Liberty Matters

An “Imperfect” Interpretation of Vilfredo Pareto’s Classical Liberalism

The title of my contribution to this conversation is not meant to suggest a flaw in Dr. Mingardi's fine and thought-provoking essay. Rather, the title is meant to point out an important and underemphasized understanding of Vilfredo Pareto as an "imperfect" classical liberal.
By this, I do not mean that Pareto was flawed in his analysis as a theorist or as a man. Rather, if we can trace the etymology of the word "imperfect" back to its Latin roots, we find that imperfect means "incomplete," or to be more precise, "not thoroughly done." I raise this point to suggest, in concord with Mingardi, that Pareto's understanding of social interaction is more akin to one of a process towards completion under a particular set of institutional arrangements, not as an equilibrium outcome, or state of affairs. The implications of Dr. Mingardi's essay are particularly important because, as he mentions, Pareto is better known as a Walrasian general-equilibrium theorist, whose association with the notion of "optimality" in economics is already well-known. Mingardi's essay introduces an important point in the political economy of Pareto, which I further extend here. In doing so, I wish to reinforce some important implications of Mingardi's thesis.
The point of extension I raise here begins with a characterization of Pareto made by Joseph Schumpeter, which relates not only to Pareto's political realism but more broadly his theory of social interaction: "primarily and fundamentally his sociology was a sociology of the political process" (emphasis added). (Schumpeter 1949,168) This would seem to suggest that Pareto's economics and his broader social theory are separate rather than overlapping parts of a broader theory of human action. As he points out, in "political economy itself, theories of pure or mathematical economics have to be supplemented – not replaced – by the theories of applied economics." (Pareto 1916 [1963], 20) This "logico-experimental" method of social science, according to Pareto, applied not only to his understanding of economics but also applied no less to the other social sciences, particularly political science.
The logico-experimental method, according to Pareto, traces the unintended consequences of social interaction under alternative institutional arrangements (i.e., the realm of applied theory) back to the choices of individuals, who are attempting to fulfill their separate ends through the purposive applications of means to such ends (i.e., the realm of pure theory). Though Pareto distinguishes between logical action and non-logical action, the distinction is not between rational action and irrational action. Rather, the terms describe the pure form of human action, the substance of which is manifested under different institutional contexts. Whereas logical action manifests itself in the realm of markets within a context of private property and price signals, non-logical action manifests itself in the realm of politics, which is outside the context of market exchange and price signals. Thus, the outcomes in Pareto's general theory of human action, or sociology as he refers to it, is not based upon an aggregation of atomistic individuals, maximizing given means to given ends in isolation. This would be the case if Pareto collapsed his understanding of "pure economics," or what Hayek refers to as the "pure logic of choice," onto the outcomes of social interaction. Yet no one-to-one relationship between rational action and outcomes exists in Pareto's sociology. The link between the two is bridged by an institutional analysis of time and circumstance. Therefore, to conclude that Pareto's general theory of human action was based upon the "perfection" of Walrasian general equilibrium only characterizes his understanding of pure theory and cannot be superimposed upon his broader understanding of political economy.
I raise this brief, and admittedly oversimplified, view of Pareto to reinforce the important connection Mingardi makes between Pareto and Bastiat. Though Mingardi refers to Bastiat's The Law(1850a [2012]) with regard to the Pareto's criticism of "liberal Utopians" and their neglect of Bastiat's theory of legal plunder, another important influence on Pareto's political realism can be drawn from Bastiat's "What Is Seen and What Is Not Seen." (Bastiat 1850b [2017]) In that essay, Bastiat argues that good economists take into account not only the intended consequences of public policy but also its unintended consequences. This lesson is also implied in Pareto, where he writes that "social enactments have, in general, some effects that are beneficial and others that are negative and harmful." (1916 [1963], 1299) Pareto's defense of classical liberalism is not a normative critique of the intentions of policymakers. Rather, Pareto's defense of classical liberalism is entirely consistent with his political realism, as Mingardi argues, because the imperfections inherent to political decision-making that Pareto highlights are analytic in nature. That is, the process of political decision-making, however well-intended, will generate a set of unintended consequences that the policy-maker could never anticipate. If political or market processes were perfect, institutional contexts would be irrelevant as a guide to decision-making.
