by David Orrell
To achieve this level of dominance, Bitcoin would probably need some major support, from either a powerful corporation or even a government—for example it could be chosen as the basis for a national or regional currency.36 Another route, in a country such as Venezuela, would be for the rest of the financial system to collapse—note that Bitcoin was born in a financial crisis and might hold its value quite well in the next one.
Selloutcoin
Bitcoin’s blockchain technology is taken over by financial firms to serve as the back end for lucrative money-transfer services, in either bitcoins or some other currency (such as dollars).37 Independent fintech services manage to cream off some of the banks’ profit streams, but the power structure remains in place. It will be ironic if Bitcoin, which grew out of the same utopian, antigovernment, anticorporation ethos that gave us WikiLeaks, ends up being co-opted by the very institutions it sought to protect us from. When Cypherpunks claimed that cryptographic methods would “fundamentally alter the nature of corporations and of government interference in economic transactions,” they didn’t mean strengthen them.38
An additional possibility, of course, is that Bitcoin could implode in such a spectacular manner that it scares everyone off the idea of cybercurrencies for a long time, just as John Law put the French off banks, or at least the word banque. At this moment, though, Bitcoin seems to be enjoying decent momentum. The idea behind it has succeeded in a rational test—which is why big money got involved—and also appeals to the emotions of many, since it works with concepts such as freedom and collective will.
Of course, some fear even the idea of a financial system that lacks central control. To them, the interventions of central banks and the creative policies of commercial banks are largely a force for good, and inflation, banking fees, and occasional bailouts are externalities worth their cost. Bitcoin should only be accepted if it can reinforce the existing (power) structure; otherwise anarchy would arise. The campaigner and former derivatives broker Brett Scott revived a famous discussion between two Enlightenment political philosophers: Thomas Hobbes argued that people are inherently in conflict and thus, to escape “a war of all against all,” they need to delegate some of their freedom to a sovereign who mediates. Jean-Jacques Rousseau countered with the idea that it does not have to be a sovereign but could be collective or general will. “So it goes with Bitcoin,” says Scott. “In place of a centralised, hierarchical group of banks keeping score of the money, a decentralised network of individuals records every transaction on a virtual ledger.”39 Perhaps the most likely outcome will involve some blend of the two—a kind of compromise between hierarchy (state or corporate) and decentralization (Bitcoin or other) that echoes the accommodation between sovereign power and financial innovation that led to the foundation of the Bank of England.
Emerging Currency
One of the reasons cybercurrencies, and alternative currencies in general, have met with resistance is that they don’t conform to traditional ideas about money. A price in bitcoins does not measure labor (at least the human sort) or utility (it’s not a hedonometer), and the cybercurrency’s emergence into the world relied neither on commodity value or the sanction of the state. Georg Friedrich Knapp wrote in 1905 that “the metallists fail to explain currency systems that have no metal. The chartalist has no trouble in explaining them; they are the touchstone of his theory.”40 But both these schools, along with many economists in general, struggle with something like Bitcoin. As Alan Greenspan said: “I do not understand where the backing of Bitcoin is coming from. There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable, which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it’s a government or an individual.”41 According to Eugene Fama, Bitcoin is “not a store of value. Unless it has some other value, the core value has to come from something.”42
Nonetheless, cybercurrencies have proved their “metal”—you can buy things with them. So maybe the problem is not with cybercurrencies, but with our theories of money (box 9.1).43 Implicit to all these theories is the idea that money has to be backed by something. It therefore inherits its value from some preexisting outside source, be it physical (metal), virtual (the law of the state), or some combination (labor or utility). But when we treat money as a fundamental rather than a derived quantity and acknowledge that money objects have contradictory but also mutually reinforcing aspects, it is possible to see how a currency can boot itself up out of the ether, based on nothing more than some code and an Internet connection. Money objects are desirable in themselves, so the more something looks like money, the more valuable its numbers become. And just as market prices emerge from the use of money objects, so the power of the money system expands with its markets.
Box 9.1
Seeing the Light
The debate over whether money is made of solid metal (as bullionists believe) or is a virtual system (chartalists) mirrors the much older debate over the nature of light. Democritus, in the fourth century B.C.E., believed that light was a form of physical matter that consisted, like everything else, of atomos, or atoms. Aristotle argued instead that light was a kind of wave in the ether. In the seventeenth century, Isaac Newton proposed a corpuscular theory in which light was a stream of particles, just as money was a stream of golden coins.
In 1801, Thomas Young tested this hypothesis in his famous double-slit experiment, in which light was shone from a point source through two small slits and projected onto a screen. The surprising result was an undulating pattern of bright and dark bands, which was similar to the interference patterns produced when two waves come together, with points where the crests reinforced one another and others where they canceled out.
