Introduction

4In this paper, that is part of a more general research on Pareto, from Bruni and Guala (2001) to the editing of the Manual of Political Economy critical English edition (forthcoming with Oxford University Press). In particular, this paper is in continuity with, or a representation of, the research presented in Bruni and Sugden (2007), where one can also find general framework of theses that here are just mentioned and little discussed.

1. The methodology of naked facts

5Pareto was convinced that economic theories should be deduced from firmly established empirical propositions about “objective” and observable choices rather than about “subjective” and metaphysical sensations. He claims that everything that is significant in the existing economic theory (i.e. that of Walras) can be derived from the “fact” of curves of indifference, without any recourse to concepts such as utility or pleasure:

this entire theory […] rests on no more than a fact of experience, that is, on the determination of the quantities of goods which constitute combinations between which the individual is indifferent. The theory of economic science thus acquires the rigor of rational mechanics; it deduces its results from experience, without bringing in any metaphysical entity (1971 [1909], ch.3, §36b).

6Or in other words: “I am not interested in the reason why man is indifferent between [one thing and another]: I notice the pure and naked fact” (Pareto’s letter to the mathematician Herman Laurent 1989 [1899], p.288).

7Despite the way he uses the term “metaphysical” for psychology, Pareto accepts that psychology is more fundamental than economics, in the same sense that physics is more fundamental than chemistry or biology. In principle, to him, economic phenomena have (or, in principle, can have) psychological explanations, just as chemical phenomena have physical explanations. But, he believes, each science makes progress by finding its own fundamental laws, and making deductions from those laws. His proposal is that economics should constitute itself as a separate science – separate, in particular, from psychology and from sociology, also because Pareto was not convinced about the epistemology of the psychology of his time.

We will study the many logical, repeated actions which men perform to procure the things which satisfy their tastes. […] we are concerned only with certain relations between objective facts and subjective facts, principally the tastes of men. Moreover, we will simplify the problem still more by assuming that the subjective fact conforms perfectly to the objective fact. This can be done because we will consider only repeated actions to be a basis for claiming that there is a logical connection uniting such actions (ibid., ch.3, §1).

9Pareto recognises that, as an implication of this definition of “logical” action, his economic theory applies only to a restricted range of human behaviour: “by considering only one part of man’s actions and, in addition, by assigning certain characteristics to them, we have simplified the problem enormously. The study of these actions makes up the object of political economy” (ibid., ch.3, §2). So Pareto is proposing a particular definition of the domain of economic theory.

11It should be noticed that Pareto uses two criteria to identify logical actions in economics. The first is that these are actions that are repeated many times. In such situations, he claims, it is reasonable to assume that people’s beliefs about the world (“subjective facts”) coincide with how the world really is (“objective facts”). In this respect, Pareto anticipates the “discovered preference hypothesis” (Bruni and Sugden, 2007): he restricts the domain of economic theory to situations in which individuals have had adequate opportunities to learn the consequences of alternative actions. The second criterion is that, for an economic action to be logical, it must be directed towards the satisfaction of tastes through the acquisition of goods. Thus, the rationality of logical actions is instrumental: economic actions (the buying and selling of goods and services) are the means, while the satisfaction of tastes is the end, a methodology that is widespread in contemporary economics. So taken together, Pareto’s two criteria are intended to identify a category of actions that are instrumentally rational with respect to what he calls “objective facts”. As Pareto puts it in his Trattato (1916, translated into English as: The Mind and Society, 1935), actions are logical to the extent that they “logically conjoin means to ends not only from the standpoint of the subject performing them, but from the standpoint of other persons who have a more extensive knowledge” (ibid., §150). Pareto’s first criterion, that actions must be repeated many times in order to be identified as logical, imposes a major restriction on the class of phenomena that economics can explain. This criterion may not have excluded much of what nineteenth-century neoclassical economists sought to explain, but it excludes a huge amount of what later generations of economists have treated as their subject matter – many phenomena that economists study and have studied during the xx^th century deal with choices that are not necessary repeated and where there can be learning processes: choosing a job, house, wife, children, life insurance, etc. In fact, most of the economic theorists who have seen themselves as Pareto’s followers have not applied this criterion. For many commentators, one of the great advantages of grounding economic theory on the logic of rational choice rather than on hedonism is that it widens the domain of the theory.

12Probably the first who realised the problems linked to this restriction has been the English economist (and theologian) Philip Wicksteed (1906, p.817). In reviewing the Manual of Political Economy in The Economic Journal, he criticises Pareto for having unnecessarily restricted the domain of economics, by not realising how wide a range of human behaviour can be explained in terms of indifference curves. Similarly, Hicks and Allen, in the paper which relaunched Pareto’s ideas in the 1930s, write: “The methodological implications of [the new] conception of utility […] are far- reaching indeed. By transforming the subjective theory of value into a general logic of choice, they extend its applicability over wide fields of human conduct” (1934, p.45). The restriction operated by Pareto was surely neither popular among later Paretian economists, nor central to Pareto’s own economics, that can work also without this methodological constraint.

