Vilfredo Pareto

We have already said very often that we have no intention to talk about things that can be found everywhere thousands if not millions of time. Those who were looking about biographical information about Vilfredo Pareto are referred to wikipedia: Vilfredo Pareto.

What would actually be helpful, something that happens very often in economics, is reading the original texts, something that in the case of Vilfredo Pareto nobody does and is not even possible, because the original text is not available. This analysis of his text is based on a scan, that was not available through the internet. The book can be found nowhere. (Beside that there is another little problem: Most of his texts were never translated in other languages. In English exists a translation, at a really stunning price, 96 euos (!!), Manual of Political Economy. Perhaps there is a previous translation.)

That's the reason why we found a lot of strange remarks about Vilfredo Pareto everywhere. Some, who obviously never read the original work, affirm that he was a democrat, a pacificist, a liberal etc.. The truth is, that he was an antidemocrat, a fascist and an antiliberal. There is little space for interpretation if we read his texts, see sociology.

If we have seen already very often from complex theories only some concepts made their way and belongs nowadays to canon taught in economics. From Vilfredo Pareto only survived the Pareto Optimum and the Edgeworth Box, from Adam Smith the invisible hand, from David Ricardo the comparative costs, from Alfred Marshall some concepts as the consumer / producer surplus and so on.

We have already attemted to find a explanation for that phenomenon. It is striking that all the concept that belong to the nowadays canon can be modeled mathematically and concepts where this is not possible, like for instance the creative destruction of Joseph Schumpeter or the ordoliberalism has fallen into oblivion. There is some evidence that the methodological approach is kind of a filter and determines which concepts become canonised and which are forgotten.

From Vilfredo Pareto has survived the Pareto Optimum, although the concept we find today in textbooks is from Francis Ysidro Edgeworth. The later is even mentioned in the chapter § 16 of the Manuale de Economia Politica.

Questo nome [Linea d' indifferenza o curva di indifferenza] è dovuto al prof. F. Y. Edgeworth.
This name refers to F.Y.Edgeworth.

To say that Vilfredo Pareto introduced the concept into economics is a doubtful statement. It woul be more correct to say that for an unknown reason the version of Vilfredo Pareto was canonised and F.Y. Edgeworth fell into oblivion.

The fact that Vilfredo Pareto used a concept of F.Y.Edgeworth doesn't mean at all that there was a narrow relationship between them. Edgeworth was a colleague of Alfred Marshall and Léon Walras as well as his successor of the university of Lausanne Vilfredo Pareto were silently ignored by Alfred Marshall.

The "Manuale di Economia Politica" shoudn't be confused with the "Cours d'Économie Politique" published six years earlier. The first one contains an introduction to sociology, at least to what Vilfredo Pareto assumed to be sociology, and anticipate the basic concepts of "Sociologia General" published in 1916. That means that he didn't follow a long time the ideas of Léon Walras. The "économie pure" as conceived by Léon Walras led nowhere and was finally abandoned.

He doesn't tell us why he added to the large amount of definitions already existing, the partial equilibrium of Alfred Marshall, the general equilibrium of Léon Walras, the concept of natural price / market price another one, but that is not necessary, because he tells us right at he beginning of the book that he doesn't have any intention to do something that have any practical use.

L'equilibrio economico. - Si può definire in vari modi che in sostanza tornano allo stesso. Si può dire che l'equilibro economico è quello stato il quale si manterrebe indefinitamente, ove non fosse alterato da qualche mutamento delle condizioni in cui si osserva. Se, per ora, consideriamo solo l'equilibro stabile, potremo dire che è determinato in modo che, ove venga lievemente alterato, tende subito a ricostituirsi, a tornare alla stato di prima. Le due definizione sono equivalenti.

The economic equilibrium can be defined in different ways, but the basic idea is always the same. We can say that the economique equilibrium is a stable state that would change only if the conditions that maintain it stable changed. But if we only take into account a stable equilibrium we can say that it is stable if it returns to the equilibrium if it had been pushed out of the equilibrium. The two definitions are the same.

Vilfredo Pareto, Manuale di Economia Politica, Milano 1906, página 150

His definition of an equilibrium is correct and trivial. In an equilibrium nothing changes or if something changes, there are forces that allows to get back to the equilibrium. However the basic ideas of economic equilibriums are missing and we see therefore, that Vilfredo Pareto had no clue of economics.

