Pareto Efficiency, Pareto Improvements and Meekonomics


It’s been a while since I’ve written specifically about economics.  Odd, considering that’s what this blog is supposed to be about but as with anything that has wide ranging implications on how we live our lives,  a discussion of economics must often run off on a tangent or two now and then. 

For those of you who’ve been tracking with me from the beginning you may recall my very first post in which I likened this study to falling down a rabbit hole. [Down The Rabbit Hole] You never know for sure where a particular tangent is going to take you and it might be quite some time before you find your way back to the original point.  As I’ve learned, a study of economics, politics, religion and life in general has a tendency to become just one rabbit hole after another. 

It’s with that in mind that I return to a classical economic theory and how it relates to the theory of Meekonomics.

Pareto Efficiency, named for Italian economist Vilfredo Pareto, essentially says that since goods and services are finite, for one person to become better off someone, somewhere must therefore become worse off.  According to this widely held economic theory a true Win-Win within any given economic system simply doesn’t exist.   A Pareto Improvement on the other hand is a situation in which by allowing a less well of individual to gain the overall benefit to society as a whole makes everyone better off.  A rising tide floats all boats; so to speak.  This theory works fine in a closed economic system but one thing Globalization has shown us is that there is no such thing as a closed economy anymore we are all playing in the same ocean and subject to the same tides.

As a society stabilizes, the opportunities for Pareto Improvements become fewer and at the point at which it is no longer possible to initiate a Pareto Improvement a society is said to be Pareto Efficient.  No further improvements can be made without lowering the standard of living of one person in favor of another. 

The terminology used makes it seem like Pareto Efficiency is the most desired outcome of a mature society.  However; I believe that much of what we are seeing today is the result of a society that has come very close to achieving maximum Pareto Efficiency and as the members of the occupy movement and others will readily tell you, that is far from a good thing.

In a Pareto Efficient society, those at the top of the ladder have absolutely no motivation to help those below them, the risk to their own position is too great.  We have been taught all our lives that we are in a Pareto Improving society and that in order to do our part to help raise the tides for everyone we must strive for a better life for our selves, get a better job, buy a bigger house and send our kids to college so that they can get even better jobs and spend even more money.  We are told that the money we spend flows down to the people who made those goods and services there by helping them to raise their standard of living, but that’s not the way it works at all. 

In the last few decades; as we have approached Pareto Efficiency the reality has changed.  Now in order to just hang on to our position we have to work even harder and live on credit or risk slipping backwards and those above us are just as worried about slipping down as we are.   The ugly side of Pareto Efficiency is this; in order for us to maintain our position we have to convince everyone below us that Pareto Improvement is still possible so they keep spending and supporting us.  It’s the opposite of trickle down economics, it’s a pyramid scheme!   

To Pareto Efficiency and Pareto Improvements, Meekonmists say ENOUGH!

Enough is enough.  Stop trying to move up the ladder and stop trying to stay on a position that you know you cannot maintain.  Take a good hard look at the numbers.  A recent study showed that Canadians, who are by nature much more conservative with their spending than our American neighbors, are carrying a debit to income ratio of 153%.  That means that for every dollar we make, we spend $1.53 to maintain our lifestyle, most of it servicing debt.  How do we do that?  By taking on even more debt! 

It doesn’t take a masters degree in economics to know that is just not sustainable.

We are now living in a Pareto Efficient society, the problem is that in order to maintain their position those at the top of the ladder are still trying to convince the rest of us that it’s a Pareto Improving society, while using their power and influence to sabotage our ability to move up the ladder. 

That is one of the main drivers of our politics and has help to fracture our society into left and right, haves and have-nots.  Pareto Efficiency is what has stalled our economy and the continued desire for Pareto Improvement has driven us into an unprecedented crisis of debt.  Until we recognize what is happening and make a conscious decision to allow or society to become Pareto Inefficient (i.e. allow ourselves to have a lower standard of living) there will be no relief. 

We must act now, before it’s too late.  Sooner or later a Pareto Efficient society that continues to behave as though it is a Pareto Improving society will collapse on itself.  That collapse will primarily be economic in nature but it could also lead to violence.  We are already seeing the rumblings of the coming collapse through the civil disobedience of the occupy movement, Tea Party politics and the so called Arab Spring.   How long before these mostly peaceful protests turn violent?   

Enough is enough.

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