

  • barak

    since compounding works to your advantage only if you have an initial capital this means that by definition rich people will get richer faster than poor people. the dividing line lies in the level of expenses of an average household compared to the net income of the same household. if savings beyond that level goes to investment, then with time the distance between those who save and those who don’t increases. governments can influence this point by labor tax laws and so can influence inequality. they can also influence the level of compounding by controlling the taxing on capital gains. but even so, this difference will remain and is likely to increase within time due to the nature of compounding.

  • Matthijs

    Not so sure if applying the pareto principle to income inequality adds much to our understanding or to any discussion.

    Income distribution is not a “natural fenomenon” in my opinion, it’s a thing created by people. Sure, if you would live on the moon and look at the earth as a whole as an observer, you could look at what happens and say it’s a “natural fenomenon on that planet with those upright walking creatures”.

    The proof that it’s not some natural fenomenon is if you look at different countries and compare them. The differences are pretty big. Some countries have huge income inequality, like most banana republics in which a small elite controls most of the power, often through corruption (you could include the US in this group). Other countries have different systems and therefore different inequality results. From almost full equality in some communist countries (except for their leaders of course), to some capitalist/social-democracies with a distribution somehwere in the middle.

    So I would be careful calling it a natural fenomenon, mostly because that could suggest it’s something you cannot change anyway.

    But I guess in this discussion what can make it difficult is the question what you would fit under the umbrella “natural fenomenon”. It’s the same discussion you can have about peoples individual behavior. Is that a “natural” thing, outside of their own control, a natural result from genes, upbringing and environment? Or do you take the standpoint that a person has his own will and his own responsibility to make his own decisions?

    And lastly, I disagree with the saying that it shouldn’t surprise anyone. First, don’t forget only a small fraction of the people have studied enough to even know about the pareto principle. Second and more important, the image being portrayed in the culture and media of the US is still very strongly one of a society with a more equal distribution. The american dream, the “middle class”, the “small businesses of hard working americans”, etc. like it was in the post war period. It’s only relatively recently because of the crisis that that perception is slowly changing.

  • Cullen Roche

    I don’t believe I used the word “natural” and certainly didn’t mean to imply that this was natural. I’m just pointing out that its very common and not nearly as unusual or shocking as most people might have us believe. Does that make it okay? Not necessarily, but we’re likely to form better conclusions by first understanding the facts and then working together to build a solution from those facts.

  • Happy Swede

    Can it be fixed?

    In regards to income certainly, look at Sweden.
    Easy with high income taxes, and you can still have a productive economy (slighly lower labour productivity than US).

    Wealth inequality is harder though, Sweden places third from the bottom (!!!) here, before the US, Switzerland and Denmark.

    We did have a “wealth-tax” years ago but it was very unpopular. Probably one of the few ways to get to grips with wealth-inequality. Higher capital gains taxes might be another better way?

  • bfuruta

    1. There is a study out of the University of Minnesota that says wealth will accumulate in the hands of a few just by chance. The lead into the article: “Most of our society’s wealth is invested in businesses or other ventures that may or may not pan out. Thus, chance plays a role in where the wealth of a society will end up.

    But does chance favor the concentration of wealth in the hands of a few, or does it tend to level the playing field? Three University of Minnesota researchers have built a simplified model that isolates the effects of chance and found that it consistently pushes wealth into the hands of a few, ever-richer people.”

    2. Emmanuel Saez, a leading researcher in global inequality, says rents play a major role in creating inequality, where rent is understood as sweetheart deals, corruption, backdating stock option contracts—all sorts of pay-setting practices that permit those at the top to secure more than they would in a competitive market–i.e., more than their economic contribuion.

    Saez says very progressive taxation is a blunt instrument that works to reduce inequality. He says history has shown that taxation is more effective than regulation.

  • Nils

    Isn’t a high income tax just a way to keep those who aren’t already wealthy from attaining wealth while not really hurting those who are already wealthy?

    I would suggest something else: 1) Cap deductions for charity – this is where the wealthy move their money, in essence they can still control how it is spent and it’s tax sheltered. This is how guys like Romney achieve their lower individual tax rate.
    2) Tax any large inheritance just like regular income.

  • Brick

    Now if I was making putting forward this view I might be tempted to quote 2011 census information that 51% of all income is given to the top twenty percent of households. Interestingly the data shows a marked deterioration in the middle and fourth quintile. Yet again you need to look at the small print and find that income does not include capital gains and when you take that into account I guestimate that about 85% of all income is given to the top fifteen percent.

    Income is of course not wealth and I hope I am not being rude by questioning the actual numbers you quoted. Unfortunately the only realistic estimates I could find were in a CRS report which concluded that.
    The share of wealth held by the top 10% of wealth owners grew from 67.2% in 1989 to 74.5% in 2010.The share of total net worth owned by households in the 50th to 90th percentile of the wealth distribution fell from 29.9% in 1989 to 24.3% in 2010.

