Vilfredo Pareto
An Italian economist and sociologist,
known for his application of mathematics to economic analysis and for
his theory of the 'circulation of elites'. Vilfredo Pareto was the
father of the concept of "social systems". Vilfredo Pareto's societal
notions would later be applied by
Elton Mayo and the human
relationists in an organizational context.
Born in 1848, the son of a Genoese
father and a French mother, Pareto studied engineering at the University
of Turin. The five-year course in civil engineering, the first two years
of which were devoted to mathematics, deeply influenced Pareto's future
intellectual outlook. In 1870 he graduated with a thesis on "The
Fundamental Principles of Equilibrium in Solid Bodies." His later
interest in equilibrium analysis in economics and sociology is
prefigured in this thesis. From 1870 until 1893 he worked as an engineer
(like his father). Residing in Florence, he studied philosophy and
politics and wrote many periodical articles in which he was one of the
first to analyse economic problems with mathematical tools. In 1893 he
was chosen to succeed Léon Walras in the chair of political economy at
the University of Lausanne, Switzerland. He died in 1923 in Geneva.
Pareto's first work, Cours d'economie politique (1896-97), included his
famous 'law' of income distribution, a complicated mathematical
formulation in which he attempted to prove that the distribution of
incomes and wealth in society is not random and that a consistent
pattern appears throughout history, in all parts of the world and in all
societies.
In his Manuale di economia politica (1906) and Manuale d'economie
politique (1909 - a translation of the preceding item but with a
completely redone mathematical appendix) he further developed his theory
of pure economics. In this book he laid the foundation of modern welfare
economics with his concept of the so-called Pareto optimum, stating that
the optimum allocation of the resources of a society is not attained so
long as it is possible to make at least one individual better off in his
own estimation while keeping others as well off as before in their own
estimation.
His most important sociological writings dealt with his theory of the
'circulation of elites'. Pareto wrote a sociology of the political
process in which history consists essentially of a succession of elites
whereby those with superior ability in the prevailing lower strata at
any time challenge, and eventually overcome, the existing elite in the
topmost stratum and replace them as the ruling minority. In Pareto's
view, this pattern is repeated over and over again.
The Italian economist Vilfredo Pareto
was one of the leaders of the Lausanne School and an illustrious member
of the "second generation" of the Neoclassical revolution. Although only
mildly influential during his lifetime, his "tastes-and-obstacles"
approach to general equilibrium theory were resurrected during the great
"Paretian Revival" of the 1930s and have guided much of economics since.
Vilfredo Pareto was born in the year of people's revolutions at its
epicenter -- Paris, 1848 -- to an Italian aristocratic family. His
father, a Ligurian marchese (marquis) and civil engineer, had fled to
Paris in 1835 in self-imposed exile, following the example of Mazzini
and other Italian nationalists. Vilfredo was the third child (and first
son) of his marriage to a Frenchwoman.
The Pareto family returned to Piedmont circa 1858. Following his
father's footsteps, Vilfredo Pareto studied classics and then
engineering at the Polytechnic Institute of Turin. It was here that he
acquired his proficiency in mathematics and his basic ideas about
mechanical equilibrium that were to characterize his later contributions
to economics. After graduating at the top of his class in 1870, Pareto
took his first job as a director of the Rome Railway Company. In 1874,
Pareto become the managing director of an iron and steel concern, the
Società Ferriere d'Italia in Florence.
Pareto's stay in Florence was marked by political activity, much of it
fuelled by his own frustrations with government regulators. After the
Cavourist liberal government was replaced with a more interventionist
government in Italy in 1876, Pareto was quick to identify the vested
political interests that lay behind economic regulation, protectionism
and nationalization that proceeded. A democratic republican and
free-trader by instinct, Pareto deplored aristocratic and government
corporatism. He saw the new Italian parliamentary system as a sham, a
"pluto-democracy", a fig leaf for the naked power of the nobility and
the wealthy. He sided with the radical democratic movements and the
liberals whom, he believed, would replace privilege with meritocracy,
restore real democracy, pursue free trade and true competition and
promote social welfare. Pareto ran unsuccessfully for office on an
opposition platform in the district of Pistoia in 1882.
