Lesson 1

Rationality, Utility Maximization, and Money

Lesson 1

by Joseph Mark Haykov

Both mathematical economics and game theory posit as an axiom that human beings are “rational utility maximizers.” In game theory, a human being is mathematically modeled as a “player” in a game who, given the rules of that particular game, seeks to maximize their own payoff or winnings. In mathematical economics, “players” are modeled as representative agents that try to maximize their payoff as measured by “utility” or “overall happiness.”

Outside any theories about money, in reality, all money serves as a unit of account, a medium of exchange, and a store of value in all real-world economies, past and present, without exception. It is an evidence-based claim, independently verifiable for accuracy and corroborated by the US Federal Reserve, that in any real-world economy, money is inevitably used not only as a medium of exchange but also as a store of value and a unit of account in which prices are expressed in reality and in a theoretical equilibrium, such as the one described by the Arrow-Debreu framework.

Of course, wealth, as measured by money, cannot buy happiness, but it does impose a binding constraint on how much utility or benefit we can obtain from purchasing goods and services available for sale in a free market economy. In other words, money cannot make anyone happy, but a lack of money is guaranteed to make any individual relatively less happy than if they had twice as much money. Money, in its role as a store of value, measures purchasing power and therefore represents wealth. It is a universal law that optimizing happiness includes purchasing goods and services available for sale with money. Therefore, having less money means less purchasing power—a binding constraint on each individual’s quest to maximize their happiness.

Because money measures purchasing power, and purchasing power limits how much benefit, also referred to as subjective utility, any individual can obtain from engaging in voluntary, free-trade commerce, money inevitably acts as a binding constraint for anyone trying to maximize their overall well-being or happiness. Hence, ceteris paribus, less money, less happy—more money, more happy. This axiom defines rationality. Rationality, in this context, is understanding the concept that “money, being a generally accepted medium of exchange, determines our purchasing power, and purchasing power limits our ability to enjoy goods and services available for sale in a free market economy” is a true axiom. If you do not understand why this is universally true for all rational individuals, then your definition of rationality does not align with that posited as an axiom in mathematical economics.

In the context of mathematical economics, “utility maximization” refers to individual participants in the game of “economic life” trying to maximize their wealth, which is equivalent to purchasing power, as measured by money. This purchasing power can be represented by money or other assets, some income-producing, like real estate, and others non-income-producing, like art, gold, or land. However, regardless of what you use to store purchasing power or wealth, money measures it. Therefore, money, in the form of government bonds or cash, is often used to store wealth or purchasing power directly.

Now that we understand that “utility maximization” in mathematical economics theory, in reality, means “wealth maximization as measured by money,” we see that mathecon posits as an axiom that any rational individual will seek to make as much money as possible. The reason being that whatever it is that you want to do that makes you happy, money represents a binding constraint on your ability to do this—even if all you want to do is charity, help the poor, support the environment, or be a teacher. The more money you have, the more you will be able to accomplish as a teacher, environmentalist, or scientist, especially when it comes to funding basic research.

Now that we have established as an axiom that all rational individuals will seek to maximize their wealth, as measured by money, we can proceed to define precisely what the word “rational” means in reality, as it pertains to monetary wealth maximization in terms of mathematical economics theory.

Rationality in Reality

In mathematical economic theory and in reality, "rational" simply means that, given the rules of the game, each individual participant in the economy will seek to maximize their wealth under the existing rules—not as we wish them to be, not as we imagine them to be, but as they really are. That's what rational means: maximizing wealth under the rules of the game. Of course, in any game, both in theory and in reality, there are two ways to win: honestly or by cheating. From this axiom, it logically follows that rational individuals participating in unfettered trade (meaning voluntary, fully free trade, excluding involuntary exchanges like robbery) seek to maximize their own subjective utility or benefit. This rational, utility-maximizing behavior naturally extends to politicians who, like all other people, aim to maximize their own wealth—which provides future subjective utility—by engaging in rent-seeking activities in addition to performing their regular duties.

Consistent with this concept, wealth maximization, according to mathematical economic theory, can manifest itself in one of two ways: either as honest productivity improvements or by cheating, through rent-seeking.

