Aluminum queue antitrust case dismissed

A fair judgment overall which accounts for the fact this wasn’t a malicious conspiracy but rather an arbitrage resulting from the curve structure, itself the product of the interest rate environment.

Some highlights:

That the combined actions of traders and warehouses to
maximize their profits negatively impacted downstream purchasers through a rise in the Midwest Premium is clear—but as cast in the complaints, this was an unintended consequence of rational profit maximizing behavior rather than the product of conspiratorial design.

“Plaintiffs allege as a plus-factor that defendants’ alleged conduct was against their self-interest. Economically, this is incorrect. In fact, it was entirely consistent with their self-interest. Plaintiffs’ allegations regarding the recession, the contango, and the resulting arbitrage opportunity support sensible parallelism—whether conscious or not —by the trader defendants. The way that defendants acquired, held, and cancelled warrants simply furthered this arbitrage opportunity, on which it was in each’s individual economic self-interest to capitalize.”

“Similarly, to the extent the warehouse defendants could have sped up load-
outs and did not, or even delayed them, plaintiffs again allege that this led to higher storage revenues. But the warehouse plaintiffs were, after all, in the business of collecting rent for storage; and the longer the storage, the higher the rent. In this sense it would be in the warehouse defendants’ economic self-interest to turn a minimum load-out rule into a maximum, so long as they were not losing business due to their slow load-out times. Indeed, this point is further supported by plaintiffs’ allegations that warehouse inventories began increasing in 2009, before the trader defendants even acquired the warehouse defendants, as these allegations suggest that the warehouse defendants were motivated to act in this manner of their own accord. “


Tribute series – Part 3 (Muscle economics)

In this tribute series, I’ve been trying to get people to stop thinking about money in the abstract or intrinsic value sense.

My proposition instead is that money is about muscle. Always has been and always will be. Riches are the product of the authority or gravitas that affords you well being, a.k.a wealth. A muscle, of course, being a biological machine which optimizes energy efficiently so as to create power with.

But by muscle, I don’t necessarily only mean brute force. I mean all systems that are better organised than other systems and thus stronger and more capable of enforcing their will or alternatively of creating value. Whether that means they are better at collecting favours due, cultivating the land, confiscating assets directly or manipulating you into doing what they want, doesn’t really matter. What matters is that they are just better at doing it.

Not to say that reciprocity doesn’t encourage value creation but simply that when it happens it’s mostly incentivized by a need to join forces so as to organise against a stronger enemy, whether that enemy is a stronger person, a nation or nature itself.

For example, I will remember to reciprocate the favour you did for me when you shared your bison meat with me because it’s in my interests to have access to your food if and when I go without it again. The two of us sharing stuff have a better chance of defeating mother nature’s brute randomness than if each of us tries to beat her on our own.

Going back to hunter gatherer times, the most powerful man was generally the strongest man. i.e. someone who was leaner, faster and more adept at whacking the competition than anyone else.

Power flowed to him because he had the best power-generating muscles. His authority was tied to the fact that he could fight anyone for what he wanted and would probably win.

This left anyone without muscular physicality on their side at a distinct disadvantage.

Thus, from hereon forward the pressure for brains to outsmart brawn would become a driving and equalizing force in society. It became the eternal story of David outsmarting the brute force of Goliath with wisdom, skill and craft.

It is because the strong oppressed the weak, in other words, that the weak became motivated to unleash their mental faculties against the strong and use them to process information more efficiently than the strong could ever hope to or to organise themselves more diligently (trade unions, cartels, etc).

Women have always been more inclined to form alliances for example or to get what they want from information advantage and sharing (gossip).

Skills, crafts, and weaponry, meanwhile, all result from the fact that the weak, the hungry or the oppressed were motivated to innovate their way out of bad situations.

I go back to Rome once again, because I seriously can’t think of a better example of the phenomenon than the foundation of the Roman Republic — a system which was designed not only to protect the people from oppression by a pathological tyrant, but to allow for the emergence of a city-state that understood that information workers (politicians, scholars, traders, bureaucrats and lawyers) were as important to organised progressive society as the farmers who supplied them with food.

Today’s modern cities are the by-product of these trends. They are huge hubs dedicated to information gathering and stand-alone consumption.

