Thanks for the appreciation. It always feel good when one pens something on a matter dear to his heart and it resonates with others.

With respect to your concerns, the key to effectiveness of the Pareto optimality condition is the fact that negotiations occur around payoffs that are bounded by rationality conditions. It is impossible for instance for the least paid full time employee to demand a CEO’s salary. It also is impossible for a company to offer next to nothing to the least paid employee because market conditions and regulators have bearing on the least possible offer.

More generally, the finance rule that investors accept all projects whose returns exceed their cost of capital is a Pareto optimality rule. It ensures any project whose returns exceed cost of capital ought under ideal conditions — conditions which unfortunately do not always exist — to receive financing from investors. So then, if investors’ cost of capital were say, 18%, so long as they have accepted all projects with returns greater than or equal to 20% and still have capital available for investing, they ought to accept a project with returns equal to 19 percent.

Why is this Pareto optimal?

A project that delivers value is financed and relative to if they were to pass on the project, investors are a little bit richer. An entrepreneur’s desire to satisfy some need or want is satisfied, the entrepreneur’s wealth increases, there is possibility of ‘higher return’ investments in future, and aggregate value within the economy increases (government taxes inclusive).

Since everyone in society is made better off from financing of the project with a rate of return of 19%, absent investing in the project, Pareto optimality has yet to be violated. Pareto optimality is not violated or attained to (depends on the directionality of discussion) until investors invest in a project yielding 17% returns, a project that decreases their wealth.

Pareto optimality is an extremely powerful concept, which handled right can help the USA catch up with the Nordic countries in so far as GDP Per Capita, and minimum wealth realizations within society are concerned.

With respect to fascism, with benefit of hindsight, fascist Czars actually did more for the average Russian than Communists who killed off the Czars. Sometimes it’s not the form of government that is most important, but the character of the government. Not to say I am advocating fascism in the USA. In some countries, however, governance of the people, by the people, for the people is best effected by 1 person who truly cares about the country and the people. This after all is essentially how Singapore became a great country.

I hope this clarification helps. Thanks for taking the time to engage.

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Educator and Researcher, Believer in Spirituality, Life is serious business, but we all are pilgrims so I write about important stuff with empathy and ethos

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