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 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. (continue reading)