First, a procedural note…
The truth value of a myth doesn’t matter, where efficacy is concerned. However, some myths have become so strongly internalized that they become difficult to identify as myths; they are mistaken for “common sense”. For most of us, the ideas underlying western* capitalism are like this. It’s difficult to separate ourselves from these myths and gain the appropriate distance, so I’m going to engage in a little bit of ‘debunking’ — specifically, I’m going to take some time pointing out parts of the capitalist model that don’t match with reality or history, during the course of analyzing its structure and function. This doesn’t take away from the immense power and importance of capitalist mythology, nor does it indicate that I consider all of the ideas associated with capitalism to be strictly false.
On tautology
Academics tend to treat tautologies as a lesser form. Tautologies are shallow, by their nature. It’s quite reasonable for a system optimizing for novel and interesting ideas to reject tautologies. Nevertheless, some really important ideas can be rephrased as tautologies — as Charles Fort points out, natural selection is better summarized as “survival of the survivors” than “survival of the fittest” — and one can make the argument that any really true argument is in some sense circular. There’s no shame in a circular argument that depends only on true premises. In fact, this is one way to look at all of mathematics — which is true because of its internal consistency, and only accidentally coincides with physical reality.
When someone dismisses a seemingly profound statement as “just a tautology” they omit important information. An obvious tautology contains no information. However, a non-obvious tautology is just about the most profound thing imaginable — it takes a complex, incomplete, vague collection of loosely related ideas and replaces it with a much smaller and simpler set of rules, which (if the tautology is reasonably close to correct) is both at least as accurate as the original set of ideas and easier to reason about. A non-obvious true tautology refactors huge sections of our mental models. Obviousness is a function of existing knowledge, so what is an obvious tautology to some people will be non-obvious to others. It should come as no surprise that people seek out ideas that present themselves as non-obvious tautologies.
The drive toward seeking non-obvious tautologies can lead to mistakes. Looking for simple and efficient models of the world is a mechanism for enabling lazy thinking. When lazy thinking is correct it’s strictly superior to difficult thinking, but lazy thinking often comes with lazy meta-cognition. If we jump on ideas that look like non-obvious tautologies too greedily, we fail to see hidden assumptions.
Market efficiency is a very attractive model. Under certain circumstances, we can expect things to actually work that way. If a large number of competing producers really do start off completely even in capability, we really can expect the best product to price ratio to win out. To accept it completely means ignoring hidden assumptions that serious thinkers should at least consider.
One hidden assumption in market efficiency is that competitors start off even in capability. This is almost never the case outside of a classroom demonstration. Companies enter established markets and compete with established competitors, and companies established in one market will enter another. Both of these mechanisms make use of existing resource inequality in order to reduce precisely the kinds of risks that lead to efficient markets, and while perhaps in the long run poor products might lose out, with the extreme spread of resource availability the “long run” can easily last until long after we are all dead. Given no other information, if age is not normally or logarithmically distributed, we can reasonably expect something to last about twice as long as it already has. With corporations, the tails of this distribution are further apart — we can expect a startup to be on its last legs, and we can expect a 50 year old company to last 75 more years, because resource accumulation corrects for risks. A company that has a great deal of early success can coast on that success for a much longer period of poor customer satisfaction.
Another hidden assumption is that communication is free within the set of consumers and between consumers and producers but not within the set of producers.
Free communication within the set of producers is called collusion, and the SEC will hit you with an antitrust suit if you are found to engage in it. People do it all the time, and it is usually worth the risk, since it reduces market efficiency down to almost zero.
Free communication between producers and consumers is also pretty rare: even failing producers typically have too many consumers to manage individually and must work with lossy and biased aggregate information; successful producers have enough resources to be capable of ignoring consumer demand for quite a while, and often encourage ‘customer loyalty’ via branding. (In other words, cultivating a livestock of people who will buy their products regardless of quality — ideally enough to provide sufficient resources that appealing to the rest of the customers is unnecessary). Customer loyalty can have its benefits compounded if wealthy customers are targeted: “luxury brands” are lucrative because something can be sold well above market price regardless of its actual quality or desirability, and sometimes the poor price/desirability ratio is actually the point (as a form of lekking / conspicuous consumption).
