Chapter 2 – Market mechanisms and human nature
2.1 Free market versus intentional action
An inherent, essential and natural part of the economy has almost always been the free market, in which goods are exchanged through voluntary transactions between interested parties.
There is also no doubt that this essentially simple algorithm based on the law of supply and demand has played a great role in the history of mankind and positively influenced the development of civilisation. The free market brings with it valuable values such as freedom, creativity, stimulation for entrepreneurship and many motivational factors. However, it is above all what people make it.
Like most natural mechanisms, it is burdened with a high degree of inertia. Its reactivity, especially in an environment of human behaviourism, based on very different laws to this simple algorithm, paradoxically makes its natural origin, no longer an advantage.
In order to realise the gravity of the implications of the elementary difference separating man from the rest of reality, even though he is an integral part of it, it suffices to observe man comparatively with the rest of the natural world and the phenomena or entire physical systems occurring in nature with particular reference to their fundamental division into behaviour.
Human intentional action is the key to understanding the whole issue, as it is the factor that can overturn all the assumptions and theoretical models of various mechanisms, including the free market.
Intentionality, which is characterised by a high degree of unpredictability and resistance to statistics, apart from human behaviour, is essentially a phenomenon that does not occur in nature. Ignoring this phenomenon of nature, if only from a mathematical point of view, necessarily has to be fraught with consequences and often becomes a prime cause of subsequent misunderstandings. It can even be the source of a domino effect of many cognitive errors, among others, in fields dealing with economics.
The issues described here should not be combined and confused with the concept of entropy, which in nature balances ordered states. Economic processes and human interactions with them are local phenomena, characterised by very unrepresentative properties and relations with respect to a general account of the law of entropy, as well as the associated second law of thermodynamics.
Human behaviour based on intentional action is basically the opposite of the behaviour of other systems, which are characterised by spontaneity and lack of order, or the mere randomness of events. Furthermore, there are many downplayed but fundamental elements that distinguish human behaviour from the animal world, although certain similarities tempt us to make comparisons with it.
Somewhat simplistically, the animal world functions through instincts, which can be compared to more or less complex but reasonably predictable algorithms. Human activity, on the other hand, is a conglomeration of many complex elements: logical thinking, highly structured actions, abstract thinking, complex emotions and intentional actions, characterised in their general trend by a high coefficient of unpredictability.
These are factors that are so radically different from the rest of organisms that, with their characteristics and consequences, they go far beyond strictly biological criteria, making their mark far more strongly than one might think, right down to the level of physical systems.
This is why humans evolve so quickly in their behaviour, unlike animals, in all spheres of life. The domain of the economy is no exception. Unlike the animal world, it is not based solely on natural law, but also operates in an environment of legislated law, which is unprecedented in the natural world and the behaviour of herd species.
This is important information, and tells us a lot about human nature, which has emancipated itself from the rest of nature to such an extent that it has produced something like its own operating system. This does not apply only to law, but to all human activity. Human nature turned out to be so complex that natural mechanisms were no longer sufficient and man was forced to produce a new framework for his species, encompassing his functioning in reality. Moreover, other natural mechanisms, including the free market, were able to function better precisely because of legislated law.
Since in the domain of law, the natural must have recognised the primacy of state law, by analogy, it is reasonable to argue that in the field of economic activity it must be similar. It turned out that the human environment, characterised by intentional behaviour, the reactive mechanism of the law of supply and demand can become a negative tool in the hands of a conscious being. Therefore, it must operate on the basis of legislated law, and therefore a mechanism devoid of reactive characteristics.
Consequently, the obvious conclusion should be that man must also strive to develop the economic mechanisms themselves with a degree of complexity in their structure and adequate standards to accommodate the high degree of complexity of the environment they are to serve.
In an increasingly complex yet globalised world, it is becoming clear that the economy is a system of interconnected vessels, interacting ever more strongly with each other, especially as it serves the closed environment that is our planet. It could be argued that it is beginning to interact with itself, as it naturally exhausts its diversity of ownership of individual economic players and new areas of market expansion. It also loses competitiveness.
In addition to this, certain self-destructive processes can be observed, geared solely towards commercial objectives that have nothing to do with meeting social needs. Pressure is being exerted on the political class to delegitimise various aspects of our lives under the pretext of concern for people's health or environmental protection just to create space for new investments. Although pathological, this is at the same time a natural process of many actors following the principle of acting along the line of least resistance and economic cost. To some extent, in its structure, it resembles autoimmune diseases.
This phenomenon is further reinforced by the natural process, which has been going on for many decades and even generations, of the expansion of capital and the emergence of ever larger entities, up to the size of today's corporate giants. It is not difficult to see that what was once intended to serve competitiveness now paradoxically contributes to trends that monopolise the market. Another paradox is that what, thanks to the free market, was supposed to regulate itself automatically, had to be corrected with the help of, antitrust institutions, i.e. by state interventionism.
