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Poverty and the Pareto Distribution: Part 1

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Adam Gant talks about poverty, the Pareto Distribution, and what we may be able to do to address the problem of inequality.

Published in: Economy & Finance
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Poverty and the Pareto Distribution: Part 1

  1. 1. P O V E R T Y A N D T H E P A R E T O   D I S T R I B U T I O N P A R T 1 A D A M G A N T
  2. 2. I N A N Y G I V E N S O C I E T Y , P E O P L E T E N D T O S T A C K U P A T Z E R O . W H A T D O I M E A N B Y T H I S ? W E L L , T H E O C C U P Y W A L L S T R E E T M O V E M E N T W A S A G O O D , R E C E N T E X A M P L E O F T H E O U T R A G E T H A T P E O P L E H A D T O W A R D S T H E 1 % . T H E N O T I O N S T A R T E D T O G R O W I N T H E C O L L E C T I V E U N C O N S C I O U S T H A T T H O S E A T T H E T O P ( T H E 1 % ) H E L D A S M U C H / M O R E T H A N A L L O F T H E R E S T O F T H E P E O P L E I N T H E U N I T E D S T A T E S ( T H E R E M A I N I N G 9 9 % ) . T H I S O U T R A G E , A S S O M E C L A I M E D , W A S T H E R E S U L T O F G R E E D Y C O R P O R A T I O N S A N D B U S I N E S S B I G W I G S W H O P R E Y E D O N T H E S E E M I N G L Y N O W D E F U N C T M I D D L E C L A S S O F A M E R I C A . W A S T H E A N G E R W A R R A N T E D ? W E L L , P E O P L E D O T E N D T O S T A C K U P A T T H E T O P A N D T H E B O T T O M . B U T T H E A N S W E R , U N F O R T U N A T E L Y , I S N ’ T A S S I M P L E A S T H E “ T H E R I C H G E T R I C H E R B E C A U S E T H E Y T A K E F R O M O T H E R S . ” A D A M G A N T A D D R E S S I N G I N E Q U A L I T Y
  3. 3. A B O U T 1 0 0 Y E A R S A G O , E C O N O M I S T V I L F R E D O P A R E T O O B S E R V E D W H A T M A N Y C A L L T H E 8 0 / 2 0 R U L E . I T ’ S A L S O K N O W N A S T H E P A R E T O D I S T R I B U T I O N , P A R E T O ’ S R U L E , A N D T H E “ L O N G T A I L ” D I S T R I B U T I O N . W H A T D O E S T H I S R U L E , O N E T H A T I S S O C O M M O N T O B U S I N E S S E X P E R T S A N D E C O N O M I S T S , H A V E T O D O W I T H P O V E R T Y A N D I N E Q U A L I T Y I N T H E W O R L D ? L E T ’ S T A K E A L O O K . A D A M G A N T
  4. 4. I N 1 8 9 7 , A P A R I S - B O R N I T A L I A N E N G I N E E R N A M E D V I L F R E D O P A R E T O R E C O R D E D T H A T T H E P O W E R O F W E A L T H I N E U R O P E F O L L O W E D A S I M I L A R P O W E R - L A W S T R U C T U R E T O T H A T O F H I S G A R D E N . P A R E T O O B S E R V E D T H A T 2 0 % O F T H E P E A P O D S I N H I S G A R D E N C O N T A I N E D 8 0 % O F T H E P E A S . L I K E W I S E , H E F O U N D T H A T 2 0 % O F T H E P E O P L E I N E U R O P E W E R E R E S P O N S I B L E F O R 8 0 % O F T H E W E A L T H . L A T E R , E C O N O M I S T S R E A L I Z E D T H A T T H I S L A W M I G H T O N L Y P E R T A I N T O T H E V E R Y R I C H , A N D N O T N E C E S S A R I L Y T O T H E R E S T O F T H E P O P U L A T I O N . B U T T H E F I N D I S A S T O U N D I N G , N O N E T H E L E S S . N O W , W H I L E I T A P P E A R S T H A T P A R E T O ’ S L A W C E R T A I N L Y A P P L I E S T O T H E R I C H , I T S E E M S A S T H O U G H A D I F F E R E N T E N T I T Y G O V E R N S T H E L E S S W E A L T H Y . A D A M G A N T P A R E T O ' S L A W
