Category Archives: Economics

Telos and Economics

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In the organic complex of habits and thought which make up the substance of an individual’s conscious life, the economic interest does not lie isolated and distinct from all other interests.
— Thorstein Veblen

Economics is essentially a moral “science,” and not a natural science. That is to say, it employs introspection and judgment of value.  
— John Maynard Keynes, letter to Roy Harrod in 1938

Consciousness cannot be computable.
— Roger Penrose

It is the “end” that lends “means” its importance, not vice versa … There cannot be any doubt that there is a causal relationship between the importance of the end, and that of the means.
— Eugen Von Böhm-Bawerk

As a matter selective necessity, man is an agent. He is, in his own apprehension, a centre of unfolding, impulsive activity — “teleological” activity. He is an agent seeking in every act the accomplishment of some concrete, objective, impersonal end….
— Thorstein Veblen, The Theory of the Leisure Class, Chapter I

[Humans are seeking subjective and personal ends; Veblen followed the spirit of the age in not recognizing this and his adoption of classical Darwinian bias to impersonal mechanism and depersonalization of social explanations. Social science was to be modeled after physics and impersonal mechanistic classical Darwinian ideas which were also seeking to model themselves after physics.]

Telelogical explanations of action have been largely extruded from the natural sciences, even if we take account of the doctrine of “vitalism” which proved to be the most stubborn and chameleon-like of adversaries. After all, it is no longer a subject of credible speculation to attribute goal-seeking or purpose to bodies (individual or collective) that are considered to lack consciousness. (Roth 2008, 5)

However, such explanations of behavior and their resultant consequences are of crucial relevance in the behavioral sciences and in the forming of judgments in the daily business of life—where the values, preferences, motivational beliefs, and purposes of people and their institutions are of vital operational interest. To circumvent them—or to seek to “rise above” [or below] them (via exalted supra-deterministic forces) … or what is equivalent in practice, to treat them as just “being there” in the form of “given” items on a “menu” of commodities or “unexplained factor endowments” without ontogeny—is to create a self-neutering cordon sanitaire between the entire subject and the real world which is dependent on its historical trajectory. (Roth 2008, 5)

(….) In Norbert Wiener’s “God and Golem” 1964, the following trenchant comment appeared which sums up the mindset of the neoclassical straight-jacket.

“The success of mathematical physics led the social scientists to be jealous of its power without quite understanding the intellectual attitudes that had contributed to the power.” As Wiener explains further: “The mathematical physics of 1850” (this early date may be especially unkind cut on his part) became “the mode of the social sciences.” Wiener goes on to say that “very few econometricians are aware that, if they are to imitate the procedure of modern physics, and not its mere appearances (perhaps the unkindest cut of all), a mathematical economics must begin with a critical account (i.e., rigorous definitions?) of these quantitative notions and the means adopted for collecting and measuring them.” Since Wiener spent many years on the same premises as the most prominent “imitators” he must have been keenly aware of just how the problem of defining key economic variables to a point where they could be meaningfully manipulated as homogeneous “technical” units had, in effect, defeated their best efforts to attain the “scientific” respectability that only “quantifiability” can bestow. With this perhaps definitive limiting principle on the subject as a subliminal guideline we can, in a humbler vein, pose the following question: Is there at least some procedure that accepts implicitly the subject’s inherent limitations or, more to the point, its own unique nature by actually searching for the boundaries within which some degree of “quantifiability” is feasible, and beyond which this aspiration is merely spurious or being deliberately or unwittingly abused? This is the same as asking how far we can go with many of the traditional operations of economic estimation, calculation, and comparative valuation … or at what point do they cease to convey ordinal meaning? (Roth 2008, 80-81)

(….) There cannot be any “iron laws” that determine the “path” of economic history. Such “prophecy” is more in the nature of proclamation, disguised as “Science” that was so typical of 19th Century crack-pot determinists, from Gobineau to Marx to Houston Stuart Chamberlain and their disciples in the twentieth century. Their “predictive power” was closer to Nostradamus than to Darwin. Their powers of explanation were closer to those who can explain “the price of everything and the value of nothing.” Economic behavior is contingent and value-loaded and has a gestalt relationship to the consequences of its own interactions. Therefore no strictly “determined” rest point or steady-state, whatever we choose to call it, can be the result of a process which originates in human behavior at the individual level, or that of their institutions which are governed by “rules” crafted by groups of individuals. (….) The evolution of markets is the active (institutional) expression of human teleologies. (Roth 2008, 119-120)

— Norman L. Roth (2008) Telos and Technos: The Teleology of Economic Activity and the Origins of Markets

Even such purely academic theories as interpretations of human nature have profound practical consequences if disseminated widely enough. If we impress upon people that science has discovered that human beings are motivated only by the desire for material advantage, they will tend to live up to this expectation, and we shall have undermined their readiness to moved by impersonal ideals. By propagating the opposite view we might succeed in producing a larger number of idealists, but also help cynical exploiters to find easy victims. This specific issue, incidentally, is of immense actual importance, because it seems that the moral disorientation and fanatic nihilism which afflict modern youth have been stimulated by the popular brands of sociology and psychology [and economics] with their bias for overlooking the more inspiring achievements and focusing on the dismal average or even the subnormal. When, fraudulently basking in the glory of the exact sciences, the psychologists [, theoretical economists, etc.,] refuse to study anything but the most mechanical forms of behavior — often so mechanical that even rats have no chance to show their higher faculties — and then present their mostly trivial findings as the true picture of the human mind, they prompt people to regard themselves and others as automata, devoid of responsibility or worth, which can hardly remain without effect upon the tenor of social life.

— Andreski 1973, 33-34, in Social Sciences as Sorcery

Stories about Taoism taken out of historical context*, speculations about abiogenesis unrooted in fact** (Geoff 2019); parables about Umwelt (an organism’s ‘world-view’) reduced to a “social insect” with a ganglion for a brain as human proxies devoid of personality and real human behavior (Shiozawa 2019); facile ex cathedra assertions that human minds capable of contemplating “means” and “ends” and  looking before leaping, let alone reflecting on moral and ethical choices — values — are really nothing more than mere Turing Machines and therefore mathematically modellable with genetic computational algorithms (Shiozawa 2019); claims the entire world economy can be modeled after a fitness climbing tick aka “social insects” because human beings behave like them 99% of the time  (Shiozawa 2019) have little to do with understanding “basic economic ideas or of the history of economic thought.” (Norman L. Roth on RWER) Shiozawa claims he has now provided the micro-foundations of an entire world’s macro-economics in his “if-then” algorithmic computations by simply reducing all human behavior to the level of a tick. Evolution is the New Central Dogma of economics according to his theory.

What some of these stories have in common is the desire to impose upon human economic behavior a simplifying story meant to enable mathematical tractability so encompassing it can be called a world-view.  Mirowski’s history of economics “More Heat than Light” eloquently tells the history of the “eternal folly of imitating other more ‘truth-seeking’ {usually physical} sciences, by simply imposing them on economics” and the “farcical ‘physics envy’ & slavish imitation of mid-19th century thermodynamics … [n]ot to mention mathematically trained Irving Fisher’s slavish mimicry of Boyle’s Law of gases, to derive his ‘Quantity theory of Money’.” (Norman L. Roth on RWER)

There are far more proximate causes than the big bang we can study to gain a fuller picture of economics, many of which are amenable to reasonable mathematical modeling within sensible limits. We can learn a lot from behavioral economics and its use of experiments within certain limits; human beings are after all to one degree or another habitual creatures. We can even learn something from our evolving understanding of evolutionary theory if we are careful to distinguish the difference between claims of mechanism vs. metaphor. We learn, for example, that many human behavioral traits are shared with animals; cooperation is as much a part of evolution and life as competition and that too much of the later can be actually self-destructive. But there are also important differences that can not be overlooked or ignored or explained away with scientism’s hand-waving and just-so stories.

* Historical context counts; Taoism (along with Confucianism) was a religion and moral philosophy (metaphysical theory of the universe) that was more about maintaining harmony between heaven and earth, which translated into social context meant harmony between the ruling upper class and the ruled lower-classes aimed at maintaining social harmony and civil and political stability. The real interesting aspect of Taoism was its moral precepts that were meant to guide social and economic behavior so-as to maintain social harmony. The ethical precepts have more relevance to economics than some recent Western reinterpretation of what it means to modern science. The idea that the ruler’s behavior must accord to a moral code of conduct embodied in the Way provided a basis upon which the mandate of heaven could be either considered in operation (i.e., they ruled fairly, justly, and upheld moral standards)  or not in operation (i.e., they ruled unjustly, unethically, and for selfish gain and not for the benevolence of the people). These considerations were the ancient Chinese method of determining if the ruler needed to be removed or remain in place; at least that was the theory.

Chemical self organisation, life

Self-organisation has been observed in chemical systems as well (Prigogine, 1980), and exploration of this has revealed an intriguing path that may lead to life (Kauffman, 1993).

(….) One of the great puzzles about life is that a living cell is an assembly of very special molecules in very particular relationships. Given that much of the universe seems to degenerate into randomness, it seems impossibly unlikely that the components necessary for rudimentary life would ever come together. Catalytic cycles provide a mechanism for generating a particular small group of chemicals, rather than a random soup.

(….) Living organisms are made of carbon molecules of many different kinds. We have known for a long time that carbon was capable of very complicated chemistry and that this must have something to do with the existence of life. Only in the past few decades, however, has growing knowledge of catalytic cycles led to the realisation that they might lead to an accumulation of ever-more complicated carbon chemistry that might ultimately become a living cell. This would involve not just one level of self-organisation and emergence, but probably many levels, each level giving rise to new kinds of emergent behaviour. It is thus possible to conceive how something with the vast complexity of a living cell might have originated from inanimate materials through many levels of self organisation (Kauffman, 1993).

In any case, regardless of how life began, the modern understanding of biochemistry makes it clear that living organisms are vastly sophisticated examples of complex self-organising systems.

— Geoff Davies (2019, 118-121) Society, Nature: An introduction to the new systems-based, life-friendly economics

** Interestingly enough abiogenesis is not part of Neo-Darwinian evolutionary theory and it is careless history and misleading story-telling to imply it is. If such speculation could become fact then it would finally be possible to reduce biology to physics, but at this point in time the only way we know how to successfully accomplish that is murder. One doesn’t need to tell highly speculative and misleading stories about abiogenesis to recognize the complexity and emergent nature of human individual and social interactions. Abiogenesis is no more relevant in understanding economics than is the big bang. The real irony is that the lessons from quantum physics—i.e., fundamental physics cannot exclude ‘the observer’—are more applicable to economics than either the big bang or abiogenesis. Such speculation is more akin to Shiozawa’s effort to reduce human economics to econophysics by reducing complex human mind and behavior to the level of brainless “social insect” and then modeling bio-mechanical stimulus-response behavior with genetic algorithms. Shiozawa correctly calls out the mainstream economic assumption of a Homo economicus with unlimited information and “farsightedness in time” as “conspicuous,” but it is as equally conspicuous to assume humans know nothing more than than a brainless insect. Unfortunately for Shiozawa human beings transcend mere stimulus-response behavior far more than 1% of the time. Slow and fast are not the full story of human thinking. The invention of financial instruments of mass destruction transcend the thinking capacity of ants and ticks, even dogs, no matter how “social” some think they are. The fatal flaw of Yoshinori Shiozawa’s new Central Dogma—Microfoundations of Evolutionary Economics—is succinctly stated in Stanislav Andreski’s quote above.

