MC 25: The Art of the Deuce or Why We Sell What We Sell
In 2001 Professor George Ackerlof received a Nobel Prize in Economic Science for “The Market for Lemons,” in which he explores asymmetric information.
Asymmetric information is a type of market failure that occurs when a buyer has less or inferior information when compared to the seller. Akerlof describes his paper in this way:
“Lemons deals with a problem as old as markets themselves. It concerns how horse traders respond to the natural question: “if he wants to sell that horse, do I really want to buy it?”
But hidden in plain sight is a much bigger problem. Why is he selling his horse?
To an economist this question might sound like the start of a bad joke - a man walks into a bar and asks, “who wants to buy a horse”. His reason for selling so obvious and self- evident that it needs no punchline or even second thought.
Beyond their perfunctory role as profit maximizing automatons, economists pay little attention to why seller’s sell. Even now, as markets approach what can only be described as a market crisis, the scenario in which the forces of supply and demand not only fail to reproduce the conditions necessary for human existence but actively undermine the natural and human systems required to maintain the conditions required for life, the profession continue to search for solutions on the demand side of their equations.
In the market they continue to trust.
Vulgar economics is concerned with what can be described as anti-lemons questions – if she wants to buy a horse, why does he want to sell it to her and, more importantly, why does he have a horse he doesn’t want.
Curious and more fundamental question to that posed by Lemons.
Curious because, as Adam Smith reminds us, dogs don’t decide to sell their bones. The urge to sell is uniquely human. Nature does not produce things for sale. And possibly, for very good reason.
More fundamental, because the explanation for why things are sold, may provide the foundation for a theory of value aligned with the physical processes that govern life. A theory that predicts that complete trust in the market is existentially misplaced.
Why are Things Sold
If a buyer wants to buy a horse, why does the seller want to sell it to her?
The answer might seem obvious. To make a profit from the demand for the horse.
Central to orthodox or neo classical economics is the idea that demand comes before supply. In simple terms, the greater the demand for a thing by individuals, the higher its price and the more of it will be produced and offered for sale by firms. It is assumed that the horse is sold because the demand for horses made it profitable to do so.
Absent Akerlof’s asymmetric information, market failure, externalities, incomplete contracts, government regulation, inefficient property rights, and host of other “imperfections”, for which the Nobel prize committee are most keen to have solved, it’s widely believed that the pursuit of private goods and services by individuals matched by supply produces the optimal allocation of all scarce resources. The incredible prediction that, in an ideal world, satisfying demand in a free market produces the greatest social welfare.
But there is also another and more practical reason for why things are sold - things are sold because they’re not wanted.
Whatever the demand for the horse, it’s of no consequence for so long as exchange for something else represents the second-best use of the horse. If the horse is in any way more useful as horse for transport, agriculture, sport, recreation or any other uses limited only by imagination, the horse will be kept, and no market will come into existence. Likewise, the seller’s demand for a profitable price is equally hollow if everyone decides their cash is more useful in their pocket than transformed into a use less horse.
If both want what they have there is no market. If one is wanted and other unwanted, someone is returning from the market a little sadder than when they arrived. Only when the horse and money are unwanted does a market come into existence.
Outside a forced sale, markets depend on the production of things that the producer can do without. Put another way, economists believe that the most effective way to maximize social welfare is for firms and individuals to produce the things they don’t want to get the things they do want. Remembering, that logically only when unwanted things intersect and collide can the unwanted thing be substituted for the thing that is wanted.
Though of no real concern to the study of economics, things are only sold because they’re not wanted by the producer. And by not wanted, I mean either not as useful as something else or, more often than not, could never be used by the producer. As a rule, the horse is sold because if it remains in the hands of the producer, it is use-less and therefore has no value or worse, the thing has counter or anti-value. An economic paradox. Something that is useful to the producer only when they lose the use of it.
When the best use of thing is to exchange it for something more useful it can be described as an unwant. “Unwants” are not inherently useful or useless. Rather, unwants is a relative term indicating that from the producer’s perspective, the thing they have produced is either:
less useful to that producer relative to something available in the ambient market; or more commonly
unusable by that producer in that it cannot perform any kind of productive work within the boundaries of the producer.
