“Money is a tangible illusion, the frozen shadow of a thousand trade events.” – European fortune cookie
Pioneering environmental scientist Donella Meadows left us with a powerful as well as simple overview of levers, of places within a complex system where a “small shift in one thing can produce big changes in everything”. Such complex systems could essentially be anything, such as a firm, a city, an economy, a living being, an ecosystem, an ecoregion or a geopolitical area. Donella described a system in very simple terms, as being in a certain state, and containing a stock, with inflows (amounts coming into the system) and outflows (amounts going out of the system). Most people know where these levers are instinctively, but tend to adjust them in the wrong direction. According to Donella we need to grow understanding of these levers, where they are and how to use them. This understanding would help solve global problems such as unemployment, hunger, economic stagnation, pollution, resources depletion, and conservation issues. After some refinement Meadows comprised a list of twelve leverage points with explanation and examples, for systems in general.
Trade in its widest sense, such as global commerce, can be understood as a complex system as well, and likewise the dynamics of the most widely used trade commodity, money can be described in terms of stock and flow. Like a balance sheet does, to a certain extend.
To better understand the system of money, it serves to understand its goal in general, and there we come at the different functions of money. Its main functions are those of an exchange medium, a unit of measure, a measure of value and a value store. With these functions we move from trade towards banking and accounting, and back again. Obviously when exchanging goods and services money serves as a sort of universal good. Instead of receiving five chickens and a goat in exchange for a job well done you’d receive a certain amount of money, with which you can then buy goods and services that may be closer to your needs. In order to do that, money needs to act as a reliable yardstick so the money representing five chickens can buy you five chickens everywhere. This function coincides with valuation, the comparative measure of value, expressed in money, so that the money for one cow can buy you more than five chickens because a cow has more utilitarian value. And finally money should store value, during the exchanges as well as retain value in between exchanges, over time.
Simply said, money is “a matter of functions four, a medium, a measure, a standard, a store”. The ‘standard of deferred payment’ is an arguable function but it simply refers to lending a sum of money, with or without personal property acting as collateral. If the value of money is stable, then money can serve all function, but when it is unstable over time, then often another measure of value is taken, such as the gold standard. Nevertheless, this function overlaps with the ‘measure of value’, so the old rhyme still stands.
From a systems point of view, we can more or less define the ‘dimensions’ of money to address regional scope, quantitative differentiation (changes in degree), qualitative discrimination (changes in kind), and difference in time (duration). In that sense money is a routine aiming to represent both an absolute (quantitative) and relative (qualitative) idea of value at a given place, at a given time. In that sense it is a ritual, a recipe, even a lever, making money a programming language.
The latter is very apparent with the ‘monetarist’ approach, as represented by Milton Friedman, possibly the most influential economist of late. Friedman maintained that there is a close and stable association between price inflation and the money supply, mainly that price inflation should be regulated with monetary deflation and price deflation with monetary inflation. Price deflation could be fought by “dropping money out of a helicopter.”
But is that really so? Recent exploits in ‘quantitative easing’ show that the helicopter didn’t travel all that far and for reasons unexplained was able to drop the money right into a number of bank vaults. It must have been the fuel prices. Yet, if money doesn’t circulate through “the economy”, how does it influence pricing? If some money is only part of a small isolated part of the overall economy, then how can it influence the rest, if it is isolated? Like a beautiful house in the mountains, it may have some intrinsic value, but what does its value matter in an overall context if there are no buyers? Apparently not.
But is printing money actually needed to deflate its value. When looking at the billionaires of Italy since the crisis of late 2008, while the economy is crumbling and is so low-down that it cannot recuperate, their riches have increased with some 40-50%. That 40% increase may have very well been the way inflation and devaluation expresses itself in a semi-open system. Maybe the ‘real’ economy shrank 30%, which would be in line with other countries in the EU. So, the problem here is that it has become so effective to play around and speculate with money, that like with derivatives you can earn more money by playing with impressions than actually doing something. Unfortunatelly this is completely detached of any reality baseline, and like with Friedman’s limited-range helicopter nine out of ten Italians are worse off today than they were ten years ago. A country where nearly everyone had some savings of their own has gradually been eating away on the savings, where much of the personal investments has been in houses while the population is shrinking, what does it actually mean that the Italian Euro has some 30% of its value? Well, very little as it is not reflected in some exchange rate where the value has been reset compared to other currencies. Except for the long term value store, house prices have been coming down significantly because people have run out of other savings, but as this is primarily private owning and doesn’t influence the banking world too much. But are the basic costs of living adjusting? Or simply said, is the amount of money for a shopping basket going down? No, because contrary to the general idea, there is no real ‘free market’ and competition is only a very minor shaping force of market dynamics in Italy. And still, while a Berlusconi’s fortune is adjusted for local devaluation, globally he simply got richer.