    What this tells us is that the US is deviating away from the Pareto principle, namely that the distribution is no longer 80/20 but more like 85/15 and will approach 90/10 within a couple of decades. Now you can argue that the deviation is within allowable parameters. Perhaps what we should be asking is what happens if the deviation from Pareto rule increases. My guess is that rule of law and personal freedom becomes more polarized in protecting the interests of the very wealthy. I guess you either get oppression or a pitchfork moment, whether on a country or global scale. Go long body armor.

  • Blobby

    I believe it most certainly is natural. But also a lot down to luck.
    As animals evolve to suit their environment and flourish or otherwise so do humans.

    There are alpha males that take 80% in nature, wolves, bears etc.

    Tree’s which by luck grow in the most fertile grounds, fish in the most nourishing seas, humans is the best environments etc.

    While others struggle and suffer in less than optimal environments. Not just physical surroundings, but also nurture, education etc.

    Its the right combination of these things which give rise to 20% taking 80%. Its pervasive and very Darwinian.

    I would guess there is probably even 80% of the universe’s mass in 20% of the stars. (maybe!?)

    Education is the best remedy for inequality. Education of parents, children, businesses, government etc. To seek knowledge is the best answer IMO.

    Freedom and free markets also help. Scrap trade barriers, rules and laws against labor mobility etc, etc. Economic barriers seek to prevent the disadvantaged from moving to more favourable climes.

    Just look at the Unions preventing entry to protected trades…

    These are all places where the 80/20 rule applies.

    This all should be broken through freedom and education.

  • Happy Swede

    Depends on level of progressivity I guess, top bracket in Sweden something like 60+% while lowest around 25%..

    Inheritance tax could be a solution but would like a wealth tax be very unpopular.

    Imagine having your mothers/fathers hard earned savings taxed by the gov. You would also need a gift tax while your at it..

  • Ilya

    How about targeting inflation? Those with assets are partially shielded. Those poor are not. A classic unintended consequence of central banks policy. Targeting asset prices benefits asset holders primarily.

  • Matthijs

    Well apperently it is shocking to many people. Most people just don’t realize yet how huge the inequality is and how big, no how gigantic, BigMoney is. And I do understand that people are shocked.

    It’s only after you get interested in economics, study a lot, read things online, etc that you realize what’s going on. 99,9% of the people just live their lives and try to survive. From the “outside” they only see a man in a nice suit entering a building on Wallstreet, not knowing what is going on inside. Or incidentally they might read about some big bonus or something. But it’s hard to put in perspective. So I’m not surprised at all that people are shocked.

    What is also a factor that has hidden the growth in inequality is that in the last 30 years or so, most people still have improved in a material sense. People have cell phones now, maybe are able to still buy cheap food at Walmarts, etc. The fact that some people have seen their incomes improve 10% hides the fact that another group has gained 200%.

  • Lukey

    What this tells me is that a) smart people tend to do well, and there’s a pretty small minority of smart people, and b) there’s a very small percentage (one or two percent) of the population are driven to possess vast wealth. Futhermore, in an era of currency devaluation, those with assets tend to do better than those without assets.

  • Lukey

    Exactly! Nothing has done more to drive a greater proportion of the wealth into fewer hands than big government regulations that limit the path to success for new and small businesses.

  • Dragon8888

    Could it be that it’s just the natural process of capitalism that over time, the top 1% will possess most of the wealth? It’s a bit like Darwinism, survival of the fittest or the luckiest?

    How do you make it more equal? We’d need a big economic depression, a major World War, and a New Deal. That was what happened 70 years ago. Many will call it socialism, I call it naturalism. We’d need an event that is big enough, chaotic enough to flatten out this “inequality” graph.

    Remember the dinosaurs? Without the Chiccxulub meteor, none of us would be here today.

    We need a revolution! Nah, forget it, let’s get back to watch some more YouTube.

  • Andrew P

    I think it has more to do with nature than compound interest. Why do 20% of the guys get to bed down with 80%+ of the women? It has nothing to do with finance.

  • Nils

    Yeah, personally I won’t inherit anything so that makes me biased. Here in Germany, gifts are taxed like inheritances. I also don’t have any children, presumably if I had any (knock on wood that doesn’t happen) I’d rather they have my wealth than somebody I don’t like.

    It really strikes the core of capitalist society if you start thinking about if people actually deserve their wealth. What has Paris Hilton ever contributed that she deserves to be so much wealthier than 99% of the planet?

  • Steve W

    I’ll watch the video later, but will pose a question now. Do you think “most people think it’s not all that unequal” because of the relatively high living standards enjoyed by so many in the USA? The middle class may not own much of the wealth in this country, but many of them have decent homes, newer cars, various toys (boats, motorcycles), eat pretty much whatever they like, and use technology (smart phones, etc.) that was barely imagined ten years ago.

