by David Orrell
In a cowboy economy, the scarcity of money drives the thirst to acquire more. The spaceman economy, in contrast, is seen as an explicitly open system, in the sense that it takes in food energy at one end and outputs waste at the other. Growth is therefore constrained not by a shortage of precious metal or the actions of a central bank, but by the capacity of the natural systems in which it is embedded. In one economy scarcity is primarily mental, in the other it is primarily physical. Of course, with a fiat currency, it might seem there is no shortage of money, since it can be easily created. But when the money is created through interest-paying loans to people or firms, the interest component has to be actively taken or borrowed from someone else—so either the money supply must inflate, or someone has to go broke. We are therefore all drawn into a high-stakes competition for resources to pay our interest bills. As economist Bernard Lietaer notes, “The job of central banks is to create and maintain that currency scarcity. The direct consequence is that we have to fight with each other in order to survive.”82 While scarcity is a fundamental feature of life (as is its opposite, plenty), our monetary system has elevated it to a kind of defining principle. Where it does not exist, corporations artificially create scarcity to protect profits (e.g., through patents, intellectual property laws, and similar mechanisms).
Money is a way of stamping number onto the world, but (since the planet is not a head of cattle or a frozen chicken in a supermarket) there is a fundamental inconsistency between the artificial constraints of our money system, which are designed to foster continuous growth, and the real constraints of the biosphere. The result is two kinds of debt: one the numerical type, the other physical, to the planet and to future generations. Money has an inbuilt tendency toward the abstract and mental: to restore some balance, we need to align not with money, which points always toward number, but with the kinds of environmental impulses that money seems to erode. This requires new economic thinking, but especially new ideas about money itself: a kind of monetary yoga, which yokes (the root meaning of yoga) together the mental and physical aspects of money.
The Virtual Economy
Viewed from a complexity perspective, the world economy seems less a mechanical system operating at a state of maximum efficiency than an organic process dominated by a financial industry that demands constant growth to sustain itself with interest payments and other profits. Since these profits flow to a small number of asset-rich people, they have contributed to growing levels of income inequality. In most jobs, salaries have remained stagnant for the last few decades, while the wealth of the top 1 percent has soared.83 The magnetic fields of money are polarizing society—while a degree of inequality is natural, money amplifies the differences. Another consequence is that the economy has to grow just to keep the system rolling, which brings it into conflict with natural systems—just as cancers come into conflict with our bodies. As Boulding famously pointed out, “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.” In particular, an economist who confuses numbers with the real world.
Just as money is experiencing a transition between its real and virtual sides, so is the economy itself. In external appearances, our countries and cities are still based on infrastructure, natural resources, and human labor—the world of physical things. But much of the economy is concerned not with things but with information. A pharmaceutical company, for example, may employ thousands of people in sites and laboratories around the world, but much of its worth will be tied up in intellectual property for a handful of drugs—remove that and the rest falls apart. Commuters in a modern city such as London or Toronto still navigate a transit system that looks rather like the one their grandparents used fifty years ago, but they are consumed by their smartphones. As with money, the virtual sometimes seems more real than the reality.
The problem from the perspective of traditional economics is that, as Stewart Brand famously observed, “Information wants to be free.”84 Unlike land, commodities, labor, or energy, something like computer code can be duplicated and transmitted at near-zero cost. Our scarcity-based money system, which was designed for an earlier era, therefore struggles to cope. As mentioned earlier, scarcity can be maintained to an extent through legal means, but the system is leaky. Some protected workers in the knowledge economy, such as those in the financial sector, are very well compensated, while others, such as journalists, face shrinking incomes. Much knowledge work, for example, writing open-source code, is done for free, on a volunteer basis.
The impact of the virtual knowledge economy extends also to the real economy, as more and more tasks are handled by robots. As the Boston Consulting Group’s Michael Zinser notes, “The price and performance of automation are improving rapidly. Within five to ten years, the business case for robots in most industries will be compelling, even for many small and midsized manufacturers.”85 According to Harvard’s Justin Reich, “Robots and AI will increasingly replace routine kinds of work—even the complex routines performed by artisans, factory workers, lawyers and accountants.”86 A study by Bruegel, a Brussels-based research organization, for instance suggests that 54 percent of jobs in the twenty-eight member states of the European Union are already at risk due to advances in computerization.87 One of the explicit aims of the cybercurrencies discussed in chapter 9 is to remove the need for human intermediaries—that is, jobs. Algorithmic trading systems are already responsible for most of the activity in stockmarkets, and they don’t ask for bonuses. Robot armies are just a matter of time. But this leads to an inherent contradiction: If value is increasingly a measure of information, but information wants to be free, then what is the role of money? We return to this question in chapter 10.
