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Pareto and pure economics: analyses subsequently accepted and others neglected

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Abstract

Pure economics, as presented by Pareto in the Manual of Political Economy, has only a scientific purpose to be evaluated according to the agreement with reality, takes into account only economic actions, and its object is the determination of equilibrium, represented by the compatibility of agents’ choices. The choices depend on the agents’ tastes (preferences), the obstacles (constraints) to which they are subject, and the conditions in which they operate. Pareto’s pure economics does not have the purpose of determining prices, it is therefore not a theory of value, since exchanges can have variable prices. Pareto distinguishes agents into three types: those without market power whose choice is obliged to belong to a pre-assigned path (constraint), agents with market power who impose to the first type agents a path, and agents who represent the socialist state. The two main contributions introduced by Pareto in pure economics and subsequently accepted are discussed. They are the adoption of the ordinal function of utility and the notion of Pareto optimum. The general equilibrium theory presented by Pareto does not consider only, or even principally, the competitive equilibrium, but also includes other market rules, such as monopolies, duopolies, cartels, and the collectivist economy. Particular importance is given by Pareto to production with big overheads, which determine a decreasing average cost. The analysis proposed by Pareto anticipates many results which were successively introduced in the economic literature.

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Notes

  1. Pareto uses the term ophelimity for reasons already indicated in the Cours 1896–1897 and synthetically in Chap. III, § 30; today utility is commonly used. Ophelimity and utility as synonyms in this paper, even if not they were such for Pareto.

  2. Pareto sometimes applies to ordinal utility, especially when he considers its second and third derivatives (for example, in the App.Fr. § 47), properties that have meaning only for the cardinal one. In this regard, and on the question of whether Pareto is completely ordinalist or has remained substantially cardinalist, an issue on which there is a wide diversity of opinions, see, for example, Bruni and Guala 2001.

  3. For instance, Mas-Colell, Whinson and Green 1995, Chap.I, pp.5–14.

  4. In the modern representation of the competitive general equilibrium, agents are price-takers and the theory of value is sought: for example, Debreu 1959.

  5. On general equilibrium theory without prices, see Gay 2006.

  6. The analysis of the collectivist state provided by Pareto had been in some ways preceded by von Wieser 1889 (1893), who, however, was only interested in showing how it is necessary to charge a cost to the use of capital goods also in this type of economy, and it was followed by the famous article by Barone 1908 (2012), based on Pareto’s approach.

  7. For instance, Debreu 1959 and Mas-Colell et al. 1995.

  8. I presented the problem of dynamics, also considering in detail the confusion between “static” and “stationarity” prevailing until the 1930s, in Montesano 1972 (2012).

  9. In this regard A. Zanni E.N.3 in Pareto 2014.

  10. On the distribution of incomes as obtained and formulated by Pareto, see Pareto 1896-7, §§ 950–972, and Pareto 1967. Chipman 1976, 1999, Chap. 4.gives an accurate presentation of Pareto’s research on this distribution, the discussions that arose (in particular, with Edgeworth), and the subsequent research.

  11. See, for instance, Gabaix 1999.

  12. See, for instance, Ijiri and Simon 1975.

  13. Pareto introduces in the App.Fr. § 5 the marginal rates of substitution (without giving them this name) by writing: “we shall therefore seek to determine by what positive amount, \({\Delta _1}x\), the variable x would have to increase in order to offset the decrease represented by the negative amount \(\Delta y\); in the same way, we shall determine the \({\Delta _2}x\) that corresponds to \(\Delta z\), etc.”

  14. An economist, before Pareto, who indicated the presence of characteristics of the utility function that are of no use in economics, including cardinality, was Fisher 1892; in particular in Part II § 8 (p.89). Marchionatti and Gambino 1997 present the evolution of the Paretian approach to utility, and the comparison with Fisher statement.

  15. Considering a price-taker agent, the demand functions represent the choices, and the first author to introduce the conditions of integrability for this situation was Antonelli 1886. Hurwicz 1971 provided an exhaustive analysis of the integrability of demand functions.

  16. Montesano 2006 and Scapparone 2006 and 2009 on this aspect of Pareto’s analysis.

  17. These conditions are indicated in a simple way by Montesano 2022.

  18. Pareto is not at all clear, as Allais 1973; pp.1072–1076, points out.

  19. As, moreover, already indicated by Debreu 1951.

  20. For instance, Mas-Colell et al. 1995; p.308.

  21. Pareto 1913 and Trattato di Sociologia 1936 (§§ 2128–2139).

  22. See, for instance, Mas-Colell et al. 1995; p.825, where they write: “In this section we assume that the policy maker has an explicit and consistent criterion to carry off this task [i.e., to choose the social policy]. Specifically, we assume that this criterion is given by a social welfare function \(W(u)=W({u_1},...,{u_I})\) that aggregates individuals’ utilities into social utilities.” In the footnote, they add: “This approach to welfare economics was first taken by Bergson (1938) and Samuelson (1947)”, without however indicating Pareto’s anticipation. Pareto’s anticipation is noted by Chipman 1976, 1999, Chap. 1.

  23. I examined this market regime, overlooked by the economic literature, in Montesano 2012.

  24. There is certainly no lack of analyses in the economic literature concerning productions with big overhead costs. See, for example, Hotelling 1938; Boiteux 1956 and Mosca 2008. Dupuit 1844 was probably the first economist to deal with this problem.

  25. For instance, a global analysis is in Debreu 1959; pp. 90–97.

  26. Stationary price expectations are, for example, assumed in the cobweb theorem, the history and analysis of which is described by Mordecai 1938.

  27. Walras does not explicitly consider expectations when he uses them in the theory of capitalization and credit. However, he writes equations that use stationary expectations: Walras 1900 (1954) Eq. (8) in § 249 of the IV ed. In this regard Montesano 2008; p. 88.

  28. One of the first economists to introduce expectations in the theory of general equilibrium was La Volpe 1936 (in this regard, Montesano 2018b). La Volpe anticipates Hicks 1939 both about expectations and the temporariness of static equilibrium. Moreover, the rediscovery by Hicks that static equilibrium is temporary does not mean that this was not already the case for Walras and, above all, for Pareto: in this regard, Donzelli 1986; pp. 264–268 and 404–406.

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  1. Bocconi University, Milan, Italy

    Aldo Montesano

  2. Accademia Nazionale dei Lincei, Rome, Italy

    Aldo Montesano

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Pareto’s economic theory of Manual is presented showing all principal characters and innovations and clarifying some obscure treatments.

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Correspondence to Aldo Montesano.

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Montesano, A. Pareto and pure economics: analyses subsequently accepted and others neglected. Int Rev Econ (2024). https://doi.org/10.1007/s12232-024-00462-x

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