  • Keophus

    Sorry, I don’t understand why this is a problem. The truth is there are very few actual poor people in the US. Even the poorest here are far better off than the average citizen of the Congo, for example.

    Blacks(to name one supposedly disadvantaged group) in the US have a higher per capita income than do Canadians.

    When obesity is a scourge of our poor, we don’t truly have a poverty problem.

    While Bill Gates has several orders of magnitude more dollars than I, the amenities available to me are not that far behind. Sure, he probably has a personal jet. But I can afford to fly pretty much anywhere in the world on occasion, and my health care is quite good even if not the ultimate.

    I don’t own a private ranch, but if I want to hike in the woods there are plenty available for that purpose.

    And Bill has certainly made a far greater contribution to society than I have.

  • coolhead

    The conservatives often use President Reagan’s famous line, “The government is the problem” about which there is certain degree of truth: government tends to be bureaucratic, slow, wasteful, etc. However, at this moment of human beings’ history, there are no better alternatives to take some chunk of money to re-distribute to the needy people and help them out. The snowball effect of wealth needs to be tampered, which eventually will help the rich too to avoid the social upheavals.

  • Nils

    How would you suggest helping the needy?

  • http://None Midas II

    Government programs like Medicare are far more efficient than Insurance companies in providing health coverage. Of course those companies must advertise, expend strong efforts to reduce claims, and show profits.

  • krb

    Excellent post Cullen…..I wish more writers would take up the issue! Going further (I read your post, didn’t watch video), this has been one of my major frustrations with current fed policy of fostering speculative rises in stock and commodities in an effort to revive the economy via the “wealth effect”. I’ve pointed out in past posts that while Bernanke thinks or hopes this can work, I don’t believe it is even possible for it to work…the math doesn’t work.

    For the economy to get out of depression the middle/lower classes must prosper because that is where the volume buying capacity is… matter how wealthy the wealthy get they can not revive the economy by themselves. The wealthy have proportionately more of their assets in the stock and commodity markets than the middle/lower classes do, but the middle/lower classes pay proportionately more of their weekly income in energy and food costs. So as Bernanke policies, intentionally, raise stock and commodity prices higher than they otherwise would be, the meager portfolio increases (compared to the wealthy) are substantially being consumed by higher weekly living expenses (as a percent of income compared to the wealthy). The math in Bernanke’s policies can’t help but widen the gap between rich and poor, and in fact that is exactly what the data are showing over the last four years. Not only is his theory wrong-headed, it’s immoral…..and this doesn’t even address the issue of baiting people into behavior that is NOT in their personal best interest, like coaxing retirees and near retirees into buying more stocks, coaxing them to spend more than they should from paper wealth instead of real wealth, etc. Thanks again for raising the issue of wealth gap. I honestly appreciate your wish to avoid the prescriptive, but there is a void out there when it comes to critically, factually, debating current policy and its impact on this issue. krb

  • Rich R

    Not that I would defend Paris Hilton, “the person”…but Paris Hilton, “the brand” is a successful business that ultimately employees a significant number of people. Beyond the marketing of her fragrances and linens, there’s the manufacturing, distribution, and retail operations of her 35 stores.

  • coolhead

    In addition to offering food, clothing, shelter, education, healthcare, etc, I think the “National Free WiFi” might be a great idea that enables them to have equal access to the internet after giving them them devices. Even if people just play games, they will learn something and will have less time to go to streets forming gangs and selling drugs.

  • Mark S

    I wonder if the income figures used above include wealthy people’s income subsequently donated to charity and poor people’s “income” received in the form of charitable giving, tax credits, government benefits, etc.

    While I don’t necessarily accept the notion that income is too “unequal” in the US, I am certain there are more effective ways to enhance income equality than to ask the federal government to seize more of wealthy people’s assets; process the funds through the most wasteful, fraudulent and abusive institution in the country; and re-distribute what’s left to poor people.

    Rather, I would prefer to see the federal government enhance the tax benefits of charitable giving or even dollar-match charitable donations to encourage more private philanthropy. We may need a bigger safety net, but we do not need a bigger federal government.

  • Greg

    I disagree with your assessment of how this is not a problem, especially when you also use blacks and say we are not a disadvantaged group. When a you have a large percentage of black males incarcerated in prison due to government policies such as their war on drugs(i.e. making marijuana a higher felony). When blacks or other minorities in inner city do not receive the same education such as others. If you feel that only a few should control all the wealth and power then I believe that history will repeat itself by causing those who have been taken advantage to revolt once they become fully aware of their plight. French revolution comes to mind.

  • Rich R

    All true…but, as Ben Bernanke, and others continually point out, by providing liquidity to the banking system, and maintaing core price stability, the Fed is merely fulfilling their mandate. All their extraordinary interventions have been centered around these goals, with the affects you’ve described being “unintended consequences.”

