Vilfredo Pareto

Vilfredo Pareto

Lausanne School
Born	15 July 1848(1848-07-15)
Died	19 August 1923(1923-08-19) (aged 75)
Nationality	Italian
Field	Microeconomics Socioeconomics
Influenced	Luigi Amoroso
Contributions	Pareto index Pareto chart Pareto's law Pareto efficiency Pareto distribution Pareto principle

Vilfredo Federico Damaso Pareto (Italian pronunciation: [vilˈfreːdo paˈreːto]; 15 July 1848 – 19 August 1923), born Wilfried Fritz Pareto, was an Italian engineer, sociologist, economist, political scientist and philosopher. He made several important contributions to economics, particularly in the study of income distribution and in the analysis of individuals' choices. "His legacy as an economist was profound. Partly because of him, the field evolved from a branch of moral philosophy as practiced by Adam Smith into a data intensive field of scientific research and mathematical equations. His books look more like modern economics than most other texts of that day: tables of statistics from across the world and ages, rows of integral signs and equations, intricate charts and graphs."^[1] He introduced the concept of Pareto efficiency and helped develop the field of microeconomics. He also was the first to discover that income follows a Pareto distribution, which is a power law probability distribution. The Pareto principle was named after him and built on observations of his such as that 80% of the land in Italy was owned by 20% of the population. He also contributed to the fields of sociology and mathematics.

Biography

Pareto was born of an exiled noble Genoese family in 1848 in Paris, the centre of the popular revolutions of that year. His father, Raffaele Pareto (1812–1882), was an Italian civil engineer and Ligurian marchese who had left Italy much like Mazzini and other Italian nationalists. His mother, Marie Metenier, was a French woman. Enthusiastic about the 1848 German revolution, his parents named him Fritz Wilfried, which became Vilfredo Federico upon his family's move back to Italy in 1858.^[2] In his childhood, Pareto lived in a middle-class environment, receiving a high standard of education. In 1870, he earned a degree in engineering from what is now the Polytechnic University of Turin. His dissertation was entitled "The Fundamental Principles of Equilibrium in Solid Bodies". His later interest in equilibrium analysis in economics and sociology can be traced back to this paper.

Civil engineer to liberal to economist

For some years after graduation, he worked as a civil engineer, first for the state-owned Italian Railway Company and later in private industry. He did not begin serious work in economics until his mid-forties. He started his career a fiery liberal, besting the most ardent British liberals with his attacks on any form of government intervention in the free market. In 1886 he became a lecturer on economics and management at the University of Florence. His stay in Florence was marked by political activity, much of it fueled by his own frustrations with government regulators. In 1889, after the death of his parents, Pareto changed his lifestyle, quitting his job and marrying a Russian, Alessandrina Bakunin. She later left him for a young servant.

Economics and sociology

In 1893, he was appointed a lecturer in economics at the University of Lausanne in Switzerland where he remained for the rest of his life. In 1906, he made the famous observation that twenty percent of the population owned eighty percent of the property in Italy, later generalised by Joseph M. Juran into the Pareto principle (also termed the 80-20 rule). In one of his books published in 1909 he showed the Pareto distribution of how wealth is distributed, he believed "through any human society, in any age, or country".^[3] He maintained cordial personal relationships with individual socialists, but always thought their economic ideas were severely flawed. He later became suspicious of their humanitarian motives and denounced socialist leaders as an 'aristocracy of brigands' who threatened to despoil the country and criticized the government of Giovanni Giolitti for not taking a tougher stance against worker strikes. Growing unrest among labor in Italy led him to the anti-socialist and anti-democratic camp.^[4] His attitude toward fascism in his last years is a matter of controversy.^[5]

Personal life

In the 1920s Pareto remarried. He died in Geneva, Switzerland, 19 August 1923, "among a menagerie of cats that he and his french lover kept" in their villa; "the local divorce laws prevented him from divorcing his wife and remarrying until just a few months before his death."

Sociology

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).

In his Trattato di Sociologia Generale (1916, rev. French trans. 1917), published in English by Harcourt, Brace in a four-volume edition edited by Arthur Livingston under the title The Mind and Society (1935), Pareto put forward the first social cycle theory in sociology. He is famous for saying "history is a graveyard of aristocracies."^[6]

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.^[7]

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.^[8]

Fascism and power distribution

Benoît Mandelbrot writes:

"One of Pareto's equations achieved special prominence, and controversy. He was fascinated by problems of power and wealth. How do people get it? How is it distributed around society? How do those who have it use it? The gulf between rich and poor has always been part of the human condition, but Pareto resolved to measure it. He gathered reams of data on wealth and income through different centuries, through different countries: the tax records of Basel, Switzerland, from 1454 and from Augsburg, Germany in 1471, 1498 and 1512; contemporary rental income from Paris; personal income from Britain, Prussia, Saxony, Ireland, Italy, Peru. What he found – or thought he found – was striking. When he plotted the data on graph paper, with income on one axis, and number of people with that income on the other, he saw the same picture nearly everywhere in every era. Society was not a "social pyramid" with the proportion of rich to poor sloping gently from one class to the next. Instead it was more of a "social arrow" – very fat on the bottom where the mass of men live, and very thin at the top where sit the wealthy elite. Nor was this effect by chance; the data did not remotely fit a bell curve, as one would expect if wealth were distributed randomly. "It is a social law," he wrote: something "in the nature of man".

