Reflecting on one year of Misaligned Markets!

I can’t believe it’s already been a year since I officially launched this blog! Thank you so much to those of you who’ve read, subscribed, and spoken to me about my work, it means a lot. I wanted to use this post to reflect on what I’ve learned through blogging while being brutally honest about what I could have explained better. Then, I’ll talk about the future of Misaligned Markets.

For me, writing is a form of thinking, and I covered a lot of conceptual ground in the past year. We talked about optimization, information asymmetry, risk, LLMs from a socio-political angle, and much more. However, I want to pick out three concepts that transformed my understanding of market capitalism. For each topic, I’ll discuss:

• What the concept is.
• Why I wrote about it.
• What I wish I had articulated better when I wrote about it.
• What I need to do to develop the idea further.

These are basically open notes I’m writing for myself, but they will also serve as a useful review of my project so far.

The four paradoxes of capitalism

What are the four paradoxes? The four paradoxes of capitalism are a description of systemic tendencies or “attractors” that emerge as a result of the tension between markets and capitalism. The first two paradoxes revolve around failure states with property rights enforcement, and the last two paradoxes stem from failures from market competition. Briefly, they are:

1. Property rights limit competition. Property rights allow for incentives and compensation to exist in market systems, but they inherently restrict where competition occurs, which can undermine market self-regulation and access.
2. Property enforcement invites exploitation. If the state is too weak, then the cost of violating property rights is relatively low. Thus, the complexity of state-enforced property rights regimes tends to grow as markets mature. This, in turn, creates new opportunities to exploit the state to undermine competition.
3. Markets reward secrecy but need transparency. Information has a tendency to diffuse to where it’s most useful, but markets reward secrecy through property rights. The consequence is a strong incentive for market actors to create information asymmetry and a reduced ability for markets to self-correct by identifying and iterating on useful information.
4. Market success undermines market conditions. Markets can create Matthew effects, where the proceeds from winning market competition can be invested in undermining market competition, often by expanding property rights and exploiting the other paradoxes.

All paradoxes of market capitalism reinforce themselves and one another. This makes resolving these paradoxes in a way that doesn’t worsen market competition a sort of wicked problem.

Why did I write about the four paradoxes? The four paradoxes emerged from me conceptually divorcing markets and capitalism. While this is uncommon in popular discourse, I’m far from the first person to do this. In political economy and historical analysis, there are many traditions where this is a standard analytical move. For me, though, this is really the first time I’ve thought through the implications of this distinction and their role in market structure and market formation. This naturally led to viewing markets from a systems or cybernetic lens, where the structure of the rules enables self-sustaining feedback loops.

What I want to add. The four paradoxes are doing a lot of explanatory work, only some of which I made explicit in my blog post on the paradoxes:

• Individual policies or market behaviors can be mapped onto each paradox’s continuum. Those of you who read the post will remember I created an axis for each paradox. You can think of each axis as a dial that determines how concentrated an economy is. Policies and actions that favor excessive property rights may weaken competition. Conversely, moving the dial too far in the other direction might prevent markets from forming at all.
• The four paradoxes explain the tradeoffs societies make when enabling markets. For how long will your society recognize patents? What can be patented? Questions like this have to be answered if you’re going to have a market economy. If patents are viewed as being too weak, you may chill market participation. If patents are too long and durable, then you risk creating entrenched incumbents.
• Regulators also face the four paradoxes. After a market society has been running for a while, you face the same questions. Are there too many monopolies (paradoxes 3 and 4) expanding and exploiting property rights enforcement (using paradox 2 to target paradox 1)? Teasing apart the paradoxes might be part of a response to fix this.
• Companies avoiding competition see the four paradoxes as an opportunity landscape. Basically, this is what’s metaphorically in the head of a CEO who does not want to compete on the basis of their product proposition. It was this adversarial way of thinking that first led me to the paradoxes. I’ve always viewed the paradoxes as a sort of threat landscape, since I have a security background. Developing a threat landscape involves modeling adversarial intentions to better understand how open environments that run on trust, like a computer network, provide opportunities for adversarial advantage.
• Citizens and customers influence the four paradoxes. Consumption habits and voting patterns can have some effect on which direction each paradox goes in.
• The paradoxes have an order in which they influence one another. I left this implicit, but some paradoxes have more of a relationship to each other. Paradox 4, for example, is an amplifier that touches all other paradoxes. Paradox 2 is explicitly about the enforcement of paradox 1.

