Every politician, college professor, social warrior, and NYT columnist today is concerned about wealth and income disparity. The general view is that there is a lot of it. Globally, but also within the good old USA. The underlying assumption is that this is a bad thing.
I agree. When I was a young man, living in Africa and working for the Peace Corps, I felt that I was part of a larger mission to close the gap – not by bringing the wealthy down, but by bringing the poor up. And during my lifetime I’ve taken part in and/or witnessed many efforts towards that goal. Johnson’s War on Poverty, for example, and the hundreds of social welfare and economic reform campaigns that have taken place since then.
To my chagrin, I’ve seen no substantially positive results. The biggest reductions in poverty happened around the turn of the last century thanks to industrialization. More progress was made mid-century after WWII. But progress has slowed to a standstill. In the last 30 or 40 years, in fact, the gap has widened.
The African country I lived in for two years, Chad, is no better now than it was in 1975. The same is true for most sub-Saharan countries. Southern African countries such as Zimbabwe (formerly Rhodesia) and South Africa are much poorer than they were back then. (See my essay about Robert Mugabe.) In the USA, working- and middle-class Americans earn less – when you figure in inflation – than they did in 1980. That bothers me.
I’ve been thinking and writing about this subject since about 2000. And what I’ve noticed is that the remedies that were proposed nearly 50 years ago are pretty much the same as they were then: give more, help more, teach more, etc.
The aid we give to single moms was meant to help them take care of their children, who would then go on to have better lives. But what’s happened is much the reverse. The children are dropping out of school sooner and getting into legal trouble at a much higher rate than they did when the only financial assistance their mothers could hope for came from churches and private charities.
So if what we have been doing is not working, it seems obvious that we should try something else. But the only “something else” that is being offered is to do nothing. That may be the better solution… but for me and many others, it is not a satisfactory one.
Which brings me to an essay I read recently by James Clear: “The 1 Percent Rule: Why a Few People Get Most of the Rewards in Life.”
The Inequality Gene: Our Deep-Seated Impulse to Be Better or Worse
In his essay, Clear talks about the discovery of the famous 80/20 rule in the 19thcentury by Vilfredo Pareto, a part-time gardener and full-time economist.
Having noticed that most of the peas in his garden were produced by a small number of plants, he wondered if there was some sort of mathematical ratio that could be applied to the peas as well as to other things. As an economist, he had been studying the unequal distribution of wealth in various countries – so now, beginning with his own country, he turned his attention to analyzing the data he had collected. And the first thing he found was that about 80 percent of the land in Italy was owned by just 20 percent of the people.
He found similar ratios in other countries. In Great Britain, for example, 30 percent of the population earned about 70 percent of the total income.
The numbers were never quite the same, but the pattern was consistent. The majority of the financial wealth and income always accrued to a small percentage of people.
“In the decades that followed,” Clear writes, “Pareto’s work practically became gospel for economists. Once he opened the world’s eyes to this idea, people started seeing it everywhere. And the 80/20 Rule is more prevalent now than ever before.
“For example, through the 2015-2016 season in the National Basketball Association, 20 percent of franchises have won 75.3 percent of the championships….
“The numbers are even more extreme in soccer. While 77 different nations have competed in the World Cup, just three countries – Brazil, Germany, and Italy – have won 13 of the first 20 World Cup tournaments.
“Examples of [what we now know as] the Pareto Principle exist in everything from real estate to income inequality to tech startups.
“Why does this happen?”
Clear answers his question with another theory: the Winner-Take-All Effect.
The idea here is pretty simple. When you win the gold, you are given rewards that put you in an advantaged position over those against whom you have been and will be competing.
“From this advantageous position,” he says, “with the gold medal in hand or with cash in the bank or from the chair of the Oval Office, the winner begins the process of accumulating advantages that make it easier for them to win the next time around. What began as a small margin is starting to trend toward the 80/20 Rule….
“If one business has a technology that is more innovative than another, then more people will buy their products. As the business makes more money, they can invest in additional technology, pay higher salaries, and hire better people. By the time the competition catches up, there are other reasons for customers to stick with the first business. Soon, one company dominates the industry….
“The margin between good and great is narrower than it seems. What begins as a slight edge over the competition compounds with each additional contest. Winning one competition improves your odds of winning the next. Each additional cycle further cements the status of those at the top.
“Over time, those that are slightly better end up with the majority of the rewards. Those that are slightly worse end up with next to nothing. This idea is sometimes referred to as The Matthew Effect, which references a passage in The Bible that says, ‘For all those who have, more will be given, and they will have an abundance; but from those who have nothing, even what they have will be taken away.’”
This takes us to what Clear calls “the 1 Percent Rule.”
“The 1 Percent Rule states that over time the majority of the rewards in a given field will accumulate to the people, teams, and organizations that maintain a 1 percent advantage over the alternatives. You don’t need to be twice as good to get twice the results. You just need to be slightly better.
“The 1 Percent Rule is not merely a reference to the fact that small differences accumulate into significant advantages, but also to the idea that those who are one percent better rule their respective fields and industries. Thus, the process of accumulative advantage is the hidden engine that drives the 80/20 Rule.”
So where does this leave us? How does this help?
What it means is that in any free area of competition – whether it be competing in sports or owning a restaurant or running a business or making money – those that come out of the gate working harder and smarter than the rest and edge ahead of the competition can stay ahead of the competition and eventually move to the lofty one-percent level… if they continue to work hard and smart.
But it also means that in any given area of competition, newcomers that come up with new ideas and/or new strategies for “winning” can enter the market and begin their own ascent.
What’s interesting is that in a free market – where everyone is competing for wealth and income – staying ahead, though perhaps easier, is not as common as the 1 Percent Rule would have you suppose. Fortunes made in one generation are reduced in most cases in the second generation, and are mostly gone by the third.
Meanwhile, the up-and-comers keep coming. About 80 percent (there it is again!) of the approximately 1500 new millionaires the USA produces every day are people that started from scratch.
And the reason for that is another principle. Let’s call it “the intrinsic impulse for inequality.”
This is my principle. (You heard it here first.) And it is easy to understand. It states that human nature deplores equality. And that no matter how often and how ruthlessly you attempt to level inequality in any given market, the moment you seem to be making headway, every single individual in that market will begin to work on creating inequality again.
The easiest way to achieve inequality is to find a way to do less or to have less. And that is the choice that many people make. The harder way is to do more in order to have more. And that is also a popular choice.
A government can, by force, mandate more equal incomes. It can also redistribute wealth. This can be done partially or fully. But the result is always the same. The forced equalizing is accepted, even welcomed by those on the take. But within 24 hours, that equality will start to erode as individuals do what they are genetically designed to do – distinguish themselves from the rest.