In 1889, after the death of his parents, Pareto changed his lifestyle.
He inherited the marchese title, but he never used it. Instead, he quit
his job, married a penniless Russian girl from Venice, Alessandrina
Bakunin, and moved to a villa in Fiesole. From his retreat, he began
writing numerous polemical articles against the government and gave
public lectures at a working man's institute. He was quickly targeted as
a troublemaker by the authorities. Trailed by police, intimidated by
hired thugs, his lectures were often closed down and his applications
for teaching jobs blocked. (incidentally, being well-trained with the
sword, a crack shot with a pistol and equipped with an aristocratic
sense of honor, Pareto never let himself be physically intimidated).
His activities brought him to the attention of Maffeo Pantaleoni, then
Italy's leading Neoclassical economist. A friendship sparked between the
two men, and Pantaleoni introduced Pareto to economic theory,
particularly the Walrasian strand. Pareto, a quick learner with
exceptionally good mathematical aptitude, took to it immediately and
published several theoretical articles in the Giornale degli economisti.
In the meantime, Léon Walras was looking for someone to take over his
chair in political economy at the University of Lausanne in Switzerland.
Pantaleoni recommended Pareto to him -- "He is an engineer like you; he
is an economist not like you, but wishing to become like you, if you
help him." Walras and Pareto disagreed on many economic policy issues
such as free trade and the role of the State. They also had opposing
temperaments -- Walras was a timid, bourgeois idealist while Pareto
remained his caustic, disputatious, aristocratic self. In spite of this,
Walras decided that Pareto ought to succeed him. Pareto was appointed in
1893, and his position at Lausanne made permanent in 1894. Although
courteous and respectful to each other in public, Walras and Pareto did
not get along very well.
Doubtlessly, there were many people in Italy who were glad to see Pareto
safely hidden away in Switzerland. But from his new academic perch,
Pareto's nerve only increased. His attacks on the Italian government
continued in his monthly column to the Giornale degli economisti and in
foreign journals. He assisted and even housed many socialists and
radicals that had been chased out of Italy (particularly after the 1898
May riots). When the Dreyfus affair broke in France, Pareto put his
poison to work against the anti-Semitic authorities.
Pareto also set himself to work, producing a three-volume edition of his
lecture notes, Cours d'économie politique (1896, 1897). This was more
than merely an restatement of the doctrines of the Lausanne School.
Interspersed with his presentations of pure economic theory were
numerous asides on methodology and applied economics and extensive
sociological observations. His recent reading of Karl Marx and Social
Darwinists like Herbert Spencer leaves its imprimatur. Mathematics was
neatly relegated to footnotes and corners.
In the Cours, his main economic contributions was his exposition of "Pareto's
Law" (or
Pareto Principle) of income distribution. Pareto argued that in all
countries and times, the distribution of income and wealth follows a
regular logarithmic pattern that can be captured by the formula:
log N = log A + m log
x
where where N is the number of income
earners who receive incomes higher than x, and A and m are constants.
Over the years, Pareto's Law has proved remarkably resilient in
empirical studies.
Pareto was also troubled with the concept of "utility". In its common
usage, utility meant the well-being of the individual or society, but
Pareto realized that when people make economic decisions, they are
guided by what they think is desirable for them, whether or not that
corresponds to their well-being. Thus, he introduced the term
"ophelimity" to replace the worn-out "utility". Preferences was what
Pareto wanted to get at.
Another contribution of the Cours was Pareto's criticism of the marginal
productivity theory of distribution, pointing out that it would fail in
situations where there is imperfect competition or limited
substitutability between factors. He'd repeat his criticisms in future
writings.
Also of importance was Pareto's observation that since the equilibrium
is merely a solution to a set of simultaneous equations, then it is at
least theoretically possible that a socialist or collectivist economy
could "calculate" this solution and so attain exactly the same outcome
as in a system guided by free markets. This proposition was picked up
and extended by Enrico Barone and became the first shot of the famous
socialist calculation debate, .
