Pareto from Italy, Europe

I’m catching up with some of my economy studies, and remember the Italian economist Vilfredo Pareto. He came up with concept of a Pareto improvement: A change that can make at least one individual better off, without making any other individual worse off. Seems like a good thing to strive for. An allocation where no more Pareto improvements can be made is Pareto efficient.

Two Nobel Prize winners, Kenneth Arrow and Gerald Debreu, actually proved mathematically in their “first welfare theorem” that a free market economy is Pareto efficient. What does that mean? Does it mean it is economically superior? No. Thereby, it doesn’t prove that a Pareto-efficient society has a higher GDP than another, even though it seems very likely.

Distributive policy, or welfare, is all about how one can modify that free market economy away from a Pareto efficient state, towards a situation where the ones worst off get a better situation, while the ones best of get a worse situation. This is pretty important to Swedes, since we have the highest taxes in the world (which I wrote about before).

These values seems really hard-core to whether you are a socialist or conservative today. Either you support an increased distributive policy, with the argument that: “Minimizing the economic differences between individuals is the only descent thing we can do as human beings”. Or you support a decreased distributive policy, with the argument that: “Decreased distributive policies will benefit all. In the long run, the ones worst off will be better off in real terms”.

And that last thing seems to be the key. In real terms. Is it that simple, that our Swedish left-wing blogger Ali Esbati would like to see a world where we are worse off in economical terms, but economically equal? And that right-wing Johan Norberg would like to see a world where we are better off in economical terms, but economically unequal? And Daily Kos and Powerline?

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