    If we want the Fed to behave differently, the Congress needs to reevaluate their (the Fed’s) mandate.

  • Tom Brown

    Obesity is bad example. That’s evidence of poor quality food.

  • Nils

    I suppose though there is quite a bit of confusion on who is taking advantage of whom exactly.

  • Nils

    But you would agree that starvation is a good indicator of absolute poverty?

  • http://pragcap Michael Schofield

    IMO the most shocking thing is that people are shocked about things they really ought to know. Lately, many are shocked to find that the markets are way up. Of course I could go on but I would fail to wake the sleeping… We are truely screwed when the knowledge to understand our complex problems escapes most people. But let me get back on topic. Some of the reasons for wealth disparity are solid, fair or not, it’s just the way it will always work. Some are the unfair advantage of wealth and among those is a simple principle- MONEY IS POWER AND THAT POWER WILL BE USED TO GET MORE MONEY. The lower income classes are failing to get their share in part because they don’t have paid advocates (lobbyists), or are simply afraid to say “where’s mine” for fear of being called a SOCIALIST!!! Wise up you unmonied, someone is eating your lunch.

  • krb

    I think our views of fed actions are entirely a matter of perspective. Ask the middle, lower and elderly classes if they are experiencing “price stability” from Bernanke’s policy of goosing stock and commodity prices “higher than they otherwise would be”….the fed’s stated goal, not my words. Ask the 12-14% unemployed if they are successfully addressing the other half of their mandate…..full employment. I am quick to defend the fed in that anything about employment has no business being part of their mandate…..their two mandates are actually at cross purposes….but for the time being this IS also part of their mandate. As I’ve said, I actually believe their attempts to revive the economy or meet their employment mandate is mathematically unachievable, despite their claims. And to be completely transparent…….I don’t believe their policy has ever been about economic revival….Bernanke knows the math as well as I do and the GROWING gap between rich and poor capacity to spend……I believe from day one this has been a bank support policy disguised as an economic revival policy…….and in that respect Bernanke probably, behind closed doors, believes he has been wildly successful.

  • Valuation Consultant


    It is interesting that you posted this. I think if you are interested in learning more you should read about Massively Multiplayer Online games (MMOs).

    Some of these games include free floating exchange of in game items for in game currency, people spend real dollars to acquire currency in game (exchanging real world time to save game time).

    Anyway, the point is everyone in these games starts with the same opportunities and nobody has a leg up. But time and time again, the wealth flows to the top few percent of gamers who actively try to accumulate it.

    If tomorrow you doubled the income of the bottom 20% of the United States, do you think they would have accumulated any more wealth in the next 5 years? I doubt it, in fact, they would probably have twice as much debt as supported by their increased income.

  • Tom Brown
  • Tom Brown

    I’ve always wanted to adapt an online game to run an economic experiment. Set up identical, but separate worlds… only change the “economic czar” policy. Let different economic schools of thought program this “economic czar” to their liking in each world. Players are randomly assigned to different worlds. Run the game for a while and see whose world is doing better by a number of measures.

  • rharaz

    Hi Tom,

    I’ve been helping my son setup a Minecraft gaming server and found that there are a number of “plugins” which can be used to help establish an economy within the game. Do an internet search on “Minecraft iConomy”. You might be able to use the system to perform some crude experimentation (could be fun too).

  • rharaz

    Hi Midas,

    By efficient do you mean cost effective? If so, then I think you might be mistaken. I’ve read that hospitals/clinics cost shift based on the type of insurance they have (or lack thereof), which makes Medicare costs look lower than they actually are. If I am mistaken, please let me know your findings (thanks).

  • rharaz

    clarification: I’ve read that hospitals/clinics cost shift based on the type of insurance their patients have (or don’t have), which makes Medicare costs look lower than they actually are.

  • Tom Brown

    thanks for the tip.

  • Sixx

    This might be fodder for the argument against QE that’s used to promote the Wealth Effect. If the video is accurate, the top 1% own 50% of all nominal Wealth Effect targeted assets (stocks, mutual funds). Does an increase in the value of these securities really make the top 1% go out and spend more? Would the incremental spending of the top 1% due to this effect produce any real economic difference? Presumeably that demographic already has enough money to make any purchase they desire before the effect so changing their psyche might be as effective as giving toilet paper to a t-rex: don’t need it, can’t use it, but looks fun.

  • jaymaster

    Wealth and income inequality are good things. For a progressive economy, they’re a feature, not a bug. They’re the carrot that provides motivation for most of the progress we as humans have made.

    But for these incentives to work, we must ensure equal opportunities for all, and laws that maintain a level playing field.

    It’s a package deal. History has shown that the first without the second, or vice versa, will both ultimately fail.

  • Old Dog

    The Chinese have a saying that sort of goes like this: When the wealthy get too wealthy and the poor get too poor, “things” happen.