In spite of antitrust action, the market manifests a natural tendency towards the formation of large players and, in some industries, even cartels. With the help of legislation, more and more antitrust prohibitions can be created, but human creativity will be able to circumvent them in one way or another. These phenomena, in the human environment, are inevitable, because man, as a creature acting intentionally and consciously, and therefore acting actively, will always achieve an advantage over the simple and reactive algorithm of the law of supply and demand. These processes settle not so much at the economic, social or biological level, but at a more elementary level – at the level of physical layouts/systems that can be described in the language of mathematics.
The graphic below illustrates the difference between events occurring at random and intentional, human-specific action.
Graphic 3 – Comparison of two layouts
Graphic 3 for preview and download as PNG, SVG and TXT file
In a very similar way, intentional human action shapes processes related to the financial side of the economy and the ubiquitous paradigm of financial profit, mainly based on a quick rate of return.
Centuries ago, when the role of science and its impact on economic and civilisational development was severely limited, it was not as important as it is today. In modern times, the role of science in the economy began to grow rapidly. Over time, its impact on financial returns has clearly become significant.
2.2 The dissonance between classical economics and progress
As in many systems in which the goals of different elements of a larger whole sometimes cease to coincide, it has become apparent that, paradoxically, the development of science can stand in the way of the economy's central imperative of financial profit. Moreover, it can threaten entire industries. Thus, a turning point was reached where the economy began to live its own life. It gradually ceased to play its role as the main engine of civilisation, seeing science as a threatening competitor.
Since then, it is science that has become synonymous with development and a direct tool for obtaining human well-being in the broadest sense and the main means of achieving overall absolute benefits on a macro scale, i.e. so universal as to be relevant to the interests of every individual – new technologies, medicines, vaccines, etc. Economics, on the other hand, has come to be primarily a source of providing relative benefits, i.e. mainly profits estimated in the relationship of a person or economic entity to other persons and entities – measured primarily by the criteria of financial gains.
Economic processes obviously continue to support the scientific ones, contributing to the overall development of civilisation, as long as they do not interfere with the former's main priority – financial profit. This is why a paradigm shift by replacing the economic imperative with the scientific one is so crucial.
Financial economics is a good example of how an economy left largely to spontaneous mechanisms starts to split internally into different factions, further creating internal structural contradictions and damaging processes. Not only socially, but also economically. We often hear criticism of financial economics, which has emancipated itself from economic processes to such an extent that it has become a new branch of the economy, even though it does not actually produce any goods itself. It gives the impression of being a cancer created by the organism on which it parasitizes.
However, along with the criticism, there is no in-depth reflection that this is in fact a natural process of the classical economic model, exploiting its inertial nature. The comments usually amount to criticism of the ethical attitudes of other people or the political class, with an uncritical attitude towards the very nature of the model. In part, this is probably a typical psychological regularity, characterised by people treating the status quo with sufficiently long tenure as a natural state. Mechanisms operating long enough in the human environment become naturally axiomatised, becoming immune not only to their contestation but even to in-depth analysis.
Similar processes form throughout an economy heavily based on inertial mechanism. The whole system begins to function autonomously, subject to spontaneous processes, not necessarily always beneficial to man. What was supposed to be a source of many solutions for man becomes his trap and begins to be unfettered freedom for the system itself and the pathological phenomena that often accompany it.
Generated, socially harmful phenomena in free market processes most often become a challenge for state governments. In order to eliminate or offset them, central authorities are forced to implement various regulations, which in turn conflict with free market principles. This creates a negative feedback loop from which there is no good way out.
Any compromises in this area tend to become only ad hoc half-measures. There is no good synergy between one element and the other – the free market and regulation – because they are incompatible processes. The first element is a spontaneous and chaotic process, while the nature of the second is characterised by a high degree of orderliness. Worst of all, however, is the fact that the incompatibility, and often the dissimilarity of the objectives of the two, does not merely manifest itself in a lack of cooperation, but in a mutual collision.
Solutions that focus on the systemic use of scientific potential are those that will make a major contribution to the successive levelling out of the described conflict. Over time, they can eliminate this disharmony, replacing these phenomena with their own processes with positive results for all. Scientific potential, by virtue of its universal nature, can combine creative and orderly elements.
The scientific element will make it possible to free oneself from the unstable nature of economic processes operating in a strongly inertial environment. It is not about permanent human control of all processes, but about the elementary agency of human activities related to development in the broadest sense, supported by stability, a rational degree of order and an increase in its efficiency.