Since this historical [Miller-Urey] experiment, the field has veritably exploded. In the last three decades, the origin of life has been the subject of dozens of books, scores of essays, thousands of articles, relating an enormous amount of experimental and theoretical work. Periodicals devoted exclusively to the subject have been founded. Textbooks dedicate whole chapters to it. The reason for this upsurge of interest is simple. As I have attempted to show …, we have come to know enough about life to draw the basic blueprint according to which all extant living organisms are constructed. Scientists faced with the blueprint (or, rather, with their own version of the blueprint, because they tend to see life through different glasses, depending on their fields of specialization) find the problem of how the plan materialized almost inescapable. This turned out to be my case as well. (de Duve 1991: 110)

But I must add a warning. If not considered totally outlandish any more, the field still remains largely confined to speculation. When it comes to events that happened several billion years ago, hard data are scarce and, perforce, are supplemented by reasoning and imagination, if not blind faith. Yet, life did start somewhere, sometime, somehow. Trying to reconstruct the events that led to its birth holds almost irresistible fascination, especially now that we have available so much new knowledge on the nature of life and so many new tools for digging into the past and approaching the problem. (de Duve 1991: 110)

The tale is told in simple historical style, without any of the probability weightings, plausibility assessments, and other precautionary periphrases that it requires.[2] These will come in due course. According to my reconstruction, emerging life went through four main successive stages—or “worlds,” to use a popular expression: the primeval prebiotic world, the thioester world, the RNA world, and the DNA world. This version of the script differs from the current favorite mainly by the insertion of a thioester world. I consider this insertion essential because I cannot accept the view of an RNA world arising through purely random chemistry. (de Duve 1991: 112-113)

[2] The readers’ attention is called to this point, lest they be misled by the apparently dogmatic style of the script. All statements should be read as conditional and hypothetical. (112)

I have quoted Monod’s declaration “The Universe was not pregnant with life,” to which he added “nor the biosphere with man.” I have made it clear that I disagree with his first statement. Life belongs to the very fabric of the universe. Were it not an obligatory manifestation of the combinatorial properties of matter, it could not possibly have arisen naturally. By ascribing to chance an event of such unimaginable complexity and improbability—remember Hoyle’s allegory of the Boeing 747 emerging from a junk yard—Monod does, in fact, invoke a miracle. Much as he would have refused this description, he sides with the creationists. (de Duve 1991: 217)

— Christian de Duve (Nobel Laureate) Blueprint for a Cell: The Nature and Origin of Life. Neil Patterson Publishers. 1991.

[T]here are a couple of important things that evolution is not, misleading claims by creationists [and materialists] notwithstanding. For example, evolution is not a theory of the origin of life, for the simple reason that evolution deals with changes in living organisms induced by a combination of random (mutation) and nonrandom (natural selection) forces. By definition, before life originated there were not mutations, and therefore there was no variation; hence, natural selection could not possibly have acted. This means that the origin of life is a (rather tough) problem for physics and chemistry to deal with, but not a proper area of inquiry for evolutionary biology. (Pigliucci 2002: 76)

(….) Evolution is also most definitely not a theory of the origin of the universe. As interesting as this question is, it is rather the realm of physics and cosmology. Mutation and natural selection, the mechanisms of evolution, do not have anything to do with stars and galaxies. It is true that some people, even astronomers, refer to the “evolution” of the universe, but this is meant in the general sense of change through time, not the technical sense of the Darwinian theory….. The origin of the universe, like the origin of life, is of course a perfectly valid scientific question, even though it is outside the realm of evolutionary biology. (Pigliucci 2002: 77)

(….) Is the fact that evolutionary theory can explain neither the origin of life nor the formation of the universe a “failure” of Darwinian evolution? Of course not. To apply evolutionary biology to those problems is like mixing apples and oranges, or like trying to understand a basketball play by applying the rules of baseball. Creationists [and materialists] often do this, but their doing so betrays either a fundamental misunderstanding of science or a good dose of intellectual dishonesty—neither of which should be condoned. (Pigliucci 2002: 78)

(….) [Creationists often claim “It’s a debate about origins.”] This is … a recurring fallacy in debates on creation-evolution…. Briefly, the problem is that creationists do not make a distinction between different origins debates. For them the origin of the universe, the origin of life, and the origin of species are all one and the same. (Pigliucci 2002: 175)

Of course, they are not. Evolutionary biology deals only with the origin of species, and even that is only a relatively minor part of what interests evolutionary biologists. Darwinian theories have absolutely nothing to say about either the origin of life or the origin of the universe—the first one being a problem for biochemistry and biophysics, the second a problem for physics and cosmology. Again, therefore, this fallacy reflects a deep misunderstanding of the nature of science, one that scientists themselves need to correct [or not perpetuate themselves] on every possible occasion. (Pigliucci 2002: 175)

— Massimo Pigliucci (2002) Denying Evolution: Creationism, Scientism, and the Nature of Science

ORIGIN OF LIFE

Whether the proponents of hell or heaven theories finally convince their rivals of the most plausible scenario of the origin of the first replicating structures, it is clear that the origin of life is not a simple issue. One problem is the definition of life itself. From the ancient Greeks up through the early nineteenth century, people from European cultures believed that living things possessed an élan vital, or vital spirit—a quality that sets them apart from dead things and nonliving things such as minerals or water. Organic molecules, in fact, were thought to differ from other molecules because of the presence of this spirit. This view was gradually abandoned in science when more detailed study of the structure and functioning of living things repeatedly failed to discover any evidence for such an élan vital, and when it was realized that organic molecules could be synthesized from inorganic chemicals. Vitalistic ways of thinking persist in some East Asian philosophies, such as the concept of chi, but they have been abandoned in Western science for lack of evidence and because they do not lead to a better understanding of nature. (Scott 2009: 25-26)

How, then, can we define life? According to one commonly used scientific definition, if something is living, it is able to acquire and use energy, and to reproduce. The simplest living things today are primitive bacteria, enclosed by a membrane and not containing very many moving parts. But they can take in and use energy, and they can reproduce by division. Even this definition is fuzzy, though: what about viruses? Viruses, microscopic entities dwarfed by tiny bacteria, are hardly more than hereditary material in a packet—a protein shell. Are they alive? Well, they reproduce. They sort of use energy, in the sense that they take over a cell’s machinery to duplicate their own hereditary material. But they can also form crystals, which no living thing can do, so biologists are divided over whether viruses are living or not. They tend to be treated as a separate special category. (Scott 2009: 26)

(….) The origin of life is a complex but active research area with many interesting avenues being investigation, though there is not yet consensus among researchers on the sequence of events that led to living things. But at some point in Earth’s early history, perhaps as early as 3.8 billion years ago but definitely by 3.5 billion years ago, life in the form of simple single-celled organisms appeared. Once life evolved, biological evolution became possible. (Scott 2009: 26-27)

This is a point worth elaborating on. Although some people confuse the origin of life itself with evolution, the two are conceptually separate. Biological evolution is defined as decent of living things from ancestors from which they differ. Evolution kicks in after there is something, like a replicating structure, to evolve. So the origin of life preceded evolution, and is conceptually distinct from it. Regardless of how the first replicating molecule appeared, we see in the subsequent historical record the gradual appearance of more complex living things, and many variations on the many themes of life. Predictably, we know much more about evolution than about the origin of life. (Scott 2009: 27)

— Eugenie C. Scott (2009) Evolution vs. Creationism: An Introduction

Phishing for Phools

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Mainstream economics takes the particular features of capitalism — a very recent form of economic organisation in human history — as if they were universal, timeless and rational. It treats market exchange as if it’s the essential feature of economic behaviour and relegates production or work — a necessity of all provisioning — to an afterthought. It also focuses primarily on the relationship between people and goods (what determines how many oranges we buy?) and pays little attention to the relationships between people that this presupposes. It values mathematical models based on if-pigs-could-fly assumptions more than it values empirical research; so it pays little attention to real economies, having little to say about money and debt, for example! Predictably, the dismal science failed to predict the crisis. When the UK’s Queen Elizabeth asked why no one saw the crisis coming, the economists’ embarrassment was palpable. (Sayer 2015, 23-24)

— Andrew Sayer (2015) Why We Can’t Afford the Rich

[M]any of our problems come from the nature of the economic system itself. If business people behave in the purely selfish and self-serving way that economic theory assumes, our free-market system tends to spawn manipulation and deception. The problem is not that there are a lot of evil people. Most people play by the rules and are just trying to make a good living. But, inevitably, the competitive pressures for businessmen to practice deception and manipulation in free markets lead us to buy, and to pay too much for, products that we do not need; to work at jobs that give us little sense of purpose; and to wonder why our lives have gone amiss. (…) The economic system is filled with trickery and everyone needs to know about it.” (Akerlof & Shiller, 2015, viii)

[F]ree markets do not just deliver this cornucopia that people want. They also create an economic equilibrium that is highly suitable for economic enterprises that manipulate or distort our judgment, using business practices that are analogous to biological cancers that make their home in the normal equilibrium of the human body. (Akerlof and Shiller 2015, x)

— George A. Akerlof and Robert J. Shiller (2015) Phishing for Phools: The Economics of Manipulation & Deception

Many of the quotes above are from economists, experts in their field, some Nobel Prize-winning economists. One thing is clear; the Great Recession shook the very foundations of economics to its core. Only the blind leading the blind can pretend today that something isn’t amiss within the field of economics. The quotations above only represent a small sampling of the discontent rising to the surface within the field of economics today. There is actually a revolt underway in the younger generation of economic graduate students who lived through the Great Recession and the near melt down of the world’s economy yet witnessed their teachers being confounded by the Queen’s question. And if we value our children’s and our grandchildren’s economic future we can no longer afford to simply leave economics to the experts—the Econocracy—for as these young graduate students tell us, we do so at our own peril. Amartya Sen in his essay Rational Fools: A Critique of the Behavioral Foundations of Economic Theory takes us on an intellectual journey back in time to the thoughts and reflections of one of the founders of the field of economics:

In his Mathematical Psychics, published in 1881, Edgeworth asserted that ‘the first principle of Economics is that every agent is actuated only by self-interest’. This view has been a persistent one in economic models, and the nature of economic theory seem to have been much influenced by this basic premise…. I should mention that Edgeworth himself was quite aware that this so-called first principle of Economics was not a particularly realistic one. Indeed, he felt that ‘the concrete nineteenth century man is for the most part an impure egoist, a mixed utilitarian’. This raises the interesting question as to why Edgeworth spent so much of his time and talent in developing a line of inquiry the first principle of which he believed to be false. The issue is not why abstractions should be employed in pursuing economic questions—the nature of inquiry makes this inevitable—but why would one choose an assumption which he himself believed not merely inaccurate in detail but fundamentally mistaken? (Sen 1982, 84-85)

— Amartya Sen (1982) Rational Fools

Imaginary Empty Balls

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The answer, therefore, which the seventeenth century gave to the ancient question … “What is the world made of?” was that the world is a succession of instantaneous configurations of matter — or material, if you wish to include stuff more subtle than ordinary matter…. Thus the configurations determined there own changes, so that the circle of scientific thought was completely closed. This is the famous mechanistic theory of nature, which has reigned supreme ever since the seventeenth century. It is the orthodox creed of physical science…. There is an error; but it is merely the accidental error of mistaking the abstract for the concrete. It is an example of what I will call the ‘Fallacy of Misplaced Concreteness.’ This fallacy is the occasion of great confusion in philosophy. (Whitehead 1967: 50-51)

(….) This conception of the universe is surely framed in terms of high abstractions, and the paradox only arises because we have mistaken our abstractions for concrete realities…. The seventeenth century had finally produced a scheme of scientific thought framed by mathematics, for the use of mathematics. The great characteristic of the mathematical mind is its capacity for dealing with abstractions; and for eliciting from them clear-cut demonstrative trains of reasoning, entirely satisfactory so long as it is those abstractions which you want to think about. The enormous success of the scientific abstractions, yielding on the one hand matter with its simple location in space and time, on the other hand mind, perceiving, suffering, reasoning, but not interfering, has foisted onto philosophy the task of accepting them as the most concrete rendering of fact. (Whitehead 1967: 54-55)

Thereby, modern philosophy has been ruined. It has oscillated in a complex manner between three extremes. These are the dualists, who accept matter and mind as on an equal basis, and the two varieties of monists, those who put mind inside matter, and those who put matter inside mind. But this juggling with abstractions can never overcome the inherent confusion introduced by the ascription of misplaced concreteness to the scientific scheme of the seventeenth century. (Whitehead 1967: 55)

— Alfred North Whitehead in Science and the Modern World

In the UK, for example, 97 percent of money is created by commercial banks and its character takes the form of debt-based, interest-bearing loans. As for its intended use? In the 10 years running up to the 2008 financial crash, over 75 percent of those loans were granted for buying stocks or houses—so fuelling the house-price bubble—while a mere 13 percent went to small businesses engaged in productive enterprise.47 When such debt increases, a growing share of a nation’s income is siphoned off as payments to those with interest-earning investments and as profit for the banking sector, leaving less income available for spending on products and services made by people working in the productive economy. ‘Just as landlords were the archetypal rentiers of their agricultural societies,’ writes economist Michael Hudson, ‘so investors, financiers and bankers are in the largest rentier sector of today’s financialized economies.’ (Raworth 2017, 155)

Once the current design of money is spelled out this way—its creation, its character and its use—it becomes clear that there are many options for redesigning it, involving the state and the commons along with the market. What’s more, many different kinds of money can coexist, with the potential to turn a monetary monoculture into a financial ecosystem. (Raworth 2017, 155)

Imagine, for starters, if central banks were to take back the power to create money and then issue it to commercial banks, while simultaneously requiring them to hold 100 percent reserves for the loans that they make—meaning that every loan would be backed by someone else’s savings, or the bank’s own capital. It would certainly separate the role of providing money from the role of providing credit, so helping to prevent the build-up of debt-fuelled credit bubbles that burst with such deep social costs. That idea may sound outlandish, but it is neither a new nor a fringe suggestion. First proposed during the 1930s Great Depression by influential economists of the day such as Irving Fisher and Milton Friedman, it gained renewed support after the 2008 crash, gaining the backing of mainstream financial experts at the International Monetary Fund and Martin Wolf of the UK’s Financial Times. (Raworth 2017, 155-156)

— Kate Raworth in Doughnut Economics

Suggestions are anchored in neoclassical theory

Despite growing diversity in research, the theory flow of economics, often referred to as neoclassical, continues to dominate teaching and politics. It developed in the 19th century as an attempt to apply the methods of the natural sciences and especially physics to social phenomena, In the search for an “exact” social science, social relationships are abstracted to such an extent that calculations are possible. The neoclassical economics department primarily asks one question: How do rational actors optimize under certain circumstances? This approach is nothing bad in and of itself. However, in view of the ecological crisis, we have to ask ourselves completely different questions in society: How can the planetary collapse be prevented? What can an economic system look like that is social, fair and ecological?

— Katharina Keil and Max Wilken

~ ~ ~

The dematerialization of the value concept boded ill for the tangible world of stable time and concrete motion (Kern 1983). Again, the writer Jorge Luis Borges (1962, p. 159) captured the mood of the metaphor: (Mirowski 1989, 134. Kindle Location 2875-2877)

I reflected there is nothing less material than money, since any coin whatsoever (let us say a coin worth twenty centavos) is, strictly speaking, a repertory of possible futures. Money is abstract, I repeated; money is the future tense. It can be an evening in the suburbs, or music by Brahms; it can be maps, or chess, or coffee; it can be the words of Epictetus teaching us to despise gold; it is a Proteus more versatile than the one on the isle of Pharos. It is unforeseeable time, Bergsonian time . . . (Mirowski 1989, 134-135. Kindle Location 2877-2881)

It was not solely in art that the reconceptualization of value gripped the imagination. Because the energy concept depended upon the value metaphor in part for its credibility, physics was prodded to reinterpret the meaning of its conservation principles. In an earlier, simpler era Clerk Maxwell could say that conservation principles gave the physical molecules “the stamp of the manufactured article” (Barrow and Tipler 1986, p. 88), but as manufacture gave way to finance, seeing conservation principles in nature gave way to seeing them more as contingencies, imposed by our accountants in order to keep confusion at bay. Nowhere is this more evident than in the popular writings of the physicist Arthur Eddington, the Stephen Jay Gould of early twentieth century physics: (Mirowski 1989, 135. Kindle Location 2881-2887)

The famous laws of conservation and energy . . . are mathematical identities. Violation of them is unthinkable. Perhaps I can best indicate their nature by an analogy. An aged college Bursar once dwelt secluded in his rooms devoting himself entirely to accounts. He realised the intellectual and other activities of the college only as they presented themselves in the bills. He vaguely conjectured an objective reality at the back of it all — some sort of parallel to the real college — though he could only picture it in terms of the pounds, shillings and pence which made up what he would call “the commonsense college of everyday experience.” The method of account-keeping had become inveterate habit handed down from generations of hermit-like bursars; he accepted the form of the accounts as being part of the nature of things. But he was of a scientific turn and he wanted to learn more about the college. One day in looking over the books he discovered a remarkable law. For every item on the credit side an equal item appeared somewhere else on the debit side. “Ha!” said the Bursar, “I have discovered one of the great laws controlling the college. It is a perfect and exact law of the real world. Credit must be called plus and debit minus; and so we have the law of conservation of £. s. d. This is the true way to find out things, and there is no limit to what may ultimately be discovered by this scientific method . . .” (Mirowski 1989, 135. Kindle Location 2887-2898)

I have no quarrel with the Bursar for believing that scientific investigation of the accounts is a road to exact (though necessarily partial) knowledge of the reality behind them . . . But I would point out to him that a discovery of the overlapping of the different aspects in which the realities of the college present themselves in the world of accounts, is not a discovery of the laws controlling the college; that he has not even begun to find the controlling laws. The college may totter but the Bursar’s accounts still balance . . . (Mirowski 1989, 135-136. Kindle Location 2898-2902)

Perhaps a better way of expressing this selective influence of the mind on the laws of Nature is to say that values are created by the mind [Eddington 1930, pp. 237–8, 243]. (Mirowski 1989, 136. Kindle Location 2903-2904)

Once physicists had become inured to entertaining the idea that value is not natural, then it was a foregone conclusion that the stable Laplacean dreamworld of a fixed and conserved energy and a single super-variational principle was doomed. Again, Eddington stated it better than I could hope to: (Mirowski 1989, 136. Kindle Location 2904-2907)

[Classical determinism] was the gold standard in the vaults; [statistical laws were] the paper currency actually used. But everyone still adhered to the traditional view that paper currency needs to be backed by gold. As physics progressed the occasions when the gold was actually produced became career until they ceased altogether. Then it occurred to some of us to question whether there still was a hoard of gold in the vaults or whether its existence was a mythical tradition. The dramatic ending of the story would be that the vaults were opened and found to be empty. The actual ending is not quite so simple. It turns out that the key has been lost, and no one can say for certain whether there is any gold in the vaults or not. But I think it is clear that, with either termination, present-day physics is off the gold standard [Eddington 1935, p. 81]. (Mirowski 1989, 136. Kindle Location 2907-2913)

The denaturalization of value presaged the dissolution of the energy concept into a mere set of accounts, which, like national currencies, were not convertable at any naturally fixed rates of exchange. Quantum mechanical energy was not exactly the same thing as relativistic energy or thermodynamic energy. Yet this did not mean that physics had regressed to a state of fragmented autarkies. Trade was still conducted between nations; mathematical structure could bridge subdisciplines of physics. It was just that everyone was coming to acknowledge that money was provisional, and that symmetries expressed by conservatiori principles were contingent upon the purposes of the theory in which they were embedded. (Mirowski 1989, 136. Kindle Location 2913-2918)

Increasingly, this contingent status was expressed by recourse to economic metaphors. The variability of metrics of space-time in general relativity were compared to the habit of describing inflation in such torturous language as: “The pound is now only worth seven and sixpence” (Eddington 1930, p. 26). The fundamentally stochastic character of the energy quantum was said to allow nuclear particles to “borrow” sufficient energy so that they could “tunnel” their way out of the nucleus. And, inevitably, if we live with a banking system wherein money is created by means of loans granted on the basis of near-zero fractional reserves, then this process of borrowing energy could cascade, building upon itself until the entire universe is conceptualized as a “free lunch.” The nineteenth century would have recoiled in horror from this idea, they who believed that banks merely ratified the underlying real transactions with their loans. (Mirowski 1989, 136-137. Kindle Location 2918-2925)

Goldman Sachs and Flash Boys

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In the City, they sell and buy. And nobody ever asks them why. But since it contents them to buy and sell, God forgive them, they might as well.

— Humbert Wolfe, The Uncelestial City, 1940

Front-running in the name of ‘democratizing’ Wall Street

Unlike most trading platforms, it [Robinhood] does not charge a commission for letting users buy and sell shares. Instead it makes money by selling data on those deals to others before they go through.

