Economics Professor Herman Daly of the University of Maryland once noted that the most formidable problem in our society is the judicious sharing of its resources. This sharing is an ethical problem, that demands solution. In this context of judicious sharing, Daly's view (and my own) is that - while people are not created equally- the Earth's resources exist to be shared equally. Indeed, the Utilitarian economist Jeremy Bentham once noted that the happiness of a given society is maximized when its utilities are maximized. That means ALL of its people, not just a few at the top, able to exercise their talents to their maximum potential. In the words of Bentham:
"The more nearly the actual proportion approaches to equality, the greater will be the mass of happiness'
Because resources, i.e. money, ensure one's talents can acquire the choices to be used in the most able ways then, Bentham argued, the greatest happiness is assured when the distribution of the resources to support the development of talents are nearly equal. If 10 million men or women wish to become fulfilled artists or poets, then they can, or if they wish to be writers, or builders.
No one "owns" the Earth's resources (though a few lay claim to most of its converted natural capital), since they're all temporarily on loan to us. This carries over to whatever wealth is acquired by humans in extracted resources. If that wealth is disproportionately in a few hands, then it follows that the effect is inimical to the welfare of the human community - be it city, state, nation or globe. So long as some have resources, while others lack, this discrepancy undermines long term human welfare.
If resources are squeezed so only a tiny fraction can benefit, then the mass of people suffer, and the society as a whole becomes woefully inefficient, and even pathological. Communities are then paired off against communities, and people against other people as each becomes a threat to the other in an economy governed by a diminishing resource pie.
S = L - V
Let us say, as an illustration, that a craftsman working for a company is paid $10 an hour to make beautiful mahogany chairs by hand. He takes 10 hours to make one chair, thereby imparting a discrete labor value of 10hr x $10/ hr = $100 into the chair, invested in his blood, sweat and maybe tears. The chair is then sold at retail for $1,000 by the company. Then the surplus value S is:
S = $1,000 - $100 = $900
Hence, in this light, V is the paid labor and S is the unpaid labor. The amount of labor expropriated is therefore equal to $900.
Meanwhile, the rate of surplus value, or the rate of exploitation is:
S/V
In this case: S/V = $900/ $100 = 9
Vilfredo Pareto along with his Italian elitist compadre Gaetano Mosca then sought to erect an economic model to negate Marx surplus value theory. They saw Marx's postulated unpaid labor as a direct threat to the elites at the time, a supreme motivation of some of the masses to instigate for redistribution by allocating more S to the worker's V via higher hourly wages. They reasoned that something had to be done to quash this idea in its infancy, and so they developed their Elite theory. The risk they saw was that Marxism as defined would deliver too much proportion of resources to the masses by way of compensating what was originally unpaid labor. After all, according to Elite theory and the Pareto Distribution basis, the mass of people had to be kept poor if the few elites were to maximize their own efficiencies of wealth and resources. It was a zero sum game, after all, though later Elite theory propaganda would try to say zero sum didn't apply if the little sheep just got off his duff and worked harder! Then, he might get more money or resources.
Therefore, if the company or managerial hierarchy had to part with a fraction more of its surplus value S, they might not have that extra capital to re-invest in ways that undermined the workers' labor. Perhaps, to invest in machinery to manufacture the chairs and get rid of the workers altogether. Or, more likely today - to use an investment bank that would leverage the workers out of existence via a massive merger with a larger company. The idea thus had to be NOT to make the masses richer, but to make them poorer. Poor masses couldn't make trouble, since they would have to work longer and harder to even get the bare necessities. And they'd likely have precious little time to stick their noses into politics. At least not in any comprehensive learning format Far easier to just get one's info (actually disinfo) from social media pals.
Pareto and Mosca also saw the need at the time to develop a massive economic propaganda industry to sow memes that would destroy Marxism. They suggested use of the term "evil", or "inhuman" and this was improved and enhanced as other elites took up the message. For example, Friederich von Hayek later waxed on about the "road to serfdom" as being deprived of the freedom to spend. Hayek, like other capitalists and purveyors of Elite theory, saw that if rampant consumerism could be incited and promoted, Marxism's tenets would become redundant. A person enmeshed in whatever his consumerist fancy desired, whether a fresh bottle of rum or a new ipad, wouldn't give two mites about some long-haired radical commie and his theories of labor!
Enter then Pareto's infamous summary of his mode of economics which underlay the Pareto Distribution and by extension, Pareto-style economics:
"Assume a collectivity made up of a wolf and a sheep. The happiness of the wolf consists in eating the sheep, that of the sheep in not being eaten. How is this collectivity to be made happy?"
Pareto concluded the only happy ending was for the wolf to eat the sheep. If the collective had ten wolves and 200 sheep, the only happy ending was for ALL the sheep to be devoured by the wolves. In this way utility was maximized along with efficiency. The sheep would get their fill of the grass while the wolves held out for a time, but in the end all that sheep meat would be consumed by the wolves. The smaller set of the more powerful faction of the collective owned and merited the killing and eating of the larger ("mass") set.