But they also happen to be society’s most vulnerable pressure points, due to their dependence on supply chains and the actions of the body whole. Cities can for example be easily starved out, cut off or sacked. And when that happens, civilisation itself is threatened.

Whilst economic crises touch every part of a country, their effects on the city state are what makes of breaks countries. For government, the urban poor are a much bigger problem than the rural type.

An inflation crisis generally signifies a lack of energy or supply flowing to the main city hub. Somewhere the distribution channels (the nervous system) have become clogged whether that’s due to natural disaster, famine, war, disease or corruption (over consumption by the few).

In these circumstances the body has to work hard to revive supply and the distribution channels. Not doing so risks losing its proverbial head. More often than not this involves the strong once again overcoming the weak due to their superior ability to get the supply they need to keep going. Sometimes, however, societies can come together and collectively organise themselves out of trouble thanks to carefully regimented strategies to share toil or suffrage among them in the name of longer term prosperity. War-time rationing and dedicated compliance with that rationing, so as to more capably defeat the true oppressor, is a good example of that.

A deflation crisis, however, is more of an obesity attack. It represents a system that is too efficient at getting supply to the brain. In these circumstances the physically weak have become so efficient at serving themselves or so organised that the muscle in society has been left with nothing to live for at all.

Redundant muscle wastes and transforms into fat, which is an energy system that very specifically focuses on making people less efficient at exerting power, but not necessarily any less of a burden.

Fat is a strange phenomenon in that sense. It detracts from muscle power. Yet it also does little to encourage brain power. Also, even as the body grows bigger other essential mechanisms get wasted, corrupted or destroyed.

What does that mean for money?

I’m not sure at this point.

But if money is muscle, and the weak are now the muscle because they have outsmarted the strong to such a degree that muscle is no longer needed… there may be grave implications for anyone who uses or is used to depending on physicality to achieve well being. There’s also the problem that brains are getting overly fat.

While riches will increasingly be tied to those who understand the organizational needs of the system as well as the protocols that govern them, it’s probably not a good idea to lose all of society’s muscle. We don’t want to end up like the humans in Wall-E

But perhaps that’s why we have become so body conscious and why the world’s most powerful nerds — now that they have achieved power –are also gymming it up.

The question we should, consequently, be asking in this new age of passive/benevolent/redundant muscle is: what should we really be doing with all the energy being expended by those trying to stay physically fit and relevant? If there’s no paid labour for them to do, and even criminality, piracy or gangsterism can’t buy you power through muscle because it too has been outwitted by the nerds, and even nerds need muscle… how best to deploy all this human energy intelligently?

(Not sure human gym dynamos are the answer.)

What is not a Ponzi? (Short version)

The preceding post became tl;dr.

To summarize:

Not a Ponzi: when giving up your capital to an enterprise facilitates its ability to create something that encourages private wealth allocation towards it, in a way that covers its costs so that it can keep doing that thing and usually (but not always) rewards shareholders over and above the capital they have invested. This is usually determined by the prices at which these goods can be sold at in the market. A highly “praised” endeavor receives a high tribute. Price = prize. To praise.

Ponzi: when giving up your capital to an enterprise/scheme facilitates nothing other than the transfer of your wealth to people already invested, and depends on the constant flow of such money to keep payments flowing to early adopters (at the general cost of capital erosion in the total wealth pool). The scheme promotes itself as a value-generating enterprise when really nothing it does is highly praised (valued) in society. Quite the opposite.

Ponzi-esque: when giving up your capital to an enterprise/scheme facilitates an activity that you believe is valuable but nobody else does and you are prepared to keep funding it at a cost to yourself irrespective of “returns” because you “believe” the services it provides are worth the cost, and you can afford to lose that wealth. Alternatively, because you are prepared to pay a tax to early adopters/scheme organisers because you think paying tribute (praise) to unworthy people is a fine thing to do since you too will benefit from the scheme relative to newcomers who are even later to the game than you.

Tax: when society decides to transfer capital to an elected committee which facilitates an activity that it believes is valuable but the private sector doesn’t and funds it irrespective of “returns” because it believes what it provides is worth the cost, and those it takes money from can afford to lose this wealth for the sake of social cohesion and progress of the masses.

Bitcoin counts either as a transparent ponzi or a private voluntary tax.