  5. 5. P H Y S I C I S T V I C T O R Y A K O V E N K O A N D H I S R E S E A R C H P A R T N E R S A N A L Y Z E D I N C O M E D A T A F R O M 1 9 8 3 T O 2 0 0 1 . T H E F I N D I N G S ? W H I L E T H E I N C O M E D I S T R I B U T I O N A M O N G T H E E X T R E M E L Y - W E A L T H – A B O U T 3 % O F T H E P O P U L A T I O N – I N D E E D F O L L O W S T H E P A R E T O D I S T R I B U T I O N , I N C O M E S F O R T H E R E M A I N I N G 9 7 % F O L L O W A D I F F E R E N T C U R V E — O N E T H A T A L S O A C C O U N T S F O R T H E D I S T R I B U T I O N O F E N E R G I E S O F A T O M S I N A G A S . A D A M G A N T
  6. 6. T H E R E S E A R C H C O N C L U D E D T H A T S P E N D I N G H A B I T S A M O N G T H E P O O R A R E M O R E R A N D O M T H A N P E O P L E G E N E R A L L Y T H I N K . W H I L E W E T E N D T O T H I N K O F H U M A N D E C I S I O N S A S P R E E M P T I V E A N D W E L L - P L A N N E D , T H E E F F E C T S O F O U T S I D E F O R C E S T E N D T O I M P E D E O N R A T I O N A L D E C I S I O N - M A K I N G , A N D T H U S R A N D O M I Z E T H E P R O C E S S O F S P E N D I N G . T H E A N A L O G Y O F M O N E Y A N D E N E R G Y H O L D S B E C A U S E , L I K E E N E R G Y , M O N E Y I S N O T C R E A T E D O R D E S T R O Y E D , O N L Y R E D I S T R I B U T E D T H R O U G H T R A N S A C T I O N S ( O T H E R T H A N T H E E F F E C T S O F I N F L A T I O N D U E A T H E C E N T R A L B A N K I N G S Y S T E M ) . A D A M G A N T S P E N D I N G H A B I T S
  7. 7. E C O N O - P H Y S I C I S T S W O R K O F F O F S O M E T H I N G C A L L E D T H E M A T T H E W P R I N C I P L E , W H I C H T H E Y D E R I V E F R O M A Q U O T E I N T H E B I B L E ’ S N E W T E S T A M E N T W H E R E J E S U S S A Y S , “ T O T H O S E W H O H A V E E V E R Y T H I N G ; M O R E W I L L B E G I V E N . F R O M T H O S E W H O H A V E N O T H I N G ; E V E R Y T H I N G W I L L B E T A K E N . A V I C I O U S S T A T E M E N T ? C E R T A I N L Y . B U T I T ’ S O N E T H A T H O L D S U P . P A R E T O ’ S L A W I S A L M O S T A N I N T R I N S I C , U N I V E R S A L L A W . N O T O N L Y I S I T R I G H T R E G A R D I N G T H E T R A N S A C T I O N O F W E A L T H A N D C U R R E N C Y , B U T I T G O V E R N S T H E D I S T R I B U T I O N O F P L A N T S I N T H E J U N G L E , T H E N U M B E R O F S T A R S I N A G I V E N S T A R - C L U S T E R , A N D T H E N U M B E R O F E M P L O Y E E S T H A T C O M P L E T E M O S T O F T H E W O R K I N A B U S I N E S S . I T ’ S T R U E ; I N E Q U A L I T Y I S A N I S S U E . I N F A C T , I T ’ S A M O R E S I G N I F I C A N T I S S U E T H A N W E L I K E T O T H I N K . A D A M G A N T
  8. 8. A D A M G A N T POVERTY AND THE PARETO DISTRIBUTION 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.

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