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 !!
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3 comments:
Very informative post.The last paragraph is an ideal illustration to explain your 'disequilibrium' theory better.
if the rupee had appreciated, it would have lead to bigger troubles and for the importers it is the other way around
Could you substantiate the above statement in business terms(not in diseq terms)?
Dear Sheky, say when we export a software service, we fix the deal in terms of dollars/euro. So when rupee trades at 42 against a dollar and if the deal is worth 1 million dollars, then in Indian rupee, it is Rs 42 million. But when the rupee appreciates to 40 against a dollar, the total deal in Indian rupees is just 40 million which is 2 million less than the previous case( we call it appreciating because, with lesser rupee you can bu a dollar, or we can also dollar has depreciated which is straight since the price of dollar has come down, think of dollar as a product/gold and gold prices coming down means gold's value is depeciating and so is the case with dollar and hence rupee appreciates)
It is very important because all the company's costs are denominated in indian rupees, like employee costs, rent of building, networking/hradware cost so and so forth and hence your bottomline in Indian rupees is hurt(cost remains the same but reveues in Indian rupee fell by Rs 2 milllion and hence your bottomline or profit falls by 2 million)
The case of imports is exactly opposite, since u have to pay your importers in dollars and when you had to pay 1 million dollars, u had to shell out 42 million rupees and now as a result of rupee appreciation, u just pay rupees 40 million and hence rupeee appreciation is advantageous
Hope it clears ur doubts..
good one :)
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