Asymmetry Is the Root of All Value

It’s not hard these days to find vignettes like this one (starting at minute 1:45) that describe a microeconomic chain of events that give you a glimpse into the recessionary dynamic.  I think it’s a good starting point to explain my personal theory of why asymmetry is the root of all value (economic and otherwise).

The lime green coat vignette shows how value gets destroyed, so you have to invert the chain of reasoning, and recognize that when you do so, there is value being created all along the chain.  But what is really going on at each link in the chain is a simple monetary transaction.  And all monetary transactions — whether they involve cash directly, or credit, equity, barter, etc — are a form of cooperation.  In particular, they happen due to the so-called Law of Comparative Advantage (LoCA). Simply put, this “law” is the inverse of the Prisoner’s Dilemma (PD).*  In PD situations, two agents are worse off by following their self interest and not cooperating.  In LoCA situations it’s just the opposite: its in the agents’ self interest to cooperate, and by doing so they end up better off than by going it alone.

If you think about it, no monetary transactions ever take place unless it’s a LoCA situation.  You walk around all day long not making purchases because you are better off having the money (and time) it would cost you.  But every once in a while the situation is right (or you seek out the situation) and you’d prefer a cheeseburger to the $0.99 cents in your pocket.  The burger joint prefers the money to the burger, so it all works out great and everyone is better off for having done the transaction.

Now, what is special about LoCA situations such that the magic of cooperation can make everyone better off?  It’s simple: asymmetry.  You and the burger joint have asymmetries not only in your production capacity — the burger joint can make burgers much cheaper and faster than you can — but also in your consumption profiles: the burger joint doesn’t consume any burgers, plus you each have different utility curves for money.  Compare this to a person you meet outside the burger joint who is identical to you in terms of burger making ability, hunger, cash in pocket and love of money.  You two have no reason to cooperate on getting burgers into your bellies, so you both just end up going inside and ordering for yourselves and paying with your own hard-earned cash.

You might be thinking to yourself at this point that PD’s are also asymmetric situations and they decidedly don’t lead to cooperation and value creation, so how can I claim that value is derived from asymmetry?  The answer is that asymmetry leads to change in value, and the direction of change is determined by the specifics of that asymmetry; LoCA situations lead to creation of value and PD situations lead to destruction of value.**  Not all asymmetrical situations fall into either the LoCA or PD category (at least I don’t think so), but these are the ones that are most instructive .

As for non-economic value, if you don’t believe the above argument you can stop reading here because my argument is more philosophical and even more by analogy.  But assuming you are with me so far, check out  Nobel laureate P.W.Anderson’s famous Science article More is different in which symmetry breaking is the key to his argument.  Also, check out Parrondo’s Paradox which can be used to describe all sorts of value creation from different realms, and “[i]n its most general form… can occur where there is a nonlinear interaction of random behavior with an asymmetry.”

* which itself generalizes to the well-known economic problem of the Tragedy of the Commons.

** At least for the “prisoners.”  One can see that the “police” gain value, and it’s an open question in my mind whether there is conservation of total value if you look at the system as a whole.  If anyone has a proof of such a concept, or can show that total value goes down, would love to see it.

  • I shouldn’t wade into this, but…

    The way Econ 101 teaches this idea is the following: Gains from trade exist any time two individuals have different marginal rates of substitution among two goods.

    What’s does “gains from trade” mean? It means the same as “value” in your post. Gains from trade exist whenever two parties can trade and both are made better off. Why don’t we call it “value”? Because “gains from trade” don’t imply that everyone is better off — only that the two people trading are better off. There are plenty of examples of gains from trade that reduce social surplus. If I buy gasoline to put in my car, both me and the gas station are perfectly happy with that. But then the emissions smog up the air and reduce everyone’s life expectancy. Society as a whole might be better off if this trade wasn’t realized. There were gains from trade, but plausibly not “value”.

    What’s with “marginal rate of substitution”? My marginal rate of substitution for, say, oranges with apples is how many apples I’d need to be given in order to give up an orange. Suppose I’m wiling to give an orange as long as I get two more apples back. Conversely (ignoring endowment effects), I’d be willing to give up two apples in exchange for an orange.

    If your marginal rate of substitution is different from mine, then gains from trade exist. If your MRS for oranges with apples is 1, then you can give me one orange and I’ll give you 1.5 apples, and we’re both better off. If your MRS for oranges with apples is 4, then I can give you an orange and you give me three apples, and again we’re both better off. In this sense, you’re right that asymmetry creates gains from trade. But it’s a very specific sort of asymmetry.

    Generally speaking, marginal rates of substitution are decreasing. This means that as I get more oranges, I become less willing to give up apples to get more oranges. If you gave me a crate of oranges, my MRS for oranges with apples might fall to one. Notice that this means generally that as we trade, our MRS’s will move toward each other.

    In an economist’s ideal world, everyone’s marginal rate of substitution for oranges with apples would be exactly the same — this means all the potential gains from trade have been realized.

    Markets have the nice feature that if a trade happens, we know there were gains from trade. But they have two other not-so-nice features: (1) There’s no guarantee that trade generates social surplus when there are negative externalities. (2) There’s no guarantee that markets will realize all the potential gains from trade. Case (2) can happen if there is market power, asymmetric information, or positive externalities.

    Points (1) and (2) form primary the intellectual justification (in the minds of most economists) for most all government intervention in markets. Different markets suffer from these problems in different degrees, which is why some market seem to work so well without any government involvement, while others don’t.

    Yes, now I’m the pinko.

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  • Thanks, Schaef, for the econ tutorial, quite lucid!

    Notwithstanding negative externalities and inefficiencies, do you agree with the premise that the root of all economic value — aside from harvesting natural resources — is in realizing “gains from trade”?

    Or are there other forms of value creation?