The Anti-Pareto

 

1.  There was a period in my life when I got obsessed with Pareto. Why did I get obsessed with Pareto? Well, at the time, I had some vague notion of Pareto’s theories as the crackable code of neoliberal economics. Also, I love the name, Pareto. A beautiful name which should designate some resort locale on the Adriatic, where it is all luxe and beach towels – and instead, it designates this acerbic rightwinger. So, it makes me poetically indignant.

Where to start? I’ll start here.

2. Vilfredo Pareto has never been a well known name, outside of economics and a part of sociology. He has, however, entered popular culture due to his so called “80/20” law, a power law that is often used by conservatives to indicate that inequality is not caused by social arrangements but transcends them – is rooted, in fact, in human nature.

In many ways, Pareto, who lived during a time when the classical liberal order was dissolving, prefigured neoliberalism. He advocated for two theses that have become part of neo-liberal doctrine. The first is that inequality isn’t bad, poverty is: thus, growth is the way out of poverty, and the only real economic concern of the state. The other thesis, which he called the “circulation of elites”, is that family wealth – wealth attached, as it were, to the house – does not secure a specific elite over time. In other words, social mobility is such that the rich become poor and some of the poor become rich.

These two theses make up the apologetic for capitalism in our time. It is for this reason that taking a critical view of Pareto is a politically charged act.

It is one of the peculiarities of the secondary literature on Pareto that so few are interested in the sources from which he took his statistics to derive his  famous “law” of the distribution of income. Admittedly, Pareto himself simply articulated a power law in which the significant variable {a} could be a bit different. Still, he was very sure that he had stumbled upon a statistical relation that must, somehow, be rooted in human nature, and he claimed that he did so empirically: by looking at statistics about total income and its distribution in various countries. In other words, Pareto didn’t bring his power law to these stats, they brought the power law to him. Pareto used that law to attack socialistic schemes for equality. Go to twitter and advocate for equality, and [by a special power law I will entitle Gathmann’s law] before the string of replies is complete, someone will have invoked the 80/20 law, or some distorted form of it. It has become business school wisdom, which is where all truisms go to be shined up for perky MBAs to pour forth to the workers.

According to Jean-Sebastian L’enfant’s study of the Pareto law, Pareto viewed statistics from colonial Peru as an affirmation of what he had (supposedly) found in studying income distribution in Europe – his 80/20 law.

“Ainsi, lorsqu’il constate que sa loi peut tout aussi bien décrire la répartition des revenus au Pérou, à la fin du XVIIIème siècle 14, il n’hésite pas à y voir une confirmation et un motif de généralisation : “une coïncidence fortuite est possible mais peu probable, et il se pourrait qu’une même cause eût produit les mêmes effets observés” (Pareto, 1897a, 46). C’est en tout cas un indice supplémentaire que la distribution des revenus n’obéit décidément pas au hazard. [Thus, when he observed that his law could describe, as well, the distribution of incomes at the end of the 18^th century, he didn’t hesitate to see in this a confirmation and a motive to generalization: “a fortuitous coincidence is possible but not very probable, and it could be that the same cause produces the same observed effects.” In any case this was a supplementary index that the distribution of incomes did not obey mere chance.

This statement interested me. Knowing that statistics for colonial Peru, especially as they were available to a historian who was writing in the late eighteenth century in Britain, were unlikely to be extensive, I went to Pareto’s text. Pareto writes:

Curious information is furnished to us by W. Robertson on Peru, at the time of Spanish rule, at the end of the 18^th century. They sold there a certain [papal] bull, said to be from the crusades, and everyone bought it, Spaniard creole or mulatto, at a price fixed by the government.. the price of the bull varied according to the rank of persons.”

Robertson gives us the numbers of persons who bought the bull. We find here, approximately, the law that we saw presiding over the distribution of total income.”