Pareto's discovery that power laws applied to income distribution embroiled him in political change and the nascent Fascist movement, whether he really sided with the Fascists or not. Fascists such as Mussolini found inspiration for their own economic ideas in his discoveries. He had discovered something that was harsh and Darwinian, in Pareto's view. And this fueled both the anger and the energy of the Fascist movement because it fueled their economic and social views. He wrote that, as Mandelbrot summarizes:

"At the bottom of the Wealth curve, he wrote, Men and Women starve and children die young. In the broad middle of the curve all is turmoil and motion: people rising and falling, climbing by talent or luck and falling by alcoholism, tuberculosis and other kinds of unfitness. At the very top sit the elite of the elite, who control wealth and power for a time – until they are unseated through revolution or upheaval by a new aristocratic class. There is no progress in human history. Democracy is a fraud. Human nature is primitive, emotional, unyielding. The smarter, abler, stronger, and shrewder take the lion's share. The weak starve, lest society become degenerate: One can, Pareto wrote, 'compare the social body to the human body, which will promptly perish if prevented from eliminating toxins.' Inflammatory stuff – and it burned Pareto's reputation."

Pareto had argued that democracy was an illusion and that a ruling class always emerged and enriched itself. For him, the key question was how actively the rulers ruled. For this reason he called for a drastic reduction of the state and welcomed Benito Mussolini's rule as a transition to this minimal state so as to liberate the "pure" economic forces.^[9]

To quote Pareto's biographer:

"In the first years of his rule Mussolini literally executed the policy prescribed by Pareto, destroying political liberalism, but at the same time largely replacing state management of private enterprise, diminishing taxes on property, favoring industrial development, imposing a religious education in dogmas".^[10]

Karl Popper dubbed him the "theoretician of totalitarianism,"^[11] but there is no evidence in Popper's published work that he read Pareto in any detail before repeating what was then a common but dubious judgment in anti-fascist circles.^[12]

It is true that Pareto regarded Mussolini's triumph as a confirmation of certain of his ideas, largely because Mussolini demonstrated the importance of force and shared his contempt for bourgeois parlementarism. He accepted a "royal" nomination to the Italian senate from Mussolini. But he died less than a year into the new regime's existence.

Some fascist writers were much enamored of Pareto, writing such paeans as:

"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."^[13]

On being sent an anti-Semitic book, Pareto's reply indicated no repulsion for it.^[14] But many modern historians reject the notion that Pareto's thought was essentially fascistic or that he is properly regarded as a supporter of fascism.^[12]

But the truth is he had simply explicated an observation of the human condition: In most societies a few people are extraordinarily rich, a small number very rich, and most people are in the middle or poor.

Economic concepts

Pareto 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 leader of the "Lausanne School" and 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.^[15]

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.^[16]

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, the idea that a system is enjoying maximum economic satisfaction 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 is that a perfectly competitive market creates distributions of wealth that are Pareto optimal.^[17]

Concepts

Some economic concepts in current use are based on his work:

• The Pareto index is a measure of the inequality 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:

1. 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.

• The Pareto chart is a special type of histogram, used to view causes of a problem in order of severity from largest to smallest. It is a statistical tool that graphically demonstrates the Pareto principle or the 80-20 rule.
• Pareto's law concerns the distribution of income.
• The Pareto distribution is a probability distribution used, among other things, as a mathematical realization of Pareto's law.
• Ophelimity is a measure of purely economic satisfaction.

Major Works

• Vilfredo Pareto. Cours d'économie politique professé a l'université de Lausanne. Vol. I' 1896; Vol. II, 1897.
• Vilfredo Pareto. Les systèmes socialistes. 1902.
• Vilfredo Pareto. Manual of Political Economy. Augustus M. Kelley, 1971 (translation of French edition from 1927).
• Vilfredo Pareto. Trattato Di Sociologia Generale (4 vols.). G. Barbéra, 1916.