13Pareto’s second criterion (that actions must be instrumental in order to be logical) is instead much more essential for his larger conception of social science. Pareto was a sociologist as well as an economist, and most of his methodological efforts were spent in trying to define distinct domains for these two sciences. At least as much as economics, sociology too deals with actions that are constantly repeated (although less than economics: the kind of rationality – non logical actions - in his sociology was different and surely less crucial). Pareto gives as examples a man who removes his hat whenever he enters a drawing room, or a Catholic who regularly attends mass. Notice that these actions satisfy Pareto’s first criterion; just as in the case of repeated market transactions, we have reason to expect that the actors’ beliefs about the consequences of their actions will converge to the objective facts. However, Pareto claims that these actions fail his second criterion. Rather than being instrumentally rational, they are governed by norms or convention (here one can also find some contact with elements of Weber theory of rationality); people perform them because, on their understanding of the world, “one ought to do so” (1971 [1909], ch.2, §2). On Pareto’s account, these actions belong to the domain of sociology, not economics. According to the instrumentality criterion, economic theory applies only to choices that are directed towards the satisfaction of tastes. This immediately raises a question about the empirical bases and “operability” of Pareto’s definition of the domain of economics. Considering only the “naked fact of choice”, how do we know whether or not a person is motivated by her tastes? We cannot observe motivation itself, and (on Pareto’s account) we cannot observe tastes independently of choices. Thus, we cannot identify the situations to which the theory applies, prior to observing the behaviour that it is intended to predict.

14As noted and discussed by Bruni and Sugden (2007), Pareto’s instrumentality criterion presupposes some theoretical model of what it is to act to satisfy one’s tastes. If the second criterion is to have content, we must be able to define a set of possible end states that can be brought about by economic actions, and over which a person expresses tastes. And if rational choice is to be defined in terms of the satisfaction of tastes, the problem of choosing among actions so as to satisfy tastes must be well defined. That requires that tastes have some formal structure. Exactly what that structure is depends on how rational choice is formalised. For Pareto, who interprets rational choice in terms of constrained maximisation, the requirement is that tastes take the form of an ordering over the relevant set of end states.

2. The integrability problem

15On this requirement rest the roots of Pareto’s obsession for the so-called “integrability problem”, that occupied most of his theoretical energies between the Italian (1906) and the French (1909) editions of his Manual of Political Economy. The question is: how to derive from the (empirical) indifference curves “rational” utility functions (representations of preferences), and then the supply and demand curves essential for Pareto’s equilibrium analysis? To understand his attempts to solve this problem, we must first ask what he means by “tastes”. As the passage about “objective facts” and “subjective facts” shows, Pareto assumes that, after sufficient repetition of the relevant choice tasks, tastes “conform perfectly” to relevant objective facts. What kinds of facts are relevant, and what it means for tastes to conform to those facts, are not clear. What is clear is the assumption that, after sufficient repetition, each person has a stable system of tastes, structured in such a way that problems of instrumentally rational choice are well defined. Sometimes Pareto seems to be suggesting that a person can discover his/her true tastes, as if tastes were objective facts in themselves. Thus:

A man who buys a certain food for the first time may buy more of it than is necessary to satisfy his tastes, price taken into account. But in a second purchase he will correct his error, in part at least, and thus, little by little, will end up by procuring exactly what he needs. We will examine this action at the time when he has reached this state. Similarly, if at first he makes a mistake in his reasoning about what he desires, he will rectify it in repeating the reasoning and will end up by making it completely logical (1971 [1909], ch.3, §1).

• 9 Notice that Pareto is interpreting tastes as subjective comparisons of sensations. So the set of en (...)

to compare the sensations of a man in different situations, and to determine which of these he would choose. […] since it is customary to assume that man will be guided in his choice exclusively by consideration of his own advantage, of his self-interest, we say that this class is made up of theories of egotism. But it could be made up of theories of altruism (if the meaning of that term could be defined rigorously), or, in general, of theories, which rest on any rule, which man follows in comparing his sensations. It is not an essential characteristic of this class of theories that a man choosing between two sensations choose the most agreeable; he could choose a different one, following a rule which could be fixed arbitrarily (ibid., ch.3, §11)9.

17Given this understanding of tastes, Pareto’s problem is to justify the assumption that tastes take the form of an ordering of sensations. What grounds do we have for this assumption? Repetition alone does not provide an adequate explanation. The significance of repetition is that it allows the learning of what Pareto calls objective facts. The relationship between actions and sensations is such an objective fact, and we might expect that with repetition individuals would become able to predict the sensations that would result from alternative actions. But what is at stake here is not individuals’ knowledge of the processes that induce their sensations, but the rules they use to compare the sensations themselves. Unless we can assume that people compare sensations as different quantities of some common objective attribute, we seem to have no grounds for assuming that these comparisons are logical (i.e. transitive). Pareto was very conscious of this difficulty for his theory. In mathematical terms, this is the integrability problem. Pareto treats a consumer’s marginal rates of substitution at any given point in commodity space as “facts of experience” that in principle can be discovered by observing the consumer’s behaviour or relative prices (that are facts of experience).

