Saturday, February 5, 2011

Pareto's 20-80 Law Still Applies Everywhere, Except When It Becomes the 20-85 Law, as It Has in the United States.

Feb. 5, 2011
Vilfredo Pareto was an Italian engineer-turned-economist teaching in Switzerland at the turn of the 19th century. In 1896-97, he published a book on economics, Cours d'économie politique. It included a section on the distribution of wealth in Europe. He announced his famous finding: 20% of the population owned 80% of the wealth. He examined several Western European nations. The pattern held.
Ever since then, economists have studied wealth distribution in other nations. The law holds.
This is the single most important social law ever discovered. It is probably the most important economic law. No one has explained it. It defies reason. So, academic economists ignore it. Pareto's Cours has never been translated, despite being a universally acknowledged classic. It is arguably the most important still-untranslated book in the history of economic theory.
No one wants to deal with the 20-80 law in a scientific fashion. Pareto could not explain it. He devoted the last decade of his life to a study of society, trying to explain it. Nothing came of this. His explanation is hardly known. Yet this exercise moved him from an economist to a sociologist.
I list several academic discussions of the 20-80 law at the end of this article.
Pareto's law applies to society. It applies to biology. Pareto discovered that 20% of his garden's pea pods produced 80% of the peas. Here is a summary, found on a site selling a book on 20-80. These observations have been discovered over the years.
(a) 80 percent of the results are achieved by 20 percent of the group.
(b) 20 percent of your effort will generate 80 percent of your results.
(c) In any process, few elements (20 percent) are vital and many elements (80 percent) are trivial.
(d) If you have to do ten things, two of those are usually worth as much as the other eight put together.
(e) 20 percent of the tasks account for 80 percent of the value.Pareto analysis can be effectively employed for separating the major causes (the "vital few") of a problem, from the minor ones (the "trivial many"). Such an analysis focuses your attention to tackling the major causes of the problem at hand rather than wasting time on the minor ones. The 80/20 rule has been tried and tested over the years but it has withstood the stringent scrutiny that it has been subjected to.
Application of the 80/20 rule in management
The Pareto Principle or the 80/20 rule proves its mettle in practically every area of management some of which are given below:
(a) 20 percent of the customers account for 80 percent of the sales.
(b) 20 percent of the products or services account for 80 percent of the profits.
(c) 20 percent of your stock takes up 80 percent of your warehouse space.
(d) 80 percent of your stock comes from 20 percent of your suppliers.
(e) 80 percent of your sales will come from 20 percent of your sales force.
(f) 20 percent of your staff will cause 80 percent of your problems.
(g) 20 percent of a company's staff will output 80 percent of its production.
It applies all the way up. If you add up the wealth of the ten richest men on earth, the top three -- Buffett, Gates, and Carlos Slim -- own 70%.
In other words, this is a true sociological law. If sociologists were really serious, their discipline would begin with this law, for it really is a law. There is only one law of sociology that is more universal: Some do. Some don't. Pareto's is more useful. But the sociologists can no more explain it than the economists can.

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