MC 26: Markets Abhor a Gradient - Why Useless Things Want to Flow To Where They're Useful
As markets approach what I have 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 them, the following quote is worth repeating:
it is a peculiar fact that the literature of economics ….contains so little discussion on the central institution that underlies neoclassical economics - the market
D North, 1977
The future of the planet may depend on the free market, but our saviour only exists in assumptions, axioms and myths. Though gushed about in the precise and formal language of science, the market is a more a malleable and mythical idea:
The market is the nonstate, and thus it can do everything the state can do but with none of the procedures or rules or limitations. … Because the word lacks any observable, regular, consistent meaning, marvellous powers can be assigned. The market establishes Value. It resolves conflict. It ensures Efficiency in the assignment of each factor of production to its most Valued use. … From each according to Supply, to each according to Demand. The market is thus truly a type of God, “wiser and more powerful than the largest computer,” … Markets achieve effortlessly exactly what governments fail to achieve by direct effort
Galbraith, 2008
The purpose of this post is to return economics to the vulgar market and to locate it within the laws of nature. Revealing that vulgar markets are arguably more remarkeable than could ever be imagined by economists but for absolutely none of the reasons ascribed by neo-classical economics.
What then is a vulgar market.
A vulgar market is the real and visceral market. An ignoble co-ordination device in which producers exchange their unwanted goods, services and income based on the utility of an unmistakable gamble of excrement. A type of calculated bet premised on the idea of everyone producing things that they can’t use and don’t want for the purpose of wagering that another producer has produced something they can’t use and don’t want.
But this is not a game of chance or a lottery.
The miracle of the vulgar market is that properly understood, useless things want to flow to where they are most useful and will be used. Whereas in the mythical market, governed by profits and preference have worked in reverse, the rules of the vulgar market tend to work in favour of producers, society and nature.
Thankfully, it does not require an economist’s myth to explain how the vulgar market works or Friedman Esque moralising guidance. Nor does it require an Erdos number to understand. And though there is a science to the vulgar market, you do not need an advanced degree in algebra, calculus or statistical methods to analyse, interpret and predict market behaviour and outcomes.
If orthodox economics wraps the market in impenetrable mathematics, the secrets of the vulgar market have been wrapped in sh$t for millennia. The last place any serious scholar would look.
Shooting Craps
When firms and individuals each produce something useless and unwanted to take the risk that the other has produced something more useful they are gambling. Each wagering that the insufferable urge to supply and sell their waste or “unwant” will ensure they receive something useful and therefore win.
Each punter betting that:
their useless unwant flows to where it is useful and used; and in exchange
that producer’s useless unwant flows to them where it will be useful and used.
Betting on the vulgar market is a parlay bet.
A parlay bet is single bet made up of a series of bets. Winning a parlay bet is dependent on winning each of the bets. if one bet fails they all fail.
For a producer to win under this model of capitalism, all producers must make the following series of bets:
The First Bet
The first bet is to gable on using something useful (inputs) to produce a product, service or money that is useless to the producer. Remembering that if the thing produced was useful to the producer it would not come to market.
This bet is won when the value destroyed to produce their unwant is less than the value received from exchanging the unwant on the market.
The Second Bet
The second bet is to gamble that the unwanted thing produced is wanted by another producer.
This bet is won when disequilibrium is manufactured. That is, the unwant is wanted by a second producer.
The Third Bet
The third bet is to gamble that the second producer has produced an unwant that is wanted by the first producer.
This bet is won when symmetry is produced. Symmetry simply means that each producers has produced an unwant that the other wants and vice versa.
The Final Bet
The final parlay bet is to gamble that each want what the other has produced but does not want. If the first producer and second producer can agree to exchange their unwants their useless unwant will be substituted with a useful want.
This bet is won based on the magnitude of the gradient.
On each side of the market is a gradient represented by the relative usefulness of the unwant which the producer wishes to sell and the want that the producer wishes to buy The greater the difference in value (usefulness) between a useless unwant and a useful want the more efficient the market exchange and the more value generated.
