So far I have connected the concept of change to energy in it’s social form - value in use, recognized that potential value in use is stored in various forms of capital and described how capitals are transformed to animate open social systems such as corporations.
None of this is rooted in a natural metaphor or analogy.
By creating links between value in use, the phenomena of change and the energy concept, I’m confident that we are getting closer to escaping the limitations of metaphor and creating a new science of value in use. Embracing open systems by way of homology. My contention is that value in use performs a similar role in theorizing social open systems as the concept of energy does in theorizing physical open systems. Arguably providing a better way to explain why social systems, such as corporations, come into existence, evolve and cease to exist.
This proposition might even be novel.
Though systems theory has become a methodological mainstay in economics and management theory (though less so in corporate law) , as far as I am aware few if any such theories begin their analysis based on an energy equivalent. Absent an energy concept, the social sciences can only engage with the more advanced versions of the science by way of metaphor - complexity, chaos and self organization. Reminding me of Marx’s criticism of the physiocrats. An earlier group of value theorists who thought land was the source of all wealth. Who, according to the grumpy economist, went about their business by:
"discussing the complex form of the problem without having solved its elementary form”
Though, as I return to the notion of entropy introduced in Part 7, I hope to demonstrate that value in use is more elemental than elementary to solving the problem of the best use of a thing.
But a word before you start reading. Based on my analytics, I’ll be lucky if you make it past the next few paragraphs. Don’t be too concerned. The thing about working on value in use is that its provides a framework for explaining why an idea - such as a change theory of value of use - might not appear useful. Things with value in use must be available and accessible. While I’m confident that there is value in use in my work ( even if only as the economic equivalent of science fiction) I was reminded recently that the work is largely inaccessible to anyone that can use it:
of the 75 people who work here ( many of whom hold Phd’s) perhaps 3 people can understand their argument
And those three people, having their own important projects, can ill afford the distraction.
Humanity’s solution to the problem of accessibility seems to be time. I need only consider the history of ideas about value to see that there is nothing less powerful than an idea before its time. Marx sitting in the reading room at British museum for decades. Soddy, an early 20th century Nobel Laurette in chemistry, was written off for the best part of a century as a crack-pot for his ideas about thermo- economics. But if the time comes and also comes in time, there is nothing more effective at generating social change than an idea.
Entropy, Availability and Why Capitals are Exchanged
As noted in Part 7, the Second Law of Thermodynamics is concerned with the quality of energy. Described in many ways, at its most basic “if you have a system that is isolated, any natural process in that system progresses in the direction of increasing disorder, or entropy, of the system.” Put in a practical way, entropy is a measure of how much energy is not available to do work.
The capitals are also subject to entropy - manufactured capital wears, financial capital inflates, social capital fades, intellectual capital is lost or forgotten and promissory capital is broken. Over time, the value in use embodied in physical capitals becomes less available to do the work of maintaining social systems. Likewise, with notable exceptions, fiat capitals also lose their capacity to do work. A dollar today can do less work tomorrow. But the rate at which value in use becomes unavailable is a function of the characteristic of a specific capital. In this sense, high quality capitals tend to have low entropy and low quality capitals have higher entropy.
There is no way to escape the dark shadow cast by the second law of thermodynamics. It can be slowed, but not defeated. Which makes the phenomena of humans and corporations exchanging capitals curious as it represents the acceleration of entropy.
When Ford exchanges a car, with an individual for cash the value in use in the car thereafter becomes unavailable for use by Ford and the financial capital used becomes unavailable for further use by the individual. If the cash and the car were not exchanged the value would slowly become unavailable to the Individual and Ford. But through, exchange the process by which value in use becomes unavailable is accelerated to the point of collapse in the moment of exchange.
To an economist there is nothing remarkable about exchange. The process a perfect representation of the first law of thermodynamics - equilibrium. The equilibrium of supply and demand in each market determining the ratio between price and quantity.
But, from a second law of thermodynamics perspective, exchange is a dramatic representation of entropy. the counter parties deliberately accelerating entropy to the point of a complete collapse in the availability of the value in use embodied in the exchanged primary capital. The individual can no longer use the cash and the corporation can no longer use the car. When corporations and individuals are understood as open systems, parting with a capital, represents an acute loss of value in use that could otherwise be available to maintain existence. Within the ordinary act of exchange hides an existential secret.
Why then do corporations and individuals choose to accelerate entropy by entering into exchange relationships?
