Why is there a monopoly on productivity?

[FallenApple]

We know that IQ and many other traits related to success is normally distributed. But for some reason, wealth is connected to the Pareto distribution. Is there a relation between the two?

 

[scottdave]

As far as wealth, looking at the extremes, if you have almost nothing, then practically everything that you earn goes toward the essentials like food and shelter. There is usually nothing available to save up to increase your wealth. On the other extreme, if you have a lot more than needed to take care of the essentials, you can invest the excess into ventures with the potential to earn you even more money.

 

[FallenApple]

As far as wealth, looking at the extremes, if you have almost nothing, then practically everything that you earn goes toward the essentials like food and shelter. There is usually nothing available to save up to increase your wealth. On the other extreme, if you have a lot more than needed to take care of the essentials, you can invest the excess into ventures with the potential to earn you even more money.

That is true. But a higher intelligence should be able to increase one's productivity on average to compensate, at least somewhat, so that the wealth distribution wouldn't be as skewed as it is. I mean a poor but really smart person should be able to have some of his/her personal reality under control, as one would expect, whether through raw innovation, cunning, mental endurance, problem solving, whatever.

 

[256bits]

his/her personal reality under control, as one would expect, whether through raw innovation, cunning, mental endurance, problem solving, whatever.

You already have listed a few of the other "items" that cannot influence whether or not a person can achieve their lifelong goal of becoming supper-rich.

 

[scottdave]

I think @56bits meant "can influence". But it is more than just IQ, problem solving, or innovation. There has to be ambition to have more money or stuff. Some people get to a point where they are happy with what they have, or maybe they just are happy with what they get for the amount of effort.
Or they desire to use their talents in a different fashion, like doing charity. These are just a couple of factors.

But I still think the big reason for the skew is: if you have a lot of money, it is much easier to make more money. The rich person can afford to take some risks with investing. If one business venture fails, they still have money to try a different one. The one that pays off can be expanded to have even more profit.

 

[Vanadium 50]

How does the title have anything to do with the topic?

 

[scottdave]

How does the title have anything to do with the topic?

I wondered that, too. What is the procedure to fix. Just ask the OP to change it?

 

[FallenApple]

I think @56bits meant "can influence". But it is more than just IQ, problem solving, or innovation. There has to be ambition to have more money or stuff. Some people get to a point where they are happy with what they have, or maybe they just are happy with what they get for the amount of effort.
Or they desire to use their talents in a different fashion, like doing charity. These are just a couple of factors.

But I still think the big reason for the skew is: if you have a lot of money, it is much easier to make more money. The rich person can afford to take some risks with investing. If one business venture fails, they still have money to try a different one. The one that pays off can be expanded to have even more profit.

That's very much true. A very intelligent person cannot simply will themselves into being super rich because there are risks in taking the necessary ventures to get there. Unless one is a genius and innovates on a completely exceptional level(Think Einstein, Millennium Prize Winners, Bill Gates etc). Or they marry into it. Those are the only other risk free ways I can think of.

 

[FallenApple]

How does the title have anything to do with the topic?

I would imagine that the Pareto distribution has something to do with the fact that only small percentage controls all the means of production, has the highest levels of creative innovation, etc. Which is a monopoly of sorts because of the extreme skew. That is the implicit premise in my title. Because while IQ is normally distributed, there might be cognitive capacities that haven't been considered to account for that skew in wealth/productivity. Or not. It's worthy of discussion.

 

[russ_watters]

We know that IQ and many other traits related to success is normally distributed. But for some reason, wealth is connected to the Pareto distribution. Is there a relation between the two?

Wealth is cumulative and persistent. Income is a better fit for the traits associated with success (and "success" is more typically associated with/defined by income) and the income distribution shows it. Trying to correlate wealth and "success" is not appropriate.

 

[russ_watters]

I would imagine that the Pareto distribution has something to do with the fact that only small percentage controls all the means of production, has the highest levels of creative innovation, etc.

So it's a follow-up question to the conclusion you reached before even asking the question? Yikes! Mind if we change it to match the question in the OP?

It's worthy of discussion.

Maybe, maybe not. But in either case a totally different question.

 

[jbriggs444]

We know that IQ and many other traits related to success is normally distributed

The premise is incorrect. It is well known that IQ is not normally distributed.

 

[FallenApple]

Wealth is cumulative and persistent. Income is a better fit for the traits associated with success (and "success" is more typically associated with/defined by income) and the income distribution shows it. Trying to correlate wealth and "success" is not appropriate.

What about the creative genius needed to innovate. Is that normally distributed as well? Surely people that innovate well enough can just become rich if the innovation is truly good. I would't really call this an income though. More like cashing in on a really good idea.

 

[jbriggs444]

What about the creative genius needed to innovate. Is that normally distributed as well?