Provided the gradient of the useful want is greater than the gradient of the unwant, value will be generated, and the parlay bet will be won.
The Laws of the Vulgar Market
Vulgar economics posits that useless things want to flow (Says Second law) and that useless things want to flow to where they are useful ( Markets abhor a gradient). Two principles that explain what happens when an unwant is produced and why, out of the hands of economists, the market is a remarkeable invention.
Say’s Second Law –
Useless Things Want to Flow
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 basic 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 “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.
Once the first bet is made, and producer produces something that can’t do productive work, a force as old as life itself, takes hold. The anxious desire to sell use less unwants is an expression of the instinctive will to live.
Selling signifies “conatus”. A Latin term that refers to the innate inclination of a thing to continue to exist and develop. The concept largely forgotten by all but the followers of Spinoza, the concept of conatus explains, at least in part, why we sell what we sell. At some point, the tension between the useless unwants and useful wants creates an irrepressible impulse to sell.
No living organism strives to accumulate use less unwants. This is fundamental aspect of how living systems maintain their existence. Use less unwant’s being a form of entropy (uselessness), the seller “strives to preserve its being” by exporting their un-wants to the ambient market in the same way as a bear sh$ts in the woods.
Incredibly or perhaps unsurprisingly humanity found a remarkable way to game the urge to sh$t the things we create but cannot use . That useless thing want to flow creates the opportunity to generate value based on another, and even more remarkeable, rule of the market.
Markets Abhor a Gradient
Useless Things Want to Flow to Where They are Useful
If Say’s second law means useless things want to flow, the maxim markets abhor a gradient means that useless things want to flow to where they are useful.
Though described as a gamble, the vulgar market is only a game of chance or a lottery if a producer goes in blind or worse still following some heuristic for use or usefulness. For example, profit in the case of the firm or unexamined self interest (greed) in the case of an individual is not a proxy for usefulness (something that will be examined in detail in MC 27). These cornerstone principles of neo-classical economics are no substutute for reason and deep understanding of what can and cannot do productive work and therefore valuable.
Assuming producers are motivated to act out of reason and interests, the principle markets abhor a gradient, weighs the bet in favour of both producers, society and even nature. Only useless things flowing to where they are useful and not useful things flowing to where they are useless!
A gradient is a difference between properties (for example in physics, temperature of pressure across time). But in vulgar economics, a gradient refers to a difference in value or usefulness across time and/or boundaries (ie. the firm and the individual). Value in vulgar economics being the productive work a thing can do within a system or its usefulness and certainly not price.
A difference of value on either side of a market represents a gradient. For example, both producers produce an unwant that are wanted by the other, each has manufactured a gradient that can be used to create value (represented by substituting something useless for something useful).
Nature also abhors a gradient (Schneidder and Kay, 1989). In natural systems, gradients tend to collapse spontaneously. For example, light a fire and a difference is created between the hot and cold air. When it burns out the gradient collapses as the hot and cold air mixes and settle in equilibrium.
But humans, being the only known example of a thinking natural systems, gradients can be tamed and made to work.
When Prometheus stole fire from Zeus and gifted it to humanity, it was not just fire but the ability to manufacture, master and manipulate gradients that was gifted. But in the vulgar market we see something not even the gods managed to do, the ability to generate usefulness from uselessness through the co-ordination of entropy. Each producer, knowing that markets abhor a gradient, deliberately produces an un-want and wagers that it will flow to where it is used and is useful and in return, something useful will be delivered in return. Thereby allocating resources to where they will be put to the greatest use or productive work based on the intersection of the supply of unwanted things.
But as genius and useful as the vulgar market is and has been, it comes with a warning. Prometheus' punishment, for stealing fire was to be chained to a cliff in the Caucasus Mountains for eternity, where each day an eagle would tear out his liver, only for it to grow back overnight to be consumed again and again.
Gambling with gradients is no different to playing with fire. In the hands of an individual or firm, lacking the understanding of the consequences of their decision and guided only by their preference or profits, the results can be devastating. Imagine systematically destroying something useful, to create something that the firm can’t use, to exchange it with an individual who never uses it in return for something that the firm already has too much of and neither needs or really wants. It’s an abomination.
