# Stone-Soup for the Capitalist’s Soul

by on January 31, 2013

The fable of Stone Soup is probably my favorite piece of European folklore. In the Russian version, which I prefer, called Axe Porridge,  the story goes something like this:

A soldier returning from war stops at a village, hungry and tired. He knocks on the door of a rich, stingy Scrooge of a woman. In response to his request for food, she of course claims she has nothing. So the canny soldier asks her for just a pot and water, claiming he can make “axe porridge” out of an old axe-head he spots lying around. Intrigued the woman agrees.

You know how the rest of the story goes: the soldier quietly hustles a bunch of other ingredients — salt, carrots, oats — out of the old woman, under the guise of “improving the flavor” of the axe porridge. He does this one ingredient at a time, offering an evolving narrative on the progress of the porridge (“this is coming along great; now if only I had some oats to thicken it.”)

The result is some excellent porridge that they share, while applauding the idea of axe porridge together. The shared fiction that soup can be made out of an axe-head results in the fact of real porridge for all.

There are some deep insights into the psychology of wealth and the nature of progress in this fable, insights that are very relevant for our times.

Two Narratives of Wealth and Community

There is something quintessentially European about Stone Soup. There is individualist hustling, a fluid conception of the relationship between the rich and poor, and an energizing element of the paradoxical (represented by the stone or axe-head: is it necessary ingredient or not?).

And speaking of Scrooge-types, it is also very unlike that other European fable of wealth and community, A Christmas Carol, which ironically (despite its overt Christian context) is not particularly European in spirit.

Both fables offer implicit commentaries on the nature of the relationship between wealth and community, but I’ve concluded that  A Christmas Carol is fundamentally wrong-headed. It is based on a characteristically religious incomprehension of wealth creation as a sort of de facto sinful black-box process, for which absolution must be sought, either during or after the act. The incomprehension leads to the conflation of wealth and corruption caused by wealth. A Christmas Carol suggests that the rich ought to unilaterally share out of a sense of compassion, empathy, charity, moral duty and yes, guilt. In other words, it limits itself to challenging just the moral authority of the rich. The poor for their part, are forced to accept the demeaning status of recipients of charity.

Stone Soup on the other hand, challenges both the moral and intellectual authority of the rich, and is ultimately a more satisfying tale because of it.

On the second front, intellectual authority, the fable illustrates that the rich do not necessarily understand wealth any better than others, any more than the landed understand geology better than the landless. They simply have more of it. The study and possession of wealth are two entirely different, and mostly unrelated, things. In the fable, the soldier actually demonstrates a better grasp of the psychology of wealth than the old woman.

On the first front, moral authority, there is no presumption that the person holding the money has a right to determine what to do with it. She merely has the right to engage in a battle of wits with others who have the right to try and part her from it.  So the fable turns the proverb “a fool and his money are soon parted” into a basic set of rules of engagement:

2. You are fair game for hustlers who understand your wealth better than you do.
3. The role of the state is to limit the violence with which you can be hustled.
4. If you are poor, you have the right to hustle the rich within certain limits.

What I like particularly about the story is that it offers a moral framework for the movement of wealth that does not depend on redistributive, trickle-down or revolutionary logic. It does not require the rich to feel generous or guilty. It does not require the poor to feel ashamed or grateful. It does not require the desperate to feel angry. It merely requires that everybody think about their transactions. It also legitimizes slightly evil behaviors like deception and certain kinds of lying.

The problem with those big ideological frameworks is not that they are immoral but that they are static and dead. I prefer a living, continuously negotiated, slightly evil economic order over a dead one, no matter how noble in conception.

Redistributive, trickle-down and revolutionary moralities of money all share a common feature: the idea that relationships between the rich and the poor need to be normalized in a way that hands over control of big chunks of the economy indefinitely to one side or the other (the poor, the rich and the outlaw classes respectively). This sort of economy is always a dead economy, no matter whom it favors, and whose behavioral biases are activated.

