The Pareto Threshold
Human history is a depressing cycle of repetition. Societies/economies rise; societies/economies crumble. The patterns of these cycles are virtually identical, yet living through thousands of years of this “history”, we have learned nothing.
Those who cannot remember the past are condemned to repeat it.
- George Santayana 1863 – 1952
Indeed, our understanding (and thus our “memory”) of history is worse than useless, as it is characterized by fundamental misconceptions which guarantee the repetition of this Cycle of Futility.
Ironically, just a few years before Santayana’s time, an economist (and Jack-of-all-trades) named Vilfredo Pareto was born (1848 – 1923) in Italy. Pareto himself was not a “thinker” he was an observer. What Pareto observed around him was that he quite often encountered bizarre “80/20 splits” in the allocation of a particular resource (or resources), where a 20% minority held an (inverse) 80% share – while the 80% majority held only a 20% share.
Pareto remains blameless in History. He merely reported what he observed. It was the idiot-economists who came after him who took his data and managed to pervert it into the most-preposterous conclusion which one could draw from Pareto’s observations: the “Pareto Principle”.
The economic zealots who propound this pseudo-science assert that this grossly disproportional allocation of resources is, in fact, an “equilibrium”. Thus the supporters of this Great Myth assert that such an unequal, 80/20 allocation of resources is actually (supposedly) appropriate, and thus the Pareto Principle is often expressed instead as “Pareto equilibrium.”
Within these Zealots is a cadre of extremists who take this idiocy an order of magnitude further. Not only do they presume these 80/20 splits to represent “equilibrium”, but they actually insist that such a division is optimal. Thus to the extreme Zealots, the Pareto Principle is simply the expression of “Pareto optimality”; that an unequal 80/20 division of resources is not merely appropriate – but it is an ideal to which we should aspire.
Clearly none of these economic Zealots ever heeded the warning of Santayana, and learned their history. If they had done so (with any diligence), then undoubtedly they would have come across another “principle”, nearly 2,000 years older than the observation put forth by Pareto, from a Greek philosopher named Plutarch, who was living in Rome at the time.
The Plutarch Principle was not only considered “wisdom” in its own time (and thus has survived 2,000 years), it has been confirmed again and again and again since then by our Cycle of Futility:
“An imbalance between rich and poor is the oldest and most fatal ailment of all Republics.”
Two thousand years ago, it was old news that a grossly disproportionate allocation of wealth was not “optimal”, but rather suicidal. Two thousand years ago, it was old news that the Pareto Principle was nothing more than a recipe for disaster.
threshold – n. The point that must be exceeded to begin producing a given effect or result.
equilibrium – n. A state of rest or balance due to the equal action of opposing forces.
What have we seen throughout our Cycles of Futility since Plutarch uttered his own, immortal Principle? Virtually every time we see economic/societal collapse (or even revolution) we see simultaneously that the Rich have gotten very, very rich, and the Poor have gotten very, very poor.
We saw it with the Great Depression. We see it evolving again today. At exactly the same time that the Middle Class have been transformed into the Working Poor (and the Very Wealthy have become the Ultra Wealthy), we see all our economies on the brink of not simply collapse, but outright bankruptcy.
Prior to that, the truth of the Principle is practically automatic. What is (ultimately) the instigator of any revolution, or a symptom of any collapse? Empty stomachs among the masses – but not the very wealthy. At the very least in relative terms (if not absolute terms), at the moment of collapse/revolution the Very Wealthy are always wealthier than ever.
What Pareto observed roughly a century ago was not an “equilibrium”. It was a Threshold – a warning sign for any (sane) society to heed that we dare not go any further (and should never have come this far). It is not “optimal” for a 20% minority to hoard 80% of the wealth of any society (or to hoard 80% of anything). Rather, it is a maximum level of inequality which can (at least over the medium term) be sustained without collapse.
We have no way of knowing if the (supposed) “Pareto equilibrium” could ever actually be sustained over the long term – because our societies never last (intact) that long. Long before that, the Very Wealthy always cross the Pareto Threshold, and then the countdown to (short-term) economic implosion begins.
However, we can conclude (as a matter of logic) that the “Pareto equilibrium” cannot possibly be sustainable over the long term by simply turning to the realm of mathematics. We can represent an (unequal) 80/20 division of wealth in geometric terms: the inverted pyramid. There is no more unstable structure in the natural universe than the inverted pyramid.
