Where the Pareto Principle falls short

By Adam L. Penenberg , written on January 6, 2014

From The News Desk

For more than a century, the "Pareto Principle," also called the "80/20 rule," has described, with steadfast accuracy, a dizzying array of physical and man-made phenomena. The concept was the inspiration of Italian economist Vilfredo Pareto, who in 1906 realized that 20 percent of the population owned 80 percent of the property in Italy. He fashioned power law curves to posit that wealth follows a "predictable imbalance," leading to a winner-take-all society.

Although no one knows why, Pareto's Principle characterizes everything from ranking the size of planets and galaxies and lakes by volume to Newtonian Physics and man-made activities. If you charted Earth's cities by population, listed everyone in the world in descending order of wealth, analyzed sales of music or the concentration of endowments for pubic and private colleges -- with 20 percent of the schools possessing 80 percent of the endowments -- you would end up with a similar shaped curve as Pareto did with Italian land distribution.

The Pareto Principle has also been called on to characterize blog traffic, with, roughly speaking, the top 20 percent of bloggers attracting 80 percent of the readers and the relative popularity of websites. Now it reflects in broad terms the new consumer culture, both online and off-. Success begets greater success. It explains why Danny Meyer restaurants like Gramercy Tavern and Union Square in New York have long lines for tables while decent restaurants on the same block are empty. The world demands excellence and has the ability to exile the average with a one-star review.

While the general shape of the curve remains the same, Pareto's Law is not a hard and fast rule, of course. The 80 and 20 in the "80/20 rule" are approximations. Exact percentages can vary. And in recent years, they have. In fact, I wonder if we have been killing off Pareto's Principle, at least in one specific, man-made phenomenon.

It has to do with wealth distribution. Those backward 19th century Italians and their aristocracy, where 80 percent of the land was owned by 20 percent of landowners, would seem positively Che Guevara-n compared to us.

According to Who Rules America: Wealth, Income, and Power:

As of 2010, the top 1 percent of households (the upper class) owned 35.4 percent of all privately held wealth, and the next 19 percent (the managerial, professional, and small business stratum) had 53.5 percent, which means that just 20 percent of the people owned a remarkable 89 percent, leaving only 11 percent of the wealth for the bottom 80 percent (wage and salary workers). In terms of financial wealth (total net worth minus the value of one's home), the top 1 percent of households had an even greater share: 42.1 percent.
The last time the bottom 99 percent of Americans held 20 percent of the nation's wealth was in the early 1980s, when Ronald Reagan was president. We've fallen out of alignment with Pareto's Principle. Maybe it's time we started to work ourselves back into it.