The Market Mind Hypothesis, page 13
According to data from the Worldbank, world trade as a percentage of global GDP reached 60% before the GFC (see Figure 1.2). This is now under threat, with growing protectionism, trade sanctions, and similar measures. Viewing modern geopolitics by applying practical dualism, we can look, for example, at the psychophysical make-up of their countries’ GDP, rather than just its size. You could then expect, say, a strong man presiding over a relatively small physical economy to use its products (e.g. commodities) to try to damage the larger psychological (e.g. finance and/or IT based) economy of his enemy, and vice versa. As we have seen, weaponizing banking, currencies and insurance is answered by weaponizing gas, precious metals, and oil. And judging ‘economic power’ purely by the size of GDP is flawed. Instead, it depends on the circumstances which are determined by mind~matter exchanges, including manipulation.
Source: World Bank
Figure 1.2:
World trade as a percentage of global GDP.
Apart from valuing their population mainly as voting machines to secure their next election, politicians in general are opportunistic in their application of metaphysical views. Before elections they primarily employ idealism,31 by focussing on intangible emotions, promises, and visions. Once elected, there is a clear shift to physicalism to gain physical control. If opposed, they complain about physical constraints which prevent them from ‘getting the job done’. This is why politicians do not like constraints, such as a gold standard to money, because it would require having to tighten budgets or raise taxes which make them unpopular. In worse cases they resort to physical violence to keep promises. Propaganda via social media is the strategy used to employ both material and mental tools to manipulate information in order to affect consciousness. For example, elements of the goal of the physical act of a political murder are similar to those of the mental act of releasing fake news: not just to serve up the ‘meal’ of information (i.e. grab attention) but also to ‘spice up its taste’ (i.e. valuation; see Appendix 1-A) to the point of making an impression.
As an aside, there are various conspiracy theories surrounding planned globalisation in general and the establishment of a global government in particular. I’m sceptical in every regard. It seems to me that such thinking or intentions ignore the fact that the success of both politics and markets starts locally. But only ‘free’ markets have shown to be able to spontaneously widen this, especially via distributed knowledge. Cracks occur when politics forgets its roots, shows global ambitions (e.g. requiring ‘allegiance’ from industry in return for monopolies), and interferes with the competition and cooperation that should be left alone. Earlier I argued against any central executive. That includes globalists, i.e. the so-called ‘Davos men’, but also the global military-industrial complex.
Fair markets are our common ground. They are the determining factor for coordinating our global society which produces prosperity and can help solving shared problems. Their exchanges cross borders, cultures, ideologies, and other ‘separations’. Unfortunately, the growth in central planning over the past decades—exemplified by growing influence from totalitarian regimes, central bank distortions, and government lockdowns—has been accompanied by increased interference in and manipulation of markets. The crises are a consequence of this. In turn, they impact other areas whereby economic and non-economic catastrophes become intertwined, leading to a global polycrisis, as some have called it, with similar features as the reality checks.
This brings me to the positive message of this note, especially regarding the shared (e.g. ESG) challenges the global society faces.
In his fabulous introduction to the 250th anniversary edition of TMS, Amartya Sen reminds us that Smith’s concept of the impartial spectator gets around the limitations of the traditional social contract. Those limitations are due to the social contract being confined to members of sovereign states. Specifically, the impartial spectator and markets offer a way towards global reasoning: “In many examples in each of his books, Smith did, in fact, make good use of the reach of global reasoning … Similar issues remain extremely alive today … [For example,] what can be said about the environmental challenges we currently face has to be based on global reasoning about the sharing of obligations and burdens, rather than on a strictly contractarian line of analysis confined within the limits of a sovereign state” (TMS, 1759, p. xix).
In that regard, the recent economic experience is a blip on the screen of our total economic history. Continuing in the Smithian tradition, the evolutionary argument that the market economy has shown to be superior to the planned economy is strong, backed by historic record. Any criticism and scepticism should be limited to capitalism, respectively socialism, as they are the politically motivated interpretations (and implementations) of those two economic systems. To compare the capitalism of Mill and Friedman with the socialism of Hegel and Marx is academic. In both cases power concentrates. We end up with corporatocracy, respectively statism as political systems. Both are anti-markets. In principle, markets could allow people to trade freely among themselves in a dispersed, diversified and decentralised manner. Even if some members of the ‘Markets family’ are occasionally (e.g. schizophrenic) patients or growing teenagers (e.g. with tantrums), they would generally be benefactors. In fact, it is the political and other manipulations—serving special, rather than public interests—that weakened market economies and any damage, reputational or otherwise, should be attributed to these causes. (See my earlier straw man comment in the Prologue).