Free communication between consumers is becoming more and more rare, since flooding consumer information channels with fake reviews and native advertising is cheap and easy. There used to be stronger social and economic incentives to clearly differentiate advertising from word of mouth, but advertising’s effectiveness has dropped significantly as customers develop defenses against it and economic instability has encouraged lots of people to lower their standards. Eventually, consumer information channels will become just as untrusted as clearly paid advertising is now considered to be, and communication between consumers will be run along the same lines as cold war espionage.
Motivated reasoning
Considering that the hidden assumptions in market efficiency are dependent upon situations even uninformed consumers know from experience are very rare, why would people accept it so easily? The inefficiency of markets has no plausible deniability, but motivated reasoning lowers the bar for plausibility significantly.
During the bulk of the 20th century we could probably argue that anti-communist propaganda played a large role. I don’t think that’s true anymore. Nevertheless, in many circles faith in the invisible hand actually is increasing.
There’s another kind of circular reasoning — one that operates on the currency of guilt and hope. If one accepts market efficiency, it tells the poor that they can rise up through hard work, and it tells the rich that they earned their wealth. This is remarkably similar to the prosperity gospel, which claims that god rewards the righteous with wealth and therefore the poor must have secret sins. It also resembles the mandate of heaven, which claims that all political situations are divinely ordained and therefore disagreeing with the current ruler is sinful.
The similarity between the guilt/hope axis of the market efficiency myth and the prosperity gospel explains the strange marriage between Randian Objectivists and Evangelical Christians found in the religious right. We can reasonably expect many members of this group to be heavily motivated by the desire to believe that the world is fair. It’s not appropriate to characterize this movement as lacking in empathy — empathy is a necessary prerequisite for a guilt so extreme that it makes an elaborate and far-fetched framework for victim-blaming look desirable.
For the poor of this movement, at least on the prosperity gospel side, it might not be so terrible. Motivating a group of people to do the right thing has a good chance of actually improving life generally, even if their promised reward never materialized; second order effects from accidental windfalls are more dangerous, though. (For instance, if you disown your gay son and then win the lottery, you’re liable to get the wrong idea about what “doing the right thing” means).
That said, while the above factors encourage people to trust more strongly in an idea of market efficiency they already accept, bootstrapping the idea of market efficiency is much more difficult.
Natural law, myth vs legend
Market efficiency draws power from an older myth: the idea that money is a natural and universal means of exchange. This is historically and anthropologically dubious. David Graeber, in his book Debt: The First 5,000 Years, makes an argument for the idea that systematic accounting of debts predates the use of actual currency and furthermore only became necessary when cities became large enough to necessitate something resembling modern bureaucracy. Regardless of how accurate that timeline is, we know that gift economies, potlatch, and feasting are more common in tribal nomadic societies than any kind of currency exchange, and that feasting in particular remained extremely important in Europe through the Renaissance.
The legend that backs up the myth of money-as-natural-law takes place in a town. A shoemaker trades shoes for potatoes, but doesn’t want potatoes, so he organizes a neutral currency so that potatoes and apples can be traded for shoes. Graeber points out that this level of specialization couldn’t be ‘natural’ — the town is an appropriate place to set it, since specializing in a particular crop or craft would have been suicidal in the bands of 20–50 people that most humans lived in prior to around 2000 BC.
Our first examples of writing, of course, coincide with the first permanent settlements to have a large enough population to justify heavy specialization. Our first examples of writing are, in fact, spreadsheets recording debt and credit. This, along with the evidence that the unit of currency (the mina of silver) was too substantial for most people to afford even one of (and probably was mostly moved between rooms in the temple complex), is part of Graeber’s argument that independent individuals carrying money for the purpose of direct transactions (i.e., our conception of money) probably only became common later, when imperial armies were expected to feed themselves in foreign lands.
So, on the one hand, it seems to have taken a very long time for the ‘natural’ ‘common sense’ concept of money to take hold among humans. On the other hand, people exposed to the idea of money tend to adapt to it quickly and we have even been able to teach apes to exchange tokens between themselves in exchange for goods and services — in other words, it’s a simple and intuitive system that even animals we mostly don’t consider conscious can grasp.
If something is considered natural law, it’s very easy for people to believe that it is also providence. If something is straightforward and useful in every day life, it’s very easy for people to consider it natural law.