Either way, it represents a collection of people who for some reason think it’s wise to subsidise a valueless service (other people already provide this service more efficiently) in a way that transfers their wealth to a small elite to do with what they please. The alternative is paying regular taxes.

Fiat is based on the value of a social tax to fund services which are often valueless in the private sector but which are essential for civilized progress. A wise government doesn’t tax more than the system can afford.

There are two meanings of tax: to assess and evaluate or to burden. Good government uses taxes to assess and transfer wealth for the good of the whole. Bitcoin uses taxes to burden.

What is not a Ponzi?

Having become totally bored of explaining why things like Bitcoin are a Ponzi, I thought for a change I would approach the issue from the opposite direction.

What then doesn’t constitute a Ponzi?

So here we go:

1) any enterprise that can take your money and invest it in an activity that generates earnings which can cover operational costs/taxes and leave an excess to be reinvested in the business or to be paid out to shareholders, (irrespective of new money coming in or not).

2) any enterprise that can take your money and invest it in an activity that generates earnings which can cover operational costs/taxes and leave an excess to be reinvested in the business or to be paid out to shareholders, and to be able to pay for any debt interest they owe, and/or be confident of being able to roll or repay debt, (irrespective of new money coming in or not).

3) any enterprise that can take your money and invest it in an activity that generates earnings which can cover operational costs/taxes and leave an excess to be reinvested in the business or to be paid out to shareholders, and to be able to pay for any debt interest they owe, (irrespective of new money coming in or not). AND … only be confident that the debt can be rolled in perpetuity rather than totally repaid. Though, of course, unless it’s a zombie company, it’s ability to roll debt will be based on investor judgment about its likelihood to repay in the future.

4) any enterprise that can take your money and invest it in an activity that generates earnings that can cover operational costs/taxes and leave an excess to be reinvested in the business or to be paid out to shareholders, and be able to pay for any debt interest they owe, and be able to raise money through new equity for the purpose of new growth-focused activity which derives its earnings either from doing more of the thing it’s already doing or doing something totally different, or in developing something different. (Something different is advisable if the old thing you are doing is becoming obsolete or over-saturated). All of this without failing to satisfy the pre-existing liabilities without the need for new money.

5) All of the above, except instead of a capital raising for growth, the company is able to raise money through a rights issue or extra debt to gain the money it needs to maintain current activity because it has generated an excess of earnings but a deficit. All this is usually seen as worrying for investors, but doesn’t indicate ponzi as much as dying business.

The one thing all non-ponzis, consequently, have in common is earnings.

A complete lack of earnings can, however, sometimes be forgiven in a young growth company that is clearly worth “something” but is yet to develop a marketing strategy. Earnings, nevertheless, are eventually expected.

Some enterprises that have a very low cost of capital due to overly enthusiastic public sentiment for their business can remain going concerns without generating all the earnings they need to satisfy all the above preconditions, but their shareholders must remain very forgiving of underperformance. What this means, effectively, is that in the most forgiving case shareholders are prepared to subsidise the company while it gets its act together or, at the least, to waive returns. Either way, the subsidy is assured through the overvaluation of the stock relative to earnings — the so-called earnings multiple —which buys (especially young technology companies) time to create the earnings they need to sustain their business. The higher the multiple the greater the shareholder support.

In those circumstances shareholders are agreeing to collectively absorb a portion of the costs that the company generates and which it can’t necessarily pay off with earnings alone. This is tolerated a lot in the technology sector because many companies need to forge brand new markets before they can deliver earnings. But these are considered very high risk investments.

If public enthusiasm in such companies wanes, any crash in the price of the equity can impact the concern’s ability to pay its debts and take company’s under. This is because the company can no longer depend on the implicit shareholder support which is provided by a high multiple. Namely, the ability to raise cash from equity investors who believe in the business at a rate that can cover their costs for x amount of time.

Yet even this type of company is not a Ponzi. It still has real earnings. Just, very often, not enough of them.

What is definitely a Ponzi then?

Any enterprise or scheme which has zero earnings from activities, never intended to have any, and survives only on the constant ability to pay out dividends to shareholders through the issuance of new equity or the entrance of new investors.

Why is bitcoin worse than a Ponzi?

