Equilibrium is Disequilibrium

Well, you might wonder what a stupid and paradoxical title is this:'Equilibrium is disequilibrium'. It completely defies whatever we have learnt in our high school physics. But to look from from a holistic view point, it is the disequilibrium, which leads to an equilibrium.

Let me substantiate, what I exactly mean by this. For quite some time now, I have been pondering about the sustainability and feasibility of the northward moving growth rates in India. With the increasing 'Paretisation'(I'm talking about the Pareto Distribution skewness), the sustainability of double digit growth rates is questionable. This is where the issue of 'inclusive growth' crops up. All said and done, we want everyone to be happy. Of course, this is a good thought.

But suddenly I thought what would happen if everyone lives in Utopia. Everyone is having equal wealth. Everyone is 'happy' from a materialistic point of view. Is that happiness? We'll be bored of happiness that we'll get sick of the so called happiness. Here comes the question of what defines happiness. It is the differences that exist leads to the thrill in life. You want to go up and up and up, and you love intense competition. You might fail, but it is the thrill of competing and fighting that gives happiness. I might be wrong in saying that. Honestly, I don't know. That is why probably, we have this inequality which in turn leads to happiness. It is this disequilibrium which is in realty, the equilibrium. I think I'm getting too philosophical.

Coming to some real time fundae, most of us know how markets function. Market functioning is based on the conflicts of opinion that exists in our mind. Take stock markets for example; a stock can be traded only if some in the market feel that the price will go up and others feel that the price will fall. If all feel that the price will fall and start selling, markets can't survive and this is what we call as the multiplier effect market collapse. This is the disequilibrium(difference of opinion) what leads to the functioning of markets. The funda of futures and options/derivatives market is also the very same. Perhaps, the example of derivative markets will drive home my idea in a clearer way.

We say that the concept of derivatives tries to minimise the risk of market as a whole(this is what I call equilibrium). How does that happen? Let me give you a practical case of hedging. Some in the market, hedge their rupees against dollars thinking that the rupee would appreciate and others thinking that the rupee would depreciate. At the end of the day both the parties have a win-win at a small premium of course, because for Indian exporters, if the rupee had appreciated, it would have lead to bigger troubles and for the importers it is the other way around. You, hedge because you want to play it safe. It is this difference of thoughts and logic that leads to the concept of hedging, minimising the overall risk of the market.

For water to flow, you need difference in levels of height, pressure to be more precise(Funda of pressure P=hdg) and water flows fromhigher level to lower level. Similarly for the current to flow, you need difference in voltage levels and current flows from higher voltage level to the lower one. If in the world, all the water height levels and voltage levels are same, there will be no rivers or any concept of flow of electric current. It is this disequilibrium which in turn leads to equilibrium !!