Before I explain why, I would like to let you know that I consider mainstream economists intelligent idiots. You may ask why is that?
Well because of:
1. They created a loanable funds theory out of nothing (a phantasy) and are defending it against all evidence (1).
2. They created general equilibrium theory out of nothing (just an other phantasy) and are defending it against all evidence (2 , 3).
3. They will most probably stop reading at this point and by doing so they will miss their chance to save the world and to win the next not so nobel fake Nobel Price.
Now back to the paradox question raised by an confessing not so intelligent non economist.
Lets assume a game / economy where returns on economic activity are distributed like the IQ of people. As you may know, the IQ of humans is the normal distributed capability of humans to deal with and solve analytical and logical problems. And you know how a normal distribution looks like.
So an IQ of 100 tells you that the person has an average intelligence in respect to solving the type of analytical/logical problems as they are presented in an IQ test. A typical test done with a representative sample of people yields this average of 100 with a sigma of 15, which means that 68% of the people will have an IQ between 85 and 115 or 95% of the people will have a IQ test result between 70 and 130.
Now back to our game/economy, where returns on economic activity are distributed like the IQ is distributed. When every one invests 1$ (out of an equal distributed pool of investable wealth) and receives an arbitrary return on it, that is drawn out of a pool of returns that is normal distributed like the IQ is, the distribution of results would look like the distribution of IQ. If the game is a zerosum game, where the returns are payed out of the pool of investments collected beforehand 68 % of people would have between 85 and 115 cents, 95% between 70 and 130 cents with an average of exactly 1$. If the game is a game where because of some magick the pool of invested $ shows some growth of for example 5% during the time between investment and distribution of results, the average will shift from 100 cents to 105 cents but the shape of the distribution will not change. So it looks like the system behaves like an equilibrium system where the gains of someone are the loss of another, due to an arbitrary but fair and normal distribution of returns. And that is the point where the intelligent idiots of mainstream economics led economics astray. They ignored and are ignoring the findings of Pareto and Gibrat. And that is, because an economy is an ongoing process where something like above is repaeted over and over again. The twist is, this can't and is not be done in an additive way, but in a multiplicative way. In the next round the one who lost 15 cents can only reinvest his remaining 85 cents and the one who gained 15 cents will most probably reinvest his 115 cents. And when that is done over and over again, cumulated results start to look like the results of a rigged game. The wealth distribution (cumulated results) is transformed from an equal distribution in the beginning (every one has 1$) to an distribution that looks like a normal distribution (after the first round in this example) to a log normal distribution with an ever increasing inequality=distance between mean, median and mode.
And this is true independent of some magick, that lets the economy as whole grow, stagnate or shrink.
I consider the ignorance of this the cause of rising instabilties in economies all over the place. It leads to disintegration of societies which used to work fine. Revolutions, class war, war between economies and the decay of economies, which used to be examples for doing it right. All that has its roots in the ignorance of what is typical for an out of equilibrium system (driven out of equilibrium by an endless repeated stochastic multiplicative process). By the way a lot of people may consider me an above average intelligent but somewaht arrogant guy. I like to think I am not. I tested my IQ just recently. It turned out to be 98.
Richard A. Werner
- Published: July 21, 2011
Breaking the Bad Habits of Economics: put that “equilibrium” out! - See more at: http://www.debtdeflation.com/blogs/2015/08/27/breaking-the-bad-habits-of-economics-put-that-equilibrium-out/#sthash.kzHCnpAa.dpuf