    Seems like our social safety net here in the US is regularly tweaked to keep us just short of “things” happening.

    Overall our system is regressive.

  • Old Dog

    Teddy Roosevelt sponsored and signed into law that most Republican of all taxes – the Estate Tax.

    He felt it was essential to the future of this nation. That without it we would in a few generations build an aristocracy that would leave us no different than Europe.

    He felt that the greatest advantage the US had over Europe was that here each new generation had a REAL chance and incentive to build wealth from little or nothing but their own hard work.

    Our aristocracy has pretty well gutted and circumvented that tax and today we have almost as uneven a wealth distribution as Europe!

  • Old Dog

    Same reason 20% of women bed down with 80% of the guys!

  • http://pragcap Michael Schofield

    Of course we need fantastically wealthy people. Try building a $6 billion project without them. And certainly demand and skill should enter into pay. So while I agree that there certain features of capitalism that the system needs, fair or not, imbalances usually favor the people with money. The playing field will never be level, and the US government is always a redistribution mechanism. It’s just a question of which way you want the money to flow, and lately it’s been one way.

  • rharaz
  • PedroCPAGuy

    The Pareto Principle is very interesting.

    Cullen, you ask: “Well, these are the questions I am more interested in. Why does this happen? Is it a bad thing? Should it be fixed? Can it be fixed?”

    So, let’s take them in order against the background of my own work experience. By way of background, I’m now retired. During my almost 5 decades of working years, I worked for a very large professional services firm. One of my responsibilities for about 2 decades was human resource related. That included college recruiting and monitoring of on-the-job performance of our macro staffing data over time.

    The 20/80 rule was clearly at play. Even though we were able to hire college trained people from among the top graduates as measured by academic performance, only about 20% had what it takes for the long run in our profession. Their superior performance was evident very early on(ie., within 1-2 years on the job). Bottom line, they were very sharp, very motivated, and had a knack for doing things right, whether in a technical context or their ability to interrelated effectively with others. Advancement within the firm was driven by on-the-job performance, not by sucking up to one’s superiors.

    So … “Why does it happen?” I think Mother Nature plays a significant (not the only, but clearly significant) role, not at all different from what is seen in gifted athletics. Some folks just have it, many don’t.

    “Is it a bad thing?” It’s not a question of good or bad; it’s just the way it is, a blatant fact of life to be understood and managed.

    “Can it be fixed?” The effects of the Pareto Principle can be managed, but in the final analysis, trying to fight Mother Nature is no different than trying to “fight the Fed”. Odds are, efforts to change Mother Nature’s principles will not be all that successful because … they are contrary to natural forces. The best approach is to simply manage things, recognizing that we’re not all equal in our skills and abilities and the related outcomes.

  • Rich

    The few people I know that I consider to be mildly wealthy made their money by finding a niche in business, and exploiting it to the exclusion of everything else. Street smarts and willingness to do hard work outweighed intelligence and education. I believe almost anyone could duplicate the ideas, but few have the willingness to do what it takes. The personal costs are pretty high. I put family, friends, enrichment and education before making tons of money, but some make the opposite decision.

  • William Bedloe

    Perhaps the Harvard Business folks who put together the study can begin to help close the gap by offering their top flight education at a fraction of the cost of what it currently takes to go there. The rest of the universities can follow suit.

  • Explorer

    The Pareto principle is 80/20 not 85/15.

    If the current situation is to mean revert then the 15% have to lose a lot of wealth to the 80%.

  • Tom Brown

    Just watched the video. Sickening. What makes me worried is that as this trend continues extreme political philosophies will become more attractive. Personally I think we’re ripe for fascism. Fascism is certainly making a bit of a comeback in Europe… especially Southern Europe.

  • jaymaster

    Michael, I disagree twice.

    We don’t need fantastically wealthy people. Just marginally wealthy ones. But we shouldn’t fret when the fantastically wealthy folksy do occur, as long as they earn their wealth playing by the rules.

    And why can’t we have a level playing field? With the right rules, and sensible regulation, it should be possible. Of course, it won’t ever be perfect. But it can surely be close enough to be effective.

  • Simon

    Great post Cullen. I wish more people would address the obvious pink elephants in the room.
    I would like to see how the list of countries has evolved of the last 3000 years. In the top 20% who were/are the biggest movers, who has had the lasting power, etc.

  • http://pragcap Michael Schofield

    That’s close enough for me Jaymaster. The hard part is always getting all that sensible stuff rounded up

  • Matthijs

    Your analysis is only correct to a certain extend. And doesn’t apply in the current situation in the US or the world. Meaning: of course different people are gifted/inherit different qualities, some better then others, and therefore some will do much better in their work, financially and economically then others. All true.

    And we can even agree that, even though it’s too unfortunate that some people are born less gifted then others, in the end a system with competing people, all doing their best on an individual level, will improve the society for all.