The balance of evidence therefore seemed to favor the wave hypothesis—but then the advent of quantum physics at the start of the twentieth century showed that light was actually made of individual photons. In 1909 Geoffrey Taylor repeated the double-slit experiment, this time with an extremely weak light source, and showed that even when individual photons passed through the slit, the interference pattern was still reproduced. The crests corresponded to places with a high probability of seeing a photon, while the troughs were places with a low probability. Even though individual photons were passing through only one of the slits, they somehow reacted to the presence of the other slit. According to Niels Bohr, the only way to make sense of this was to see the wave–particle properties as complementary aspects of a unified whole.
The debate over money has followed a similar trajectory. Prior to the early twentieth century, most experts (including Newton) believed that money was precious metal—something physical you can touch and weigh. The chartalist movement then countered with the idea that money is actually a virtual system—an information wave in the ether. As we have argued, though, money is best understood as having dual, complementary, real/virtual properties—in which case economics really is like physics, just a century behind. Viewed in this light, far from being an aberration or a curiosity of the digital age, cybercurrencies are a natural step in the evolution of money; the latest manifestation of its quantum nature.
A decentralized cybercurrency is supported not by metal or the state but by something much more distributed and amorphous—its network of users. A property of networks is that their power expands rapidly with size (sometimes called the fax effect, since fax machines were of little use until enough people had them). The value of a cybercurrency—and the trust it embodies—grows in the same way with the size of the network, so it can initially be near zero. Note that the two sides of money, which represent positive credit and negative debt, remain in oppositional balance, so a kind of conservation principle is observed, as when matter–antimatter particles are created from the quantum void. It is therefore not necessary to begin with an external debt or a source of value, because the two can expand together.
In many respects, buying a stake in a new c
ybercurrency is the same as funding a business—you are betting that it will take off and your investment will be worth something. In 2014 Ethereum crowdfunded its development through an online sale of ethers, which raised over $18 million, a record at the time. The business exchange network Ripple Labs was similarly funded by issuing its own blockchain-based altcoin known as XRP and keeping 20 billion of the maximum 100 billion that can be issued.44 NeuCoin granted its nonprofit foundations an initial endowment of NeuCoins. If these currencies gain value, so do the holdings of their founders, investors, and organizations. They are making money by coining (in the sense of inventing) a new form of the stuff—just as Nakamoto did in 2009.
The traditional notion that a currency must be explicitly backed by something of value may in fact have affected the design of Bitcoin: as discussed earlier, the capped limit and the energy-intensive mining seem clearly to be attempts to emulate the properties of gold. Adam Smith, who equated value with labor, might have approved—assuming that the labor of computers counts.45 If instead money is seen as a fundamental quantity, and market value as an emergent property of the money system, these restrictions begin to seem less relevant or desirable. Money doesn’t so much need to be backed as it needs to be used. This raises the question of whether an algorithm that simplifies the mining process, such as proof-of-stake or another, may turn out to be a superior approach. It will be ironic if the world’s leading cybercurrency founders because it is too much like metal.
Since the 1970s, we have moved from having one gold-linked global reference currency, to enjoying a wide menu of choices. The dollar, the euro, and the yuan, along with smaller national currencies, are complemented by both local currencies and global currencies such as Bitcoin. As fintech firms around the world compete to find new ways to mesh computer technology with finance, the results promise to revolutionize not just money but everything around it from wealth management to funding business loans to trading options. Such tools, notes author Nathan Schneider, are “a testing ground for whatever virtual utopias people are able to translate into code, and the tests will have nonvirtual effects. … As for any utopia, though, the power struggles of the real world are sure to find their way in as well.”46 Whatever form that money takes—from clay tablets to gold coins to banknotes to computer bits—it still retains the same quantum, dualistic nature that binds virtual number to real value; and the struggle between these two sides is far from over. In the final chapter, we take an envious look at different visions of utopia and ask whether the design of money can hold practical solutions to some of our most pressing problems.
10
Utopia
Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal—that there is no human relation between master and slave.
LEO TOLSTOY, “WHAT SHALL WE DO THEN?”
Money often costs too much.
RALPH WALDO EMERSON
As seen in previous chapters, modern fiat currencies are based on the public–private partnership between the state and private banks that was developed during the years of the gold standard. Today, though, many alternative forms of money exist, from local time-share schemes to modern cybercurrencies, that fundamentally renegotiate the relationship between number and value at the core of money. But is money, which always points toward number and profit, ultimately incompatible with values such as ethics and with long-term projects such as preventing environmental degradation? What will be the future monetary order?
Of all human inventions, money must be the most deceptively powerful. It helped spark the development of writing and the organization of the first city-states. Its use contributed to a great flowering of thought in the Axial Age. It has been the cause of epic bloodlust and the focus of scientific geniuses. It arouses overpowering emotions but also a kind of detachment. It has the nuclear power to make or destroy nations. We revere it but also see it as corrupting—even evil. And yet our economic theories treat it as a mere tool for exchange and accounting, nothing special in itself.
