Beautifully put John.
The finance industry has become the biggest casino in town, yet they are not playing with their own property, but with the property values of all of us.
I don’t know your legal system, in this country we have a law that allows for the confiscation of all property made as the result of illegal action.
Surely you must have a statute making it illegal to knowingly destroy the property of another?
I’m not a lawyer, and it would seem to contain the seed of a class action suit that some set of bright young lawyers might like to get their teeth into. Just a thought 😉 (I wonder what the effect on Harvard might be in a few years of having to find $400M to give to the government? Might upset a tenure or two.)
My argument is not simply with short sellers, it is with the whole logical construct that is a market based system of valuation.
The whole system has too many systemic feed-forwards (as distinct from stabilising feed backs) that are systemicly destabilising.
It is all a system based on beliefs, on the individual value judgements of people in a sense, and in another sense it is being manipulated by automated systems designed specifically to extract value from trends in changes in those values as expressed through market interactions, at time frames that are below the level of human cognition.
So yes I have issues with people who intentionally develop strategies to extract wealth and deliver nothing – it is the definition of “cheating the system”.
And to be clear, I have no issue with people gambling. If people want to gamble with their own money, then by all means do it, go to a casino, or a race track, and gamble to your heart’s content. What I have an issue with is people gambling with a system that delivers life or death for other people (not themselves).
Those systems that deliver the primary needs of people for food, water, shelter, education, communication, transport, healthcare, etc, need to be universally available, and outside of the realm of gambling (systemic manipulation for personal gain).
What individuals do beyond that, is a matter of choice.
It seems clear to me that the monetary and finance systems as currently structured deliver at least as much systemic threat as they deliver in goods and services.
The whole system is systemically corrupt.
It does not deliver universal security (it is so systemically structured that it cannot).
I accept your first statement “inherently all economic value is derived from relative perceptions and belief.”
Your second statement “The system is definitely feed forward and acts as a risk discounting system by design” is partially true, and the partiality depends very much on exactly what it is that you refer to with “The system”.
It seems clear that the economic and monetary system as a whole is a very complex system, with many levels, many feedback (stabilising) subsystems and many feed forward (destabilising) subsystems. It also seems clear that many of the subsystems have been installed with multiple motives – often with a public story that supposedly holds some public benefit, and also with a private set of motives that are hidden from public view and carry private gain for some select few. This has been part of the evolving system for centuries (millennia).
A lot of “smoke and mirrors” to use a common term.
You go on to state “the major flaws are around mis priced externalities (pollution etc.) and super-ordinate failures in risk management for commodity services like banking where short term competitive pressures and incentives lead to long term instability.”
The second part of that statement I can agree with.
The first part is where we seem to be operating from different paradigms (completely different levels of abstraction).
To me, it is clear that the idea of pricing an “externality” is fundamentally flawed in the sense that markets always value universal abundance of anything at zero.
Given that universal abundance (of anything) has zero value, there can be zero internal incentive within the system to deliver it.
Human beings require universal abundance of a small set of goods and services (clean water, nutritious food, safe housing, health care, communication, education and transport). We easily have the technology to supply all of those things in abundance to every person on the planet – but we don’t. The only reason we don’t is market values – not only is there is no profit in it, doing so would take all of the monetary value out of all of those goods and services. It simply makes no sense from within a market based paradigm, but from within a system where human life and human liberty are one’s highest values, it makes perfect sense.
The issue is, that for most of human history, most things were genuinely scarce. Where scarcity is in fact genuine, markets are in fact effective and efficient tools for the allocation of those resources.
However, we are now in an age where automation and robotics allows us to deliver universal abundance of a growing set of goods and services. However, any such universal abundance drives the market price (and thence monetary value) to zero (by definition, whatever temporal smoothing function is employed). The systemic response to this has been to erect barriers to the delivery of such abundance. Examples of such barriers are the concept of intellectual property – a complete nonsense if ever there was one. IP may have some validity over the short term (not more than one generation of the technology involved) but beyond that is a rent extraction and capital protection tool. There are many other more abstract examples.
The fact that markets value universal abundance at zero, that we can now deliver universal abundance of a growing set of goods and services, means that market incentives are now directly threatening life and liberty for a substantial and growing subset of humanity.
Based upon the above, it is clear that the systemic utility of markets as a prime valuation tool has passed its use by date.
There can be a place for markets in the world going forward, and it cannot be a prime place. Their use and values must be secondary to sapient life and the liberty of all sapient entities (human and non-human, biological and non-biological).
I am aware of the general cycles of various banking systems, and the human misery such things cause.
If one is using “mark to market”, price and value are synonymous in economic terms. If one uses some longer term averaging function, then current market price and longer term value can vary, and ultimately all monetary value is some function of a market price – by definition.
There is a very limited sense in which “High frequency trading is annoying but only impacts price, usually not value” can be said to be true, and it is a most trivial sense – of that most people ignore annoying things that are constant, until they do something that cannot be ignored – like collapse a system. Same can be said for people who design financial instruments that are designed to mislead (which is arguably the vast majority). In any non-trivial sense, high frequency trading is extracting value from the system, and providing nothing in return. In a biological system it would be characterised as a cancer – a subsystem out of control, using system resources for its own replication at the expense of the system a whole.
I stand by my statement that the system is systemically corrupt in several senses:
In one sense, the sense that it is set up to value scarcity over human life, even in times when we have the technical ability to supply all the essentials of human life to everyone, it is a corruption of value. We have so many artificial scarcities to try to retain monetary value, and hold the system together, when we need to face the reality that the system is no longer appropriate to the technical reality in which we find ourselves.