— Elon Must grills Robinhood boss over GameStop row on Clubhouse, BBC

There is no such thing as a free lunch. Just as social media platforms like Facebook have been used to manipulate class grievances and spread falsehoods the claim that Robinhood is ‘democratizing’ Wall Street and putting the ‘little guy’ aka retail investors on an even playing field is another Big Lie. But to understand why requires a sophisticated understanding of how Wall Street trading of stocks really works and that nanoseconds matter. It is based on not just information but timing and we are talking about microseconds or perhaps even nanoseconds (think quantum computing).

‘High-frequency trading’ is undertaken by computers which are constantly offering to buy and sell securities. The interval for which these securities are held by their owner may—literally—be shorter than the blink of an eye. Spread Networks, a telecoms provider, has recently built a link through the Appalachian Mountains to reduce the time taken to transmit data between New York and Chicago by a little less than one millisecond. (Kay 2015, 2)

— John Kay, Other People’s Money: The Real Business of Finance

What better way to manipulate the market than to aggregate the trades and sell the information before the trades are made to front-run the “little guy” so the platform doesn’t charge transaction fees — but does let the “little guy” buy on “leverage” aka credit so they can lose their shirt, house, and everything else — and then hold his trade long enough to sell the information to high-frequency traders who can then front-run them. We need to be asking “Who is Robinhood selling this information to? Who would profit from such information to a degree greater than Robinhood’s client trading costs and therefore be willing to pay for it? And what are they doing with it?” Epistemic Inequality is a dangerous thing. By holding its clients trades long enough to sell information about those trades to a third-party the cost of the ‘free lunch’ is a dystopian future of Surveillance Capitalism.

When you combine ignorance and leverage, you get some pretty interesting results.

— Warren Buffett, on the global financial crisis, 2008

When Robinhood delays their retail-investor’s stock transactions in lieu of charging a commission this gives the illusion of something for nothing (i.e., ‘democratizing’ Wall Street with a ‘free lunch’) for its “retail investor” clients. But this is sham, a fraud, for Robinhood is collecting its commissions by selling its “retail investor” stock data information on trading positions while holding/delaying the trade going through so third-parties can profit on this information at the “retail investors” expense. This trading data can then be used to front-run the positions of Robinhood’s “retail investors.” This is Surveillance Capitalism at its best!

Lucky fools do not bear the slightest suspicion that they may be lucky fools.

— Nassim Nicholas Taleb, Fooled by Randomness, 2001

We the public have no idea at this time who the real people are profiting overall from this phenomena; it could even be outside foreign powers with a larger agenda such as destabilizing the US economy. As the SEC says, to find out who is really behind it you must follow the money; for those who profit most are most likely those who are behind this front-running market manipulation. The majority of actual “retail investors” who are being pumped up on Reddit to hold until the end will lose much depending on how leveraged they are. A few will make a killing, make the news, and further pump the dump. But in the end the one’s who really make a killing over the long haul are those who have the millisecond advantage and the cash to purchase Robinhood’s “retail client” positions and based upon this asymmetric (insider?) information take trading positions to win on the up-side and down-side (win-win) while the “retail investors” are left with win-some lose-many.

In the long haul the stock market cycle of creating bursting bubbles is a numbers game in which the only people really winning are Robinhood and its third-party clients who roll in the cash on the backs of the con of the retail investors. Only a fool thinks outside investors would drop 3.4 billion into Robinhood overnight if not for the fact that it was a win-win regardless of the fact that what wild speculation drives up based upon no intrinsic value inevitably will come crashing down. They have already banked (front-run) their profits and left many naïve retail investors qua speculative day traders who bought into this Ponzi scheme no chair to sit in when the music stops. This in the end is nothing but a massive transfer of wealth from the middle class to the wealthiest 1% in the world.

The goose that lays the golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else’s goose. The investment bankers and their associates [aka financial services qua Robinhood] now enjoy that privilege. They control the people through the people’s own money.

— Louis Brandeis, Other People’s Money, 1914

The junk merchant doesn’t sell his product to the consumer, he sells the consumer to his product.

— William S. Burroughs, Letter from a Master Addict to Dangerous Drugs, 1956

Robinhood sells its retail customer’s trading data as its product. Robinhood’s real customers are those who pay for this time-delayed “retail investor” data. How convenient to misdirect the outrage at Robinhood’s halting trading when its clearing house demanded it put up 3 billion cash to back its positions. Like all misleading and/or disinformation, this directs the “retail investors” anger away from the real abuse of Robinhood, which is not stealing from the rich and giving to the poor but fleecing the not-so-poor out of their money by delaying their trade while selling their stock positions (data) to potential third-parties who can then trade to their own advantage based upon this information. What the retail investors should be angry about and asking for is absolute transparency as to why their trades are delayed while their data is sold to third-parties, who these third-parties are, and how is their time-delayed trade data being used by these third-parties?

Someone out there was using the fact that stock market orders arrived at different times at different exchanges to front-run orders from one market to another…. [He] explained … how his team had placed big trades to measure how much more cheaply they bought stock when they removed the ability of the machine to front-run them….

“It happens on such a granular level that even if you tried to line it up and figure it out you wouldn’t be able to do it. People are getting screwed because they can’t imagine a microsecond.”

When bids and offers for shares sent to these places arrived at precisely the same moment, the markets acted as markets should. If they arrived even a millisecond apart, the market vanished, and all bets were off. [He] knew that he was being front-run—that some other trader was, in effect, noticing his demand for stock on one exchange and buying it on others in anticipation of selling it to him at a higher price.

— Lewis, Michael. Flash Boys: A Wall Street Revolt . W. W. Norton & Company. Kindle Edition

It took only a few weeks for a consortium of high-frequency traders to marshal an army of lobbyists and publicists to make their case for them. These condottieri set about erecting lines of defense for their patrons. Here was the first: The only people who suffer from high-frequency traders are even richer hedge fund managers, when their large stock market orders are detected and front-run. It has nothing to do with ordinary Americans. Which is such a weird thing to say that you have to wonder what is going through the mind of anyone who says it. It’s true that among the early financial backers of IEX were three of the world’s most famous hedge fund managers (Bill Ackman, David Einhorn, and Daniel Loeb). But rich hedge fund managers aren’t the only investors who submit large orders to the stock market that can be detected and front-run by high-frequency traders. Mutual funds and pension funds and university endowments also submit large stock market orders, and these, too, can be detected and front-run by high-frequency traders. The vast majority of American middle-class savings are managed by such institutions.

— Lewis, Michael. Flash Boys: A Wall Street Revolt . W. W. Norton & Company. Kindle Edition.

When angry class grievance mixed with greed and desire for a quick profit are joined with an army of “little guys” jumping into the market on a SPAC Jesus rumor and randomly running up the price of stocks based not on any intrinsic value in the underlying asset but only anger at the “big guy” aka hedge funds and greed for quick capital gains — unaware of front-running because of their greed, anger, and mob psychology riled-up by Reddit social media posts — the golden age of fraud has dawned and we have entered the era of the ‘democratization’ of Long-Term Front-Running and turned the entire American economy into the wrecking ball of casino capitalism.

“We’re living in a time of absolutely unprecedented uncertainty,” she said. “There really is no reason for anyone in their twenties to imagine that their 401(k) is going to pay off in 50, 60 years the way it did for their parents. And I’m not saying they shouldn’t believe it. I’m just saying they have good reason not to”. — WallstreetBets Poster

Why should I care about posterity? What has posterity ever done for me?

— Attributed to Groucho Marx, but also credited to various eighteenth-century English figures

There is a wide range of reasons used to justify jumping into day trading, running from just wanting to make a quick buck to a nihilistic desire to blow the system up. One thing is sure, what goes up must come crashing down. This house of cards will fall and with it potentially the American economy and middle class with it experiencing another Great Depression worse than 1929. This will be the prelude to the next American Demagogue, perhaps even Trump 2024, and the end of any of hope of progressive change in America. Unless this angry mob psychology is swiftly redirected to political activism, such as outlawing short-selling and leveraged speculation and bringing transparency, fairness, and robust regulation to the stock market — which can only be done by the regulatory subpoena power of the SEC — more economic destruction is likely to follow the destruction already wrought by the pandemic and four long years of Grifting Trumpism.

We are investment bankers [and financial services like Robinhood]. We don’t care what happens in five years.

— Vincent Dahinden, head of global structured products, Royal Bank of Scotland, Institutional Investor, 12 February 2004

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object. (Keynes 1936, 97)

These tendencies are a scarcely avoidable outcome of our having successfully organised ‘liquid’ investment markets. It is usually agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges. That the sins of the London Stock Exchange are less than those of Wall Street may be due, not so much to differences in national character, as to the fact that to the average Englishman Throgmorton Street is, compared with Wall Street to the average American, inaccessible and very expensive. The jobber’s ‘turn’, the high brokerage charges and the heavy transfer tax payable to the Exchequer, which attend dealings on the London Stock Exchange, sufficiently diminish the liquidity of the market (although the practice of fortnightly accounts operates the other way) to rule out a large proportion of the transactions characteristic of Wall Street. The introduction of a substantial Government transfer tax on all transactions might prove the most serviceable reform available, with a view to mitigating the predominance of speculation over enterprise in the United States. (Keynes 1936, 97)

— J. M. Keynes, The General Theory of Employment, Interest and Money, 1936

~ ~ ~

I suppose this book started when I first heard the story of Sergey Aleynikov, the Russian computer programmer who had worked for Goldman Sachs and then, in the summer of 2009, after he’d quit his job, was arrested by the FBI and charged by the United States government with stealing Goldman Sachs’s computer code. I’d thought it strange, after the financial crisis, in which Goldman had played such an important role, that the only Goldman Sachs employee who had been charged with any sort of crime was the employee who had taken something from Goldman Sachs. I’d thought it even stranger that government prosecutors had argued that the Russian shouldn’t be freed on bail because the Goldman Sachs computer code, in the wrong hands, could be used to “manipulate markets in unfair ways.” (Goldman’s were the right hands? If Goldman Sachs was able to manipulate markets, could other banks do it, too?) But maybe the strangest aspect of the case was how difficult it appeared to be—for the few who attempted—to explain what the Russian had done. I don’t mean only what he had done wrong: I mean what he had done. His job. He was usually described as a “high-frequency trading programmer,” but that wasn’t an explanation. That was a term of art that, in the summer of 2009, most people, even on Wall Street, had never before heard. What was high-frequency trading? Why was the code that enabled Goldman Sachs to do it so important that, when it was discovered to have been copied by some employee, Goldman Sachs needed to call the FBI? If this code was at once so incredibly valuable and so dangerous to financial markets, how did a Russian who had worked for Goldman Sachs for a mere two years get his hands on it? (Lewis 2014, 40-53)

[I]n a room looking out at the World Trade Center site, at One Liberty Plaza … gathered a small army of shockingly well-informed people from every corner of Wall Street—big banks, the major stock exchanges, and high-frequency trading firms. Many of them had left high-paying jobs to declare war on Wall Street, which meant, among other things, attacking the very problem that the Russian computer programmer had been hired by Goldman Sachs to create. (Lewis 2014, 53-56)

