Pareto Optimality (1906)
Essentially, Pareto optimality describes a state of affairs in which resources are distributed such that it is not possible to improve a single individual without also causing at least one other individual to become worse off than before the change.
It provides those studying economics with a certain perspective and criteria for judging the efficiency of a distribution system. Additionally, this way of looking at economic efficiency and income distribution helped Pareto and other contemporary economists develop microeconomics as a field and discipline of study.
What Is a Pareto Improvement?
Related to the idea of Pareto optimality is that of a Pareto improvement. A Pareto improvement is a term used when looking at a distribution of goods within a system from the perspective of Pareto optimality.
A Pareto improvement is said to have taken place if a change is made in the distribution of goods or resources that results in at least one individual being better off than before the change while not making any other individual worse.
Another way of describing Pareto optimality is to describe any state as Pareto optimal when no Pareto improvement is possible. This effectively means that it is impossible to improve the condition of any single individual without harming the condition of another individual.
Weak Pareto Optimum Allocations
A weak Pareto optimum, which is also known as a WPO, is a distribution in which there is no alternate distribution that would cause each individual in the system to gain. Under this perspective, a change is considered a Pareto improvement only when an alternate distribution is preferred by the individuals in consideration. When considering Pareto optimality from this perspective, the previously mentioned standard Pareto optimum standard is then considered to be a strong Pareto optimum, or an SPO.
Pareto Optimality in Engineering
In addition to economics, the idea of Pareto efficiency has also had a considerable impact in the field of engineering. It is used to describe a range of choices as a Pareto set or a Pareto frontier. These choices are those that are Pareto efficient, and defining this set of choices allows engineers to make considerations within this set without considering the full range of parameters available to them. In computer science, algorithms that are designed to compute the Pareto set from a set of choices are referred to skyline queries or maximum vector problems.
Relationship to the Pareto Principle
Pareto optimality is often considered alongside the Pareto principle, but the two ideas are only tangentially related to each other. The Pareto principle was actually developed by Joseph Juran, a business consultant, who named the law after an observation made by Vilfredo Pareto. In 1906, Pareto observed that 20 percent of the population in Italy owned 80 percent of the land. Juran began to apply this as a rule of thumb as the principle of factor sparsity or the law of the vital few. Given the observation that this proportional distribution occurs frequently in nature, it is assumed to be desirable.
It is common for sales teams to observe that 80 percent of their sales come from only 20 percent of their products, that 80 percent of their sales result from 20 percent of their staff members and 80 percent of their revenue is from 20 percent of their clientele. Following this line of thinking, businesses use the Pareto principle to focus their efforts and resources on areas that are more likely to exhibit growth and productivity.
Legacy of Pareto Optimality
The importance of Pareto optimality results from its widespread use as a standard for comparing and judging outcomes. While Pareto optimality provides only a weak standard because it does not provide a mechanism for discerning between the relative efficiency of competing Pareto improvements, it offers standard judging criteria that many can comfortably accept in the areas of economics, engineering and business.
Vilfredo Pareto (1848-1923)
Vilfredo Pareto the Economist
Vilfredo Federico Damaso Pareto was an Italian economist who contributed seminal work to microeconomics, income distribution and land distribution in Italy. Best-known for his contributions to the field of economics, Pareto was a true Renaissance man, delving into diverse disciplines that included sociology, political science, philosophy, engineering and mathematics.
Born in Paris on July 15, 1848, Pareto was named Fritz Wilfried, reflecting his Genoese expatriate parents’ enthusiasm for events in Germany during that year of widespread European revolutions. They changed it to something more suitably Italian after their return to Italy 10 years later.
His formative years
While living in Paris, Pareto received a high-quality middle-class education, setting him up for his later academic achievement. Receiving his doctorate in engineering from the predecessor of the Polytechnic University of Turin at the age of 21, his later interest in economics and sociology grew out of his dissertation on the equilibrium of solid bodies.
After 20 years of working as a civil engineer, Pareto turned his focus to the social sciences after developing liberal political leanings during a period of frustration with the authorities in Florence. He was the manager of the University of Florence at the time.
A pivotal change
The deaths of both his parents by 1889 set Pareto free to make several radical lifestyle changes, quitting his job and marrying his impoverished Russian girlfriend, Alessandrina Bakunin.
After a few years of semi-retirement in Fiesole, he later moved to Lausanne, Switzerland, accepting the political economics chair at the university. During his self-imposed exile in his Fiesole villa, Pareto read voraciously in the social sciences, poring over works written in six or seven languages, eventually turning his attention to economics. His subsequent tenure at the University of Lausanne lasted many years and he remained in Switzerland until his death in Geneva on August 19, 1923.
Alessandrina abandoned him in 1902, but they remained legally married for many years because of the Swiss divorce laws at the time. He lived with his French lover, Jeanne Regis, in Geneva, marrying her a few months before he died.
Contribution to economics
Pareto was responsible for introducing several terms and concepts into today’s popular and social sciences vernacular, notably “elite” during his work on social analysis. He also contributed the 80-20 rule, stating that 80 percent of a society’s wealth is typically held by 20 percent of its population.
More importantly, Pareto’s engineering background shaped the way he expressed economic theory, relying on graphs, maps and statistical analysis to prove scientific points. While he carried this mindset into his later work, which influenced American sociologist Talcott Parsons in his development of his systems theory, Pareto transformed the field of economics from philosophical conjecture to a quantifiable science discipline.
His earlier liberalism soured in his later life, as Pareto disagreed vehemently with the Italian government’s handling of labour strikes and social reforms increasingly ran counter to his own views. From fiery liberal, Pareto became more and more an anti-socialist and anti-liberalist, and very close to a fascist in his last years.
In essence, Pareto came to believe that democracy was fundamentally unsustainable and that a power elite would always rise and dominate the lower classes. Benito Mussolini and other fascists of the 1920s and 1930s took their inspiration in part from his economic and social theories, but historians and Pareto scholars doubt that the economist was a fascist himself.