My point, via the MMH, is twofold. First, here too we can follow Smith’s advice, in this case by each inviting our “man within the breast” to recognise leaders for who they are. How would a morally balanced, global free citizen view them? A citizen who, once educated in cognitive economics, would recognise a political ‘freebie’ for what it is. I suspect the resulting view of the impartial spectator is frequently of leadership that is dangerously opportunistic, while lacking humility and open-mindedness, especially regarding the global problems that exceed parochial knowledge and requires global solutions. Second, and related, the economic laws which follow from the cognitive laws will overcome the political hubris from any “man of system” in general and strongmen in particular:
The man of system … is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts … He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board … [risking that] the game will go on miserably, and the society must be at all times in the highest degree of disorder (Smith, 1759, p. 275–276).
Nobody can afford their behaviour because by destroying markets they kill the goose that lays our collective golden eggs. Indeed, popular estimates for the largest economies of the future based on extrapolations of data over the past decades will turn out to be wrong for reasons explained in this book. Stated differently, the dominance of economic realities over political wishes will be enforced again, however painfully, by (conscious) human nature just as it has been throughout history.
So, while you can be bullish on their countries and peoples, you should be bearish on men-of-system and their mechanical/repressive policies, regardless of regime. The recent protests in both the East and the West are a sign for this.
Going forward I will borrow Smith’s term “man of system” and use man-of-system (multiple: men-of-system; both meant gender neutrally) for all those who (wish to) engineer the economic system and/or organise society top-down. It particularly emphasises their mechanical/systematic approach to achieve this.
Setting the scene, I started this chapter with a family visit to a local market, concluding that markets reflect what ultimately binds us. Perhaps you reply, ‘but my local market does not exist anymore’. This is exactly part of what should concern us. At a larger scale, markets could help to rebuild a sense of global community if we let them … but we don’t. Markets, in their natural psychophysical form, are deteriorating or disappearing all together. Perhaps this is the cause, not the consequence of societies (mentally) breaking down, exactly because they are extensions of our minds. This book is about markets as the solution, not part of the problem, and how to better understand them—and by extension us. In the remainder I will mainly focus on the financial markets as a prominent case-in-point.
Chapter 2
On Ontology: Am I Evil?
It ain’ what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.
Mark Twain
2.1
Economics’ Hard Problem
Now, the issue, as is plain, relates to the treatment of “consciousness” in human beings … [i.e. the] insistence that we ignore … the existence of consciousness … In opposition to this view I propose … that we cannot treat human beings as … mechanisms, and that we do not want to do so even if it were possible.
Frank Knight
A hypothesis usually addresses a particular problem that is central to its research efforts. In the MMH’s case I call it the market’s mind~body problem. Here is an earlier thought:
What is the relationship between the phenomenal (sentient/qualitative) and the physical (functional/quantitative) properties of the market? Specifically, how and why are the physical processes in the market accompanied by an experience which completes its state? (Schotanus, 2014)
This problem is nested in the wider hard problem of economics which I will discuss first. At the macro level most of us perceive the economic system as dualist: it combines the physical real economy of markets in goods and services—“the economy”—with the psychological financial economy of markets in securities—“the market”.1 The hard problem of economics concerns the complex relationship between these two domains, including the question concerning the leading~lagging sequence. That is what earlier reflections by Simmel, Soddy, Knight, Akerlof and Shiller, as well as others (including, as we will see, Jerome Powell), ultimately boil down to. Importantly, for cognitive science it highlights that the original mind~body problem should no longer be viewed as just a theoretical challenge but due to its extension leads to practical issues. These, in turn, have implications for how to address the original problem. First, I will elaborate on this in the next Cognitive Economic Note ([Im]material Money).
Cognitive Economic Note (Im)material Money
Money is the root of all evil.Apostle Paul
The lack of money is the root of all evil.Mark Twain
In this note I would like to explain how, within markets and via exchanges, matter and mind are specifically related to money.2
Let’s start with barter, the direct exchange of goods (and sometimes services) without the use of money. Imagine two of our ancestors whose respective tribes regularly barter finding two identical eggs laid by the same hen, one after the other. As the same simple food, they are physical products that are equally valued. So, while there is no real need, should they decide to exchange eggs it will be a simple exchange: one egg for an identical other egg. Each existed there and then.
It turns out, however, that different hens (of the same species) lay different sized eggs. So, another ancestor finds a supersized egg and brings this for exchange to the next barter event. While the same simple food, the supersized egg is valued more than normal eggs due to its larger proportion. In fact, it is exchanged for three normal eggs making its price, expressed in units of the latter, 3. Again, all four items involved in the exchange existed as physical entities.
Things get more complicated, valuation wise, when the nature of the goods are different. Historic examples of valuation differences include beaver furs that native American Indians exchanged for blankets and cooking utensils. Those valuations were based on the utility of these goods as experienced by the respective agents using them. And whatever the prices, they were reflecting units of physical items that existed and were present there and then.