(….) One moment all is well; the next, the value of the entire U.S. stock market has fallen 22.61 percent, and no one knows why. During the crash, some Wall Street brokers, to avoid the orders their customers wanted to place to sell stocks, simply declined to pick up their phones. It wasn’t the first time that Wall Street people had discredited themselves, but this time the authorities responded by changing the rules—making it easier for computers to do the jobs done by those imperfect people. The 1987 stock market crash set in motion a process—weak at first, stronger over the years—that has ended with computers entirely replacing the people. (Lewis 2014, 62-67)

Over the past decade, the financial markets have changed too rapidly for our mental picture of them to remain true to life. (Lewis 2014, 67)

(….) The U.S. stock market now trades inside black boxes, in heavily guarded buildings in New Jersey and Chicago. What goes on inside those black boxes is hard to say—the ticker tape that runs across the bottom of cable TV screens captures only the tiniest fraction of what occurs in the stock markets. The public reports of what happens inside the black boxes are fuzzy and unreliable—even an expert cannot say what exactly happens inside them, or when it happens, or why. The average investor has no hope of knowing, of course, even the little he needs to know. He logs onto his TD Ameritrade or E*Trade or Schwab account, enters a ticker symbol of some stock, and clicks an icon that says “Buy”: Then what? He may think he knows what happens after he presses the key on his computer keyboard, but, trust me, he does not. If he did, he’d think twice before he pressed it. (Lewis 2014, 72-78)

The world clings to its old mental picture of the stock market because it’s comforting; because it’s so hard to draw a picture of what has replaced it; and because the few people able to draw it for you have no [economic] interest in doing so. (Lewis 2014, 78-80)

Anti-Human Economics

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Emily Northrop (2000) questions whether the fundamental cause of scarcity — unlimited wants — is really innate, and argues that it may be merely constructed [see Diamonds are Bullshit]. She notes that some people manage to resist consumerism and choose different lifestyles embodying simplicity, balance or connection (to the earth and to others). The fact that some are able to do this suggests unlimited wants aren’t innate. In arguing that our wants are constructed, she emphasizes the power of social norms and the power of advertising: some of society’s cleverest people and billions of dollars a year are spent creating and maintaining our wants. (Hill and Myatt 2010, 16)

Northrop also points out that the notion of unlimited wants puts all wants on an equal footing: one person’s want for a subsistence diet is no more important than a millionaire’s want for precious jewellery. This equality of wants reflects the market value system that no goods are intrinsically more worthy than others — just as no preferences are more worthy than others. This is clearly a value judgement and one that many people reject. Yet economics, which unquestioningly adopts this approach, claims to be an objective social science that avoids making value judgements! (Hill and Myatt 2010, 16)

It is noteworthy that Keynes disagreed that ‘all wants have equal merit’. Rather than identify the economic problem with scarcity, he identified it with the satisfaction of what he called absolute needs: food, clothing, shelter and healthcare (Keynes 1963 [1931]: 365). This definition of the economic problem puts equity and the distribution of income front and centre. It contrasts with the textbook approach of treating equity as a political issue outside the scope of economic analysis. (Hill and Myatt 2010, 16)

Another economist who rejects the ‘innate unlimited wants’ idea is Stephen Marglin (2008). Unlike Northrop, he doesn’t blame advertising or social norms. Rather, he sees the fundamental cause to be the destruction of community ties, which creates an existential vacuum: all that’s left is stuff. Goods and services substitute for meaningful relationships with family, friends and community. His conclusion: as long as goods are a primary means of solving existential problems, we will always want more. But what or who is responsible for undermining community ties and bonds? Marglin argues that the assumptions of textbook economics, and the resulting policy recommendations of economists, undermine community…. (Hill and Myatt 2010, 16-17)

According to Marglin, the textbook focus on individuals makes the community invisible to economists’ eyes. But it is our friendships and deep connections with others which give our lives meaning. So community ties, built on mutual trust and common purpose, have a value — a value that economists ignore when recommending policy.

Furthermore, Marglin argues that rational choice theory — emphasized in the mainstream textbooks — reduces ethical judgements and values to mere preferences. Are you working for the benefit of your community? That’s your preference. Are you cooking the books to get rich quick and devil take the hindmost? That’s your preference. Being selfish is no worse than being altruistic, they are just different preferences. (Hill and Myatt 2010, 16)

Indeed, according to mainstream textbook economics it is smart to be selfish. It not only maximizes your own material well-being, but through the invisible hand of the market it also produces the greatest good for the greatest possible number. This view influences the cultural norms of society and indirectly erodes community. This influence of economics on attitudes isn’t mere speculation. Marwell and Ames (1981) document that exposure to economics generates less cooperative, less other-regarding, behaviour. Frank et al. (1993) show that uncooperative behaviour increases the more individuals are exposed to economics. (Hill and Myatt 2010, 17-18)

(….) Marglin argues that the textbook focus on individuals is problematic. John Kenneth Galbraith went farther. He thought the textbook focus on individuals was a source of grave error and bias because in the real world the individual is not the agent that matters most. The corporation is. By having the wrong focus, economics is able to deny the importance of power and political interests. (Hill and Myatt 2010, 18)

Further, textbooks assume that the state is subordinate to individuals through the ballot box. At the very least, government is assumed to be neutral, intervening to correct market failure as best it can, and to redistribute income so as to make market outcomes more equitable. (Hill and Myatt 2010, 18-19)

But this idealized world is so far removed from the real world that it is little more than a myth, or ‘perhaps even a fraud’ (John K. Galbraith 2004). The power of the largest corporations rivals that of the state; indeed, they often hijack the state’s power for their own purposes. In reality, we see the management of the consumer by corporations; and we see the subordination of the state to corporate interest. (Hill and Myatt 2010, 19)

(….) Galbraith argues that the biggest corporations have power over markets, power in the community, power over the state, and power over belief. As such, the corporation is a political instrument, different in form and degree but not in kind from the state itself. Textbook economics, in denying that power, is part of the problem. It stops us from seeing how we are governed. As such it becomes an ‘ally of those whose exercise of power depends on an acquiescent public’ (John K. Galbraith 1973a: 11). (Hill and Myatt 2010, 19-20)

Spotting the Spoof

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I came to think of humans as a kind of Turing machine. I searched for stories which reinforced the parable. There were many of them. However, Üxküll’s tick story was the most impressive (Kindle Locations 884-887). (….) Üxküll’s tick and the Turing machine parable all fitted together in one idea (Kindle Locations 900-907). (….) We find an astonishing coincidence with my Turing machine parable of animal and human behaviors…. This is the most primitive case of the definition of the situation.

(Shiozawa et. al. (2019) Microfoundations of Evolutionary Economics. Kindle Locations 884-887, 900-907, 926-933. Springer Japan. Emphasis added.)

According to this view, individuals within an economy follow simple rules of thumb to determine their course of action. However, they adapt to their environment by changing the rules they use when these prove to be less successful. They are not irrational in that they do not act against their own interests, but they have neither the information nor the calculating capacity to ‘optimise’. Indeed, they are assumed to have limited and largely local information, and they modify their behaviour to improve their situation. Individuals in complexity models are neither assumed to understand how the economy works nor to consciously look for the ‘best choice’. The main preoccupation is not whether aggregate outcomes are efficient or not but rather with how all of these different individuals interacting with each other come to coordinate their behaviour. Giving individuals in a model simple rules to follow and allowing them to change them as they interact with others means thinking of them much more like particles or social insects. Mainstream economists often object to this approach, arguing that humans have intentions and aims which cannot be found in either inanimate particles or lower forms of life.

— Kirman et. al. (2018, 95) in Rethinking Economics: An Introduction to Pluralist Economics, Routledge.

Even such purely academic theories as interpretations of human nature have profound practical consequences if disseminated widely enough. If we impress upon people that science has discovered that human beings are motivated only by the desire for material advantage, they will tend to live up to this expectation, and we shall have undermined their readiness to moved by impersonal ideals. By propagating the opposite view we might succeed in producing a larger number of idealists, but also help cynical exploiters to find easy victims. This specific issue, incidentally, is of immense actual importance, because it seems that the moral disorientation and fanatic nihilism which afflict modern youth have been stimulated by the popular brands of sociology and psychology [and economics] with their bias for overlooking the more inspiring achievements and focusing on the dismal average or even the subnormal. When, fraudulently basking in the glory of the exact sciences, the psychologists [, theoretical economists, etc.,] refuse to study anything but the most mechanical forms of behavior—often so mechanical that even rats have no chance to show their higher faculties—and then present their mostly trivial findings as the true picture of the human mind, they prompt people to regard themselves and others as automata, devoid of responsibility or worth, which can hardly remain without effect upon the tenor of social life. (….) Abstrusiveness need not impair a doctrine’s aptness for inducing or fortifying certain attitudes, as it may in fact help to inspire awe and obedience by ‘blinding people with science’.

— Andreski (1973, 33-35) in Social Sciences as Sorcery. Emphasis added.

Complexity theory comes with its own problems of over-reach and tractability. Context counts; any theory taken to far stretches credulity. The art is in spotting the spoof. It is true irony to watch the pot calling the kettle black! To wit, mainstream economists questioning the validity of complexity theories use of greedy reductionism — often for the sole purpose of mathematical tractability — when applied to human beings; just because mainstream economists also have unrealistic assumptions (i.e., homo economicus) that overly simplify human behavior and capabilities doesn’t invalidate such a critique. Just because the pot calls the kettle black doesn’t mean the kettle and the pot are not black. Building models of human behavior solely on rational expectations and/or “social insects” qua fitness climbing ticks means we are either Gods or Idiots. Neither Gödel nor Turing reduced creatively thinking human beings to mere Turing machines.

~ ~ ~

The best dialogues take place when each interlocutor speaks from her best self, without pretending to be something she is not. In their recent book Phishing for Phools: The Economics of Manipulation and Deception, Nobel Prize–winning economists George Akerlof and Robert Shiller expand the standard definition of “phishing.” In their usage, it goes beyond committing fraud on the Internet to indicate something older and more general: “getting people to do things that are in the interest of the phisherman” rather than their own. In much the same spirit, we would like to expand the meaning of another recent computer term, “spoofing,” which normally means impersonating someone else’s email name and address to deceive the recipient—a friend or family member of the person whose name is stolen—into doing something no one would do at the behest of a stranger. Spoofing in our usage also means something more general: pretending to represent one discipline or school when actually acting according to the norms of another. Like phishing, spoofing is meant to deceive, and so it is always useful to spot the spoof.

Students who take an English course under the impression they will be taught literature, and wind up being given lessons in politics that a political scientist would scoff at or in sociology that would mystify a sociologist, are being spoofed. Other forms of the humanities—or dehumanities, as we prefer to call them—spoof various scientific disciplines, from computer science to evolutionary biology and neurology. The longer the spoof deceives, the more disillusioned the student will be with what she takes to be the “humanities.” (Morson, Gary Saul. Cents and Sensibility (pp. 1-2). Princeton University Press. Kindle Edition.)