Quantum Economics
The transition from seeing the economy as a mechanical system to seeing it as one part of a living system amounts to an aesthetic shift that has profound implications for the way we think about money and the economy.88 Instead of speaking about “linear,” “mechanistic,” “rational,” “predictable,” and “efficient” behavior, the relevant terms are “networks,” “complexity,” “nonlinearity,” “contagion,” “emergence,” “health,” and “uncertainty.” We can also learn from properties such as redundancy and modularity, which lend stability to natural systems such as ecosystems. For example, William White observes that the study of such systems “might lead to the conclusion that our current ‘fiat money’ system invites complexity with all its associated dangers. … We urgently need to rethink the foundations of our current international monetary (non) system.”89
Our gold standard economic theory is based on the idea that the economy is made up of individual agents who act rationally to optimize their own utility. The result is supposed to be a stable system that maximizes overall happiness. But as discussed earlier, none of these assumptions stand up to critical analysis. Prices are not the optimal result of a rational, mechanistic process governed by deterministic laws but are an emergent phenomenon influenced by myriad complex processes. In recent years, groups such as Rethinking Economics (with branches in seven countries), Manchester University’s Post-Crash Economics Society, and many others around the world have sprung up to demand urgent reforms in the way that economists work and teach.90 These call for an approach that incorporates
Pluralism. Students from Quebec wrote a petition in 2014 noting that the field leaves “little room for ethical, epistemological, philosophical, political and historical reflection, which would allow the discipline to reflect on itself and renew continuously.”91 Instead of being shoehorned into a unified, consistent approach, models should be seen as imperfect patches that capture some aspect of the system. University textbooks could be replaced by anthologies of economic thought.
Humility. A consistent theme is that mainstream economists are not receptive to new ideas. As Keith Harrington from the activist group Kick It Over told Yes! magazine in 2015, “Despite its enormous failings in the face of the financial crash, t
he mainstream of the profession has by and large failed to embrace self-criticism or open itself up to different approaches.”92
Empiricism. Economists such as Smith and Jevons based their theories on imagined villagers trading beaver pelts rather than on actual observations. While these ideas are still taught as timeless mathematical truths in some textbooks, the social sciences—including economics—are being transformed by the flood of empirical data that has become available in recent years. At the same time, economic theories should be put into historical context, since the economy is changing and adapting over time.
Science. The subject needs stronger interactions with areas such as biology, ecology, complexity, network theory, and nonlinear dynamics.93 A first step will be to unlearn the Newtonian model that has persisted in economics long past its use-by date.
Money. Above all—and implicit in the foregoing—money needs to take its rightful place at the center of economic thought.94 Money is not an inert substance but an active medium. We may therefore be able to shape its form to achieve certain outcomes—even if this means inverting some of the sacred tenets of economics.
As we have argued, money objects—with their dualistic, contradictory aspects—have much in common with quantum objects. Now, it is something of a cliché to say that quantum physics is so weird that it is beyond human understanding; and indeed, many of the properties of quantum objects do seem to defy everyday logic.95 This appears to back up the view, frequently expressed, that money is an impenetrable mystery, comprehensible only to a privileged elite. It might be tempting to throw your arms up in the air and conclude, as one medieval churchman did, that
Money and currency are very strange things.
They keep on going up and down and no one knows why;
If you want to win, you lose, however hard you try.96
But perhaps the respective problems are less to do with quantum reality, or with money, than with classical logic, which is based on Aristotelian yes–no, true–false dualities; and perhaps these properties and behaviors aren’t as foreign or bizarre as we tend to believe.
For example, behavioral economists have shown that we make economic choices based on a range of cognitive processes, which then “collapse” to a single decision, in a manner similar to the process in which wave-like quantum properties collapse to a single value when measured.97 However, if queried, we then tend to justify the decision based on a logical argument. Quantum physics is context sensitive, so the act of interrogating a system changes its behavior. We can even modify the behavior of a particle just by checking to see if it has moved. Context is equally important in economic questions: the answer we get will depend on time, place, and our own stance. We can modify the behavior of something just by putting a price on it. The behavior of quantum objects or money objects is often paradoxical, but then so is that of humans—“If you want to win, you lose” describes more than just money. As physicist Diederik Aerts notes, “People often follow a different way of thinking than the one dictated by classical logic. The mathematics of quantum theory turns out to describe this quite well.”98 Money is only truly perplexing if you view it from the abstract viewpoint of classical logic—as an inert, dead thing, rather than something with a life of its own. No wonder mainstream economics tries to ignore it.
To summarize, economics is on the verge of a revolution that in a more modest way resembles, or at least can draw inspiration from, the quantum revolution that rewrote the laws of physics a century ago. As then, a first step is to acknowledge the quantum nature of money—that is, the notion of money as a fundamental quantity and the dualistic properties of money objects—and the effect of this on the system as a whole:
• Prices are an emergent phenomenon that arise from the use of money objects. They do not necessarily optimize utility, efficiency, or anything else (they don’t always need to make sense).
