The L Curve

[August1991]

Picture your annual income as a stack of $100 bills.

Do you make $25,000? Your stack of $100 bills is 1 inch high.

Do you make $100,000? Your stack of $100 bills is 4 inches high.

Do you make $1 million? Your stack of $100 bills is 3.3 feet high.

Do you make $1 billion? Your stack of $100 bills is over ½ mile high!

The L Curve

I haven't verified this data. I am not certain that there are any people in the world who earn $1 billion a year. (Bill Gates receives dividend income of about $400 million annually.) Bear in mind too that a person's wealth is distinct from a person's income. For most of us, our primary source of wealth is the human capital between our ears and to some degree, the physical capital of our home.

Nevertheless, the web site above makes the accurate (I think) point that it is wrong to imply that there are rich and poor. Rather, there are extremely rich and everyone else who - in modern societies - is more or less rich.

The distribution of income is shaped like the letter L.

Edited March 3, 2008 by August1991

[eyeball]

I'm more concerned about the distribution of political power and wealth's influence on how its distributed and concentrated.

Money is just a thing, its what people do with it that really counts.

[bush_cheney2004]

The dataset supporting the "L Curve" contention only applies to the United States, which is not representative of income distribution throughout the world.

[Wilber]

The dataset supporting the "L Curve" contention only applies to the United States, which is not representative of income distribution throughout the world.

Are your $100 dollar bills thicker or thinner than ours?

[bush_cheney2004]

Are your $100 dollar bills thicker or thinner than ours?

Historically, they are much thicker.....more than 30 years of "brain drain" relocation to the USA for a better position on the ""L curve" does not change overnight.

Technically, US $100 notes measure 2.61 inches wide by 6.14 inches long, and the thickness is 0.0043 inches. I have no idea what the Canadian dimensions are (metric, of course!)

[August1991]

The dataset supporting the "L Curve" contention only applies to the United States, which is not representative of income distribution throughout the world.

You may be right. In countries such as Sweden (pop. 7 million), the L curve is even narrower than in the US (pop. 300 million).

Ingvar Kamprad

Then again, Kamprad now lives in Switzerland.

----

I think the point is that income distribution is not shaped like a V or a U. It's shaped like an L. A very small number of innovative entrepreneurs are extremely wealthy and everyone else - at least in modern societies and in comparison - is merely "alright".

[bush_cheney2004]

I think the point is that income distribution is not shaped like a V or a U. It's shaped like an L. A very small number of innovative entrepreneurs are extremely wealthy and everyone else - at least in modern societies and in comparison - is merely "alright".

Not sure where you are going with this, as the author specifically distinguishes "income" from "wealth", which is even more skewed, be it US dollars or cattle in Kenya. Bill Gates is only worth $60 billion on paper, whereas the cattle are real.

I never got a job from a poor man.

Edited March 3, 2008 by bush_cheney2004

[White Doors]

I'm more than happy with being 'alright'.

[kimmy]

Nevertheless, the web site above makes the accurate (I think) point that it is wrong to imply that there are rich and poor. Rather, there are extremely rich and everyone else who - in modern societies - is more or less rich.

I am not sure about the "more or less rich" part.

I would think that people who are "more or less rich" would be able to own homes, but in every major city west of Winnepeg at least, it seems as though the rapid rise of home prices has far outpaced incomes.

I would suppose that in small towns, the Maritimes, and probably Ottawa, homes could be purchased for pennies per square foot, but living in a place where there's nowhere to work is as futile as working in a place where there's nowhere to live.

-k

[myata]

This is as dumb as popular "economy" ever gets. The only thing it's saying is that the difference between smallest and median income is by far inferior to that between the median and the highest. I.e. 50,000/10,000 = 5 (median/lowest), while 400,000,000 / 50,000 = 10,000 (approx, max/median). And?

What's missing is distribution of population by income i.e what percentage of population falls into lowest income (e.g < 30 K) vs median (30 K - 75 K) vs high (< 200 K) vs rich ( 200 K < ... few M) vs super rich (everybody else). I would imagine that the last two categories won't exceed one-two percentiles, so the income distribuion indeed fall down very quickly as income raises. The real difference is between slope style distribution where majority is poor, and the bell shaped one where significant part of population achieves decent level of well being, while super rich and extremely poor are both in minority.

