General Equilibrium and Welfare Theory
Vilfredo Pareto, born of a Genovese father and French mother, was trained as an engineer. At 45 years of age, he accepted the chair at Lausanne. Pareto's system of thought and his vision of social processes differed from Walras's, but Pareto cast his pure theory of economics in much the same mold, extending and refining Walras's general equilibrium system. Moreover, Pareto did what Walras had not been able to do: he founded a school of thought. His disciples cooperated in theoretical research, cultivated personal contacts, and defended one another in controversy. The school, reflecting Pareto's own heritage, was primarily Italian.
Two of Pareto's contributions to economics are especially noteworthy. First, he identified a situation of maximum efficiency for a society as one in which it is impossible to increase the happiness of one individual without decreasing that of someone else. Today, all the conditions specifying economic efficiency are referred to as “Pareto optimal.”
Second, Pareto proved that a state of maximum efficiency and social welfare is identical with equilibrium under pure competition. This led him to conclude that the problems in reaching a position of maximum efficiency, as well as their solutions, were the same for a collectivist economy as for an economy founded on private property.
Pareto's chief objective was to develop general equilibrium models covering the whole spectrum of social phenomena. Both he and Walras were aware that their equations could not be solved due to the lack of data and the large number of variables involved. Nevertheless, theirs was a great achievement from the standpoint of logical clarity, and the impact of their thoughts on modern economic theory ranks them both among the dozen most influential economists of all time.