Magic rites in the lore of economics


In the folklore of the men who call themselves economists there is a story of a magic ritual. In this ritual, when two men meet in body, they meet in mind. When two men meet in mind, and exchange one thing for another thing, there is a Determination of Value. The thing and the other thing are so alike in the world of the economist we might call them by the same name, say Th. Th and Th have such a poverty of difference that it cannot be said that Th has a value different from Th. And yet. To the economist, this is a time and place of great power.

For when one man and another exchange Th for Th, despite the two Th having precisely equal value, in the two worlds of the two men’s minds, they each see themselves, happier, prouder, standing ever so taller, if these two items change hands, are repossessed, and walk away with these two men as their paths through the world twist, shift, and judder away from one another. To the economist, Value stayed the same. but something that never before existed has been brought into the world: Expected Value.

(expected value, lowercased, is a crass term of the uncontrollable gambler, foretelling the prices they ought set for bookie’s tables and coins for cards, in the oldest etymology of the term. How the lowercased term came to coincide in speech sounds with the uppercased Expected Value of the decider is a mystery for another time.)

Let us sum up this exchange in a more expedient form: To the economist, when a thing and another are exchanged, their Values must be taken to be equal, for if their values were not equal, neither thing’s owner would accept a trade. And yet, at the exact same time, despite the equal Value, one owner or another must envision a greater Expected Value at the end of this transaction than they saw at its start, or else neither owner would be willing to spend their time and attention on this rite of exchange.

Let us be a little bit more expedient:

To the economist, there are Transactions. The Values of things are found by their transacting. When two things are transacted for one another, their Value must be exactly identical at the moment of transaction. Nevertheless, a second, immanent, more magical value is revealed, the Expected value. It increases with all exchanges.

More expedient still:

  • In a transaction, thing1 and thing2 are not identical objects.
  • In a transaction, the values of thing1 and thing2 are made identical.
  • In a transaction, a secondary quality called Expected Value is brought into the world from nothing.

To the economist, Expected Value is always increasing.

Even though Expected Value is bound up in objects whose values may not be measured or understood within the transaction, the Expected Value may be known through pure faith.

Expected value is immaterially connected to the material objects of exchange, and may only be brought about through their substitution.

So. Why would we care about the construction of the ritual of The Exchange, or the legend of the origin of the Expected Value in The Exchange? Because this is a post about moral hazard, and the explicitly magical foundation of the belief in the men of economics in the moral value of exchange.

Moral hazard, as it is commonly told, is a story about insurance. In the story, when people are insured’, they are blessed people. When the insured experiences extreme, unpredictable bad fortune, they may shrug off their ill fate, and continue their everyday affairs as if they were far luckier. To the economist, one of the greatest sins one might perpetrate, of course, is being the customer of an economist who has mispriced a contract. Were an insured party to hold a contract mispriced in their favor, the customer might choose many courses of action where their best laid plans are sure to be profitable, minus costs, (including insurance,) when all desired outcomes and undesired outcomes are fully considered. Most typically, the economist’s slang of moral hazard’ serves as a handle for the far longer statement: when my insured customers predict the economic returns of their own actions, they choose braver, more profitable actions. even though my contractual insurance fees did not adequately increase in proportion with the bravery-borne risks. I am bad at math.’

Amusing as this picture of the naive economist might be, it is worth considering that there is an interesting structure of morality embedded within the story, one that might resonate well with other sorts of thinkers. The notion of moral hazard’ can be extended to any distancing of one party from harms that their conduct might cause to others with which they contract. As with the economist’s happy insurance customers, errors in the structure of contracts can allow one participant to experience greater realized value even as their counterparty experiences lesser realized value. This has some interesting similarities of structure to the rite of the exchange’ described above: Situations with moral hazard’ seem to correspond to a violation of the critical assumption that the values of two sides of an exchange must be equal at the moment it is made real, or else there must be a negative expected value’. This interesting inequality need be explored no further, however, as it is adequate to explore the incentives to distort the signs and measures of the economist’s rite.

Economists are men of the markets, men of the futures, and literally subsist on the financialization of what has not yet been financialized.

However, this is a vocation so stratified and so demanding of resources that economists are compelled to huddle together into larger institutions to earn their thinly divided shares of real transactions. It is extremely unlikely for a self avowed economist to venture into the world as their own market-maker, to found their own brokerage, or to invent, profit from, and disseminate an original form of contract. While economic thinkers might found their reasoning on mercantilism, the mercantile spirit does not flow through their bodies.

So, for an economist to eat, he must take commissions on the settlement of transactions. They can’t just think about transactions, you know. If they don’t interpose themselves into human activity, there is no origin for their own ineffably-valued transactions’ and immanent expected value’. And, of course, where a person may only earn their keep in the world through inducing other people to enter into contracts, which they themselves are not prepared to support as buyer or seller, the second form of moral hazard emerges!

We should note that the positive immanent value’ theory of transactions is a story of a triple intersubjectivity, closer to the homestuckian troll romance quadrant of auspisticism (♣) than any relationship well developed in traditional human folklore. (the blessedly innocent reader may interpret auspistice’ as mediator between two rivals who otherwise might destroy one another’.) The economist need only spectate on a true relationship (of contracts) between two actual partners, and the economist is free to imbue the actual deal, whether auspicious or destructive, with the same conciliatory romantic feeling’ as any equal valued transaction that brings about positive expected value.

Ultimately, we might properly view the economist, as distinct from a contract lawyer, softare mercantilist upstart, or actual capitalist, as incentivized not to nurture and cultivate autopoietic contracts, where Values really do equalize, and Expected Values really do increase. Rather, the economist is under extensive selective pressure to persuade themselves and their counterparties to transact as many times, in as many ways, and in as many situations as can possibly sustained by the institutions which expose markets. Whether or not the transactions are truly of the axiomatic, internally legitimate form demanded by the foundations of their thought. In fact, the economist can survive even if both partners in a transaction are brought to ruin!

This difference in incentives, and the philosophies it encourages, might affect the rest of us.