Pareto on the History Of Economic Thought as an Aspect of Experimental Economics

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History of Economics – The ‘Economic Part’

In regard to analysis of theory pertaining to the economic part of the economic phenomenon, namely the theory of economic equilibrium for the analysis of exchange and production, Pareto acknowledged the asymptotic or cumulative view of scientific knowledge. This is because experimental observation has confirmed that modelling equilibrium on the assumption that subjective intent is a constant influence in given objective circumstances provides an acceptable first approximation to reality. In such circumstances, the history of economics is an end in itself and its progress can be considered using essentially logical criteria. In modern terms, rational criteria would be used to historically review progress in a discipline. The rational criteria are acknowledged as imperfect (the current state of knowledge in a particular place and time), but they allow an approximate indication of progress.

In the case of economic phenomena dominated by the economic aspect, such as for the theories of exchange and production, the result of Paretian history of economics is essentially Whig history. This is because such theories are dominated by their ‘intrinsic’ aspects, and modern notions of experimental economics provide the assessment criteria. However, this aspect of the history of economics held little interest for Pareto: to him, the history of economics is most potent and vibrant in the case of theories for which the sociological part of the economic phenomena influences the extrinsic aspect of theories, and vice-versa.

History of Economics – the ‘Sociological Part’

When the extrinsic aspects of economic theories are significant, Pareto rejected the ‘asymptotic’ view of cumulative scientific knowledge. In particular, the asymptotic scientific progress does not apply to theories that treat the ‘sociological part’ of the economic phenomenon through deductive reasoning based on a hypothetical proposition. As the subjective intent of action pertaining to the sociological part of the economic phenomenon is not a constant force on human action in like objective circumstances, such an approach yields deductive rationalisation rather than experimental science.

The difference between theories with and without asymptotes can be well illustrated by considering Pareto’s distinction between ophelimity and utility. Deductions concerning exchange and production are based on the notion of ophelimity – the relationship of convenience between a person and things – and behaviour that maximises ophelimity may be roughly confirmed experimentally. That is, stable equilibrium in exchange and production can be observed by monitoring price averages for consumer goods and productive serves and the fundamental theorems of welfare economics are consistent with this observed relationship. However, when deductions are based on propositions about utility, which extends the notion of ophelimity to include benefits from relationships between a person and other people (including third parties), hypothetical deductions are unlikely to be confirmed by experimental observation. When economic theories are deduced from a hypothetical postulate based on utility and concerning ‘things’ other people should have, or how other people should behave, they have little intrinsic (scientific) merit because they are generally not confirmed by experimental observation. Nevertheless, their extrinsic elements are numerous and Pareto was a strong advocate of economists undertaking historical studies of non-experimental economic theories over history to identify regularities of the range of subjective influences on the economic phenomenon that are not amenable to theory based on axiomatic representation.

History of Economics as Experimental Economics

In general terms, Pareto treated action as falling within the ‘sociological part’ of economic phenomena when individuals, or groups of individuals, act to directly or indirectly redistribute economic goods. While theories which advocate some redistribution of economic goods are phrased in terms of collective benefits, benefits for certain classes of disadvantaged people etc, he interpreted the outcome in terms of the relative change in access to productive resources by speculators (high risk investors and workers whose pecuniary interests depend on high risk economic activity) and rentiers (low risk investors, savers and workers in secure employment whose pecuniary interests do not directly depend on the activity of speculators). This is especially the case for the activities of government: trade/protection policy, fiscal policy and monetary policy all have distributive consequences that alter resources available to speculators of rentiers. Private actions may also be influenced by dynamic factors that relate to changes in sentiment: changes in economic and social equilibria may alter the distribution of economic goods and impact on economic growth. It is the history of economic theories pertaining to such phenomena that most interested Pareto, as they provided fertile ground for developing theories of economic phenomena influenced by government decisions (and the influence of economic actions on government decisions).

