Stone-Soup for the Capitalist's Soul

The fable of Stone Soup is probably my favorite piece of European folklore. In the Russian version, which I prefer, called Axe Porridge,  the story goes something like this: A soldier returning from war stops at a village, hungry and tired. He knocks on the door of a rich, stingy Scrooge of a woman. In response to his request for food, she of course claims she has nothing. So the canny soldier asks her for just a pot and water, claiming he can make "axe porridge" out of an old axe-head he spots lying around. Intrigued the woman agrees. You know how the rest of the story goes: the soldier quietly hustles a bunch of other ingredients -- salt, carrots, oats -- out of the old woman, under the guise of "improving the flavor" of the axe porridge. He does this one ingredient at a time, offering an evolving narrative on the progress of the porridge ("this is coming along great; now if only I had some oats to thicken it.") The result is some excellent porridge that they share, while applauding the idea of axe porridge together. The shared fiction that soup can be made out of an axe-head results in the fact of real porridge for all. There are some deep insights into the psychology of wealth and the nature of progress in this fable, insights that are very relevant for our times. Two Narratives of Wealth and Community There is something quintessentially European about Stone Soup. There is individualist hustling, a fluid conception of the relationship between the rich and poor, and an energizing element of the paradoxical (represented by the stone or axe-head: is it necessary ingredient or not?). And speaking of Scrooge-types, it is also very unlike that other European fable of wealth and community, A Christmas Carol, which ironically (despite its overt Christian context) is not particularly European in spirit.  Both fables offer implicit commentaries on the nature of the relationship between wealth and community, but I've concluded that  A Christmas Carol is fundamentally wrong-headed. It is based on a characteristically religious incomprehension of wealth creation as a sort of de facto sinful black-box process, for which absolution must be sought, either during or after the act. The incomprehension leads to the conflation of wealth and corruption caused by wealth. A Christmas Carol suggests that the rich ought to unilaterally share out of a sense of compassion, empathy, charity, moral duty and yes, guilt. In other words, it limits itself to challenging just the moral authority of the rich. The poor for their part, are forced to accept the demeaning status of recipients of charity. Stone Soup on the other hand, challenges both the moral and intellectual authority of the rich, and is ultimately a more satisfying tale because of it. On the second front, intellectual authority, the fable illustrates that the rich do not necessarily understand wealth any better than others, any more than the landed understand geology better than the landless. They simply have more of it. The study and possession of wealth are two entirely different, and mostly unrelated, things. In the fable, the soldier actually demonstrates a better grasp of the psychology of wealth than the old woman. On the first front, moral authority, there is no presumption that the person holding the money has a right to determine what to do with it. She merely has the right to engage in a battle of wits with others who have the right to try and part her from it.  So the fable turns the proverb "a fool and his money are soon parted" into a basic set of rules of engagement:

1. Your rights to your wealth,  do not extend beyond your understanding of it.
2. You are fair game for hustlers who understand your wealth better than you do.
3. The role of the state is to limit the violence with which you can be hustled.
4. If you are poor, you have the right to hustle the rich within certain limits.