Because on top of transferring wealth from latecomers to “early adopters” — at the cost of latecomers, who increasingly get a smaller percentage of the dividends relative to early adopters — it generates real world energy costs.

In other words, it uses up valuable energy — which could be preserved for much better purposes — for the sole purpose of transferring wealth from dumb money to “smart early adopters”.

Going around pretending you are a high-earning hedge fund when in fact you’re just a Ponzi is a much less heinous crime in comparison because at least your money grabbing efforts aren’t exhausting anyone else’s energy but your own.

Why is fiat currency not a Ponzi?

Because fiat currency is the equivalent of a stake in Sovereign Corp which generates real earnings. These earnings are reflected by the taxes that the sovereign corporation is able to collect.

The national concern is viable if the redistribution of those earnings — just like a well organised company — incentivise further growth, innovation and added value. If and when the national concern has to issue more and more equity in a way that dilutes all the collective shareholders (who are also the corp’s employees) in such a way that it diminishes the amount of added value they can claim you know its viability is being tested. But it’s still not a Ponzi. It’s just being badly managed.
Conversely, just like a company, it’s totally justifiable for the sovereign state to issue more stock if there is more than enough value to go around and not enough equity owners to share it with. Either way, in order to flourish, just like any company, the national concern should constantly be investing in new development (education), covering its costs (replace what it consumes), borrowing money when it can see potential for growth, looking after it’s employees (especially when they retire or get sick) and not be afraid to issue equity or debt for those purposes.

A badly managed national concern does none of the above, of course. Sometimes it issues equity for non-growth purposes. This is when unsustainable inflation happens.

But even a badly managed country that funds itself through constant equity issuance still has value. Furthermore, if there’s no inflation, it’s certainly not a Ponzi.

This is because the value of sovereign corp equity (national fiat) is the sum of a country’s natural resources, its collective intelligence, its ability and willingness to transform resources into added value products and services, its ability to maintain the goodwill of its employees to keep and most important of all its management.

But whilst bad management can seriously compromise a country’s potential and therefore the value of its national equity, it doesn’t change the fact that all those preceding values are still there to fall back on. Even a badly managed country has value and can be returned to growth through better management.

Which is why management, at both corporations and sovereign, must be held to account for bad decisions by vote-holding shareholders, who can force it out or force it to make better decisions that add value rather than detract from it.

Bitcoin derives no earnings from anything apart from inflows of value-backed dollars. Bitcoin has no central authority that can be held to account for mismanagement of the economy due to poor distribution of resources and claims. Most important of all, bitcoin does not replace the energy it uses.

The dollar, however, does derive earnings from the taxable surpluses of society. The dollar does have a central authority that can be held to account if mismanagement of the economy leads to poor distribution of those resources and claims on products produced. Most important of all, the US — which ultimately backs the dollar — does replace the energy it uses (albeit at a potentially unsustainable level, though this is a different issue).

Here is a diagram that tries to explain why either energy or information (innovation) have to be maintained or improved to keep a concern thriving.

Screen Shot 2014-08-20 at 17.20.54

Given the number of technology companies trading at crazy multiples due to a serious lack of earnings, it’s hardly surprising that silicon valley VCs have got so easily confused about what constitutes a Ponzi and what doesn’t

Anything that has zero earnings potential — and this also applies to tech firms –can only thrive through monopolisation, i.e. the constant capture and consolidation of competing businesses into its own enterprise. This is very much how any Ponzi works as well.

In these circumstances, the company (or Ponzi) must annihilate anything that threatens the value of its equity/scheme or risks the shareholder flock seeking better “early adopter” gains elsewhere.

Which, of course, is also the way that bitcoin works. And why it is that the more price goes up, the more tempting it is to support altcoins. In a world where bitcoin prices only go one way, bitcoin would have to gobble up every possible point of competition to keep its power. A tough job given a) how low the barriers to entry are in the altcoin world and b) the community’s inability to fund those acquisitions with new equity because eventually the new equity is capped.

To conclude

Ponzi => anything that can’t exist without permanent inflows to cover its liabilities and costs.

Not a Ponzi => anything that has the potential to generate real earnings eventually.

Young earnings-less tech companies => providers of a service or utility that users won’t pay for directly but which shareholders are prepared to support nonetheless at their own cost. Potential ponzis or extremely bold bets.