By the same token, when economists pretend to solve problems in ethics, culture, and social values in purely economic terms, they are spoofing other disciplines, although in this case the people most readily deceived are the economists themselves. We will examine various ways in which this happens and how, understandably enough, it earns economists a bad name among those who spot the spoof.

But many do not spot it. Gary Becker won a Nobel Prize largely for extending economics to the furthest reaches of human behavior, and the best-selling Freakonomics series popularizes this approach. What seems to many an economist to be a sincere effort to reach out to other disciplines strikes many practitioners of those fields as nothing short of imperialism, since economists expropriate topics rather than treat existing literatures and methods with the respect they deserve. Too often the economic approach to interdisciplinary work is that other fields have the questions and economics has the answers. (Morson, Gary Saul. Cents and Sensibility (pp. 2-3). Princeton University Press. Kindle Edition.)

As with the dehumanities, these efforts are not valueless. There is, after all, an economic aspect to many activities, including those we don’t usually think of in economic terms. People make choices about many things, and the rational choice model presumed by economists can help us understand how they do so, at least when they behave rationally—and even the worst curmudgeon acknowledges that people are sometimes rational! We have never seen anyone deliberately get into a longer line at a bank. (Morson, Gary Saul. Cents and Sensibility (p. 3). Princeton University Press. Kindle Edition.)

Even regarding ethics, economic models can help in one way, by indicating what is the most efficient allocation of resources. To be sure, one can question the usual economic definition of efficiency—in terms of maximizing the “economic surplus”—and one can question the establishment of goals in purely economic terms, but regardless of which goals one chooses, it pays to choose an efficient way, one that expends the least resources, to reach them. Wasting resources is never a good thing to do, because the resources wasted could have been put to some ethical purpose. The problem is that efficiency does not exhaust ethical questions, and the economic aspect of many problems is not the most important one. By pretending to solve ethical questions, economists wind up spoofing philosophers, theologians, and other ethicists. Economic rationality is indeed part of human nature, but by no means all of it.

For the rest of human nature, we need the humanities (and the humanistic social sciences). In our view, numerous aspects of life are best understood in terms of a dialogue between economics and the humanities—not the spoofs, but real economics and real humanities. (Morson, Gary Saul. Cents and Sensibility (pp. 3-4). Princeton University Press. Kindle Edition.)

Value Crisis of Modernity

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There are many examples in the modern world showing how this doctrine of the free market—the pursuit of self-interest—has worked out to the disadvantage of society.

— CAMBRIDGE PROFESSOR JOAN ROBINSON, 1977, cited in Buddhist Economics.

The approach used here concentrates on a factual basis that differentiates it from more traditional practical ethics and economic policy analysis, such as the “economic” concentration on the primacy of income and wealth (rather than on the characteristics of human lives and substantive freedoms).

— NOBEL LAUREATE AMARTYA SEN, DEVELOPMENT AS FREEDOM, cited in Buddhist Economics

In Buddhist economics, people are interdependent with one another and with Nature, so each person’s well-being is measured by how well everyone and the environment are functioning with the goal of minimizing suffering for people and the planet. Everyone is assumed to have the right to a comfortable life with access to basic nutrition, health care, education, and the assurance of safety and human rights. A country’s well-being is measured by the aggregation of the well-being of all residents and the health of the ecosystem.

— Brown (2017, 2), in Buddhist Economics

As Toyota President Akio Toyoda recently commented, Toyota’s renewed commitment to society extends from putting customers first to “putting people first” and aiming to serve society as a whole. This mission statement stems from Toyota’s earliest values and explains why the company is closely aligned to the Sustainable Development Goals as inspiration for its long-term global sustainability strategy. At a European-level, the company is following this lead by contributing to society through its social and employment practices, such as its focus on diversity and inclusion

(….) “As we transform from an automotive to mobility company, and to produce mass happiness, we need to make more than cars, vans and trucks. We need to align with the Sustainable Development Goals, Green Deal and a better future”

— Automotive World, Toyota’s mission to produce “happiness for all” with its business transformation programme, December 7, 2020

We live in the age of kikikan (危機感). Civilizational crisis is everywhere to be seen for those who are awake. The way forward is gapponshugi, a vision embodying a new motive for economic striving.

~ ~ ~

In the most dramatic moments of Italy’s debt crisis, the newly installed “technical” government, led by Mario Monti, appealed to trade unions to accept salary cuts in the name of national solidarity. Monti urged them to participate in a collective effort to increase the competitiveness of the Italian economy (or at least to show that efforts were being made in that direction) in order to calm international investors and “the market” and, hopefully, reduce the spread between the interest rates of Italian and German bonds (at the time around 500 points, meaning that the Italian government had to refinance its ten-year debt at the excruciating rate of 7.3 percent). Commenting on this appeal in an editorial in the left-leaning journal Il Manifesto, the journalist Loris Campetti wondered how it could be at all possible to demand solidarity from a Fiat worker when the CEO of his company earned about 500 times what the worker did.1 And such figures are not unique to Italy. In the United States, the average CEO earned about 30 times what the average worker earned in the mid-1970s (1973 being the year in which income inequality in the United States was at its historically lowest point). Today the multiplier lies around 400. Similarly, the income of the top 1 percent (or even more striking, the top 0.1 percent) of the U.S. population has skyrocketed in relation to that of the remaining 99 percent, bringing income inequality back to levels not seen since the Roaring Twenties. (Arvidsson et. al. 2013, 1-2)

The problem is not, or at least not only, that such income discrepancies exist, but that there is no way to legitimate them. At present there is no way to rationally explain why a corporate CEO (or a top-level investment banker or any other member of the 1 percent) should be worth 400 times as much as the rest of us. And consequently there is no way to legitimately appeal to solidarity or to rationally argue that a factory worker (or any of us in the 99 percent) should take a pay cut in the name of a system that permits such discrepancies in wealth. What we have is a value crisis. There are huge differentials in the monetary rewards that individuals receive, but there is no way in which those differentials can be explained and legitimated in terms of any common understanding of how such monetary rewards should be determined. There is no common understanding of value to back up the prices that markets assign, to put it in simple terms. (We will discuss the thorny relation between the concepts of “value” and “price” along with the role of markets farther on in this chapter.) (Arvidsson et. al. 2013, 2)

This value crisis concerns more than the distribution of income and private wealth. It is also difficult to rationalize how asset prices are set. In the wake of the 2008 financial crisis a steady stream of books, articles, and documentaries has highlighted the irrational practices, sometimes bordering on the fraudulent, by means of which mortgage-backed securities were revalued from junk to investment grade, credit default swaps were emitted without adequate underlying assets, and the big actors of Wall Street colluded with each other and with political actors to protect against transparency and rational scrutiny and in the end to have the taxpayers foot the bill. Neither was this irrationality just a temporary expression of a period of exceptional “irrational exuberance”; rather, irrationality has become a systemic feature of the financial system. As Amar Bidhé argues, the reliance on mathematical formulas embodied in computerized calculating devices at all levels of the financial system has meant that the setting of values on financial markets has been rendered ever more disconnected from judgments that can be rationally reconstructed and argued through.5 Instead, decisions that range from whether to grant a mortgage to an individual, to how to make split-second investment decisions on stock and currency markets, to how to grade or rate the performance of a company or even a nation have been automated, relegated to the discretion of computers and algorithms. While there is nothing wrong with computers and algorithms per se, the problem is that the complexity of these devices has rendered the underlying methods of calculation and their assumptions incomprehensible and opaque even to the people who use them on a daily basis (and imagine the rest of us!). To cite Richard Sennett’s interviews with the back-office Wall Street technicians who actually develop such algorithms: (Arvidsson et. al. 2013, 2-3)

“I asked him to outline the algo [algorithm] for me,” one junior accountant remarked about her derivatives-trading Porsche driving superior, “and he couldn’t, he just took it on faith.” “Most kids have computer skills in their genes … but just up to a point … when you try to show them how to generate the numbers they see on screen, they get impatient, they just want the numbers and leave where these came from to the main-frame.” (Arvidsson et. al. 2013, 3)

The problem here is not ignorance alone, but that the makeup of the algorithms and automated trading devices that execute the majority of trades on financial markets today (about 70 percent are executed by “bots,” or automatic trading agents), is considered a purely technical question, beyond rational discussion, judgment, and scrutiny. Actors tend to take the numbers on faith without knowing, or perhaps even bothering about, where they came from. Consequently these devices can often contain flawed assumptions that, never scrutinized, remain accepted as almost natural “facts.” During the dot-com boom, for example, Internet analysts valued dot-coms by looking at a multiplier of visitors to the dot-com’s Web site without considering how these numbers translated into monetary revenues; during the pre-2008 boom investors assigned the same default risks to subprime mortgages, or mortgages taken out by people who were highly likely to default, as they did to ordinary mortgages.8 And there are few ways in which the nature of such assumptions, flawed or not, can be discussed, scrutinized, or even questioned. Worse, there are few ways of even knowing what those assumptions are. The assumptions that stand behind the important practice of brand valuation are generally secret. Consequently, there is no way of explaining how or discussing why valuations of the same brand by different brand-valuation companies can differ as much as 450 percent. A similar argument can be applied to Fitch, Moody’s, Standard & Poor, and other ratings agencies that are acquiring political importance in determining the economic prospects of nations like Italy and France. (Arvidsson et. al. 2013, 3)

This irrationality goes even deeper than financial markets. Investments in corporate social responsibility are increasing massively, both in the West and in Asia, as companies claim to want to go beyond profits to make a genuine contribution to society. But even though there is a growing body of academic literature indicating that a good reputation for social responsibility is beneficial for corporate performance in a wide variety of ways—from financial outcomes to ease in generating customer loyalty and attracting talented employees—there is no way of determining exactly how beneficial these investments are and, consequently, how many resources should be allocated to them. Indeed, perhaps it would be better to simply tax corporations and let the state or some other actor distribute the resources to some “responsible” causes. The fact that we have no way of knowing leads to a number of irrationalities. Sometimes companies invest more money in communicating their efforts at “being good” than they do in actually promoting socially responsible causes. (In 2001, for example, the tobacco company Philip Morris spent $75 million on what it defined as “good deeds” and then spent $100 million telling the public about those good deeds.) At other times such efforts can be downright contradictory, for example when tobacco companies sponsor antismoking campaigns aimed at young people in countries like Malaysia while at the same time targeting most of their ad spending to the very same segment. Other companies make genuine efforts to behave responsibly, but those efforts reflect poorly on their reputation. Apple, for example, has done close to nothing in promoting corporate responsibility, and has a consistently poor record when it comes to labor conditions among its Chinese subcontractors (like Foxconn). Yet the company benefits from a powerful brand that is to no small degree premised on the fact that consumers perceive it to be somehow more benign than Microsoft, which actually does devote considerable resources to good causes (or at least the Bill and Melinda Gates Foundation does so). (Arvidsson et. al. 2013, 3-4)