However, in an imperfect world, the "perfection" or "completion" of political processes will generate entirely different outcomes from market processes precisely because the differing institutional incentives in each context will generate different expectations regarding the costs and benefits of pursuing different forms of rational action. To illustrate this point, Pareto writes:
When the engineer has found the best machine, he has little difficulty in selling it, and even without dispensing with derivations altogether, he can for the most part utilize arguments that are logico-experimental. Not so for the statesman. For him that situation is precisely reversed. His main resort must be derivations, often times absurd ones. [Pareto 1916 [1963], 1299]
To quote Professor Richard Wagner, the reality of politics is that it is just a peculiar form of business. (Wagner 2016) In markets, producers are residual claimants of their decision-making; they absorb the profits and losses of responding correctly or incorrectly to consumer demand. If entrepreneurs in the marketplace fail to deliver a product consistent with the plans of consumers, appeals to derivations (i.e., justifications) inconsistent with consumer demand will only generate further losses in revenue directly and fully borne by the producer. The indirect, though beneficial effect will be for market processes to free up misallocated resources and reallocate them to more-valued uses. In politics, policymakers are just as entrepreneurial in that they are "selling" different policies that benefit their respective constituencies, but the costs of implementing a particular policy in terms of the unproductive rent-seeking activity that it generates are not directly concentrated on the political decision-maker.  Thus, Bastiat's characterization of legal plunder via the state is a normative critique that has an analytic grounding in Pareto's general sociology.
This brings me to another point, which is to engage Mingardi's claim that Pareto's political realism "is not incompatible with a classical liberal worldview: it is incompatible with a classical-liberal program." What's unclear, and I hope we take this up further in the discussion, is whether Mingardi equates the classical-liberal program held by Pareto with the vision of the classical-liberal program of his time.
Having said this, I would like to suggest that they are both compatible with Pareto once we interpret them through the "imperfect" lens I've suggested. Here I am on tenuous grounds of misinterpreting Mingardi's use of terminology, but if a classical-liberal worldview implies that individuals hold a set of diverse ends that must be realized through the self-directed application of means, this implies "imperfection" in the sense that the pursuit of one's human flourishing is a process towards completion that requires freedom to realize. However, human flourishing is not an activity pursued by isolated automatons; rather, it is the normative basis for realizing the gains from productive social cooperation under the division of labor.
From this perspective, Pareto's vision of a classical-liberal program was not imperfect because it was flawed but because it was incomplete. As Mingardi mentions, Pareto's alleged association with fascism was implied by his increasing interest in force. However, from a Paretian perspective, force is another set of means to compete for scarce resources that can be traced back to logical action. If Pareto's classical liberalism was inconsistent, it is only because it was imperfect in the sense of his failure to complete his positive analysis of human interaction by carrying it to its logical conclusion, which was to modify the political rules of the game in a way that minimizes the gains from rent-seeking.
I would like to conclude here with a statement by Frank Knight often quoted by Buchanan, which is the notion that a situation that is hopeless is a situation that is ideal. If there are any imperfections that Buchanan (and Tullock) updated and perfected in Pareto, as Mingardi suggests, it would be because Pareto, ironically, failed to be Paretian. That is, precisely because political processes are not ideal, there is hope. And that hope for improvement has a non-normative basis, as Buchanan suggested in Paretian fashion: "the political economist's task is completed when he has shown the parties concerned that there exist mutual gains 'from trade'" (emphasis added). (Buchanan 1959, 129) Such mutual gains from trade can be achieved only when the political economist takes the political status quo as given and suggests Pareto-improving rule changes from that status quo as a point of analytical departure, as Pareto might suggest. This is consistent with the classical-liberal vision of expanding the scope of productive social cooperation under the division of labor.