Pareto Distribution

The past three posts [here, here, and here] were all a declaration that feminism doesn’t speak for me. That was prompted by a video of an interview with Jordan Peterson. I hadn’t been aware of him before, but I was certainly not the only one whose attention was caught by that interview. There were entire collections of responses to it on YouTube, and a series of memes featuring the flummoxed interviewer.

When you watch something on YouTube, a whole list of suggested videos appears based on what you were watching. I was thinking it was time for an economic post. It turns out Jordan Peterson can help there too. I came across one where he talks about income inequality, on the Joe Rogan podcast, from October 2017. (You can watch the whole 25-minute interview below.)

In this discussion, Jordan Peterson presents the problem, or the phenomenon of inequality. He refers to the Pareto distribution, which I had to look up. The Pareto principle is also called the 80/20 rule, which is, in essence, that 80% of outputs come from 20% of causes. And, further, 20% of producers bring about 80% of production in any particular class of production.

Image from Wikipedia, which explains
"The Pareto Principle claims that
only a 'vital few' peapods
produce the majority of peas."

Jordan Peterson explains it this way:

If you look at any creative endeavor that human beings engage in—so that would be an endeavor where there’s variability in individual production. It doesn’t matter what it is. Here’s what happens. People compete to produce whatever that is, and almost everybody produces zero. They lose completely. A small minority are a tiny bit successful. And a hyper-minority are insanely successful. And so, the Pareto distribution is the geometric graph representation of that phenomenon. And so, here’s how it manifests itself.

If you have 10,000 people, 100 of them have half the money. So the rule is, the square root of the number of people under consideration have half of whatever it is that’s under consideration. So, this works everywhere. So, if you took 100 classical composers, 10 of them produce half the music that’s played. And then, if you take the 10 composers, and you take 1000 of their songs, 30 of those songs, which is the square root of 1000, roughly speaking, are played 50% of the time.

So, when people work to produce something—anything: a product, wealth, music—the outcome will be unequal. Quite dramatically unequal. In a distribution we can estimate with a mathematical formula of

√X = ½ Y 

where X is the total number of something, and Y is the recipient of the reward or whatever you’re counting.

There’s a field of study that measures this kind of thing—econophysics. Econophysicists, Peterson tells us, “use the same mathematical equations that represent the propagation of molecules—gas molecules into a vacuum, to describe the manner in which money distributes itself in an economy.” Cool. I didn’t know that.

He also refers to the Matthew effect. This references the parable of the talents. To one man is given five talents (a sizable amount of money); he doubles that for the master and is rewarded. To another is given two talents, which he doubles for the master, and he is also rewarded. To a third man is given a single talent. He does nothing with it and returns only that single talent to the master at the day of reckoning. He made no use of what he was given, so he has that talent taken from him and no reward.

The verse referred to as the Matthew effect is 25:29:

For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken away even that which he hath.

In a parable, things are metaphorical. It is about using what you have—not about producing five more or two more of something. But sociologists describe this effect as “the rich get richer and the poor get poorer.”

As we also know from scripture, “For ye have the poor with you always” (Mark 14:7), there will always be work you can do to help them.

The question being discussed in the podcast is a combination of “Why are the poor always with us?” and “Is there something that can or should be done about it?”

The whole discussion shows just how interrelated economic and social issues are. Given the Pareto effect, as long as people do different things, think up different things, and find solutions to various problems, they will acquire differing rewards for their efforts. Some will create wealth more successfully than others.

As Peterson explains, “The problem is, if you let a monetary system run, all the money ends up in the hands of a few—a very small number of people.” That is only a problem when things are wildly unequal—more than that, wildly unequal and with some having essentially zero—subsistence with no way out. Add to that a sense of oppression or systemic unfairness, and bad things happen.

People with no way out get desperate, which leads to high crime, or revolt. That’s what you see in Pearl Buck’s The Good Earth. I wrote about this result of disparity in 2015:

In Pearl Buck’s novel The Good Earth, there’s a point where the poor are starving and growing daily more desperate, squatting along the walls of the wealthy, until things get so heated, the poor rise up and raid the property of the wealthy, looting and killing. That was a book of fiction, but the Durants’ book [The Lessons of History] describes that as a typical cycle.

It might look like the problem is too much wealth at the top, but it’s really about too little at the bottom. When people are starving and suffering while the wealthy ignore their needs, that is an injustice that won’t stand indefinitely.

As Peterson put it, “If you don’t have any money, it’s really hard to get some. Once you have some, it’s not so hard to get some more.” And that's the underlying problem of inequality--not too much in some places, but too little in some places.

As Peterson points out, “what Marx observed was that capital tended to accumulate in the hands of fewer and fewer people, and he said that’s a flaw of the capitalist system. That’s wrong. It’s not a flaw of the capitalist system; it is a feature of every single system of production that we know of, no matter who set it up and how it operates.” 

But it becomes more troublesome when someone—usually a Marxist—reframes the situation as rich = evil and poor = good. It is not the fault of successful people that they tend to accumulate the good stuff. It is also true that being poor is not simply a matter of failing to work hard enough. Getting the ones at that near zero situation unstuck is necessary, not only for those stuck there to improve their lot, but also for the successful to not lose what they have from a revolt.

I don’t think the discussion got all the way to a solution, but Peterson frames it right:

You need innovation. You pay for innovation with inequality. But you need to bind inequality, because if it’s too intense, then things destabilize. OK, we can agree on that. We’ve got the parameters set. Now we have to start thinking very carefully through how to do the redistribution issue, and we don’t know how to do that.

I understand what he’s saying, but I wouldn’t use the term “bind inequality.” That sounds like something that needs to be imposed from some greater power—although I don’t think he intended that. He’s literally talking about the “redistribution issue,” but I wouldn’t use that term either, although technically that is the issue. Redistribution, again, sounds like something imposed.

What we really want—and he suggests, although I’m not sure how we get there—is “equality of opportunity. Because people are actually not as resentful about the success of others as you might expect; they’re resentful about it if they feel that the game is fixed.” He adds, “It has to be a straight game. And that’s why ethics is so important to keep this landscape stable. People can’t play crooked games.”

So a discussion of civilization has to come into it. People have to be honest in order for it to work for everybody.

Also, people have to care about those stuck at zero, where high IQ and conscientiousness—the best predictors of success—are just not enough to get going. In a civilized society, people care about one another. They give freely to help those who are temporarily downtrodden, or those who are not capable of helping themselves, or who just need a break.

We can only have that to give, if we’ve had enough success to build up surplus beyond our needs. And we only get surplus—or wealth—by creating more than subsistence and having a way to store the surplus. The most effective way ever invented—the natural way—is trade in a free market economy.

The answer comes down to free market—free of crony capitalism and con games—plus philanthropy. We’ve talked about that before [here, here, and here]. The addition today is, there will always be natural inequality, but even the wealthy benefit economically by being honest and giving freely. So, you need a civilized people to get and keep a healthy, prosperous economy.