Vilfredo Pareto

Vilfredo Pareto.

Vilfredo Federico Damaso Pareto, (July 15, 1848 &ndash August 19, 1923) was an Italian sociologist, economist and philosopher.

Biography

Vilfredo Federico Damaso Pareto was born on July 15, 1848 in Paris, France. His father was an Italian civil engineer, his mother a French woman.

In 1870, he gained an engineering degree from what is now the Polytechnic University of Turin. His thesis 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.

For some years after graduation, he worked as a civil engineer, first for the state-owned Italian Railway Company and later in private industry. In 1886, he became a lecturer on economics and management at the University of Florence. In 1893 he was appointed a professor in economics at the University of Lausanne in Switzerland, where he remained for the rest of his life. He died in Lausanne on August 19, 1923.

Work

Some economists put the designation "sociologist" in inverted commas when applied to Pareto, because, whilst Pareto is often accorded this appellation, it would be truer to say that Pareto is a political economist and political theorist. Nonetheless, his work has important consequences for sociology and sociologists. His works can be neatly divided into the two areas: Political Economy and Sociology.

Political Economy

Pareto strongly criticized Karl Marx’s main “doctrine”. In his view, the Marxist emphasis on the historical struggle between the unpropertied working class — the proletariat — and the property-owning capitalist class is skewed and terribly misleading. History, he wrote, is indeed full of conflict, but the proletariat-capitalist struggle is merely one of many and by no means the most historically important:

“...The class struggle, to which Marx has specially drawn attention... is not confined only to two classes: the proletariat and the capitalist; it occurs between an infinite number of groups with different interests, and above all between the elites contending for power.... The oppression of which the proletariat complains, or had cause to complain of, is as nothing in comparison with that which the women of the Australian aborigines suffer. Characteristics to a greater or lesser degree real - nationality, religion, race, language, etc. - may give rise to these groups. In our own day [i.e. 1902] the struggle of the Czechs and the Germans in Bohemia is more intense than that of the proletariat and the capitalists in England....” ( Lyttelton, p. 86) .

Pareto (and his Lausanne School) concentrated on analyzing the relationship between demand and consumer preferences, between production and the profit-maximizing behavior of firms. The differential calculus and Lagrangian multipliers, rather than simple linear systems of equations, were their tools of choice. He replaced all the grand themes of Leon Walras with a single new one of his own: the efficiency and social optimality of equilibrium.

Pareto's Optimum

Pareto optimality is a measure of efficiency. An outcome of a game is Pareto optimal if there is no other outcome that makes every player at least as well off and at least one player strictly better off. That is, a Pareto Optimal outcome cannot be improved upon without hurting at least one player.

Much of modern social policy and welfare economics uses such a formula. If we restate the above definition, it suggests that an optimum allocation of resources is not attained in any given society when it is still possible to make at least one individual better off in his/her own estimation while keeping others as well off as before in their own estimation ( Alexander 1994 ).

Pareto’s Law and Principle

Pareto did also some investigation of the distribution of income in different economies and concluded that regardless of the ideology the distribution of income is of the negative exponential family, to be illustrated by downward concave curve, i.e. such that rises fast up from 0 on the intersection of horizontal X-axis ( where the wealth or importance of the sample elements: people, countries, etc. is arranged in decreasing order ) and vertical Y- axis ( where the cumulative percentage of the sample are charted ) to be losing its rising-rate as it continues absorbing elements on X-axis; eventually showing zero increase.

Thus, in Cours d'économie politique (1896, 1897), his main economic contributions was his exposition of the Pareto’s Law of income distribution. He argued that in all countries and times ( and he studied several of them: Italy, England, Germany, and the U. S. in great details ), the distribution of income and wealth follows a regular logarithmic pattern that can be captured by the formula ( that shows the above described graphical quality ):

log N = log A + m log x,

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 and, after his death, was captured and elevated to immortality by the famous 80-20 Pareto Principle, which was at the heart of the seventies quality revolution. It suggested, among others, that:

80% of outputs resulted from 20% of inputs,
80% of consequences flowed from 20% of causes, and
80% of results came from 20% of effort.

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 many future writings.

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 ( Alexander 1994 ) noting that human beings are not, for the most part, motivated by logic and reason but rather by sentiment. This very notion inspired the whole “behavioralist school” in the U.S. in 60s and 70s ( e.g. A.Tversky,D. Kahneman, Z.Grilliches et al., of which group Kahneman eventually won the Nobel Prize for Economics in 2005).

Pareto reasoned that the field of economics, especially in its modern form, had limited itself to a single aspect of human action: rational or logical action in pursuit of the acquisition of scarce resources. He turned to sociology when he became convinced that human affairs were largely guided by non-logical, non-rational actions, which were excluded from consideration by the economists. For this reason he attempts in his Treatise to understand the non-rational aspects of human behavior, omitting almost completely the rational aspects which he considered to be treated adequately in his economic writings.

Sociology

Trattato di sociologia generale, published 1916, 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).

An aspect of Pareto's theories which we shall examine here briefly is what he calls derivations, the ostensibly logical justifications that people employ to rationalize their essentially non-logical, sentiment-driven actions. Pareto names four principle classes of derivations:

1) Derivations of assertion; 2) derivations of authority; 3) derivations that are in agreement with common sentiments and principles; and, 4) derivations of verbal proof.

The first of these include statements of a dogmatic or aphoristic nature; for example, the saying, "honesty is the best policy." The second, authority, is an appeal to people or concepts held in high esteem by tradition. To cite the opinion of one of the American Founding Fathers on some topic of current interest is to draw from Class II derivations. The third deals with appeals to "universal judgement," the "will of the people," the "best interests of the majority," or similar sentiments. And, finally, the fourth relies on various verbal gymnastics, metaphors, allegories, and so forth.

