The term is named after Vilfredo Pareto an Italian engineer, economist, and social scientist. Pareto was born in 1848 as the Italian revolution got underway in typical Italian fashion (people stopped smoking and playing the lottery!) and he died in 1923 right after Benito Mussolini assumed power in Italy.
The term is most usefully applied in the production of goods, as in "guns vs. butter." Same amount of butter and more guns is a Pareto improvement; so is same amount of guns and more butter; so is more guns and more butter. Trading off guns for butter (fewer guns in order to make more butter) is not a Pareto improvement.
I have often wondered and never manage to get completely straight in my mind how economics lost its utilitarian roots–how it went from saying “this is a good policy because it advances the greater good of the greater number” to “competitive free-market allocations are good because they are Pareto-optimal, and we do not prefer any particular Pareto-optimal allocation because that would be a question not of science but of values and politics, and non-Pareto-optimal allocations are bad.” It has puzzled me particularly because the claim that we cannot say X is better than Y because they are not Pareto-ranked is not, in general, raised when the policy at issue is a GDP-increasing and either distributionally-neutral or inequality-increasing policy like tariff reductions or cuts in capital taxation…
And, by all means, read John Quiggin's The Political is Personal too.