See also

• Pareto efficiency
• Pareto distribution
• Pareto principle

References

1. ^ Mandelbrot, Benoit; Richard L Hudson (2004). The (mis)behavior of markets : a fractal view of risk, ruin, and reward. New York: Basic Books. p. 153. 
2. ^ van Suntum, Ulrich (2005). The Invisible Hand. Springer. pp. 30. ISBN 3540204970. 
3. ^ Mandelbrot, Benoit; Richard L Hudson (2004). The (mis)behavior of markets : a fractal view of risk, ruin, and reward. New York: Basic Books. 
4. ^ Richard Bellamy, "From Ethical to Economic Liberalism – The Sociology of Pareto's Politics," Economy and Society vol. 19, no. 4, 1990, pp. 431–55.
5. ^ Renato Cirillo, "Was Vilfredo Pareto Really a 'Precursor' of Fascism?," The American Journal of Economics and Sociology 42.2 (2006), 235–46. "Abstract. Vilfredo Pareto has been labeled a fascist and 'a precursor of fascism' largely because he welcomed the advent of fascism in Italy and was honored by the new regime. Some have seen in his sociological works the foundations of fascism. This is not correct. Even fascist writers did not find much merit in these works, and definitely condemned his economic theories. As a political thinker he remained a radical libertarian till the end, and continued to express serious reservations about fascism, and to voice opposition to its basic policies. This is evident from his correspondence with his close friends. There are strong reasons to believe that, had he lived long enough, Pareto would have revolted against fascism." — See also Stuart L. Campbell, "The Four Paretos of Raymond Aron," Journal of the History of Ideas, 47 (1986), 287–98.
6. ^ Daniel W. Rossides, Social Theory: Its Origins, History, and Contemporary Relevance (1998) p. 203
7. ^ Aron, Raymond. (1967)
8. ^ Homans and Curtis (1934)
9. ^ Eatwell, Roger; Anthony Wright (1999). Contemporary Political Ideologies. London: Continuum. pp. 38–39. 
10. ^ Borkenau, Franz (1936). Pareto. New York: John Wiley & Sons. p. 18. 
11. ^ Mandelbrot, Benoit; Richard L Hudson (2004). The (mis)behavior of markets : a fractal view of risk, ruin, and reward. New York: Basic Books. pp. 152–155.
12. ^ ^{a b} Renato Cirillo, "Was Vilfredo Pareto Really a 'Precursor' of Fascism?," The American Journal of Economics and Sociology 42.2 (2006), 235–46.
13. ^ Amoroso, Luigi (1938). "Vilfredo Pareto". Econometrica 6 (1): 21. 
14. ^ Wood, John Cunningham; Michael McLure (1999). Vilfredo Pareto : critical assessments of leading economists. London: Routledge. p. 331. 
15. ^ Cirillo, The Economics of Vilfredo Pareto (1978)
16. ^ Michael Mclure, Pareto, Economics and Society: The Mechanical Analogy 2001 online edition
17. ^ Vijay K. Mathur, "How Well Do We Know Pareto Optimality?" Journal of Economic Education 22#2 (1991) pp 172-78 online edition

Further reading

• Aron, Raymond. (1967) Main Currents in Sociological Thought: Durkheim, Pareto, Weber - Vol. 2 online edition; excerpt and text search
• Bruno, G. (1987). “Pareto, Vilfredo" The New Palgrave: A Dictionary of Economics, v. 5, pp. 799–804.
• Cirillo, R. The Economics of Vilfredo Pareto (1978)
• Eisermann, G.(2001). "Pareto, Vilfredo (1848–1923," International Encyclopedia of the Social & Behavioral Sciences, pp. 11048–11051. Abstract.
• 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
• Kirman, A. P. (1987). “Pareto as an economist" The New Palgrave: A Dictionary of Economics, v. 5, pp. 804–08.
• Osipova, Elena; Translated by H. Campbell Creighton, M.A. (Oxon) (1989) "The Sociological System of Vilfredo Pareto" in Igor Kon (ed.) (DOC, DjVu) A History of Classical Sociology Moscow: Progress Publishers pp. 312–336 http://su-ltd.mylivepage.ru/file/2715/6547_Kon_History_of_Classical_Sociology.zip 
• Tarascio, Vincent J. (1968) Pareto's Methodological Approach to Economics: A Study in the History of Some Scientific Aspects of Economic Thought 1968 online edition

Primary sources

• Pareto, Vilfredo (1935). The Mind and Society [Trattato Di Sociologia Generale]. Harcourt, Brace .

External links

• Further information from New School University
• Review materials for studying Vilfredo Pareto
• Vilfredo Pareto Biography at the Concise Encyclopedia of Economics. Library of Economics and Liberty, Econlib

Persondata
Name	Pareto, Vilfredo
Alternative names
Short description
Date of birth	15 July 1848
Place of birth
Date of death	19 August 1923
Place of death