Another way to understand this is in terms of waterfall as opposed to agile financial logic. An institution is simply an upfront lump-sum payment of estimated transaction costs for a class of transactions expected to extend indefinitely into the future.

When you negotiate a paycheck with an institution, you’re done until you leave the job or try a re-negotiation. What’s more, even these negotiations are informed by social proof and mimicry rather than an actual examination of the transaction. It’s a rigged game.

A social order is a set of institutions, each defined by boundaries at which  negotiations occur. These negotiations are always ritualized to a degree, favor one or the other side systematically, and apply to an indeterminate amount of wealth flows.

Each of these models impoverishes the economy by draining agile intelligence from individual transactions in the interests of reducing transaction costs. Individual interactions between rich and poor (one dollar or other resource unit at a time, two people at a time) are replaced by a social order with fixed relationships between arbitrarily delineated classes. The vast majority of transactions become partially or completely ritualized. Between low-end haggling with street vendors and high-stakes battles over public billions in legislatures, most of economics is reduced to ritual.

It’s not the economy, stupid. It’s the stupid economy. The dead economy. An economy created by the waterfall logic of class warfare.

Taken to an extreme, the majority of the population develops an aversion to haggling and negotiation; a distaste for actually looking at and assessing the subjective value of whatever is on the table. Instead, we choose fixed-price shopping over bargain-hunting (or at best, play gamified and rigged coupon sports), social proof (“am I making more than my brother-in-law?”) over valuation, and develop social taboos around the open discussion of money. And we criminalize even healthy patterns of hustling.

Revealingly, while the salaried rarely discuss their paychecks, free agents often swap stories about hourly rates and the value of projects won or lost. When income becomes volatile and intelligent, it becomes decoupled from status and sheds its taboos.

Barefoot Economics

I am a recent convert to the idea of barefoot running, based on the theory that most modern shoes are orthotic casts that deaden feet. You don’t feel the ground; your muscles and nerves atrophy. I don’t run barefoot, but I do use so-called minimalist shoes: lightweight shoes with thin soles, no heels and no arch support. At best, they offer some protection against sharp pebbles and such. You have to be aware of where you step, your foot muscles have to actually work with the information flowing in with every step.

Minimalist shoes offer a useful design pattern for organization design. To the extent possible, institutions should be designed to be economically barefooted. This means, retaining as much information flow as possible around each individual transaction (or foot fall). You’ll pay more in overheads in the short time, but you’ll remain more economically alive and survive longer.

Today’s institutions are like running shoes from ten years ago. Heavily padded and cushioned, with arch supports, thick heels and sold with convoluted reasoning around ideas like “pronation” and “supination” that don’t actually apply in the vast majority of cases (those are real enough conditions, but are probably vastly over-diagnosed and over-treated).

We do need institutions though. Most of the economy cannot run barefoot. What might be good heuristics for the design of minimalist economic shoes?

Normalized and ritualized transactions represent economies of scale and scope, and are captured in an institutional order.  The general logic of the institution stands in for the specific logic of every individual transaction. The creation of an institution is essentially an economic intervention, to correct a structural problem (just like an arch support is a structural intervention to correct extreme pronation) in a class of transactions, and efficiently deal with “dumb money” (wealth that truly does not contain any information).

Within limits, such interventions are justified, to correct gross structural problems. Such interventions make sense when the economy is in extremely strange regimes that makes transaction costs skyrocket (think about buying groceries in a country with daily triple digit inflation for instance).

But the function of any major structural adjustment, (such as the New Deal, Reagonomics or the French Revolution), whatever the underlying ideological motivation, is not (or should not be) to permanently get rid of the need for all thinking around individual transactions.

