Power and Inequality
New concepts and old news
We all know about the normal distribution, also called the Gaussian distribution, that bell-shaped curve describing how events or data points tend to cluster around an average. But it wasn’t until a few weeks ago in my class on Urban Economic Policy that I learned about the power law, another statistical distribution that shows up in natural and man-made phenomena. When data fits the power law, a very few items account for the lion’s share of the distribution.
For example: in any country, there tend to be just a few very large cities but lots and lots of small towns. There are only ten US cities with more than a million inhabitants. But there are almost 15,000 with fewer than 5,000 residents, amounting to over three-quarters of the country’s incorporated places. The lower the population of a city, the greater the incidence. Solar flares fit the same pattern: a few large ones, a vast number of tiny ones. So do word frequencies, family names, and volcanic eruptions.
The power law is also called the 80-20 law, based on the discovery by 19th century Italian economist Vilfredo Pareto that 80% of the land in Italy was owned by 20% of the population. Pareto’s research demonstrated that a similar ratio could be found in other countries, leading to his principle that (roughly) 80% of the consequences tend to come from 20% of the causes. It’s a commonplace in business, I’ve been told, that 20% of the customers deliver 80% of the sales.
Distribution of wealth follows the power law, too. There are a few thousand billionaires on earth, but 47 million millionaires and billions of poor people. Today, 3.4 billion people live on less than $3.20 a day. Maybe the distribution of wealth was 80-20 in Pareto’s time, but today the richest 20% of Americans own 90% of the country’s wealth.
I came to the Harvard Kennedy School this summer (as a mid-career student in the Master in Public Administration program) in order to study economic inequality and think about strategies to reduce it. My modest goal is to figure out how to foster an alternative to neoliberalism – one that is more equitable, sustainable, and inclusive.
Imagine a world where the Power Law didn’t apply to wealth or income, in which our country’s resources were distributed broadly and generously. If you shared out all the privately owned wealth in the US equally, every person from the tiniest baby to the oldest grandma would have more than $200,000! If wealth followed a Gaussian distribution, there would be a large middle class, with just a handful of very rich people and a correspondingly small group of very poor people. There would not be a single billionaire. Acknowledging that neither of these patterns are likely in the near future, I’m cheering for a world with fewer billionaires and more resources for the rest of us. To get there, it’s going to require another kind of Power – the power of organized people demanding a fairer, more just economic order.
I’ve watched our country become increasingly unequal in terms of wealth and income since I was in high school. Over the course of the next two semesters, I hope to learn more about strategies to reverse the trend. Stay tuned.
Power law functions are significantly more complex than the 80-20 rule; depending on the exponent they can be very different. It may be that for the systems you are interested in the 80-20 rule is an adequate approximation, but remain aware they aren't the same thing.