First of all: A better definition would be this: In an equilibrium the resources are optimally allocated and therefore there is no benefit if there are reallocated. If the (monetary) marginal revenue, or the marginal utility, is the same in all uses, there is no reason why something should be reallocated.

The second problem is, that it makes a big differences if the forces push back to the same equilibrium or to another level of an equilibrium. A change in the transportation costs for instances can increase dramatically the amount disposable of the respective product and destabilise the old equilibrium. After a while the system will find a new equilibrium, but at an increased amount and lower prices.

The obsession for equilibriums in modern textbook, actually that's the only issue they address, gives a completetly misleading idea of economics. The analysis of equilibriums is an analysis in THE SHORT RUN and in the short run NOTHING ChANGES.

An analysis of the short run is too simple to get any insights on economics issues. If nothing changes, mathematical methods, algebra to be more precise, can be used, because only few parameters have to be taken into account. In the long run we do not only have to know the impact of changes, but we have to know WHAT will change. In other words, we have to know, what we will know tomorrow. That's impossible.

Some basic concepts of microeconomics are even useless, it the period taken into account is not defined. The consumer and producer surplus for instance refers to an amount of goods sold in a given period. But if the adaption of the less efficient producers happens immediately, there will be no producer surplus in the next period.

We have talken about this issue already several times, see markets where products are exchanged and markets where products are produded and cardinal measurement of utility.

It is to assume that the analysis of equilibriums would disappear immediately from textbooks if it were posible to say something conrecte about processes. It is quite easy to analyse equilibriums, because in the short run nothing changes. The ceteris paribus clause mentioned in any textbook as a necessary basic assumption is completely superfluous, because in the short run nothing will change. A moment is not characterised by the period of time passed, but by the changes happened. In the universe a moment can last one million years, if nothing changes in this million years. For a stone there is no difference between 1000 years or a minute. For a living being that makes a big difference.

The analysis of equilibriums is completely irrelevant. We can talk about them half an hours, but than everything what can be said about them is said and we can dedicate the rest of our time to processes.

If the most interesting thing to analyse in market economies would equilibriums, we don't need a market economy. Once reached the equilibrium and the optimal allocation of resources, a central planning commission can take over the distributing of resources. No need for further exploration of the market by trial and error through decentralised information processing steered by prices and the incentive to make use of opportunities.

Economists stick to equilibriums because there they can't find "economic laws". It is well possible that economists stick to equilibriums, because they have little to say about processes.

It would be very uselfull to substitute the analysis of equilibriums of the partetian type by relevant issues, for instance informatics, modern languages, online marketing, international cooperation, accounting etc. etc..

We have never been interested in equilibriums and we are not interested in equilibriums. The most perfect and eternal equilibrium is reached when we are dead. The demand is then zero and the supply as well and we won't change something for something else because the utilitiy of what we get and the utility of what we have to give in order to get it is zero. A perfect equilibrium.

Vilfredo Pareto needs 100 pages in order to explain his special kind of equilibrium, but the concept is so simple that it can be explained with a few sentences and even with one product. If someone has a huge amount of choclate, in any case more than he can eat and the other a huge amount of cherries, they will start changing choclate for cherries, although the first has a preference for choclate and the second a preference for cherries. What does that mean? The fact that someone has a preference for choclate doesn't mean that he doesn't like cherries at all, but if he likes cherries and the pleasure he have eating choclates diminishes with every unit he eats he will reach a point where he prefers cherries. Same thing, the other way round, for the one who prefers cherries. From that we can deduce that owner of the choclate will change a certain amount of his choclate for cherries and the owner of the cheries will change a certain amount of cherries for choclate.

However Vilfredo Pareto assumes that both of them have choclate and cherries. What does that change? Nothing. If A) and B) have cheries and choclate they will change choclate for cherries and cherries for choclates until they reach their optimum.

The only thing that changes is that we can paint nice indifference curves. A indifference curves shows all the combinations of choclate an cherries with the same level of utility. This indifference curves has some characteristics and all of them are completely irrelevant.