In a famous 1900 Rivista article, Pareto suddenly changed direction.
Heretofore a radical democrat, Pareto now decided to declare himself an
anti-democrat. The disturbances of the 1890s in Italy and France led
Pareto to realize that, far from restoring true democracy, meritocracy
and promoting social welfare, the radical movements were really just
seeking to replace one élite with another élite, the privileges and
structures of power remaining intact. The struggle was not for a good
society, but a squabble among élites over whom exactly was to going to
govern. And the ideals and theories they claimed to fight for? Just
propaganda, Pareto declared, the way upwardly-mobile folks incite the
helpless, hopeless mob to take to the streets on their behalf. For
Pareto, humanitarianism, liberalism, socialism, communism, fascism,
whatever, were all the same in the end. All ideologies were just
smokescreens foisted by "leaders" who really only aspired to enjoy the
privileges and powers of the governing élite.
Pareto decided to have none of it -- and went on a crusade to expose the
sham of political ideology and doctrine. He condemned socialists of all
stripes roundly in a 1902 book, but took particular aim at logically
demolishing the "new gospel" of Marxian economics. As revealed in the
Cours and in his own introduction to an abridged 1893 edition of Karl
Marx's Capital, Pareto applauded Marxian theories of class struggle and
even thought historical materialism was on the right track (albeit not
deep and general enough, in his view). But he deplored Marx's
Wizard-of-Oz-like conclusion. For Pareto, class struggle is eternal; the
promised "classless" society that would emerge under communism was
merely ideological fodder for socialist leaders to lay on their flock.
Of course, as a good Neoclassical, Pareto could not fathom the labor
theory of value either.
In 1906, Pareto published his Manual of Political Economy, his magnum
opus on pure economics and moved him out of the shadow of Walras. Unlike
the Cours, the Manual concentrates on presenting pure economics in an
explicitly mathematical form (especially after it was heavily revised
for the 1909 French edition). The Walrasian equations are still there,
but the focus is on formulating equilibrium in terms of solutions to
individual problems of "objectives and contraints". To illustrate this,
the indifference curve of Edgeworth (1881) was employed extensively --
both in his theory of the consumer and, another great novelty, in his
theory of the producer. It is in the Manual that we find the first
representation of what has since become known (and misnamed) as the
"Edgeworth-Bowley" box.
Like Irving Fisher (1892), Pareto stumbled on the idea that cardinal
utility could be dispensed with. Preferences were the primitive datum,
and utility a mere representation of preference-ordering. With this,
Pareto not only inaugurated modern microeconomics, but he also
demolished the "unholy alliance" of economics and utilitarianism. In its
stead, he introduced the notion of Pareto-optimality, the idea that a
society is enjoying maximum ophelimity when no one can be made better
off without making someone else worse off. (for more details, see our
discussion of the Paretian general equilibrium system).
His sociological observations also begin to indicate the future course
of his ideas. In 1900, Pareto had entered into a brief controversy in
the Giornale degli economisti with Benedetto Croce. Croce had criticized
economists' positivistic approach, particularly the assumption of
"rational economic man". Pareto defended economists, but, at the same
time, realized that the conventional defense was not even convincing
enough to himself. Why did the predictions of economics fail to
correspond to reality? Why were its policy recommendations, to him
logically irrefutable, not adopted? The explanation, he concluded,
echoing Georges Sorel, was simply that much of human activity was driven
not by logical action, but rather by non-logical action. On this, of
course, economics has nothing to say -- which is why, ultimately,
economics will always fail empirically. Pareto realized that he had to
move beyond economics to look for his answer.
Pareto retired from his chair at Lausanne in 1907, gradually passing on
his teaching responsibilities to Pasquale Boninsegni. He moved to Villa
Angora in Céligny, near Lake Geneva. There he was nursing a heart
disease, surrounded by a dozen cats, his enormous personal library, a
cellar full of superb wines and a large cabinet of exquisite liquers.
His wife ran off in 1901, but, as an Italian citizen, he could not
legally divorce her. A Frenchwoman, Jane Régis moved in shortly
afterwards, and they remained devoted companions for the rest of his
life. He only married her in 1923, after he became a citizen of the
city-state of Fiume and thus overcame the legal obstacles to divorce.
