I hate corporate jargon at least as much as the next person, and “Think Win-Win!” is one of many good reasons to be self-employed. Still, it represents an interesting idea: how do we find solutions to problems that make everyone better off? To too many managers, the phrase means “I’m going to screw you but will try to convince you that you are now better off”, but that doesn’t mean it never happens.
Economics is the study of how to satisfy infinite wants with finite resources. Vilfredo Pareto, an Italian economist who died in 1923, was interested in exposing flaws in the Italian government. He found that about 80% of the land in Italy was owned by 20% of the people. Furthermore, he found that in almost every society, a small percentage of the people have the bulk of the wealth. The exact proportion could vary; in some places, 20% of the people held 80% of the wealth, and in some places, 5% of the people held 95% of it. Pareto developed equations to explain the phenomenon, which look scary (you can take a gander on the Wikipedia page.) The explanation is easier: every time you increase the amount of an item in a distribution, whether it be wealth, population, or catastrophic accidents, its frequency will decline by a set proportion. Hence, fewer people are wealthier than poor, fewer cities have large populations than small populations, expensive car accidents are less common than fender-benders. This is the genesis of the so-called “80-20 rule” that is almost as beloved by managers as “think win-win!”
Pareto then theorized that the problem with this distribution is that no one can be made better off without someone being worse off. That, he said, was why poverty is intractable. To improve the lot of the 80% of the people without wealth, those who have it would have to give some up, and they wouldn’t like that. Economists say that this type of distribution is “Pareto optimal”. It may not be optimal for society, of course, but hey, there is no free lunch. (Economists like to say that a lot, too.) (more…)
