The market is merely an extension of human nature, which is filled with flaws and selfishness.

Written by: @polarthedegen

Translated by: AididiaoJP, Foresight News

Highly Financialized and the Market

Highly financialized refers to the extreme stage of the financialization process, which itself indicates the dominance of financial markets in the economy. In highly financialized economies, speculative trading and other financial activities overshadow more socially beneficial productive services. Meanwhile, household wealth and inequality issues are increasingly tied to asset prices. In short, wealth is no longer directly related to hard work and is disconnected from the means of production.

As a result, more capital flows into speculative activities, as Keynes said:

"When the capital development of a country is treated as a by-product of casino activities, this job is likely to be messed up." — John Maynard Keynes

Understanding the market is important. We live in (mostly) a free market economy: voluntary buyers and sellers meet here, prices are constantly updated to reflect new information, and theoretically, winning traders continuously replace losing traders. Their decisions determine how scarce resources are allocated in the market, thereby improving market allocation efficiency. The essence of the market is theoretically elitist, which makes sense. Since traders decide the direction of scarce resources, we naturally hope they excel at capital allocation.

Therefore, in an idealized free market system, excellent traders will direct capital toward socially desired directions and receive more capital in return; while those who are poor at allocation will see their capital diminished. Capital naturally flows to those with the strongest allocation abilities, and all of this occurs alongside the actual output created by manufacturing and services.

However, the market no longer fully realizes this. Trading was once an exclusive game; for a long time from the 19th to the 20th century, only those with connections could participate, trading in places like the New York Stock Exchange, which was limited to licensed brokers and members, with ordinary people having almost no chance to access the market. Additionally, market data was difficult to obtain, leading to high information asymmetry.

Digitalization changed all of this. With the proliferation of telephones and new technologies, emerging applications began to bring investment to the masses. Today, there are applications like Robinhood that offer zero-commission trading and allow access to options, prediction markets, and cryptocurrencies. While this development has made investing more accessible and fairer, it has also increased the importance of the market in our daily lives.

Super Gambling ⬄ Highly Financialized

The rapid digitalization from the late 20th century to the early 21st century has made financial speculation, or "super gambling," not only unprecedentedly low in barriers to entry but also has seen participation numbers reach new highs.

0-day options trading volume: a reference indicator for retail gambling behavior

One might ask whether the current level of financialization is a bad thing. I can almost certainly say: yes. Under high financialization, the market deviates from its role as a "capital weighing machine" and merely becomes a tool for making money. But I want to explore the causal relationship: we live in a society where both financialization and gambling are significant, yet it is difficult to distinguish which is the cause and which is the effect.

Jez describes super gambling as a process where "actual returns are compressed, and risks rise as compensation." I believe super gambling is one of the two natural responses to high financialization. However, unlike the other response, the growing socialist tendencies of the millennial generation, super gambling catalyzes high financialization, which in turn raises the level of super gambling, forming a near "ouroboros" cycle.

High financialization is a structural shift, with society increasingly relying on the market; super gambling is a behavioral response, reacting to the decoupling of effort and reward. Super gambling itself is not a new phenomenon. A 1999 study showed that American households with incomes below $10,000 spent 3% of their annual income on lottery tickets, motivated by the hope of "correcting" their low-income status relative to their peers. However, in recent years, as society has become increasingly financialized (and digitalized), the trend of gambling has become more prevalent.

Socialism as a Response

Now we can discuss the first of the two natural responses to high financialization that I mentioned:

With the help of social media and digitalization, financialization has permeated every aspect of our lives. Our lives increasingly revolve around the market, which now bears unprecedented responsibilities for capital allocation. The result is that young people can hardly step onto the path of homeownership. The median age of property owners has reached a record 56 years, and the median age of first-time homebuyers has also reached 39 years, another historical high.

The decoupling of asset prices from real wages, partly due to inflation, makes it nearly impossible for young people to accumulate capital. Peter Thiel has pointed out that this is an important reason for the rise of socialism:

"If a person is burdened with student debt or housing is too expensive, they will be in a negative capital state for a long time, making it difficult to start accumulating capital through real estate. If a person has no chips in a capitalist system, they are likely to oppose it."

Asset inflation and high housing prices have diminished the perceived social mobility. This feeling of "the social contract has broken" is reflected in a recent poll by The Wall Street Journal: only 31% of respondents still believe in the "American Dream," that hard work can lead to success. Additionally, most Americans believe that the trend of financialization will continue until 2050, and that the wealth gap will only continue to widen.

This pessimistic sentiment reinforces the notion that rising asset prices will leave those without capital behind, and that hard work cannot change this. When people no longer believe that effort can improve their lives, they lose the motivation to work hard in a system they perceive as "manipulated" and biased toward the bourgeoisie. This has accumulated into the rise of socialism today, which is a structural response to the increasing financialization of the world, as people hope to re-establish the connection between effort and reward through fairer asset distribution.

Socialism is an ideological response aimed at bridging the gap between the bourgeoisie and the proletariat. However, as of May 2024, public trust in the government is only 22%, leading to another natural response: more and more people no longer expect socialism to narrow the gap, but instead try to climb into the upper class through (super) gambling.

