Vilfredo Pareto, 1848-1923

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 moderately 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 into an Italian aristocratic family in the year of people's revolutions, at its epicenter -- Paris, 1848.  His father, Raffaele Pareto, a Genoese 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 Genoa in 1852 where his father became a French teacher at a local school.  Around 1859, they moved to Casale Monferrato (Piedmont), where his father had another teaching appointment in accounting and agriculture at the Istituto Leardi. In 1862, Pareto's father took a civil service job in the ministry of agriculture, industry and trade in Turin, the Piedmontese (and now Italian) capital. Later that same year, when the provisional capital was moved to Florence (Tuscany), the marchese was forced to follow.  But his son stayed behind in Turin to complete his studies. 

Vilfredo Pareto followed a conventional schooling, guided by his father. He obtained his Licenza de maturita from the Royal Technical Institute in Turin (1864), and proceeded to enroll at the University of Turin, where obtained a degree in mathematics and physics in 1867.  His first publication (1866) was published in his father's journal.  After a year of military service, Pareto signed up to take an advanced degree in civil engineering at the polytechnic institute of Turin. As his thesis on solid bodies makes evident, it is here Pareto acquired his knowledge about mechanical equilibrium that were to characterize his later contributions to economics. 

After graduating at the top of his class in 1870, Pareto moved to Florence to take up a job as an engineer with the local branch of the Rome Railway Company (Società Strade Ferrate Romane), which had just been created from a merger.  The annexation of Rome -- the final step in the unification of Italy -- happened that very year and, naturally, much debate swirled around the political future of the new nation.  A radical democrat and "classical liberal", Pareto had been energized in his youth by the liberal ideals of Cavour -- and was consequently horrified at the Bismarckian-style interventionist state that was being called for by "modern" Italian politicians.   The strongly-opinionated Pareto was itching to get involved and speak his mind.  In 1872, he delivered his first address to the Accademia dei Georgofili, an agricultural economics research institute in Florence, defending radical parliamentary democracy and universal suffrage, while condemning Bismarckian paternalism.  It was here that he made the acquaintance of the celebrated Peruzzi family of Florence.  Pareto began attending the Peruzzi salons and imbibing in the political and intellectual milieu of post-risorgimento Italy.  

In 1873, Pareto quit his humdrum job to and moved to San Giovanni Valdarno to take up a more responsible position with a local iron and steel company (Società per l'Industria del Ferro).   It was in dealing with the demands and  complaints of iron workers, that Pareto's interest in economics really picked up.  During this time, he took many business trips to Germany, France, Belgium, Austria, etc. and soaked up not only the politics, but also the local economic and sociological literature. He became a founding member of the "Società Adamo Smith" in Florence, launched by Ferrara in 1874.

Pareto's first venture into economics came in 1877, in a celebrated address to the Accademia dei Georgofili. Pareto lashed out at the German Historical School -- then enjoying a wave of popularity in Italy after the fall of the Cavourist liberal government in 1876 and the installation of a more interventionist  government under Agostino Depretis.  The paternalistic politics, State interventionism and anti-theoretical stance of the Historicists rubbed against practically all of Pareto's instincts.  He also saved some nasty words for Auguste Comte, whom he regarded as a "precursor" to the Historicists, and defended the scientific claims of Classical economics. Pareto invoked Herbert Spencer's theory of social evolution as a response to what he perceived to be their nihilistic "historical conditionality".

In 1880, the Valdano iron and steel concern was reorganized into the Società Ferriere d'Italia and Pareto himself elevated to managing director.  Released from menial duties, Pareto had more time to reflect -- and, now as director, more issues to reflect upon, particularly with regard to government regulation and worker conditions.

Around this time, Pareto decided to get into politics himself.  In 1877, he had been elected to the municipal council of Valdano.  Now, in 1880, Pareto decided to run for national parliament as the radical party candidate for Montevarchi.  He lost.  He tried again in 1882, this time as a deputy for Pistoia.  He lost again.  

Pareto's up-close-and-dirty experience with the mechanisms of political double-dealing and patronage embittered him permanently.  Henceforth, Pareto would take up the politics of resentment against the "corrupt" system.  He derided the Italian parliamentary system as a sham, a "pluto-democracy", a fig leaf for the naked power of the nobility and the wealthy.  In the newspapers and magazines of the day, Pareto disgustedly  identified and denounced the vested interests that lay behind new waves of economic regulation, protectionism and nationalization.  In 1886, Pareto came out strongly in another lecture to the Accademia, denouncing the hypocrisy of government for outlawing worker initiatives, like a minimum wage and the right to strike, on the grounds of laissez-faire, and yet happily putting up tariff walls and other protections for the profits of the rich.  Urged by his friends to run for a seat again, Pareto would reply, "I prefer to discover shame rather than be a part of it." 

In 1887, the Belgian economist Gustave de Molinari spotted Pareto's tireless polemics in the press and invited him to submit articles on the Italian situation to the prestigious Journal d'economistes. Pareto happily acceded.  Through Molinari and the Journal, Pareto came quickly into the heady orbit of the French Liberal school.

