What a depressing situation, if Price's Law is correct. Pareto is bad, but Price's Law is worse. And the larger the organization, the worse it gets.
Suppose GDP per capita is 100,000. If we have 90,000 people, GDP is 9,000,000,000. Price's Law says that 300 people will create $4,500,000,000 of that or $15,000,000 each. The other 89,700 create the other $4,500,000,000 or $50,167. That means that the elites are just 0.3% of the population and they earn 299X more than the average people. Now, suppose that GDP per capita is the same, but the population is increased to 9,000,000. Now Price's Law says that 3,000 people will create $450,000,000,000 or about $150,000,000 each. They will be .03% of the population and they will earn 2,990X the hoi polloi.
So, IF Price's Law is correct, the larger the population, the more inequality. However, if Pareto is a better model, it is not anywhere near as bad. According to it, 20%^3.1 (0.68%) will create 80%^3.1 = 50%. 0.68% is much more than 0.03%. So, as bad as Pareto might be, Price's Law is much, much worse. Fortunately, the actual data doesn't seem to support Price's Law. In 2017 the top 1% of Americans owned 38.5% of the wealth. In other words, it was actually slightly more equal than Pareto and far more equal than the Price's Law prediction.
Also, Price's Law suggests that the percent of high producers falls precipitously with increases in organizational size without explaining why that would happen. Suppose you have 100 groups with 90,000 people each. Each group has 89,700 people averaging the lower, $50,167 income. In total there are 8,970,000. However, if we smash them all together into one group, there are now 8,997,000 people earning $50,167. There is no explanation of the mechanism by which 27,000 people became unproductive simply by virtue of the organizational merger.
Either way, the clear inequality of income and wealth in free societies is not the result of oppression. It is simply a reflection of the fact that most people are really not very productive. Also, many people, likely Jordan Peterson who uses Price's Law, will wonder why I use the .2^X and .8^X Pareto equation. It is simply because Price's Law leads to conclusions that are not supported by the evidence. The evidence supports the notion of two components to wealth and income inequality. One a linear equation that describes mechanical productivity and is usually measured by per hour compensation and the other is the exponential Pareto distribution which governs the more intangible value added.
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What do you think of network effects?
ReplyDeleteThey are an Internet challenge that can exacerbate a situation beyond Pareto, though probably not to the Price Law level which just gets silly with large n. Network effects have create this dominance of Facebook, Twitter, Google, Instagram, etc. Between 100 and 1,000,000 network effects can be crucial, which is something I have fought with efforts to organize Polymaths. But between 1,000,000 and 1,000,000,000 filters can be very beneficial. There has been talk about Internet 'bubbles' and I do not consider them a bad thing. You cannot interact with everyone, so making sure that you are optimizing with whom you speak has benefit.
ReplyDelete