This template translates directly to the basis for Elite economic theory. That is, only a very select few - an extreme minority - in any given society - often belonging to the most elite classes, are fit to govern that society and moreover, partake of the bulk of its resources and wealth. In a word, the elite are also the "elect" - predestined by the process of alleged "social Darwinism" to attain the pinnacle and be served by the masses in the society. These masses, in addition, to be kept docile must be forced to adhere to an economic efficiency model that redistributes their resources to the elites.
Example: The unemployed are probably the biggest potential users of any federal dollar, so why are they not given more extended benefits to spend that money (especially in a poor demand market) while the rich are given more tax cuts they don't need? Well, because Pareto's distribution favors the higher intrinsic value or "utils" for each dollar of the rich. (See graphic).
The key aspect to note is the width corresponding to the "delta x" portion of the gradient (delta U over delta x) which translates into the net dollar's worth for each population. As readers can see from inspection, the width of $1 for the rich is significantly longer than the one for the poor. This translates into the argument that the buck is worth more to the rich man, and hence, any transfer from the rich to the poor hurts the rich more than it helps the poor (especially as the 'utils' for the poor man is also rather smaller by comparison).
One other important concept in this mix is what's called the reservation price for a given object or service. Ultimately, along with the Pareto distribution, this factors into what is called the Pareto efficiency. This is just the maximum price a person is willing to pay. So, if I have a 1954 Henry Aaron TOPPS baseball card (now with a very high book price) and I offer it to you for sale, and ask what the top price is that you'd pay, if you respond "one hundred dollars" then that is your reservation price.
The same may apply for rent. So let's say a new apartment complex opens up in the Springs and is selling apts. (1-3 bedrooms) ranging from $1,500/month (for single Bdr) to $2,400 for 2 Bdr, to $3,600, and people want to buy. Obviously, a relatively poorer couple will have a reservation price probably lower (e.g. $500) than any of the apartments, and hence need a Section 8 HUD rental subsidy to offset costs, while the rich couples or families can move into any of them.
The same may apply for rent. So let's say a new apartment complex opens up in the Springs and is selling apts. (1-3 bedrooms) ranging from $1,500/month (for single Bdr) to $2,400 for 2 Bdr, to $3,600, and people want to buy. Obviously, a relatively poorer couple will have a reservation price probably lower (e.g. $500) than any of the apartments, and hence need a Section 8 HUD rental subsidy to offset costs, while the rich couples or families can move into any of them.
But, according to modern economics and the Pareto distribution, offering a rent subsidy on the order of $1,000 (for the single Bdr apt.) effectively removes it from the actual competitive market. Thus, $1, 000 is thereby "wasted" say if a wealthier couple can pay the full price of $1,500. Hence, the loss of $1,000 rent makes it Pareto inefficient. This is why modern economics frowns on rent subsidies. (Another way to say this is that the poor couple receives a "consumer surplus" of $1,000 which they didn't earn).
To take a more general example, some readers may recall that former Fed Chairman Alan Greenspan went on record in an appearance before congress (in 2003) as asserting that "Social Security benefits need to be cut to pay for Bush’s tax cuts."
What on Earth was the man thinking? Well, he's thinking on the basis of Pareto efficiency! Social Security payments, especially with COLAs, do everything the Fed Chairman didn’t want. They pour more money into the economy, but not via productive labor or market investments, returns. People receive their checks merely by existing and breathing day to day, and having paid into the system with FICA deductions. Even then, they receive far more in benefits than actually paid in, making a total mess of "utils" earned. In a way, the Social security recipient (in the eyes of this Pareto-riguer bunch) are like the rent subsidized couple with their "consumer surplus". Worse, the S.S. COLAs increase the non-productive payments each year, one reason why – back in 1997 – Greenspan demanded an artificially much lower COLA increase than had originally been proposed.
Greenspan had surmised – correctly in terms of Pareto Efficiency – that the Bush tax cuts accomplished the same for the well off. The tax cuts poured more money into their hands each year, and actually allowed them to keep more of their higher valued dollars and their associated utility. Greenspan obviously reasoned, based on his 2003 Senate Banking Committee testimony, that it made more fiscal sense to let these wealthy keep their ill-gotten gains from the tax cuts, than to preserve Social Security and reward the unproductive (and mostly non-investors) with unearned compensation. In terms of both magnitude of the wealthy's "utils" and greater worth of each $1 they got, it was more Pareto Efficient!
What about health care? How does Pareto efficiency work there? The clue was revealed by Academic Economist (and former Reagan Advisor) Martin Feldstein, after being awarded the presidency of the American Economic Association in 2004. A large part of his address was devoted to the issue of health insurance. Feldstein made the case that health care is in trouble in this country because deductibles and co-payments are too low, and as a result people (mainly the non-wealthy) tend to over use the system and go to the doctor too many times.