Pareto then constructs a little table of figures derived from Robertson. It is all very neat. Yet when we look at what Robinson says, huge gaps appear in this account. It should be said Robertson uses the figures on the issuances of the bull to make an estimate at the population of Peru, since he has no census figure, (evidently he was not  familiar with the Peruvian census of 1740 – which he would not have had access to anyway in the 1790s). Even so, these figures themselves are shaky. In Robertson’s account, from whence Pareto derives his numbers, the reference source is not quoted, and Robertson falls back on numbers of copies of the bulls printed, not bought.  And one thing Robertson tells us straight out: the figures tell us nothing about the Indian population, since so few Indians bought the bull from the government,  even though he estimates that the Indians were perhaps the majority of the population. Other sources – not Robertson – have implied that there was a strong secondary market in the bula – it was, basically, a bull of indulgence. Thus, Indians may not have bought it from the government, but they did from salesmen who bought it from the government. So we are talking about a product that was bought both for consumption and for sale – which already tells us that we cannot use these figures as a proxy for income distribution, any more than we could use figures about television sets that mix up wholesale and retail sales. Robertson never gives his source for the sales of the bull, although he claims that he believes they are accurate. He gives an estimate for the Indian population as around 2,600,000 from another source before he gets to the bulls.

 “According to an account which I have reason to consider as accurate, the number of copies of the bull of cruzada exported to Peru on each new publication, is 1,171,953; to New Spain, 2,649,326. I am informed that but few Indians purchase bulls, and that they are sold chiefly to the Spanish inhabitants, and those of mixed race.”

Comparing Pareto’s source to what Pareto claims Robertson says, we do have to say that chance plays probably plays little role in the emergence of Pareto’s power law, here. What seems to play the biggest role is Pareto’s own obsession. The printing of these bulls, at different prices, from an indeterminate source, over a period of at least two hundred years, does not offer empirical confirmation except through the most hazardous of conjectures. We have Robertson’s numbers, at best, for the “last predication”, which is undated, although the selling of these bulls goes back to the sixteenth century. So what we have is the essence of an unsound method for making statistical analysis. Far from being an independent confirmation of the Pareto law, the Robertson quote seems to be a confirmation of a hermeneutic tendency: to assume the law and look for instantiations.

 

Yet I have yet to read any doubt about Pareto’s method for gathering his data. And perhaps his data set  from Italy is sound. Pareto’s leaping upon confirmation in his reading of a hundred year old text about Peru, in spite of its own author’s cautions, gives me pause, though.

3. In his General Sociology – I’m using the French version – Pareto writes of two categories of “new” man in the ranks of the governors. The one consists of those who spend nearly as much as they gain, and the other is “constituted by those who take away from their gains not only the amount needed for supporting their great expenditures, but still more, what they have constituted for their patrimony.” And he observes how the modern economy works in Italy: “in Italy, one can observe that almost all the great, recently constituted patrimonies come from government concessions, the construction of railroads, enterprises subvented by the state, tariff protections, and that in this way a number of people have elevated themselves to the ranks of first honor in the state.” (1471)

Although Pareto is the idol of the classical liberal school a la Hayek, his observation rings much truer than Hayek’s fantasy that there existed a golden liberal period in which the great fortunes were constituted by some pure operation of grace in the private sphere, ‘without Government interference.”

Of course, Pareto believed these new men were violating his optimization principle – which is why he could call down upon them the wrath of the economist, rather than the moralist, scorned. But from the political point of view, Pareto starts a unique and little followed critique of democracy by pointing out that democracies don’t, in fact, interrupt the process by which the governing class operates to aggrandize its position. Here, I think, our experience makes us think that Pareto must be right. As – to use the terms of Donzelot – capital lost its place as the distributor of all the world’s evils in the 1970s, and was succeeded by the “state”, an international democratizing movement sprang up, flowered, and, in the 2000s, experienced its decadence: for it was in the 00s that we discovered that bringing democracy to others had to be done, regrettably, by strangling it at home. And thus was completed the second moment of a-politicization of state functions: first, in the 90s, the state suddenly had no business ‘interfering’ in business; and second, in the 2000s, the citizens had no business in ‘interfering’ with the executives right to make and continue war. The disempowerment of the people was accompanied by a politics of scandal that intensified the feeling around meaningless symbols and incidents, crimes with no real scope, the chance remark captured by the open mike, etc.