Ignoring a few interim phases, the final step in exchange history involves modern markets where money facilitates exchanges. Now things get a bit weird. As previously mentioned, a key area where metaphysics reigns is our fiat currency and credit system. It is faith-based: faith in fiat (see also Appendix 1-B). That is, it is the belief that fiat-based IOUs, issued by governments, remain “credit worthy” which, in turn, implies an imagined future. It means that money3 is metaphysically suspicious, primarily because it is a mental construct not backed by anything physical: “Money is the representative of abstract value” (Simmel, 1907, p. 118). Even in the case of physical coins and notes, for example, their value is believed to be higher than the costs of their materials. (As an aside, such physical cash does not earn interest and can be viewed as a free loan to/hidden tax from the government. This is called seigniorage.)
But faith in fiat currency is circular: faith in the currency relies on faith in the men-of-system which, in turn, relies on faith in (future) citizens to have faith in both and ‘do their duty’. In the case of debt, or credit in general, its value depends on future minds’ willingness to use their bodies to physically earn, create wealth and pay taxes with the fiat currency. In other words, the metaphysical issue with fiat money is not simply about it not being backed by something physical, like gold. Rather it is about such purely physical backing having been replaced by dualist mind~bodies, many of whom do not exist yet but are nevertheless expected to honour the IOUs.
This is the ‘real’ backing men-of-system bank upon with lots at stake. One key dilemma is to balance the need to allow freedom for economic agents against the need to enforce fiat on those agents. Money’s mind~matter complexity particularly leads to complications when safely issuing new debt (and/or printing new money) relies on additional constructs that are metaphysically suspicious, like beliefs about inflation. Specifically, there is more to Milton Friedman’s statement that “inflation is always and everywhere a monetary phenomenon” (Friedman, 1963).
Finally, the 2023 failure of SVB signifies, for our case, how digitisation—as the summit of mechanisation4—not only changes money but, by extension, also the metaphysical nature of a bank run. While the mental panic driving it remains the same, the physical execution is different. Whereas it was digital in the case of SVB, the run on California’s Ivy Bank, which failed in July 2008, was largely physical: physical queues of human bodies to physically get their hands on their money. A female depositor expressed this to a CBS reporter at the time (emphasis added): “I think it’s mass hysteria. I think this is similar to what happened in the Great Depression. And I think that everyone wants their money, and they want to touch it and hold it and see it”. Again, money is metaphysically suspicious, and if we get the overall matter~mind balance wrong (e.g. when immaterial promises require too much faith), things can become dangerous (as historic collapses of monetary systems have shown). More generally, faith supporting the ‘intangible space’ in the economic system (e.g. IT-sector, SPACs, etc.) is more volatile (and vulnerable) than faith put in fixed stuff. Why? Because the implied (and often required) mental causation for things to ‘materialise’ in the former case means that you move, in Knightian terms, much further from risk to true uncertainty (and thus closer to the mind~body problem, i.e. our ignorance of mind~matter interaction in the economic system).
On the topic of economic cycles and financial cycles, the Bank for International Settlements (BIS) published a survey titled “Asset prices and macroeconomic outcomes”. It highlights the difficulty in understanding the “macrofinancial linkages” between the (physical) economy and the (mental) market. That includes their respective growth, inflation, and health. Figure 2.1 shows a graph depicting two estimates of, respectively, the economic (or business) cycle and the financial (or credit) cycle over time.
Source: Bank for International Settlements (BIS), https://www.bis.org/publ/arpdf/ar2014e4.pdf.
Figure 2.1: Economic and Financial Cycles.
We can think of their correlation in similar matter~mind terms as being respectively those between the bodies and minds of economic agents. Specifically, the business cycle captures physical activity in real economic variables like factories, offices, pipelines, tankers and so on. The credit cycle, on the other hand, primarily reflects psychological activity in monetary variables and prices. There clearly is no one-to-one correspondence between them and, worryingly, since around the 1980s they have become more disconnected.5 Ultimately the BIS implicitly wonders what type of causality is involved between asset prices and macroeconomic fundamentals. Subsequent questions about whether correlations suggest causation and, if so, in what direction can similarly be raised. Among others, it underlines once again the relevance of Soros’s reflexivity.
Like the individual, there needs to be a healthy, coordinated balance between physical and mental activity in the economic system. This is hardly ever analysed, let alone explained, in explicit mind~matter terms. Related issues include inequality which bottomed in many countries in the 1970s. At first sight, its increase over the last five decades or so, especially between the very top and bottom segments of the population, seems to follow two events. In physical space, the 1971 removal of whatever remained of the Gold Standard. In mental space, the 1987 removal of downside risk (a.k.a. the Greenspan put). I submit that, more likely, it is due to their underlying common driver: the emergence of mechanical economics as the dominant paradigm that advocates and justifies such removals. Mechanisation, which facilitates control, strengthens the status quo and benefits the rich and powerful. Things have not improved; Oxfam reports in its 2023 Global Inequality Report, that since 2020 the richest one per cent have captured almost two-thirds of all new wealth (i.e. twice as much money as the rest of world’s population).