Cycle

As mentioned earlier, the dream of turning one's fortunes around through gambling is not new.

But with the advancement of the internet, the mechanisms of gambling have changed completely. Today, almost anyone of any age can participate in gambling. Behaviors once shunned by society have become deeply embedded in the social structure due to the glamorization and lowered barriers brought by social media.

As previously mentioned, the rise of gambling is a result of the proliferation of the internet. Today, people do not need to go to physical casinos; gambling is ubiquitous. Anyone can open a Robinhood account to trade 0-day options, cryptocurrencies are equally accessible, and online casino revenues have reached historical highs.

As The New York Times stated:

"Today's gamblers are not just retired seniors at the card table, but young men on smartphones. Thanks to a series of quasi-legal innovations in the online gambling industry, Americans can now bet on almost anything through investment accounts."

Recently, Google partnered with Polymarket to display betting odds in search results. The Wall Street Journal wrote: "Betting on football and elections is becoming as integrated into life as watching games and voting." While this is largely a social phenomenon, I believe its main driving force remains high financialization; even social gambling is a result of the market's increasing penetration into our lives.

As household wealth becomes increasingly tied to asset prices, while wage growth lags, the upward mobility for hard work seems to be narrowing. This raises the question: if one cannot improve their standard of living, why work hard? A recent study found that when households feel that homeownership is out of reach, they are more likely to consume, reduce work input, and choose higher-risk investments. The same goes for low-wealth renters. These behaviors accumulate over the life cycle, further widening the wealth gap between the haves and have-nots.

At this point, survivor bias begins to take effect. Stories of overnight wealth on social media, ostentatious consumption on Instagram, and day traders promoting the promise of "quitting your job" collectively foster a widespread speculative mentality. South Korea is a typical example: low perceived social mobility, increasing income inequality, and high housing prices have led ordinary South Koreans to gamble more. The Financial Times stated: "Speculative retail investors have become the main force, accounting for more than half of South Korea's $20 trillion stock market's daily trading volume." They call themselves the "Three Throw Generation": due to high youth unemployment, job instability, stagnant wages, high living costs, heavy family debt, and fierce competition in education and employment markets, they have given up on dating, marriage, and childbirth.

This phenomenon is not limited to South Korea; Japan's "Wudao Generation" and China's "Tangping Generation" are also similar.

Across the ocean in the United States, half of men aged 18 to 49 have sports betting accounts, and 42% of Americans and 46% of Generation Z agree with the statement: "No matter how hard I work, I will never be able to afford the house I truly desire." Since a few minutes of betting can earn a week's, a month's, or even a year's salary, why bother with a hated job for minimum wage? As Thiccy sharply pointed out:

"Technology has made speculation effortless, and social media spreads every story of overnight wealth, luring the masses into this losing gamble like moths to a flame."

The dopamine effect behind this should not be underestimated. In the long run, these gamblers will lose money, but once they have experienced easy money, how can they return to a 9-to-5 job? People will always think: just one more try, as long as the last time is lucky, they can quit and retire.

"You just need a dollar and a dream." — The classic slogan of the New York State Lottery

Thus, the ouroboros begins to cycle: high financialization leads to a sense of nihilism toward the system, resulting in increased gambling, which in turn exacerbates financialization. More survivor bias stories are spread in the media, more people start gambling and losing money, and resources are misallocated away from productive activities. The market no longer supports companies that benefit society but flows toward those that promote gambling. A striking example is that HOOD (Robinhood) stock price has risen 184% this year, while the average research time per trade for ordinary retail investors is only about 6 minutes, often conducted hastily before trading.

However, I do not believe this is purely a market failure. The market is merely an extension of human nature, which is filled with flaws and selfishness. Therefore, the market chooses the most profitable outcomes rather than those most beneficial to society, and even if it is detrimental to humanity in the long run, it should not be entirely blamed on market failure; the market is not a moral arbiter.

Nevertheless, it is still sad that the entire industry is built on deceiving people out of their money. But as Milei said: "If you go to a casino and lose money, what can you complain about? You know the nature of the casino." Or more bluntly: there are no tears in the casino. I do believe that high financialization distorts the market. While the market is not perfect, financialization makes it increasingly resemble a casino. When net negative outcomes can also be profitable, the problem has clearly transcended the market itself.

Regardless of morality, this accelerates high financialization. Stock prices rise further, unemployment rates increase, escapism prevails, TikTok, Instagram short videos, the metaverse… The problem is that gambling is a zero-sum game (strictly speaking, due to fees, it is a negative-sum game). Even from a simple zero-sum perspective, it does not create new wealth or bring social benefits; it merely redistributes money. Less and less capital flows into innovation, development, and positive-sum outcomes. Elon Musk once said: "The meaning of civilization is to create far more than to consume." But in a highly financialized society, this is difficult to achieve, as we must also face another consequence of financialization: escapism.

The gap in leisure activities between the middle and upper classes has never been so small, as humans spend more and more time online. This, combined with declining social mobility, not only weakens people's motivation to work hard but also diminishes their willingness to create beautiful new things.

What I want to say is: in a highly financialized society, one cannot create more than they consume, and society cannot achieve positive-sum outcomes.

Finally, I conclude with this description of a highly financialized society under technological capitalism:

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