The concept of rent-seeking we are about to dive into is key in public choice theory, developed by Gordon Tullock and James Buchanan Jr., the winner of the 1986 Nobel Prize in Economics for his contribution to this field. Rent-seeking, as originally defined by Gordon Tullock refers to seeking to obtain wealth without making a reciprocal contribution to productivity. Under this definition of rent-seeking, as per Gordon Tullock, successful rent seekers can be conceptualized as “economic parasites” who, akin to rodents or other vermin pilfering grain in a warehouse, are able to obtain wealth, as measured by money, which in turn allows them to consume goods and services produced by others without making a reciprocal contribution to productivity.

All rational schools of economic thought assert, as an evidence-based proposition, that the unearned extraction of wealth by unproductive "economic parasites" reduces efficiency. It is an established fact—independently verifiable for accuracy and evidence-based—that robbery, theft, and fraud are detrimental to economic growth. For example, the prevalence of total lawlessness in Haiti facilitates involuntary exchange, such as robbery, which violates the unfettered exchange condition posited as necessary for achieving efficiency by the first welfare theorem of mathematical economics, the cornerstone of the Arrow-Debreu general equilibrium model of the economy. As a result, Haiti’s per capita GDP is roughly five times lower than that of the neighboring Dominican Republic.

Unearned Wealth Extraction, Barring Crime

Unearned wealth extraction occurs daily through various forms of crime, including theft, robbery, extortion, and collecting ransom—whether involving people or a computer's hard drive. These crimes allow perpetrators to consume goods and services without contributing to their production, aligning with the definition of rent-seeking in public choice theory.

Public choice theory, as developed by Gordon Tullock and James Buchanan (1986 Nobel Prize), applies economic principles to political processes, analyzing how self-interested behavior influences decision-making in government. It explores how individuals in the public sector (politicians, bureaucrats) pursue their interests, sometimes leading to outcomes that do not maximize social welfare. Unearned wealth extraction occurs when these individuals use their positions to benefit themselves or specific groups at the expense of the general public.

Rent-seeking, according to public choice theory, involves efforts by individuals or firms to gain economic benefits through manipulation or exploitation of the political and economic environment rather than through productive economic activities. This includes lobbying for favorable regulations, subsidies, or tariffs that provide them with unearned wealth. Rent-seeking is inefficient because it diverts resources away from productive activities and creates economic inefficiencies, much like other forms of theft.

Asymmetric Information and Fraud

Another significant and related area of study in mathematical economics pertains to asymmetric information and fraud. The impact of asymmetric information on market transactions has been extensively studied by economists like George Akerlof. Akerlof, along with A. Michael Spence and Joseph E. Stiglitz, was awarded the Nobel Prize in Economics in 2001 for his work on markets with asymmetric information. In his famous 1970 paper, “The Market for ‘Lemons’,” Akerlof describes how outright fraud facilitated by asymmetric information results in unearned wealth extraction.

In reality, potential fraudulent unearned wealth extraction facilitated by asymmetric information, such as a used car dealer lying about the condition of a “lemon” car, double spending Bitcoins, or Bernie Madoff lying about his performance, is extremely costly to mitigate. For instance, Bitcoin mining consumes more energy annually than Argentina, and billions were lost to Madoff. This energy consumption highlights the significant costs associated with securing transactions and preventing fraud in the digital age.

Agency Costs

Agency costs, according to Jensen and Meckling’s most referenced paper in corporate finance, "Theory of the Firm," arise from conflicts of interest between principals (owners) and agents (managers or employees) in a company, owing to owners being asymmetrically informed about the quality of the agent’s labor. When agents act in their own self-interest rather than in the best interest of the principals, it can lead to unearned wealth extraction. Examples include excessive executive compensation, perks, or investment decisions that benefit managers at the expense of shareholders. This naturally also includes smaller-scale issues like employees pilfering office supplies. Agency costs can be mitigated through proper incentives and monitoring mechanisms to align the interests of agents with those of the principals.