The Edgeworth Box works with the fiction that both participiants had two products hasn't any impact on the simple basic idea and beyond ficticious examples no explicative value, beyond trivialities. The basic problem of the Edgeworth box is that it assumes a given amount of goods or resources. That way the whole complexity is reduced to one question: How the goods or resources should be distributed under a given initial situation, see sociology.

The result is as trivial as irrelevant. There is a criterium to determinate an equilibrium. Until the owner of choclate gets more utility by changing a unit of choclates for cherries and the the owner of cherries benefits by giving away cherries for choclates they will do it. If this is no longer the case, they will stop doing it, because they will not profit anymore from further change.

However concerning the second question, if the initial situation should be changed, there is not only no answer, but it is affirmed that it is not possible to make any "scientific" assumption concerning the initial situation. It doesn't make any difference if A) has so much choclate and cherries that he uses them to feed his dog and B) needs all he have to survive or if both have more or less the same amount. In both cases we get to the Pareto Optimum.

Public discussions are never, absolutely never, about the optimal change. Public discussions are about the initial situation.

The second point is that the indifference curves and the Edgeworth Box assumes products with a decreasing marginal utility in other words product where the utility decreases with consumption. This is only true for food and some few other products. However from most products we consume only ONE UNIT: one bicycle, one refrigerator, one car, one smartphone, one computer, one telephone etc. etc.. In this case it is the competition between the products that decides if we change or not. The marginal utility is irrelevant. If a bicycle and smartphone yield the same amount of utility, but the bicycle is cheaper, we buy the bicycle, but if the smartphone is cheaper, we buy the smartphone. The marginal utility is irrelevant, because in any case we want only one unit.

The concept of Alfred Marshall is compatible with both cases. If a brewery wants to sell more beer, they have to lower the price. If people drink more beer, the utility of the last unit will decrease, but if the have to pay less, they will buy more beer. A car is competing a boat. If the car and the boat yields the same utility, it depends on the price, which of the two the consumer will buy.

If we want to summarise the Pareto abracadabra we can say that he didn't resolve with a lot of effort an inexisting problem.

We can read very often that the pareto equilibrium has the advantage of not being based on cardinal measurement, in other words, that the utility is not measured with money, see cardinal measurement of utility. In other words: If two people spend 500 euros for a smarthpone, we cant say that the utility of smartphone is the same for both, if the first one earns 10 000 dollars a month and the other 1000. The utilitiy of money decreases itself and therefore we can't add them how it is done in the consumer surplus. The problem is already mentioned by Alfred Marshall. The answer is simple: Statistically the differences are balanced and at least the problem of the differences in the initial situation is addressed.

It is indeed true that in the Pareto logic there is no need that the amount of utility A) gives away is equal to the amount of utility he gets, it is enough that he improves his situation. There is no comparison of the utilities of A) and B). However the problem with the differences in the initial situation are simply ignored or assumed that this problem cannot not be discussed in a "scientific" way. In other words, the Pareto logic resolves a trivial problem and lets the real problem unresolved. Every point on the contract curve is as good as any other.

The advantage of abstracting from money is hard to see. We can't get any relevant insight in the context of economics if we abstract from money. Nobody outside a strictly private context changes things for things. The paretian abracadabra is a scholastic discussion.

This kind of discussion will not stop because one day the question are answered. This discussion will stop, as in the case of the scholastic theology, because nobody will be interested in the questions and still less in the answers. Nowadays we don't care if God, the Saint-Spirit and Jesus are one person or three. The middle ages felt a big need to answer this question, nowadays we are not even interested in the question.

We understand therefore very well that finally Vilfredo Pareto was bored and changed to sociology. The range of economic issues addressed by Vilfredo Pareto, thats something typical for neoclassic thinking, putting aside Alfred Marshall, is very reduced, actually the only issue addressed is the market equilibrium in his special version. We understand therefore that he switched to sociology.

The optimum of Pareto describes therefore a situation where change depends only on the utility. (Actually Vilfredo Pareto distinguishes between utilité = utilitiy, something beneficial, and ofemilitá. Oftemilitá is something that someone wants, but doesn't help him really, for instance drugs.) The conclusion he draws from that is very simple. Only a change that is not distorted by governmental intervention guaratees the optimum. If for instance the government imposes a tax on choclate, to stick with our example, more units of cherries are needed to get one unit of choclate and this distorts the optimal chance rate. In this case it is not the utility alone that determinates the change rate, but the governmental interverntion which depends on arbitralily taken assumptions.