    However. Where it goes wrong is when people with more money and thus power misuse that to gain unfair advantages. Create monopolies, having a big influence in Washington to change laws in their favor, etc etc. And that is the reality. It would all be very different if every child in a country could get the same quality education and upbringing as all others and then at 18 years age (or so) enter a complete uncorrupt, free market in a fair competition with others, without any crony capitalism going on, as is now the case.

    So I could agree that in a completely free and well regulated capitalistic system, some form of inequality will unavoidably happen. Maybe according to the 80/20 rule, maybe 70/30, who knows. But the current situation is that that distribution has shifted largely because of other, unwanted reasons like corruption and crony capitalism, keeping most poor people poor and getting many rich people richer.

  • ES71

    Late to the discussion, but I am convinvced that you cannot make people equal in prosperity, only in misery. You can bring everyone down to the lowest common denominator by supressing the top but you cannot bring everyone up to the same level of prosperity simply because of different abilities of different people and lack of resources.
    In the US average income is somewhere like 50K per family. If we took all this income and made everyone make 50K regardless of their actual contribution we’d just get another perverted society where there would be no reason to work, and there would be nobody to pay the taxes because suddenly everyone would be equally poor.

  • ES71

    Following Mother Nature more successfull people can better provide for their offsprng and procreate thus improving the genome of thepopulation.
    Conversly, by supporting the bottom 80% at the expense of 20% we weaken our genome.
    The same goes for a number of other things – medical advances allow to save kids who would’ve died because of their poor health.Now they survive and their genes survive.
    Mother Nature is all about survival, but the society is all about fairness.We need to have a balance or we jeopardize our surival in the name of fairness.

  • ES71

    Lol, yes, the male lion sleeps all day and lionesses do all the work. How come nobody tries to remedy that blatant inquality.

  • Mike

    What’s to fix? The wealth that is “owned” by the top 1-2% is largely equity in business enterprises. These business enterprises act as if they are part of a giant public trust. People have jobs, they go to work and engage in productive activity, they get generally sufficient pay to live a standard of living that is arguably envied by most of the world’s population. At the end of the day, every human being has problems, even the wealthy. Quality of life and happiness are not related to wealth once sustinence is satisfied. And then, at the real end of the day, the owners relinquish their ownership when their mortality catches up to them. In that light, they were just renters, same as you and me. Not a problem.

  • Tom Brown

    You could make a similar sounding argument to justify almost any socio-economic situation. So Pharaoh owns 99% of the wealth.. the slaves have jobs and get their gruel and a roof over their heads at night. Better than starving to death in the desert! At least their time is valued. So comrade Stalin controls 99% of public life. Look at the secret police he employs, all of which are able to put bread on the table with the rubles they bring home. It’s not like Pharaoh or Stalin don’t have their problems. Mortality catches up to them eventually as well. Turns out they were only renters just like the rest of us.

    And I guess you could make the same kind of arguments to justify any kind of reaction against the status quo as well. So what if socialists win politically and impose a new 99% wealth tax? The “wealthy” would still eat and live and die. Just renters in the grand scheme of things. They’d still be just like the rest of us.

  • Tom Brown

    Very interesting. So what do you think? Do you think online gaming could be used for economic experiments like I’ve described above?

    I’m guessing that for a good experiment, the game might be a little boring, and you might have to offer [ongoing?] cash prizes to the “winning” participants. You’d also have to try and control for the riff raff joining up just to sabotage a world, etc.

    I guess what tickles me about the idea is if we could somehow get buy-in from some big name participants: Imagine Scott Sumner endorsing MM world, and Ron/Rand Paul, Lew Rockwell and/or Charles Murray endorsing Austrian World. Krugman could have his own, the em em tee folks their own. Other’s might include Cochrane, Keen, Stiglitz, … and perhaps somebody from the “free banking” crowd… and maybe some right and left extremist libertarians… and perhaps some REAL socialists and Marxists as well.

    If the game (which could be never-ending) were anything like reality, each of these groups might be on top for a period of time, but then slip behind the others for other periods of time. Of course there’d be a lot of disagreement about how to “score” the various worlds for “success” … so you’d have to be careful about defining that up front.

    Probably you’d NEVER get these crowds to agree to endorse these worlds though… they live very comfortably never having to have their ideas really put to test like scientists do. I think that’s one of the things that attracts people to economics in the first place: it means never having to acknowledge that you were completely wrong… there’s always a “it would have worked if…” (a “counter-factual”) escape hatch you can use to justify your errors and misjudgements. This makes academic economists very different from “practitioners” who ARE put to the test… managing other people’s money, etc.

  • hangemhi

    Who on earth is suggesting we go from one extreme to your extreme? No one. I’m so tired of hearing the excuse that if there is a problem we shouldn’t do anything about it because we’ll magically kill ourselves. Like driving a 90 MPH and your wife says “honey, I think you should slow down” and you say “what, you want me to drive 10 MPH?”