The primary observed regularity that Pareto discerned from studying the history of economics is that theories on the economic role of government not only advocate change in the distribution of economic goods, it is overwhelmingly done in a manner that supports the interests of the governing classes and their supporters (prevailing political and economic elites united through informal patron-client relations) and to the disadvantage of potential alternative governing classes and the subject classes generally. For trade theory, fiscal theory or monetary theory; the story is essentially the same. Pareto illustrates the situation for monetary theories in “Economia Sperimentale”.

“The theory of money is one of those that does not have asymptotes; it fluctuates indefinitely between the theory of money-as-a-token and money-as-a-good; all that varies are the justifications that are offered for it and the methods through which it is forced on the public.” (Pareto [1918] 1980, p. 734)

In short, Pareto used the history of economics to identify an enduring long period cyclical pattern, with theories fluctuating between stable currency (money-as-a-good) theories and fiat money (money-as-a-token) theories, with the latter rationalising large increases in monetary emissions in particular circumstances. While the importance of a stable currency is usually acknowledged, fiat money theories advocating a policy of issuing of paper money in a manner that depreciates the value of a currency emerge at relatively irregular intervals, each time explaining why issuing money is beneficial in the current circumstance.

The specific purpose of Pareto’s analysis of the history of economics is to investigate whether economic theories pertaining to the welfare of society reflect the interests of the prevailing government and related economic elites (e.g. speculators) against alternative elites (e.g. rentiers and competing political elites) and the subject classes generally. From the history of economics, Pareto’s general answer is in the affirmative. He then seeks to verify this experimentally through the study of economic history. Staying with the example of monetary theory, Pareto found that stable monetary theories and policies dominate in the short period, but in the long term, the fluctuation between stable theories/policies and policies that deflate the value of currency is the principle regularity. Towards the end of World War I he wrote that:

“we are seeing measures being resuscitated that we thought were dead and buried forever, that they want us to believe that the future will resemble neither the past nor the present, that we will have no further reductions in the value of the unit of currency, in debts, in the various commitments of the States, that what has always been will never happen again, that the uniformity that was observed for so many centuries will disappear.” (Pareto [1918] 1980, p. 736)

The relevance of this to current theory is direct. The history of monetary theory, and the practice of monetary policy, are both motivated by the prevailing and/or opposing economic and political elites who are attempting to defend, or acquire, economic benefits that derive from positions of political and economic authority. The success, and lack of such success, of public policies contribute to economic, social and political cycles, which Pareto links to the circulation of the elite.

“If one considers short periods of time, no longer than one century, one can suppose, at least for certain, indeed few countries, without moving too far way from experience, that money is an exclusively economic tool, and one can more or less accept the theory of money-as-a-good. However, for long periods of time, of several centuries, the sociological character of money becomes predominant, it appears as a tool that is always used to reduce the debts of the State and of certain social classes, and therefore as a potent factor in the circulation of those selected classes.” (Pareto [1918] 1980, p. 736)

In an analogous way, Pareto considered the impact on the struggle between speculators and rentiers of policies advocates in theories of protection, public debt, taxation and ‘public needs’, all theories where the sociological part of the economic phenomenon dominates the economic part. The fiscal sociology that developed in Italy in the early twentieth century was largely inspired by Pareto, with important studies by Borgatta (1920) and Sensini ([1917] 1933).6 When theory was complemented by the study of economic history, Pareto confirmed his key regularity of the sociological part of the economic phenomenon: governments (and sometimes private entities) never leave private property unscathed. The methods that Pareto identified for non-voluntary redistribution of economic goods among speculators and rentiers include: (i) direct abolition of private debts (law);(ii) direct State bankruptcy (fiscal and monetary policy); (iii) changes in the value of currencies (monetary policy); (iv) reduction of public debt (through loose monetary policy); (v) state appropriation (fiscal policy); (vi) redistribution of goods from rich to the poor (fiscal policy); and (vii) price increases through protection and public or private monopolies (international and domestic trade policy).7

As an experimentalist, Pareto quite simply insisted that the abovementioned methods for redistributing economic goods be treated as regularities that must be reflected in logico-experimental theories of the sociological part of the economic phenomenon. He was dismissive and scathing when this was ignored and replaced by deduction from a hypothetical postulate.8

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