Vilfredo Pareto and the Circulation of Elites

Written by Paul Marotta of Corporate Law Group, California, on October 3rd, 2016.

vilfredo-paretoAs an entrepreneur you may be, as one person put it, “working harder than anyone else is willing to work,” so that you can, “live as no one else is able to live.” You may be trying to break into the 1%. The club inhabited by Bill Gates, Warren Buffet, and Mark Zuckerberg. Well, a bit of bad news about that. An economist who died in 1923 had a theory about that which he called the “Circulation of Elites,” a leveling process.

Ludwig Lachtman described it in The Market Economy and the Distribution of Wealth, as follows: “Wealth is unlikely to stay for long in the same hands. It passes from hand to hand as unforeseen change confers value, now on this, now on that specific resource, engendering capital gains and losses. The owners of wealth, we might say with [Joseph] Schumpeter, are like the guests at a hotel or the passengers in a train. They are always there but are never for long the same people.”

In other words the elites of today will not be the elites of tomorrow. If the economy is allowed to do its job; if businesses are not protected and bailed out when they make horrible mistakes, the 1% will cycle. If disruption is allowed, society wins and many 1 percenters lose. That’s OK. That’s how it is supposed to be. Both Marx and Schumpeter thought that this was a flaw of capitalism, but it is capitalism’s beauty. When innovation is rewarded by the market we get more innovation.

Years ago there was a gathering of the ancestors of Andrew Carnegie, possibly the wealthiest person to ever have lived. There were hundreds of people. Not a single one of them was a millionaire. The Carnegie Corporation manages an endowment of $3 billion. It has over 20 Trustees. Not a single one is named Carnegie.

Pity the 1%; the only certainty is that they will join the rest of us eventually. The important thing is that the fluidity in and out of the 1% is unimpeded. Every time anyone is bailed out or gets government funding or regulatory protection, the 1% is protected and we are all harmed. Let the market do its job. Let the elites circulate.

Written by Paul Marotta of Corporate Law Group, California, on October 3rd, 2016.

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Andrew

Lawyer to entrepreneurs and investors