How Does Loki Serve Odin?
When you're a leader, you need contrary as well as highly unique positions close to you to use as a foil. You have to be the one to hold things together in council, but having someone who will speak up for the obnoxious or extremist position is extraordinarily useful, because then you can moderate them, but utilize the force that lies in their argument to press for more radical changes within the council.
See, any group of people have a basic goodness inhering in their community frith, but there can be a tendency towards stagnancy, and if you represent an essentially dynamic force, then you need an agent to stir things up so you can get forward motion, if you can keep that agent on a leash.
For the time that Odin was able to keep him on a leash, Loki served well. He kept people on their toes and tested their wits, sometimes, even often, to wits' ends.
But everything has its limits, and every fool is a fool. Chaotic forces worked through Loki, and he became the undoer of everything he had served. A tangler, he became entangled in intrigues from which he could not extricate himself, where every move took him deeper and deeper into a sinister web. (Let us remember that all jesters are not benevolent! Remember Tom Skelton, Fool of Muncaster:
This lovely sadist of a jester would hang by the roadside as visitors came along the path seeking the castle, and if he liked them, he sent them on the way towards the castle, and if he didn't, he directed them off to the quicksands and bogs, where they could drown in the marsh. A carpenter who stole a couple coins from him ended up decapitated, his head thrown in wood shavings, upon which Tom allegedly said, according to legend (which is all this may be : ghost story around legend, but certainly a folk-figure form of a sinister jester in any case), "He'll have less luck finding his head than he did my shillings," or something to that effect. Mad as a hatter.)
Loki himself was driven mad.
We hear the refrain several times in Lokasenna. Heimdall tells him he is örvita, "out of his wits". Both Odin and Freya, call him ærr, "mad" or "frenzied". Of course! He had swallowed the heart of Gullveig, whose crazed angst (Angrboda) was well-known and ill-famed, and everything in him began to turn inside-out. He was the best of jesters, turned into the worst of jesters, with a sense of humor that could kill. He turned the elves against the dwarves, masterminded Baldur's death, and set men on earth to war against each other, with an increasingly sociopathic caprice and devil-may-care jollity in line with Tom Fool's sadistic lacksadaisy. Deeper and deeper into the net that he wove, tricked into his own trickery, mad, crazed, fool, and interestingly, as Snorri attests, he was caught in the pattern of the very net he made. A telling metaphor.
And it is not that Odin did not see this possibility, but sought to use as thoroughly and deeply as possible even those who might one day turn or be turned, in order to drive things onward, and implant unforeseen, unpredictable possibilities in unseen seed-forms into the fabric and texture of wyrd, there to unfold as creative surprises.
The rabid fool, frothing at the mouth in frenzy, out of his wits and outwitted, still has fool's proverbs to share, bitter half-jokes and crazed prophecies, quarter-bits of wisdom, and fragments of old satires to bring the mirth of gall. But still mad.
Yet up to this very limit, a fool is a wise man's best friend, because a fool allows a wise man to play the fool while remaining wise. Everyone needs a good idiot, someone not afraid to make an ass of themselves, particularly in the pursuit of an important aspect of truth that everyone else is neglecting to their peril. This may be a dangerous truth that no one wants to touch, an aspect too controversial for a leader to propose outright, yet which moderated, might prove catalytic. Having such a foil is very useful indeed ...
Perhaps you have sorely felt at times the absence of an asshead, who will leap into the center of the circle and cry outrageous things, for then it saves you the ridicule and opprobrium that come as jester-costs, while allowing you to wisely draw out what kernel lies in the scandal or controversy they dared expose publicly. A king and his court fool.