PARETO ANALYSIS

Pareto Analysis

Pareto Analysis

Pareto was greatly influenced by the work of another Italian, Niccolo Machiavelli. In The Prince (1532), Machiavelli had set for himself the problem of discovering “the best means available to princes for holding their power” (Pareto [1916]1980:254). Although Machiavelli argues that princes should stay in power, the methods he described included deceit and force, as well as the use of argument. Pareto thought that Machiavelli's insights helped to explain history and society.

Pareto's Economic Theories

Though Pareto's views of society and elites were his primary foci, he also sought to understand economics. Although few economists have adopted it, Pareto used the term ophelimity to mean the pleasure that a certain quantity of a thing affords an individual. According to Pareto, differences in ophelimity are due to differences in taste, coupled with the obstacles encountered in gratifying one's tastes. Markets and prices do not by themselves determine economic behavior, but depend on “the opposition of tastes and obstacles” ([1906]1971:152). The more intense and wide-spread the taste for an item, and the more obstacles to obtaining it, the higher its value and its price.

Another important part of Pareto's economic theory is capital, of which he listed three kinds. Land capital is immovable property that can be mined or developed. Mobile capital includes machines, transport means, house-hold goods, and money. Human capital is “the cost of production of a human being…what is strictly necessary to keep him alive and train him” (Pareto [1906]1971:300). The concept of human capital has been expanded in economics, but Pareto was one of the earliest writers to recognize its importance. These three forms of capital are used in the free market system to increase one's bargaining position relative to others.

Although individual economic behavior was of some interest to Pareto, he was more concerned with economic systems, their upswings and downswings. According to his analysis, upswings result when entrepreneurs expand production by transferring savings into development, often using credit. Investors likewise extend themselves to have a part in a productive boom. Downswings occur when markets become glutted and/or stagnate (because tastes are satisfied with few obstacles for the individual) and the producers and investors reduce and retrench (Pareto [1906]1971:321-83). According to Pareto, “[I]t is customary to assume that man will be guided in his choice exclusively by consideration of his own advantage, of his self-interest” (Pareto [1906]1971:105. This premise for human behavior was later expanded into exchange theories, which ...