Monday, April 23, 2012

Pareto's Law: Understanding Inequality

Economists, always intent on making their work into a science, like to transform their ideas into a "scientific" law. Accordingly, the Fascist Italian senator, Vilfredo Pareto is credited with discovering Pareto's Law, which explains why inequality is a natural outcome. Pareto suggested that 20% of causes create 80% of effects. He argued that this law explains why 20% of the Italian population owned 80% of the wealth. Sadly, the U.S. experience calls Pareto's data into question, but then, those lazy Southern Europeans wallow in socialism.

There is a second Pareto Law, which offers a more accurate explanation inequality. In his Manual of Political Economy, he explained:

"In all periods of the history of our country we find facts similar to the practices we have just pointed out, permitting certain persons to use stratagems to appropriate to themselves the goods of others; hence we can assert, as a uniformity revealed by history, that the efforts of men are utilized in two different ways: they are directed to the production or transformation of economic goods, or else to appropriation of goods produced by others. War, especially in ancient times, has enabled a strong nation to appropriate the goods of a weak one; within a given nation, it is by means of laws and, from time to time, revolutions, that the strong still despoil the weak."

Pareto, Wilfredo. 1906. Manual of Political Economy, Ann Schweir, tr. (New York: Augustus M. Kelley, 1971): p. 341.

The final phrase about the strong despoiling the weak offers an excellent insight into the way that capitalist countries, led by the United States have been repealing Pareto's first law.


ProGrowthLiberal said...

So Pareto - not Gordon Tullock - first came up with the concept later known as rent seeking?

Will said...

What's weird is that I can quote Thorstein Veblen making a very similar point, in his distinction between predacious "exploit" and productive "drudgery." This, in turn, is really not very far from Adam Smith's distinction of productive and unproductive labor (or so I'd argue).

michael perelman said...

Pareto is saying something different than Smith or Veblen. Smith was attacking the 1% (i.e., the aristocrats who hired servants). Veblen was attacking predation buy business rather than using the state to redistribute the produce of society.