The Law of Averages

I stopped off in London a couple of days ago and felt as if I’d landed on a lost planet. I only muttered the ‘B’ word briefly, but the echoes were clear—people are fed up, confused, and mostly numbed to the political mayhem.

As I traveled east, the picture changed from a Europe troubled by the rise of populism to nations where freedom of expression—and therefore of choice—varies from limited to radically curtailed. As the plane flew over the Mid-East, and then on to Southeast Asia, the dawn brought me a little clarity.

The rise of populism in the EU is inevitable, as it is (and was) in the US and UK. The reason became obvious as I wandered around London and observed ordinary working people—it crystallized when an English lady opened a restroom door for me in an airport lounge two days ago. She was one of two englishwomen who stood in the access corridor providing these services—the lady was charming and worthy of all my respect, and as I exited she once again pulled the door open for me, to my great embarrassment.

In the lounge itself the opulence of the extremely wealthy hid in plain sight, and therein lies the rub. Over the last fifty years, income inequality in the West has mushroomed—and that got me thinking about GDP.

If you want to make absolute comparisons, you use absolutes (duh). China is the most populous nation in the world. France is larger than the Netherlands. Brazil has more head of cattle than Belgium.

But to make relative comparisons, you need to normalize—express your data per unit area, or perhaps as a percentage, or an average—which is exactly what happens with GDP. If you want to rank nations by living standards, per capita GDP is the weapon of choice.

Norway? 71,800 US dollars per annum. Portugal, less than half of that.

That’s all well and good, but are these fair comparisons? The short answer is no. Averages are only appropriate if we’re looking at a bell-shaped curve, but the distribution of income in the West is now much better aligned with what you see in the East, or in South America—fifty years ago, as a rule of thumb income inequality increased as you traveled east and south.

The analysis of income inequality is not new. The work by M.O. Lorenz led to a paper, Methods of measuring the concentration of wealth, published in 1905, and the Lorenz curve is widely used to represent distribution of wealth. The Gini coefficient was published in 1912, and provides a numerical representation of income inequality.

The Gini index on a world map. East and south are still the unfairest places on earth.

Let me pick five numbers out of a hat. The first numbers are similar: one, four, two, three. But the last number is whoppingly different: nine hundred-ninety. By sheer coincidence, these numbers add up to one thousand.

Bell-shaped they most certainly aren’t—four low numbers jumping to a huge one. If we average them, the result is two hundred. Is that a fair representation of 1, 2, 3, 4, 990? Nope. What might be fair is the median, i.e. the middle number: three.

If this were a human population, eighty percent of the people fall into the one to four income bracket, and the remaining twenty percent are of the species Felis crassus—that’s Latin for fat cat.

The Triple Eye Income Inequality Index, as a simple ratio of median/average, for several European countries and the US. Values close to one hundred indicate a well-balanced nation.

My own Triple Eye calculation suggests the developed world falls far short of equality—low values mean that a few wealthy people hold much of the income, which skews the per capita GDP. Values higher than one hundred exist only in Utopia—a nation with a smattering of poverty and an abundance of wealthy folk.

Of course, the Triple Eye in many gated communities, airline lounges, and luxury resorts is at least one hundred—that is, if you exclude the help.

How does all this relate to populism? If a hundred percent of families can vote, and eighty percent of them are poor, it’s only a matter of time before they vote to disenfranchise the twenty percent that tower above them financially.

Which leaves only two paths.

The first is China, whose Triple Eye score is 14.2%, lower than any of the results graphed above. In an unequal system where votes don’t count, there’s little threat to the status quo.

If the China model is not your bag, then there’s only way democracy can beat populism—fair play.

The India Road, Atmos Fear, Clear Eyes, and Folk Tales For Future Dreamers. QR links for smartphones and tablets.