Similar irrationalities exist throughout the contemporary economy, ranging from how to measure productivity and determine rewards for knowledge workers to how to arrive at a realistic estimate of value for a number of “intangible” assets, from creativity and capacity for innovation to brand. (We will come back to these questions below as well as in the chapters that follow.) Throughout the contemporary economy, from the heights of finance down to the concrete realities of everyday work, particularly in knowledge work, great insecurities arise with regard to what things are actually worth and the extent to which the prices assigned to them actually reflect their value. (Indeed, in academic managerial thought, the very concept of “value” is presently without any clear definition; it means widely different things in different contexts.) (Arvidsson et. al. 2013, 4)

But this is not merely an accounting problem. The very question of how you determine worth, and consequently what value is, has been rendered problematic by the proliferation of a number of value criteria (or “orders of worth,” to use sociologist David Stark’s term) that are poorly reflected in established economic models. A growing number of people value the ethical impact of consumer goods. But there are no clear ways of determining the relative value of different forms of “ethical impact,” nor even a clear definition of what “ethical impact” means. Therefore there is no way of determining whether it is actually more socially useful or desirable for a company to invest in these pursuits than to concentrate on getting basic goods to consumers as cheaply and conveniently as possible. Consequently, ethical consumerism, while a growing reality, tends to be more efficient at addressing the existential concerns of wealthy consumers than at systematically addressing issues like poverty or empowerment. Similarly, more and more people understand the necessity for more sustainable forms of development. And while the definition of “sustainability” is clearer than that of “ethics,” there are no coherent ways of making concerns for sustainability count in practices of asset valuation (although some efforts have been made in that direction, which we will discuss) or of rationally determining the trade-off between efforts toward sustainability and standard economic pursuits. Thus the new values that are acquiring a stronger presence in our society—popular demand for a more sustainable economy and a more just and equal global society—have only very weak and unreliable ways of influencing the actual conduct of corporations and other important economic actors, and can affect economic decisions in only a tenuous way. More generally, we have no way of arriving at what orders of worth “count” in general and how much, and even if we were able to make such decisions, we have no channels by means of which to effect the setting of economic values. So the value crisis is not only economic; it is also ethical and political. (Arvidsson et. al. 2013, 4-5, emphasis added)

It is ethical in the sense that the relative value of the different orders of worth that are emerging in contemporary society (economic prosperity, “ethical conduct,” “social responsibility,” sustainability, global justice and empowerment) is simply indeterminable. As a consequence, ethics becomes a matter of personal choice and “standpoint” and the ethical perspectives of different individuals become incommensurate with one another. Ethics degenerates into “postmodern” relativism. (Arvidsson et. al. 2013, 5, emphasis added)

It is political because since we have no way of rationally arriving at what orders of worth we should privilege and how much, we have no common cause in the name of which we could legitimately appeal to people or companies (or force them) to do what they otherwise might not want to do. (The emphasis here is on legitimately; of course people are asked and forced to do things all the time, but if they inquire as to why, it becomes very difficult to say what should motivate them.) In the absence of legitimacy, politics is reduced to either more or less corrupt bargaining between particular interest groups or the naked exercise of raw power. In either case there can be no raison d’état. In such a context, appeals to solidarity, like that of the Monti government in Italy, remain impossible. (Arvidsson et. al. 2013, 5-6)

There have of course always been debates and conflicts, often violent, around what the common good should be. The point is that today we do not even have a language, or less metaphorically, a method for conducting such debates. (Modern ethical debates are interminable, as philosopher Alasdair MacIntyre wrote in the late 1970s.) This is what we mean by a value crisis. Not that there might be disagreement on how to value social responsibility or sustainability in relation to economic growth, or how much a CEO should be paid in relation to a worker, but that there is no common method to resolve such issues, or even to define specifically what they are about. We have no common “value regime,” no common understanding of what the values are and how to make evaluative decisions, even contested and conflict-ridden ones. (Arvidsson et. al. 2013, 6)

This has not always been the case. Industrial society—that old model that we still remember as the textbook example of how economics and social systems are supposed to work—was built around a common way of connecting economic value creation to overall social values, an imaginary social contract. In this arrangement, business would generate economic growth, which would be distributed by the welfare state in such a way that it contributed to the well-being of everyone. And even though there were intense conflicts about how this contract should apply, everyone agreed on its basic values. More importantly, these basic values were institutionalized in a wide range of practices and devices, from accounting methods to procedures of policy decisions to methods for calculating the financial value of companies and assets. Again, this did not mean that there was no conflict or discussion, but it did mean that there was a common ground on which such conflict and discussion could be acted out. There was a common value regime. (Arvidsson et. al. 2013, 6)

We are not arguing for a comeback of the value regime of industrial society. That would be impossible, and probably undesirable even if it were possible. However, neither do we accept the “postmodernist” argument (less popular now, perhaps, than it was two decades go) that the end of values (and of ethics or even politics) would be somehow liberating and emancipatory. Instead we argue that the foundations for a different kind of value regime—an ethical economy—are actually emerging as we speak. (Arvidsson et. al. 2013, 6)

Crystal Balls and Econometrics

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The growth of economic knowledge over the past 200 years compares quite favourably with the growth of physical science in any arbitrary 200 year stretch of the dark ages or medieval period. But one is reminded of Mark Twain: “it ain’t what people don’t know that’s the problem; it’s what they know that just ain’t so.” Along with the accumulation of knowledge there has been a proliferation of abstract theorizing that is only too easy to misapply or apply to situations where it is inappropriate. The low power of empirical tests and indifference of too many people to empirical testing has allowed useless models to persist too. Ideology also plays a bigger part than it does in most sciences, especially in macroeconomics. So it is easy to point to cases where economists offered terrible advice. No reason to despair. Smith, Marx, Keynes, Kalecki, Simon and Minsky all advanced understanding somewhat while Marshall, Hicks and others clarified and formalized concepts. Macroeconomics took a wrong path and a sharp turn for the worse in the1970s and we are barely emerging now. Still, what is 50 years in the eye of history?

— Gerald Holtham on RWER Blog

The modern forecasting field, which emerged in the early twentieth century, had many points of origin in the previous century: in the field credit rating agencies, in the financial press, and in the blossoming fields of science—including meteorology, thermodynamics, and physics. The possibilities of scientific discovery and invention generated unbounded optimism among Victorian-era Americans. Scientific discoveries of all sorts, from the invention of the internal combustion engine to the insights of Darwin and Freud, seemed to promise a new and illuminating age just out of reach. (Friedman 2014, ix)

But forecasting also had deeper roots in the inherent wish of human beings to find certainty in life by knowing the future: What will I be when I grow up? Where will I live? What kind of work will I do? Will it be fulfilling? Will I marry? What will happen to my parents and other family members? To my country, to my job? To the economy in which I live? Forecasting addresses not just business issues but the deep-seated human wish to divine the future. It is the story of the near universal compulsion to avoid ambiguity and doubt and the refusal of the realities of life to satisfy that impulse. (Friedman 2014, ix)

Economic forecasting arose when it did because while the effort to introduce rationality—in the form of the scientific method—was emerging, the insatiable human longing for predictability persisted in the industrializing economy. Indeed, the early twentieth century saw a curious enlistment of science in a range of efforts to temper the uncertainty of the future. Reform movements, including good, bad, and ugly ones (like labor laws, Prohibition, and eugenics), envisioned a future improved through the application of science. So, too, forecasting attracted a spectrum of visionaries. Here were “seers,” such as the popular prophet Roger Babson, Wall Street entrepreneurs, like John Moody, and genuine academic scientists, such as Irving Fisher of Yale and Charles Jesse Bullock and Warren Persons of Harvard. (Friedman 2014, ix)

Customers of the new forecasting services often took these statistics-based predictions on faith. They wanted forecasts, John Moody noted, not discourses on the methods that produced them. Readers did not seek out detailed information on the accuracy of economic predictions, as long as forecasters proved to be right at least a portion of the time. The desire for any information that would illuminate the future was overwhelming, and subscribers to forecasting newsletters were willing to suspend reasoned judgment to gain comfort. This blend of rationality and anxiety, measurement and intuition, optimism and fear is the broad frame of the story and, not incidentally, why forecasters who were repeatedly proved mistaken, as all ultimately must be given enough time, still commanded attention and fee-paying clients. (Friedman 2014, x)

(….) Forecaster’s reliance on science and statistics as methods for accessing the future aligns their story with conventional narratives of modernity. The German sociologist Max Weber, for instance, argued that a key component of the modern worldview was a marked “disenchantment of the world,” as scientific rationality displaced older, magical, and “irrational” ways of understanding. Indeed, the forecasters … certainly saw themselves as systematic empiricists and logicians who promised to rescue the science of prediction from quacks and psychics. They sought, in the words of historian Jackson Lears, to “stabilize the sorcery of the market.” (Friedman 2014, 5)

The relationship between the forecasting industry and modernity was an ambivalent one, though. On the one hand, the early forecasters helped build key institutions (including Moody’s Investors Service and the National Bureau of Economic Research) and popularize new statistical tools, like leading indicators and indexes of industrial production. On the other hand, though all forecasters dressed their predictions in the garb of rationality (with graphs, numbers, and equations), their predictive accuracy was no more certain than a crystal ball. Moreover, despite efforts of forecasters to distance themselves from astrologers and popular conjurers, the emergence of scientific forecasting went hand in hand with rising popular interest in all manner of prediction. The general public, anxious for insights into an uncertain future, consumed forecasts indiscriminately. (Friedman 2014, 5)

Diamonds are Bullshit

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Nineteenth-century economists liked to illustrate the importance of scarcity to value by using the water and diamond paradox. Why is water cheap, even though it is necessary for human life, and diamonds are expensive and therefore of high value, even though humans can quite easily get by without them? Marx’s labour theory of value — naïvely applied — would argue that diamonds simply take a lot more time and effort to produce. But the new utility theory of value, as the marginalists defined it, explained the difference in price through the scarcity of diamonds. Where there is an abundance of water, it is cheap. Where there is a scarcity (as in a desert), its value can become very high. For the marginalists, this scarcity theory of value became the rationale for the price of everything, from diamonds, to water, to workers’ wages.

The idea of scarcity became so important to economists that in the early 1930s it prompted one influential British economist, Lionel Robbins (1898–1984), Professor of Economics at the London School of Economics, to define the study of economics itself in terms of scarcity; his description of it as ‘the study of the allocation of resources, under conditions of scarcity’ is still widely used.8 The emergence of marginalism was a pivotal moment in the history of economic thought, one that laid the foundations for today’s dominant economic theory.

