Alien Economies

What are markets?

I pose this question for a couple reasons. First, it’s probably the single most misunderstood question in economics; not because it’s conceptually difficult, but rather because the term has been used to mean multiple, semi-overlapping and at times contradictory concepts. Wikipedia says:

A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. […] It can be said that a market is the process in which the prices of goods and services are established.

and

A market economy is an economy in which decisions regarding investment, production and distribution are based on supply and demand and the prices of goods and services are determined in a free price system.

This is good as far as it goes. Manuel DeLanda provides a useful qualification that cuts out some of the worst misuses of the term, by adding an opposing term antimarket to address the cases where autonomous actions are suppressed in favour of management interactions. Hayek stresses the challenges with the antimarket approach in his Nobel prize lecture on the pretence of knowledge. And David Graeber’s recent book, Debt: The First 5,000 Years illuminates the everyday communismsthat necessarily undergird our economies, that humanize them.

Are the constituitive parties of a market necessarily human?

Interestingly, the humanity of the parties in a market is typically left implied; they may be villagers, or farmers, or they may be social collective entities such as collectives, armies, corporations or governments. But there’s nothing essentially homo sapiens about markets, as Laurie Santos so cleverly demonstrates with our genetic neighbors.

What would a truly alien market look like? Not merely a highly abstracted, financialized market such that speculations on commodities result in widespread hunger and starvation risks, but something truly divorced from human concerns, engaging in transactions for its own purposes and towards its own ends.

Many would argue against algorithms as having their own ends; after all, they are deterministic, mathematical, and crafted by human minds. But algorithms, working on shifting data sets alongside competing algorithms operating at near-light speeds in highly complex, dynamical systems, can hardly be reduced to human intents, even if their broad purviews have been explicitly coded. Brian Kernighan famously said:

Debugging is twice as hard as writing the code in the first place. Therefore, if you write the code as cleverly as possible, you are, by definition, not smart enough to debug it.

As a result, the algorithms making up the “secret sauce” of many financial institutions end up exhibiting uncanny and unnerving characteristics, much like Kevin Slavin’s amusing anecdote of a Roomba veering off at a 45° in the middle of an empty room. We saw a hint of this on May 6, 2010, when the Dow Jones Industrial Average dropped thousands of points, losing 9% of the market, only to recover minutes later. The subsequent SEC/CFTC report found that

“a large fundamental trader (a mutual fund complex) initiated a sell program to sell a total of 75,000 E-Mini S&P 500 contracts (valued at approximately $4.1 billion) as a hedge to an existing equity position.”

Wikipedia then describes:

As the large seller’s trades were executed in the futures market, buyers included high-frequency trading firms - trading firms that specialize in high-speed trading and rarely hold on to any given position for very long - and within minutes these high-frequency trading firms also started aggressively selling the long futures positions they first accumulated mainly from the mutual fund.

A subsequent paper stressed that, while not strictly causal, the high-frequency traders exacerbated the problems:

under normal market conditions or during periods of high volatility, High Frequency Traders are not willing to accumulate large positions or absorb large losses. Moreover, their contribution to higher trading volumes may be mistaken for liquidity by Fundamental Traders. Finally, when rebalancing their positions, High Frequency Traders may compete for liquidity and amplify price volatility. Consequently, we believe, that irrespective of technology, markets can become fragile when imbalances arise as a result of large traders seeking to buy or sell quantities larger than intermediaries are willing to temporarily hold, and simultaneously long-term suppliers of liquidity are not forthcoming even if significant price concessions are offered.

What brought all these thoughts to the surface this week, however, was a simple story related by an author watching the price of his book swing on Amazon.com:

Last week I noticed a marketplace bot offering to sell [my children’s book] for $55.63. “Silly bots”, I thought to myself, “must be a bug”. After all, it’s print-on-demand, so where would you get a new copy to sell? Then it occured to me that all they have to do is buy a copy from Amazon, if anyone is ever foolish enough to buy from them, and reap a profit. Lazy evaluation, made flesh. Clever bots! Then another bot piled on, and then one based in the UK. They started competing with each other on price. Pretty soon they were offering my book below the retail price, and trying to make up the difference on “shipping and handling”. I was getting a bit worried. The punchline is that Amazon itself is a bot that does price-matching. Soon after the marketplace bot’s race to the bottom, it decided to put my book on sale! 28% off. […] It’s possible that the optimal price of Lauren Ipsum is, in fact, ten dollars and seventy-six cents and I should just relax and trust the tattooed hipster who wrote Amazon’s pricing algorithm. After all, I no longer have a choice. The price is now determined by the complex interaction of several independent computer programs, most of which don’t actually have a copy to sell.

The parties in our economies are now largely inhuman; guided, certainly, by human intents but realizing those intents through intuitions far from our own. Those setting their hopes upon a Friendly AI are perhaps a little late; the alien economy has coalesced.