Say you have two scenarios.
A: 100 people earn 100k each. Economy = 10,000k
B: 99 people earn 1k and one guy earns 9902k. Economy = 10,001k
Which do you prefer? IMO median economic wellbeing is frequently more important than average economic wellbeing.
First of all, we can not give a scientific answer in regards to distrubution. No matter how we distribute the same amount of a good among people, no solution is objectively "better" than the other. To do that we would have to use interpersonal "utility-comparison" and until you invent a "util-o-meter" this requires a normative value judgement - which is unscientific.
What we can say, however, is that the production technique that produces the biggest net-output (under a few conditions that I don't mention here, because otherwise it gets too long...) is always the preferable technique, because the winners can compensate the losers. So in your example the guy earning 9902k could offer compensation of 99k + a few bucks to all 99 other people, leaving everyone better off than before. So even if the initial allocation would be situation A the free market would eventually realize B (with compensation). Thus total output is really a good estimate, when we are talking about economic modeling.
That games theory can be abused doesn't mean the study of games theory isn't valid nor interesting. Guns can be abused...should they be outlawed? That is the logic you are using.
Yeah but the well known examples of public goods and negative externalities, the lighthouse and river pollution, require excessive commentary on why they, although
some inefficiency
might be caused, are still solved in a superior way via free markets and property rights, than via government action. Usually colleges and universties don't explain real life, free market solutions and work-arounds to externalities, non-excludablity, etc. (advertisements on broadcasting, shareholders paying for infrastructure like roads, or the lighthouse, to increase revenue and value of the company, dealing with negative externalities through property rights, and so on). And neither do they like to mention the problems of structural, game-theoretic government inefficiency.
If there were no economies of scale there would be no specialization. Because we have specialization, that means we must have economies of scale.
When economists think of economies of scale, they usually mean production functions with a degree of homogeneity > 1. Which means by multiplying all inputs with a factor "t", total output is multiplied by more than t, without changing the production technique. That's why I mentioned that what we usually call economies of scale, is actually the availability of a different production function, that becomes viable at a certain size.
Hypothetical. Strand two on an island. By themselves they only catch one fish a week and one coconut. Through specialization/trade/economies of scale they can catch a total of 8 fish a week and 8 coconuts. How do you account for this?
Specialization allowed them to change their production technique from producing fish and coconuts to producing only either or the other and then engaging in trade. If one guy strands on the island and produces 1F,1C, and then another one strands and both were to produce with the initial technique, total output would be 2F,2C (assuming non-scarce primary factors and no externalities). That's what I meant.
Equilibrium theory is absolutely contradictory. Let's go back to coconuts and fish.
By themselves each person gets 1 coconut, 1 fish a week, for a total of 2 coconuts and 2 fish a week.
With specialization the aggregate equals 8 coconuts and 8 fish.
Trade has yielded a benefit of +6 coconuts and +6 fish.
Supply and demand can NOT determine the ratio by which these will be traded for. Person A could get +5 coconuts and +4 fish...they could get much less. If a person is worried that they aren't getting a fair share (if that is determinable) then they can just threaten to withdraw their labor/contribution and using this as bargaining power they can get a larger share of the "increment of association". Throw in 1,2,4,8,etc...more people and the problem doesn't go away. Nor does it when you introduce money and other items.
First of all "fair share" is not determinable, from an economic point of view.
Your example is obviously difficult to illustrate with the typical framework, because the coconut market is simultaneously the fish market, and because of a few other factors, but I don't see where the big problem is, tbh. Say A produces 8 fish and B produces 8 coconuts. A and B meet and bargain until a price and quantity is reached at which nobody could benefit by additional trade anylonger. S&D functions are obviously theoretical constructs for us to understand the world and to do modeling. They "exist" in the same way mathematical concepts "exist" in reality.
But we could try to estimate S&D functions on that island by doing a survey. We ask the fisher at what price (in terms of coconuts/fish) he would not be willing to trade a single one of his fish for a coconut. Let's say he states that the highest price at which he would sell a single fish would be half a coconut/fish. The price at which he would sell 4 of his fish would be 1 coconut/fish. The price at which he would sell 6 fish would be 3 coconuts/fish and he would never sell more than that. We could ask every possibly price level or ask a few and approximate the rest of the function.
Now we do the same for the coconut farmer and the point of intersection of fish supply and demand function is approximately going to be our market clearing price. Like in this example:
I still don't see what's contradictory about supply and demand from a logical point of view. Believe me, somebody would have found circular reasoning until now. Some economists are the most rigorous logic-nerds I've ever met. You can tackle almost every single axiom of modern day micro-economics by pointing out why they don't hold in reality, but the logic itself is totally sound, once you accept the axioms.
