Vilfredo Pareto - Expensivity

Pareto’s Early Life and Education

Vilfredo Federico Pareto (1848–1923) was born in Paris, France. His father, Raffaele, hailed from an aristocratic family from Genoa in what is now Italy. His mother was French.

Raffaele was a liberal civil engineer who—along with other Italian republicans and nationalists, such as Giuseppe Mazzini—was obliged to flee his native region of Liguria following the failure of the pan-European uprisings earlier in the revolutionary year of 1848.

Pareto’s birth name was Wilfried Fritz, given to him by his parents in honor of the radicals then fighting for liberty across the German-speaking states. The family reverted to the Italian form of the boy’s name upon returning to Italy in 1858.

Pareto’s home environment was solidly middle class and he received an excellent education, attending the newly created Istituto Tecnico Leardi [Leardi Technical Institute] in the Piedmont region, not far from Turin. Still in operation today, Pareto’s alma mater is the oldest technical school in Italy.

For his higher education, Pareto attended the Turin Technical School for Engineers (now the Polytechnic University of Turin), where he earned his doctorate in 1869.

Pareto’s doctoral dissertation was entitled “The Fundamental Principles of Equilibrium in Solid Bodies.” This early work in the analysis of physical equilibrium conditions paved the way for his later work on equilibrium conditions in economics and sociology.

Pareto’s Career

After graduating, Pareto went to work as a civil engineer for the publicly owned Italian Railway Company. Later, he switched to the private sector, eventually becoming manager of the Iron Works of San Giovanni Valdarno Iron Works, and then general manager of Italian Iron Works.

Pareto did not begin to publish work in political economy until he was over 40 years old. At first, he supported a fiercely classical-liberal position, criticizing any and all government intervention into the operation of the free market. Gradually, he moved to the more nuanced position for which he is known to history.

In 1886, Pareto was appointed a lecturer in economics at the University of Florence, with a co-appointment in business management.

In 1893, Pareto took up the chair in political economy formerly occupied by Léon Walras at the University of Lausanne in Switzerland. He remained at Lausanne for the rest of his life.

Pareto’s Ideas

Pareto is important to the history of economic thought for three chief reasons.

First, Pareto was one of the first thinkers to apply the new discipline of sociology to economic problems in a systematic way. Conversely, he also applied economic analytical tools (some of which he developed himself) to sociological problems.

Second, Pareto is known as an early advocate and practitioner of formal, mathematical modeling in political economy. For example, contemporary game theory—as articulated by John Nash and others—is essentially a refinement of the equilibrium theory originally developed by Pareto in the 1890s and early 1900s.

Indeed, it has been observed that Pareto’s books on economics—replete with statistical tables and mathematical equations—are the first ones in history to have the appearance of the textbooks in use today.

Finally, Pareto is remembered for articulating several empirical relationships, which contributed much to the development of microeconomics as a discipline.

One of these relationships became known as “Pareto’s principle,” which states that “80 percent of the consequences derive from 20 percent of the causes.” Pareto came to this conclusion by observing that, in Italy in his day, roughly 80 percent of the land was in the hands of 20 percent of the population.

The relevance of Pareto’s principle is the following. If the principle is correct, then as economic theory ought not to assume as a premise for calculation an equal distribution of goods, since goods are not in fact distributed equally, but rather according to Pareto’s principle (AKA “Pareto distribution”).

Another relationship first observed by Pareto came to be known as “Pareto efficiency” (or “Pareto optimality”). This is a situation in which no possible action (according the prevailing rules) can make anyone better off without at the same time making someone worse off.

In other words, Pareto efficiency is a measure of the degree to which a situation is “Pareto dominated,” meaning the degree to which it departs from the ideal of being mutually advantageous (or “win-win”).

Thus, a Pareto-dominated (or “win-lose”) situation is, by definition, one in which the possibility of “Pareto improvement” exists—meaning a closer approximation to the ideal limit of “win-win”—usually, by means of some adjustment to the rules.