• Money objects have a fixed, defined value, but other values are fuzzy, indeterminate, and variable.
• Prices and values are coupled because we value something when it has a high price, and vice versa, but the two have a complex relationship, because price is numerical and value is not. The link breaks down completely for digital goods that can be freely copied and distributed.
• The money system is not a veil over the true workings of the economy, as assumed in mainstream economics—it is the driving force of the economy, and its design affects societal outcomes.
• Our money system boosts economic activity, which feeds into cultural and technological development, but its negative effects—which include obsession with numerical measures such as net worth or GDP, wealth polarization, financial instability, and environmental damage—reflect the innate tension between number and the real world: money’s quantum contradictions writ large.
• The two sides of a ledger—positive credit and negative debt—are in a kind of oppositional balance but do not simply cancel one another out, either in a coin or in the economy as a whole. In particular, while moderate levels of debt boost economic activity, excessive levels are destabilizing.99
• To mathematically model these effects, we need to use techniques that have been developed for living, organic systems, such as nonlinear dynamics and complexity science.
• The design and function of money has evolved throughout history and is evolving now.
Reforming economics will, of course, not just come down to a kind of economic Manhattan Project, in which genius scientists solve the problems of mankind. Economics is as much about human behavior as it is about number, so it is both a science and an art. And while the reform process is already under way in many institutions and university campuses and activist organizations around the world, one should not underestimate the resistance of economists to adopting new ideas.100 The impetus from change will come from people outside the profession and is likely to be driven and overtaken by developments in finance. Neoclassical economics made money irrelevant, and now money is returning the favor.
Since its invention, money has been through a number of phases in which it has flipped back and forth between being primarily virtual and physical. The shift currently taking place, though, is a bifurcation point that promises to completely upend everything we know about money. Just as the monoculture of economic thought is being replaced by a range of new ideas, so monopolistic national currencies are being challenged by a diverse ecosystem of alternatives. In chapter 8, we see how the currency system is changing as we abandon gold standard ideas and learn to exploit the power of money in new ways.
8
New Money
It would be crazy to believe that we are going to go into the information age and that the most important information system—our money—will not change. Which is the hypothesis that everybody works with.
BERNARD LIETAER, “WHY THIS CRISIS? AND WHAT TO DO ABOUT IT?”
Our “Age of Anxiety” is, in great part, the result of trying to do today’s job with yesterday’s tools—with yesterday’s concepts.
MARSHALL MCLUHAN, THE MEDIUM IS THE MASSAGE
Since the 1970s, the world economic system has been based on virtual fiat currencies. As many critics have pointed out, that means cash no longer has intrinsic value, so it can be printed at will, unlike under the gold standard. Psychologically, though, we seem to still have one foot in that previous era. Like a king short of funds, the government borrows money at interest from central banks. The private banking system clings on to its Victorian traditions and prestige. Money is scarce, even though it is made of electrons, instead of electrum. In this chapter, we look at how developments, including new alternative currencies, are reinventing the basic design principles behind money, subverting our gold standard mentality, and pushing the economic system toward something that may look very different.
One of the defining features of money is that there is never quite enough. As discussed earlier, even the wealthy always seem to feel a little short. At the same time, though, we have strong moral
rules and codes about how money is handled. Our monetary and economic system is based on the concepts of scarcity and competition. Life is a game, and money is a way of keeping score. During exchange, the net amount of money stays the same, so trades involve winners and losers. We have to fight for our lucre, and it seems morally wrong to get something for nothing. This principle is encoded in the oft-quoted statement that economics is the science of scarcity and is based on the idea that money is, like gold, a kind of limited commodity.
It therefore came as a surprise to many when, following the Great Financial Crisis, the U.S. Federal Reserve under Ben Bernanke decided to embark on the procedure known as quantitative easing (QE), which seemed rather like bending the rules. The aim was to stimulate the economy in a top-down fashion by using newly created money to buy assets such as government bonds from private sector banks. The theory was that this would flood said banks with money, which they would then lend out to companies, and this would boost the economy, just as the discovery of new sources of gold did in olden days. After a period of time, in theory, the bonds are sold back to the private sector, so the effect is only temporary.
The name was an example of the deliberate obfuscation that has been perfected by central banks over the years. To use the words of the journalist Ed Conway, “Central banks have been able to carry out such radical policies without inciting public unrest comes down to the oldest trick in the economic textbook: jargon.”1 (What was being eased? What would nonquantitative easing look like?) Many critics saw it as a disguised form of money printing that would inevitably lead to inflation or even threaten the dollar’s role as a key pillar of the financial system.2 Others argued that the new money was just filling a void left by the implosion of credit instruments during the financial crisis, so inflationary effects would be muted.