Moreover, un-wants speak for themselves.
In my work, there is an expression “res ipsa loquitur” or the “the thing speaks for itself”. An inferential reasoning process, which permits a court to infer a conclusion where the cause is unexplained but, on the balance of probability, the facts admit no other conclusion.
The fact that things are sold is enough to infer that they were not wanted. We need not know why the producer decided to sell to know that a thing is an unwant. Nor make any assumptions regarding their psychological motivation. Nor study the thing itself to divine the future of fortune.
McDonald’s does not want its hamburger. Apple does not want its phones. And McKinsey certainly does not want its advice.
Likewise, though healthy individuals typically want their money for a time, once they identify the thing they prefer to money, they are overwhelmed by a similar urge to rid themselves of a portion it. Price, more a reflection on the value we place on the money spent, than the thing purchased with it. No doubt, a confounding statement that I will explain in due course. For now, money can also be described as an unwant.
Though economists adopt the self-serving convention that define firms as the “producers” and “sellers” and individuals as the “consumers” and “buyers”, from the perspective to be developed in this paper, there is no meaningful distinction between firms and individuals.
Firms and individuals both produce and supply their unwants to the market.
That firms produce and supply a seemingly infinite variety of unwants to the ambient market and individuals produce and supply identical units of unwants, called money to the same market, does not alter the fact that, from each producer’s perspective, they are supplying something they don’t want. Likewise, that firms have an unnatural appetite for cash alone makes them no less a consumer and buyer, than their more omnivores counterpart.
In vulgar economics, firms and individuals are both described as producers and suppliers.
The Urge to Sell – Say’s Second Law of Motion
In the Wealth of Nations, Adam Smith argued that the “propensity to truck, barter, and exchange” was inherent in human nature. But in the following passage, Jean Baptiste Say offers a more viceral explanation for trade. The urge to sell being less about human nature and perhaps more about the call of nature.
“When the producer has put the finishing hand to his product, he is most anxious to sell it immediately, lest its value should diminish in his hands. Nor is he less anxious to dispose of the money he may get for it; for the value of money is also perishable. But the only way of getting rid of money is in the purchase of some product or other. ”
— Jean Baptiste Say, 1803
though Say, is best known for “Say’s law” or the “law of the market” a classical principle that states the act of production of goods creates its own demand, it seems Say may have also have “discovered” a second or number two law of economics.
Say’s second law states that the act of producing a good or service that cannot be used by the producer (an “unwant”) creates an overwhelming urge to supply and sell that unwanted thing. An immutable law of motion as old as the market, that compels a producer to no less dispatch products, services and even money that are useless to the producer to the market, than a bear is compelled by nature to dispatch its sh#t to the woods. And, most likely governed by the same law of supply. The echo of entropy heard as much in the woods as in the market.
Say had recognised a principle that had existed from the first time a shoe was created not be worn but as an object of barter.
Each time a firm or individual decides to produce something that can’t be used to perform productive work within the boundaries of the producer, they simultaneously crystalize a desire or urge to transform their unwant into something more useful. Countless exchange transactions pointing toward to an almost universal compulsion that impels sellers to sell their unwants.
An urge witnessed countless times every day and practiced by billions of firms and individuals. Found nearly everywhere on the planet but nowhere in the economic cannon. Obscured by the idea that demand is the motive force of capitalism, economists have no meaningful explanation for the primordial desire to dispatch un-wants to market. An invisible force that logically powers the market and without which, all trade would end.
Make no mistake, if Say's second law is accurate, economics should be considered more the study of skat than scarcity. Products and services unwanted by the producer being the social equivalent of poo, modern capitalism has become an unmistakable and unwinnable gamble of excrement.
Firms and individuals each producing something use less and unwanted to take the risk that the other has produced something more useful. Each wagering that the insufferable urge to supply and sell their waste or “unwant” will ensure the useless thing flows from where it use less and unwanted across the ambient market to rest where it can be put to best use.
Does a Bear Sh$t in the Woods ?