The no earnings tax

Problem with the last type is that there’s usually only so long that private individuals are prepared to altruistically support services (at a cost to them) for the good of society. After a while the support becomes a type of self-imposed wealth tax or charity. These are the sort of services consequently that make much more sense being supported by government (if they are indeed truly useful and help the country at large run more efficiently).

But of course if millionaires have so much money that they’re happy to throw it away on unsustainable Ponzi ventures because they like them for ideological reasons, there’s probably no stopping them. But the venture becomes entirely dependent on their ongoing good will.

On which basis, the only compelling argument for Bitcoin not being a Ponzi is that it is a venture with genuine utility for some people but which can’t work unless investors are prepared to permanently cover its costs with their own capital. Also the fact that it doesn’t pretend to generate earnings.

Such a service however already exists. It’s called fiat money. The capital cost to support that system comes via the taxes we transfer into the national kitty.

Funny how billionaire tech giants are so happy to pay de facto taxes (i.e. Suffer capital losses) to support a scheme that concentrates wealth but so unhappy to pay taxes to a government that focuses on redistributing wealth for the sake of a better organised Sovereign Corp.

Off Blockchain

The spectacle that is Bitcoin never seizes to entertain me.

Two things strike me as particularly absurd at the moment.

First, despite the fact that Bitcoin’s all time high of $1,242 (depending on which exchange you use) occurred last November and the blind faith unit has been trading in a range of $450-650 for most of this year, there is a strange lack of stories in the altcoin propaganda press about bitcoiners who have lost fortunes. There must be some. But no, these stories (whether about unfortunate speculators, launderers or merchants) are strangely missing. But then of course it isn’t in any bitcoiner’s interest to remind people that pump and dump campaigns don’t always guarantee you fortunes.

Second, what is hilarious are the number of stories that try to justify price declines as something good for bitcoin. The most significant of these is that bitcoin doesn’t need to be valuable to be an efficient payments technology.

Yet, without the asset price incentives blockchain tech simply doesn’t work.

Let’s not mention the fact that a valueless unit can hardly pay anyone’s salary.

But the key reason why the idea that bitcoin is an efficient payments mechanism in its own right falls down is because even the currency’s main processors and exchanges don’t like using block chain. No, they prefer very much established fee-taking, internalising (and thus trust demanding) broker dealer models.

Bitfinex even let’s your trade on margin! (So much for the no debt vision of bitcoin!)

My favourite story highlighting this absurdity, however, comes by way of Coinbase. Here’s the VC-funded processor desperately trying justify why “off blockchain” transactions don’t equate to an attempt to create a Silicon Valley controlled Goldman Sachs:

A number of consumer-based bitcoin companies are focused on off-block chain transactions, including Coinbase, Circle Internet Financial.

These companies are facilitators of everyday payments between parties and, as a result, they have decided to keep transaction speeds high by keeping most payments internal – that is, off the the public block chain.

Robinson says that at Plug and Play’s cafeteria there is a bitcoin-accepting point of sale (POS) system, and he has seen why companies like Coinbase want to run transactions through their own system, off-chain.

Simply, it’s faster to use Coinbase-to-Coinbase, for example, than relying on Coinbase-to-block chain. Plus, “issues arise with miner fees,” Robinson noted.

Transaction off the block chain do not incur the small amount of BTC that miners are paid for their services in verifying the ledger. Hence, transaction are a little more expensive on-chain.

That is hilarious above all because the key justification for off-blockchain transactions is because they are cheaper and faster, and because the block-chain can’t handle all that flow. (But I thought such a superior mechanism!)

Question: if you need Goldman Sachs-like broker dealers to make bitcoin fast and cheap how exactly is it a better system?

No, as usual, this is just more evidence of the fact that Bitcoin has nothing to do with empowering people and everything to do with “disrupting banking” by transferring power from now-regulated conventional institutions to a new greedy and cunning elite that likes to operate without regulation.

Indeed, just as we start bringing much needed transparency to the murky OTC world of conventional banks and dealers, and start holding them to account, here comes an attempt to carve out a brand new unregulated market to exploit the dumb money as per usual. But this time, of course, with no buyer of last resort to stabilize anything!

Speaking of buyers of last resort, it will be interesting to see what happens with the current price decline.