21Nevertheless, over the first half of the xx^th century, Pareto’s rationality-based approach to the theory of choice gradually displaced the psychological approach advocated by Pantaleoni. It seems that Pareto’s reservations about the general applicability of the concept of logical action and his concerns about the justification of transitivity were quietly forgotten.

3. The naked emperor

22Pareto can be seen as the major interpreter of a methodological project that was common in most xx^th century, very much related to a wider neo-positivist and anti-metaphysical philosophy: to show that economics can be a separate science of rational choice, founded on firm empirical bases, and thus independent of any subjective and psychological elements. In trying to achieve this objective and push it ever further, post-Paretian neoclassical economists (Hicks, Allen, Samuelson) faced a common set of methodological problems, two of which are particularly fundamental and particularly difficult to solve. The first problem is to find and to justify a definition of the domain of economics within which rationality-based theories predict successfully: such a definition is not vacuous and is wide enough for economics to have something useful and relevant to say about the real world. The second problem is to find consistency conditions for “rational” or logical preferences, secure enough to serve as the basis for reliable deductive inferences and with enough substance to allow a science of rational choice to have predictive power, without appealing to contestable hypotheses that derive from psychological unstable theory. Pareto and, today, the discovered preference theorists grapple with these problems, but leaving open not only “cycles” of thermodynamics, but many key methodological questions.

23For most of the twentieth century, however, without bothering much about these problems, nor taking into consideration Pareto’s strict limits assigned to economics, mainstream economics was Paretian and extended economics tools to domains that Pareto should have considered beyond the boundaries of economics (family, religions, politics, altruism, etc.). Limits to the domain of rational choice theory were not discussed by Paretian microeconomics, and there was an implicit assumption that the theory was universal in its application. The preferences of economic agents were a priori assumed to satisfy strong axioms of consistency, without any need to test their empirical ground to respond to the many empirical anomalies of the true “naked fact of choice”.

24But recently behavioural economics remarked that “the emperor was naked”. It can no longer be taken for granted that the Paretian turn – the project of separating economics from psychology, of grounding economics on principles of abstract rational choice – was the path of progress in economics.

25Maffeo Pantaleoni (1857-1924), probably the only friend Pareto had among leading economists, the one who introduced Vilfredo Pareto to the “new economics” and brought marginalism to Italy, was always convinced that Pareto’s turn toward the naked fact of choice was wrong. His Principii di economia pura (1889, translated into English as: Pure Economics, 1898) was considered a real masterpiece of his generation. “We do not know, wrote Irving Fisher reviewing Pure Economics in 1898, where else in English can be found so compact and excellent an epitome of modern economic theory”. The Principii di economia pura was Pantaleoni’s “gem” (Edgeworth), a book still characterised by the hedonist hypothesis on which economic science is based, and from which every theorem has been derived. In his famous obituary for Pareto, published in the Giornale degli economisti (in 1924), Pantaleoni restated his argument, expressed many times in his work, i.e. that psychological hedonism is more scientific and empirical than other hypotheses upon which choice theory can be based (including Pareto’s theory of choice). His reasons were that: a) the past and recent history of economics, from Genovesi to Bentham, from Jevons to Edgeworth has shown the efficiency of hedonistic economics; b) this approach is based on the real observation of concrete reality, i.e. on psychological and biological studies; and c) since people reveal their preferences, economists can know much more about consumer behaviour than natural scientists.

26Pareto’s proposal to constitute a new economics (new not only with respect to hedonist first generation neoclassical economics, but also to Walras) as a separate science seemed to them (Pantaleoni, Edgeworth, Jevons, but also for most of the old Italian classics), to be a perverse refusal to use relevant available data. In Pantaleoni’s own words:

I claim that we cannot take away from economics the data coming from psychology. I cannot see what, by virtue of this renunciation, we gain, but I see what we lose. […] I cannot see the convenience of not utilising laws regarding tastes and pains that we know to be true, and that are the reasons of economic actions (1925 [1913], p.8-9).

27For a hedonist economist such as Pantaleoni, the domain of economics consists of those situations in which individuals are motivated to seek pleasure, and, even more radically, egoistic pleasure – an economic theory were problems such as “integrability” could never apply. If – as the hedonists assert – introspection is a valid mode of enquiry and if pleasure is measurable, we have an operational criterion for distinguishing economic acts from non-economic ones.

28Over the first half of the xx^th century, Pareto’s approach to the theory of choice gradually displaced the psychological approach advocated by Pantaleoni, Jevons and Edgeworth. The end of xix^th century was that of Pantaleoni and hedonists; the xx^th century was dominated by Pareto’s economics. The xxi^th century economics is, up to now, closer to Pantaleoni again.