The question seems too obvious to pose. Based on the idea of the subjectively perceived benefits, individuals exchange things to get what they want. And corporations produce things to get money. The issue for economics is not why but what is exchanged and how to decide the ratio.
But, from a value in use perspective, the answer is not that obvious but perhaps far more significant.
The Water-Diamond Paradox
To explain why things are exchanged, we must go back to Part 1 in this series and remember that Adam Smith argued that there were two kinds of value:
The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called “value in use;” the other, “value in exchange.”
To illustrate, he introduced the water-diamond paradox. The apparent contradiction that diamonds are more valuable than water, even though water is needed for life.
The things which have the greatest value in use have frequently little or no value in exchange; on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarcely anything; scarcely anything can be had in exchange for it. A diamond, on the contrary, has scarcely any use-value; but a very great quantity of other goods may frequently be had in exchange for it.
Despite global bottled water market being estimated at more than US 283.billion, the fable is still repeated in textbooks to show how the apparent paradox can be solved with marginal utility theory and a partial equilibrium supply and demand diagram ( White 2002).
But, with the discovery of thermodynamics and the mechanisms by which open system maintain their existence, we can start to make out a different solution to the water-diamond paradox that has far more explanatory power than that offered by orthodox exchange value theory.
The ambivalence of economics towards value in use since Smith’s time has hidden in plain sight a fundamental principle of exchange - under the condition of a perfect market, each actor will exchange things with a lower value in use for things with a higher in value in use. The disequilibrium between supply and supply determining what is available in the market and why each party is willing to exchange their capital for another’s. If there is no disequilibrium such that there is nothing in the market with a higher value in use, the capital will not come to market. From a value in use perspective, supply and not demand drives exchange relationships.
Demand is a hollow wish if it is not matched by an ability to supply a capital with a higher value in use. Again from a value in use perspective the driver of supply is not external demand, but an instinctive response to the human and corporate condition to transform capitals to generate increased access to value in use.
If individuals and corporations are rational and have full information, they would only bring to market their lowest quality/highest entropy capitals or those capitals which do not exhaust through use. Reserving their highest quality/lowest entropy capitals for internal use.
An extreme example illustrates this principle. In 2022 Alphabet’s board approved a $70 billion dollar buyback. After the buy back google would have the shares but not the use of $70 billion dollars. And those shares have virtually no value in use. Google’s board having the power to issue those bought back shares for a tiny fraction of the cost.
From a systemic perspective, $70 billion dollars has less value in use to Alphabet than a share it can not use. Contrast this with an in specie distribution, say of a proprietary algorithm. Why does Alphabet or any corporation distributed cash to its shareholders for virtually no return, but not their in specie assets such as code?
The decision can be explained from a value in exchange and a value in use perspective:
Exchange value theorists argue that this behavior is the natural product of one of their domain assumptions - the purpose of corporations is to maximize profits for shareholders;
a value in use theorist would look for an answer in physics and the magic of disequilibrium.
The Magic of Negative Disequilibrium
If Alphabet exchanged a high quality/low entropy ( say its algorithms) for a low quality/high entropy capital (the co-operation of its shareholders) , the result would be that Alphabet has less available value in use available to it.
In a very practical sense , exchanging code for co-operation would result in a loss of energy and less capacity to effect change. Conversely, the board considers that there is virtually no value in use 70 billion dollars as it is willing to lose access to it for shares it cannot use.
The willingness to lose access to $70 billion dollars in exchange for little or no return, tells us that money has no value in use to Alphabet. And having no value in use, it can exchange it for something that has slightly more value in use howsoever indirect.
Thus actors tend to keep hold of their high quality/low entropy capitals and only bring to market capitals from their perspective, lower quality/higher entropy capitals - financial capital, natural capital and manufactured capital - cash and commodities or capitals that don’t exhaust through use - intellectual capital. This insight explains a lot about the limitations of orthodox economics. But again, the implications of this insight on demand based theories of value are for another post.
We can infer from the behavior of actors that, under perfect market conditions of rationality and full information, for exchange to occur there must be negative disequilibrium in the market.
Negative disequilibrium exists when an exogenous capital with greater value in use is available in the environment or market than an endogenous capital within a system. This can be restated in terms of value return on investment or VROI. Negative equilibrium exists if the value return on investment or VROI to acquire that external or endogenous capital is greater that 1.
I appreciate that describing a quotient that is greater than 1 as a negative is counterintuitive. However, the negative in this context implies a relationship of negative entropy or more value in use or available energy to do work.