    We have record inequality – the last time it was this bad… 1929. NOT A COINCIDENCE. The first step to dealing with any problem is becoming aware of it. And it is a problem. Saying that you have no idea how to solve the problem is NOT an excuse not to at least discuss it.

  • hangemhi

    We are playing Monopoly. If one player gets all the money he either has to loan the other players money to keep them playing (this is where we are now), or redistribute his wealth (what we did in the 30’s), or the game simply ends (what austerity will do). In the 1930’s they dramatically raised tax rates on upper incomes, and increased spending everywhere else. Even that didn’t do the trick until the great “Gov Jobs & Spending Act” known as WWII.

    A capitalist economy without redistribution is no different than earth without evaporation. Water must be removed from the oceans and spread everywhere else. The money always ends up right back in the hands of the “winners” (the oceans and large lakes)… but at least everyone else has a chance to flourish. The best of both worlds.

    Yes, inequality is normal and healthy, but not at today’s level which is very unhealthy. Something has to be done about it. If the 80/20 rule becomes 90/10 and then 95/5 the economy will grind to a half, and the large group who own nothing will increasingly turn to crime and riots. We will get back to 80/20 one way or the other…. raising taxes on the wealthy and increasing spending on infrastructure, renewable energy, education is all far less painful than WWIII or riots

  • Anonymous

    The problem with those games is that the ‘winners’ are people who live in mom’s basement and spend every waking hour playing the game.
    Which is unfair for those who just want a casual game to play.
    If you extend that to our economy, some of our economic winners are people who do things that most people won’t. Sometimes those are good things, like working hard or innovating, but sometimes those are things that don’t help the rest of us.
    So long as the rules of the economic game reward positive behavior, I’m fine with inequality.
    But very often you get the feeling that rewards are flowing to bad behavior.
    This is just a bad example, but let’s say you could get rich with a product or activity that pollutes the environment — would that be good for the rest of us? Of course not.

  • Tom Brown

    Iluvatar, I don’t consider ANY of our politicians or their policies truly fascist… YET. If you’re counting ObamaCare as fascist, then what about any country with national health insurance? You think the Candadians are fascists? Ha! I don’t think you’re going to get brownshirts holding torchlight rallies and burning books in support of ObamaCare! Even it’s most ardent supporters would have a hard time working up that much enthusiasm for it! Or is your complaint that it’s not truly national health insurance, but some sort of strange mix, which will perhaps benefit crony corporations more than the rest of us?

    Personally, I don’t consider mere “mixed economies” as fascist myself. Some people do define fascism as state-sponsored crony style capitalism. OK, fair enough… but the worst part of fascism to me is missing from this definition: that’s its misinformed, anger based radical, regimented, violent populism — usually with heavy emphasis on nationalism, “strength,” traditionalism, militarism, xenophobia and scapegoating. But (I think) this negative populism can arise from the plutocrats getting the electorate to vote against their own interests. When things don’t go well for the electorate (predictably), the plutocrats convince them it’s because of “minorities” or “immigrants” or “intellectuals” or some other scapegoat. Then instead of seeing the con game (it’s hard to admit you’ve been conned… there’s a strong incentive to reject this conclusion… otherwise you feel like a chump, which is very unpleasant), the electorate accepts the scapegoat explanation, and continues to vote against their own interests, continues to get screwed, and gets angrier and more willing to take radical steps against the scapegoats. Eventually this blows up in the plutocrats faces when they fail to control the monster they’ve created. Think of Von Papen when he (and his cronies) thought he could control Hitler. Maybe someone could claim I’m a fascist since I’m “scapegoating” the “plutocrats” here! Ha! At least do me the favor of calling me a commie please… that’s just as bad, but I hate to think of myself as a fascist! ;)

  • Tom Brown

    No problem. I know that fascism was created in Italy before Germany… the fasci was a bundle of sticks wrapped around an axe, right? A symbol of ancient Roman unity. It’s funny, because I live next to a Monarch overwintering site in CA… it’s literally a few hundred yards from my home, and just this past year I got into growing milkweed, which is the only thing the Monarch caterpillars eat… and the kind that grows around here naturally is called Asclepias fascicularis (although I’ve never seen it growing naturally). That too is related to this Latin root!

    Actually there were a lot of fascist governments just prior to WWII: Spain, Italy, Germany, Austria (these Austrian fascists were AGAINST Hitler, and were wiped out by the Nazis), and I’m sure some others… Poland perhaps? Romania? Czechoslovakia perhaps? Portugal… I can’t recall… I’ll have to look them up… Not all were on the same page… Italy was VERY suspicious of fascist Germany before they became allies…. especially regarding their ambitions in Austria.

    Well I’ll be happy to see your response. I agree about your definition… in that it is an accepted definition, and I know a lot of people use it, right and left. However, to me it’s inadequate… I really have to marry that with the dangerous/scary/violent populism.