What I like particularly about the story is that it offers a moral framework for the movement of wealth that does not depend on redistributive, trickle-down or revolutionary logic. It does not require the rich to feel generous or guilty. It does not require the poor to feel ashamed or grateful. It does not require the desperate to feel angry. It merely requires that everybody think about their transactions. It also legitimizes slightly evil behaviors like deception and certain kinds of lying. The problem with those big ideological frameworks is not that they are immoral but that they are static and dead. I prefer a living, continuously negotiated, slightly evil economic order over a dead one, no matter how noble in conception. Living versus Dead Economics Redistributive, trickle-down and revolutionary moralities of money all share a common feature: the idea that relationships between the rich and the poor need to be normalized in a way that hands over control of big chunks of the economy indefinitely to one side or the other (the poor, the rich and the outlaw classes respectively). This sort of economy is always a dead economy, no matter whom it favors, and whose behavioral biases are activated. Another way to understand this is in terms of waterfall as opposed to agile financial logic. An institution is simply an upfront lump-sum payment of estimated transaction costs for a class of transactions expected to extend indefinitely into the future. When you negotiate a paycheck with an institution, you're done until you leave the job or try a re-negotiation. What's more, even these negotiations are informed by social proof and mimicry rather than an actual examination of the transaction. It's a rigged game. A social order is a set of institutions, each defined by boundaries at which  negotiations occur. These negotiations are always ritualized to a degree, favor one or the other side systematically, and apply to an indeterminate amount of wealth flows. Each of these models impoverishes the economy by draining agile intelligence from individual transactions in the interests of reducing transaction costs. Individual interactions between rich and poor (one dollar or other resource unit at a time, two people at a time) are replaced by a social order with fixed relationships between arbitrarily delineated classes. The vast majority of transactions become partially or completely ritualized. Between low-end haggling with street vendors and high-stakes battles over public billions in legislatures, most of economics is reduced to ritual. It's not the economy, stupid. It's the stupid economy. The dead economy. An economy created by the waterfall logic of class warfare. Taken to an extreme, the majority of the population develops an aversion to haggling and negotiation; a distaste for actually looking at and assessing the subjective value of whatever is on the table. Instead, we choose fixed-price shopping over bargain-hunting (or at best, play gamified and rigged coupon sports), social proof ("am I making more than my brother-in-law?") over valuation, and develop social taboos around the open discussion of money. And we criminalize even healthy patterns of hustling. Revealingly, while the salaried rarely discuss their paychecks, free agents often swap stories about hourly rates and the value of projects won or lost. When income becomes volatile and intelligent, it becomes decoupled from status and sheds its taboos. Barefoot Economics  I am a recent convert to the idea of barefoot running, based on the theory that most modern shoes are orthotic casts that deaden feet. You don't feel the ground; your muscles and nerves atrophy. I don't run barefoot, but I do use so-called minimalist shoes: lightweight shoes with thin soles, no heels and no arch support. At best, they offer some protection against sharp pebbles and such. You have to be aware of where you step, your foot muscles have to actually work with the information flowing in with every step. Minimalist shoes offer a useful design pattern for organization design. To the extent possible, institutions should be designed to be economically barefooted. This means, retaining as much information flow as possible around each individual transaction (or foot fall). You'll pay more in overheads in the short time, but you'll remain more economically alive and survive longer. Today's institutions are like running shoes from ten years ago. Heavily padded and cushioned, with arch supports, thick heels and sold with convoluted reasoning around ideas like "pronation" and "supination" that don't actually apply in the vast majority of cases (those are real enough conditions, but are probably vastly over-diagnosed and over-treated). We do need institutions though. Most of the economy cannot run barefoot. What might be good heuristics for the design of minimalist economic shoes? Normalized and ritualized transactions represent economies of scale and scope, and are captured in an institutional order.  The general logic of the institution stands in for the specific logic of every individual transaction. The creation of an institution is essentially an economic intervention, to correct a structural problem (just like an arch support is a structural intervention to correct extreme pronation) in a class of transactions, and efficiently deal with "dumb money" (wealth that truly does not contain any information). Within limits, such interventions are justified, to correct gross structural problems. Such interventions make sense when the economy is in extremely strange regimes that makes transaction costs skyrocket (think about buying groceries in a country with daily triple digit inflation for instance). But the function of any major structural adjustment, (such as the New Deal, Reagonomics or the French Revolution), whatever the underlying ideological motivation, is not (or should not be) to permanently get rid of the need for all thinking around individual transactions. Rather, structural adjustments need to go just far enough to make transactions computationally tractable in proportion to the value being traded, and then stop. If I buy a $3 coffee, I should not spend more than say $0.30 worth of my time figuring out the logic of the transaction and whether it is a good deal for me. If it takes me $10 worth of effort to figure out whether the $3 coffee is worth it, either I am so rich that it doesn't matter, or something is seriously wrong. The advantage in a transaction should not be structurally assigned to a member of one class by default, but situationally awarded to whoever is willing to bear higher transactional costs. This is generally the poorer party, thanks to the natural logic of marginal utility (which has some subtleties when applied to the wealthy, however, as discussed in this excellent post on the Interfluidity blog). Social norms must allow for such transactions to play out. When the poor are not allowed to hustle, the economy starts to die. The fable of stone soup is a fable of barefoot hustler economics. Imagine a much more ritualized economy, where the soldier meekly accepts the assertion of the old woman that she has no food to spare as morally and economically authoritative, simply because she is rich. He walks away and starves. He doesn't think he has a right to try and outwit the old woman. That means the end of innovation (which, in case you didn't get it, is what stone soup symbolizes in our re-interpreted fable here). Even worse is an economy where the poor cannot even come into contact with the rich. Those are some thick-soled economic shoes indeed. Fortunately our hero in the fable is a hustler in a hustler-friendly world. Every conversational move is pregnant with transactional intelligence. He wins because literally and metaphorically, he is hungrier. He is willing to pay a higher transaction cost for each resource unit than the old woman. And she pays for her lazy thinking by letting him prevail. The incentives for the old woman are another story: why does she not simply walk away? Why is she vulnerable to having her curiosity hooked by the idea of stone soup? That's the story of the social threat old money perceives from frontiers and the potential for new money and the eternal new-money/old-money yin-yang. I'll save that tale for another day, but the Interfluidity blog post I linked to above covers the first half of the argument.