The opposite is positive disequilibrium or no available exogenous capital in the environment with greater value in use than a capital within the system. The value return on investment or VROI to acquire that capital is less than 1. Under conditions of positive disequilibrium there is no incentive for a system to exchange regardless of the demand. Succumbing to demand or miscalculating the VROI results in a decline in available value in use to the system.
Negative and positive disequilibrium are critical concepts when trying to understanding how value in use is created ( and destroyed) and how social change occurs. It’s the mechanism that explains the difference between capitalism and decapitalism.
Whenever there is negative disequilibrium between the system and the environment, the difference in endogenous and exogenous capitals can be exploited by the market ,as prime mover ,to generate a systemic change for actors (remember Carnot and the motive force of fire). Each actor accelerating entropy of its lowest quality/highest entropy endogenous input capitals (through export from the system) in exchange for a higher quality/lower entropy exogenous output capital (through import into the system).
The greater the difference between the value in use in the endogenous input capital and the exogenous output capital the more likely an actor is to enter into an exchange relationship. Despite there being no obvious commensurability to the capitals that are exchanged, there is a symmetry in the fact that each can use what the other can not. The invariant measure value in use.
Thus in a perfect market organized around the idea of value in use, the ratio in which things are exchanged are determined by symmetrical negative disequilibrium. Each actor able to use the market to generate value in use by transforming lower quality capitals into higher quality capitals.
Put another way, symmetric negative disequilibrium is a product of supply vs supply. Each actor supplies to the market that which they can’t use or are losing the use of due to entropy. The motivation to supply is not to satisfy the demand of the other ( as is foretold by economists) but to capitalise ie. transform capitals to generate greater value in use for each party. This principle applies to markets and all transformations of capital that don’t involve markets.
Despite the compelling logic of symmetric negative disequilibrium, it is often not the norm. Whether due irrationality or inadequate information, individual and corporations engage in three types of market exchange:
Symmetric negative disequilibrium - the VROI off all parties to the exchange is greater than 1;
Asymmetric positive disequilibrium - the VROI of at least 1 party to the exchange is less than 1;
Symmetric positive equilibrium - the VROI of all parties is to the exchange is less than 1. What I describe as the planet killer.
Admittedly, these terms are a mouthful. Thankfully, in the next part I’ll replace these terms with the idea of natural and unnatural exchanges.
Based on an understanding of disequilibrium in market exchanges we can use the idea of value in use to re-solve the water-diamond paradox.
Solving the water diamond paradox using Symmetric Negative Disequilibrium
If an actor has more accessible and available value in use they they could ever use, the diamond (comprising both physical and fiat capital ) need only hold a fraction more value in use than all those goods to justify the exchange. It’s not that the actor values diamonds more than all those things. From a value in use perspective, It’s the opposite. Within that system all those things hold such little value, that their exchange for a diamond, represents their best use.
But what about water?
If water is readily available and accessible, there is no disequilibrium between the system and the environment that can be exploited by the market as prime mover to generate a systemic change. No value in use can be generated by a system by exchanging a thing for water. The VROI is less than 1.
But lets imagine that even if despite the abundance of water, an actor decided to exchange their high quality capital for water, the result would be asymmetric positive disequilibrium. The value in use in the water being less than the value in use of the input capital ( the thing exchanged for the water), the net result is:
The actor that traded the water has more value in use available to her - VROI is greater than 1;
The actor that traded a thing for water ( that he already had) has less value in use available to him - VROI is less than 1.
This is an example of asymmetrical positive disequilbrium. In this scenario, exchange of a a thing for water is not the best use of a thing. The prime mover would have no difference to impel positive change for both actors. Only one actor is capitalised. And even then, that might flip over time. Stealing value in use is unsustainable as reducing the value in use in the environment means there is less value in use in the environment on which to feed in the future.
Moreover, if actors were truly rational and had full information asymmetric positive disequilibrium would not occur. Supply must meet supply for exchange to occur. In the ordinary course, no actor would willing to accept lower value in use in return for something that was already providing higher value in use. That would be the equivalent of exchanging $10 for $5.
Which brings me to the Alphabet Paradox.
The Alphabet Paradox
Cash appears to be Alphabet’s lowest quality/highest entropy capital. Evidenced by the fact that its board is prepared to lose access to it in exchange for shares that it can not really use. To an observer unfamiliar with neo classical economics, it looks like the board values money so poorly as a store of value in use that it is prepared to almost give it away.
