Lenz’s Law Of Capitalism

allen farrington
4 min readFeb 28, 2021

or, how to check your fiat privilege

Lenz’s Law states that a current induced by a changing magnetic field flows in the direction such that the magnetic field created by the current opposes the change in the flux of the magnetic field that induced it. One could dive into all kinds of fun electrodynamics to explore its importance; that it explains the negative sign in Faraday’s Law, for example. But we needn’t do so here. I intend only to use it as a metaphor, as I think we can just as well observe of capitalism that it tends to generate a social force in opposition to itself.

There is a great story about Boris Yeltsin visiting the Johnson Space Centre in Houston and taking a quick trip to a suburban supermarket — a Randall’s in Clear Lake. Stefanie Asin of the Houston Chronicle wrote that Yeltsin, “roamed the aisles of Randall’s nodding his head in amazement.” He couldn’t believe the selection, pondered that it was perhaps staged for him, and asked the store manager if he needed a special education. His biographer later wrote that, “on the plane ride to Yeltsin’s next destination, Miami, he was despondent. He couldn’t stop thinking about the plentiful food at the grocery store and what his countrymen had to subsist on in Russia.

We are used to explaining this apparent success of capitalist organization in terms of the profit motive attracting capital and enabling the coordination of widely distributed information through the efficient medium of price signals (to the extent central banking and financialization isn’t ruining this, of course).

Let us call this the “objective” explanation — this is mechanistically what is really happening, independent of any participant’s perspective. We can distinguish this from an equally valid but, I think, often overlooked “subjective” explanation: what are the individual perspectives? It may be perfectly objective to describe people as “acting on distributed information” and “affecting price signals by revealing their preferences,” but I don’t think anybody thinks of themselves as doing that — which ought to matter because what they think of themselves as doing is why they do it in the first place!

As Hayek masterfully outlined in, The Use Of Knowledge In Society, the only sensible way markets can be called “efficient” is with respect to information. The mechanism of profit, capital, coordination, and so on, is lubricated precisely by participants’ ignorance of its workings. The subjective hallmark of capitalistic success is that consumers don’t have the slightest clue how the things they consume ended up in that state. In fact, the less idea they have, the better. The regular Houstonians’ indifference to the phenomenon of the suburban supermarket is arguably just as interesting as Yeltsin’s amazement, if not more so, because poverty and deprivation is the default state of human existence.

The product that is better marketed, and whose supply chain is better concealed, conveys the efficiently minimal information and creates the optimal subjective experience: this solves your problem. You want it. Any more information conveyed is superfluous and hence inefficient. Really going gung-ho with capitalism allows complexity to develop well beyond what any individual human could articulate, plan, or comprehend, with the gains flowing to whoever hides this the best. It all starts to seem like magic.

And hence we start to forget, or even reject, the processes that allow it to happen in the first place. We no longer realize why certain customs or institutions are important. We fall much more easily for zero-sum thinking because we no longer subjectively experience wealth being created; we see wealth being moved and we see problems being solved. Well then, that must be how to solve problems! By moving wealth! Bernie can go on TV and say that, we don’t need 23 different kinds of sneakers, and nobody can quite articulate why we do.

And finance? Fuhgeddaboudit. Good luck explaining to somebody who wants fewer sneaker choices why, ACKSHUALLY, trading the volatility of derivatives on the convertible debt of multinational reinsurers is as fine a way to make a living as any:

This is Lenz’s law. Capitalism generates a social force in opposition to itself. Because, naturally, after long enough having zero clue how wealth is created, being shielded from the very concepts of “trade-offs” and “consequences,” and treating superabundance as the default, the pampered rabble will start to poke holes in the endless-stuff-machine because they don’t know any better and because they want even more stuff. They may even graduate to vanity mantras along the lines of, energy consumption itself is bad, that can only possibly be entertained by those consuming the most energy of any human who has ever lived.

The cruel joke is that any attempt to break this cycle will fail by the system’s own logic. Any merchant who goes out her way to show you wealth creation will have not only higher costs but, more importantly, a higher superfluous informational load for the consumer to have to deal with.

I don’t really have a conclusion to this bloglet. I have no idea how this all ends, it just strikes me as an amusing yet important observation. A kind of qualitative law of socioeconomic equilibrium. Perhaps it can be overcome with sufficient discipline and awareness? Perhaps time preference helps push back? I don’t know, but we should keep these kinds of things in mind when designing the educational curriculum for the citadels.

At the very least, we should reconsider child labor laws. Only for the fiat privileged, mind you. Send the yuppielings down the mines and let the poor kids take their spots in private schools. It’s all privilege laundering anyway. In terms of actual “education”, my idea is clearly better for everybody.

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allen farrington

I’m an investor. I think about things. I write some of it down.