$F_{damage}$: Organizational Structure and Price Formation

I remember watching a documentary a long time ago, and there was a line I really liked:

"The reason humans were able to survive and thrive in the struggle for survival is that humans possess the ability to obey others' commands and read their expressions."

This is actually why humans, as a species and a group, are more efficient and effective in their struggle against nature and other species, because it gave rise to "transaction." Individuals cede a portion of their self-control to the leader of the group, obeying their command, thereby obtaining a greater overall chance of survival.

Therefore, from an economic perspective, "transaction" is a unique intra-species relationship that promotes the development of the entire human species. Do not think that primitive tribes had no transactions; they did, though perhaps not through currency and money.

However, with the development of human society, the class differentiation of human society inevitably led to the differentiated application of $F_{damage}$ to different groups and individuals within the human species. This is exactly why we can use it to understand economic phenomena in human society in a simplified yet more thorough manner.

So, when I want to define $F_{damage}$, I use:

$$F_{damage} = \frac{S_s \cdot T^{\alpha}}{1 - \beta \cdot e^{-\gamma(L - W)}}$$

this dynamic function. The numerator is the coupling tension between structure and tools, and the denominator is the biological behavior feedback damping. It is no longer a simple multiplication, but a pressure-collapse model.

When discussing economic issues, all of humanity is a single species (not a "population"), a single species. This also aligns with our grand ideal of building a community with a shared future for mankind.

1. Intra-Species Composition and Structure

Before discussing economic mechanics, we must first clarify the hierarchical structure within a species.

• Individual: A single biological unit. The smallest granularity that bears $F_{damage}$.
• Group: A functional collective composed of individuals (e.g., families, enterprises, communities).
• Regional Cluster: A geographic or functional block composed of multiple groups (e.g., cities, industries, ethnic groups, countries).
• Full Ecosystem: The sum of all groups and their interactive relationships (e.g., civilization, the global economic system).

$F_{damage}$ is formed step-by-step among these four levels, which is consistent with the formation of prices; the collective behavior of a species ultimately forms a consistent overall survival effect. The price formation mechanism described by $F_{damage}$ aims to explain how the economic behaviors of participants in an economy—from individuals to groups, to regional clusters, to all of humanity (as a species)—receive "loss/gain factors", thereby leading to the price formation mechanism of transactions between individuals, as well as transactions between individuals and groups.

This is what Steven N.S. Cheung refers to as "market price" and "selling price" in Economic Explanation. Of course, our $F_{damage}$ is more generalized than his explanation. From here, we understand $F_{damage}$—the price loss/gain factor—as all factors of harm or gain that affect the price offering and price taking of both parties in a transaction.

Therefore, we can ultimately deduce that the loss/gain factor determines whose price is depressed and whose price is compensated in the end. That is to say, in a transaction, who gets the bargain and who suffers the loss. However, we must be clear that because "$F_{damage}$" is inevitable—meaning it is a force majeure factor, at least when the transaction is reached—actual transactions are, as traditional economic theory suggests, beneficial to both parties ("both parties get a bargain").

Thus, if we are to conclude that "both parties in a transaction get a bargain" while in reality "one party has their price depressed and the other gets a bargain," we must acknowledge that "$F_{damage}$" exists systematically, historically, and structurally. It inevitably causes price deviation at the moment the current transaction is made and the current price is formed.

I have said that I only hope our theory is a purely explanatory one; I do not want to develop any revolutionary theory. We explain economic phenomena, especially by explaining the most fundamental "price formation" within economic phenomena to explain everything else.

Hierarchical Decomposition of $S_s$: The State as a Meta-Structure

$S_s$ (intra-species structure) is not a flat concept. It is hierarchical:

$$S_s = S_s^{国家} \times S_s^{微观}$$

• $S_s^{国家}$: The structural rigidity of the state's political and economic system. It defines the monopoly of violence, property rights rules, the baseline of distributive justice, and the channels for individuals to appeal to or exit the structure. The state is the highest form of realization of $S_s$, and the meta-structure for all micro-price formation.
• $S_s^{微观}$: The internal structure of lower-level organizations such as enterprises, families, and communities.