Mathematics (like History) utterly refutes any nonsense of “Pareto equilibrium” (let alone “Pareto optimality”), and completely confirms the Plutarch Principle. Apparently the economic Zealots who continue to regurgitate this idiocy not only failed to study history, they failed to study mathematics as well – which certainly begs the question as to how they ever became “economists” in the first place.
How could economists be so wrong? How could they mistake a threshold (an absolute boundary) with virtually the opposite concept: equilibrium (or even optimality)? It centers on the fundamental defect of all economists, irrespective of whether they are part of the “Keynesian” or “Austrian” ilk.
They are all shameless elitists. Scientists could never possibly make such a gross (indeed laughable) analytical mistake. Such a massive error of logic/analysis could only be made by Zealots or Cheerleaders. These pseudo-scientists didn’t “think” the the Pareto Equilibrium was true, they wanted to believe it was true – and so they did.
There is no (legitimate) research which has ever validated any of this Mythology. Obviously (as a matter of logic) it is impossible to create a mathematical model where an inverted pyramid can be depicted as either an “equilibrium” or (even beyond that) some ridiculous “optimal ideal”. Indeed, one of the most fundamental – and universally accepted – principles of economics provides yet more absolute refutation of Pareto Nonsense and more confirmation of the Plutarch Principle.
The Marginal Propensity to Consume is a principle of economics which is true in all societies, because it is nothing more than an expression of very simple arithmetic/logic. Simply, the less wealth that one has, the more they will spend (i.e. consume) out of every new dollar they receive.
Translating that into the real world is the epitome of simplicity. If you have one dollar and you want to “stimulate” an economy, you put it into the hands of either a poor person (or perhaps a Middle Class person) so that they will spend it. You would never put that dollar into the hands of a wealthy/very wealthy individual, because (inevitably) they will hoard most of it – guaranteeing the least “bang for your buck.”
The more of the total supply of dollars being hoarded by these Misers, the more-anemic our hollowed-out economies become, and the closer they get to collapse. This was why (European) Austerity was guaranteed to fail miserably. This was why I predicted it must fail miserably the moment it was begun.
No sane physician would ever prescribe a “diet” for a patient with severe anemia. Similarly, no sane government would ever grossly contract spending in economies/societies already starved for capital. What happens when a government is foolish enough to do so? Greece.
Where is all our capital, as all our economies teeter on the verge of bankruptcy while the private cabal of “central banks” pumps out ten times as much “new money” as at any other time in history? Every penny goes straight into the pockets of the Very Wealthy, or into the maw of the One Bank, to be more specific.
And what does the One Bank do with the $trillions in “new money” being handed to it every year (for free)? It hoards or “lends” (in usurious manner) some of it, but most of all these $trillions are simply used for gambling, in the One Bank’s private casino known as “the derivatives market.”
These massive bets themselves are not just idle gambling. Rather, in the fraudulent financial markets which the One Bank has been allowed to create/operate, it uses this derivatives gambling to control or destroy markets – or even nations. And when it loses on its own bets, it simply refuses to pay.
Currently, this derivatives casino represents a mountain of paper wealth roughly twenty times as large as the global economy. We can’t be entirely sure how big this gambling casino has swelled, because shortly after the Crash of ’08 (as people began noticing the obscene amount of gambling being done) the One Bank “redefined” its own casino – and the dollar-figures used to describe it instantly shrunk by more than half.
Like moths to a flame, we now pursue Pareto Inequality, oblivious to this suicidal tendency. Moths have an excuse for their behavior: the absence of intellect. The Serfs of the 21st century have no such excuse.
The modern charlatans who have the audacity to label themselves “economists” are (with but few exceptions) now nothing but Promoters for the stealing of the One Bank. Give all our wealth to the One Bank; it will know what to do with it. Indeed it does: hoard, lend, gamble – and then collapse.
Jeff Nielson is co-founder and managing partner of Bullion Bulls Canada; a website which provides precious metals commentary, economic analysis, and mining information to readers/investors. Jeff originally came to the precious metals sector as an investor around the middle of last decade, but soon decided this was where he wanted to make the focus of his career. His website is www.bullionbullscanada.com.