The Pareto Principle is a foundational concept in economics, business and productivity theory. It states that 80% of effects come from 20% of causes, or that a small number of factors dominate the outcome. This principle is named after Vilfredo Pareto, an Italian economist and sociologist, who first observed this phenomenon in 1896 when he found that 80% of Italy’s land was owned by 20% of the population. The concept gained relevance in the 1940s, when it got adopted for industrial use, especially in quality control. Applying this principle more broadly, 80% of profits come from 20% of customers, 80% of sales come from 20% of products, 80% of productivity comes from 20% of tasks etc
In 1949, Zipf’s Law, propounded by a linguist, described how rank and frequency are inversely related in many natural and social phenomena. According to this for instance, the most common word in a language appears twice as often as the second most common word, three times as often as the third most common, and so on. Zipf’s Law suggests that a few items dominate usage, while most items occur rarely. The top 100 words are said to make up over 50% of any English text. Expanding that theory, the largest city in a country is twice as populous as the second-largest, three times the third-largest and so on.
The Matthew Effect, coined by sociologist Robert Merton in 1968, theorised that advantage begets more advantage, while disadvantage compounds over time. The core idea is that initial access to resources creates benefit and, conversely, those starting with less face systemic challenges. Applied to other spheres, VC-funded startups that raise early capital are more likely to raise again and scale quickly; Meanwhile, equally promising startups without early backing may struggle to get noticed.
The extreme form of this is the 1% rule. The top 1% of the world’s population owns 50% of global wealth; On platforms like X and Instagram, 1% of users generate 90% of the content; 1% of mobile apps account for 90% of all app downloads and revenue; 1% of artistes receive over 90% of Spotify streams; the top 1% of tennis players earn more than 90% of total prize money. The world is very concentrated.
The core takeaway from these rules is that outcomes are rarely evenly distributed. A small number of people, actions, or entities seem to account for a disproportionately large share of results, rewards or resources. This implies that as individuals we should focus on the highest impact actions, as companies we are best off focussing on the vital few viz 20% most profitable customers, products, or employees or, in terms of society, focusing on allocating resources where impact is largest.
The bigger social issue though is these patterns can lead to extreme and growing inequality and winner-take-all dynamics. Systems and policy therefore need to ensure correction to avoid growing gaps, exacerbation of the haves vs have-nots or social instability.