The Role of Mathematical Economics

Mathematical economics provides frameworks to understand how unearned wealth extraction occurs through the behavior of individuals in political and economic systems. Public choice theory highlights the self-interested actions of public officials. Rent-seeking underscores the inefficiencies created by gaining wealth through non-productive means, and agency costs illustrate the conflicts within organizations that lead to misaligned interests and inefficient outcomes. Additionally, there is always the risk of fraud facilitated by asymmetric information, such as potential double spending of Bitcoins, CEOs cooking books (e.g., Enron), outright lying and fraud (e.g., Theranos), and Ponzi schemes (e.g., Madoff). Not to mention outright bribery (e.g., Menendez). Together, these theories describe the precise, specific mechanisms of unearned wealth extraction in various real-world unfettered exchange (free-trade) contexts.

By understanding these specific mechanisms, policymakers and businesses can develop strategies to mitigate unearned wealth extraction, enhance economic efficiency, and promote fairer economic systems. Implementing robust regulatory frameworks, improving transparency, and aligning incentives can help reduce the prevalence of rent-seeking and fraud, thereby fostering a more productive and equitable economic environment.

How Do We Make Money in Reality?

In reality, according to mathematical economics theory, the only way to make money in any unfettered exchange is by being better informed. By unfettered exchange, we are specifically referring to free market trade, which in both theory and reality excludes involuntary transactions such as theft, robbery, extortion, blackmail, or asset expropriation by unfriendly governments or government-related entities, like FSB colonels in Russia, and so on.

To earn real-world economic profits in unfettered trade, as exemplified by trading liquid, large-cap US equities, one must be better informed about the underlying asset than the trading counterpart. This is precisely why firms like Citadel buy client order flow from brokers like Robinhood—to purchase "dumb" order flow to trade against. But let's not get ahead of ourselves.

Asymmetric information is key in being able to profit from investing in anything, and there are two types of asymmetric information: one can be better informed, or the counterpart in trade can be misinformed—and we explore exactly how this occurs. Both enable you to make money in unfettered exchange, as we are about to explain using mathematical economics.

The advantage that mathematical economics has over all other decision-making tools is that it directly models rationality as a formal system, and it models cognitive biases, such as theory-induced blindness, mathematically. These biases are not seen as flaws in deductive logic itself, but rather as flaws in the underlying axioms from which any mathematical economics theory is deduced. It is precisely unrecognized, but clearly flawed axioms that cause your counterparty in trade to be misinformed, enabling you to earn real-world economic profits. But in order to identify such flawed, blindness (or misinformation) inducing axioms, we need to first define what we mean by a formal system in mathematics, which is actually very simple and intuitive.

Formal Systems

Formal systems in mathematics are frameworks consisting of a set of axioms and rules of inference. These systems are used to derive statements and prove theorems within a consistent logical structure. Those of us who are mathematically literate have proven for ourselves that the Pythagorean theorem holds true universally in Euclidean geometry using formal mathematical rules of inference, otherwise known as deductive logic, which underlies all rational reasoning and logical thought. In this sense, under the Euclidean axiom that the shortest distance between two points is a straight line, the Pythagorean theorem is guaranteed to hold true universally.

However, what happens when the underlying implicit assumption that the shortest distance between two points is a straight line is violated in reality? The Pythagorean theorem no longer holds true. For example, in reality, the shortest distance between two points is not a straight line when your position on the surface of planet Earth is triangulated using GPS satellites. This is how your iPhone or Android is able to show where you are on a map—through GPS triangulation. This uses Riemannian geometry, necessitated by relativistic effects, including time dilation of satellite vs. Earth clocks. Therefore, when triangulating your GPS position in reality, the Pythagorean theorem is false.

Please note: the “absolute” truths established through formal mathematical proofs using deductive logic are conditional, not absolute. All mathematical proof does is establish a tautology: a logical equivalence between the axioms and the theorems, which are absolutely guaranteed to hold true as long as the axioms hold true, both in theory and in reality. However, should the axioms fail to hold true in reality, so will the theorem(s), being merely logical claims about reality deduced from the underlying axioms.