Pareto’s idea of what might be called the position creep of the governing class is expressed like this:

“We see that, in sum, whatever be the form of the regime, the men who govern have on average a certain tendency to use their power in order to maintain themselves in place, and to abuse it in order to obtain advantages and particular gains, that sometimes they do not distinguish from the gains and advantages of party, and that they almost always confond with the advantages and gains of the nation. It follows from this: 1, that, from this point of view, there will not be a great deal of difference between different forms of regime. The differences reside in the background, that is to say in the sentiments of the population: there where the latter are more or less honest; 2 that the uses and abuses will be all the more abundant as the intromission of the government in private affairs is the greater; in the degree to which the matter to be exploited is augmented, what one can take away is augmented too; in the U.S., where one wants to impose morality for the law, one sees enormous abuses, errors which emerge where this constraint does not exist, or exists in the lesser proportions; 3 that the governing class tries to appropriate the goods of others not only for his own usage, but also for sharing them with the governed class which the governing class defends, and which assures the power to do so, be it by arms or ruse, with the support that the client gives to the patron; 4 that most often, neither the patrons nor the clients are fully aware of their transgressions of the rules of morality existing in their society, and that, even if they perceive it, they easily excuse it, be it that in the end, others do the same, or under the commodious excuse that the ends justify the means.” (1474-1475)

Pareto’s mixture of logic and history here is surely peculiar, as – if we concede that he is correct – it would seem to put into question just what are the ‘goods” of “others”. They would seem, in the end, to result from previous generations of government in which the same logical force applied. And so they are sanctified as private goods after a decent interval has dulled our sense of them as public thefts.

Around this corner, of course, we come to the idea of how those private goods are earned synchronically – and to Marx, with the idea of surplus labor value.

Of course, once one concedes that these 4 moments occur under every regime, throughout the existence of human society, we are less inclined to find the moral argument for not appropriating the goods of ‘others’ to the governed class – that mass of clients. And given that the making of wealth so often is the result of government concession – Pareto’s examples can be multiplied a thousandfold in today’s world of inflated and bogus IP – the virtuous others become such a shrinking part of the total that they are like the legendary hidden dozen just men that keep God from punishing the world – an invisible mass in the world’s visible masses.

4. “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.

 

5.  It is a tale often told by the economist, this one of Pareto optimization. The tale goes that, in the Pareto optimal state, we reach a sort of distributional heaven, in which no person can gain any utility without that gain being made at the expense of somebody else in heaven. But the tale contains a paradox, of the kind associated with Zeno. To advance to this state, we must move through Pareto superior arrangements. These arrangements subtly reverse the terms of the optimum. A Pareto superior arrangement is one in which one party – or shall we say the owners? – may gain utility, but without any other party in our heaven losing it. This, we are assured, improves the entire set – all of heaven rejoices when one sinner is forgiven – or when one of the archangels receives a nice golden parachute and stock options amounting to 400 million dollars.

This, of course, is the neo-liberal heaven on earth, and the dispensation by which our rulers rule us. It is, however, a curious idea. For one thing, the ‘gain’ of utility seems to come ex nihilo – surely we are far removed from the labor theory of value here. Ex nihilo, in bureaucrat-speak, is exterior – it is an exogeneous gain. If it were, after all, endogenous, then we would have to ask about who created it, which would lead us to the question of whether, indeed, the other party wasn’t losing utility here. Which brings us to the other perplexing moment in this paradise. For the assumption, here, seems to be that there is no future - it is all present states. Heaven indeed! We transcend time, in Pareto superior states. For the inequality that must hold between the parties is eternally static.

But if our heaven is not in eternity, but in the sublunar flux of time – if all things in this heaven are mutable – then we see that, indeed, what looks like no skin off the nose of the drudge – what does he care if the boss makes his 400 million, as long as the drudge himself makes enough to buy the entertainment center, the car and the house on easy credit terms of 9 percent per annum (with the creditor holding the right to readjust interest at any time)? – might actually not be such a good deal. Heaven has a flaw. The devil’s disciples, from Machiavelli to Marx, have noticed it. The flaw is called power. In fact, a part of the 400 million dollars might well be used to block the poor drudge’s socially upward mobility, by making the cost of entry into a higher class too expensive – say, by making college tuition too expensive, or dentistry, etc. It might even be that the 400 million dollar Moneybags sees that limiting the upward mobility of his employee can be a moneymaker in itself. He has to get to work, and nobody is buying that car. So the drudge has to buy the car, and the moneybags, with his investment in Tesla stocks, is the beneficiary.

And so on. La di da, we dance this dance as our lifestyle begins to seem less like a path to a better life for our kids and more like the fall of the house of Usher.