Rather, structural adjustments need to go just far enough to make transactions computationally tractable in proportion to the value being traded, and then stop. If I buy a $3 coffee, I should not spend more than say$0.30 worth of my time figuring out the logic of the transaction and whether it is a good deal for me. If it takes me $10 worth of effort to figure out whether the$3 coffee is worth it, either I am so rich that it doesn’t matter, or something is seriously wrong.

The advantage in a transaction should not be structurally assigned to a member of one class by default, but situationally awarded to whoever is willing to bear higher transactional costs. This is generally the poorer party, thanks to the natural logic of marginal utility (which has some subtleties when applied to the wealthy, however, as discussed in this excellent post on the Interfluidity blog). Social norms must allow for such transactions to play out. When the poor are not allowed to hustle, the economy starts to die.

The fable of stone soup is a fable of barefoot hustler economics. Imagine a much more ritualized economy, where the soldier meekly accepts the assertion of the old woman that she has no food to spare as morally and economically authoritative, simply because she is rich. He walks away and starves. He doesn’t think he has a right to try and outwit the old woman. That means the end of innovation (which, in case you didn’t get it, is what stone soup symbolizes in our re-interpreted fable here). Even worse is an economy where the poor cannot even come into contact with the rich. Those are some thick-soled economic shoes indeed.

Fortunately our hero in the fable is a hustler in a hustler-friendly world. Every conversational move is pregnant with transactional intelligence. He wins because literally and metaphorically, he is hungrier. He is willing to pay a higher transaction cost for each resource unit than the old woman. And she pays for her lazy thinking by letting him prevail.

The incentives for the old woman are another story: why does she not simply walk away? Why is she vulnerable to having her curiosity hooked by the idea of stone soup? That’s the story of the social threat old money perceives from frontiers and the potential for new money and the eternal new-money/old-money yin-yang. I’ll save that tale for another day, but the Interfluidity blog post I linked to above covers the first half of the argument.

Joe January 31, 2013 at 4:59 pm

small nit: “Redistributive, trickle-down and revolutionary moralities of money”…” (the rich, the poor and the outlaw classes respectively)”
-> (the poor, the rich, and the outlaw classes respectively) ?

Venkat February 3, 2013 at 12:52 pm

thanks, fixed.

et January 31, 2013 at 5:21 pm

If they both were stuck in their roles, the ritualized dance of have/have not might be the best way to interact.
Maybe the old woman enjoyed (if grudgingly) the opportunity to share a meal.
The soldier could also just have taken what he needed from an obviously weaker opponent.

Jenny Bhatt January 31, 2013 at 10:18 pm

I haven’t read the whole thing because I got stuck at the comparison between Stone Soup and A Christmas Carol. I don’t think I agree with the distinctions. Indulge me as I explain why – not asking anyone to agree with me, but just sharing a slightly different perspective. I will eventually make my way to the meat of this post about economies and wealth – there are rather too many ideas here. They’re excellent ideas, but, for me, personally, they’re not flowing entirely coherently and cogently as a compelling set of arguments. This could well be a reflection of my inability to absorb all of them in one sitting as I’m a new reader here.

I don’t dispute most of the analysis of Stone Soup – I’ve heard versions of this story over the years and, mostly, they have illustrated the morality of the hustle, if you like. What I’m finding hard to accept is that hustling is “individualistic”. Jared Diamond’s study of traditional societies proves there is such a thing as collective hustling which is for the greater good. Given that, I’m not able to buy the “quintessential European” descriptor. Nor do I think that the fable illustrates any fluidity in the relationship, conceptually or otherwise, between the rich and the poor. At the end of the day, soup made and consumed, neither woman nor soldier has changed in their class standing. And, finally, the paradoxical aspect of the stone/axe, energizing or otherwise, is, of course, not quintessentially European. If anything, the use of paradoxical elements in storytelling came from older, more traditional societies and continues to be used across non-European societies.