In the normal world, a cbank could deploy its FX reserves to defend the currency.

In the bitcoin world, of course, the market depends on the Winklevii and other deep-pocketed FX holding (FX being fiat) Silicon Valley entrepreneurs defending the price. It will be interesting to see just how much of their own money they will be prepared to squander in this regard.

Closing thought. A currency system that consumes on zero conditionality (I.e. doesn’t ever intend to conserve or replace what it consumes or to deal with decay) is a sucker on the part of society that does pay its way.

Consuming unconditionally is fine during an output gap to some degree. But concentration of wealth isn’t. Nor is wanton waste of energy.


Tribute series – Part 2 (The Romans as frantic organisers)

The Romans get a bad wrap because people always think of them as oppressive expansionists.

In reality, the Romans were frantic organisers who had found a great way to organise life and desperately wanted to maintain that level of civil society. They also couldn’t understand why anyone wouldn’t want to benefit from their superior way of doing things. (What have the Romans ever done for us?)

Unfortunately, there were always things getting in the way of their organised and civilised existence, whether that was barbarians at the gate, greedy rivals, internal rebellions, pirates or grain shortages due to bad agrarian management (the concentration of grain supply) or other externalities. Such disruption, especially when it resulted in the loss of human capital or output, created a scarcity of the stuff that the Romans needed to be able to maintain domestic order, especially among the city dwellers who relied on a constant flow of cheap wheat. This created an incentive to catch up on the organisation that was lost through the acquisition of new resources or energy.

Defending Rome’s organised equilibrium was thus the key motivation for creating the organisationally superior Roman military machine. This machine was crucial in securing new lands and resources whenever output or human capital was lost to wars, invasions or confiscations. Regions with high crop yields were particularly desirable. What followed were tit-for-tat retaliations which eventually led to the creation of empire, but which were all mainly driven by a desire to maintain stability in the capital.

The tribute system

Roman expansion was interesting in so much as all the Romans really longed for was tribute from the occupied lands (usually in grain form) and respect for civilising processes. Other than that, most occupied territories were allowed a great deal of autonomy. As long as you paid your tribute, allowed the Romans to bring organising technology to your regions, and respected their authority, the Romans cared little for how you chose to govern yourself locally, your cultural practices or your belief-systems.

To the occupied territories Roman tribute could be seen as the cost of development. It was the price you had to pay to be organised by the Romans, so that your efficiency could be improved and the additional yield could then be captured by Rome to maintain its standard of living. Most territories were so far behind the Romans that even simple efficiencies allowed for enough domestic improvement to satisfy wealth flows to Rome as well as an increase in the standard of life in the occupied territories.

By the time of Pompey the Great and the civil wars, Rome depended greatly on regular shipments of grain from its acquired territories. Those territories it didn’t control directly, meanwhile, it could still trade with for grains thanks to the notoriety of its Roman military machine. Trade, in other words, was code for keeping the Romans off your territory.

But then came pirates.

Pirates cared little for civilisation, the authority of Rome or the superiority of Rome’s military machine. Their disruption tactics were so disorganised and random, they were a constant bug in the Roman order. Romans couldn’t live with them and Romans couldn’t get rid of them. They were, in other words, a constant cost to capital — and by capital I mean Rome’s standard of living.

Pompey soon realised that the easiest way to deal with the pirate threat was not to waste resources tracking and eliminating them, but to cut a deal with the extortionists. Rome, he realised, could handle a certain degree of loss providing that loss was predictable both in volumes and in location.

The pirates, in other words, were paid off. Rome was prepared to look the other way as long as the pirates didn’t push their luck by threatening the stability of Roman civil society in the capital directly. More on how the pirate threat is equal to bitcoin here.

Two different costs to capital

What we end up with consequently are two different types of capital costs from the earliest period of civilisation.

The first is the cost of “civilised capital” coming to your region. This being the tribute demanded by a superior power who wishes to exploit your resources for the sake of organisational efficiency, which you get to benefit from too. This sort of capital cost is constructive since it allows for development. More so, it benefits from the fact that the superior power understands there is no point in over-draining resources since this will only lead to exhaustion of tribute. This means it is predicated on the understanding that there is a natural rate of tribute, which there is no point in over squeezing.

