How Pareto screwed Marxism and what we can learn for business

Karl Marx has been described as one of the most influential figures in human history. Born in 1818 in the Kingdom of Prussia he observed that capitalism would always create an increasingly large working-class who would increasingly concentrate wealth in the hands of the few, resulting in endlessly rising inequality.

In terms of the outcome, he was right, but where he was wrong is that this is true of any system of production not just capitalism. Clearly, inequality is fundamental to slavery or feudalism, but it is also true of communism and every other system that has been devised for production.

In fact, the only activities that re-level the playing field according to Jordan Peterson shown in the video below, are revolution, war and plague where everyone loses out.

So why are systems of production inherently unequal?

Vilfredo Pareto was born in 1848 in Paris, he was an Italian engineer and economist who observed what has become known as the Pareto Principle.

Broadly, it says that “success breeds success!” or put simply:

• The tallest tree in the forest will get all the light and grow disproportionately taller

• The heaviest star will have the greatest gravity and attract all the other stars thereby getting bigger

• The biggest celebrity will attract all the fans and make most of the money

The Pareto distribution is an exponential curve where the top 20% do better than the lower 80% and being exponential, this repeats fractally within the top 20%.

So, can things ever be equal?

Probably not.

But it could be argued, that at least with capitalism through disruption anyone can get to the top. Although it is far from equal, it does at least reward innovation, focus and hard-work and everyone benefits from these attributes.

And so, if you are struggling or things just aren’t happening, go and conquer a new market niche, innovate or develop a new exponential capability.

Lessons for Business

1. Focus on the exponential forces that drive your market and production - [read more ...]

2. Fully understand the problem before prescribing radical solutions

Further Reading

• Koch, Richard, "The 80/20 Principle: The Secret of Achieving More with Less", Nicholas Brealey Publishing, 1997

• Koch, Richard, "The Star Principle: How it can make you rich", Piatkus Books, 2008

• Kim, W and Mauborgne, R, “Blue Ocean Strategy: How To Create Uncontested Market Space And Make The Competition Irrelevant”, HBR Press, 2005

• Marshall, Perry, "80/20 Sales and Marketing: The Definitive Guide to Working Less and Making More", Entrepreneur Press, 2013