Re. A Christmas Carol – firstly, Dickens was not a religious guy. He wrote mostly from the child’s perspective and mostly about the working class – due to his own experiences and wanting to highlight problems to the government and people of his time. He chose Christmas as the setting for this particular novel just to get wider audience mileage and not to make a religious point. There are plenty of other non-religious Scrooge-types in his other novels like Great Expectations, Bleak House, Our Mutual Friend, etc. Pretty much all his other books, actually.

Secondly, for the most part, all his Scrooge-like characters, including Scrooge himself, underwent transformations from bad to good (or they came to terrible ends somehow), which required more of their intellectual engagement (or authority, as you call it) as opposed to just moral. There was a strong bildungsroman aspect about Scrooge’s progression from the grumpy, uncaring, rich boss to an altruistic, caring friend. The 3 ghosts engaged him in rather philosophical conversations rather than just religious dogma. Once morality becomes conflicted, it turns into an intellectual exercise – it has to. And, more than anything, of course, what Dickens was seeking was a transformation in his readers through all his characters – one that was not based on pure morality (in which case, he could have written a religious tract like others of his time, instead of creating various fictional characters).

As for the working class in the story – they were not left to just accept their demeaning fate/position. That has never been the premise of any of Dickens’ books. In this one, there is plenty of discourse among the supporting characters, including the clerk, that highlights some of their progressive (and provocative for the authorities and gentry at the time) thinking against the class system of their time, which, of course, was very European. I’ll leave out some of the other very-European constructs in the novel like industrial capitalism, etc. Again, more about intellectual than moral/religious conflicts.

If anything, all of the above make A Christmas Carol a quintessentially European fable and the Stone Soup a more universal one for me.

Sorry – my first comment here and it’s a bit contradictory. But, I take Dickens rather seriously, as you may gather. :)

Alexander Boland February 1, 2013 at 9:29 am

Before this post I always took stone soup to being Keynesian economics before Keynesian economics (in the version I heard, stone soup fed all of the village; but in order for that dish to be made, a single agent had to trick them all into cooperating. A liquidity trap.) But I like that the more evil (and I imagine more faithful) version has a lesson of its own.

Ultimately, without the “slightly evil” (hustlers) there is no creative destruction. Also worth noting that this post goes in opposition to the idea of “equilibrium”–which I find a troublesome economic concept to begin with.

Venkat February 3, 2013 at 12:54 pm

Hmm… yes, I think fable can also stand for basic Keynesian thinking on stimulation. You’d need to add in an element I think: the soup could turn out to be inedible.

Kay February 2, 2013 at 1:11 am

Isn’t the idea of a “dead” economy closely related to the idea of money as a prize for a good which reflectively expresses the current value relative to all other goods and more generally as a universal equivalent of exchange? It is the modern institution all others derive from and can be related to.

Since prize is determined reflectively it is also problematic to talk about transaction costs as if this was a category on which all others can be based in whatever neoclassical framework. Let’s say it takes lots of efforts to trade with each potential seller/customer individually, an approach which simply doesn’t scale. There is an upper limit to the amount of work which can be put into transactions compared to other activities, say research and development, maintenance, organization and production. This argument appeals to an engineering mindset more easily than the economical one. The lowering of transaction costs is merely a nice side-effect. We are used to put things on the head because it simplifies our reasoning about economical relationships but it doesn’t mean that this reasoning was also true.

Venkat February 3, 2013 at 12:55 pm

I don’t think I understand your point here.

Kay February 6, 2013 at 5:39 am

Sorry, for my overly terse brain dump!

I’ve been grown up in a time which has gone through a tough economization, where the sort of hustling you describe has either been professionalized or absent. For anything but my hourly wage rate I don’t trade and even that follows closely market observations which means that the prize is already “reflected” by knowledge about other market prizes. We look after trends and instead of battling poor against rich on the market place ( instead of the political stage ) the market becomes a medium where we observe trends and speculate for up- and downturns. I guess this is also true for your own consulting fees and you are not much engaged in “stone soup” like hustling either.

