Nature of Competition: Arbitragers and the Government 01

 

If resources were unlimited, we would not need economy. If all are equal we would not need trade. Where there is no need for either, there is no need for economics, either.

             Fortunately, both economy (M∙U∙T^-1) and trade (M∙U∙T^-1 vis-à-vis U∙m∙T^-1) are absolute necessaries while we stay in Here (T^-1 possibly as long as 125 years before “we are all dead”).

 

Pareto optimum. First, who with the legitimate wherewithal should be served first, from the most desperate to the least desperate? Yes, exactly in that order, whether to the letters of ethics or in the spirit of Adam Smith.

             Second, who with the wherewithal should be allowed to utilize the human or natural resources, first before all others, from the most efficient to the least efficient? Yes, exactly in that order.

             If there were an omniscient benevolent dictator (from Gregory Mankiw; an oxymoron to J.S. Mill  by the way), she would get the ideal scenario to come true. There we go the diagram of “the market” in the textbook of his and others’. In the Pareto optimum of the most ideal occasion as such, the communal surplus, combination of consumers’ and producers’, is at the maximum.

Pareto Ultimatum. We have yet to see whether the invisible hand is noticeably existent. In reality, no one is either omniscient like the invisible or omnipotent like a dictator. With the hand out of sight, the only guidepost as for each and all of us is “self-interest.” More specifically, we never go for it at the margin of choice, when the cost outweighs the benefit.

             With the above said, there can possibly like once in a blood moon be the Pareto Ultimatum where no communal surplus is created at all. More specifically, the least desperate buys from the most efficient all the way to the most desperate buying from the least efficient. Nobody loses and nobody wins; everyone evens out. At any rate, that’s as fair as fair can be. See we told you so: Look at the Pareto Ultimatum, “golden rule-like” or otherwise.

            Icing on the cake: the “real quantity of production” (M∙U⁰) literally “doubles down.” By construct, the quantity of the Ultimatum is twice as great as that of the Optimum: no value added while the real quantity grows 100% per period. Shall we be happy or sad? Well, "a sad movie always makes us cry."  

             On caveat: Political dreams (from the right brain) are never as pragmatic as economic realities (of the left brain). If history is any guide, propaganda is efficient everywhere except for never effective. Boys and girls, frame the end (M∙U∙T^-1) correct, before all else! Don’t be fooled with M∙T⁰, M²∙T^-1, M∙U²∙L^-1, L∙M∙T, or the like.

 

The virtue in the middle of two vices. The nice and beautiful reality always and everywhere takes the middle of the road, while on the road side everybody is yearning for the best.

It’s the transaction costs, stupid. What pull our legs back in our way to the dreamy optimum is the transaction costs of all kinds; pecuniary outlays, time wasted, uncertainties, un-predictabilities, fears, concerns, annoyances, displeasures and the like.

 

Competitive context. None of the household, the market and the community exists in vacuum. All the three have a common competitive context (CCC), which is supposedly provided by the sovereignty. If we will, we can call CCC the “greatest common dictator” (GCD).

             As such, where the soft and hard infrastructures of communication, transportation, money, banking and finance are “satisficing” or “near-satisfying,” the self-interests will lead us home of the Utilitarian Paradise. More specifically, we come nearer to the law of universal one price we talk about somewhere else. The key of keys in this regard is the Hayekian rule of law: that is, purposive “rules of the game” firmly established.

             Come to think of it, “the invisible hand Adam Smith talked about” (from Larry Summers) is the collective noun of us thinking at the margin at each and every opportunity of arbitrage. Meanwhile, J.S. Mill proposes that Order be the prerequisite of Progress. In that regard Mill particularly names the systems of taxation and Finance. According to Ben Bernanke, incidentally, Finance was the very problem in the Great Depression. Umm, “Orderly ruling of Finance” Ben Bernanke talks about at Stockholm (2022) is a marginal Section of the rule of law.

             Exogenous to macroeconomics, wise men “bark up the right tree.”

 

Keynes vs. Hayek