Pareto used his time at Céligny to write his Trattato di sociologia
generale, which was finally published, after wartime delays, in 1916.
This was his great sociological masterpiece. He explains how human
action can be neatly reduced to residue and derivation. People act on
the basis of non-logical sentiments (residues) and invent justifications
for them afterwards (derivations). The derivation is thus just the
content and form of the ideology itself. But the residues are the real
underlying problem, the particular cause of the squabbles that leads to
the "circulation of élites". The underlying residue, he thought, was the
only proper object of sociological enquiry.
Residues are non-logical sentiments, rooted in the basic aspirations and
drives of people. He identifies six classes of residues, all of which
are present but unevenly distributed across people -- so the population
is always a heterogeneous, differentiated mass of different
psychic-types. The most important residues are Class I the "instinct for
combining" (innovation) and Class II, the "persistence of aggregates"
(conservation). Class I types rule by guile, and are calculating,
materialistic and innovating. Class II types rule by force and are more
bureaucratic, idealistic and conservative.
Pareto's theory of society claimed that there was a tendency to return
to an equilibrium where a balanced amount of Class I and Class II people
are present in the governing élites. People are always entering and
leaving the élite thereby tending to restore the natural balance. On
occasion, when it gets too lopsided, an élite will be replaced en masse
by another If there are too many Class I people in a governing élites,
this means that violent, conservative Class II's are in the lower
echelons, itching and capable of taking power when the Class I's finally
make a mess of things by too much cunning and corruption (he regarded
Napoleon III's France and the Italian "pluto-democratic" system as an
example). If the governing élite is composed mostly of Class II types,
then it will fall into a bureaucratic, inefficient and reactionary mess,
easy prey for calculating upwardly-mobile Class I's (e.g. Tsarist
Russia).
Pareto colored his sociological theory with numerous classical and
contemporary illustrations of his theory. He published two more books
(1920, 1921) expanding on the theme. His quasi-mystical arguments about
the non-logical motivations attracted many Italian Fascists (Mussolini
himself claimed to have attended his lectures at Lausanne). Pareto,
however, was largely disdainful of the Fascist movement -- he never had
patience for ideologies or ideologues -- but he found them quite
amusing. When Mussolini's small band of Class II Fascists marched on
Rome in 1922 and brought the whole Class I-dominated Italian government
tumbling down, Pareto mumbled triumphantly in his sick-bed, "I told you
so!". He was not unhappy at the turn of events.
The Fascists showered Pareto with honors from afar, making him a Senator
of the Kingdom of Italy, inviting him to join the Italian delegation to
the Geneva Disarmament Conference, asking him to contribute to the
Fascist party periodicals, etc. He declined most of the honors, but
spoke favorably of certain early reforms undertaken by the Fascists.
However, he also warned them to avoid despotism, censorship and economic
corporatism. When the Fascists clamped down on freedom of expression in
Italian universities, Pareto managed to rouse himself to write a
protest.
Pareto died a mere ten months into Mussolini's reign -- before the
uglier aspects of Fascism became obvious. The Fascists continued to use
his name unreservedly to give intellectual veneer to their movement.
Writing in 1938 on the legacy of Pareto, the economist (and Fascist)
Luigi Amoroso would have the gumption to write (and Econometrica the
editorial lapse to publish) the following:
"Just as the weaknesses of the flesh delayed, but could not prevent, the
triumph of Saint Augustine, so a rationalistic vocation retarded but did
not impede the flowering of the mysticism of Pareto. For that reason,
Fascism, having become victorious, extolled him in life, and glorifies
his memory, like that of a confessor of its faith." (Luigi Amoroso,
"Vilfredo Pareto", Econometrica, 1938: p.21)
Despite his association with Fascism, Pareto's sociological work has
been taken seriously, going through recurring phases of popularity and
critical scrutiny. Freudian psychology has given much weight to some of
his notions. It is not so much its main thrust, but its roughness,
simplicity and incompleteness that are the main sources of complaint.
