AMERICANS aren’t in the habit of thinking, much less acting, systemically; we prefer breaking problems into pieces. But wealth distribution (or more precisely, wealth maldistribution) is a quintessentially systemic problem, a result of how different parts of our economy interact. It can’t be understood without viewing it at that level, nor can it be fixed without treating it at that level.
The Italian economist Vilfredo Pareto was among the first to percieve that modern economies consistently concentrate wealth at the top. Early in the twentieth century, he observed that about 20 percent of the people in Italy owned about 80 percent of the wealth. Looking further, he saw the same pattern throughout Europe. This led him to posit that in market economies, about 20 percent of the people will always acquire about 80 percent of the wealth . . . because that’s how market economies work.
Pareto’s Law in action
A century later, French economist Thomas Piketty confirmed Pareto’s thesis using mountains of historic data. And he offered an explanation: wealth concentrates at the top because the income paid to capital owners grows faster than the income paid to everyone else. And this happens over and over again.
Putting this in everyday terms, extreme inequality isn’t a result of extreme differences in people’s skills and capacities. Rather, it results from our economy’s design. That design — which is neither god-given nor immutable — turns modest differences in individual capacities into grotesquely large differences in reward.
IF EXTREME INEQUALITY is caused by our economic system, not by individual lack of skill or motivation, we’ve got some deep thinking to do. For this means that even if we educate our children till the cows came home, inspire or cajole them to work harder, and get them all jobs, we won’t sustain a large middle class over time. Wealth concentration will remain self-reinforcing. The only way to get a less unequal outcome is to build some equalizing flows into the system.