In 1889, after the death of his parents, Pareto changed his lifestyle completely.  He inherited the marchese title, but he never used it.  Instead, he quit his job, married a penniless girl from Venice, Alessandrina Bakunin (of Russian descent, but apparently unrelated to the other Bakunin), and, in 1890, moved to a villa in Fiesole.  His engineering career abandoned, Pareto sat down to become an "intellectual".  

From his retreat, Pareto increased the frequency of his polemical articles -- which took on a particular urgency after the ascension of the openly Bismarckian government of Crespi in 1887. His alarmist articles were followed up by public lectures at a working man's institute and putting out feelers to the socialist cause.  He was quickly targeted as a troublemaker by the authorities.  Trailed by police, intimidated by hired thugs, his lectures were closed down and his applications for teaching posts blocked. 

Pareto's activities now brought him to the attention of Maffeo Pantaleoni, then Italy's leading Neoclassical economist, and a friendship sparked between the two men..  In 1891, Pareto published an article in the Revue des deux mondes, which favorably cited an article by Pantaleoni.  The content of the article -- and the association between the serene academic and the revolted engineer -- came to the attention of the authorities and Pantaleoni was promptly dismissed from his teaching job at Bari.  

Still, the two men only got closer.  Pantaleoni introduced Pareto to economic theory, particularly the Walrasian strand. Pareto, a quick learner with exceptionally good mathematical aptitude, took to it immediately.  Impressed, Pantaleoni invited Pareto to contribute a monthly column, the "Cronache", to his economics journal, the Giornale degli economisti. There Pareto demonstrated his new mastery of economics -- although he would also use the column to continue to take not-so-sly shots at the Italian government.

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."    Although courteous and respectful to each other in public, Walras and Pareto did not get along very well.   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 a caustic, disputatious, aristocratic cynic. 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. 

Doubtlessly, there were many people in Italy who were glad to see Pareto gone and 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 columns to the GdE and in foreign journals. 

In 1893,  Pareto published an introduction to an abridged Italian edition of Karl Marx's Capital.  Pareto applauded Marx's theory 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 Oz-like conclusion and wrapped it all up with a wholesale denunciation of the socialist program. "Any attack on economic freedom, from wherever it comes, is an evil.  Whether this freedom be violated in the name of bourgeois socialism or that of the people's socialism, the effect is the same -- a destruction of wealth which, in the end, falls on the poorer, more numerous part of the population, increasing its sufferings." (Pareto, 1893).

Pareto was attentive to his academic duties and produced a superb two-volume edition of his lecture notes at Lausanne, the Cours d'économie politique (1896-97).  Pareto opens the first part, on "pure economics", immediately with a suggestion to drop the worn-out term "utility" (which has connotations of "well-being") and replace it instead with "ophelimity" (which is simply meant to capture purely subjective "desire", which may or may not contribute to a person's "well-being").  Preferences was what Pareto wanted to get at.  For "marginal utility", Pareto substitutes the term "elementary ophelimity".  

In the Cours, Pareto relegates math and diagrams to footnotes. His first depiction of a utility function is not additively separable, but the general one, U(x₁, x₂, ..., x_n) from Edgeworth.   He notes that a person is only conscious of the marginal, and never the total, utility (§28; this argument was made earlier in a 1892 GdE article).   Pareto then steps back and adds some cautionary notes about scope and limits of economic science, e.g.  it does not cover "motive", but only a small facet of behavior in a social context and other motives and factors cannot be ignored.  He also repudiates any relationship with utilitarian philosophy.  From there, Pareto proceeds quickly to exchange.  He assumes price-taking behavior -- which he identifies with "free competition". He then takes a two-agent, two-good example and derives Gossen's law for exchange via the method of Lagrangian multipliers  -- reminding us, in the process, that utility is not comparable across people.  No demand curve is derived, although reference is made to the possibility of it (in a reference to a 1892, GdE article).

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.  

One of the contributions of the Cours 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.

Another contribution of the Cours was Pareto's criticism of the marginal productivity theory of distribution. Pareto pointed 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, . 

The Abyssinian debacle in 1896 and string of political corruption scandals led to violent street demonstrations against the Italian government.  In a pre-emptive attempt to avoid a mass uprising, the authorities clamped down hard on liberals, socialists any other potential troublemakers.  Outspoken journalists and academics, like Pantaleoni, were dismissed and exiled. Pareto's "Chronace"  were terminated in 1897.  In Switzerland,  Pareto assisted and even housed many Italian liberals and socialists that had been chased out of Italy (particularly after the 1898 May riots).  When the Dreyfus affair broke out in France, Pareto put his pen to work against the anti-Semitic French military authorities. 

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, Pareto concluded, 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 governing.  

Pareto resumed his task as political polemicist -- 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 Marxism.  Marx had sold a delusion, Pareto declared.  The 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, that moved him out from 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 curves of Edgeworth (1881) are 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 mislabeled) as the "Edgeworth box". 

Like Irving Fisher (1892), Pareto embraced 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 divorcing his first wife.

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 what he calls 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 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 posthumous 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 broke out between the Paretians and the Austrians. 

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