Beside the problems already mentioned, the abstraction from the initial situation of the two trading partners, there is another problem. With the concept of Alfred Marshall, see cardinal measurement of utility, the effect of governmental intervention can be measured and analysed. At a certain degree we can analyse with the marshallian cross even some long term effects. The marshallian cross takes into account the producer as well as the consumer side. Changes in prices as well in the amount are considered.

The analysis of Vilfredo Pareto as well as the analysis of Léon Walras are based on a strange kind of market. In his market, as in the market of Léon Walras, products are not produced but only changed. In other words, the amount doesn't change and the market gets to equilibrium through a change of the exchange rate of the respective products. There is no change in the total amount, because the total amount is presumed fix in this market. Fundamental mechanisms of market economies can't be shown this way.

The only thing that can be shown with this modell is that people only change something for something else if both trading partner benefits or if at least none of them is worse off than before the change. That is trivial.

It does not make even sense to mention that the Pareto Optimum supposes that the good can be splitted in infinively small units. This is possible for apples and bananas, half an apple for one banana, but if two people change diamonds for carbuncles and the owner of the diamonds start to splitt them in smaller pieces, they reach the pareto minimum. Both of them will be worse off than before. Two little diamonds are less valuable than one big one. But there are such lot of problems with the pareto abracadabra, that this problem can be neglected.

Equally neglectible is the fact the marginal utility, in opposite to what we can read everywhere, is something new. Beside the fact that for most products it is irrelevant, because only one unit is consumed, see above, the concept is not new. In a more general and therefore correct form, a form that includes both cases, the slooping downward demand curve because the decreasing marginal utility and because of the competition between the products, it was already described by Jean Baptiste Say.

Léon Walras titled his book Élements d'Économie Pure, the book of Vilfredo Pareto has the name Manuale di Economía Política and the product of Carl Menger is called simply Volkswirtschaftlehre, that would be something like economics. However the right title would be EQUILIBRIUM because that is all these books are about. There is no other topic and even this topic is dealt with in a cursorily way, because all of them present their equilibrium as the only existing one. Their is no discussion about the usefulnes of the respective equilibrium, the context is should be taken into account depending on the interest of the analysis or the limits.

If we compare the works of Vilfredo Pareto, Léon Walras or Carl Menger with Adam Smith or Jean Baptiste Say we have a step back and no advance at all.

Actually we have four different definitions of equilibriums.

a) The most relevant one is the one given by Adam Smith, because this is the definition the austrian school, neoliberalism and ordoliberalism is based on and the one that is "intuitevly" comprehensible and the basis of market economy. If in publc debate there is a clear understanding of the meaning of the term market economy, if people don't speak about capitalism, it is this one. The idea is easy to understand, although most people don't understand the meaning of the "invisible hand of the market". This is shown by the fact that most academic economists didn't understand that Adam Smith describes a general equilibrium. We have a general equilibrium when the natural price, the price for a productive factor or resource is the same in any use and therefore no reallocation of productive factors or resources happens. The market price can differ from this price because the preferences and therefore the demand changes. This will lead to a reallocation of the productive factors and resources until the natural price is once again equal the market price. This model describes inherently two basic mechanisms of market economies. The price as a signal that contains information about the economic structure and the incentive of prices to reduce scarcity. The changes that going to happen will not only affect the price and the amount, but will also have an impact on technologies, qualification, organisation etc..

If for instance the price of oil increases it is signal of scarcity and in thousand of different way the economy will adapt itself to these changes. The price of gasoline will increase, this will lead to the construction of less consuming cars, more oil will be produced from corn, the insulation of the houses will be improve, more solar energy plants will be constructed, people will qualify for new jobs and so on. These changes will not only have an impact on the amount an on relative prices, but will change the whole production structure.

b) The second description of an equilibrium is the partial equilibrium of Alfred Marshall. In this cas only one product, the demand and the supply side, is taken into account. The scope of this equilibrium is different from the scope of the equilibrium of Adam Smith. This modell, the famous marshallian cross of the demand and supply curve doesn't allow actually to "calculate" something, this is only possibly in ficticious example we find in textbooks and this kind of exercise is a vaste of time and money, but it allows to illustrate in a didactical context the different effects of subsidies, customer duties, taxes, changes in the prices of inputs, changes in the preferences and so on.