Moral economies
Thoughtful economists tend to recognize the caveats I present here. Some behavioral economists have done great work on illuminating what kinds of things aren’t — or shouldn’t be — subject to the market. This, in turn, illuminates the market myth itself.
It’s possible to think of social relations as economic in nature. Indeed, this is a pretty common model. Transactional psychology presents social interactions as the exchange of a currency of strokes, for instance. Nevertheless, Khaneman presents an experiment that shows social relations aren’t, and shouldn’t, be fungible.
The experiment went like this: a busy day care center has a problem with parents picking up their children late, and instates a fee. Parents in turn respond by picking up their kids late more often, and paying the fee. After the fee is eliminated, the percentage of on-time pickups does not return to the pre-fee state.
Khaneman interprets the results in this way: initially, parents thought of picking their kids up late as incurring a social debt (they were guilty about inconveniencing the day care), the fee reframed it as a service (they can pay some money in exchange for their kids being watched a little longer, guilt-free). But when the fee was eliminated, they felt as though they were getting the service for free.
This result looks a whole lot like the way fines for immoral business practices end up working.
If we consider that, typically, we can make up to people we feel we have wronged, we consider social currency to be somewhat fungible. Nevertheless, exchanging money for social currency is still mostly taboo — paying for sex is widely considered taboo, and even those of us who feel no taboo about sex work would find the idea of someone paying someone else to be their friend a little disturbing. If my best friend helps me move furniture and I give him a twenty dollar bill, he might be insulted. If I left money on the dresser after having sex with my girlfriend, she might be insulted. (Or consider it a joke.)
We could consider the ease with which money is quantified to be the problem. We rarely can put a number on our guilt or joy. On the other hand, we can generally determine if we feel like we’ve “done enough” to make up for something — our measures of social currency have ordinality, if not cardinality.
Instead, the disconnect is that money is, by design, impersonal. I cannot pay back my guilt over Peter by giving him Paul’s gratitude toward me. This is where transactional psychology’s monetary metaphor for strokes falls apart: a relationship is built up via the exchange of strokes, and that relationship has value based on trust. Meanwhile, any currency has, as a key feature, the ability to operate without trust or even with distrust. Money makes living under paranoia possible, and sometimes even pleasant. But exchange of strokes has its own inherent value, and the trust it builds likewise: it cannot be replaced with money because money’s value is based only on what it can buy.
Speculation
The belief in market efficiency, and the emotional and moral dimensions of that belief, have some unfortunate consequences in speculation. Paradoxically, these consequences are opposed by the myth of money as natural law.
With speculation, one can create money without substance. Promises, bets, and hedges can be nested indefinitely to create value held in superposition. A stake in a speculative market is both credit and debt until it is sold. This is natural, since social constructs are eldrich, operating on fairy logic. This is both a pot of gold and a pile of leaves until I leave the land of the sidhe. Of course, there’s every incentive to oversell, so more often than not it’s a pile of leaves: when too many superpositions collapse, so does the market.
Naive materialism, when it intersects with the idea of money as natural law, finds the eldrich nature of money in speculation disturbing. Isn’t money gold? Or coins? How can something be in my hand and then disappear? So, we get arguments for the gold standard along moral lines: “it’s immoral for something that’s real to behave like fairy dust, so we should limit its growth to match mining efficiency”.
The eldrich behavior of money has some paradoxical results. Being aware that money is a social construct tends to decrease its value (clap your hands if you believe!). The question “if someone burns a million quid on TV, does the value of the pound go up or down” is very had to answer. (If you think you know the answer, substitute a million for a trillion, or for twenty.) On the other hand, being aware of its eldrich nature also tends to slightly decouple one from potentially-destructive drives.
Belief in market efficiency leads successful speculators to believe themselves skilled. While skill at speculation might be possible, statisticians who have studied the problem have generally come to the conclusion that the success distribution is adequately explained by market speculation being entirely random. Unwarranted confidence can lead to larger bets, which (if results are random) means half the time the money disappears into thin air. This does not require malfeasance, misrepresentation, or willful ignorance (as with the 2008 housing crisis). Believing that speculation involves skill is sufficient to cause the market to have larger and larger bubbles and crashes.
*“Western” is neither precise nor correct here. These myths seem to be present in western Europe, North America, Japan, and South Korea. Both China and the former Soviet states have different mythology I’m not qualified to analyse. In the absence of a better term than “western capitalism”, I will use it.
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