Pricing and competition form a very powerful algorithm, but our worship of it creates (and hides) massive issues:
1. The underlying price-definer is still land, whether for facility or resource, and its truculent supply inflexibility. No matter how efficient the system, the profit goes to the owner of the land/asset (this includes patents, networks, and other "artificial" property)
2. As a result you always get feedback loops that create insane wealth distortions which inevitably destroy society
3. Along the way, the magic pricing algorithm, which actually has a very narrow set of useful applications such as in commodity trading, gets applied to everything, including areas where it works insanely badly.
4. The areas it doesn't work are any area where you cannot choose to not buy something, and those areas: healthcare, military, housing, and education, end up being virtually all of the economy.
You cannot get progress, if defined as the improvement of the human condition, solely from the price algorithm. You can get loci of improved productivity, but you will always end up with imbalance because the algorithm is missing the one thing that would make it potentially succeed, and that is a true governor. The system inevitably spins out of control because it inevitably leads to extreme capital concentration.
If you don't solve that, the algorithm is a fabulous idea that will kill us all.
Very good but I would add one more element. The "we" who vote at time t1 for one new technology over another or whose votes make one line of work more valuable than another vote with wealth held as a result of market and other non-utopian conditions at time t0. So governments who ought to intervene in markets no more than necessary to correct externalities and other imperfections ought also to arrange for transfers of resources from those with lower marginal utility for the resources to those with more.
Now lets reimagine making that pencil with only locally grown materials. Lets do a lean startup, shall we? First iteration is a stick with one end burned. Then instead of just a pencil sharpener we fire the tip to create more charcoal for writing. Next maybe we add some linseed oil for the stick. Of course it comes from locally grown flax. Now lets add a soy based gum eraser, also locally grown. Now the question becomes, which of these is less likely to be out of stock due to a catastrophic weather event half way around the world. If it's out of stock due to a local catastrophic weather event, well, there will be a lot more on everyone's mind than pencils. And this doesn't even address Big Pencil, the Organization of Pencil Extorting Companies (OPEC) and their manipulation of the market. Oh and lets not forget all the toxic waste generated when OPEC realized they could make more on synthetic materials and dump the toxic waste where they had the local politicians in their pocket or that the pencil itself is now toxic and causes cancer. Please sir may I have more?
I wish every discussion on climate change had this essay as its preface.
Over the past 21 years MSCI Country Indices performed as follows: US +491%, China +281%, Taiwan +337%, Korea +365%, and India +955%. MSCI USA market cap is more than 60% of MSCI world market cap. See any essay-evidence in these numbs?
The folks running their economy mostly on prices keep getting richer. In basketball their strategy might be starting the stall offense. But if this was basketball Coack K would be President and Magic would run Blackrock. But it’s not. So what should the winners do next?
Here are a few suggestions:
If markets made you relatively richer…then by all means make them failure-free. You don’t want mis-allocation of capital due to that any more than you’d want it via dumb SOE banks. Just a thought, but why wouldn’t the markets leader be positioning itself for world-beating longterm market efficiency?
To the extent all those US companies make money all over the world…you’d want protectionism and trade barriers minimized. To the extent that negative externalities are priced, you’d want them globally-aligned (taking into account stage of development).
In many aspects of life, bigger risks are taken by those who are trailing. Conversely, leaders tend to make more prudent decisions in trying to preserve their lead. Fat tail risks, like those realized in the financial crisis (especially with contagion) can both destabilize the global profit opportunity as well as well as bear direct cost.
So the US on climate change, at least since the failure of cap & and trade in 2010 (I testified on Waxman-Markey) is irrational. Worse still, the dreaded resource curse of emerging economies may be seeping into the US. Would an upstream economy-wide co2-e price crush American natural gas & LNG business? A lot less than other policy approaches…and policy-certainty plus potential reduction in trade frictions would offset losses. Bottom line, the US would gain relative wealth in a world that prices carbon (see MIT EPPA7 analysis).
Last point: financial services is 13% of US market cap. Academics have written on whether society gets enough value for their money. After standing by while ESG was thrashed almost out of existence…what do we hear from finance leaders on both globally-aligned carbon prices and reduced trade barriers? Crickets.
Thanks for the shout out!