Winning and Lossing in the Vulgar Market
There are three possible outcomes when a an unwant is produced for the purposes of gambling:
win/win
If both producers are guided by reason and recognisie a positive gradient, the useless unwant will flow to where it is useful.
All bets win and both producers win. Each uses the vulgar market to transform useless un-want into a useful want. Leaving both producers better off. This is called symmetric disequilibrium. This is good. Both unwants flow to where they are most useful.
Win/lose
If absent reason, one producer substitutes their useless un-want for another useless unwant they lose. The substitution did not create any additional capacity to do work or created less capacity to do work.
The other producer may be better off because they managed to substitute a useless unwant for a want.
This is called asymmetric disequilbrium. This is generally not good or even bad. Only some unwants flowed to where they are useful.
lose/lose
When guided by preference and profits, rather than reason, both producers tend to lose. This is called symmetric equilibrium. There are three kinds of symmetric equilibrium:
the first bet fails. Each producer expends more useful wants on the production of their useless un-wants than they receive in return.
the second or third bet fails. Neither producer finds a buyer for their use less unwant.
the fourth bet fails. Again absent reason, each producer substitutes their useless un-want for another use less un-want.
In a lose /lose scenario, the unwants do not move to where they can be transformed into productive work, but continue to accumulate in the form of counter or anti value.
Keeping the Score
In the mythical market, economists keep an eye on the score by tracking gross domestic product – the measure used to calculate the production of goods and services. In simple terms, GDP can be looked at through production (all goods and services produced), income (all incomes generated), or demand (all goods and services consumed) (Mazucatto)
Based on even the most basic description of GDP three observations can be made:
The first thing is that GDP is a measure of unwanted things. Only included in the national accountants because the producer considers them use less and unwanted.
The second is that properly understood, consumption is nothing more than a substitution of the individuals unwanted income for the producer’s unwanted goods and services and vice versa.
Third, and perhaps the most important thing to observe is that the economist stops scoring before the result is known. Until the firm uses the income to do productive work and/or the individual uses the product or services to do productive work, there is no cause for celebration. No value has been generated. All that has occurred is the substitution of things that are prima facie useless and may never be used in relative amounts having regard to how unwanted they were.
If GDP was used to keep the score, there would only be winners in the promethean casino. Each scenario, results in a win even if a producer only manages to substitute one unwanted thing for another over and over again. That governments continue to prioritise GDP and the growth of literally unwanted thing without examining whether any of these things are being used to do productive work in society is a scandal.
In the in the vulgar market only use counts.
Whilst it may be possible to one day calculate the magnitude of the gradient and therefore the amount of value generated, for now the score is based on use vs non-use. If one unwant is exchanged for another and that unwant is not used the bet is lost.
For example, if an individual exchanges their unwanted income for any unwanted product and that product spoils before use, or is left unopened in a drawer, or is put into storage or thrown out or used once or never at all, the parlay bet has been lost. No value was generated by the unwanted income. Rather the individual substituted something useful (their income) for something less useful.
Likewise, firms can lose the bet even when their products and services are never useful to the firm and the consumers income is.
Leaving aside that a great many things that are produced are never “consumed” and go straight from production to landfill, the primary way a firm loses in the vulgar market is by substituting unwanted products and services for unwanted income.
Unwanted income is the income that a firm has no foreseeable use for. If the firm can’t or has no intention of using that income it is as useful to the firm as the product or services it sold to obtain that income. Yes, profit and particularly excessive or super profits have all the marks of excrement. Unavailable to do productive work within the boundaries of the firms, the firm experiences the urge and urgency to purge itself through dividends and buybacks. But, this is more like a regular sh$t into the pocket of the shareholder. All that work, and all the useful things destroyed in the process and nothing to show for it.
You Win Some We Lose More
Next up, I look at what happens when a society bets civilization on the production unwanted goods, services and incomes.