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@UnlearningEcon lamented the deviations-from-Pangloss framing of neoclassical economics. Normal economic theories take perfection (optimality) as a starting point and ask how real-world “market imperfections” differ from the putative abstract-free-market ideal. (That “the free market” is an abstract ideal can be verified by first going to an actual bazaar and then listening to the way pundits use the term “free market” or “private enterprise” as in versus “government”.)

If you’ve spent too much time with your head in a book rather than participating in actual commerce, it can be hard to even conceive of another frame.

 

Here’s an alternative theory, just as wrong and just as simple & parsimonious as the Panglossian-private-enterprise frame:

  • Every rich person has some business that’s making them rich.
  • No rich person will enter a contractual relationship that makes them poorer.
  • The only way for a poor person to obtain wealth is to perform a service for a rich person.
  • So the service must increase the efficiency of the rich person, add new customers, draw more sales from existing customers, or make the same work get done for lower cost.
  • Therefore, the rich always get richer. The poor may or may not get richer.

Of course, the real world deviates from this theoretical ideal in some respects.

  1. Ego projects. Sometimes a rich person wants to indulge in an ego project—like starting their own fashion label, “investing” in a “startup”, or retiring from business to write a blog or perfect the craft of 17th-century viola restoration.
  2. Bad, lying employees. Hiring managers sometimes make mistakes and hire someone who said they would make the operation more efficient, but actually costs more than they’re worth.
  3. Vacations and big houses. A few large purchases do transfer wealth from rich to poor for consumptive purposes. However, it can be shown that when a continuum of houses and vacations trade in continuous time, the real [def.] economic [def.] returns to hillbillies exchanged for house-building go to booze and marijuana with plim → 1.

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