Homology of State and Family: $S_s^{国家}$ penetrates downward, setting a hardness ceiling for all $S_s^{微观}$. When $S_s^{国家}$ is extremely high (authoritarian regimes, class consolidation, lack of independent labor unions, lack of judicial remedies), even if a company wants to manage flexibly and pay employees higher wages, it cannot break through the ceiling set by the state. This is because the state itself is the largest $F_{damage}$ distribution apparatus—it is naturally impossible for the rulers and the ruled to bargain on equal terms.

Conversely, when $S_s^{国家}$ is low (democratic systems, checks and balances, independent labor unions, welfare safety nets), $S_s^{微观}$ has room for adjustment. Employees always have the physical option of "exiting to another enterprise" or even "exiting to the welfare net."

This explains why micro-reforms have a ceiling—the ceiling is locked by the state.

2. The Impact of $F_{damage}$ on Labor Market Prices from the Perspective of the Formation of "Weighted Labor Cost" and the "Despair Score"

In fact, this is how price formation works—progressing and synthesizing layer by layer. Previously, when explaining the overvaluation of the exchange rate, we mentioned the "weighted labor cost" pointed out by Lu Zhengwei. This is actually about workers and capitalists, or let's say workers and employers—to prevent our theory from becoming a theory of violent revolution, let's tone down the emotional tone of the phrasing. Between workers and employers, in some places there is collective bargaining over labor prices and conditions, such as through labor unions. In other places, there are no unions, and workers negotiate employment prices with employers individually. This will obviously form different formation mechanisms for the "weighted labor cost," right?

Then, in the era of algorithms, I feel that the expression of this loss/gain factor is particularly obvious. Just a few days ago, someone exposed on the foreign internet a kind of "crowdsourcing platform" that calculates a crowdworker's "despair score" based on the minimum price, average price, and frequency of orders they accept. If a worker's "despair score" is low enough, they will never be assigned high-priced orders. This is because the few high-priced orders must be dispatched to those crowdworkers with low "despair scores" who treat it as a hobby and can take it or leave it, in order to attract them to participate and maintain the platform's vitality.

Isn't that interesting?

But this "despair score" is not the $F_{damage}$ we want to discuss. Rather, this "despair score" is precisely the consequence of "$F_{damage}$". In other words, the lower a worker's despair score, the more severe the "damage" they receive, which leaves them with no choice but to take even the "orders that others look down upon." After all, they are too desperate for money! Too desperate for opportunities! Life has already reached the margin of survival!

So, from individual labor prices to collective wage bargaining, to "weighted labor costs," and to the new era of digital slavery in the "algorithmic cage" of "despair scores."

The Role of Labor Unions: In an environment with labor unions, $W$ (individual retention) is pushed up by collective bargaining, $L-W$ shrinks, the denominator increases, and $F_{damage}$ decreases. This is not an "efficiency improvement," but rather the structure providing the individual with the ability to resist price damage. In an environment without unions, individuals are isolated "fuel," $W$ is pressed close to $L$, and $F_{damage}$ is massive.

3. The Performance of $F_{damage}$ in Price Formation Between Regional Clusters from the Perspective of the Dual Economic Structure

Originally, I wanted AI to write this section for me, but what they wrote was too abstract and they loved coining new terms and introducing boring concepts, which made me feel thoroughly disgusted. When I proposed the theory "Seeking Deep Understanding Over Mere Reading" in 2015, it was precisely because I disliked reading those writings of waste paper literature that pile up rhetorical flourishes but lack theoretical capability and explanatory power, published solely for the sake of publishing.

If I use the example of the dual economic structure, readers familiar with China's urban-rural dual economic structure will understand it immediately. Since the founding of New China, agriculture has supported industry. After all, industry started from scratch. For a year or two in the early days of the country's founding, the prices of agricultural products were quite good. This led my maternal grandfather, that fool, to actually give up his public office in the county seat to return to the countryside and grow radishes!!! The misfortune of the family!