But if that’s the case, based on the concept of symmetric negative disequilibrium the logical thing to do would be to use the market to impel positive change by swapping that low quality financial capital for a higher quality capital -social, intellectual and human capital in the market. And like the diamond, the value in use in those capitals need only be fractionally more than the value in use in the cash that board clearly devalues . Moreover, given those capitals are freely available in the environment, the conditions are perfect to exploit the value in use differential and grow Alphabet’s access to available and accessible capitals and value in use.
For example, paying employees at least what the law requires would be an example of capitalization. The financial capital securing human and intellectual capital and not risking social capital. If Alphabet was prepared to give it away, it would be logical to use its financial capital in exchange for these higher quality capitals.
Instead, the Guardian reports that Google has been underpaying thousands of temporary workers for several years:
Google executives and attorneys at one point pursued a plan to come into compliance slowly and at the least possible cost to itself, despite acknowledging that such a move was not “the correct outcome from a compliance perspective” and could place the staffing companies it contracts with “in a difficult position, legally and ethically”.
Likewise, the board does the systemically unthinkable and introduces a paradox that rivals the water- diamond paradox - the apparent contradiction of announcing a $70 Billion dollar buy back in 2022 and in the next year announcing that it’s terminating the employment of approximately 6% of its workforce.
This is the equivalent of exchanging diamonds for water when you own the lake. Shareholders have $70 billion dollars, Alphabet doesn’t have $70 Billion dollars. Shareholders don’t have the shares. Alphabet has the use of shares that it could issue for a fraction of the cost. The result is that Alphabet (through Google), along with other tech behemoths, don’t appear to have enough value in use embodied in cash to continue to pay their employees. Resulting in the same boards who approved the buy backs, terminating the employment of more than 150,000 employees across these corporations.
But Alphabet’s board is not terminating employees. The directors are effectively destroying 12,000 prime movers. Whose purpose and function is to generate value in use embodied in nearly every form of capital required by a corporation to replace the capitals lost to the second law.
In the simplest terms, after the buy-back and the terminations, Alphabet has less value in use available to it to sustain its existence. It doesn’t have the use of $70 Billion dollars and it doesn’t have the use of the capitals generated by 1000’s of its human prime movers. Alphabet has been decapitalised. And so too have its stakeholders.
The net effect of the buy back is the one time capitalization of the shareholders at the expense of the long time capitalization of both the corporation and its employees (And those prime movers can no longer transform their low quality/high entropy capitals (their time) into higher quality/lower entropy (relative to time) financial capital in the form of wages). Buy-backs represent asymmetric positive disequilibrium and are seldom in the best interest of a corporation understood as an open system.
Alphabet and Google have an unhealthy relationship with money - They aquires it, do not need it, do not even want it based on giving it to shareholders without any real benefit in return, withold it from employees and then terminate their employment losing access to prime movers and all their capitals.
In a perfect market, governed by a capital theory of value, this would not occur. Asymmetrical postive disequilibrium would be an aberration. Motivated by survival, all systems seek out higher quality capitals. As a result, we get symmetrical negative disequilibrium and both actors have the means to positively change.
Thus, in the ordinary course, it is not in the best interest of a corporation or any other system to deliberately choose to accelerate their own entropy through losing access to available capitals without replacing them with higher quality capitals. This conclusion is supported by science but clearly not the science that the directors at Alphabet studied.
Dissipative Open Systems
The magic of entropy is fundamental to understanding the relationship between capital and systems. In part 15, I introduced the basic notion of an open system and the idea that systems maintain their existence by exchanging matter and energy with the environment. However, it was not until the work of Prigogine in the 1970’s that the mechanics underlying this idea were known.
According to Prigogine, an open system can be understood as a dissipative structure. Importing “free energy” or “negative entropy” from the environment and, at the same time, exporting positive entropy to the environment. As a result, the entropy of a dissipative open system can either be maintained at the same level or decreased (a concept described as negative entropy). .
The process represented formally:
According to the second law of thermodynamics, in any open system, change in entropy dS in a certain time interval consists of entropy production due to an irreversible process in the system (an internal component) diS and entropy flow due to exchange with the environment (an external component) deS. Thus, a change in entropy in a certain time interval can be represented as dS = deS + diS (where diS > 0). However,unlike diS, the external component (deS) can be either positive or negative. Therefore,if deS is negative and as numerically large as, or larger than, diS, the total entropy may either be stationary (dS = 0) or decrease (dS < 0). In the former case, we can say that the internal production of entropy and entropy exported to the environment are in balance.