Of course, all of these explanations can simultaneously be true. The paradoxes can describe the initial conditions of a market society, the direction of its drift, and the current position of the society given all the activity happening within the system. 

What do I need to further develop the four paradoxes? While visualizing the tensions of market capitalism in this way has been helpful for me, I recognize the four paradoxes as a stepping stone to something more useful. As the concept stands now, I don’t think it has much predictive utility. That’s fair, as it mainly served to help me articulate a set of intuitions. But I don’t think it’s useless; in fact, in future posts I’ll share ways in which the four paradoxes fit into the broader project I’m working on.

Something that I’m eager to do is to look for opportunities to do historical or empirical validation of the four paradoxes using political and legal case studies across different countries. There might also be value in using these case studies to categorically describe different types of capitalist societies and the ways in which they’re meaningfully different from one another.

Capitalist serialization 

What is capitalist serialization? Serialization is the recognition that capitalism must create legal and economic representations of objects in the world so that markets can function. In some cases, this takes the form of endowing an object with a specific set of legal rights, financial entitlements, and economic value. Capitalism, or more specifically, the legal, political, financial, and economic institutions that manage and enable ownership, take a real-world thing as input and create a representation of it in the form of pointers to the object. This is how your house becomes a deed, how your deed becomes a mortgage, and how your mortgage becomes part of a mortgage-backed security, and so on. Capitalism tracks all of these changes through various institutions so that participants at the “market layer” of the system only need to focus on trade and exchange value. Other objects, like climate change damage functions, are not owned by anyone but created through regulatory and political institutions.

Why did I write about capitalist serialization? This is another idea that is an encapsulation of other ideas in political economy, though I’ve not seen them bundled under a single process. The closest individual concept to this idea probably is James Scott’s concept of legibility, which argues that governments reduce complexity by using decontextualized, abstract representations of things within their territory so that states can take actions. However, I don’t think I can import Scott’s concept wholesale here. I also suspect this tendency toward “lossy” representation is not unique to states or market capitalism and exists in any system where scale and complexity are at play, without this kind of abstraction communication and action among people would break down.

Anyway, I deliberately chose the term serialization after hours of working with Python and JSON files because I think the metaphor, a reference to how computers create portable and interoperable data standards, is doing serious work. But I know that’s meaningless to those of you unfamiliar with this aspect of computers. You can also just think of serialization like serial numbers that mark and label objects. However, my metaphor leans very heavily on the type of composability that serialization schema (e.g., XML, JSON) enable.

Incidentally, failures in cryptocurrency markets are the prefect illustration of the limits of serialization. I wasn’t at all thinking about crypto when I coined the term, but it’s not surprising given this is a computer science metaphor being used to explain an economic phenomenon. In any case, cryptocurrency can be seen as an extension, not a deviation from capitalism’s tendency to serialize the world. If you really want the intuitions behind this serialization concept, I’d recommend watching the excellent crypto/NFT documentary Line Goes Up by Dan Olson (foldingideas). If you do, pay close attention to circumstances where the underlying crypto asset diverges from the thing whose value it’s supposed to represent. Also notice how crypto networks are highly suspetible to instances where assets are intentionally encoded in ways that disadvantage one party over another.

Perhaps in the future, I’ll write a proper blog post on why serialization is a good metaphor to describe capitalism and how cryptocurrency, which literally (not metaphorically) serializes real world objects, fails.

What I want to add. I’m not happy with the post where I introduced serialization, even though it’s my most read article. There, I introduced serialization alongside a broader set of cybersecurity metaphors like capitalism-as-a-stack and markets as inherently trustful systems. I’m slowly building toward a description of economic “security exploits," and that post serves as a stepping stone. Unfortunately, I think the resulting blog glosses over security concepts too quickly in order to set up multiple uses of serialization that I could have articulated more cleanly.

Serialization as a mechanism vs. a description. When I first wrote about serialization, I alluded to a mechanism, as I have in this post, where institutions take actions to create the references that enable serialized representations to exist. However, since I haven’t formalized this mechanism—the nitty-gritty of how serialization actually happens—most of the value of the concept is coming from a high-level description of serialization’s consequences. The main consequence is that a system that can only “see” the world through abstract, decontextualized, and manipulatable representations (regardless of how they’re created) has massive blindspots that can be exploited. This might seem like nitpicking, but I think my failure to tease this distinction out made the post harder to read than necessary.

