Pareto principle and money distribution

The Pareto principle, often called the "80-20 rule", comes from the Italian economist and sociologist Vilfredo Pareto (1848-1923) who discovered that wealth distribution always obeys to a condensation rule such as "20% of the population possesses 80% of the money". Each time the amount of wealth is doubled, the number of people that possess this wealth falls by a constant factor.

Conventional economic theory has never managed to explain the origin of Pareto's distribution law, but physics has. French physicists Jean-Philippe Bouchaud and Marc Mézard have demonstrated that this law shows up almost everywhere in nature.

It happens when "granular" objects self-aggregate and condensate because of the nature of the network in which they interact together. Examples are numerous: matter and particles (most of it in the universe is concentrated - probably in black holes), waterways (most water ends up in a minority of big rivers), traffic in the World Wide Web (most goes through a few sensitive hubs), our professional life (e.g. 80% of the work is done by 20% of the staff), commerce (e.g. 10% customers generate 70% sales in a given company), demography (e.g. 80% of population lives in 2% of the surface of the land, i.e. cities, in a given country), popularity (a few people - politicians, stars, corporate leaders - cumulate most of the attention), and of course money. The more money one has, the more can be invested, the more revenues can be generated, and so on. As a result "the rich get richer and the poor get poorer", unless some re-circulation rules are applied. The practice of usury (interest) dramatically increases this phenomenon. Earlier trends in this report show a clear picture of this reality.

This is the reason why social justice is strongly intertwined with Paretian hoarding effects (money, power, goods, resources, information, popularity, social networks, etc). Placing social injustice as a result of natural law is a step that some liberal ideologies have crossed without hesitation.

In human communities, Pareto effects generally emerge without participants being aware of it since it's an a posteriori process resulting from individual interactions that get iterated a large number of times.

The Bouchaud-Mézard model confirms that increasing the number of money transactions is what lessens the condensation effect. Income taxes contribute in reducing differences in wealth only if those taxes are redistributed in an equal way (it is then similar to an artificial increase of transactions and connections in the system). But sales taxes lead to fewer sales, i.e. diminish the number of transactions and therefore accentuate the condensation effect. The model also shows that free trade is a good thing, but at the condition that wealth circulates in both ways, that is not being blocked by unilateral protectionism. The protectionism applied by northern countries over the southern ones have transformed free trade into an asymmetrical one and led to aggravate the disparities.

The good news is that Paretian dynamics are now much better understood --thanks to Bouchaud-Mézard model and the recent breakthroughs done by the research in complex systems-- so that their regulation can be seriously envisaged. Computational economics can become one of the best allies for communities in order to help them anticipate the emerging results of their multiple inner-transactions. Then they can apply correcting actions in order to attenuate or amplify the Paretian effects upon the needs (such effects are not necessarily harmful).

The practice of holopticism is also to be considered as instrumental in controlling the emerging effects of a given social system.

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Reference

• Buchanan, Mark: " http://www.austms.org.au/Jobs/Library4.html
• Buchanan, Mark: "Nexus - Small worlds and the groundbreaking theory of networks" (1982)
• Bouchaud, Jean-Philippe - Mézard, Marc : "Wealth Condensation in a simple model of economy" (2000)
• Bouchaud, Jean-Philippe : "La (regrettable) complexité des systèmes économiques" - Article in "Pour la Science", December 2003