Vilfredo Pareto

The Italian economist Vilfredo Pareto was one of the leaders of the Lausanne School and an illustrious member of the ‘second generation’ of the neo-classical 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 neo-classical 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, Leon 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’ of income distribution. He 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 elite with another elite, the privileges and structures of power remaining intact. The struggle was not for a good society, but a squabble among elites 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 elite.

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 Das Kapital, 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 neo-classical, 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 elites, 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 elite 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 dascist) 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 Roy 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
– 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.: Mind and Society)
– 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