The Ritual of Capitalization (2021) | Hacker News Reader

The Ritual of Capitalization (2021)

economicsfromthetopdown.com

72 pointsbenaadams54 comments

It's sad that someone like the author would spend so much time avoiding understanding basic economics like subjective value, marginal value, voluntary exchanges etc. There are plenty of economics who never use any maths and help in understanding finance without resorting to this kind of silly critic

I don't know how you can prove the existence of voluntary exchange in the real world. Also neoclassical economics tends to get marginal cost structures completely wrong. When you ask them, companies report constant or falling marginal cost. The text book authors that do the study then proceed to teach their students that marginal cost must rise. I am not sure I should trust people like that. If they are willing to straight up lie about this, what are they going to lie about next?

The thing about economics is that you can keep studying and studying and get none the wiser. All the low hanging fruit are still there to pick but nobody is interested in that research because it is the equivalent of going from geocentrism to heliocentrism.

The "obvious" conclusions you can derive from a continuous neoclassical model make no sense the moment you add multiple goods because at that point you now need to run NP hard optimization algorithms to get an equivalent answer. Yes, the proverbial corn economy works if all you care about is corn.

From my perspective neoclassical economics is just a disguised form of centrally planned communism so that capitalists can claim the supposed benefits of communism for themselves, while they do something different behind the scenes. Communism should be rejected because it is not possible to implement it and so should neoclassical economics. This leaves us with a lot of research opportunities that nobody is willing to take.

You had me for 2 paragraphs. But claiming that a branch of economics is trying to implement communism but somehow hide in plain sight, is a real stretch. Like a giant leap over the grand canyon stretch. Is there anything to this argument?

I really would like to know. I read a recent theory that late stage capitalism does naturally morph into socialism, as a way for the rich to quell dissent in the poor. But not sure that is what you are going for here.

The federal reserve is hiding in 'plain sight' ... You could argue that a monopoly of large commercial banks regulated by a federal centralized government fixes the market to a degree.

Still. It is still a pretty huge leap that because the Fed is a central bank, that we are really communists.

I really just want imtringued to explain a few more links in the chain of reasoning. It sounds like something I heard recently that we'll have a veneer of socialism, to hide the fact that the rich are in control (central bank, monopolies). Just not sure I'm reading into this post correctly.

> recent theory that late stage capitalism does naturally morph into socialism

I think this is a quite old theory, and well, who knows on the scale of history, but I am pretty skeptical about it over the last 50 years.

> But claiming that a branch of economics is trying to implement communism but somehow hide in plain sight, is a real stretch.

I think it's usually called corporatism, or literally called fascism (the Italian version, not whatever liberal Democrats mean when they say it.)

For me, the test hypothetical is how one would like literal chattel slavery if laws and diligent inspections limited slave work hours to 6 hours a day with a max of 24 hours a week, slave quarters looked like fancy college dorms, families were given the right to stay together, and slaves all had iPhones and Netflix. If slavery starts to sound more appealing, you might lean towards corporatism or national syndicalism.

Another way to think about it is that prices come from a game where one player wants the number to be higher and the other wants it to be lower, and the players can walk away. That's a voluntary exchange.

I don't know why you think the existence of this game needs to be proven when it's a game people play all the time? It's very unlikely that you've never shopped for anything.

Not every purchase is entirely voluntary. Some purchases happen under pressure. The amount of pressure varies quite a bit.

> I don't know how you can prove the existence of voluntary exchange in the real world.

You mean that in a "what is free will anyway" form? Or is there something definable that you contest?

> The "obvious" conclusions you can derive from a continuous neoclassical model make no sense the moment you add multiple goods because at that point you now need to run NP hard optimization algorithms to get an equivalent answer.

I don't think many economists would disagree with that equivalence. They seem to always hint very strongly at it, but never actually articulate it. Exactly why do you think it's a problem?

Overall, I have some strong criticism of modern economics. You seem to be bothered by the same kind of thing, but I can only sympathize with your complaint about continuous models.

