Pareto’s Law vs. Power-Seeking Reformers
When honored by the legal code, the principle of equality before the law always produces economic inequality. In contrast, wealth redistribution by politics must begin with inequality before the law. It is impossible to achieve both forms of equality at the same time because people are unequal in their abilities to satisfy customer demand.
Defenders of the idea of the free market begin with the principle of equality before the law. Defenders of the ideal of the welfare state begin with the principle of inequality before the law.
I understand why power-seeking critics of the free market are outraged by economic inequality. They hate the free market, which minimizes state power and maximizes liberty. What never ceases to amaze me is the small army of self-proclaimed defenders of the free market who take seriously the ideal of greater economic equality seriously. They see steep economic inequality as a failure of the free market and therefore a defect in the ideal of liberty.
I have good news and bad news. The good news is that the reformers who announce greater economic equality as their ideal have proven incapable of achieving it — anywhere. The bad news is that, in their pursuit of an inherently unattainable goal, they undermine liberty, leaving the worst to get on top. Economic inequality remains constant; the means of achieving it changes: from satisfying customer demand to capturing the levers of political power.
CONSTANT ECONOMIC INEQUALITY
Economic inequality is a constant. This galls the reformers. They refuse to admit that this is the case. If it is true that economic inequality really is a constant, then all programs of political reform to increase equality will fail. This would undermine all programs of political reform that are based on the ethical ideal of greater economic equality.
It turns out that economic inequality is one of life’s constants.
It was first described in an 1897 book by the Italian economist, Vilfredo Pareto. He had made a detailed study of wealth distribution in several Western European nations. He found this fact: about 20% of the population owned about 80% of the wealth. It did not matter which form of civil government a country had, the same distribution prevailed.
For over a century, economic historians and statisticians have investigated wealth distribution. They discover a very similar distribution.
This 20/80 distribution has become known as Pareto’s law.
Pareto’s distribution is what is called a power law. The angle of this pyramid of inequality prevails all the way up.
20% of the population owns 80% of the wealth.
4% (.2 x 20%) of the population owns 64% (.8 x 80%) of the wealth.
0.8% (.2 x 4%) of the population owns 51% (.8 x 64%) of the wealth
What is even more amazing is that this distribution prevails in fields far removed from economics. It prevails in the population distribution of cities in a nation. It prevails in the membership size of churches in a community. It prevails in arrests by departments.
The problem is this: no one knows why. This bothers analysts no end.
The main strategy of dealing with Pareto’s distribution is to ignore it. So, we find that critics of the free market ignore it. So does the small army of self-professed defenders of the free market who have adopted the power-seeking statists’ ideal of greater economic equality.
A 2016 STUDY
Credit Suisse, the huge Swiss bank, employs a staff of researchers. Every year, these researchers produce an economic report. The 2016 report offers a useful graphic. It reveals a pyramid of economic inequality.
[Note: the Top percentages in bold face type are not in the original. This version of the graphic was reprinted in a MarketWatch story.]
Notice the figures.
The top 0.7% of the population owns 45% of the wealth. Pareto’s law tells us that 0.8% of the population will own 51% of the wealth. So far, so good.
The top 8% of the population owns 85% of the wealth. Pareto’s law tells us that 20% of the population will own 80% of the wealth. Yellow alert! Yellow alert! Credit Suisse reports a staggering inequality.
But there is a huge problem with this graphic. The pyramid shows the same angle all the way up. Yet if 8% of the population owns 85% of the wealth, this violates the power law’s stable angle of ascent. The statistics are not represented by the shape of the pyramid.
I think that the report’s statistics are erroneous. They deviate too far from Pareto’s normal distribution.
I also think that the report’s authors told the artist what the pyramid ought to look like, despite the fact that the reported statistics do not conform to a Pareto’s power law. A pyramid with the same angle all the way up the sides reveals a power law. At the top of the pyramid is a figure — .7/45 — that is very close to Pareto’s familiar finding of 0.8/51. But the next level down — 8/45 — deviates wildly from Pareto’s 20/80 distribution. The researchers should offer an explanation. They don’t.
Here is something else they needed to show: the statistical results of this distribution in previous years. Is there evidence of a narrowing pyramid, i.e., an increasing inequality? Or is it the same old, same old?
Here is what I have discovered in 35 years of studying reports on rising economic inequality. The reporting organizations never provide the results of previous studies that used the same methodology. They offer no evidence of a changing pattern of wealth distribution. There is a good reason for this: there are no such statistics. There is no significant deviation from Pareto’s distribution. The angles of the pyramid remain the same, decade after decade, reform after reform: 20/80, 4/64, 0.8/51.
The more things change, the more they stay the same.
