Let’s call it “The Alice in Wonderland principle”. Sometimes while trying to understand and explain something small, one stumbles upon something much bigger. This happened to me writing this post. I set out to explain how in a community where there is no money, Only the barter system to acquire needed goods and services, people are truly equal. What I found was a way to graphically represent the mechanics behind the fact and statement “The rich get richer”. This is true and in the following text and spread sheet is how I arrived at that conclusion using nothing more than math.
Some Basic Economics Laws.
First, “Value” is defined as the highest price of a good or service that a consumer has both the desire (willing) and resources (able) to pay for it. Imagine everything you buy at a store, online, or from a private citizen is a giant auction. For one single Item, the highest bidder takes the “widget”.
“Equilibrium Price”- The state in which market supply and demand balance each other and, as a result, prices become stable. Generally, when there is too much supply for goods or services, the price goes down, which results in higher demand. The balancing effect of supply and demand results in a state of equilibrium.
The Equilibrium Price is found in a market where there are multiple consumers and multiple providers using the “Law of Supply and Demand” (that is right, they are natural “Laws”, not merely suggestions). There are 4 of them.
1.If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
2.If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
3.If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.
4.If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price.
“Thought Experiment” - The Baker and his daily bread.
“Thought experiment” - "the most ancient pattern of mathematical proof". Thought experiments have existed before Euclidean mathematics, where the emphasis was on the conceptual, rather than on the experimental part of a thought-experiment.” “Schrödinger's cat” is one of the most famous. As with all experiments, the idea is to isolate just one control. The use of analogies and figures to represent something larger is common. People attempting to disprove or reject the conclusion of a "though experiment" often try to parse these generalizations. Sometimes they are accurate to do so and point out an important constraint that actually changes the results. Others try to re-expand the simplification that called for a use of an analogy. For example, In this example could say, "But people can change their earning". Which A) forced one to consider deeper and more complex economic principles that were by designs meant to be simplified and B) minimizes the fact that the graph shows that unless you make giant changes in your income it doesn't matter. This intentional attempt to cloud the point is to the thought experiment what somebody saying to B.F. Skinner "but humans are not rats". The math and the principle are sound no matter what levels you wish to apply them at.
Analogies, Where Things Mean Different Things
In this experiment we have a few “figures”.
“Baker”- equals the sum of all the employers in the economy and every job available.
“Bread” or “Loaf” – The Sum of all the basic needs of any given family unit. It has been proven that the there is a point where people would feel an overall sense of well-being and earning more money loses its “return”. A point where those things, such as a warm, well kept, and secure living space, adequate nourishment, and the fear of external threats are minimal can be determined by assessing those places within 100 miles of one’s birth and looking at property values, school district graduation and college grad rates, crime type and rates, teen pregnancy, single parenthood, per home medical costs, and ownership to mortgage ratio. Take the average of the top 10 with the most favorable ratings, and average their “food shelter and clothing rates. That “quality of life” is symbolized by “Bread Loaves”.
“Top %” is meant to symbolize the wage breakdown. The reality is that the disparity between the top and bottom wage earners in the US is much much greater.
"Day" is a time period of income. Could symbolize a week, a year, a lifetime.
All The World Is Indeed a Baker’s Auction
The Set up.: There is a community, remote and undisturbed by any other outside force. There are 11 families in this town including the Baker. In this town, there is a bakery that has the capacity to put out 7 total loaves of bread. (However, that equates to only 6 available since the baker takes one for himself every day.) Because of the location needs and the cost to build, there is no other way to build another bakery. However, to maintain an acceptable standard of living and quality of life, each family must have 1 loaf of bread per night. The 10 other families all earn 10 different wages from $10 per day down to $1 per day. Every morning the baker opens his doors and starts the bidding. Like any auction, the guy with the most money to buy with sets the price. (In an auctioneers voice) As the bids come in, “$1, then 2, $2 then 3, Now $3 give me $4, got $4, can I get $5, Now $5, who will give me $6… Anyone.. Anybody give me $6? Sold to ‘Top Ten’ at a price of $5. How many do you want?” That first day, the top 6 people get their loafs of bread at a rate of $5. The bottom 5 go home. But the next day, everything changes. This graph shows that The price goes up. The rich always get bread and always save. I went on to extrapolate this data out. At day 9, a turning point occurs in this example. On that day, the “Ten” has enough money to buy 2 loaves at the current price. The poorest “hundred” were finally going to get a loaf that day, but instead, it was snatched from them. What “Ten” chooses to do with that money and loaf can send ripples and effect the choices of all those involved. Does he sell it the next day adding supply and driving the market down? Does “10” offer the loaf to a family who doesn't have the money that day, for an interest payment spread out over the next few days? Any way you look at it, the most wealthy take control of the entire economy at that point. Everybody’s liberty and happiness is based upon what they chose. BUT, they are removed from acknowledging it by saying, “I am just buying stuff at market price. Everybody has the opportunity to buy at the same price I do.” Below is the graph of the first 9 days.
A final thing to be noted here is that the poor don't actually save the money they don’t spend. In reality, if they have enough income to buy 40% of the total needed to sustain, then they spend it on 40% of a loaf. They continue to play the "catch up" game.
Continue The Experiment Yourself
Now apply some of the most common "conceptual beliefs" about an auction based economy to this. (I will send anybody my spread sheet if they request it.) Here are some questions to ask
What happens if we tax everybody equally? add a "0" to the end of the wages, and tax them at 10%.
What if we let the "investors" keep more of their money?
What happens if another bakery is opened and the top earner wins the bid and buys as much as he wants?
What happens to the overall income of the baker if you introduce another bakery and set his operation costs at $30 per day?
What if loans take place? The poor guy on "Day 9" is offered the bred snatched away from him by the rich guy for $10. He will have to pay the next 2 days wages to "Ten"?
Last, the point I was trying to make, what would have to happen to in order for "Hundred" to just get to "Fifty" and what happens to "Fifty" when he gets there?
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