c) The Léon Walras nonsense is kind of general equilibrium as well, but is based on such strange assumptions, that it is useless. The description of the general equilibrium is based on a market where products are only exchanged, but not produced. This is already strange, because the production of goods, the dynamic part of an economy, plays no role. However Léon Walras assumes that market must be cleared at the end of the period, something still more strange. Under these assumptions only the price can balance the offer and the demand, because the amount is fix. This is an analysis on the very, very short run. A fish market on a single day works like that. It is true that on a fish market all fishs must be sold at the end of the day and the adaption of the supply and demand is realised through the price only. However the next day, the fishermen will have learned the lesson and they will only sell the amount of fish for which they can get a price that covers the costs. The amount AND the price will change. However this is not the end. Concerning the productive factors, for instance labour, it is the other way round. The price is fixed and the adaption is made through the amount. This description of a general equilibrium is useless and it would be big advance in economic thinking simply forget it.

d) The model of Vilfredo Pareto is as strange as the model of Léon Walras. As the model of Léon Walras it is based on a model where products are only exchanged, but not produced. It focuses on a higly irrelevant issue. Its aim is to show that the optimum is reached, if it is not possible to increase the utilitiy of one trading partner without reducing the utilitiy of the other. Put in short terms: People change only products if both of them benefits. This is so trivial, that it is even true. We understand that without any abracadabra of indifference curves, contract curve, Edgeworth Box etc.. If a model only serves to introduce a lot of concept of no use in the analysis of real world problems we don't need it.

But the subtle message of this model is different. Pareto wants to show us that there is no way to prove "scientifically" that the initial situation should be changed. In other words: If A) and B) have a certain basket of goods they will change until the reach the Pareto Optimum, independently from the value of this basket. The Pareto Opimum can be reached if the value of the basket of A) is equal than the basket of B), ten times more, hunded times more or thousand times more. Vilfredo Pareto only discusses about the optimal change. The question about optimal distribution can't be answered, following Pareto, "scientifically".

Vilfredo Pareto stated that he is not interested in the practical usefulness of his theories. That can be doubted. From a personal perspective and in general. If is not interested in the practical usefulness there is no need to write books, that's the first point. The second point is that he was a publicly financed professor and it is doubtful whether the tax payer is willing to pay for something without any use.

There is a general misunderstanding of the term basic research, see methodological approach. There are reasons why basic research should be financed by the government, but the reason is not that the government should finance the hobbies of some people.

Léon Walras and Vilfredo Pareto believe that they can abstract from money, because actually goods are exchanged for goods. That is something that has already been said by Jean Baptiste Say.

Similmente, il concetto del prezzo non è essenziale, e se ne può, sebbene più difficilmente, fare a meno. Ciò è posto assai meglio in luce qui che nel Cours.

De manera similar el precio no es decisivo y se puede, aunque se difícil, ignorarlo. Este concepto se destaca más claramente aquí [Manuale di Economia] que nel Cours [COURS D'ÉCONOMIE POLITIQUE].

Vilfredo Pareto, Manuale di Economia Politica, Milano 1906, Proemio VI

This is not true. We can't analyse a modern economy if we abstract from money. The idea behind this statement is that money is backed by already produced products. That is not the case. Money is backed by the productive potential. As long as the productive potential is strong enough to supply the products people want, we can inject any amount in the economy. We can even fly with a helicopter over the cities and distribute money the money printed by the central bank, although it is crystal clear that the productive potential would be very quickly exhausted if we do that. The only relationship between the products produced in the past and the products produced and bought in the future is the fact that we assume, something true in the short run, that the relationship between the different prices is going to be the same in the future as in the past. If someone earns 3000 dollars he knows more or less what he will be able to buy for these 3000 dollars, although the products he wants to buy for that money, doesn't exist at the moment when he gets the money.

If somenone gets 3000 dollars at the beginning of the month he knows more or less how much he had to pay for the bread which is going to be produced at the end of the month.

This is not as trivial as it may appear at first glance. In contrary, it is one of the most fatal error in economic thinking. In any textbook about microeconomics we find these equations.

