Vilfredo Pareto (1848-1923) was an Italian sociologist and economist responsible for several mathematical insights, particularly for economic equilibriums. He is credited with the work underlying indifference curves, and proved that a theory of demand did not depend on utility. As a sociologist he is best known known for his analysis of elites and his statistical studies of inequality. He opposed Marxism and socialism and his ideas were widely admired by conservatives.
Pareto was born in Paris, France, July 15, 1848. Son of an aristocratic Genovese engineer living in exile and a Frenchwoman, he returned to Italy with his parents in 1858. After attending the Reale Politecnico until 1869, he became a railway executive and rose rapidly to a place as a director of Ferrovie Italiane. When Leon Walras retired as professor of economics at Lausanne University, Switzerland, in 1893, Pareto was chosen his successor. Italian dictator Benito Mussolini was impressed by Pareto's theories, named him a delegate to the Geneva Disarmament Conference (an honor Pareto refused) and conferred on him the title of Senator of the Kingdom of Italy (1922). His death soon after the ascendancy of Mussolini left it unclear whether or not he supported or rejected Fascism. His open advocacy of force may have lent support to the Fascist regime, but he also insisted on a libertarian economic system free from political restraints.
Pareto's turned his interest to economic matters and he became an advocate of free trade, finding himself in difficulty with the Italian government. His writings reflected the ideas of Leon Walras that economics is essentially a mathematical science. Pareto was a leaders of the "Lausanne School" represents the second generation of the Neoclassical revolution. His "tastes-and-obstacles" approach to general equilibrium theory were resurrected during the great "Paretian Revival" of the 1930s and have influenced theoretical economics since.
In his Manual of Political Economy (1906) the focus is on equilibrium in terms of solutions to individual problems of "objectives and constraints". He used the indifference curve of Edgeworth (1881) extensively, for the theory of the consumer and, another great novelty, in his theory of the producer. He gave the first presentation of the trade-off box now known as the "Edgeworth-Bowley" box.
Pareto realized that cardinal utility could be dispensed with—that is, it was not necessary to know how much a person valued this or that, only that he preferred X of this to Y of that. Utility was a preference-ordering. With this, Pareto not only inaugurated modern microeconomics, but he also demolished the alliance of economics and utilitarian philosophy (which calls for the greatest good for the greatest number; Pareto said "good" cannot be measured). He replaced it with the notion of Pareto-optimality. A system is Pareto-optimal when no one can be made better off without making someone else worse off. Pareto optimality is widely used in welfare economics and game theory. A standard theorem, the first welfare theorem, states that under ideal conditions competitive markets create distributions of wealth that are Pareto optimal.
An important contribution still in use was his "Pareto's Law" of income distribution. He argued that in all countries and times, the distribution of income and wealth is highly skewed, with a few holding most of the wealth. He argued that all observed societies follow a regular logarithmic pattern:
- log N = log A + m log x
where N is the number of people with wealth higher than x, and A and m are constants. Over the years, Pareto's Law has proved remarkably close to observed data.
Sociology of elites
Pareto's later years were spent in collecting the material for his best-known work, Trattato di sociologia generale (1916) ("The Mind and Society" (1935)). His final work was Compendio di sociologia generale (1920).
Pareto seems to have turned to sociology for an understanding of why his abstract mathematical economic theories did not work out in practice, in the belief that unforeseen or uncontrollable social factors intervened. His sociology holds that much social action is nonlogical and that much personal action is designed to give nonrational actions to spurious logicality. We are driven, he taught, by certain "residues" and by "derivations" from these residues. The more important of these have to do with conservatism and risk-taking, and human history is the story of the alternate dominance of these sentiments in the ruling elite, which comes into power strong in conservatism but gradually changes over to the philosophy of the "foxes" or speculators. A catastrophe results, with a return to conservatism; the "lion" mentality follows. This cycle might be broken by the use of force, says Pareto, but the elite becomes weak and humanitarian and shrinks from violence.
Pareto's sociology was introduced to the United States by George Homans and Lawrence J. Henderson at Harvard, and had considerable influence, especially on Harvard sociologist Talcott Parsons, who developed a systems approach to society and economics that argues the status quo is usually functional.
- Aron, Raymond. Main Currents in Sociological Thought: Durkheim, Pareto, Weber - Vol. 2 (1967) online edition; excerpt and text search
- Cirillo, R. The Economics of Vilfredo Pareto (1978)
- Femia, Joseph V. Pareto and Political Theory (2006) excerpt and text search
- Homans, George C., and Charles P. Curtis Jr. An Introduction to Pareto: His Sociology (1934) online edition
- Lopreato, Joseph, and Lawrence E. Hazelrigg. Class, Conflict, and Mobility: Theories and Studies of Class Structure (1972) online edition
- Mclure, Michael. Pareto, Economics and Society: The Mechanical Analogy 2001 online edition
- Mathur, Vijay K. "How Well Do We Know Pareto Optimality?" Journal of Economic Education22#2 (1991) pp 172–78 online edition
- Peacock, Alan T., and Charles K. Rowley, "Pareto Optimality and the Political Economy of Liberalism" The Journal of Political Economy, Vol. 80, No. 3, Part 1 (May - Jun., 1972), pp. 476–490 in JSTOR
- Stiglitz, Joseph E. "Pareto Optimality and Competition," The Journal of Finance, Vol. 36, No. 2, (May, 1981), pp. 235–251 in JSTOR
- Tarascio, Vincent J. Pareto's Methodological Approach to Economics: A Study in the History of Some Scientific Aspects of Economic Thought 1968 online edition
- Wold, H. O. A., and P. Whittle, "A Model Explaining the Pareto Distribution of Wealth" Econometrica, Vol. 25, No. 4 (Oct., 1957), pp. 591–595 in JSTOR
- Pareto, Vilfredo. The Rise and Fall of Elites: An Application of Theoretical Sociology (1991) excerpt and text search
- Pareto, Vilfredo. Cours d'economie politique(1896-1897)
- Pareto, Vilfredo. Les Systemes socialistes(1902)
- Pareto, Vilfredo. Manuale di economie politica(1906).
- online books by Pareto in English and Italian
- Homans and Curtis (1934)