Really good information here Bill, and I appreciate you taking the time to provide some explanation of these economic events in clear terms. I do question a couple of your earlier comments about the Pareto Principle though.
Bill Glasheen wrote:
Let's back up a bit and talk about a basic law of Nature.
and
No matter what we do government-wise, the laws of Nature will prevail. You can't change that.
"The Pareto Principle is an observation, not a law of nature"
Newton’s laws are laws of nature. In socio-cultural systems like economics there are no deterministic laws, natural or otherwise. Such laws would imply that certain socio-culture phenomena cannot be changed, yet socio-cultural phenomena are made to be changed. Observing the Principle in a number of phenomena does not make it infallible or “natural”, merely ubiquitous. The reasons for its prevalence include aspects of the reasons you list, as well as the simple fact that the currently dominant socio-cultural systems promote it. Pareto's Principle is really about optimization and efficiency, and the 80-20 rule in economics describes conditions that are optimal for the accumulation of wealth. The flip side of that is that it has been used by some to justify inequality, but as others have stated ‘Inequality is not a Law of Nature’, particularly since the concept of wealth accumulation is a cultural construct and not a law of nature. The Pareto Principle has its uses, but justification for maintaining a status quo in a given phenomenon in which it is observed is not one of them.
There is growing debate as to how relevant Pareto's Principle is to economics, with economists such as Paul Krugman saying that over the past 30 years the reality has been more like 80-1, i.e. that 1% of the population accounts for around 80% of the wealth, particularly at the global scale.
Bill Glasheen wrote:
1) In any society, a small percentage of the people often do most of the work.
To what extent has this assumption been quantitatively verified? In any society, the people who do most of the work are called “poor” or “labor”, not wealthy! The inclusion of a comment like this as a cause of wealth inequality always grates on me. Even if a small percentage of people may do most of the work and a small percentage of the people has most of the wealth, that does not mean the two are causally related. If anything, the relationship is inverse. Do you really think that the top 20 (or 1) % who are working primarily for wealth accumulation do more work than the bottom 40% who are working so that they and their families can survive day-to-day? I guarantee a subsistence farmer in Africa is working more, and harder, than is a CEO in the U.S., but the former will never accumulate the kind of wealth that we base principles like Pareto’s on. Nor will the factory worker in China working 50+ hours a week in very strict conditions for an average wage of 50 cents an hour. And yet they are somehow working less than the wealthiest people in the world? Even in the U.S. the hardest working people I know are the hourly laborers, not the CEOs. What your explanation of the Pareto Principle leaves out is that the wealth of the top X% is made off the labor of the bottom Y%. It also ignores the benefits that can be gained from privileged geography and birth.
While your 2nd, 3rd, and 4th points are relevant for most people in the more-developed countries like the U.S., they have no relevance to the majority of people in the world. Many people in the world don’t even earn a wage as we conceive it, so there is no opportunity for saving or investing.
Bill Glasheen wrote:
Top 5% - a half
The world median annual income in 2005 was $1700, so if you make over $1700 a year you make more than half the people in the world...and hardly anyone in a more-developed country makes anywhere near that little, heck my oldest child made almost half that just detassling corn for a month last year. Five % of the global population is ~340 million people, the vast majority of whom are located in the more-developed countries, so odds are good that most if not all on this forum fall into at least the top 5-10% of wealthiest people in the world based on income. Do you feel that wealthy? How much of your portion of global income wealth is due to how much work you do relative to everyone else in the world, how much you “get it”, or how much you save or understand the time value of money…and how much is due simply to the opportunities that come from living in a more-developed country? Something to think about.