What Is Pareto Analysis?

Vilfredo Pareto (July 15, 1848-August 19, 1923), Italian economist, sociologist, one of the main representatives of the Lausanne school. Born in Paris, studied at the University of Turin, Italy, and later became a professor at the University of Lausanne, Switzerland.

Pareto

July 15, 1848

Vifredo Pareto uses solid geometry research

There are "Lectures on Political Economy", "Summary of Political Economy", "General Sociology", "Socialist System".

Pareto economic dilemma

The purpose of economics is the maximization of social welfare. But what index is used to measure the total welfare of the whole society? This is not an easy question to answer. The difficulty is that the welfare of different people cannot be added together. There is no analytic method that can strictly prove that I make an extra dollar, and at the same time, thanks to one dollar, the total social welfare can be maintained, although people may think so. The final basis of welfare is the subjective feeling of a person. Since this feeling is subjective, it cannot be objectively calculated.

Pareto application Pareto optimal

To get out of the woods, economics accepted the concept of Pareto optimality. Strict Pareto optimality can be described by multi-objective mathematical programming. Suppose we have several goals at the same time, these goals are independent of each other, and can not be weighted summation. Ask us how we can achieve our goals. In general, if you highlight one goal, you must sacrifice others. So it is impossible to balance all goals at the same time. Pareto optimal means to improve each goal as much as possible, and to a certain extent, the improvement of any one goal at the cost of worsening other goals. This state is called Pareto optimality. It is not a unique solution, and there are different solutions for different degrees of care for each goal. But it avoids the disadvantage that there is room for improvement without utilization.

Applying this concept to economics, our multiple goals are the material conditions of every citizen in society. The market economy is a solution to Pareto's optimality. If there is still an opportunity for improvement in the material conditions of any individual without having to reduce the material conditions of others, we have not yet achieved the Pareto optimality. The prosperity of the economy is achieved by continuously improving towards Pareto. For example, if the two parties agree to make a sale, both of them can make a profit, and there is no negative externality (damaging the third party), then promoting such a transaction is a Pareto improvement and preventing the Implementation is a departure from Pareto optimality. Simply put, economic prosperity is achieved by taking advantage of all opportunities to exchange profits.

Pareto application premise

The application of the Pareto optimal concept in economics implies three extremely important premises. First, it assumes that the rights of each member of the society are the same. It is not Pareto optimal to harm someone and benefit others. Its profound meaning is that a market economy is an economy in which everyone is equal. In an economy ruled by an emperor and aristocracy, the rights of the ruler are higher than those of the ruled, so it is impossible to achieve a market economy there. The second premise is that Pareto's optimal solution in a market economy depends on everyone's initial resources, including personal talents, family and educational environment, and inheritance from previous generations. Therefore, the market economy recognizes the difference in the level of wealth achieved by each person. This difference is due to the different starting points when each person participates in the market. The third premise is to assume that each person's happiness depends solely on the material conditions he enjoys. This premise enables everyone in the market economy to enjoy more and more abundant material conditions. But they are not necessarily happier, if everyone's happiness is related to other factors. For example, if a person's happiness is based on the comparison of wealth rather than the enjoyment of wealth, then they will be happy if they find ways to make others poor. This kind of harm to others is bound to destroy Pareto optimality. Although showing or showing off is not the same as making others poor, the psychological basis is to base happiness on the comparison of wealth, not the enjoyment of wealth. Jealousy is the root of human inferiority. If we unconsciously guard against this bad mentality, or even incite and tease, there will be no peace in the society and no sense of happiness in the people. A policy based on this kind of psychology is even more terrifying. The richest person in society is the source of pain for the people across the country. If he is deprived of his property to make it the national average, half of the people in the country will be happy. ; Depriving him of all his possessions and sweeping the house would make all jealous people happy. However, the matter did not end. The richest people were resolved. The richest people turned out to be the richest people and they must be prepared according to law. It wasn't until all people became abjectly poor that all the problems were solved. Sadly, the result of such a policy is to fundamentally eliminate all opportunities for individuals to become rich. It didn't make anyone feel a little happier, but it all fell into the tragic situation that was least expected.

Pareto application goals

The rules of the market system are designed with the goal of Pareto optimality. Moreover, the performance of the market system over the past two to three hundred years also proves that this rule can indeed achieve a state very close to Pareto's optimal state, that is, the material wealth of society is greatly enriched, and the people's material life enjoyment is greatly improved. The history of the world over the past few hundred years has also proved from the opposite side that any pursuit that deviates from Pareto's goals (for example, to achieve a certain heavenly ideal and highlight the material equality between people) has led to social tragedies. If we agree that Pareto's optimal goal is desirable, we should be wary of value judgments that deviate from this goal. One of them is to place happiness in the comparison of wealth rather than the enjoyment of wealth. The whole society should consciously resist display and display, and abandon any form of jealousy. The "policy of getting some people rich" put forward by Comrade Xiaoping is Pareto's optimal policy. It has produced unprecedented power.

A large part of the unsatisfactory phenomena in the market we are seeing today violates the principle of Pareto optimality. This principle is that everyone has the right to pursue material enjoyment but not to infringe others' same rights. Everyone's enjoyment is an independent goal in multi-objective planning. These goals have the same status, and everyone is equal. Unfortunately, we often see violations of the rights and interests of others. For example, breach of contract, dishonesty, fake and shoddy loans, non-repayment of borrowed money, non-emergency business trips use police cars to drive the way, not to mention some people use conscientious methods to make money, and destroy health to spend money. In the direction of Pareto's best, it should be possible to build a society that respects people, the beauty of adults, and harmony and happiness. In such a society, all transactions provide people with the convenience of life and the opportunity to develop their talents. People are grateful to the opponents who traded with him, and this kind of thanks does not come from only one party.

Pareto 's greatest invention

The market system is the greatest invention in human history, and Pareto's optimal genius idea points out the organization principles of the market system. This principle is beneficial to everyone, at least everyone has the same opportunity to pursue material enjoyment, and it does not despise any individual person. But the market system is by no means the final stage of human society. People will also seek higher levels of enjoyment, that is, spiritual enjoyment, including satisfying people's desire for knowledge, creativity, and the pursuit of friendship and health. Material enjoyment is obtained through exchanges, while spiritual enjoyment cannot be obtained through exchanges, but through self-cultivation. Of course, it is impossible for any society to be separated from material conditions, so the market system cannot be completely abandoned, but it will certainly be greatly supplemented. What kind of society will it be, we can't describe it yet. However, it seems that this direction of development and more pursuit of spiritual enjoyment is not wrong.