Not convinced that an article which mentions religion more times than it mentions risk and doesn't mention growth expectations at all tells us very much...

You're missing the point of the essay actually. It's like complaining that an essay written by an atheist about church doesn't talk about sin and salvation.

No, I'm entirely getting the intended point of the essay, I just think that missing the 101 stuff makes the point that the author doesn't understand the subject matter he's attempting to do a hatchet job on.

Think it is because he is saying the 101 stuff is bunk, so why try to use the bunk to disprove the bunk. Like if a physicist is trying to convince a true religious believer there isn't a god, doing it by quoting the bible is often not very effective.

The way to convince people the 101 stuff is bunk is to refer to the 101 stuff correctly, and explain why it doesn't work (or alternatively, come up with a better model), not to try to explain how some of it, fail to acknowledge other parts and imply there are gaps in it.

Quoting the Bible is one of the more common methods of arguing against it or beliefs [purportedly] based on it, and certainly a better way of arguing against the coherence of the Christian model of salvation than writing an article about "the ritual of salvation" that makes a lot of disparaging comparisons to sun gods and talks a lot about Abraham but seems unaware that the Christian model of salvation actually revolves around Jesus

You are correct, I posted to fast. I retract post.

I do often think the best way to convince people to not be Christian is to have them read the Bible. Most Christians have no idea what they believe in, and don't know what is in the Bible (like in US where they think Jesus was pro-Gun, kill thy neighbor). Just reading the Bible is enough to convince people to not be Christian.

So, if I take this reasoning back to Economics. Maybe people do have a lot of false beliefs about Economics, and if they would study it, they would realize it is bunk, and turn away from it?

[EDIT POST] Changing bit more. Because it really is where the person is at in their learning. There are plenty of Christians that want to persecute Trans Kids, and reading the Bible is not going to convince them they shouldn't (even though Jesus). But maybe when they learn more about Jesus they will stop wanting to kill people.

It is about the learning. If you indoctrinate kids into a cult at Bible School, how are they supposed to know it is wrong? They a fresh young minds to be imprinted.

Same with Econ 101. Freshman, just starting out, they are learning. They are not already experts, so going to study Economics and immediately see through it all as bunk.

So guess you need some expertise in the bunk, to refute the bunk. But that all takes a lot of energy.

I mean, freshman taking economics classes and learning "here's a theory and its assumptions here's a theory of why this may be wrong and are some counter examples" is going to be a lot better informed about the limitations of theories than someone that doesn't. It's a bit like if you want to learn the limitations of models predicting weather, you probably want a meteorology course, not a list of climate sceptic blogs written by people who hate climate models more out of political objection to their implications than the detail.

You don't need to take an undergraduate course to understand basics like capitalization (i.e sometimes people value stuff now because they think it will make them more money in future, and people will be willing to sell it for less because they have different expectations, risk tolerance or investment opportunities available to them.. its not exactly one of the more controversial or less practically applied parts of economic theory). But you probably want to read an introductory text, not the guy who pronounces that it's part of the heresy of "economics" and then constructs a straw man version of the theory that actually misses the most important bits.

> I mean, freshman taking economics classes and learning "here's a theory and its assumptions here's a theory of why this may be wrong and are some counter examples"

Indeed, except it not how most eco 101 goes, at all …

> It's a bit like if you want to learn the limitations of models predicting weather, you probably want a meteorology

Except one is actually science, whereas the other is political philosophy which pretends to be science in order to justify its perspective. Studying theology isn't necessary to be able to criticize religion. It can ne useful if you want to give theoligical criticism of religion but that's it.

Ans I say that as someone who's spent 5 Yeats studying economics for the exact reason you mention. It turns out it's ideology all the way down…

And the author is also very familiar with econ 101, he's just not reusing these concepts from the canon, because in fact they're mostly ideological ans not very helpful to understand the real world.

It's not like he doesn't understand it, he refuses to accepte the canonic explanation as true. Sin and salvation are 101-level stuff too.