The second is the cost to capital because of disruptors. This being the tribute demanded by a disruptive and predatory power which wishes to exploit your productivity for the sake of disorganised and unsustainable living, the sort that cares little about organisation. This sort of capital cost is destructive because it leads to decay, the exhaustion of resources, and a lower relative return on energy expended by the productive and organisation forces in society.

Disruptors are a cancer-like force on organised systems. They feed on the efficiency of the whole, but give nothing back in return. They are a system parasite. In the worst case scenario they care little about killing the organised entity they depend on for their free lunch.

All innovation in organised systems is motivated by a desire to catch-up on output lost to such disruptors or to find a way to annihilate them or to gain some leverage over them.

Parasitic entities of this sort include the Mafia, pirates, extortionists, conmen, thieves, and to some degree rentiers (or any entity that demands too great a cut of an organised system’s output despite not contributing to it).

Even in Rome itself there were periods of time when the rich elite jeopardised the social order of Rome by over-hoarding supplies and keeping them away from wealth distributing and this organising processes.

But internal costs of capital play a much less significant role I would argue in the formation of financial markets than external ones.

One of the greatest battles of antiquity — the battle to Actium — which prompted Rome’s transition from Republic to Empire involved control over the grain resources of Egypt. This grain supply was the antique equivalent of Middle Eastern oil supply, providing anyone who controlled this territory with serious leverage over the rest of the known world.

Jefferson and the pirates

Fast forward to the formation of the United States, and it’s interesting to discover that Jefferson too faced a similar dilemma. The whole point of US independence was ridding itself of the costly tribute it had to pay to the British. One of the key advantages in this regard was that unlike territories being absorbed by the Roman organisational machine, the United States had the information and knowledge to be able to organise without the help of the British, and thus stood a good chance of being able to stand up to the British.

Even so, after Jefferson came to power he realised the biggest threat to US stability and organisation was now the pirate threat to its supply channels via Gibraltar, especially now those ships had lost British protection.

From Wiki:

Barbary corsairs led attacks upon American merchant shipping in an attempt to extort ransom for the lives of captured sailors, and ultimately tribute from the United States to avoid further attacks, much like their standard operating procedure with the various European states.[4] Before the Treaty of Paris, which formalized the United States’ independence from Great Britain, U.S. shipping was protected by France during the Revolutionary years under the Treaty of Alliance (1778–83). Although the treaty does not mention the Barbary States in name, it refers to common enemies between both the U.S. and France, which would include the Barbary States or pirates in general. As such, piracy against U.S. shipping only began to occur after the end of the American Revolution, when the U.S. government lost its protection under the Treaty of Alliance.

Unlike the Romans, however, Jefferson wasn’t prepared to cut a deal immediately. Costly battles ensued. A key American tactic was the use of blockades and sanctions. A deal was finally struck at a significantly lower cost to the Americans than would have been otherwise. But the pirate threat was never entirely eliminated until the European powers united against the pirates, and took control of the area. Britain’s occupation of Gibraltar and France’s occupation of North Africa being the direct result of this.

The point being that war can be economically stimulating if it rids an organised system of a parasitic entity. As long as a parasitic entity is able to extract tribute from an organised system bringing nothing to the table itself this creates a cost to capital and to maximum efficiency.




The tribute and organisation theory of value – Part 1

In the following series of posts I am going to outline a concept I call the tribute and organisation theory of value. There will be sweeping generalisations made, but they’re necessary to be as concise as possible. Ultimately, I’m going to argue that all value emerges from the cost to capital of disruption — and by capital I mean any organised system at all.

Organisers and disruptors

What we call civilisation is the emergence of organisational systems that process things in such a way that organisation increases.

Life itself can be thought of as the output or product of organisation. We are all organisms. And in the great scheme of organised life humans are the most compulsive organisers of all. We were born to organise. “Growth” is what happens when we take resources and process them (using information) to create faster, more organised systems.

Scientists believe that the earliest form of organised life emerged when an unexpected boom of energy hit the earth and caused its spontaneous development.

Every major step for civilisation since then has involved some form of energy windfall or efficiency.

For example, the greatest leap for intelligent organised life arguably occurred about 10,000 years ago when a mutation in the grasslands of the fertile crescent led to a new wheat type.