First, come up with a measurement procedure. Then we can ponder whether the distribution of measured values is or is not normal.

 

[FallenApple]

The premise is incorrect. It is well known that IQ is not normally distributed.

It's close enough

 

[FallenApple]

First, come up with a measurement procedure. Then we can ponder whether the distribution of measured values is or is not normal.

It's not really possible. We can't really define creativity. It's one of those things where we just know it if we see it. Maybe we can operationalize it by observing new inventions and it's frequency.

 

[jbriggs444]

It's not really possible. We can't really define creativity. It's one of those things where we just know it if we see it. Maybe we can operationalize it by observing new inventions and it's frequency.

Pick an answer. Can we measure it or can we not?

[If we do it by counting inventions then it's not normally distributed -- it's positive and discrete]

 

[FallenApple]

Pick an answer. Can we measure it or can we not?

How about yes. Just approximate it by new inventions/patents/creations and whatnot.

 

[jbriggs444]

How about yes. Just approximate it by new inventions/patents/creations and whatnot.

Then the answer is no. It is not normally distributed.

 

[FallenApple]

Then the answer is no. It is not normally distributed.

Is it skewed?

 

[jbriggs444]

Is it skewed?

Undefined -- you have not come up with a measurement procedure.

What argument are you hoping to make based on the shape of some curve that you cannot even define or measure?

 

[FallenApple]

Undefined -- you have not come up with a measurement procedure.

Sure. The histogram of patents among the population

 

[jbriggs444]

Sure. The histogram of patents among the population

Without looking for the source data, it is clear that there is a big spike at "zero inventions" with a tail going one way. There is no tail going the other way.

 

[FallenApple]

Without looking for the source data, it is clear that there is a big spike at "zero inventions" with a tail going one way. There is no tail going the other way.

Yes it's zero inflated for sure. Most people generally don't invent things.

 

[jbriggs444]

So now that we've come up with a scale for creativity (number of patents granted), where are you trying to go with this argument? What has the shape of this histogram to do with the price of peanuts?

 

[FallenApple]

So now that we've come up with a scale for creativity (number of patents granted), where are you trying to go with this argument? What has the shape of this histogram to do with the price of peanuts?

I don't know. Maybe the fact that when people invent stuff, they generally profit greatly from it.

 

[jbriggs444]

I don't know. Maybe the fact that when people invent stuff, they generally profit greatly from it.

You should work for the advertising department at InventHelp :-)

 

[FallenApple]

You should work for the advertising department at InventHelp :-)

No I'm serious. When people invent things, the organization they work for, and those connected with them, greatly profit. Hence the accumulation of productivity and wealth.

 

[jbriggs444]

No I'm serious. When people invent things, the organization they work for, and those connected with them, greatly profit. Hence the accumulation of productivity and wealth.

I am serious also. When ordinary people invent things, I believe that they typically get zip. When corporations obtain garbage patents, the companies likely profit, but no identifiable creative individual gets much. When an employee invents something, the employment contract (or addendum) that they signed comes into play and the individual gets nada. The fairy tale of the lone genius that makes great profits is the exception, not the rule.

Edit: I have to admit to a certain amount of rancor in this regard. While working for my current employer some ten years ago, I was presented with a contract addendum to sign. Something along the lines of: "In consideration of my continued employment I undertake to assign the rights to all inventions obtained during the period of my employment, whether job related or not, to my employer". There was essentially zero chance that I would actually invent something, but the idea that my employer could come up with such a self-serving document and expect us all to sign it really stuck in my craw. They were within their rights, of course. I had the choice of option of using the door. As I recall, I never signed the thing and nobody noticed.

 

[russ_watters]

Wealth is cumulative and persistent. Income is a better fit for the traits associated with success (and "success" is more typically associated with/defined by income) and the income distribution shows it. Trying to correlate wealth and "success" is not appropriate.

Let me expand on this, because I thought of an analogy:

This attempted corellation of the inputs and outputs of life is a common one, but an inappropriate one. It's like looking at the graphs of acceleration and distance and thinking they should look the same when they don't, and for good reason. They are different things. Acceleration is the second derivative of distance traveled.

The inputs of intelligence, skill, whatever other "success" driving trait you want are like accelerations. Financial "class" as it drives standard of living is typically measured from income, and it's the "speed". Wealth is like distance: the cumulative effect of excess income. Inheritence and other things your parents give you, plus some of your own decisions that set you up on the path of life when you enter adulthood are the starting "Y" constant on distance and maybe velocity too.

So take me for example. I made some mistakes in my 20s but had supportive parents and emerged in my late 20s with only a small amount of debt (a small negative distance) and a slightly below average starting engineering job (decent velocity). And I had a nice acceleration, which became evident after a couple of years of raises (as acceleration does, after tracking velocity for a little while).

