Why 1% Of the World's Population Controls 45% Of the Wealth

Okay, but inequality is inevitable, is it not? And, well, that's another thing I wanted to talk to you about. Well, let's talk about that. Because I had this client who was a mathematical genius, a clinical client. He taught me a lot of things I didn't know; I hadn't learned as a statistician. One of the things he talked to me about was the Pareto principle. So I went and looked into that in some depth.

I found, for example, that it's such a strange phenomenon. It's like the square root of the number of people operating in a specific discipline produce half the output. That's the law. If there are a thousand scientists working on a particular discipline, 30 of them publish half the papers. You can look across; it's the same with basketball, hoops successfully managed, hockey goals scored, soccer goals scored, records produced, books written, books sold, records sold. It's like everywhere this law, this weird square root law. Sometimes people sum that up as the 80-20 principle, but yeah, it's way worse.

Way worse than that. Yeah, well, it implies—for example, if you have an organization with 10,000 people, 100 of them doing half the work. You know, if you have 10, it's three, and that's not so bad, but at ten thousand, it's a hundred. And you think, no way. It's like, well, if you meet some of those people who might be in that hundred, you might think differently.

So, this looks like some fundamental rule. You're interested in income distribution, so what do you make of this sort of thing? Well, it reminds me of a classic paper by the late economist Sherwin Rosen from the University of Chicago called "The Economics of Superstars." He starts it out by observing 80-20-like observations. He says, you know, let's look at the earnings of tennis players and look at the rank; how much total prize money is won by tennis players, and what proportion of it goes to people based on the rank?

He gets something like an 80— you know, the top 20 or 25 tennis players have taken in the vast majority of the winnings, and it’s the same with record sales by musicians in various genres of musical production and whatnot. Similarly, the top ones are getting—so he says, how can we account for this? This, I think, should be a part of anybody's effort to explain the Pareto principle, as you've defined it, or the 80-20 rule.

He says, look, to produce something that people want to see, you need talent, but you also need other resources. So it's the combination of the productivity of the talent—which is scarce and distributed in the population—and the effectiveness of their ability to command other resources, which, taken together, determine what they will be able to produce.

All right, so you need a combination. Imagine one distribution would be talent, so you need to be in, say, the top 10 percent, but that's not enough. You also need, I don't know, to be in the top 10 percent of education, say, to be a successful research scientist. The juxtaposition of those two curves produces a real fractional percentage, and those people are hyper-qualified for that particular enterprise.

He adds another element. Let's take opera singers—he uses this example. So, in the old days, before you had high-quality sound reproduction, you had to actually go to the opera house to hear opera. Now, the opera house can only accommodate a couple of thousand people max. The very, very best opera singers could still only command an audience of a couple hundred to a thousand people in any given performance.

This leaves plenty of room for the second, third, fifth, and thirtieth best to be able to travel to the small towns and still make a living. But once it becomes possible for the best to record their performance and to distribute it in that way, the person sitting in the small town has a choice: Do I go to hear a 20th-rate opera singer in the local hall, or do I put a recording of the best one on my device?

Now, often, they will choose to go with the recording rather than to go to the 20th best. That means that the top opera singers are now going to command an even greater share of the market. The insight there is that technological change, which permits the most talented to leverage their talent to a larger audience, is the key to understanding why they get so much of the take.

Completely right. Right? Well, you can—so it's like the smaller the game, the less the gain at the top. But we expand the games continually with technology, and recording is an excellent example of that. So I guess what we hope is that we produce enough new games so that everybody can win at something.

But we're still funneling a tremendous number of resources to people at the top of whatever the game is, especially as these games become big. So can you see that? You see that particular—well, it's really obvious with money. People complain continually about the top one percent, but the problem is there's a book called "Big Science, Little Science" that was written in about 1962. The author escapes me at the moment, but he did exactly the same sort of analysis for the scientific literature. It's exactly the same story: hyper-dominance of a tiny minority of people.

And so there's a natural—it's something like positive feedback loops, too, isn't it? Because, and I've noticed this as I've become more famous, I suppose, is that you get known, and more people know you. More people are likely to attend to you, and then more people are willing to talk to you because you have an audience. So that drives the expansion of the audience, and your connection network grows at the same time, and you have more resources.

And so it's just a pause—it's a bunch of positive feedback loops moving upward. I think the word "network" is very important there. I think what with social media and whatnot and the magnifying ability of individuals to have influence and to have influence on people who have influence, the density of that network is a tremendous asset for—yeah, so it makes its competitive position.

Well, it makes the problem of inequality a real tough one from the political perspective, right? Because we could—and conceptual for that matter—because we could perhaps agree that regardless of whether you're on the left or the right, you might view inequality on the right as a threat to social stability.

I know there's this native Canadian tribe on the west coast, Haida, the Kwakwaka'wakw, did the same thing. In their societies, they'd have big chiefs, and the big chiefs would just accrue everything. Then now and then, they'd have a potlatch and give it all away. Their status was dependent on their ability to give a lot away, and that stabilized their society.

Now, those were made illegal by the Canadian government, I think about 70 years ago or so. But, you know, they were thought of as just some pagan, unnecessary pagan ritual, I suppose. But I do believe that that was one of their so-called evolved solutions to the terrible problem of inequality—the fact that goods tend to accrue in the hands of a few.