[August1991]

I am not sure about the "more or less rich" part.

I would think that people who are "more or less rich" would be able to own homes, but in every major city west of Winnepeg at least, it seems as though the rapid rise of home prices has far outpaced incomes.

I would suppose that in small towns, the Maritimes, and probably Ottawa, homes could be purchased for pennies per square foot, but living in a place where there's nowhere to work is as futile as working in a place where there's nowhere to live.

It's a reasonable conclusion to say that the value of real property follows closely general economic well-being. As the saying, they are not making any more land. People with higher incomes compete for the same location and hence land values capture the benefits of a richer society.

My point about "more or less rich" was in a long term sense. Ordinary people are wealthier now than at any time in history. The differences between "rich" and "poor" (say $20,000/year and $100,000/year pale in comparison the differences between anyone alive today and anyone alive 300 years ago).

This is as dumb as popular "economy" ever gets. The only thing it's saying is that the difference between smallest and median income is by far inferior to that between the median and the highest. I.e. 50,000/10,000 = 5 (median/lowest), while 400,000,000 / 50,000 = 10,000 (approx, max/median). And?

What's missing is distribution of population by income i.e what percentage of population falls into lowest income (e.g < 30 K) vs median (30 K - 75 K) vs high (< 200 K) vs rich ( 200 K < ... few M) vs super rich (everybody else). I would imagine that the last two categories won't exceed one-two percentiles, so the income distribuion indeed fall down very quickly as income raises. The real difference is between slope style distribution where majority is poor, and the bell shaped one where significant part of population achieves decent level of well being, while super rich and extremely poor are both in minority.

There is a statistic known as the Gini coefficient and it measures what you are suggesting.

My point is somewhat different and is the reason I started this thread. According to the video, a family with an annual income of $100,000 would be around the 95 yard line and families' with an annual income of $300,000 would be around the 99 yard line. (I haven't verified these stats and it's not clear if this is disposable income or not, before or after transfers. I suspect it is disposable income after transfers.)

IOW, the great inequalities arise in the extremely small number of people with extremely high incomes. This question is related to the issue of CEO compensation. Does our society reward accurately the few innovators/entrepreneurs? Whether by luck or natural talent, a few people make significant changes that affect how the rest of us do things. (eg. Issac Newton or Albert Einstein.) We want to reward these people as an incentive for others to innovate also.

Edited March 5, 2008 by August1991

[kimmy]

It's a reasonable conclusion to say that the value of real property follows closely general economic well-being. As the saying, they are not making any more land. People with higher incomes compete for the same location and hence land values capture the benefits of a richer society.

My point about "more or less rich" was in a long term sense. Ordinary people are wealthier now than at any time in history. The differences between "rich" and "poor" (say $20,000/year and $100,000/year pale in comparison the differences between anyone alive today and anyone alive 300 years ago).

I was thinking long term as well, though perhaps not quite as long term as you. To someone my age, a generation seems pretty long term, and I'm having a hard time convincing myself that my generation is as rich as my parents' generation. When my parents were my age, they both had college educations, they owned a home on one income, and already had 2 children. I doubt that many in my generation will be able to say the same.

By the standards of their generation, my parents were successful but not to an exceptional degree. By today's standards, my parents were *rich*.

I strongly suspect that if one measures the wealth of this generation in real terms against their counterparts of a few decades ago, you'd find that real wealth has declined.

-k

[myata]

IOW, the great inequalities arise in the extremely small number of people with extremely high incomes. This question is related to the issue of CEO compensation. Does our society reward accurately the few innovators/entrepreneurs? Whether by luck or natural talent, a few people make significant changes that affect how the rest of us do things. (eg. Issac Newton or Albert Einstein.) We want to reward these people as an incentive for others to innovate also.