Neoclassical economics, for example, began as a kind of utopian vision for society—aiming to achieve what Francis Edgeworth called “the maximum energy of pleasure, the Divine love of the universe.”1 One property of such visions is that money never plays much of a role. The original Utopia, after all, was that of Thomas More, who in his book of the same name wrote in 1516: “Men’s fears, solicitudes, cares, labours, and watchings would all perish in the same moment with the value of money; even poverty itself, for the relief of which money seems most necessary, would fall.”2
The word was a pun on the Greek words ou topia (no place) and eu topia (good place), and meant a good place that doesn’t exist—and another property of utopias is that attempts to build them on earth routinely fail, whether they are led by religious cranks or staid academics. The neoclassical version certainly didn’t work out quite as its inventors planned. While the economy has grown enormously, and many people around the world have escaped poverty, not everyone has achieved “the maximum energy of pleasure,” and we are now faced with a number of interlinked problems that are in a way related to that success. Two of the most prominent and frequently discussed are environmental limits to growth and economic inequality. Like a projection of money’s two sides, each is associated with a different kind of debt—the physical with the planet and the numerical between groups. There is a symmetry between the slow but inexorable rise in global debt and the rise in global carbon emissions. Techno-utopians will argue that the answer to either problem is more economic growth, based on the idea that we can buy our way out of trouble, but so far the evidence seems to point the other way. It’s not that technology has disappointed—we are all impressed with the Internet and smartphones—but that the impact of the most important technology—money—doesn’t usually get taken into account.3
Perhaps the defining issue of our age is that the human economy has grown to a scale where it affects the environment at every level: on land, in the oceans, and in the air. As Kenneth Boulding put it, we are transitioning from a cowboy economy, where the world is an open frontier, to a spaceman economy, where we are restrained by natural limits. This transition, ecologist Eugene Odum argued, resembles that followed by ecosystems as they become established.4 At the early stages of an ecosystem’s development, available energy (whose ultimate source is the sun) is rapidly exploited by a few species in a sudden bloom of growth. As the ecosystem matures, the food chain switches from a linear chain—carnivores eating herbivores eating plants—to a more web-like, decentralized structure in which multiple species interact in increasingly complex ways. The waste of one organism is recycled as food for another, and resources such as nutrients and minerals are conserved. An example of a mature ecosystem is a tropical rain forest, where most of the nutrients are not in the ground but in the trees and the species that live in them. The land itself has little agricultural productivity, as farmers discover if they cut down the trees and try to grow soy or provide pasture for cattle.
Economies also develop in a similar manner. In a society of pioneers, wrote Odum, “high birth rates, rapid growth, high economic profits, and exploitation of accessible and unused resources are advantageous.”5 As the economy matures, the emphasis switches to “considerations of symbiosis (i.e., civil rights, law and order, education, and culture)” and the recycling of resources. However this transition is a work in progress: “Until recently mankind has more or less taken for granted the gas-exchange, water-purification, nutrient-cycling, and other protective functions of self-maintaining ecosystems, chiefly because neither his number nor his environmental manipulations have been great enough to affect regional and global balances. Now, of course, it is painfully evident that such balances are being affected, often detrimentally.”6 And matters have not improved in the ensuing half-century, as carbon dioxide emissions have climbed and the life-support abilities of the planet have continued to degrade. We have grown richer in monetary terms but the
hidden charges are mounting up.
In her book This Changes Everything (whose uncompromising stance has led to critics calling it a “utopian call to arms” in the climate battle),7 the author and activist Naomi Klein asks, “What is wrong with us? I think the answer is far more simple than many have led us to believe: we have not done the things that are necessary to lower emissions because those things fundamentally conflict with deregulated capitalism, the reigning ideology for the entire period we have been struggling to find a way out of this crisis.”8 Indeed, as we argued in chapter 6, mainstream economics is an ideology that has shaped our attitudes toward both the economy and the natural world. But while this ideology has certainly been influential, it has never been left alone behind the wheel. Neoclassical theory was started with the best of intentions but was co-opted or exploited by market fundamentalists to justify the existing power structure. Economics, along with its bank-sponsored Nobel Prizes, was bought, the same way anything else can be bought in a market economy. Its argument that “money is a distraction” just distracts from that fact.
So perhaps the answer, at least in a technical sense, is even simpler: the design of money. After all, it is our monetary system as much as any particular ideology that dictates how we move energy and resources around the economy, and the technology was never intended to be environmentally friendly. Money is created primarily by private banks and lent out at interest. The interest can be repaid only if the economy and money supply constantly inflate. Prices emerge from the use of money in markets to trade goods between people and firms, but the process does not work at the edges of the system—that is, with the input of natural resources or the output of pollution. Much economic growth comes from transforming preexisting natural systems and services—land, oil, gold, trees, fish, water—into money. But the earth does not trade or haggle over price; it just passively supplies, up to a point. If money, as Tolstoy said, is a new form of slavery, then the planet is the biggest slave of all.
