[samgheb]

I’m doing a project on Pareto and his discovery that 20 % of a population generally owns 80 % of the wealth. I want to see whether or not global weath distribution generally follows this Pareto trend. Is there data that consistently goes back at least 20 years?

[jmherbener]

Here is an OECD study:

http://www.oecd.org/site/worldforumindia/Davies.pdf

[samgheb]

This study seems to focus primarily on countries over time(the third last graph) rather than individuals. Are there studies or histories that focus on this topic over time? Or perhaps even some scattered studies from the past century?

I will focus on the continuity from Pareto’s observation until the present day and to what degree figures have diverged.

[jmherbener]

The study below gives several citations to the literature on wealth distribution over time:

http://www.econ.nyu.edu/user/benhabib/pareto-volterra-oct24.pdf

[samgheb]

Thanks for the link.

Has it been your experience that the Pareto distribution of wealth tends to hold over time regardless of economic policy? If so it seems strange that nobody defending the free market has ever used it as a defence because it seems to indicate that inequality is the norm even if the composition of 20% or the 80 % can change. Have I understood this correct or does this have do with the methodology?

[jmherbener]

Gary North accepts Pareto’s Law. But he sees it as a law of sociology, not economics:

http://www.garynorth.com/public/7595.cfm

http://www.garynorth.com/public/12020.cfm

http://www.garynorth.com/public/12064.cfm

[samgheb]

Yes I first read Gary North on this which is what inspired my current project. I was just wondering if you also accepted this or if you can think of objections to it? Because I can’t comprehend why economists(whether free market or not) have ignored this phenomenon for so long. I have only seen Gary North refer to this but no other Austrian. For this reason I’m wondering if perhaps it might not be taken seriously by economists or perhaps the methodology used is the reason the figures come out with close to 20 % owning 80 %.?
The fact that this is a social law would suggest it holds for economics as well and that it is not down to methodology.

[jmherbener]

To put it in different terms, Pareto’s Law is not a praxeological law but an empirical regularity or, we might say, an historical fact. Both facts and theory are important elements in debates. But Pareto’s Law refers to just one aspect of the social process for which there seems to be no praxeological explanation. For this reason, Austrian economists have not emphasized Pareto’s Law.

My guess is that the reason mainstream economists do not appeal to Pareto’s Law is that it has not been subject to rigorous econometric testing. Other mainstream economists have tried to formulate “power laws.”

http://www.dictionaryofeconomics.com/article?id=pde2008_P000324&edition=current&q=pareto%2080-20%20rule&topicid=&result_number=3

Schumpeter thought this a fruitful line of inquiry for economists. But the project has made little headway.

[samgheb]

I have tried looking at studies of inequality and I have only found 2 that correlate with Pareto’s distribution.
Looking at a lot of different data sets like those made by Piketty it doesn’t show Pareto’s principle at work except that wealth is very concentrated.

Could this be because Pareto’s principle should primarily be understood as one power law among many. Reading Richard Koch’s book on the Pareto principle he suggests it shouldn’t be taken face value even if the precise 80/20 distribution does in fact turn up many times in socal findings. Should I take the principle as a mean from which to measure distributions or rather a metaphor for how small number of actors create a majority of results?

[jmherbener]

Perhaps it’s best to take it the way Murray Rothbard takes the Iron Law of Oligarchy. Namely as a universal, qualitative principle of human social interaction. Just like in any human organization, an elite will rise to the top to acquire a disproportionate amount of decision-making authority in the organization, in any economy, an elite will rise to the top to earn a disproportionate amount of income and wealth.

http://mises.org/fipandol/fipsec4.asp

The condition that gives rise to both the Iron Law of Oligarchy and Pareto’s Law is the differences among human persons.

[samgheb]

Ok that seems a more sensible view to take. Having read up on the nature/nurture debate it makes sense that some are much better off because traits follow a normal distribution but this couldn’t make sense of the specific Pareto distribution because it suggests something that is down-right weird if it true.

Thanks Prof. Herbener

[samgheb]

What do you think of Piketty’s inequality statistics in general Prof. Herbener?

I have heard a lot of criticism of his understanding of inequality and the relation to capital but not read anybody who disputes too much of data of the past 2 centuries.

[jmherbener]

Here are a few Financial Times stories criticizing Piketty’s data:

http://www.ft.com/intl/cms/s/2/e1f343ca-e281-11e3-89fd-00144feabdc0.html#axzz3LLtPo0lu

http://www.ft.com/intl/cms/s/0/c9ce1a54-e281-11e3-89fd-00144feabdc0.html#axzz3LLtPo0lu

And Alan Reynolds in the WSJ:

http://www.wsj.com/articles/alan-reynolds-why-pikettys-wealth-data-are-worthless-1404945590

[d.sailer]

add R. Murphy to the list:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2543012

there’s quite a bit in there on the details (and flaws) in the source data.

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