I was trying to explain something to someone over dinner, and it seems interesting enough to be worth tossing up here for comment and exploration.
The question was why the growing inequality today?
And I had an idea. Basically, wealth has been unequally distributed since it’s been measured (see Pareto).
So within any economy, we have a power law distribution.
What used to be, however, was that there wasn’t much of a ‘global’ or even ‘national’ economy – there were local economies. These were effectively ‘cells’ in the larger economic organism, and most of the activity stayed within the cell.
The implication of this is a geographic field of small power law curves of wealth, with local car dealers, real estate developers, bankers, etc. at the top of the curve.
So the people at the top of these curves were prosperous, but not in the Gulfstream private jet league.
There were national and global networks with their own power laws, but they represented a relatively small component of the economy as a whole.
Got the picture?
Now dissolve the cells. And in the residual soup, build a new power curve, and make almost everyone part of that distribution.
Looks a lot like what we’re living with now, doesn’t it?
Now as an interesting question, in the past gilded ages, could we see similar transitions?
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It may be deeper. From “the post that made you ask”:http://www.windsofchange.net/archives/america_the_structure_of_decline_-_and_renewal.html “worried or challenged?” see:
bq.. “Industry structure. The structure of most American industries is significantly distorted, from welfare’s perspective. Largely artificial entry and exit barriers–like patent thickets, copyright litigation, or “off-balance sheet” gimmicks–concentrate market power, and flatten relative competitiveness…. The effect of poisonous industry structure is a poisoned market structure. In industries as different as autos, banking, pharma, food, retail, and media, relentless, vicious consolidation has been the name of the game. The result is a heavy dose of heavily concentrated industries…
Economic structure. In turn, a lack of competitiveness means that tomorrow’s industries don’t get created yesterday. Consider a jaw-dropping statistic. In 2010, Chinese companies: 391 I.P.O.’s, worth $89.5 billion. American companies: 99 I.P.O.’s worth $15.69 billion. That’s not just parlous–it’s frankly pathetic (and remember, China’s not innovating yet–it’s mostly privatizing, selling off relatively small stakes in state-controlled, quasi-governmental entities) Translation: the structure of America’s economy is broken. Value added, like profitability, is concentrated heavily in finance–to the exclusion of productive industry. Remember, of course, that finance isn’t productive–it’s allocative….
Employment structure. The result of a broken economic structure, where yesterday’s doddering industries age on into non-oblivion is an equally broken employment structure. America’s creating two kinds of jobs: McJobs and MegaJobs–with nothing in the middle. And, of course, there are deeper problems with both. The MegaJobs are more like lottery tickets, than prizes in a meritocracy (think landing a spot at a top law firm, or investment bank–it’s more about who you know and where you studied, than what you can do). And the McJobs, of course, vastly outnumber the MegaJobs–and worse still, they’re total dead ends: offering zero prospect for “skills gains”, or, perhaps more vitally, to grow any of the many kinds of intelligence.
Demand structure. Result? A eviscerated structure of demand….”
p. Well, eviscerated after the 2-job family and heavy borrowing tried to compensate.
These are parts of Haque’s argument I don’t buy, but overall, this is a fairly coherent alternative viewpoint It’s echoed in very different ways by guys like Schiff, who see a similar decline in competitiveness, and see the “service economy/ creative class” mantra as resting on some rather large illusions.
I’m not saying your Power Law theory is entirely invalid. I do think that the causes stretch well beyond it, however, and well beyond the easy rhetoric we’ve heard to date from the right _or_ the left.
Both are going to have to face hard truths. Or perhaps find themselves shoved aside, in their own parties, by former independents who are willing to do so.
I’m not sure if it’s a decline in competitiveness as much as the opposite. If there’s one big market, you’ll get massive network effects, so you’ll get a few super-players.
Part of what’s going on here is what I think of as the “War on Overhead”: a startup nowadays will have a sharply focused team of experts, an admin, and will outsource everything else to domain specialists. Even in 2000, the startups I was at and worked with still had in-house HR and such, but no more.
This means lots fewer jobs for miscellaneous “bureaucrat” middle-manager types, and is part of the reason government looks awfully bloated by comparison.
Everyone talks about manufacturing, but the real job disappearance – and the reason for the loss of “middle” jobs – is probably the vast reduction of bureaucracy and its replacement with computer networks and “flat” management structures.
One effect that this has had is you can’t work your way from the mailroom to the CEO suite; companies don’t have mailrooms (or equivalent) anymore, and a “flat” management structure means promotions are much more difficult and aren’t going to happen as a simple function of seniority.
This needs a little more fleshing out for my level of comprehension about these things.
The Pareto Power law is described as an 80/20 rule: in any given population 20 percent of the people will control 80 percent of the wealth. As I understand AL’s point, he is saying that if we shift the relevant population from the U.S. as a more or less isolated cell, to the entire world, we should expect to see the shift in income distribution we are seeing, with an implied suggestion that this represents some kind of natural order? [“Here”:http://sociology.ucsc.edu/whorulesamerica/power/wealth.html/%5D is one set of numbers suggesting in 2007 the top 1% controlled 34.6% of total net worth, and the top 20% controlled 50.5%
The Pareto Power law, of course is descriptive, not normative or explanatory.
World GDP is about 58 trillion. With population of 6.7 billion, an 80/20 split of wealth would mean the top 20% of the world population should control 43 trillion ($43,000/capita)
U.S. GDP is 14 trillion; 80 percent of that is 11.2 trillion ($212,000/capita in that lucky fifth).
In the linked data, above, the share of the top 1% in the U.S. (34%) is about where it was in 1922. It has fluctuated from a low of 19.9 percent (1976) to a high of 44% (1929).
None of this seems to correlate to the Pareto 80/20 rule. It seems clear that whatever the “natural order” that might underly the Pareto power rule: it is not fixed in stone, and it does not tell us much about how we should respond to these inequalities.
It’s at least plausible, although it does raise a host of questions, none of which I am qualified to answer.
One would be: How is the power law of the emergent larger system different than the power law of the various smaller ones? Certainly the smaller ones were different from each other by coefficient values, at least.
Thanks, Marc. I think it’s interesting.
R