For example, in algebra theory, the claim that “2+2=4” holds true universally; however, it is conditional upon Peano’s axioms of arithmetic, which include Peano’s fifth axiom—the induction principle—which posits an infinite number of natural numbers. When this axiom remains unviolated in reality, 2+2=4 holds true. Thus, for example, 2 apples + 2 apples = 4 apples, and 2 moons of Jupiter + 2 moons of Jupiter = 4 moons of Jupiter. Yet in reality, 2 moons of Mars + 2 moons of Mars = undefined, because Mars in reality only has 2 moons, no matter how we choose to count them in algebra theory. The reason why 2+2 is not 4 in this case is that the number of objects being counted is 2, which violates Peano’s fifth axiom, which assumes more than 4 objects exist.

Believing that 2+2=4 always is precisely what causes our trading counterparts to make unforced errors, which allows us to make money: their theory-induced blindness, which we identify and use to earn profits using mathematical economics. We begin our discussion with the prisoner’s dilemma, from which we will then derive the first welfare theorem of mathematical economics, and then look at its violations, particularly symmetric information in trade, which is where we will spend all of our time—looking at how asymmetric information in trade facilitates unearned wealth extraction by economic parasites, or rent seekers, as per Gordon Tullock.

Consistency in DMT Experiences

1. Commonality Across Experiences: The consistency in the types of hallucinations reported by DMT users, such as encounters with similar entities and landscapes, suggests that these experiences are tapping into a shared aspect of human consciousness or perception. This consistency challenges the typical definition of hallucinations as purely subjective and variable.

2. Neuroscientific Perspective: The interactions between DMT and serotonin receptors in the brain could explain why the experiences are similar across different users. These receptors may trigger similar neural pathways that lead to common visual and emotional experiences.

3. Archetypes and Collective Unconscious: The consistency might also be explained by the activation of archetypal images or symbols that are embedded in the collective unconscious, as proposed by Carl Jung. This could mean that DMT experiences are accessing universal patterns of human experience.

Beyond Hallucination

1. Re-defining Hallucinations: If these experiences are consistent and shared among users, they may not fit the traditional definition of hallucinations. Instead, they could represent a structured interaction with a deeper layer of consciousness or reality.

2. Accessing Alternate Realities: The similarity of DMT experiences could suggest that users are accessing a different level of reality or dimension that is typically inaccessible through ordinary perception.

Aftereffects and Behavioral Changes

1. Positive Behavioral Changes: Many users report long-lasting positive changes in behavior and outlook after DMT experiences, such as increased empathy, reduced fear of death, and a greater sense of connection to others. These changes suggest that DMT may facilitate a transformative experience that goes beyond mere hallucination.

2. Connection to Universal Consciousness: The transformative effects of DMT might be indicative of a connection to a universal consciousness, as hypothesized by thinkers like Roger Penrose. This could align with spiritual and religious texts that speak of a universal mind or divine presence.

Telepathy and Universal Consciousness

1. Telepathic Communication: Some researchers and users suggest that DMT facilitates a form of telepathic communication with a universal consciousness or other beings. This idea aligns with spiritual and philosophical theories about interconnectedness and a collective mind.

2. Philosophical and Religious Connections: Many religious and spiritual traditions describe experiences of divine or universal consciousness that resemble the experiences reported by DMT users. Texts like the Bhagavad Gita and other religious scriptures speak of transcendent states of being and awareness.

Implications for Consciousness

1. Nature of Consciousness: The experiences and aftereffects of DMT challenge our understanding of consciousness. They raise questions about whether consciousness is a purely individual phenomenon or if it is part of a larger, interconnected system.

2. Further Research and Exploration: Understanding the mechanisms behind these experiences could provide insights into the nature of reality, consciousness, and the potential for humans to access higher states of awareness.

Conclusion

The phenomena surrounding DMT experiences are a rich field for exploration in both scientific and philosophical domains. They challenge conventional definitions of hallucinations and suggest the possibility of accessing deeper layers of consciousness or reality. The consistent and transformative nature of these experiences invites further investigation into their causes and implications for understanding human consciousness and interconnectedness.