From Hobson's Choice
A measure of economic efficiency under which utility for any participant in an economy cannot be increased without one or more other parties suffering an absolute decrease in utility. If a system of production and distribution can be altered so that someone is better off, without injuring somebody else, then that system is not optimized.
Pareto Optimization is illustrated by the Edgeworth Box shown below. It's really just a pair of indifference curves. One thing to remember is that, while the vertical axis shows rising wages, the direction of the horizontal axis is reversed. That's because the "zero" axis for the utility of the owner of capital is in the extreme upper right-hand corner of the graph
According to this chart, the rising rate of wages (w) is one contributor to the utility of the worker; another contribution is lower interest rates (or capital rental rates r). The latter effectively increases the purchasing power of the worker.
The object of this diagram was to illustrate how the market, under optimal conditions, resolves the controversy of the correct distribution of the total economic output between labor and capital. This same dichotomy of interest also exists between producers and suppliers, or taxpayers and the state.
However, the chart also illustrates something else: one can see here the idea of demand reaching a convergence with available output. The optimal solution is one where the rate of indifference is the same as the comparative cost, which is (in turn) determined by the output function.
Significance of the Idea
The primary purpose of the concept is polemical, as is the case with nearly all mainstream economics. While it formerly served to identify the probable costs and benefits of policy alternatives, since the 1970's economics serves virtually no non-polemical function. It is used to defend the unique legitimacy of the corporation as a state surrogate. A simple proof is that economics could at the very least provide an evaluation of costs relative to benefits, but today invariably achieves the same result: let the rich and powerful do as they please. For example, strict laissez-faire capitalism maintains that the customer is infallible in making choices about the disposal of income, but utterly incompetent at making decisions affecting political matters. To account for this embarrassing inconsistency, economists developed "public choice theory," which is a single foregone conclusion posing as a branch of the social sciences. However, the distinction claimed by "PCT" is wholly imaginary, since it assumes management of corporations are (effectively) infallible over huge pools of resources they do not own, but exercise rights of ownership over.
The purpose of the idea of Pareto Optimality is demonstrate the advantages of establishing conditions of free trade in any situation. It is not uncommon for notionally "free trade" to consist of free trafficking in the fruits of plunder, such as products of debt peonage, crude oil pumped from autocratic nations, or water pumped from vital aquifers. Typically, panglossian economists will insist that the resolution to such blowbacks in free trade are to compensate the losers, which oddly appears as a proposition only when the original change in trading regime is proposed. Afterwards, any such compensation is viewed with undiluted horror.
- ↑ Incidentally, this is not a radical or leftist conception of labor-capital relations. It's from the work of Francis Ysidro Edgeworth and Vilfredo Pareto, two of the most extremely conservative, orthodox economists who ever lived. Anyone who is seriously disturbed by my dichotomy can relax. Everyone agrees that there's a missing dimension here, which is that of time. A reasonably high value of r leads to an increase in the accumulation of capital, allowing for greater total output.
- ↑ This distinction may seem subtle, but consider the case of a polluter, who despoils the property of other parties, thereby arrogating some of its use value. Or consider applications of the despoiler's ubiquitous Quis est beneficium? arguments.
- ↑ In countries for which currency markets are not deepened, the local currency usually trades at an extremely deep discount relative to its local purchasing power; India's rupee, for example, trades at about a fifth its purchasing power parity (PPP) to the US dollar, which, in turn, trades at about 60% of its PPP with respect to the euro (as of late 2007). The consequence of this is that firms whose revenues come from European and Usonian markets can easily buy water rights in India for very little, and use that water to produce products for re-export to rich countries. Ironically, water is much more ecologically impacted in India than it is in Europe, but "free trade" makes it cheaper.
- "The Paretian System I - Equilibrium," History of Economic Thought, College of Economics & Public Administration (NYC)