So my question is: do we still have a living economy or is it almost dead according to your criteria? If the latter is true, what could we experience for the future?

Finally I’m skeptic about “transaction costs” as an explanatory scheme but I want to leave that aside for now.

Josh W February 3, 2013 at 9:14 pm

It occurs to me that this doesn’t actually need to be a form of redistribution at all.

The first bit of it is great, with the focus on wealth as a complexity problem:

The combinatorial explosion of owning a lot of ingredients only increases when what you own is instead money, that shapeshifting asset that becomes exchangeable for a wider arrangement of differing possible combinations of things the larger the pile is!

You may know that you are wealthy, but not know exactly what that wealth is or could be.

In a way the soup sellers are almost doing a kind of arbitrage, where the market barrier you are crossing is between personal use and generic assets and both parties are the same person!

You are helping people use their assets to improve their utility, and taking a share of the previously wasted asset base, while trying to keep the ignorance that gives you something-to-do in place.

The stone is basically a way of using physical capital to stand for intellectual capital, (or nascent social capital in the case of the stone soup), allowing people to buy into it while only focusing on tangible things.

There’s also a “fake it till you make it” kind of upselling going on, where you set a price that is too low to achieve your aim, and then try to gain momentum of incremental improvements with incremental increases of margin until you make a slightly more ambitious goal possible.

I wouldn’t be at all surprised if there are kickstarters out there that have done exactly this, starting with what seems a good value proposition, and trusting in the existing social momentum surrounding the transaction, adding stretch goals at higher values than they increase their costs, until they can actually feasibly realise the project at the current funding level.

In the fable, the key is in providing a service in such a way that the original deceptions of cost base and false productivity attribution are not spotted, and a productive arrangement is produced.

In fact as a kind of redistribution this would basically be “designing for trickle-down” rather than just assuming it:

You set things up so that the poor can trick the rich into paying for their goods and services, and thus feel richer while becoming poorer. This is obviously the most tame redistribution idea of all, where you basically want to harness the same drives that make rockstars poor within minutes of achieving their wealth, but in order to create a sustained flow of services between poor and rich.

The problem here is that the trick basically only goes so far as tricking someone else into employing them, and so the same employment dynamics resurface: “Why should I share this axe soup with you, when that man over there is willing to make me knife soup for the tinyest spoonful of a share” Although the hustler may feel smug about his deception and victory in winning a trade arrangement (while concealing it’s functionality), he has still had to face the usual problems of few asset holders and many hustlers.

This doesn’t even require “knife soup” and “axe soup” to be in any way similar, just the fact that both people are competing for the same old women’s attention as asset holder means that she can push the terms of the deal in her favour.

Inequalities produce positions of market advantage that push transaction costs for mutually beneficial trade onto the poorer parties, as well as giving them smaller shares of the returns, because they “need” the trade more than the richer party does. This frequently accentuates inequalities, because each trade increases the position of wealth from which the asset holder operates.

You really don’t need “insurance against disaster” to add a zero-sum aspect to wealth!

Any turning of this idea into a form of redistribution would require surmounting this effect, perhaps by amping up that hustling power to cover the question of when asset transfers actually happen, or when a deal is made. In other words doing things like giving people something like “acceptable gains from fraud or breach of contract” almost like the existing personal tax allowances! Or ways to help people working with another persons assets to obfuscate the extent to which they are using them for their own benefit.

Making a practical realisation of this idea is quite tricky, not only is it basically the same as normalising corruption, one of the classic things suggested as making business more difficult, I also imagine most asset holders subjected to this kind of redistribution would jump a mile: At least with taxation the mechanics and proportions of redistribution are known, whereas in hustler-world, losses by definition cannot be defined concretely!

Nathan February 4, 2013 at 1:21 am

I think the guy sold his service as a prostitute. There was no hustling, simply an exchange of money for ego.

