Wednesday, 7 November 2012

Economist of The Week - Vilfredo Pareto

In present day economics, the name Pareto sound familiar to many - this Italian economist is chiefly known for the Pareto efficiency, named after him. Yet the field of economics owes much more to this Italian economist; he was one of the first to use the tools of mathematics, statistics and the scientific method in a discipline theresofar dominated (except for the German School) by the Adam Smith heritage of inductive, theoretical approach.

Source: Wikimedia

Early life

It was not just Pareto's ideas which were revolutionary around him - he was born in 1848 in Paris, the city experiencing a revolution against Louis Philippe I, the "royal citizen" the same year. More to that, his parents were Italian exiles from the city of Genoa - originally from a noble lineage, Vilfredo's parents embraced Mazzini's ideals of an independent, unitary Italian republic. His name (unusual for an Italian) is also a consequence of this; his original name was Wilfried Fritz, to honour the German revolutionaries of 1848. 


Pareto's family moved back to Italy in 1858 - by then, the Risorgimento, the Italian unification process was well on it's way, and his parent's views were no longer considered radical (although whether exactly this was their motivation for moving back is uncertain). In Italy, his name was changed to Vilfredo, and he received high-quality education in a middle-class environment. When he came of age, he began to study engineering at the Polytechnic University of Turin, where he graduated in 1870. His thesis was entitled "The Fundamental Principles of Equilibrium in Solid Bodies". Notice the term equilibrium? It is this dissertation to which his later interest in economic equllibrium is generally traced back to.


Upon graduation, it didn't seem like at all that Pareto's career was to be an economic one - rather, he worked for the state-owned Italian Railway Company as a civilian engineer, and later in private companies.
His shift from being an engineering to the field of economics happened gradually; initially, it was his parents' political heritage which influenced him the most. However, as he rose higher and higher in the ranks of corporate bureaucracy, he became the director of the Rome Railway Company - and it was these management and business experiences which lead him to delve more and more into the field of economics, not unlike David Ricardo a century earlier.

Change of regime, change of lifestyle

In 1876, the reigning right-wing, business-friendly, isolationist (hence, basically classical liberal) government was toppled by a series of moderate, or left-wing governments which increasingly became more militarist, statist and regulationist as time advanced, not to mention the persistent cronyism of Italian politics and business management. Pareto soon became a critique of this new regime - and since his attempt to change the regime from the inside (a run for a Florence constituency) failed, he became more and more radical, and cynical in this opposition, slowly beginning to condemn his parent's legacy.
The real change only happened in 1882 however, when his father died - starting from this point, Pareto became more and more vocal of his dissatisfaction, and began to pursue a more active role. In 1886 he became a lecturer on economics and management at the University of Florence. And in 1889, after his mother's pass, Pareto decided to change radically.

A new, scholarly life

At the age of 41, Pareto quit his top-management job, married a Russian run-off girl from Venice, and relocated from Florence to a villa in the countryside. There, he pursued a life of reading - but don't imagine that he has suddenly given up on Italy; on the contrary, he began to publish a long series of violent articles against the government, sometimes accompanied by more scholarly pieces. (Meanwhile, he translated classics, and read in six languages - so he was more than educated for a semi-political journalist of any age.)


While the concept's associated with Pareto include an index, a chart, a law, an efficiency, a distribution and a principle (which all will be covered in a later post), his most important discovery was the Pareto efficiency.

Source: Wikimedia
Imagine an economy where the only two goods produced are guns and butter. Since resources (manpower and capital to build and man factories, in this case) are finite, the economy has to make a choice between the goods. Eg. starting from the point B, if the country wished to produce more butter, they'd have to sacrifice their output of guns. The resulting graph is called the production possibility frontier, and all points on this blue line are Pareto-efficient. The points B,D,C all represent viable choices for the economy. the point A however, is Pareto-inefficient; people sacrifice more gun production than they'd need to, hence a part of production capability goes unused. The point X, however, is out of reach for this economy - it's outside the production possibility frontier.

Later life and death

In 1891, Pareto was introduced to the renowned French economist Léon Walras; not long afterwards, Walras became seriously ill and Pareto took over his lectures and position as head of political economy at the University Lausanne. While he continued his crusade on the Italian government, he also became more of a scholar; it was here the majority of his scientific pieces were published. A fortunate inheritance from an uncle allowed him to live as he wished for the remainder of his life; yet it was during these years that he became disillusioned not only with Italian politics, but the concept of democracy as a whole, and drifted more and more towards - though involuntarily - becoming one of the "ideological fathers" of Mussolini's Fascism. In fact, when the Duce came to power in 1922, he showered Pareto in medals - to the disdain of the venerable economist, who also turned down an offer for a place in the Italian Senate. He died in 1923 - in an age dominated by a new era of economics, but an age which he started to initiate.



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