The Market and The Equation


I am doing a daily newsletter experiment where each newsletter is a rewrite of a past newsletter.

I use the term rewrite loosely….

Yesterday the rewrite was about economics and I started writing about a distinction that bubbled up in me between the equation and the market.

The equation like F=MA (force = mass * acceleration) is about equality. It is about making sure that the variables on both sides of the equation are equal. This is also about equivalence or mapping. mass * acceleration is equivalent to Force. We can replace one for the other.

The market is about freedom. If we look at the market, like for instance the stock market, we can come up with all sorts of reasons for why a certain stock is valued at a certain price. Perhaps that is the discounted cashflow, perhaps it is in anticipation of growth, perhaps it has some sort of mystique or fetish quality. But at the end of the day a stock price only has value when someone exchanges it at that price. That is why it has that value. There are no equivalences. There is no one to one mapping, there are only a web of interpretations and explanations. What there is is freedom. Actors in the market have the freedom to try buy or sell an item at any price they want, provided they find a willing participant. No one is forcing an actor to buy or sell at a price, the limiting agent is access to capital that powers the buying or selling.

How are Markets and Equations even related – epistemology. They are both ways to know things.

Well if I want to know if I throw a ball where it will land I can use the appropriate equation. If I want to know how much my antique cabinet is worth I can try and sell it in the market. We can broaden the market and call it the arena. An arena is any closed system where agents interact according to rules. The rules of the market are that when a buyer and seller agree on a price ownership changes hands – an exchange happens. If we have an arena like a football game or even a theatrical performance there are other sets of rules that solve other epistemological questions.

Equations we can also think of as goals or targets. My goal may be to act in a certain why that certain qualities are equivalent and I can optimize my actions so that I reduce the error term on my equation.