Admittedly, that things are sold because they’re unwanted might seems the most obvious and trivial of insights. Even if it were logically true that products and services fit the description of a waste product, the statement that sellers sell their use less un-wants, appears on its face to be economically insignificant.
Such is the insignificance of supply that, according to mainstream economic theory, producers don’t even decide to produce. Firms are assumed to produce the quantity of goods and services (unwants) to maximizes their profits. The output level the product of the involuntary movement regulated by a mathematical coefficient of total revenue minus total cost.
In a neo capitalist society, neither the production of un-wants nor the desperate urge to dispatch them to the ambient market is a problem for economist to think about let alone solve. Rather it’s widely considered the fairest and most equitable way to distribute scarce resources in a society is to ensure unwanted things are produced.
According to the law of supply and demand, the horse was not produced to be used by as a horse but as a means to satisfy one goal - to make a profit. Likewise, the cash was not earned by the individual to be kept and used but rather lost and used to satisfy their subjective preference. Both have instrumental value and could therefore never be contemplated as a waste product.
The law of supply and demand producing the somewhat miraculous conclusion - that when the lowest cost products and services (unwanted output) meets the greatest price (unwanted wages) in the market social, welfare is projected to be maximised and the economist’s vision of utopia realised.
To neo-classical economists like, Milton Friedman nothing could be more undeserving of serious thought than this central organising principle of capitalism. The idea that the sole purpose of the firm is to efficiently produce and sell use less unwants to an individual who must be organised to produce and sell the maximum number of their use less unwants to the firm. Their earnings accumulated to buy what the corporation does not want. Resulting in the perfect equilibrium between things that are unwanted, concentrated in the hands of a few but certainly not scarce like a critically endangered species.
The Art of the Deuce
It is surprising that economists have failed to pick up on Say’s insight when formulating their understanding of economics. Distracted by the debate over whether supply creates its own demand, mainstream economists have ignored the obvious and undebatable fact that the act of production creates an overwhelming need to supply. Whatever the producers want for supply, it is quickly overtaken by the overwhelming need to supply.
Though, less surprising is that economists have never stopped to consider whether market transactions involve and are governed by the same universal laws that govern need to supply. Better known as the “call of nature”. The echo of entropy that is present in the bears skat and in all market transactions.
Perhaps obscured for millennia by humanities disgust for excrement, the uncanny similarity between skat and the things we buy and the money we buy it with has gone unnoticeable. Forgetting that Skat is no less sweet to a dung beetle than the finest perfume is wrapped in a bow on the counter of a department store. But to bear and the cosmetic company it is principally an output or waste product. Only available to the beetle and the consumer because it is use less and unwanted to the bear and the company that produced it.
The horse is sold because, to the producer it is an unwant and a kind of skat.
Something that the producer has extracted all the value they can from or, more likely could never extract value from and therefore as useless as skat to the bear. Whatever value remains or is in the thing, it is unavailable or inaccessible to the producer. And, having no accessible value to the producer, the producer experiences an irrepressible urge to export. In this sense, the act of selling is not unlike the act of doing the business.
Consider a can of a fizzy beverage. The company that produced gets no value from production. Processing the sugar, carbonated water, caffeine, colour and flavouring etc. into an aluminium can but extracting no value for itself from the process. Likewise, being a corporation it has no pleasure from the bite of the carbonation, the hit of dopamine or the rush of energy. Unable to extract any value from their product, the value in the can remains completely undigested by the company. But for the existence of ambient market, the can is indistinguishable from a waste product.
Similarly, money can also be considered a type of waste.
The individual who transformed their time, labour and energy to produce that can for the firm may have extracted know how and experience but otherwise are unable to process their work into anything useful but a wage. But money, having no sugar or fats, it can’t be broken down to produce energy within the boundaries of the individual. Again, but for the ambient market, money bears an uncanny resemblance to a waste product. Useful only when the use of it is lost.
To be clear, that what we buy and the money we buy it with have the characteristics of sh$t is not intended to be perjorative. Just consider a dung beetle or any number of animals that transform useless poo into useful energy and life. Rather, undertanding the art of the deuce and when the urge to supply a horse become urgent may be a non-trivial project.