In short, Prigogine and others argue that entropy can be used to explain how open systems maintain disequilibrium. In other words, existence. By circulating of matter and energy through transformations both internally and externally, the dissipative open system maintains its own existence.
But that’s not all.
The entropy that dissipative open systems export to the environment does not remain unavailable. Though unavailable to the system, the entropy becomes available as matter and energy in the environment to be imported by other dissipative energy structures. The most prominent examples of this phenomenon, the sun and photosynthesizing plants. The energy of the sun transformed first by the plant into carbon dioxide and water and then into sugar and oxygen and finally the sugar transformed back into vital energy to sustain growth and repair. The suns entropy became the plants energy and the plants entropy became our oxygen. The sun and plants providing social purpose without any sense of social responsibility. A phenomena equally applicable to dissapative social systems like corporations. Individuals transforming their human capital transforming into intellectual capital that becomes the corporations’ energy in its social form and its entropy becomes the individuals wages, Again, social purpose without any sense of social responsibility.
Dissipative Social Systems
Though based on biological systems, the principles that explain the existence and non existence of dissipative open system, can be applied to better understand corporations.and their relationship with their employees, customers and other stakeholders.
As noted above, actors tend to bring to bring capitals to market that, from their perspective, hold the lowest value in use. Ford brings its manufactured capital and share capital to market. It does not bring its social, intellectual or human capital. Whereas, exchange value theorists might explain this in terms of selling production and not the means of production. From a value in use perspective, the phenomena can be explained in terms of existence and that magic of entropy.
When Ford is understood as a system, there is virtually zero value in use in a car that is available to sustain the existence of Ford. Moreover, a Ford car being composed of both physical and fiat capital, its value in use will overtime become less than zero if it remains within Ford. If Ford kept producing cars and nothing more this positive entropy would eventually exhaust all value in use required to sustain Fords existence. The solution, provided by the market as prime mover and the fact that individuals holding cash have a similar problem (in that when an individual is understood as a system, cash is by and large a low quality/high entropy capital). Setting up the basic conditions for market exchange.
For a market to work systemically, each counter party must bring to market their lower quality/higher entropy capitals (what Schrodinger called positive entropy) in the hope of exchanging these for higher quality/lower entropy capitals (negative entropy) or symmetric negative disequilibrium. Each party receiving through the act of exchange more value in use than they expended.
Ford could use the value in use embodied in cash to pay employees, suppliers, taxes etc. The individual could use the value in use in the car. The act of exchange permitting each counterparty to substitute their negative entropy (the car in the case of Ford and cash in the case of the individual) for positive entropy ( the cash in the case of Ford and the car in the case of the individual). In this sense, it could be argued that corporations have an existential motivation to exchange things. First, importing into their system positive entropy or more available value in use required to sustain existence and flourish or positive entropy and second exporting out of the system negative entropy that threatens the existence of the system.
Symmetric negative disequilibrium could equally be described as:
a VROI greater than 1;
win win or shared value; or
expressed by the maxim - one person’s entropy is another person’s energy.
Indeed, if value in use were the organizing principle of capitalism and all actors had objective information about the capacity of their available capitals to effect change, capitalism could be described as a system for coordinating entropy. Something both Smith and Marx recognized nature could not do.
Instead,organised around exchange value, capitalism has become a system for accelerating entropy. More money measured in GDP but lessness everywhere we look.
The ascendancy of markets and exchange value as the dominant social prime movers has led to a state in which decisions about the best use of a thing are based either on maximizing profit if a corporation or maximizing their subjective happiness if an individual. Oblivious to the cause and effect of basing decision on profit and preference rather than positive and negative entropy, the collective decisions of corporations and individuals brings both the system and environment closer and closer to symmetrical positive equilibrium. A state in which each actor receive less value in use from the exchange than they expend. If left unchallenged, the market as prime mover will tend to increase rather than decease positive entropy throughout society. In thermodynamic terms, equilibrium equals death. This is the true lesson of the Alphabet Paradox or more accurately, the Alphabet Pathology.
Next Up in the Challenge
While it is tempting to run every social policy derived from neo-classical economics or the existential crisis facing humanity through the decapitalism hypothesis, time is making that argument with macabre brilliance. Instead, I’ll use the next part to provide formal representations of symmetrical disequilibrium, asymmetrical disequilibrium and the planet killer - symmetrical equilibrium. I’ll then get to explaining social prime movers - people and ideas - the principia media in a value in use theory of the corporation and capitalism.