Pareto’s Influence on the Development of Economics

Just as the preceding discussion of Pareto’s body of work was necessarily limited and selective, so too is the following discussion of his legacy. However, a more extensive treatment of Pareto’s influence on the development of economic ideas is available from Roberto Marchionatti (2006).

As Pareto’s intellectual debt to Walras was enormous, especially during the initial phase, the first point that must be made in regard to Pareto’s legacy is that he played a major role in popularizing and continuing the work of Walras’s programme in eco­nomic theory. Indeed, the early reaction to Pareto in Europe, most especially Italy, was in the context of the economic approach associated with the University of Lausanne. Notable in that regard is Enrico Barone, who is sometimes grouped with Walras and Pareto as a leading contributor to the Lausanne tradition in economics. However, it must also be added that Pareto’s influence on economics and public finance in Italy during the early twentieth century was to become so directly influenced by his works from the intermediate and final phases of his scholarship that it is legitimate to refer to a “Paretian School” within Italy (McLure 2007; Pomini and Tusset 2009; Pomini 2014), which is distinct in many important ways from the tradition that Walras initiated at Lausanne.

In the area of pure equilibrium theory, Pareto’s unique international legacy was perhaps most important in the 1930s when ordinal preferences were systematically inte­grated within utility theory by Hicks (1934, 1939), with the combined effect motivating Paul Samuelson (1938) to initiate the formalization of choice theory based on revealed preference. However, Pareto’s influence in pure theory also extends to: consumer theory, through the inspiration that he gave Slutsky (1915); pioneering and fundamental studies of economic dynamics by Luigi Amoroso, Giulio La Volpe, Eraldo Fossati, Guiseppe Palomba and Arrigio Bordin (Pomini and Tusset 2009; Pomini 2014); and investiga­tions into monopoly by Amoroso (Edgeworth 1922).

Pareto’s contribution to welfare studies is the one major issue that he continued to make original, important and enduring contributions across each phase of his scholar­ship: introducing the Pareto criterion, the compensation criterion and the first law of welfare economics in the first phase, albeit limited to the case of production; extending the analysis of efficiency to include exchange and formalizing the “surplus” approach to quantifying the gains from free competition in the intermediate period; and introduc­ing his sociological approach to issues of social welfare in the final phase. However, the legacy among the economics profession (especially outside Italy) from Pareto’s work in this area is mainly related to his contributions in the first two phases. Three examples are worthy of particular note. First, Enrico Barone’s classic study “Il Ministro della Produzione nello Stato Collettivista” (1908) was inspired directly from Pareto’s work. Second, the new approach to welfare economics associated with J.R. Hicks was directly inspired by Pareto’s work on ordinalism. Finally, and perhaps most importantly, a profound and original contribution to welfare economics was made by Maurice Allais (1975), who revised and extended Pareto’s surplus approach to the issue of welfare. Outside Italy, Pareto’s sociological works of collective welfare were not noticed by economists, which represented something of a lost opportunity as John Chipman (1976) and Vincent Tarascio (1968) suggest that Pareto’s sociological work on welfare antici­pates the social welfare function. However, in Italy, Pareto’s contribution to welfare studies from the final phases of his scholarship was not lost, with Pareto’s most direct followers attempting to integrate his economics and sociology through the development of a fiscal sociology.

Finally, in regard to empirical economics, interest in the Pareto distribution and Pareto’s law was almost immediate, starting with Rudolfo Benini (1897) in Italy, and Edgeworth (1896, 1897) in the English-speaking world. The interest, debate and contro­versy associated with the Pareto distribution and its relevance to a range of circumstances and the particular issue of inequality continued for more than half a century (Wood and McLure 1999, 4: 1-299), with the most recent historical review of that issue undertaken by Terenzio Maccabelli (2009). However, it is also relevant that the range of applica­tions for which the Pareto distribution is used has extended beyond the issue of income distribution to include finance (Mandelbrot) and the growth and distribution of firm size (Steindl) - as well as stochastic processes compatible with the generation of a Pareto distribution (Champernowne).

Michael McLure

See also:

Maurice Allais (I); Enrico Barone (I); John Richard Hicks (I); Lausanne School (II); Maffeo Pantaleoni (I); Evgeni Evgenievich Slutsky (I); Marie-Esprit-Leon Walras (I).