From a reservation cost perspective, let's say the productive cost of the typical primary care physician's visit is $150. This is what she charges, or what her affiliated Care center does. The non-wealthy person (having shelled out $250 for an insurance deductible) is then happy to pay only $15 for a co-pay. But this skews the system and makes it Pareto INEFFICIENT. If one therefore takes the difference ($150 - $15 = $135) it makes more sense to just give the unwealthy person say $134 NOT to visit the doctor and consume resources. Those resources are better left to the rich who can afford to pay the full reservation cost with no problem.
Same thing here in getting a preventive test, say a colonoscopy which normally would run $3,500. But there's no way the insured regular patient can afford that total cost, most of which his or her insurance picks up. But, in Feldstein's calculation - based on Pareto Efficiency- if the insurance paid part is $2,000 (while the patient's reservation price is $1.500) it makes more sense to give the prospective patient $1,499 NOT to get the colonoscopy, than to let her get the test and consume valuable specialist time and resources via $2,000 subsidy.
The same scheme can be carried over to environmental considerations, especially say, in implementing global warming regulations or altering behavior - say to cut carbon emissions. Since the lives of all the poorer segments of the populace are deemed to be worth less in terms of their util capacity it makes more sense to allow more of them to perish from climate-caused catastrophes (say more flooding, twisters or hurricanes) than it does to cause harm to the rich by exacting carbon costs which will upset their commodities markets. Thus, having 1,000 - 10,000 average Joes and Janes die each year is still more tolerable than having oil speculation losses for the rich, because then they will also pull back on their investments in ETFs (exchange traded funds), hedge funds, and all the rest ....ultimately ending in less investment banking profits and perhaps another financial collapse.
By a similar line of perverse Pareto reasoning, it makes more sense for the impoverished masses to be allocated cheaper housing near chemical and waste dumps or breathing filthy, polluted air - than to be afforded better conditions in wealthier areas. The reason is obvious: it is inefficient because if they had to pay for it, they couldn't afford it. Landlords would be making endless foreclosures. This is also a reason why many poorer urban areas are "gentrified" to make room for more wealthy residents who can pay much higher rents. It is more Pareto efficient!
Same thing here in getting a preventive test, say a colonoscopy which normally would run $3,500. But there's no way the insured regular patient can afford that total cost, most of which his or her insurance picks up. But, in Feldstein's calculation - based on Pareto Efficiency- if the insurance paid part is $2,000 (while the patient's reservation price is $1.500) it makes more sense to give the prospective patient $1,499 NOT to get the colonoscopy, than to let her get the test and consume valuable specialist time and resources via $2,000 subsidy.
The same scheme can be carried over to environmental considerations, especially say, in implementing global warming regulations or altering behavior - say to cut carbon emissions. Since the lives of all the poorer segments of the populace are deemed to be worth less in terms of their util capacity it makes more sense to allow more of them to perish from climate-caused catastrophes (say more flooding, twisters or hurricanes) than it does to cause harm to the rich by exacting carbon costs which will upset their commodities markets. Thus, having 1,000 - 10,000 average Joes and Janes die each year is still more tolerable than having oil speculation losses for the rich, because then they will also pull back on their investments in ETFs (exchange traded funds), hedge funds, and all the rest ....ultimately ending in less investment banking profits and perhaps another financial collapse.
By a similar line of perverse Pareto reasoning, it makes more sense for the impoverished masses to be allocated cheaper housing near chemical and waste dumps or breathing filthy, polluted air - than to be afforded better conditions in wealthier areas. The reason is obvious: it is inefficient because if they had to pay for it, they couldn't afford it. Landlords would be making endless foreclosures. This is also a reason why many poorer urban areas are "gentrified" to make room for more wealthy residents who can pay much higher rents. It is more Pareto efficient!
By the same token, it makes more sense to dump the toxic wastes from advanced nations in poor nations than vice versa, because the same reasons apply: the 3rd worlders would never be able to afford their own clean up costs, so what's an extra five million gigatons of waste in the overall scheme of things? Analogously, it makes more "Pareto" sense to ship cheap factory jobs with collateral health issues, e.g. producing toxic, carcinogenic fumes etc. to poor third world nations where there are few environmental or health standards than keep them in the U.S. where the regulatory costs would be punishing, OSHA's looking just around the corner....and hence, Pareto inefficient.
Appreciating the extent to which typical Neoliberal, capitalist economies use Pareto efficiency (and the Pareto distribution) is key to understanding how economic elites secure and preserve their advantages. It is also why they want no part of democratic socialist prescriptions that would level the playing field. The Repukes' general objection to Biden's American Rescue Plan (ARP) is of the same memetic piece: They don't want the lower economic strata of Americans getting any capital or resources they have not earned via work or investment decisions. We can therefore call the GOP's ARP objectors the allies of Vilfredo Pareto's wolves.
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