Y = C + S
Y= C + I

and therefore I = S. That means, that part of the national income (Y) have to be saved (S) in order to be invested (I). In other words, investments are only possible, if some people save, doesn't consume part of their income.

The truth is, that no savings are needed to invest, savings are not the condition of investments. Even if nobody doesn't save one pence, investments can be financed with freshly printed money from the central bank, backed by no conrete products, IF THERE IS AN UNEMPLOYED PRODUCTIVE POTENTIAL. In this case saving is going to happen in the FUTURE and the future products will back the money.

If we use the equation mentioned before in an explanation of the keynesian theory, as it happens always in modern textbooks about macroeconomis, it is the shortest way for the authors of these textbooks that they have really no clue what they are talking about.

Y = C + S or Y = C + I are true in two very differents contexts and if this distinction is not made, the result of any further explanation based on these equations is nonsense. Y = C + I or Y = C + S are true in a situation of full employment as well as in a situation of underemployement and this is very, very big difference.

In the case of underemployement we can reach to full employment by injecting money, but no saving is neede, saving is even bad in this situation. If the productive potential is already not fully used, we don't improve the situation if we reduce demand.

In the case of full employment, if there is no unemployed productive potential, injecting money would lead to inflation or to a negative balance of payments. An increase of the productive potential is only possible if the production of consumer goods is reduced in favour of the production of capital goods. That is what we call saving. Saving means reduction of consumption. For a more detailed discussion see interest rates.

The fact that the Pareto Optimum doesn't compare the utility in an interpersonal way is considere an advantage, but actually this is not a feature, it is a bug. Indeed in the Pareto Optimum change will happen if both partners benefits from trade, the question which of the two benefits more is irrelevant. This logic is right, if we accept a certain initial situation.

But the same argument can be used against any kind of redistribution of income, in other words against any measure aiming to change the initial situation, because in this case one would lose. For normal people it is obvious that the added utility increases if we take away 1000 dollars of someone who earn 10 millions a year and give it to someone who earns 10 000 dollars a year. Not so for Vilfredo Pareto. For Vilfredo Pareto there is no way to prove that "scientifically". There is no way to prove scientifically that after redistribution the added utility are higher.

If we follow the logic of Vilfredo Pareto, taxes has to be paid per head, the same taxes for everyone, independently from his income. 10 000 dollars a year for everybody. If someone only earns 8000 he goes to jail, where he gets at least something to eat.

The real interesting question, the question about the distribution of income, is not even addressed, although it is possible to discuss this topic in an objective way, or at least the relevant aspects can be addressed. We will not discuss the issue, some remarks will be enough.

- the final effect of redistribution is unclear, because social transfer will end up at the shopping centers. If the owner of the shop center complains about taxes, he should complain as well about the higher turnover, what he very seldom does.
- rich people benefits more from the governmental infrastructure than poor people. For a lot of reasons, but in any case they got their studies financed by the government and their higher taxes can be considered as a credit they pay back.
- it is to assume that the final effect of social transfer is to make the rich richer indepedently from the question how this social transfer is financed. If it is financed by taxes, the government will increase its tax revenue, the entrepreneurs, companies, retailer will pay higher taxes, but part of that money will remain in private hands. If it is financed by public debts, only people with money can buy bonds and bonds are more secure than other investments. Therefore they will profit.
- from an economic point of view low paid job doesn't increase a lot the national income, sometimes the increase is even zero. We have analysed that in detail in cardinal measurement of utility. (The example with the taxi branche.) For the economy as a whole it doesn't make therefore a big difference if people clean the windows once a week or twice a week. But if they get enough to make a living through social transfers, they have the time to find a work that makes sense or to qualify for a job that makes sense.

There are a lot of problems with the Pareto Optimum, the idea that affirmations are only possible concerning the trade under a given condition, but not concerning about the initial situation.

The first problem is that nobody shares this opinion. More ore less any industrialised country has something similar to the social market economy, although the term is only used in Germany. The idea of the social market economy is that the market decides who produces, what and how. But the result of the market is changed by social transfers.

Social transfer does not only mean social transfer in the narrow sense of the term, but as well free schooling and free universities. Most industrialised countries focus on equality of opportunities and individual performance. It is to assume that equality of opportunities wouldn't be guaranteed without governmental intervention. Even with governmental intervention there are problems.

