Pareto’s discovery: systematic and predictable lack of balance

The pattern underlying the 80/20 Principle was discovered in 1897, exactly 100 years ago, by Italian economist Vilfredo Pareto (1848–1923). His discovery has since been called many names, including the Pareto Principle, the Pareto Law, the 80/20 Rule, the Principle of Least Effort and the Principle of Imbalance; throughout this book we will call it the 80/20 Principle. By a subterranean process of influence on many important achievers, especially business people, computer enthusiasts and quality engineers, the 80/20 Principle has helped to shape the modern world. Yet it has remained one of the great secrets of our time—and even the select band of cognoscenti who know and use the 80/20 Principle only exploit a tiny proportion of its power.

So what did Vilfredo Pareto discover? He happened to be looking at patterns of wealth and income in nineteenth-century England. He found that most income and wealth went to a minority of the people in his samples.

Perhaps there was nothing very surprising in this. But he also discovered two other facts that he thought highly significant. One was that there was a consistent mathematical relationship between the proportion of people (as a percentage of the total relevant population) and the amount of income or wealth that this group enjoyed. To simplify, if 20 per cent of the population enjoyed 80 per cent of the wealth, then you could reliably predict that 10 per cent would have, say, 65 per cent of the wealth, and 5 per cent would have 50 per cent. The key point is not the percentages, but the fact that the distribution of wealth across the population was predictably unbalanced.

Pareto’s other finding, one that really excited him, was that this pattern of imbalance was repeated consistently whenever he looked at data referring to different time periods or different countries. Whether he looked at England in earlier times, or whatever data were available from other countries in his own time or earlier, he found the same pattern repeating itself, over and over again, with mathematical precision.

Was this a freak coincidence, or something that had great importance for economics and society?
Would it work if applied to sets of data relating to things other than wealth or income?
Pareto was a terrific innovator, because before him no one had looked at two related sets of data—in this case, the distribution of incomes or wealth, compared to the number of income earners or property owners—and compared percentages between the two sets of data. (Nowadays this method is commonplace, and has led to major breakthroughs in business and economics.)

Sadly, although Pareto realized the importance and wide range of his discovery, he was very bad at explaining it. He moved on to a series of fascinating but rambling sociological theories, centering on the role of élites, which were hijacked at the end of his life by Mussolini’s fascists.

The significance of the 80/20 Principle lay dormant for a generation. While a few economists, especially in the US, realized its importance, it was not until after the Second World War that two parallel yet completely different pioneers began to make waves with the 80/20 Principle.

Page 7 of the Electronic Book.