Josh W February 5, 2013 at 8:57 pm

It occurs to me that I might not have the full analogy here; rather than considering the innovators purely as hustlers, sometimes leaving people at the end of the trick with a bad taste in their mouth, perhaps they are actually more like magicians.

In that case rather than simply dealing with taking away the things that asset rich people use to avoid their looses, perhaps you should encourage those forces that make them want to be fooled, that make them risk the unknown and the potential of having their money got at. People moving from ossified, commodified business models with known reducing returns into the weird and rough edged frontiers of ill-defined business. You could probably encourage this by tying taxation to those situations where monopolies of clear competitive advantages in well understood businesses exist, basically weakening the status quo so that the big players have to take risks for their returns in strange climates.

As this is also what happened in the whole derivatives/sub-prime firestorm, it’s probably good to couple it with something like my previous “minimum acceptable gains from fraud”, but rather than framing it in those terms, framing it in terms of “when we loose the money, here are some simplifications that we use to get us back to clear equilibrium” with that simplification forming a set of loopholes that hustlers can use to refresh the game in their favour. Tweaking those to favour smaller market participants would probably be helpful.

Ben K February 8, 2013 at 12:28 am

I find it interesting that you characterise the story as quintessentially European – you need look no further than Brazil for a culture that really celebrates the ideas that you and the fable explore.

In fact, an overall philosophy that questions the moral and intellectual authority of the rich and encourages ‘living’ economics is summed up in a single (untranslatable) Portuguese word: ‘malandragem’. Check the wiki for a good explanation, but think distilled hustler paradigm. Far from being pejorative, it is generally seen as a desirable attribute in Brazilian culture and ‘malandros’ are often romanticized and looked up to.

The word is also used a lot in capoeira, where it has a related but subtly different meaning.

Gregory Rader | OnTheSpiral.com February 11, 2013 at 12:08 pm

What you refer to here as “structural adjustment” is what we commonly refer to as “reform”. And your thesis points to why it is that so many reform efforts are fatally undermined by unintended consequences. Major reform almost always flattens the intelligence (depth, subtlety) that has been incrementally accumulated by a given institution.

The intention behind so many major reform efforts is to make an institution more legible so that it will (presumably) behave more rationally. But in the course of simplifying an institution, such reforms reduce complexity and thereby reduce the degree of freedom available to the institution itself as well as agents within the institution.

A timely example can be found in the movement for a return to the gold standard. The appeal of a simpler monetary system is easy grasp. It is also easy for “reformers” to nurture exactly the kind of fear that you describe here – the fear that shadowy agents who understand the intricacies of the system better than the common folk are somehow taking advantage of said common folk. It is quite difficult to convince the same people of the benefits of a monetary system with more degrees of freedom (enabling more diverse and subtle methods of financial management).

Alicia February 11, 2013 at 7:01 pm

Thanks for the interfluidity link. I’m recently becoming more interested in wealth, its preservation, the perceived threat from the noveau rich, etc. I look forward to your follow-up post to this one :)

tubelite February 17, 2013 at 10:55 pm

Great arguments. However, there is a good reason for the existence of a large class of low-value, fixed-cost, no-bargaining transactions. Decision making depletes cognitive-emotional resources which are slow to recharge. Moreover, the depletion is not proportional to the value of the transaction but more on the number of transactions. 10 $5 transactions will “cost” ~10 times a single$50 transaction. A decision to bid up by $10,000 for a house “costs” far, far less than 1000$10 transactions.

This puts a lower bound on how agile you can make your economy. In fact, the information input may get worse as decision-fatigued agents make shittier and shittier decisions.

I suspect fixed prices and credit cards have boosted consumer spending primarily by keeping the buying experience free of the negative feedback of paying for stuff. The fifty odd negative ‘cha-chings’ you would otherwise get throughout the month are reduced to just one.

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