==== 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 los...

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