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Rare Earths as a Case Study in Civilizational Gresham's Law — LessWrong

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Rare Earths as a Case Study in Civilizational Gresham's Law

7th Dec 2025

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EconomicsGame TheoryMoloch

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==== Introduction ====

The recent U.S. Congressional report on rare earths presents a standard national security narrative: China controls the supply chain, creating a strategic vulnerability. However, focusing solely on the security aspect obscures the underlying mechanism that caused this shift.

This post argues that the rare earth disparity is not merely a trade dispute, but a classic example of **Gresham’s Law applied to regulatory environments**. In a globalized market, systems that externalize costs (via low labor rights and environmental standards) systematically outcompete systems that internalize those costs.

The "National Security" framing used by the US government is likely an institutional workaround—a "kludge"—because the current international trade framework lacks a mechanism to price in the "cost of civilization."

==== Layer 1: The Incentive Landscape ====

The disparity in rare earth dominance is best explained by a brutal economic calculation rather than incompetence.

Consider the cost structure of a US processing facility versus a Chinese counterpart. The US facility operates under high regulatory burdens: OSHA standards, EPA compliance, and high wages (internalizing the cost of labor dignity). The Chinese counterpart often operates where these costs are externalized—safety is lower, and environmental damage is absorbed by the commons rather than the company ledger.

This creates a **Race to the Bottom**. If two agents compete, and one is willing to sacrifice "human values" (safety, health, rights) for efficiency, the agent who refuses to sacrifice those values will be priced out of the market. In LessWrong terminology, this is a **Moloch trap**: a multipolar trap where individual incentives lead to a collectively suboptimal outcome (loss of high-standard industries).

==== Layer 2: Civilizational Gresham's Law ====

You can view this dynamic as Gresham's Law ("bad money drives out good") applied to civilizational norms.

* **System A (High-Rights Cost):** Treats the worker as an end in themselves (Kantian). High maintenance cost.
* **System B (Low-Rights Cost):** Subordinates individual welfare to collective/production goals. Low maintenance cost.

In a frictionless global market, System B acts as the "bad money," driving System A out of industrial dominance. The US faces a dilemma: regress to System B standards (defect on its own values) or lose the industry (economic decline).

==== Layer 3: National Security as a Legal Patch ====

Why does the US government frame this exclusively as "National Security"?

I propose this is an institutional constraint. Under WTO rules and domestic law, "our labor is too expensive because we treat people well" is not a valid legal basis for protectionism. The US Executive Branch cannot impose tariffs based on a "Civilizational Price Index."

However, "National Security" acts as a super-statutory override (e.g., the Defense Production Act). It is the only legal immune response available to a liberal democracy trying to survive against a competitor playing by different rules. We are observing the system attempting to patch a vulnerability in free-market theory using security statutes.

==== Conclusion: The Cost of Dignity ====

The rare earth report highlights a flaw in the current global operating system. If we want to maintain high-rights democratic capitalism, we have to acknowledge that it is **inherently less efficient** at pure resource extraction than low-rights authoritarianism.

The "efficiency" of the low-rights model is actually a subsidy paid for by the health and freedom of its workers. Defending the high-rights model requires accepting that "dignity" has a premium price tag. The open question is whether Western economies are willing to pay that premium via subsidies and tariffs, or if they will continue to let the "efficient" Moloch win.

Cypress Qin
Toronto, Canada
November 18, 2025