Branko Milanovic — What remains of Pareto?

My class on personal income distribution theories (within-nations) begins with Pareto. Pareto will indeed be for ever part of such classes because he was the first economist to have been seriously interested in empirical analysis of inter-personal inequality. Before him, economics was about functional income distribution which, of course, makes sense if you assume that all workers are at subsistence, all capitalists rich, and all landlords even richer. Then, you do not need to bother with inter-personal inequality. It is just a transformation of factoral income distribution. (This is, I think, most obvious in Ricardo who cannot even conceive of a possibility of wages ever going above subsistence—except temporarily to precipitate the Malthusian movement. The advantage for modeling—since Ricardo’s “Principles” are in reality an exercise in verbal modelling—is that you have one fixed quantity and you can then let others vary).

It is just a minor simplification to say that Pareto thought that there was an iron law of income distribution, namely that inequality did not change whatever social system was in power. It gave consistency to his theory of the circulation of the elites, because whatever elite be in power (land-owning, capitalist or bureaucratic), income distribution would be the same although the people who would be rich or poor would be different. It was a serious critique of the idea that Marxist socialism would reduce income inequalities. 

What remains of Pareto’s claim? Several things are clear now--more than a century after Pareto defined his power low and showed that the number of recipients of a given income decreases in proportion as that income threshold is raised. Pareto law does not apply to any entire distribution.

Global Inequality
What remains of Pareto?
Branko Milanovic | Visiting Presidential Professor at City University of New York Graduate Center and senior scholar at the Luxembourg Income Study (LIS), and formerly lead economist in the World Bank's research department and senior associate at Carnegie Endowment for International Peace

Polly Cleveland — Piketty’s Model of Inequality and Growth in Historical Context, Pt 2

Neoclassical economics was designed for the purpose of eliminating economic rent from consideration.

Mason Gaffney has shown how many individuals helped construct neoclassical economics, often with financial support from the robber barons and their successors. I will focus on two: in the United States, John Bates Clark (1847-1938), and in Europe, Vilfredo Pareto (1848 to 1923). 

Recall from Part I that the classical economists divided society into three classes: Owners of land and other natural resources received unearned income or “rent” from their holdings—often derived from conquest or inheritance. Capitalists (who often overlapped with landowners) owned physical capital (like factories or ships) and received interest or profit from investing. Workers received wages. Also recall that the classical economists favored taxing “rent” by taxing land values; Henry George crusaded for this tax. 

John Bates Clark of Columbia University, for whom is named the prestigious John Bates Clark Medal, transformed economics into an inequality-free abstraction.Writing in the 1890’s, Clark merged land into physical capital, thus obliterating the classical understanding of land. In the new neoclassical world, capital (including land) originates solely from productive investment. There is no unearned “rent”, only legitimate “profit.” (Ironically, Marx merged rent into profit because he considered both illegitimate.)

Power rules.

In my view, Piketty’s and Solow’s models are both fundamentally flawed in that they rest on the same ahistorical, apolitical, two-factor neoclassical foundation. As the classical economists understood, inequality derives from power, ultimately the power of conquerors to extract tribute from the conquered. And as the Progressives, the New Dealers, and the civil rights activists have demonstrated, democratic societies can counter that power with well-designed tax and regulatory policies supported by an aroused public. We are not prisoners of a mathematical model.

Dollars & Sense
Piketty’s Model of Inequality and Growth in Historical Context, Pt 2
Polly Cleveland | Executive Director of the Association for Georgist Studies

Charles Hugh Smith — The Pareto Economy

My cousin is an engineer, and he taught me how to use many rules of thumb in figuring and estimation. The 80-20 rule is a useful heuristic that has served me well. Take a minute to read this. Many gems.

Of Two Minds
The Pareto Economy
Charles Hugh Smith
(h/t Zero Hedge)