One of the founders of neoclassical economics in the late 19th century was the Italian economist and sociologist Vilfredo Pareto. It might seem that the musings of a neoclassical economist over a century ago would have little in common with the concerns of the Occupy protestors who recently set up camp in cities all over the world – but his work dealt with similar preoccupations, such as wealth distribution, social stability, ideology, and the role of protest.
Pareto, who was the son of an exiled Italian aristocrat and civil engineer, trained as an engineer in Turin (his dissertation on The Fundamental Principles of Equilibrium in Solid Bodies would later inform his thinking on equilibrium in the economy). He went on to become director of a railway company, then a steel company, but was also involved in liberal politics. A dedicated democrat, he attacked the Italian government for corruption and corporatism, and railed against excess regulation.
In 1889, after the death of his parents, he quit his job at the age of 41, married a young Russian girl, and moved to a villa in the country, where he began writing and giving public lectures on economics. The government reacted to his fiery speeches by having him trailed and closing down his lectures whenever they could. Pareto was not intimidated (he was an expert marksman and swordsman which may have helped), and his work eventually got the notice of the economist Léon Walras, who offered him a position at the university in Lausanne. Pareto continued to support radicals and socialists, such as those who took part in the May 1898 riots in Milan, which resulted in the deaths of hundreds of people. However he began to believe that his youthful idealism had been based on emotion rather than logic, and that all human societies were inherently corrupt and irrational. (His cynicism about human motivations was boosted in 1901 when he returned home from a trip to find that his wife had run off with the cook and 30 cases of possessions.) As he wrote to Walras, “I give up the combat in defense of [liberal] economic theories in Italy. My friends and I get nowhere and lose our time; this time is much more fruitfully devoted to scientific study.”
In 1906 Pareto published his Manual of Political Economy which elaborated on Walrasian equilibrium – the idea that a market economy automatically stabilises around an equilibrium set of prices. His concept of Pareto optimality – defined as a state in which any change that makes a person better off will reduce the wealth of someone else – would also play an important role in neoclassical theory. In the 1960s, the economists Kenneth Arrow and Gerard Debreu argued that under certain (highly artificial) conditions, free markets lead to a Pareto optimal outcome.
Any change such as government regulation will only detract from this ideal equilibrium. Pareto optimality was soon adopted as a plank in the Cold War ideological battle with the Soviet Union.
Pareto is best known today, though, for his empirical discovery of the so-called 80-20 rule. He observed that in Italy and other countries, 20 percent of the people held about 80 percent of the wealth. The distribution was also scale-free, in the sense that there was no typical degree of wealth: most people had little money, but a few were extremely rich.
This law, he wrote, “can be compared in some respects to Kepler’s law in astronomy; we still lack a theory that may make this law of distribution rational in the way in which the theory of universal gravitation has made Kepler’s law rational.” Today, the pattern still holds, but it has become even more skewed.
Globally, 80 percent of the wealth is now held by just 10 percent of the world adult population, rather than 20, according to a 2006 UN report. And as the Occupy protestors are fond of pointing out, the biggest gains have been made by the top one percent.
Foxes and lions
In 1907, Pareto resigned from the university, but continued to write. He retired to his villa near Lake Geneva where he lived with a woman 30 years his junior called Jeanne Régis (he was not allowed a divorce under Italian law), a large stock of the finest wines and liqueurs, and 18 Angora cats. In his million-word Treatise on General Sociology, he argued that human behaviour was driven by irrational desires, which we then justify by ideologies. So to understand how society works, we need to focus not on logical theories, but on the hidden drives and emotions running underneath the surface.
Pareto classified these drives into several types, the most important of which were innovation (Class I), and conservation (Class II). While everyone was motivated by a mix of these classes, one could nevertheless speak of “Class I” types, who are clever and calculating, and “Class II” types, who are slower, more bureaucratic, and dependent on force. In the terminology of Machiavelli, Class one corresponded to foxes, while those in Class two were lions.
The composition of the elite changed with time, in a process that Pareto called the circulation of the elite. If too many innovative and intelligent foxes are in power, then the conservative lions will plot a takeover. Conversely, if the elite is dominated by lions, then it will become overly slow and bureaucratic and the foxes will attack. This circulation is a natural feature of the system; but if it becomes blocked, so that “simultaneously the upper strata are full of decadent elements and the lower strata are full of elite elements,” then the social state “becomes highly unstable and a violent revolution is imminent.”
Pareto demonstrated his argument with a number of case-studies, but perhaps the best illustration was provided by Mussolini’s new fascist government. Mussolini liked the idea of robust lions taking over from weak and corrupt foxes, and appointed Pareto Senator. While Pareto does not seem to have been a fascist, his belief in free enterprise and a small but undemocratic state was certainly consistent with Mussolini’s early policies.
Today, Pareto’s sociological ideas are not taken as seriously as his insights into the distribution of wealth, and it doesn’t seem helpful to classify street protesters or Wall Street bankers as foxes or lions. But if he were around today, I am sure he would still be monitoring and writing about wealth distribution, social stability, and the circulation of the elites.
As he knew, if the circulation becomes blocked, that’s when the trouble begins – and the ideologies break down.
David Orrell is a mathematician and author of Economyths: Ten ways economics gets it wrong