Suppose some left-leaning organization (Oxfam, for example) produces a table of income statistics showing that less than one percent of a given population owns slightly more than half of the total wealth. A quick glance at the raw numbers might raise some eyebrows. Surely such a “distribution” of wealth is a drastic aberration from the normal course of things. Who in their right minds would oppose with hard hearts efforts from public minded politicians who promise to make things more equal?
Enter Gary North, who recently posted and offered a counter-intuitive conclusion–“economic inequality hasn’t increased since at least 1897.” In fact, North argues that such a wide disparity in incomes or wealth ownership–which today is all the rage for those Americans on the political left–isn’t really an aberration at all.
For support, North leads our attention to the Pareto Principle, discovered in 1897:
The Pareto principle is a principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The principle states that, for many phenomena, 20% of invested input is responsible for 80% of the results obtained. Put another way, 80% of consequences stem from 20% of the causes. Also referred to as the “Pareto rule” or the “80/20 rule”.
This principle serves as a general reminder that the relationship between inputs and outputs is not balanced. For instance, the efforts of 20% of a corporation’s staff could drive 80% of the firm’s profits. In terms of personal time management, 80% of your work-related output could come from only 20% of your time at work.
The Pareto Principle can be applied in a wide range of areas such as manufacturing, management and human resources. In Pareto’s case, he used the rule to explain how 80% of property in Italy was owned by 20% of the country’s population.
In 1896, Pareto observed in his garden that 20 percent of the peapods contained 80 percent of the peas, and proceeded to show that about 80 percent of the land in Italy was owned by just 20 percent of the population. In other words, Pareto discovered the principle in which a natural social order (whether in a garden, a private company, or even a national economy) will tend to produce about a 20/80 relationship between inputs and outputs.
In identifying how the social world naturally operates (namely, unequally), it immediately extirpates any notion that 1)an equal distribution of incomes within a given nation has historically been the long term trend, that 2)a highly unequal society (in terms of income, not political, equality) is an immoral one, and that 3)the government has a moral duty to fight income inequality.
The left’s balloon full of hot air has been refreshingly popped.
Unfortunately I haven’t seen many conservatives/libertarians using the Pareto Principle to counter the left’s incessant assault on economic liberty during their crusade to make a group of central planners responsible for distributing incomes. I know for a fact I heard Tom Woods bring it up in one of his brilliant podcasts, but he and North are the minority.
I’m currently reading Equal is Unfair, a new book from Don Watkins and Yaron Brook. I’ll be thrilled if they included such a discussion.
P.S. As I’ve noted before, income inequality per se isn’t even an issue. What matters is the means which people employ to seek economic gain, and so long as they’re of a productive nature, as opposed to a predative nature, then the resulting inequality is of absolutely no concern to me. Furthermore, in terms of our moral outrage, the resulting income inequality from predative behavior doesn’t trump the injustice/immorality of the behavior, so that I repeat: income inequality per se is no issue.