Your article brings to mind the Brit who tried to build a toaster from scratch.
https://www.youtube.com/watch?v=5ODzO7Lz_pw
Oh, and here is a better story about pencils:
https://engines.egr.uh.edu/episode/339
We get a hard-on for the complexity of the world financial and trade system, and conveniently forget the folks who actually made pencils possible.
Pricing and competition form a very powerful algorithm, but our worship of it creates (and hides) massive issues:
1. The underlying price-definer is still land, whether for facility or resource, and its truculent supply inflexibility. No matter how efficient the system, the profit goes to the owner of the land/asset (this includes patents, networks, and other "artificial" property)
2. As a result you always get feedback loops that create insane wealth distortions which inevitably destroy society
3. Along the way, the magic pricing algorithm, which actually has a very narrow set of useful applications such as in commodity trading, gets applied to everything, including areas where it works insanely badly.
4. The areas it doesn't work are any area where you cannot choose to not buy something, and those areas: healthcare, military, housing, and education, end up being virtually all of the economy.
You cannot get progress, if defined as the improvement of the human condition, solely from the price algorithm. You can get loci of improved productivity, but you will always end up with imbalance because the algorithm is missing the one thing that would make it potentially succeed, and that is a true governor. The system inevitably spins out of control because it inevitably leads to extreme capital concentration.
If you don't solve that, the algorithm is a fabulous idea that will kill us all.
Very good but I would add one more element. The "we" who vote at time t1 for one new technology over another or whose votes make one line of work more valuable than another vote with wealth held as a result of market and other non-utopian conditions at time t0. So governments who ought to intervene in markets no more than necessary to correct externalities and other imperfections ought also to arrange for transfers of resources from those with lower marginal utility for the resources to those with more.
Now lets reimagine making that pencil with only locally grown materials. Lets do a lean startup, shall we? First iteration is a stick with one end burned. Then instead of just a pencil sharpener we fire the tip to create more charcoal for writing. Next maybe we add some linseed oil for the stick. Of course it comes from locally grown flax. Now lets add a soy based gum eraser, also locally grown. Now the question becomes, which of these is less likely to be out of stock due to a catastrophic weather event half way around the world. If it's out of stock due to a local catastrophic weather event, well, there will be a lot more on everyone's mind than pencils. And this doesn't even address Big Pencil, the Organization of Pencil Extorting Companies (OPEC) and their manipulation of the market. Oh and lets not forget all the toxic waste generated when OPEC realized they could make more on synthetic materials and dump the toxic waste where they had the local politicians in their pocket or that the pencil itself is now toxic and causes cancer. Please sir may I have more?
I wish every discussion on climate change had this essay as its preface.
Over the past 21 years MSCI Country Indices performed as follows: US +491%, China +281%, Taiwan +337%, Korea +365%, and India +955%. MSCI USA market cap is more than 60% of MSCI world market cap. See any essay-evidence in these numbs?
The folks running their economy mostly on prices keep getting richer. In basketball their strategy might be starting the stall offense. But if this was basketball Coack K would be President and Magic would run Blackrock. But it’s not. So what should the winners do next?
Here are a few suggestions:
If markets made you relatively richer…then by all means make them failure-free. You don’t want mis-allocation of capital due to that any more than you’d want it via dumb SOE banks. Just a thought, but why wouldn’t the markets leader be positioning itself for world-beating longterm market efficiency?
To the extent all those US companies make money all over the world…you’d want protectionism and trade barriers minimized. To the extent that negative externalities are priced, you’d want them globally-aligned (taking into account stage of development).
In many aspects of life, bigger risks are taken by those who are trailing. Conversely, leaders tend to make more prudent decisions in trying to preserve their lead. Fat tail risks, like those realized in the financial crisis (especially with contagion) can both destabilize the global profit opportunity as well as well as bear direct cost.
So the US on climate change, at least since the failure of cap & and trade in 2010 (I testified on Waxman-Markey) is irrational. Worse still, the dreaded resource curse of emerging economies may be seeping into the US. Would an upstream economy-wide co2-e price crush American natural gas & LNG business? A lot less than other policy approaches…and policy-certainty plus potential reduction in trade frictions would offset losses. Bottom line, the US would gain relative wealth in a world that prices carbon (see MIT EPPA7 analysis).
Last point: financial services is 13% of US market cap. Academics have written on whether society gets enough value for their money. After standing by while ESG was thrashed almost out of existence…what do we hear from finance leaders on both globally-aligned carbon prices and reduced trade barriers? Crickets.