My friend, randomly this afternoon: “Heh, so Pareto had 20 cats.”
Me: “What in the hell are you reading that would tell you that?”
Friend: *holds up The Origin of Wealth*
Me: “Why are you trying to know more than me about economics again?”
Smartass tweeter, a bit later: “Well, now we know the socially optimal number of cats.”
Me: “And this will be my excuse when I someday have 20 cats.”
For those of you who don’t remember, Vilfredo Pareto was an Italian economist (among other things) back in the late 19th and early 20th centuries. (Sidenote: After reading the Wikipedia biography, I am somehow less surprised that he had 20 cats.) You’ve probably heard of him because of the concepts of Pareto improvements and Pareto efficiency. Simply put, a Pareto improvement is a change that makes at least one party better off without making any party worse off, and a Pareto efficient (or Pareto optimal) outcome is one where there are no Pareto improvements that can be made. Therefore, it’s not surprising that Pareto efficiency can be used as a criterion for an outcome to be socially optimal. (It shouldn’t be hard to see this by examining the flip side, namely that a scenario is pretty clearly suboptimal if there are unexploited Pareto improvements to be made.)
For example, competitive free markets (with no externalities) are said to be socially optimal as measured by economic value creation in part because they are Pareto efficient. In this scenario, a Pareto improvement would be a situation where a buyer and seller can come together for a transaction that makes both parties better off (or at least makes somebody better off without making the other guy worse off). In markets, this is possible when a buyer of an item values the item more (i.e. is willing to pay more for the item) than it costs the producer to make it, and such transactions do in fact create economic value. In free markets, all such Pareto-improving transactions do take place (and no non-Pareto-improving transactions take place), which leads to the value-maximization conclusion.
Since we now obviously know that the socially optimal number of cats is in fact 20 (I can’t imagine Pareto settling for anything inefficient), well, it’s the Internet, so you knew it had to come to this…I present to you what YouTube calls that top 20 cat videos of all time:
Okay, maybe not the absolute top (the one with the tiger cub and the Chihuahua is obviously the best), but some of those almost made me do a spit take.