My standard of living rose with my income (velocity) and my net worth (distance) slowly grew positive. But then in my early 30s I bought a house...and the housing market promptly cratered. So my net worth(distance) was back negative. But that didn't change my standard of living (income/velocity), which remained constant and after the recession dissipated, started climbing again (accelerating).

Now, 14 years after I bought my house, I've artificially capped my standard of living (same house, similar class of car, etc.) and am using my now excess income to pretty rapidly grow my net worth (distance).

The point of the analogy is this: net worth (distance) corellates very poorly with "success" or standard of living for most people. My net worth went from postive to negative without affecting my standard of living. Now it is rising rapidly without much impact on my standard of living. Income (velocity) is what sets your standard of living and/or allows growing your net worth by trading standard of living for net worth growth.

This all can work very differently for the very rich because of that starting distance and velocity they get from their parents. Or that billion dollar idea that suddenly gives both to them. Or even winning the lottery. Their situation doesn't provide much information helpful to understanding our situation.

 

[russ_watters]

What about the creative genius needed to innovate. Is that normally distributed as well? Surely people that innovate well enough can just become rich if the innovation is truly good. I would't really call this an income though. More like cashing in on a really good idea.

I don't see how this relates to the question you asked in the OP or my response. You seem to be focusing on outliers and how they relate to your pre-drawin conclusion. I really don't have an answer for that that I care to discuss (however, please see my previous post for discussion of how it works for most of us).

I do, however, agree with the others that your terms are poorly defined and poorly associated with each other. The words "income" and "wealth" have specific definitions in economics and it would be helpful if you would adhere to them.

 

[FallenApple]

I am serious also. When ordinary people invent things, I believe that they typically get zip. When corporations obtain garbage patents, the companies likely profit, but no identifiable creative individual gets much. When an employee invents something, the employment contract (or addendum) that they signed comes into play and the individual gets nada. The fairy tale of the lone genius that makes great profits is the exception, not the rule.

Do ordinary people invent great things? The whole point is that the exceptional inventors are the people that drive great value.

 

[FallenApple]

Let me expand on this, because I thought of an analogy:

This attempted corellation of the inputs and outputs of life is a common one, but an inappropriate one. It's like looking at the graphs of acceleration and distance and thinking they should look the same when they don't, and for good reason. They are different things. Acceleration is the second derivative of distance traveled.

The inputs of intelligence, skill, whatever other "success" driving trait you want are like accelerations. Financial "class" as it drives standard of living is typically measured from income, and it's the "speed". Wealth is like distance: the cumulative effect of excess income. Inheritence and other things your parents give you, plus some of your own decisions that set you up on the path of life when you enter adulthood are the starting "Y" constant on velocity.

So take me for example. I made some mistakes in my 20s but had supportive parents and emerged in my late 20s with only a small amount of debt (a small negative distance) and a slightly below average starting engineering job (decent velocity). And I had a nice acceleration, which became evident after a couple of years of raises (as acceleration does, after tracking velocity for a little while).

My standard of living rose with my income (velocity) and my net worth (distance) slowly grew positive. But then in my early 30s I bought a house...and the housing market promptly cratered. So my net worth(distance) was back negative. But that didn't change my standard of living (income/velocity), which remained constant and after the recession dissipated, started climbing again (accelerating).

Now, 14 years after I bought my house, I've artificially capped my standard of living (same house, similar class of car, etc.) and am using my now excess income to pretty rapidly grow my net worth (distance).

The point of the analogy is this: net worth (distance) corellates very poorly with "success" or standard of living for most people. My net worth went from postive to negative without affecting my standard of living. Now it is rising rapidly without much impact on my standard of living. Income (velocity) is what sets your standard of living and/or allows growing your net worth by trading standard of living for net worth growth.

This all can work very differently for the very rich because of that starting distance and velocity they get from their parents. Or that billion dollar idea that suddenly gives both to them. Or even winning the lottery. Their situation doesn't provide much information helpful to understanding our situation.

That makes sense. Generations of work is put into the accumulation of wealth of which keeps getting passed down. I like your physics analogy using the net change theorem. Well, I suppose if one wants to maximize their probability of getting the best output for input, they can just marry into it. Better than banking on some rare creative epiphany that may never come.

 

[jbriggs444]

Do ordinary people invent great things? The whole point is that the exceptional inventors are the people that drive great value.

Are they? And I thought the subject matter was wealth, not value. Have you ever heard of Eli Whitney?

 

[FallenApple]

Are they? And I thought the subject matter was wealth, not value. Have you ever heard of Eli Whitney?

The most creative ones create multiple times. Albert Einstein made multiple discoveries. Which is why I said that the number of patents per individual matters. Because if a genius got an invention taken away, this person will just invent again. The number of inventions really do matter, because we have to have a way to rule out the first invention being due to dumb luck.