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. On these two residues, he writes:

“... additionally, they are unalterable; man's political nature is not perfectible but remains a constant throughout history....” (Pareto 1916).

For society to function properly there must be a balance between these two types of individuals (Class I and II); the functional relationship between the two is complementary. To illustrate this point, Pareto offers the examples of Kaiser Wilhelm I, his chancellor Otto von Bismarck, and Prussia's adversary Emperor Napoleon III. Wilhelm had an abundance of Class II residues, while Bismarck exemplified Class I. Separately, perhaps, neither would have accomplished much, but together they loomed gigantic in nineteenth-century European history, each supplying what the other lacked.

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).

At the social level, according to Pareto's sociological scheme, residues and derivations are mechanisms by which society maintains its equilibrium. Society is seen as a system:

"....a whole consisting of interdependent parts. The 'material points or molecules' of the system ... are individuals who are affected by social forces which are marked by constant or common properties… when imbalances arise, a reaction sets in whereby equilibrium is again achieved....” (Timasheff 196 ).

One of the most intriquing Pareto theories asserts that there are two types of elites within society: the governing elite and the non-governing elite. Moreover, the men who make up these elite strata are of two distinct mentalities, the speculator and the rentier. The speculator is the progressive, filled with Class I residues, while the rentier is the conservative, Class II residue type. There is a natural propensity in healthy societies for the two types to alternate in power.

When, for example, speculators have made a mess of government and have outraged the bulk of their countrymen by their corruption and scandals, conservative forces will step to the fore and, in one way or another, replace them. The process, as we have said, is cyclical and more or less inevitable.

Towards of the end, even Pareto acknowledged that 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 (Alexander 194 ).

Criticisms and legacy

Pareto was not good at promoting the significance of his work and moved on to develop a series of rambling sociological theories that were later hijacked by Mussolini's fascists. It is worth to note that Trattato di Sociologia Generale (or The Treatise on General Sociology) first p ublished in English under the title Mind and society, its subsequent theories, and his lectures at the Lausanne University influenced young Benito Mussolini, and thus the development of the early Italian fascism (Mussolini 1925 :p.14). Likewise, Pareto himself never referred to the “80-20 Pareto Principle".

Legacy

To say that Pareto's economics have had a much greater impact would be to ignore the fact that Pareto turned to sociology when he became convinced that human affairs were largely guided by non-logical, non-rational actions, which were excluded from consideration by the economists. For this reason he attempted in his Treatise to understand the non-rational aspects of human behavior, omitting almost completely the rational aspects which he considered to be treated adequately in his economic writings.

During this “transformation” 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. Thus,Pareto efficiency, or Pareto optimality, is an important notion in economics with broad applications in game theory, engineering and the social sciences.

Pareto managed to construct a proper school around himself at Lausanne, including G.B. Antonelli, Boninsegni, Amoroso and other 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.

For practical management the 20-80 Pareto principle is important because ( among other things ):

A manager should focus on the 20 percent that matters. Of the things anybody does during the day, only 20 percent really matter. Those 20 percent produce 80 percent of the entity’s results. One should, therefore, identify and focus on those ( significant few ) things.
The principle can be seen as "good news" because “re-engineering may need to be apply to only 20% of a product range.
As 80% of the increase in wealth from long-term portfolios comes from 20% of the investments, only the 20% have to be analyzed in details. ……. and so on.

Publications

Pareto, V., Principii Fondamentali della Teorie dell' Elasticità, 1869.
Pareto, V.,"L'Italie économique", Revue des deux mondes, 1891
Pareto, V."Les nouvelles théories économiques",Le monde économique, 1892
Pareto, V.,Cours d'économie politique professé à l'université de Lausanne, 3 volumes, 1896-7.
Pareto, V.,The New Theories of Economics, 1897, JPE.
Pareto, V.,"Un' Applicazione di teorie sociologiche",Rivista Italiana di Sociologia, 1900(transl. in English as The Rise and Fall of the Elites)
Pareto, V., "On the Economic Phenomenon", GdE 1900, (repr.IEP 1953)
Pareto, V.,"Le nuove toerie economiche (con in appendice le equazioni dell' equilibrio dinamico)", 1901, GdE
Pareto, V., "Anwendungen der Mathematik auf Nationalökonomie", Encyklopödie der Mathematischen Wissenschaften 1903
Pareto, V., Manual of Political Economy , 1906 (Italian; French transl., 1909, English transl, 1971
Pareto, V., "L'économie et la sociologie au point de vue scientifique", Rivista di Scienza 1907
Pareto, V., "Economie mathématique", in: Gauthier-Villars, Encyclopedie des sciences mathematiques.
Pareto, V., Trattato di Sociologia Generale ( Treatise on General Sociology ), (transl. in English as Mind and Society, 1916.

References
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Alexander, J., “Pareto: Karl Marx of Fascism” , Journal of Historical Review, 14/5 ,September-October, 1994, pp. 10-18
Allais, Maurice. 1943
Hicks, John. 1939.
Hicks, John and R.G.D. Allen. 1934.
Lyttelton, A. (Ed.), Italian Fascisms: From Pareto to Gentile, Harper & Row, New York 1975, p. 86
Mussolini, B., My Autobiography, Charles Scribner's Sons, New York 1928, p. 14
Samuelson, Paul. 1947
Timasheff, N., Sociological Theory: Its Nature and Growth, Random House, New York 1967, p. 162

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