The World According to Jevons
This is the best of times and the worst of times. We have an insane global political class intent on zero-sum games to destroy living standards. Then we have innovation.
This is a very short stack to re-orient my mind to a new world of investment possibility.
Lately, I got overly pre-occupied with the geopolitical descent into chaos currently being engineered by our blessed global political class.
Rather than talk to one another in a mature dialogue of difference, a.k.a. diplomacy, they have chosen to up the ante on every single point of friction before us.
This is now a global disease.
It risks plunging all of us into a festering world of mutual hatred and antagonism.
I can be cranky too, but I was born an optimist.
That is why I gave up an early career focus on the bond market to focus on equities.
The world of equities is positive sum and founded in human hope and dreams.
Since it involves teamwork, collaboration, and an alignment of interests between all of the many stakeholders of progress it is necessarily a human negotiation.
There can be fairness but there can also be exploitation.
I know that and am not blind to the reasons why capitalism is under stress.
However, I am also an optimist and a believer that good compromises will beat the bad forces of rule by decree. I am also a pluralist. I think there is more than one way to run a country, and it is up to the citizens of that country to decide what that is.
With all of this in mind, I am going backwards in time to move forward.
There are many thinkers throughout history, from all corners of the globe, who have faced tumultuous change and exercised their minds to find solutions.
One of these who struck a personal chord with me, and my scientific background, was the English economist William Stanley Jevons, a Victorian era polymath.
He is generally regarded as one of the three founders of the Marginal Revolution. This is the economic theory of supply and demand, and the so-called utility theory. In the marginal revolution, it was held that maximizing marginal utility was optimal.
In this scheme of things, all aspects of economic life are ignored aside from gain.
Utility represents the gains on offer from reorganizing economic activity.
Starting around the year 2000, when I had been out of the academic physics world for five years or so, but still mentally engaged with mathematics, I began learning the foundations of neoclassical economics. I did so out of curiosity.
However, once I got into such study, it dawned on me that there were some serious problems with the foundations of neoclassical economics.
I am sure you will agree. You could make a list, a long list!
However, being a physicist by nature, and therefore prone to put the Universe in a jar and consider it all simple, my mind turned to one particularly obvious flaw.
In the standard theory of exchange for goods and services, the utility is considered to be uncertain, and this is maximized against known and fixed costs.
Costs are treated in the time-honored tradition of economics, they are certain.
However, real costs are uncertain.
If you adopt a polluting energy source, like fossil fuels, then there are unknown and uncertain future costs associated with the downside of that pollution.
It is not enough to consider the market price of fuel to impound all costs.
There is a natural twin to utility theory - the pleasure of uncertain gains.
The result is disutility theory - the torture of uncertain pains.
I did not, at first, know the name of this missing component to economics.
However, when working on complex problems of algorithmic trading, I found a natural role for uncertain costs of trade in modelling portfolio trades.
Intrigued by the general absence of this from the general economic discussion I raised it with the head of quantitative research at a US firm I then worked at.
He was well-read enough to know the name of the concept, and who had first introduced the idea. It was called disutility, and the inventor was Jevons.
Disutility theory is the natural but ignored partner to utility theory.
The desire of decision makers to treat costs as known is a disease.
The law of unintended consequences is surfacing everywhere at once.
Definitely, it is a good idea to deprive Russia of war revenues by stopping the export of Russian gas to Germany. The unintended consequence was a loss of economic competitiveness in Germany, political instability, and the rise of extremism.
This story of unintended consequence is repeating globally.
Politicians may claim that the unintended consequences were unforeseeable.
This is a bald-faced lie.
They were only unforeseen because you chose not to see them.
The result is rotten global leadership, which simply gets worse with each passing day.
There ends the story of how I came to name my investment firm Jevons Global.
I will have more to say on the subject of disutility maximization and the role it is now playing in undermining global living standards.
The idea of developing policies to harm your adversary is now global.
This is negative sum thinking.
It is very destructive.
Rest assured, I am in restored health both physical and mental.
I am now resolved to complete the work W.S. Jevons started 150 years ago.
We are in desperate need of better ideas to guide our political classes.
The present crop will destroy everything if we let them.
There is no reason to, and so it is time for some better ideas in economics.
Along the way, we will uncover some great investments for you.
The Age of Artificial Intelligence is moving into the applications build.
Infrastructure, the picks and shovels matter, but now is the time to be focusing effort on discovering who is using it well. One industry that is sure to boom is content.
The huge disutility challenge ahead of us is rewarding creators.
This will likely change the studio model of history.
I am researching this thematic now and will share ideas in the new year.
In the meantime, I am extending the US analysis to a full model portfolio.
Expect that to arrive in your inbox next week.
Apologies for the recent interruption to the flow of articles, but I had to get healthy again. We are well on that road now, and I have also recovered my optimism.
There is too much promise in the human race to leave our fate to the idiots.
Imagine a better world. Make it happen.
Good luck and season’s greetings to all.