In another sense, in the sense that it allows and does not penalise to the point of eradication, the production of junk financial instruments designed to give short term reward via deception, then it is corrupt.
In another sense, in the sense that it supports activities like high frequency trading that have as their only purpose the extraction of profit, without any positive contribution to the system as a whole, the system is corrupt.
We need to be thinking post scarcity, not propping up scarcity based systems by artificial means. To not be doing so is clearly to be valuing dollars over human life. That, to me, and I suspect to most human beings, is a working definition of a corruption of values.
And I get that these statements are unlikely to make any sense to anyone who has not seriously questioned the underlying systemic structure of our current systems.
Actually, I do have a problem with gambling, when it is done with the systems that support us all. No problem with gambling in places designated for it.
My dad used to run a Crown and Anchor board as a fundraiser for local charities. I got to examine the probabilities of the system very closely.
At first glance a crown and anchor board appears to have odds of 50/50. However, once you examine the available strategies, the odds are in favour of the person with the most money (or in favour of the house if there is a house limit). Dad understood the probabilities. I saw him one night have a couple of city gamblers come to a fundraiser for our local hall rebuild fund, with the intention of taking that money back to Auckland. Dad ended up doubling the amount in the fund that night (took $30K off them – and 45 years ago that was a lot of money – 2 new houses worth).
So when it comes to trading, asymmetries, in either the time one can afford to hold, or in the amount one has to play with, make a big difference to the odds.
Money functions as the prime store of value for ordinary people – for such things as pension funds.
The heart of the finance and trading systems are essentially gambling now. I’ve seen figures reporting that less than 10% of stock market transactions actually relate to money being used for real productive purposes (I think the last figure I saw was 6% and decreasing). I haven’t done the work to analyse it myself, and I suspect those figures are accurate.
I have a friend in Auckland who has a bricks and mortar business, that has survived, just. He also had about $3M to “invest” in property. He leveraged that with the bank, and has turned it into nearly $200M over 20 years. Pure gambling. Zero real productivity.
“Bricks and mortar” (goods and services) productivity is a losing game – as most of the profit ends up in finance charges – or devalued away. It’s largely because of fundamental asymmetries that most of the little guys just don’t understand – they are still working off the cultural myths that the education system has fed them. They end up trusting people who they ought to be able to trust, but can’t – bank managers and people who finance houses.
Most ordinary people don’t get that those people would actually set them up with a contract that will see them thrown out of their house, and the house destroyed, just to make some profit on a bet.
Such behaviour makes no sense to people who actually relate to real goods and services value – it makes sense only to people who relate only to abstract monetary value (completely abstracted from the realm of the real).
Why do I hear Morpheus in my head “Welcome to the Desert of the Real”!
So many issues in your last post.
I do get the lengths to which deception was likely done, and the almost impossibility of proving intent at every step of the process (the steps of plausible deniability in a sense).
I get that you are basically ethical, and have worked with people who were mostly ethical most of the time.
My issue isn’t really with the ethics of the individuals generally, or of specific actions taken by specific people.
My issue is with the system as a whole.
My issue is with the ethics of supporting a system which is demonstrably incentivised to put vast numbers of people in poverty. It is just how the system works. For a system that has scarcity as one of the determinants of value, there must be scarcity.
We now have the technology to go to an age of abundance.
We can now actually make real deterministic plans to transition from a scarcity based world to an abundance based world.
And it will be outside how most people have been habituated to think.
I don’t like the term “pay grade”.
I don’t like leaving important decisions to people who rise to the top in a system as systemically corrupt as the current one.
I know a lot of people I really respect in government and industry, and they are not typically thinking outside of the “box” of current economic thought.
I am not familiar with the details of the systems you have described, and I am familiar with the design and construction of complex systems generally (I have been running a software business for 28+ years, amongst other things), so have a feel for the general structure of the system you described initially.
It is actually more than a theory of value to guide a market based system.
I am making three quite distinct sets of claims.
I am saying that what human beings actually need (as in require to survive and self actualise) is a relative small set of goods and services to be present in abundance. That set includes – fresh water, clean air, fresh living nutritious raw vegetable based food, safe and spacious housing, sanitation, access to information and education, tools for communication and transportation (and the freedom to move most places). Beyond that, everything is optional.
I also make the explicit claim, that because markets only exist for things that are scarce (no market for air), then there is zero market incentive to ever deliver universal abundance of any good or service, and there are actually quite strong meta incentives to destroy any emergent universal abundance and turn it into a marketable scarcity.
Thus I am quite explicitly saying that we cannot rely on markets to deliver on universal values of human life and human liberty. We can in fact expect that poverty is a necessary part of any market based system. It is a mathematical and logical necessity.
Markets do not measure any sort of absolute value. What they deliver is relative values – relative to other goods and services on the market.
I am also making the specific claim that we now have the technical ability to design and build automated systems that can deliver all of the essential goods and services above, with minimal if any human input (most of the time – reality is an open system, and there will always be occasional new emergent properties from such a system that will not have been considered ahead of time, that will require human involvement to correct, and such things are likely to be very low frequency, decreasing over time).
I am quite explicitly saying that if we make a claim to value life and liberty as our highest values (which I do for myself), then we must be prepared to make all economic systems secondary to those values. That is, we must be prepared to do whatever it takes to ensure universal delivery of the essentials of life and liberty to every individual. And no market will do that in and of its own internal set of incentives. To me, that is a clear and logical demand for us to transcend markets, and market values.
And it seems there are an infinite set of possible paths to such universal abundance, and a far larger infinity of impossible paths (paths that do not deliver consistently over time).