Well, to reward breakthrough discoveries or inventions fairly one'd have to forecast their impact over very long period, perhaps even centuries long. That's not possible or practical, unless in some kind of technocracy where a panel of gurus would make arbitrary judgements on who deserves what. In capitalism, the astronomical earnings of a few are almost always directly linked to immediate mass effect in the market (new product / hit / large company). Collective judgement of many is less likely to be wrong than that of a selected small group. This explains evolution from closed elites toward open market space and democracy. I agree that there's some aspect of fairness of distribution that's causing vague discomfort. Should this be left entirely to the market, or at some point regulation would need to step in? What kind of regulation? Good question.

[August1991]

Well, to reward breakthrough discoveries or inventions fairly one'd have to forecast their impact over very long period, perhaps even centuries long. That's not possible or practical, unless in some kind of technocracy where a panel of gurus would make arbitrary judgements on who deserves what.

It's possible and practical but it's admittedly hard to do. Have you checked the current share price of Google? Why would anyone pay so much for a company that has never paid a dividend and will likely pay no dividend for the next several decades?

Myata, many people feel that the Google guys are on to something and they want now a piece of the future action. (The panel of gurus is the stock market - a true democracy open to anyone. If you're so smart, apply your knowledge and get rich.)

My question about paying a few people so much is connected to Google's share price. Never in history has it been possible to compensate so well innovators. In the past, people like Aristotle or even Isaac Newton and Gottfried Liebnitz thought of something new, maybe published it and then died. Mozart was buried in an unmarked, common grave pit.

Nowadays, we reward innovation. Paul McCartney is one of the wealthiest people in the world and this L curve exists. I suspect though that this innovation thing, once rewarded, is bound to go down market and become commercial. Many people will innovate and the L curve will just become a gentle slope. Unless someone invents something truly new.

I was thinking long term as well, though perhaps not quite as long term as you. To someone my age, a generation seems pretty long term, and I'm having a hard time convincing myself that my generation is as rich as my parents' generation. When my parents were my age, they both had college educations, they owned a home on one income, and already had 2 children. I doubt that many in my generation will be able to say the same.

By the standards of their generation, my parents were successful but not to an exceptional degree. By today's standards, my parents were *rich*.

I strongly suspect that if one measures the wealth of this generation in real terms against their counterparts of a few decades ago, you'd find that real wealth has declined.

-k

If you can believe it, I have thought of your post for several days and I wish that I had data at hand to support my opinion.

Let's assume that your parents were 30 years old when you were born. That means that in 1978, they were at exactly the same position in their life as you are now.

Well, what was the price of a house in Edmonton in 1978 and what was the salary of, say, a schoolteacher then? How does this ratio compare to 2008? (The last time I tried this comparison, I used Toronto data and a teacher's salary was about 1/10th of a house price in the 1950s and about 1/5th of a house price in the 1980s.)

One thing that's true is that in 2008, there's more stuff to spend your money on. Laptops, flat-screen TVs, digital cable. It's cheap to fly abroad and it's also easier to shack up or just live alone. We have more choices. You have the choice to have kids or not. Your parents probably didn't. They just took it for granted that they'd have kids.

I say all this because your parents (and this applies to everyone) had fewer choices than you do. Looking back at the choices they made, you ignore this fact. Your parents didn't take holidays or go to restaurants because air tickets were expensive and there weren't many good restaurants. Instead, they spent their money on a house - what else was there? (IOW, if you could ignore all the distractions, you would have more money than your parents had to spend on a house. Presumably, you prefer holidays over a house.)

Does this matter? IMHO, it would be foolish to spend money buying a horse in 1920 because that's what your parents bought in 1890.

----

Last points. While Canada is richer now than in 1978, taxes have reduced your disposable income compared to your parents. IOW, our increased incomes now go to more government provided services. I hope you enjoy them.

The government has also changed many rules for new home constructions. To meet government norms and zoning rules, builders can't build houses as cheaply in 2008 as they could in 1978.

And lastly, with an oil price over $100 a barrel, land is very costly in Edmonton right now. But the last boom was in the 1970s so I reckon the comparison to your parents in 1978 is legitimate. Maybe you should wait, speculate, and buy a house in a decade or so. In 1984, after Trudeau and the Iran hostages, houses in Alberta were cheap - or so I've heard.

Edited March 8, 2008 by August1991