A more apt comparison would be an easy written by monk about physics that doesn't talk about, well, anything that didn't fit into the scripture.

Except that “risks and inventives” aren't laws of physics, they are pieces of the dogma (and worshipers dont usually see the difference between the later and the former: it is the essence of religion to believe the dogma as if it was some kind of transcendantal law)

All of these concepts have predictive power that is proven with hard data every day. And unlike physics, it's one of the most democratic realms of knowledge: if you think that these predictions are wrong, you can make yourself a lot of money.

> All of these concepts have predictive power that is proven with hard data every day

Citation needed™

> if you think that these predictions are wrong, you can make yourself a lot of money.

The market can remain irrational much longer than you can demain solvent

As Keynes summarized it in his “beauty contest” thought experiment, it's not about getting the “real” price that matters, it's about guessing what price the group is going to assign. Being “right” against the crowd gives you no point.

For one person getting away with the big short, there are a thousand that just miss the timing of the crash even though they were right on the underlying analysis.

Or resource allocation.

But then, these navel-gazing critiques of capitalism only work in a vacuum. Why do these men in suits assemble in these temples of finance to perform these arcane rituals, to utter these numerical incantations? It's weird, right? They must be searching for god, or maybe they never got enough love growing up. Couldn't have anything to do with actual human experience telling us that the market is the most resilient and efficient (if not always the most fair) way of deciding, as a society, how to employ our scarce resources in a useful way. The people who buy and sell abstract claims on collective human endeavours must do so out of some deep-rooted spiritual malaise and it can't be related in any way to their own very mundane desire to put food on the table and maybe even spend a couple of weeks a year in a tropical location with people they love.

No, we should probably get rid of all this weird ideological baggage. (What do we replace it with? Oh, that's not my department...)

I wish there were more books or studies on how Economics is really a form of Psychology. It seems like the economic theories that delve into why humans do what they do seem more 'real', or uncovering something about human nature that can be applied.

Isn't that just behavioural economics?

Yes, you are correct. Just doesn't seem to get much respect, or its findings integrated into wider Economic Theory. Or maybe it just takes time.

given how hard it is to replicate studies in Psychology, maybe the 'rational economic actor' theory, while obviously wrong, still makes better predictions that any theory that more accurately models the humans involved? After all, one of the main things that makes real humans different from rational actors is our unpredictability.

This is a great introduction to how valuation of public stocks works. In short, market capitalization is positively correlated with gross margin rates and negatively correlated with earnings volatility and the discount rate, which is a leading indicator for FFR.

This is confusing. At one point risk is an essential component of ritualized calculations, but then the same formulas enable ignoring climate change? Also seems wrong at the core as what we know of economics shows symbols and counting used to track commodities and the regular production and trade of commodities then leading to lending and futures and so on which indicates that however abstract and ritualized everything emerges from and continues to be based on humans meeting their essential and perceived needs.

A thing is only worth what someone is willing to pay for it. Valuation by formula is a pseudo science because every thing you do is ultimately subjective.

Subjective things can’t be described by a formula?

Who knows what takes place in a person's mind? They may not be clear themselves. So, no, unlikely, unless or until the 'it' is objectified.

It’s an educated guess, not the word of God. You don’t have to know it precisely to produce useful results. The entirety of physics is wrong, so what, it still allows us to build rockets, skyscrapers and computers.

And there's a wide variation between even two people on what that guess should be.

Fortunately, we have things called markets to allow the people that think something is overvalued to sell it to people who think it's undervalued...

Markets ? Rituals ! Religion !

The unit of analysis is firms, not individuals.

My interest, at the halfway point through The Famous Article, is whether the relative sizes of the firms (in employees) fit in there somewhere.

Money is used as a sort of analytic "low common denominator" in all of this work, but that seems a narrow window for viewing life in general.

The formula allows you to compare. It is the same psuedo science as comparing SSD drive prices using storage capacity as a factor.