I also, admittedly, don’t know if there are multiple creation mechanisms at play. Damage functions aren’t at all like deeds; you can’t go down to your bank and take out a mortgage for one. That’s why in this post, I pointed out that damage functions aren’t owned or traded, even though they are created and legitimized by some of the same institutions that enable other types of financial assets. However, until I build a full ontology, I can’t take for granted that damage functions actually share a creation mechanism with commodities and financial instruments. Still, I think both serve as examples of serialization and of how market capitalism can only see the world in a decontextualized manner.

Framing serialization. I don’t know how obvious this was, but since I’m sharing my disappointments, I was unsure of how to frame serialization. It’s an extremely abstract process that in some ways exists as a consequence of scale. Many forms of representation in the economy reduce transaction costs and information asymmetry. In a lot of ways, serialization is normal, just like a teacher using quiz scores to decide which students need extra attention or a manager using performance indicators to evaluate an employee. These types of abstraction can be neutral if used mindfully, and I wish I’d emphasized that more. Of course, not all uses of abstraction or serialization are mindful; some people mistake metrics for the things they represent and then optimize for metrics alone (sound familiar, dear subscriber?). Damage functions, for example, completely underrepresented the harm caused by climate change.

Anyway, this type of serialization should be separated from what I’m now calling “weaponized” serialization, which is what the collateralized debt obligation (CDO) example in the original post was about. Some actors knowingly exploit an asymmetry in a serialized representation and its underlying object. Such asymmetries can occur naturally because serialization strips away context. CDOs are even more egregious than that, though, as they are deliberately constructed to misrepresent the object they’re based on. When a set of subprime CDO tranches was removed from their parent CDO and turned into a new asset, that new asset received a brand-new risk score. This decoupled these subprime tranches from the underlying risky mortgages and defaulting borrowers they were connected to.

What do I need to further develop capitalist serialization? I need to decide how important a formal ontology of serialization’s creation mechanism is, in order to explain its consequences. Right now, I suspect this level of granularity isn’t strictly necessary. Regardless, I'm hoping that I can learn more through reading and conducting interviews that will help me build on this concept.

Brute force optimizer 

What is a brute force optimizer? This is a concept I only talked about on my Start Here page, but earlier readers of my blog will remember my Mammon metaphor, which refers to optimization processes that overoptimize for a mis-specified target. Here brute force specifies what type of “Mammon” market capitalism is, from a cybernetic lens. I’ve jokingly started referring to market capitalism as a “blind,” “dumb,” “greedy,” and “wasteful” search process over firms. These aren’t normative descriptions; they’re fully algorithmic and describe why market failure is actually a normal part of how markets work.

A blind process is one that acts without foresight on whatever it’s selecting for. Market capitalism is searching for differentials, which can be found where there are opportunities for high profits. Some subsets of opportunities, like abuse of the property rights system (four paradoxes), actually undermine the system’s stability. Regardless, the system will happily select for them.

A dumb process has no durable memory of solutions that have been tried. It forgets incomplete ones, rediscovers old mistakes, and reproduces familiar harms under new names.

Greedy processes favor results with immediate returns, regardless of their long-term costs. In algorithm design, greedy systems are deliberately deployed when a problem is too complex to solve and approximate solutions are acceptable.

Wasteful processes have to solve problems through brute force by doing redundant work in parallel before producing both good and bad solutions.

This concept is too new to do a full postmortem, but it has been critical in helping me think about the selection effects present in market capitalism. By selection, I’m referring to an evolutionary dynamic similar to natural selection or artificial selection in biology. My next steps here are to build out a framework around the types of selection dynamics at play in the system, including the levels at which selection occurs.

The short story here is that market capitalism functions as an information-processing system that generates “solutions” to an unbounded or “misaligned” search process. Since the process is unbounded and guided by profit as a signal, it will generate any viable response to the query, including those that distort or subvert the search process through the exploitation of capitalist serialization, information asymmetry, or other means.

Plans for Misaligned Markets 

This project grew out of my desire to recreate the kind of community I had in college, so I’ve always had plans beyond just blogging.

I absolutely still intend to keep publishing posts, aiming for a cadence of one to two per month. However, I’m also planning a podcast, which should start later in the year. I’ll be interviewing researchers and others, asking questions about their work and its importance to the broader political economy. Aside from that, I’m going to be more open about what I’m reading and looking for ways to build conversation from subscribers who are interested in being part of a book club.

In the future, when my bandwidth allows, I’ll start turning my body of work into video primers and explainers, but I mainly want to focus on the blog, book club, and podcast. Subscribe for updates on all of these details, and thanks for reading!