INSIGHTS: THE LORENZ CURVE

Jack L. Treynor

For a century, the critics’ favorite example of the failures of capitalism has been the Lorenz curve. They rank households from poorest to richest and then plot cumulative wealth against the cumulative number of households. The critics argue that, if capitalism were fair, the Lorenz curve would be a straight line: the poorest 10% of the households would own 10% of the wealth, the poorest 20% would own 20%, etc. Actual Lorenz curves are not straight. Instead, they are sharply curved, showing that much of society’s wealth is owned by the richest households. Economics textbooks (e.g., Samuelson) display these curves for actual countries, citing them as examples of “market failure.” This paper develops a theory of the economic forces that shape the Lorenz curve. It explains why actual curves have the shape they have.