A GUILT MANIPULATED CRITIC
I begin with someone you have not heard of: Shaun Langlois. He writes for MarketWatch. Here is his article on rising inequality. It begins with a headline: Global wealth study reveals ‘shockingly’ high levels of economic inequality
He begins with a perfectly reasonable, i.e., Pareto-honoring, assessment. “Despite the best efforts of those raging against income inequality, the chasm between the world’s haves and have-nots doesn’t appear to be getting any narrower.” There is a reason for this: the distribution does not change much from year to year.
He continues: “According to the Credit Suisse Global Wealth Report, a mere 0.7% of the global population owns nearly half the world’s wealth.” He used the adjective “mere.” He could have used “familiar.” Even better: “Pareto-predictable.”
Then he mixes oranges and apples: not a percentage of wealth but dollar figure. “At the other end, 73% of the popular have less than $10,000 each.” I assume that he meant “population.” He wrote “popular.” Even if we substitute “population,” his sentence conveys no information that is suitable for comparing Pareto’s distribution with Credit Suisse’s distribution.
“In recent years, there has been a growing sense that the economic recovery is shallow, and has not reached all layers of society,” researchers said in the study. “Evidence from our global wealth database supports this view.”
So what? Whether the economic recovery is shallow or deep, what evidence is there of increasing inequality? Where is there evidence that recovery or recession significantly change the distribution of wealth? There are winners and losers. But where is the evidence that economic growth reduces inequality? It hasn’t since 1897.
Then he reprints the Credit Suisse pyramid, which is fake. He treats it as if it were an accurate representation of the figures that Credit Suisse’s researchers report. It isn’t.
“At the top of the pyramid, the number of global millionaires has soared by 155% since 2000, while the ranks of the ultrarich has had an even more significant spike.” What is the evidence of this? The percentage — 0.7/45 — is consistent with Pareto’s prediction of 0.8/51.
“The trend is only expected to continue. In 2000, the top 1% owned 49.6% of all household wealth. By 2009, that figure dropped to 45.4%. Since then, it has moved past the 50% mark, and it doesn’t look like that the trajectory is about to shift.” So, it keeps shifting. But where is the pyramid graphic for 2000? Where is the 2009 graphic? I want to see the angles change.
Next, Pareto’s law tells us that the top 0.8% will own about 51% of the wealth. So, the figures for 2000 show much greater equality than Pareto’s distribution would normally allow: 1% owned only 49% of the wealth. Very strange. Why was this the case? The 2009 figure is much closer to what Pareto would predict: 1% owned 45%. That is still abnormally egalitarian, but at least it was heading back where Pareto’s law would predict: 0.8%/51%. Normality was reasserting itself.
Now we get the hard sell. He cites a spokesman for Oxfam. Oxfam is an ideological think tank that promotes political intervention to redistribute wealth. I have reported on it in the past. It never refers to Pareto’s law. It never shows how economic inequality is changing. Every year, it gets media coverage when it issues its latest report on inequality. It times this press release with the meeting at Davos of the World Economic Forum, where the elite meet to eat.
Oxfam International’s Max Lawson, in a response to the study, says inequality has reached “shockingly” high levels, and changes need to be made.”This huge gap between rich and poor is undermining economies, destabilizing societies and holding back the fight against poverty,” he said. “Governments must act now by cracking down on tax dodging, increasing investment in public services and boosting the income of the lowest paid.”
Oxfam is in the guilt-production industry. It knows that guilt is the first stage in welfare state reform. It uses the public’s ignorance of Pareto’s distribution to bamboozle writers like Langlois. These people are easily bamboozled. Then these writers spread the guilt.
CONCLUSIONS
Every time you read about rising inequality, ask yourself these questions.
What is the evidence of this increase?
Did the research organization publish similar evidence in previous years?
If it presents a graphic, does it also publish graphics from previous years?
Does the degree of inequality deviate from 20/80?
Most important, does the report refer to Pareto’s law? (It won’t. I guarantee it.) Does it provide a pyramid of Pareto’s 20/80 distribution for purposes of making comparisons? (It won’t. I guarantee it.)
Here is the name of the game.
1. Create guilt about economic inequality today.
2. Avoid all references to Pareto’s distribution.
3. Announce that things — inequality — are getting worse.
4. Assert that raising taxes on the rich will reduce inequality.
Above all:
5. Avoid presenting statistical evidence from the past that raising taxes on the rich decreased economic inequality in some nation, i.e., reduced the angle of Pareto’s distribution pyramid.
Be aware of how this scam works. It will immunize you against guilt regarding the moral legitimacy of liberty, which is based on these two principles: (1) equality before the civil law; (2) the right of ownership, i.e., the right to legally exclude others from using what belongs to you. We teach this distinction to our children: “mine/yours.” Welfare statists use guilt manipulation to get us to forget or reject what we learned as children.
From Gary North, here.