— Mariana Mazzucato (2018, 64-65) The Value of Everything

The Manufacturing of Scarcity qua Market Manipulation

American males enter adulthood through a peculiar rite of passage: they spend most of their savings on a shiny piece of rock. They could invest the money in assets that will compound over time and someday provide a nest egg. Instead, they trade that money for a diamond ring, which isn’t much of an asset at all. As soon as a diamond leaves a jeweler, it loses over 50% of its value. (Priceonomics 2014, 3)

We exchange diamond rings as part of the engagement process because the diamond company De Beers decided in 1938 that it would like us to. Prior to a stunningly successful marketing campaign, Americans occasionally exchanged engagement rings, but it wasn’t pervasive. Not only is the demand for diamonds a marketing invention, but diamonds aren’t actually that rare. Only by carefully restricting the supply has De Beers kept the price of a diamond high. (Priceonomics 2014, 3)

Countless American dudes will attest that the societal obligation to furnish a diamond engagement ring is both stressful and expensive. But this obligation only exists because the company that stands to profit from it willed it into existence. (Priceonomics 2014, 3)

So here is a modest proposal: Let’s agree that diamonds are bullshit and reject their role in the marriage process. Let’s admit that we as a society were tricked for about a century into coveting sparkling pieces of carbon, but it’s time to end the nonsense. (Priceonomics 2014, 3-4)

The Concept of Intrinsic Value

In finance, there is concept called intrinsic value. An asset’s value is essentially driven by the (discounted) value of the future cash that asset will generate. For example, when Hertz buys a car, its value is the profit Hertz will earn from renting it out and selling the car at the end of its life (the “terminal value”). For Hertz, a car is an investment. When you buy a car, unless you make money from it somehow, its value corresponds to its resale value. Since a car is a depreciating asset, the amount of value that the car loses over its lifetime is a very real expense you pay. (Priceonomics 2014, 4)

A diamond is a depreciating asset masquerading as an investment. There is a common misconception that jewelry and precious metals are assets that can store value, appreciate, and hedge against inflation. That’s not wholly untrue. (Priceonomics 2014, 4)

Gold and silver are commodities that can be purchased on financial markets. They can appreciate and hold value in times of inflation. You can even hoard gold under your bed and buy gold coins and bullion (albeit at approximately a 10% premium to market rates). If you want to hoard gold jewelry, however, there is typically a 100-400% retail markup. So jewelry is not a wise investment. (Priceonomics 2014, 4)

But with that caveat in mind, the market for gold is fairly liquid and gold is fungible — you can trade one large piece of gold for ten smalls ones like you can trade a ten-dollar bill for ten one-dollar bills. These characteristics make it a feasible investment. (Priceonomics 2014, 4)

Diamonds, however, are not an investment. The market for them is not liquid, and diamonds are not fungible. (Priceonomics 2014, 4-5)

The first test of a liquid market is whether you can resell a diamond. In a famous piece published by The Atlantic in 1982, Edward Epstein explains why you can’t sell used diamonds for anything but a pittance:

“Retail jewelers, especially the prestigious Fifth Avenue stores, prefer not to buy back diamonds from customers, because the offer they would make would most likely be considered ridiculously low. The ‘keystone,’ or markup, on a diamond and its setting may range from 100 to 200 percent, depending on the policy of the store; if it bought diamonds back from customers, it would have to buy them back at wholesale prices. Most jewelers would prefer not to make a customer an offer that might be deemed insulting and also might undercut the widely held notion that diamonds go up in value. Moreover, since retailers generally receive their diamonds from wholesalers on consignment and need not pay for them until they are sold, they would not readily risk their own cash to buy diamonds from customers.” (Priceonomics 2014, 5)

When you buy a diamond, you buy it at retail, which is a 100% to 200% markup. If you want to resell it, you have to pay less than wholesale to incent a diamond buyer to risk her own capital on the purchase. Given the large markup, this will mean a substantial loss on your part. The same article puts some numbers around the dilemma: (Priceonomics 2014, 5-6)

(….) We like diamonds because Gerold M. Lauck told us to. Until the mid-20th century, diamond engagement rings were a small and dying industry in America, and the concept had not really taken hold in Europe. (Priceonomics 2014, 7)

Not surprisingly, the American market for diamond engagement rings began to shrink during the Great Depression. Sales volume declined and the buyers that remained purchased increasingly smaller stones. But the U.S. market for engagement rings was still 75% of De Beers’ sales. With Europe on the verge of war, it didn’t seem like a promising place to invest. If De Beers was going to grow, it had to reverse the trend. (Priceonomics 2014, 7)

And so, in 1938, De Beers turned to Madison Avenue for help. The company hired Gerold Lauck and the N. W. Ayer advertising agency, which commissioned a study with some astute observations. Namely, men were the key to the market. As Epstein wrote of the findings:

“Since ‘young men buy over 90% of all engagement rings’ it would be crucial to inculcate in them the idea that diamonds were a gift of love: the larger and finer the diamond, the greater the expression of love. Similarly, young women had to be encouraged to view diamonds as an integral part of any romantic courtship” (Priceonomics 2014, 7)

(….) The next time you look at a diamond, consider this: nearly every American marriage begins with a diamond because a bunch of rich white men in the 1940s convinced everyone that its size determines a man’s self-worth. They created this convention — that unless a man purchases (an intrinsically useless) diamond, his life is a failure — while sitting in a room, racking their brains on how to sell diamonds that no one wanted. (Priceonomics 2014, 8)

A History of Market Manipulation

(….) What, you might ask, could top institutionalizing demand for a useless product out of thin air? Monopolizing the supply of diamonds for over a century to make that useless product extremely expensive. You see, diamonds aren’t really even that rare. (Priceonomics 2014, 10)

Before 1870, diamonds were very rare. They typically ended up in a Maharaja’s crown or a royal necklace. In 1870, enormous deposits of diamonds were discovered in Kimberley, South Africa. As diamonds flooded the market, the financiers of the mines realized they were making their own investments worthless. As they mined more and more diamonds, they became less scarce and their price dropped. (Priceonomics 2014, 10)

The diamond market may have bottomed out were it not for an enterprising individual by the name of Cecil Rhodes. He began buying up mines in order to control the output and keep the price of diamonds high. By 1888, Rhodes controlled the entire South African diamond supply, and in turn, essentially the entire world supply. One of the companies he acquired was eponymously named after its founders, the De Beers brothers. (Priceonomics 2014, 10)

Building a diamond monopoly isn’t easy work. It requires a balance of ruthlessly punishing and cooperating with competitors, as well as a very long-term view. For example, in 1902, prospectors discovered a massive mine in South Africa that contained as many diamonds as all of De Beers’ mines combined. The owners initially refused to join the De Beers cartel, and only joined three years later after new owner Ernest Oppenheimer recognized that a competitive market for diamonds would be disastrous for the industry. In Oppenheimer’s words: (Priceonomics 2014, 10-11)

“Common sense tells us that the only way to increase the value of diamonds is to make them scarce, that is to reduce production.” (Priceonomics 2014, 11)

(….) We covet diamonds in America for a simple reason: the company that stands to profit from diamond sales decided that we should. De Beers’ marketing campaign single handedly made diamond rings the measure of one’s success in America. Despite diamonds’ complete lack of inherent value, the company manufactured an image of diamonds as a status symbol. And to keep the price of diamonds high, despite the abundance of new diamond finds, De Beers executed the most effective monopoly of the 20th century. (Priceonomics 2014, 13)

~ ~ ~

The history of De Beers’ ruthless behavior in its drive to maintain its monopoly is well documented. There were so successful at creating a market in monopoly that eventually such a monstrosity as blood diamonds could exist. But that is another story. The moral of the story is that when it comes to capitalism there is really no such thing as intrinsic value or a “free market,” and that slick marketing can make a terd sell for the price of diamond.

Upon this market manipulation economists built a house of cards that overlooked the monopolist’s manipulations and instead claimed diamonds are expensive because they are rare. Diamonds are bullshit and by extension so too is modern economics theory of scarcity largely bullshit too.

Sack the Economists

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And Disband the Departments of The Walking Dead

In 1994 Paul Ormerod published a book called The Death of Economics. He argued economists don’t know what they’re talking about. In 2001 Steve Keen published a book called Debunking Economics: the naked emperor of the social sciences, with a second edition in 2011 subtitled The naked emperor dethroned?. Keen also argued economists don’t know what they’re talking about. (Davies 2015, 1)

Neither of these books, nor quite a few others, has had the desired effect. Mainstream economics has sailed serenely on its way, declaiming, advising, berating, sternly lecturing, deciding, teaching, pontificating. Meanwhile half of Europe and many regions and groups in the United States are in depression, and fascism is making a comeback. The last big depression spawned Hitler. This one is promoting Golden Dawn in Greece and similar extremist movements elsewhere. In the anglophone world a fundamentalist right-wing ideology is enforcing an increasingly narrow political correctness centred on “free” markets and the right of the rich to do and say whatever they like. “Freedom”, but only for some, and without responsibility. (Davies 2015, 1-2)

Evidently Ormerod and Keen were too subtle. It’s true their books also get a bit technical at times, especially Keen’s, but then they were addressing the profession, trying to bring it to its senses, to reform it from the inside. That seems to have been their other mistake. They produced example after example of how mainstream ideas fail, but still they had no effect. I think the message was addressed to the wrong audience, and was just too subtle. Economics is naked and dead, but never mind the stink, just prop up the corpse and carry on. (Davies 2015, 2)

Oh, but look! The corpse is moving. It’s getting up and walking. Time to call in John Quiggin, author of Zombie Economics: how dead ideas still walk among us. Perhaps he’ll show us how to shoot it in the head, or whatever it takes to finally stop a zombie. (Davies 2015, 2)

Well, I think it’s clear we can’t be too subtle. We need to speak in plain English, to everyone, and get straight to the point. Economists don’t know what they’re talking about. We should remove economists from positions of power and influence. Get them out of treasuries, central banks, media, universities, where ever they spread their baleful ignorance. (Davies 2015, 2)

Economists don’t know how businesses work, they don’t know how financial markets work, they can’t begin to do elementary accounting, they don’t know where money comes from nor how banks work, they think private debt has no effect on the economy, their favourite theory is a laughably irrelevant abstraction and they never learnt that mathematics on its own is not science. They ignore well-known evidence that clearly contradicts their theories. (Davies 2015, 2-3)

Other academics should look into this discipline called economics that lurks in their midst. Practitioners of proper academic rigour, like historians, ecologists, physicists, psychologists, systems scientists, engineers, even lawyers, will be shocked. Academic economics is an incoherent grab bag of mathematical abstraction, assertion, failure to heed observations, misrepresentation of history and sources, rationalisation of archaic money-lending practices, and wishful thinking. It missed the computational boat that liberated other fields from old analytical mathematics and overly-restrictive assumptions. It is ignorant of major fields of modern knowledge in biology, ecology, psychology, anthropology, physics and systems science. (Davies 2015, 3)

Though many economists themselves may not realise it, economics is an ideology rationalised by a dog’s breakfast of superficial arguments and defended by dense thickets of jargon and arcane mathematics. The ideology is an old one: the rich and powerful know best, the rest of us are here to serve them. (Davies 2015, 3)