And the lefties that I see—the left political thinkers, economic thinkers as well, especially the ones on the extreme left—they tend to associate that with capitalism. But that's a fundamental underestimate of the magnitude of the problem, in my thinking. That's a real problem if you're concerned about comparatively poor or actually poor people. It's a way bigger problem.

I wonder if we could apply the same kind of thinking that we use to explain why an athlete, or a musician, or even an entrepreneur might end up at the very right end of the distribution—garnering for themselves a great bulk of the reward—to apply that to the huge financial fortunes that are accumulated either through savvy in the marketplace. You know, I'm a hedge fund guy; I know what to buy and when and when to sell.

Or to the fortunes of land-holding family fortunes and things of this kind. I wonder whether those simple insights extend to the institutionalized wealth-generating process. Well, I think they do to some degree. I mean, I studied entrepreneurial success as a researcher for quite a long time, too, because one of the personality factors that predict entrepreneurial ability is this trait openness, which is essentially creativity.

What defines creative thinkers in part is—here's a simple creativity test, and it actually is reasonably predictive of creative capacity both in terms of originality of thought and creative productions as assessed by experts: How many uses can you think of for a brick in three minutes? You gotta write them down. Or even, how many four-letter words can you think of in a minute that start with C? That'll be correlated at about .3 or .4 with your creativity, depending on how it's measured. Very simple test.

What seems to happen is that creative people, when they think of one idea, the probability that that will trigger an associated idea is higher, especially a distally associated idea. So that likely means that creative people have more erroneous ideas as well. They then have to, you know, what would you say? Edit them and select.

But one of the things that makes creative entrepreneurs successful is that they produce a large variety of creative products and then they throw them out in the marketplace. Most of them fail, but you just need one to hit that Pareto point, and then you're successful. So you throw—what do you do? You throw a mess at the wall and see what sticks, essentially.

Most entrepreneurs, before they're successful, have had a very large number of failures because even if you're intelligent and creative, the probability that you'll build a product that's actually timed for the market is extremely low. So, well, what do you do? You create more, and that's what happens. That's what creative people are essentially biologically predisposed to do.

So, I think that, yeah, I think that principle, that underlying principle of positive feedback loops and the combination of scarcity of ability and resources, I think it accounts for all those inequalities. So, you know, the question is, what do we do about that?

Well, you were saying something I thought interesting a moment ago about how even a right-winger ought to be able to see that inequality, unrestrained, could be dangerous to the stable social order because the losers—losers are going to end up having to say one way or the other at the end of the day.

And you better watch out, because if they don't have a stake in the system and they're feeling aggrieved and without status and dignity, they may act out in ways that are hard. Oh, they will. Especially if they're young men. Absolutely, they will. They absolutely will, and that is definitely dangerous.

You know, partly we've tried to solve that, so to speak, in the West by trying to ensure something like equality of opportunity across a wide range of games. That's not a bad sort of meta-solution, right? It’s like, well, we can't predict: we know that there's going to be wild disparities in outcomes, and we can't really do anything about that. But maybe we can give people something approximating an equal shot at winning some game.

That would be better for everyone, too, because then we can harness their creative resources. It isn't obvious to me that there is a better—so technically, even I can't see—I don't understand. I don't know what a better solution could be.

No, what does that mean in a world where the people who have engineering degrees or got to law school or got a good education and are connected are making six figures and living comfortably, and someone who dropped out of high school is working for thirty thousand dollars a year and just barely getting by?

What is that ladder guy's venue where he or she can feel like they're winning the game? Well, I think it depends to some degree on each individual. You know, I mean, you can find status and meaning in your family. You have your pursuits outside of your work. I'm not saying that money isn't a good singular marker of relative status; it's probably the best singular marker there is, but it's not the only one, right?

There are diverse places where you can attain status. You know, you can be poor and dignified. You've certainly met people like that. You can be poor and admired within your family. You can be poor and have decent or outstanding character for that matter.

And so, that's not exactly a domain that's regulated socially like the economic domain, but it's not nothing. By the same token, you know, you can sacrifice a lot of those things to economic pursuit, and then you'll have lots of money, but man, your life sucks in 50 different ways.

So, I don't know if that's a sufficient solution, but it's not nothing. But this is not counseling laissez-faire, if I understand it. It's not saying the government should just withdraw and let the chips fall where they may. It could be advocating for a policy of some kind of, you know, everybody needs work that's meaningful.

Everybody needs a kind of sense of security that they're not going to get sick and not be able to pay the bill or they're not going to get old and not know where the next meal is coming from. Let's try to guarantee, to the extent that we can—we know the world's not just perfect.

We may not be able to solve all these problems, but let's try to make sure that there's decent housing for someone, that they don't have to sleep under a bridge, etc., etc. And then, we can let the chips fall.

Yeah, well, it seems to me that societies like—well, the US, to some degree, but more specifically, I would say the Scandinavian countries, and probably Canada would more or less fall into that ballpark. I mean, they fall into a ballpark. It’s a pretty bad metaphor, but you know, that’s kind of what those democratic socialist countries have tried to establish.

Now, it seems to be easier to do that in a smaller country that's more homogeneous in its ethnic and racial grouping. Maybe also technically it's easier with a smaller population. The US is so damn big, it gets very complicated to try to do the same thing you know that those smaller countries have managed.

And then, of course, there's—you might think of something like a guaranteed income, let...