Pareto's economics have had a much greater impact. Pareto managed to
construct a proper school around himself at Lausanne, including G.B.
Antonelli, Boninsegni, Amoroso and others as disciples. Outside this
small group, his work also influenced W.E. Johnson, Eugen Slutsky and
Arthur Bowley. But Pareto's big break came posthumously in the 1930s and
1940s, a period which we have decided to call the "Paretian Revival".
His "tastes-and-obstacles" approach to demand were resurrected by John
Hicks and R.G.D. Allen (1934) and extended and popularized by John Hicks
(1939), Maurice Allais (1943) and Paul Samuelson (1947). Pareto's work
on welfare were resurrected by Harold Hotelling, Oskar Lange and the
"New Welfare Economics" movement. Finally, Pareto's ruminations on the
potential efficiency of a collectivist society were aired in the
Socialist Calculation Debate that arose between the Paretians and the
Austrians.
Major Works of Vilfredo Pareto
* Principii Fondamentali della Teorie
dell' Elasticità, 1869.
* "Della logica delle nuove scuole economiche", speech to Accademia dei
Gerogofili, 1877.
* "L'Italie économique", 1891, Revue des deux mondes
* "Les nouvelles théories économiques", 1892, Le monde économique
* "Considerazioni sui principi fondamentali dell'economia politica
pura", 1893, Giornale degli Economisti.
* "Introduction" to K. Marx, Capital, 1893.
* Leçon d'économie pure à l'Université de Lausanne, 1893 (unpublished)
* "The Parliamentary Regime in Italy", 1893, American Poli Sci Quarterly
* La liberté économique et les événements d'Italie.
* "La courbe des revenus", 1896, Le Monde economique (French/Italian)
* Cours d'économie politique professé à l'université de Lausanne, 3
volumes, 1896-7.
* "The New Theories of Economics ", 1897, JPE.
* "Comment se pose le problème de l'économie pure?", Notes to
Association Stella,1898 (publ. 1965)
* "Un' Applicazione di teorie sociologiche", 1900, Rivista Italiana di
Sociologia (transl. in English as The Rise and Fall of the Elites)
* "On the Economic Phenomenon", 1900, GdE (repr. 1953, IEP)
* "Le nuove toerie economiche (con in appendice le equazioni dell'
equilibrio dinamico)", 1901, GdE
* "De l'économique, discours d'installation de M.V. Pareto à professeur
ordinaire", Lausanne, 1901 (publ. 1965)
* Les systèmes socialistes, 1902.
* L'économie pure, resumé du cours donné a l'Ecole des Hautes Etudes
Sociales de Paris, 1902
* "Review of Aupetit", 1902, Revue d'econ politique
* "Anwendungen der Mathematik auf Nationalökonomie", 1903, Encyklopödie
der Mathematischen Wissenschaften
* "Il Crepuscolo della Libertà", 1905, Rivista d'Italia.
* Manual of Political Economy , 1906 (Italian; French transl., 1909,
English transl, 1971).
* "L'économie et la sociologie au point de vue scientifique", 1907,
Rivista di Scienza.
* "Economie mathématique", 1911, in Gauthier-Villars, Encyclopedie des
sciences mathematiques.
* Le mythe vertuiste et la littérature immorale. 1911
* "Introduction" to G. Osorio, Théorie mathematique de l'échange, 1913.
* Trattato di Sociologia Generale, 1916. (transl. in English as Mind and
Society. Extracts (1) , (2), (3); extract in Spanish)
* "Discorso per il Giubileo", 1917, La Riforma Sociale - Jubillee speech
manuscript
* "Formi di fenomeni economici e previsioni", 1917, Riv di Sci Banc
* Fatti e Teorie, 1920
* Trasformazione della Democrazia, 1921.
* Mon Journal, 1958
* Scritti sociologici di Vilfredo Pareto, 1966.
* Oeuvres complètes de Vilfredo Pareto, ed. G. Busino
References
http://cepa.newschool.edu/het/profiles/pareto.htm
http://www.economics.unimelb.edu.au/rdixon/pareto.html
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