Wealth Gap Explained

Wealth Gap Explained

The wealthiest 1% of the US control 24% of the national wealth.

When I first heard that some 80% of the wealth in this world is controlled by 20% of the population, I was miffed. I was upset. It felt so unfair. It took me some time to understand that this is actually how it’s supposed to be.

The truth is that not everyone works equally. Some people are more professional, more courteous to their clients, price their wares more aggressively, learn more relevant skills, take bigger risks, innovate more, and simply hustle more than others. Others like to sit on the couch and smoke weed all day, and complain about how the system is corrupt, and this is the reason why they got laid off from Blockbuster Video.

Back in the 1800s, an Italian economist/mathematician named Vilfredo Pareto observed that 80% of the land in Italy was owned by 20% of the landowners. He kept observing. 80% of the peas in a field came from 20% of the pods. It kept going. Today, this Pareto rule is used in business throughout the (successful) world. Think of it this way: if you know that 80% of your revenues come from 20% of your clients, how does that influence your marketing strategy?

And it works on a national scale, too.

80/20 is about where we actually want to be. It’s actually ideal. Go figure. You see, if the rewards for innovation and invention aren’t great, what’s the incentive to take those risks? Or, if the bulk of the workforce can have a comfortable life by doing nothing, what’s to incentivize people from doing anything at all? We tried this; it’s called communism, and it didn’t work.

Suppose, hypothetically, that a communist nation where wealth is too distributed, has something like 75/25 wealth distribution, which is enough to stifle creativity and drive down production. But what happens when you go too far in the opposite direction? What if, as in most 3rd world countries, wealth is too concentrated in the hands of too few? Why then, the middle and lower classes would not have enough resources to create a thriving economy. The incentives for working would be diminished, and grass-roots creativity would be virtually nonexistent. People would be too focused on bare survival to innovate effectively. Again, creativity would be stifled, and production driven down.

So what’s the Pareto number for the US?

About 87/13.

Michael Patrick Lewis is a teacher, and bestselling author of Edge Of God, and Preferred Rewards. He also has a cat.


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