By the time his radishes were harvested, the Republic had already implemented the new national policy of prioritizing heavy industry and developing agriculture, but using "price scissors" to depress agricultural product prices. Thus, he was completely dumbfounded—going from a state employee resigning comfortably to returning to the countryside to farm, only for agricultural product prices to be suppressed. Of course, that was secondary. Later, agriculture went through the People's Communes and eating from the same big pot, right? Grain yields "launched satellites," and there was not even enough food for the villagers themselves, yet the public grain tax had to be delivered according to the proportion of the exaggerated "yield"! If your yield was a thousand catties per mu, you could still afford the public grain; if it was ten thousand catties per mu, the commune ended up owing the state!

Right? Later came the household responsibility system. State grain was the agricultural tax. Then there were local retentions, water conservancy surcharges, and this and that. It was not until 2006 that the agricultural tax was completely abolished. Why? Because the cost of collection exceeded the total tax revenue, and it caused huge social conflicts.

However, the prices of agricultural products, especially staple grains, must be "stabilized." Look at the "purchase price" of wheat in some years—it rises by a measly 2 cents! An acre of land actually makes an extra 20 yuan a year with tears in eyes. Many people see Japanese rice and Thai rice in supermarkets at outrageously expensive prices. But why is our domestic rice able to stay at 2.5 yuan/catty for ten years as if it were a single day? In the countryside, it can even be as low as 2.0 yuan/catty.

This price scissors for agricultural products is not just a tradition; it is a systematic, institutional suppression of farmers and agriculture. It is an institutional arrangement that sacrifices farmers' interests to stabilize urban prices and maintain the affordability of basic means of subsistence for the urban underclass, much like the price of flatbread in Egypt.

Here we are not trying to dwell on these price scissors. The key point we want to discuss is their inevitability. They are formed by more complex institutional designs and intricate policy systems, creating $F_{damage}$—the "price loss/gain factor"—against farmers, which has formed the currently "stable" "grain prices." This allows our country to "keep the rice bowl firmly in our own hands"!

As for those institutional designs and intricate policy systems, I won't go into detail. You can read other related books yourselves. Three generations ago, everyone was a peasant, so let's not pretend to be outsiders. If you don't understand, you can go back and ask your parents, or grandparents.

In short, my point is that China's urban-rural dual economic system very vividly explains to us how the "$F_{damage}$" price loss/gain factor acts on Chinese farmers—both as a local regional group and as a national regional group cluster—thereby forming the damaged low prices that "farmers have no choice but to accept" for grain, vegetables, fruits... the most basic and core necessities in the "basket of standard items" we mentioned earlier.

However, we must be clear that the problem is not the price itself. So it is not that if you go to a farmer and say, "I'll buy your rice for 50 cents more per catty," you will have solved the problem. It is not like that. The root of the problem is the $F_{damage}$, the price loss/gain factor, formed by these "unavoidable" and "force majeure" systemic factors.

As for subsidizing industry, export tax rebates, subsidizing exports under overcapacity, and various industrial policies, we will not analyze the "price losses and gains" caused in the microeconomic and macroeconomic fields one by one.

Let's go straight to the final section, analyzing humanity as a species.

4. A Community with a Shared Future for Mankind and Diverse Regional Price Entities

To be honest, writing up to this point, I feel the tone has been set a bit too high, but let's force ourselves to apply it anyway. Fortunately, when analyzing the exchange rate earlier, we mentioned a classification method by Lu Zhengwei. Yes, I particularly like classification methods; I think classification is one of the greatest creations in the academic methodology system. Lu Zhengwei mentioned the different impacts of tradable and non-tradable goods prices in international and domestic price formation. For details, you can read his article; I don't like copying long passages in here.

Therefore, at this level, we can directly attribute $F_{damage}$ to the "price loss/gain factor" that a country or an economic community suffers when facing foreign countries. For example, the $F_{damage}=33\%$ we used earlier to estimate the RMB exchange rate is a nationwide comprehensive price loss/gain factor. Since it is positive, it means our $F_{cn}$—the domestic price, the local currency price of a basket of standard items in the current year—is systematically "sold low," sold too cheaply.

