Pareto’s Law: Understanding Inequality

Economists are fond of making their work into a science; they like to transform their ideas into a “scientific” law. Accordingly, the Fascist Italian senator, Vilfredo Pareto is credited with discovering Pareto’s Law, which explains why inequality is a natural outcome. Pareto suggested that 20% of causes create 80% of effects. He argued that this law explains why 20% of the Italian population owned 80% of the wealth. Sadly, the U.S. experience calls Pareto’s data into question, but then, those lazy Southern Europeans wallow in socialism.

There is a second Pareto Law, which offers a more accurate explanation inequality. In his Manual of Political Economy, he explained:

“In all periods of the history of our country we find facts similar to the practices we have just pointed out, permitting certain persons to use stratagems to appropriate to themselves the goods of others; hence we can assert, as a uniformity revealed by history, that the efforts of men are utilized in two different ways: they are directed to the production or transformation of economic goods, or else to appropriation of goods produced by others. War, especially in ancient times, has enabled a strong nation to appropriate the goods of a weak one; within a given nation, it is by means of laws and, from time to time, revolutions, that the strong still despoil the weak.”

Pareto, Wilfredo. 1906. Manual of Political Economy, Ann Schweir, tr. (New York: Augustus M. Kelley, 1971): p. 341.

The final phrase about the strong despoiling the weak offers an excellent insight into the way that capitalist countries, led by the United States have been repealing Pareto’s first law.

7 comments so far

  1. mulderc on

    I’m not sure you can honestly say he was an “Fascist Italian senator”.

    His bio over at the Library of Economics and Liberty says “A self-described pacifist who disdained honors, Pareto was nominated in 1923 to a senate seat in Mussolini’s fledgling government but refused to become a ratified member.”

    This paper argues he was a radical libertarian to the end. http://onlinelibrary.wiley.com/doi/10.1111/j.1536-7150.1983.tb01708.x/abstract

  2. Jim Farmelant on

    Pareto supported Mussolini’s ascension into power but in an article that he wrote for the Fascists’ theoretical journal he counseled them to follow a policy of low taxes and free markets – advice that Mussolini’s government would decline to follow, but all this was towards the end of Pareto’s life.

    Pareto was basically an economic libertarian who was very skeptical of democracy. In that sense he was not unlike later free market economists like Milton Friedman and Friedrich Hayek who were quite happy to support Pinochet’s military dictatorship in Chile because Pinochet was willing to accept their economic advice.

  3. mperelman on

    In 1923 Mussolini, who declared to be his disciple, made him Senator del Regno” (Senator of the kingdom of Italy).

  4. Jim Farmelant on

    Mussolini also proclaimed himself to be a disciple of both the French theorist Georges Sorel and the American philosopher William James. Sorel was by the way an intellectual companion of Pareto. However, his political views were much less clear, given the fact that he tended to flip-flop between the far left and the far right, and so influenced people like Antonio Gramsci and Jose Mariategui, on the one hand, and also influenced Mussolini and other people on the far right, on the other hand.

    I think my point concerning Pareto’s relationship with the Fascists still stands. He was an avowed skeptic of democracy. He clearly hoped that Mussolini’s government would implement his program of economic liberalism. He died before having the chance to see what policies Mussolini would actually implement. For the record, Mussolini did not implement the sort of economic program that Pareto advocated. Instead of decreasing state control over the economy, as Pareto advocated, Mussolini’s regime would increase it.

  5. mark hansen on

    “Pareto suggested that 20% of causes create 80% of effects”
    might this be the source of the so called 80/20 rule?
    wherein supposedly 20% of the people do 80% of the work.

  6. Jim Farmelant on

    In reply to Mark, Pareto thought that he had discovered universal laws that proved, to at least his own satisfaction, that economic inequality was a universal and unchanging aspect of the human condition. Hence, efforts by socialists, communists, etc, to build an egalitarian social order would, in Pareto’s judgment, necessarily come to grief.

    It was such ideas, plus Pareto’s sociological ideas (especially his analysis of residues and derivations by which he attempted to account for the irrational in society), that in my view, had the greatest appeal to the Fascists. The Fascists might have appreciated Pareto’s defense of private property and capitalism, but they did not, by and large, embrace his economic liberalism.

  7. Jim Farmelant on

    BTW one can read online George Homan’s book on Pareto’s sociology, An Introduction to Pareto’s Sociology. See:
    http://www.questia.com/PM.qst?a=o&d=80982212


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