Pareto, Walras, Pigou and P2p Social Application

Fact: The use of social application became ubiquitous in the urban quotidian of the 21st century. [...]

Fact: The use of social application became ubiquitous in the urban quotidian of the 21st century.

Reflection: Is such ubiquity of social applications really efficient?

Travelling in the French capital, in the Catalan region and in the Swiss cantons, I imagined myself in one of those charming cafés, at the end of a rainy afternoon, talking with Pareto, Walras and Pigou about the social application impact from the perspectives of their theorems about efficiency, general balance and externalities – three primordial concepts in classic economics.

A youthful dream! After all, Vilfredo Pareto, Léon Walras and Arthur Pigou were prominent economists born in the middle of the 19th century. They had lived the golden years of the end of the 1800s, witnessing the enormous impact of the capitalist private sector on European society and, with their texts, they outline the foundation of economic thinking for future generations, including mine.

The conversation begins with a brief summary on how these classic economic foundations are presented and related to each other.

Pareto is the first to comment:

“_ The Pareto efficiency is related to the specific context of resource allocation that makes any improvement in the situation of an agent impossible without worsening the situation of another economic agent. An economy becomes efficient only when no additional exchange is necessary among the satisfied agents already content with their choices and when the production possibilities have already been optimized by the available technology.”

Aware of the technicality of the comment, I try to summarize in a few lines in a general way: The Pareto efficiency, therefore, means that no one can improve his own choices without provoking a negative impact on the choices of the other participants in the market.”.

Walras continues:

“_ The general equilibrium assures the existence of a set of prices that enables equality of supply and demand for all the goods in a given market. In theory, the commissaire-priseur (auctioneer) announces the prix crié au hasard (auction price), he receives the supply and demand plans and assures that no exchange occurs before all the equilibrium prices have been defined in a process called tâtonnement (trial and error). With total symmetry of information and in the absence of transaction costs, the general equilibrium price for each item is defined when there is no surplus of demand or supply”.

Again, aware of the risk of being judged as arrogant, I insist on summarizing the concept in colloquial terms: “_ general equilibrium refers to the set of prices freely defined in such a way that all demand is satisfied and all supply fully accomplished.” Walras, to my relief, slightly waves in approval.

And then, Pigou complements the initial view on the economic instruments:

“_externalities are collateral effects – positive or negative – caused by decisions about third parties that are neither involved in the process, nor factored in by the decision-making agents. Negative externalities cause involuntary damage to third parties, without the agents responsible for such impacts receiving any onus or penalty. It is natural that externalities never occur in great social contexts, as they arise from imperfections in property rights, ignored in the decision-making process, creating a political or ethical dilemma. Sometimes the solutionis to impose a tax on those responsible for generating the externality.”

There is a certain embarrassing silence when I questioned the use of these concepts in the evaluation of the use of P2P (peer-to-peer) social application and its impacts on the local communities. I realized just in time that, had they lived until the first half of the 20th century, Pareto, Walras and Pigou would never have imagined such a possibility.

Let me explain in few words: “P2P transport and lodgings social applications facilitate the meeting of supply and demand. Transport applications enable people access drivers within a certain range of distance at a cost generally lower than traditional taxis. Lodgings applications allow people to access rooms available in a desired region, generally at a lower cost than what traditional hotels charge. Both of them use easy payment methods and one can evaluate the quality of the service there and then. Seems quite simple”.

Pareto, Walras and Pigou at last felt comfortable enough to reflect on their economic theories, celebrating the marvelous technology of future times.


Daniel Augusto Motta, PhD, MSc

Founder & CEO BMI Blue Management Institute

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