But with so many people, so many enterprises, and so many industries in our country, many of them still make a lot of money and feel they are "winning." Therefore, according to our next level—the regional and group price loss/gain factors—it is easy to deduce that someone has borne the "cost" of your "winning."

So our prices have been depressed by so much. I think from the perspective of exchange rate calculation, our value loss/gain can take a value between 0.33 and 0.50. Of course, I think that is still conservative. If we use a unique income coefficient, referring to the Gini coefficient to choose the value of this $F_{damage}$, we could take it between 0.6 and 0.8.

And from another direction of economics, low domestic prices mean that "the domestic market cannot afford it," so "the domestic basket of standard items cannot fetch a high price." In this way, we transition very smoothly to the new term "insufficient effective demand" that is currently red-hot in economic circles.

Unfortunately, "insufficient effective demand" falls right into the trap of our $F_{damage}$. "Insufficient effective demand" is because the "pricing power" of the mainstream domestic consumer groups has been damaged too much. To put it another way, the "income distribution" and "social welfare" of domestic consumers are too low, leaving them with no "consumption capacity," hence the insufficient effective demand. And the other side of the coin of "having no consumption capacity" is the lack of bargaining power in the "labor market" and "productive fields"—a lower "despair score"! Look, our $F_{damage}$ has thus completed the logical closed loop from micro to macro, and macro to micro.

Furthermore, the insufficient effective demand caused by inadequate domestic distribution leads to overcapacity, which finally turns into "dumping," making us the "world's factory"!

Many people think the world's factory is a great thing! They also love to boast that "China has closed the door to industrialization."

Do you still remember the article I mentioned earlier, "China's Export Advantage is Not the Exchange Rate," published in FTchinese in February 2015? It is because of the existence of a near-infinite supply of "hardworking," well-educated (both compulsory and higher education), and scale labor force.

Therefore, this $F_{damage}$ of 0.33 to 0.x leads to our low domestic prices, and even more so to our subsidization of foreign consumers. Furthermore, it is not just subsidizing foreign consumers in terms of price, but even in terms of product quality—where the domestic market gets garbage at high prices, while foreign markets get premium products at low prices.

When we see clearly the damage or gain that this $F_{damage}$ price loss/gain factor causes to a country's prices, we know that those foreigners who clamor about China's "dumping" every day are getting a bargain and still playing the victim.

Of course, this is just a brief analysis of some price phenomena in the "world economy" and "globalization," especially exchange rates and "dumping." Only when we understand the true source of this "price butcher" capability can we truly define who the winners of globalization are.

International Valuation Space: Exchange Rate Difference as a Measure of $F_{damage}$

In Chapter 2, we already derived the international valuation formula:

$$F_{damage}^{国际} = 1 - \frac{E_{PPP}}{E_{nominal}}$$

Here, we understand it at the "regional cluster" level. Competition between nations ultimately manifests as international price differences. The PPP exchange rate assumes the equilibrium exchange rate when there is no $F_{damage}$, while the actual nominal exchange rate has already embedded each country's domestic $F_{damage}$. The difference between the two is the international valuation space caused by $F_{damage}$.

Taking the RMB as an example, $F_{damage}^{国际} \approx 0.417$, which highly coincides with the $0.33 \sim 0.50$ range estimated from micro data. This is not a "market deviation," but a quantitative expression of the differences in $F_{damage}$ across countries—telling us how much the real price of a basket of goods in this country has been depressed by the intra-species structure and national institutions.

The Essence of Globalization Arbitrage: Low-priced goods flowing from high-$F_{damage}$ regions to low-$F_{damage}$ regions is exporting the depressed proper price within the high-$F_{damage}$ region to the world in the form of the actual price. The "price competitiveness" of Chinese manufacturing does not stem from technology, but from a meta-structure level capability of price damage.

Conclusion:

The so-called $F_{damage}$ is not that mysterious in economics. It simply refers to the deviation of prices from the principle of equivalent exchange in transactions at different levels, due to structural, comprehensive, and unavoidable loss/gain factors. The source of this price loss or gain is the "bargaining power" of the participants in economic activities, which ultimately converges layer by layer across organizations of various forms, scales, and structures, resulting in the formation of prices.