    So I doubt you’re going to convince me that mixed economies are fascist… including ObamaCare… whatever flaws it may have. I also don’t think you’ll convince me that crony capitalism is fascist. But what worries me is that I think the foundation for fascism can be established by this kind of cynical, whatever-it-takes, crony capitalism… combined with a massive misinformation campaign and a continued degradation of people’s standard of living.

    Personally I think the US is much more likely to go fascist than communist. I don’t think communism would be an improvement… but I’m a lot more worried about fascism because it seems more likely to me. I don’t think it will happen… it still seems like a remote possibility… but if things really got bad, who knows!

  • PedroCPAGuy

    Iluvatar: “Just accounting (boring!)”

    I take offense at that! :)

    The emphasis on the need – very serious need – to strengthen HH is spot on.

    But that is not in the interest of Deal Electeds, since it leads to a higher HH sense of self worth, personal strength, and personal power, which is not in the interest of Dear Electeds who need to keep HH dependent upon Dear Electeds’ power to control, doing so via the power of the purse.

    de Tocqueville understood … the Achilles Heel of the American form of democracy is the ability of the voters to vote themselves money. Dear Electeds understand this too. Thus, there is no motivation for Dear Electeds to strengthen HH.

  • DeanQ

    I’ve been somewhat surprised by the ideas being floated around by my son’s 20-something generation about changing the economic status quo. (No, not socialism.) Regardless of why 20% get the spoils and the rest get the leftovers, many young workers simply don’t accept it because it’s clearly not in their interest to do so. And they have the numbers and social media connections to change it.

    Naturally the top 20% prefer the status quo and will do anything to not only protect it but to increase their relative wealth. But widening economic disparity inevitably brings change. Current thinking involves radical changes in the monetary system, interest, debt, and employment.

    Again, it doesn’t matter how we got here. The point is that the declining financial condition of the vast majority will, out of necessity, lead to change. After all, why would the 80% support a system in which the top 20% can create greater disparities in wealth while everyone else loses ground?

  • Tom Brown

    Hahaha… yeah, I’m verbose… but you don’t do so bad in that department yourself sometimes. ;)

    I was just reviewing the wikipedia article on fascism… there were a LOT of fascist countries between 1929 and WWII. The austro-fascists I already described:

    I’m not going to take you up on your bet! I don’t have that much confidence in what’s going to happen with ObamaCare. Not saying I’m a fan… but I’m not convinced it’s the worst thing in the world either. I guess like you say, we’ll see.

    You’ve obviously spent a lot more time thinking about this than me! What you’re saying sounds a little out there… I’m not saying you’re wrong! … Just that statements like “10,000 laws are illegal” is outside the realm of … er.. “conventional wisdom.” It’s thinking like that which might lead you to do something … er… unwise… like stop paying your taxes, for example.

    I’m not a Ron Paul follower myself… so I’m not up on all his arguments… nor am I a constitutionalist or a constitutional scholar. I liked Ron when he was the lone Republican opposing the Iraq War… that’s about the time I broke w/ the GOP myself. I couldn’t believe they did that (invade Iraq). And yes I know, it wasn’t just the GOP… the Dems fell for it too. But I don’t trust his (Ron’s) libertarian ways too much… and especially the Austrian economic ideas. I like some aspects of libertarianism… but I think it can be carried to extremes (like everything else). I’m definitely not a privitization fanatic. I think it makes sense for the gov to run some things…. I do like Michael Hudson’s argument on that… that for some things public ownership is actually good (not necessarily healthcare, but I’m willing to entertain the concept): I believe it can help bring DOWN the cost of doing business, and thus promote business, rather than having a “toll booth” set up on everything… with those tolls ultimately going to pay some huge corporate executive bonuses rather than getting things done. Privatized water supplies (in S. America especially), or roads, or schools (I had great public schools growing up), or parking meters, or prisons… not necessarily that wonderful.

    As far as I know, everything you say is correct… but somehow I don’t feel too threatened by any of it. Maybe it’s because I’m a sheeple that’s been lulled into complacency. I still feel pretty free. I’m not ready to head into a bunker with my AR-15 and a year’s supply of dried goods just yet.

    I still think true fascism is better defined by folding in some of those broader concepts (Nationalism, xenophobia, etc). Perhaps we could agree that what you describe is a component of fascism… perhaps “corporatism”

    Check out this article, including the bit on “fascist corporatism”:

    … but corporatism is not one and the same as fascism. I like this quote:

    “Corporatist types of community and social interaction are common to many ideologies, including: absolutism, capitalism, conservatism, fascism, liberalism, progressivism, reactionism, socialism, and syndicalism.”

    I just looked up “syndicalism” to see what it was. OK, that’s a whole other story. Well “to bring this post to some sort of a non-insane conclusion” … you have yourself a good night!