Furthermore we have strong historical evidence that nations with very huge differences in income are unstable.

Léon Walras, Vilfredo Pareto and Carl Menger are the most prominent representatives of a tendency that believes that methodological approach in physics is the best suited as well for economics. They believe that economics is steered by universally valid laws as stable as the laws that steers the course of the planets.

There are a lot of problems with this approach, but if we want to summarise all of them, we could say that if this were true, human decision making would be as irrelevant in economics as it is in the universe and with the same precision the next solar eclipse could be determined we can forecast the the economic development.

The idea that this is the case sounds idiot at first glance, however this is would marxism assums. The only difference between Vilfredo Pareto and Karl Marx consists in the fact that the first said that implicetly, the second explicetly.

This is the crucial error of Karl Popper. Karl Popper believes that ideologies, the enemies of open society, are characterised by the content, by the description of the assumed "perfect" world. That is not the case. Ideologies are characterised by the methodological approach. He could had add Vilfredo Pareto, Carl Menger and Léon Walras to his collection of ideologues.

However their methodological approach was not, as it could had been expected, very succesful. What they consider "economic laws" is nothiing more than a bundle of trivialities. Trivialities are always true. Hundreds of economic laws of this type can be found in a few hours, for instance "the more money someone has, the more he can spend" or "the higher the national income, the more can be distributed", "the easier relevant know how can be produced, the bigger the technological advance" etc. etc.. All this statements can be mathematically and graphically modeled, but a triviality remains a triviality.

Even in humanities we can have generate and endless number of universally valid laws: "All writers can write and read", " a novel is wrapped in two book covers", "a novel can be consumed with the eyes and the ears". All universally valid laws, although completley useless.

If the approach is mathematical or graphical modelling, that's what we find in textbook, there is not only the risk to simplify reality until it fits the model, this is what actually happened in economics. Reality was reduced to a point that nothing but trivialities remained and these trivialities can be mathematically and graphically modeled.

The sample above with Y = C + I and Y = C + I illustrates as well that this method leads to fatal errors, because this error is really fatal. People forget completly the reality. We find this equation in any textbook about macroeconomics, millions of students learn it each year and nobody realises that is complete nonsense. It is not only complete nonsense, it makes it difficult to understand keynesian theory. The equation can be even interpreted in a classical sense. (And is actually very often interpreted in a classical sense, if people don't understand keynesian theory.) The equation can be understood as if savings are the condition for investments.

The more we approach reality, the more we come in touch with individual circumstances, the less we have universal laws. In social sciences the more we abstract from individual circumstances, the more find universally valid laws, the more trivial are the results.

To illustrate that with another example. In any textbook we can read, that expansive fiscal policy means to increase public spending. This is true, worldwide. However it makes a big difference, if public spending is consumed or invested. The individual circumstances of each country has to be taken into account. We will address this topic again in the chapter aobut Keynes. A multiplicator theory of the type

Δ national income = Δ expenditures / (1- consumtion rate)

is worth nothing. If the additional expenditures are completly satisfied in a foreign country, to take an extreme example, the impact on the national income is zero. If the expenditures have an investive character and the investment is able to pay off the credit, the usefulness of an increase of public expenditure does not even depend on the multiplicator effect. If we have full employment, an increase in public expenditure will lead to inflation or to a deficit in the balance of payments. Some mathematical equations, that abstracts from the individual circumstances are of no help. Even worse: They are misleading.

Some people will argue that in this case more mathematical modelling is needed that allows to take into account individual circunstances. That is not possible, because we do not only not know the impact of a change in, for instance, the productive structure, but we do not even know which variables will have an impact in the future. It is very hard to figure out a model that contains all the relevant variables and parameters, if we don't know which variables and parameters will be relevant in the future.

If someone needs an illustration for that, he can go to the chapter about David Ricardo. He assumed that wages will never exceed the substantial level, because if this is the case, the population will increase until wages are once again down at subsistence level. In the meantime contraceptive appeared and the whole theory proved to be wrong, because the premises where wrong.

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Vilfredo Pareto

Manuale di economia politica Four different definitions of market equilibrium

Manuale di economia
politica

Four different definitions of market equilibrium