American Consequences - January 2018


N othing explains the “Winner Take All” nature of an economic transition like the Pareto principle . Vilfredo Federico Damaso Pareto (1849- 1923) was a man of many... names, for one thing... but also of many talents. Trained as an engineer, he once managed the largest ironworks in Italy. But in his 40s Pareto began to study economics. In 1893 he became chairman of the Department of Political Economy at the University of Lausanne in Switzerland. Pareto was also a philosopher, political theorist, and sociologist who wrote the first book on what we would call “behavioral economics,” The Mind and Society . And, for all I know, he made a killer pesto genovese , the specialty of his family’s home town, Genoa. However, what made Pareto famous is something he simply noticed, early in his career, while working as a civil engineer for the Italian railroad. Going over maps and deeds of right-of-way, Pareto realized that about 80% of land in Italy was owned by about 20% of Italian families. He did historical and international research and discovered that this 80/20 pattern of land ownership was prevalent around the world and through the ages. Global and historical income distribution also

followed the 80/20 approximation – 1/5 of people make 4/5s of the money. But what’s more surprising is that the 80/20 rule of thumb applies to many other phenomena. Farmers find that 20% of peapods produce 80% of the peas, 20% of the seed corn grows into 80% of the ears, and 20% of a cow’s weight turns into 80% of the prime beef cuts. It’s a general rule – 20% of causes result in 80% of effects. The rule applies to scientific experiments, computer programming, sports training, occupational health and safety, etc. It certainly applies to business – 20% of the customers provide 80% of the revenue, 20% of the employees do 80% of the work, and 20% of the senior executives make 80% of the pay. This 80/20 rough computation is known as the Pareto principle and the results of an 80/20 calculation are a Paretian distribution . The Pareto principle is not, however, a law. It doesn’t have to rule your life. Maybe you’ve got 20% of the cats in the neighborhood and they’re having 80% of the kittens. You can fix that. And sometimes the Pareto principle is just a bad idea. I once had the pleasure of being the M.C. at a convention of beer distributers. (And, yes, it was as much fun as it sounds.) Beer distributors are wonderful people. They

10 January 2018

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