This new wheat had a larger ear of starch and was thus able to provide access to more “easy” energy than gathering or foraging could alone. The trade-off was that it could not reproduce itself spontaneously. It required farming. And this became the key catalyst for the emergence of civilisation as we know it.

With farming humans were finally able to control their environment and to plan for the future. Most importantly they could use information about weather and seasonal patterns to boost yields more than ever before. The greatest advantage of that was that any surpluses could be stored to and used as a risk management buffer, which allowed humans to worry about other things than just good alone. It also introduced the first example of leisure time to their lives.

Unlike animals and other primitive human beings, modern humans were now incentivized to develop skills that could process information to improve farming yields even further. This included everything from the development of water clocks, counting and writing, data management (scrolls, inscriptions etc) to protocols (government-systems, laws, calendars and dating systems, weight and measure standards).

This in turn developed an evolutionary advantage for humans who were better at forward planning, yield and risk management than others. (BTW – No story highlights the phenomenon better than that of Joseph and the Pharaoh.)

The one thing all the great ancient civilisations had in common was their reliance on the predictability of stored wheat supply (stored energy) to further organisation. You could say that predictable sources of energy provided them with the time reserves they needed to develop more organised systems or to hunt for even more exploitable energy.

Organised systems which made information-processing innovations were thus the ones that tended to leap ahead of others.

In fact, what differentiated civilised societies from barbarous ones throughout time was always an information asymmetry of some sort.

Tyrants as cancers

By the time of the Romans many great civilisations had come and gone. Why some lasted many centuries and others disappeared is still a matter of academic inquiry. Yet it’s hard to find an example of a civilised order whose collapse wasn’t linked in some way to an organisational failure or set back, whether that was linked to a natural disaster which impeded information flow, a more informed organised structure attacking it or because there was an incident of internal sabotage.

Internal sabotage is the most curious phenomenon of all because it relates to instances when an organised system consciously mismanaged itself. These instances usually involved some form of corruption (like what happens to a computer) which impeded the flow of information or misdirected energy reserves to where they were not needed causing inefficiency. This, of course, is very similar to how a cancer works. In ancient societies I would equate this to the emergence of tyrants, oligarchs and rabbles.

Whenever these cancer-like influences emerged they weighed on the efficiency of society because of the costly “tributes” they demanded at the expense of everyone else by means of the misinformation they sent out. This burden amounted to the cost to capital.

Such corruptions inevitably led to a civilisation’s death, equating to a major setback for humanity. Nevertheless, there were also rare instances when organised systems would consciously “fight back”. This is what I would argue revolutions were really about. Unfortunately, the cost of such a revolution – even of a successful revolution –was still a major setback to an organised system. Sometimes it was too much of a cost, the same way chemotherapy can sometimes end up killing the cancer victim before the cancer even gets them.

It was only the Greeks and the Romans who were fortunate enough to survive oppressive and corrupt regimes without too much organisational distress or information loss and who were consequently able to institute specific systems (protocols) that protected against this sort of future corruption.

Democracy and Republicanism were the first known computer-style patches for organised systems to protect them against the corrupting influence of tyrants.

This was a great achievement for organised systems, although interestingly enough, both in the case of Greece and Rome, the systems later fell to monarchic-style empire (Alexander Great/Augustus). But this was more a reflection of anacyclosis, a reflection of the fact that all systems need constant adaptation to deal with new corruptive bugs, or else the bugs takeover.

Romans as frantic organisers

Either way, once we get to the Romans it becomes abundantly clear that efficient ordered civilisations need to keep expanding their sphere of influence to maintain their state of order. But why is that?

If civilisation is the product of energy gained due to the better management of storable energy (due to superior information processing and risk management skills), why is it that territorial growth is necessary at all? Beyond a certain energy optimisation level, what motivates a civilisation to expand outwards or to innovate with better processes at all?

This relates to the phenomenon of “catch up”. Namely the fact that whenever a certain amount of efficiency is achieved losing that efficiency is a socially painful experience, and society strives to make it up. In these circumstances those who have access to more reserves of energy (or knowledge of where those reserves are) become socially valuable because it is only by spreading those reserves that society has a hope in catching up again. This is one part of the cost of capital story, and the one most of us are familiar with.

But there is another part. And the Romans provide an excellent example of how this other part came to be. More about this in the next post.