Meditation on Pareto's Principle

Have you ever heard of the Pareto Principle? Maybe you know it as the 80/20 rule. It amounts to the same thing. Vilfredo Paraeto was a political theorist and sociologist of Italian descent. It was he that observed that “80% of Italy’s wealth belonged to only 20% of the population.” Of course, that obsevation and the ratio has gained favor and application in many instances when it should not be used. And all but a few people really understand that this is just an observation, not a hard and fast rule.

The observation can be summarized and clarified if one accepts and realizes that most things in life are not distributed evenly. So the obsevation on Italian wealth has come to be used to tell us that 20% of the input creates 80% of the result, or that 20% of the workers produce 80% of the result, or that 20% of the customers create 80% of the revenue. In many cases the observations are not accurate, but are merely estimates. In other cases the ratio is an outright lie. And often times the ratio is used to justify some perception or projection the speaker wishes were true.

Keep in mind that since Pareto's Principle is simply a ratio that explains an observation, the ratio can change – and it should change if it is to have any accuracy and validity. Thus, the ratio may very well be expressed as 90 to 10 or 40 to 60. In the case of the wealth in the United States, the latest data suggests that the top one percent in the US control 34% of the wealth. The top 20% in the US control 85% of the wealth. Keep in mind we are talking about wealth, not income.

According to an article”Wealth, Income, and Power” by G. William Domhoff, a member of the Sociology Dept. at the University of California Santa Cruz, wrote in September 2005 (updated July 2011), “The top 10% have 80% to 90% of stocks, bonds, trust funds, and business equity, and over 75% of non-home real estate. Since financial wealth is what counts as far as the control of income-producing assets, we can say that just 10% of the people own the United States of America.”

So referring back to the Pareto Principle, one could say that it is the 90/10 rule. But keep in mind that the principle only describes the current state of affairs. The key point is that most things in life (effort, reward, output) are not distributed evenly – some contribute more than others.

Does this mean that some things are worth more than others? That some groups of people are worth cultivating and encouraging, and rewarding? Does it mean that some kids aren't worth educating because they can't contribute much to the GDP? It might seem that way at first glance. But think of the metaphor of a football team. There are 11 men on the field at one time. How likely is it that team will score if only the quarterback and full back contribute their effort, but the linemen and the rest of the team sit back on their haunches? The answer is not likely.

Continuing the football analogy, suppose a runner starts out with the ball at his own goal line. Everyone contributes and does their job, executing their blocks. The ball carrier races 80 yards but runs out of steam at the 20 and falls down and the score never occurs. The point is that in order for success to occur, everyone has to be part of the effort. The final 20 yards of a run on the football game are equally as important as the first 80 yards. That is why many teams have a star who is very fast in the open field and can gain yardage very quickly, but for the final five yards, they put in a power back who is stronger and can plow through the defense for the score. In baseball, they have turned to “the closer” in close games. The closer typically doesn't throw many pitches, perhaps a tenth as many as all the other pitchers for eight innings, but the effort is extremely concentrated, and the need for results in finishing the game rests on the shoulders of the closer. For their contribution, effective closers are richly rewarded.

I have no problem with people being rewarded for their efforts, but it would seem to me to be a better idea to look at how all the other players helped to carry the ball that first 80 yards. Shakespeare knew of the problem of the unfairness of things years ago and commented on it in the play Julius Caesar. Brutus is alone in his garden mulling over what he should do about Caesar. Cassius and Casca have urged him to join the conspiracy to murder the overly ambitious Caesar. And yet, Caesar was his friend. He is beholden to Caesar for some of his own wealth and honors. Brutus reasons as follows:

But 'tis a common proof,
That lowliness is young ambition's ladder,
Whereto the climber-upward turns his face;
But when he once attains the upmost round.
He then unto the ladder turns his back,
Looks in the clouds, scorning the base degrees
By which he did ascend.

In these few words, Shakespeare outlines how ambition motivates leaders, and leaders (in government and/or business) use the backs and shoulders of other men and women to climb the ladder of ambition to the top rung of the ladder. And says Shakespeare, upon reaching the top rung, they turn their backs on those who lifted them up “scorning the base degrees by which he did ascend.” In the real world of Joe Sixpack and the Jeannie Mudpack, they are the lowly rungs on the politician's ambitious ladder. They are the “base degrees” by which Caesar and most all the other politicians reach positions of power. They fancy themselves to be among the 20% of which Pareto wrote. They fancy that they have no debt to the 80% upon whose backs they rode, and upon whose shoulders they stand.