Pareto Principle vs. Butterfly Effect

A pyramid scheme is an employment situation in which your personal income is basically a fraction of your personal sales and of the incomes of any other employees you have recruited. It is called a "pyramid" because employees can get abnormally high income by recruiting employees who recruit employees who sell (i.e. building a hierarchy). Standard employers similarly pay top-level executives abnormally high, but do not transfer as much risk to low-level employees. Pyramid schemes are criticized as "paying in lottery tickets" because it is all too often the case that an employee earns less than they need--a very sad story much less likely to happen with a fixed minimum salary.

In 1906, Vilfredo Pareto noticed that 80% of the peas in his garden came from 20% of the pods, and theorized a connection to the fact that 80% of the land is owned by 20% of the people. Whether you use an 80/20 rule or a 90/10 rule, the Pareto principle basically posits that equality is a fool's dream: most profits will inevitably come from a minority of workers and customers, so managers should maximize profits by targeting the elite. Pyramid schemes are basically a way of maximizing profits by avoiding the risks of hiring non-elite. Sadly, people who create pyramids, instead of standard employment, either don't understand pyramids or else fully expect it to result in very sad stories for many people at the bottom of the pyramid.


Moral justification for Pareto management relies on assuming a particular metric as the definition of goodness (e.g. good pods contain more peas or good employees make more sales). The "butterfly effect" tells us that this assumption is accurate only in the short-enough-term. In 1961, when Edward Lorenz was rerunning a computer model of the weather, he discovered that rounding one of the inputs yielded a dramatically different outcome. A presentation of his findings was titled "Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas?" We have since found that, in almost every area we care about, what seems insignificant (e.g. a pod with no peas) may ultimately make a crucial difference. For example, one more breath from a woman in a coma may be just as crucial to preventing the end of the world as every effort of all world leaders.

In addition to a message of religious humility (like in the book of Ecclesiastes), the butterfly effect tells us that the job of a leader or manager should be something other than to control risks. A good leader or manager should be disturbed by a system designed to leave sincere (but non-elite) employees struggling at the bottom of a pyramid.

To this, pyramids may counter that the intellectual property system likewise pays with lottery tickets. And, for that matter, the stock market and the entire system for creating and selling companies does the same to sincere entrepreneurs. Many of the wealthiest people in our world owe their wealth to the stock market, but most hard-working entrepreneurs lose the lottery--the stock market never compensates them for their sincere contribution to our economy. Pyramid schemers can count on the Pareto management embedded in capitalism itself to protect them from regulation, since regulators cannot have double-standards.

However, a big difference between pyramid schemes vs. intellectual property and the stock market is that sincere inventors and entrepreneurs are additionally motivated simply to do the right thing. They would continue inventing and starting new organizations, even if the government did not provide intellectual property and the stock market to offer the possibility of striking it rich. Thus, these provisions do not cause them to take on any new risk. In contrast, who would sell or recruit for a pyramid without the promise of wealth? Inventors and entrepreneurs (like many other contributors to our society) may deserve more appreciation than Pareto management allows, but to them Pareto management is mere insult, not heartless betrayal as it is to pyramid employees.

This is my message to my kids: when someone attempts to recruit you for employment, pay close attention to the character of your potential employer. Some people create jobs only because they see employees as a means to a larger end. These people do not understand the butterfly effect.