What someone is willing to pay for something is very arbitrary and will be influenced by such pseudo science valuation formulas if they set the price first. Price anchoring as a form of a self fulfilling prophecy.

Diamonds are worth a fraction of what Debeers wants for them, but people still pay it because those are the only prices they've ever seen. On the other hand, printers are worth far more than they sell for, yet nobody would consider paying the actual price for them.

I don’t disagree that property value is a ritualized social fiction, but there are some glaring errors in this.

Namely they define value = future earnings / discount rate, and then when showing the example with Amazon use past earnings.

Clarification: typically[1] future earnings = sum of all future cash flows, which is different than profits. Businesses (or a music catalog) keep making money and don’t just pay out once.

It’s an arbitrary formula too, but they’re not staying consistent with their arbitrary formulas.

And there is some effort to find a mathematical basis for the discount rate, e.g. CAPM [2]. Actual asset prices often are inconsistent with this and other models of the discount rate. Lots of hand wringing ensues and nobel prizes in economics are dolled out.

[1] https://en.m.wikipedia.org/wiki/Discounted_cash_flow [2] https://en.m.wikipedia.org/wiki/Capital_asset_pricing_model

An interesting read. The basic premise of juxtaposing an explicit religion with finance seems to be that the latter is an implicit religion.

Like the discount rate itself, this seems am arbitrary rhetorical choice.

I agree, at a very high level of abstraction, insofar as both a community of faith and finance are about rendering the future "somewhat predictable", though, in that sense, the future resembles the weather.

i thought this was going to be a post about *capitalization*—i.e., it was going to be about uppercase characters. when you think about it, capital letters are entirely useless since they don't convey any information in regular text, unless you're writing in ALL CAPS.

you can get away just fine writing in all lowercase characters, as i've just done.

The article mentions that property existed in feudal Europe, so isn’t per se linked to capitalism. But the thesis is that capitalization is per se linked to capitalism. Then capitalization/capitalism is linked to caring not about actual property (things in the world) but income. Here’s the problem;

That is exactly the way things worked in feudal Europe. Nobles were interested in acquiring, for example, rights to a demesne lands not because they were interested in how much food they could produce or whatever, but because it was an income stream. At first, that meant in-kind income. Towards the later Middle Ages, it was monetized into cash income.

I don’t have a larger point, except to say that the person is so focused on their critique of capitalism that their explanation of what is essential to capitalism is wrong.

Coase’s Theorem (not technically a theorem) provides the basis for putting numbers on things, it’s not arbitrary. The specific numbers criticized (1.3%, 7%) decided on by economists are indeed arbitrary, though.

> The specific numbers criticized (1.3%, 7%) decided on by economists are indeed arbitrary

But these numbers aren't chosen by economists or any other individual. If prices aren't arbitrary then neither are discount rates.

Yes, yes the markets are an ideology and by changing the ideology we can build a better world what could possibly go wrong

> So what happens in practice is that investors capitalize income by keeping one eye on capitalization itself.

Is it right that this long essay is saying (roughly) that share prices are not really related to future earning expectations, but to future share price expectations? Well, blow me down with a feather. I'd never have guessed that stock markets were mainly about speculation.

The value of everything is speculation

Wait till you find out that the dollar is also made up.

Used to be backed by gold. How many cows per kilo of gold? Made up too.

This person needs to read some Ayn Rand so their understanding of capitalism won’t be so inept as “slap a price on something”.

Capitalism is closer to numerology or Kabbalah than ritual. The failure of the author to distinguish between different types of spiritual practices makes the entire article fall flat, which is sad because an investigation into the relationship between numerology and capitalism is quite interesting. Especially since you quickly discover that the number Zero holds special significance in accounting since all books must balance to it - assets and liabilities are equal.

I am not sure I need numerology for accounting identities. You would be better off just reading one of Wolfgang Stützel's books. E.g. "Volkswirtschaftliche Saldenmechanik"

https://books.google.de/books/about/Volkswirtschaftliche_Sal...

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