a post on the pareto rule - rerun

Pareto and petit bourgeois nietzschianism

“His belief in man's freedom of thought and action, whether in the marketplace, in the press or in the university lecture halls remained unshaken till the end of his life. His economic liberalism was similar to that of the classical school; he upheld the freedom of markets, defended the merits of a free competitive system and was responsible more than any other economist for turning economics into a positive science, devoid of ethical considerations.”

Such is the summing up of Pareto’s work by one of his modern admirers, Renato Cirillo. The last phrase, with its combination of the petit bourgeois and Nietzschian grandiosity, is meant seriously. But of course it is nonsense: you do not uphold the ‘freedom of the markets”, or think that “freedom” even has a meaning in relation to ‘markets’, unless you are jammed full of ethical considerations, unless they dictate your whole view of the social hierarchy.

Pareto optimization, or “efficiency”, has been enfolded in the neo-classical tradition as something like a law of economics – or at least that branch which deals with ‘welfare”. Now it may seem that efficiency has little to do with needs and satisfactions except as, at best, a measure of the number of steps involved in performing an action. But efficiency has been elevated from humble origins far above the other conceptual gods by the economists, who have found in it a mantra to defend every kind of inequality and turn the tables on the carpers. The classical formulation of the Pareto axiom is this, from Alan Peacock and Charles Rowley: “if any change in the allocation of resources increases the social welfare of at least one person without reducing the social welfare of any other person, then this change should be treats as improving total social welfare.”

It is a dog’s body of a formula, but of course one can see at a glance that – skipping lightly over the exploitation of labor, which we will now pretend never happens and has nothing to do with value – from a neo-classical point of view, this is nearly heaven. To justify the enormous fortunes of the wealthy on the grounds that they somehow earned it runs into the absurdity of ‘earning’ millions for sitting at a desk and making decisions, or for having come up with a nifty device once upon a time in one’s youth, etc. Far better, then, to derail the whole critique by boldly claiming that the rich not only harm no one, but improve the total social welfare every time the dividend check comes in the mail.

Pareto’s own formulation of this maxim is heavily mathematical, which is, of course, another strike in its favor. Mathematizing relations is a very handy way of avoiding the conceptual analysis of same.

Otherwise, of course, this oracular pronouncement seems unlike to help us understand almost any real situation of “allocating” resources.
Let’s go for the first and most obvious problem, which is the presumption that the social welfare is defined in terms of positive gains. As anybody knows, though, this is simply not a general rule for life. In fact, it is often the worst rule to follow. If the allocator of ice cream at the party allocates me a bowl and my friend, Mr. Cardiac Arrest, a bowl, his social welfare would be improved if I stole his bowl of ice cream. Such situations of limits and overindulgence, writ large and small, are all over our “social welfare”.

Which, of course, gets us to questions of the allocator. The allocator is a strange beast, having no self interest of its own, but begin able to read exactly what the self-interest of all individuals in the collective are. Even the neo-classicals back away from this idea – which is why they prepose the much more wooly idea that interest and aggrandizement of goods is the same. Of course, this shreds into little synchronic strobe lit bits the true temporal dimension of the social. That x get wealthy and I don’t may, at time 1, seem to be no skin off my nose – but it is one of the funny things about wealth that you acquire it to acquire power. Wealth is as much a part of a position vis a vis others as it a quantity of purchasing power. This means that there exists a distinct possibility that, at some time in the future, the wealthy man will use his wealth to raise the bar to entry for the non-wealthy man.

How, of course, is our magic allocator to know this? The neo-classical solution, of course, is to pretend that this allocator is dumb to such things, and make a virtue of that dumbness. It is dumb because the future is uncertain! This distributor of cards, this dealer behind the curtain, turns out to be, of course, the market. The, as they like to say, “free market”. And furthermore, we are to believe that this free market is exquisitely sensitive to our needs and wants. Like a tongue tied beau, it woos us with poetry. The market’s poetry happens to be prices.

Even granted that something like “a market” can be extracted from the thousands of real markets in existence in this world – which, I confess, I doubt – the idea that the market is extremely smart and extremely dumb at the same time is curious. In fact, as one of Pareto’s commentators sheepishly admits, Pareto just assumed Say’s law – that markets always clear. Say’s law is the black sheep of neo-classical economics – it dare not speak its name, but – of course – it is believed with the ardor of true love among their ranks.