Adam Gant is a committed philanthropist

Tag: Pareto Distribution

Poverty and the Pareto Distribution: Part II

In my last blog, I covered the Pareto Distribution and how it relates to the problems of inequality throughout nature. We left off with a critique of the Marxist view that Capitalism was to fault. And while I don’t deny that man-made structures can become corrupt and fueled by greed, we must be careful to address the problem for what it is. Inequality is a problem; it is. But it’s not capitalism or any other system’s fault – it’s something we don’t quite understand.

Many have attempted to remedy this problem by implementing higher taxes on the rich or enforcing programs that redistribute wealth – all of which have not produced the intended result, with some of these ‘solutions’ resulting in the death of untold millions. But many are researchers are looking at the Pareto Distribution and similar methods to see if there is a solution we can derive from the natural laws that are in place.

Work on Saving

Bikas Chakrabarti of the SINP and his colleagues are working on a method that paints a much less solemn prescription for the poor. His team worked with the gas model (mentioned in the previous blog) to help develop a plan that allows people to save more money. This model predicts both class models that Yakovenko found, and it. It also posits (but does not guarantee) that if you save more, you are more likely to end up rich. This research suggests that training people to save and spend money more responsibly (something that harkens back to the random spending habits of people) can help even out wealth distribution. While this model is far from perfect and has received criticism by many in the field, it is certainly a proper start on the road to assessing the problem of inequality from a scientific and thoroughly examined viewpoint.

Personal Responsibility

In the end, it does in part come down the philanthropic work of individuals. As a free society, we cannot force people to engage in actions they do not wish to. If we can learn to foster a love for the people around us, then it’s certainly reasonable to assume that many people would be much better off. But we also need to move to a deeper understanding of helping people build a sustainable future for themselves. The adage, “Teach a man to fish and he eats for a lifetime” is certainly true in this case. Working to instill dignity and self-respect in the people who stack up at zero is crucial for the betterment of all societies. It has proven toxic to force other people to give the ‘fish’ they worked so hard for to other people. Kindness must come from the heart, not from the legislative hand of so-called morality.
It’s true, we all have a part to play, but we must be honest with ourselves when we are unsure of what that part entails. We need to address the very real problem of inequality, but we also have to figure out smarter and more comprehensive ways to help and do away with the old murderous models of the 20th century. We need to find contentment in the fact that everything is not as it should be, but we are working to remedy that problem.

Poverty and the Pareto Distribution: Part 1

In any given society, people tend to stack up at zero. What do I mean by this? Well, the Occupy Wall Street Movement was a good, recent example of the outrage that people had towards the 1%. The notion started to grow in the collective unconscious that those at the top (the 1%) held as much/more than all of the rest of the people in the United States (the remaining 99%). This outrage, as some claimed, was the result of greedy corporations and business bigwigs who preyed on the seemingly now defunct middle class of America. Was the anger warranted? Well, people do tend to stack up at the top and the bottom. But the answer, unfortunately, isn’t as simple as the “the rich get richer because they take from others.”

About 100 years ago, economist Vilfredo Pareto observed what many call the 80/20 rule. It’s also known as the Pareto distribution, Pareto’s rule, and the “long tail” distribution. What does this rule, one that is so common to business experts and economists, have to do with poverty and inequality in the world? Let’s take a look.

The Roots of Pareto’s Law

In 1897, a Paris-born Italian engineer named Vilfredo Pareto recorded that the power of wealth in Europe followed a similar power-law structure to that of his garden. Pareto observed that 20% of the pea pods in his garden contained 80% of the peas. Likewise, he found that 20% of the people in Europe were responsible for 80% of the wealth. Later, economists realized that this law might only pertain to the very rich, and not necessarily to the rest of the population. But the find is astounding, nonetheless. Now, while it appears that Pareto’s law certainly applies to the rich, it seems as though a different entity governs the less wealthy.

Physicist Victor Yakovenko and his research partners analyzed income data from 1983 to 2001.
The findings? While the income distribution among the extremely-wealth – about 3% of the population – indeed follows the Pareto Distribution, incomes for the remaining 97% follow a different curve—one that also accounts for the distribution of energies of atoms in a gas.

The research concluded that spending habits among the poor are more random than people generally think. While we tend to think of human decisions as preemptive and well-planned, the effects of outside forces tend to impede on rational decision-making, and thus randomize the process of spending. The analogy of money and energy holds because, like energy, money is not created or destroyed, only redistributed through transactions (other than the effects of inflation due a the central banking system).

It’s Not So Easy to Solve

Econo-physicists work off of something called the Matthew Principle, which they derive from a quote in the Bible’s New Testament where Jesus says, “To those who have everything; more will be given. From those who have nothing; everything will be taken. A vicious statement? Certainly. But it’s one that holds up. Pareto’s law is almost an intrinsic, universal law. Not only is it right regarding the transaction of wealth and currency, but it governs the distribution of plants in the jungle, the number of stars in a given star-cluster, and the number of employees that complete most of the work in a business. It’s true; inequality is an issue. In fact, it’s a more significant issue than we like to think.

Karl Marx laid the problem of inequality at the feet of capitalism, but this was wrong. Inequality is not a fault of hierarchical structures; it’s something much more pernicious than that; something seemingly intrinsic to humanity itself. The vast redistribution of wealth doesn’t work for a variety of reasons, the least of which not being the fact that wealth will continually stack up with a small minority. All you have to do is play one long game of Monopoly to discover that one person will end up with everything and everyone else will end up with nothing.

Check back for my next blog as I discuss some possible solutions to the problem of inequality.


Powered by WordPress & Theme by Anders Norén