And this is what is wrong with the Euro. Simultaneous to its introduction in the Eurozone, price agreements were annulled. To stimulate competition most, if not all, agreements on bottom and ceiling prices are abolished. That included income guarantees for farmers so they’d at least get a minimum price for their milk, so that dominant buyers wouldn’t try squeezing the lemon beyond reasonability. Milk is a great example as it also had a maximum price because it is seen as a nutritious and vital part of a basic diet, so if some seller would increase the price this would impact the whole balance of what they can afford. All these arrangements were let go off in order to hear Finance Ministers claim for years on end that inflation has been under control, which may be another way to say that all the prices going up was not their responsibility.
Maybe if we stretch out everything over hundreds of years on a global landscape, where information flows freely to inform everyone about everything we can indeed speak of a ‘free market’. But when we have regional tightly interwoven socio-economical and geo-political webs, local community, these act as a unity. A city state or a province is a self-sustaining collective ‘organism’… a complex system. Essentially every such region has a mature and cohesive socio-economical web which is self-proficient enough to provide the basic living conditions, and these regions cooperate and collaborate in different ways, forming a confederation or a nation state, with local specialization such as concentration of industries. If such industries are vital to the functioning of other regions, like milk is used for cooking, you’d like to ensure some stability.
Yet what we see within the evolution of technology is a tendency towards increased commodification, to maximize the interchangeability of a resource so that it can be applied within a larger variety of contexts. Up to now we primarily see a history of commodification due to technical progress and market forces, followed by competitive defensive reaction of defending ones turf. This would usually follow a few patterns, such as delayed payments and low-interest loans so that the delay buffer can be used to make appear a certain amount of monetary value which is then used to finance debts. If problems are of such a scale that it spills over into other regions, then one can try to adjust the local exchange rate to adjust the whole web of impacted regions to recalibrate to the new situation. From a systems approach this is quite limited, with the mutual enforcement of accelerating technological and societal trends the world has gotten too small for that. We are seeing a continuous friction between the shared function of money. On one side it’s a value store, so if there is a lot of money it is stable with respect of minor fluctuations and you’d like to have a stable and predictable value over a long time so that any arrangement such as savings and pension funds retain their value. This is a passive function of money. On the other hand, as an exchange medium on a market place, the active function of money is highlighted and even in the form of indirect money, like securities, stocks, bonds, options, derivatives, the aim is exploit a difference such as a price difference between one continent and another. And you can even try to exploit differences in exchange rates by trying to gauge the overall dynamics of one market versus another.
So, there is a fundamental conflict as far as the timescale of money goes, and we also see that with the geo-economical scope of a currency like the Euro. A single currency automatically forces towards financial, economic and social teamwork, and this can easily respect each other sovereignty within a mutualistic setting. This was known before the Euro was introduced and it was agreed that it was the shortest path towards a European unity and peace. As long as national governments sink back into nationalism, divide and conquer tactics, they will punish their own population.
Taking the long term view, even without the intermediate layer of national governments, the socio-economical coherence of regional communities should be addressed. Automation of manual and mental tasks, productivity increased have started to become apparent after 1995 and are accelerating to such a degree that by 2025-2030 the fully automated part of the world economy will pass by the ‘normal’ economy in value. Add to that the fact that by 2020 the average cellphone has the same computing power as the human brain, advances in modular robotics, and self-learning artificial intelligence and mass-unemployment is a realistic future scenario. With the aging population and advances in medicine (regenerative medicine, cloning, turning of the ‘death genes’) and older people will only get older, and sometime around 2050, 2060 dying will be optional. Now that the babyboom generation is starting to retire, the impact is double. Every pensioner has a drop of income of some 30-40% which is enough to cover the basic expenses but makes it challenging to finance the extras. Their job position however is replaced by a junior, someone at the beginning of their career, who also doesn’t earn enough to finance the extras in life. Those extras are what make a rich country rich, and even if the pension has been funded correctly it is the impact of the spendable income that has governments worried and deliberately shortcutting a country’s pension system into forcing additional labor years isn’t going to fix that one. The most valuable solution ahead, is a base-income, and that is only viable when applying a dual currency model, with local money which can adjust itself via exchange rates, so that it maintains a consistent value in itself. Along with that the Euro can be maintained as a global currency just like Eurodollars used to.
There is a viable future there, for banks to facilitate diversity, taking the lead as “certified valuators”, which is actually where banks and money originated from. Instead of a ‘gold-standard’ the standard for the future is information, not as static data, but as a living localized process. It can solve one of the primary paradoxes of money; a ‘universal coin’ does not imply a ‘uniform coin’. There is a future in context-dependent universal rating mechanisms which establish mutual interpretable value. Of course, on a meta-level such ‘universal rating mechanism’ will have context-dependent interrelational value too, and there are ample opportunities there for the financial business.
It doesn’t matter that some societies are more oriented on a baseline of materialized value goods such as houses, land and other semi-scarcities, or other societies have a baseline of credit with more immaterial goods like trust, mutual dependency or goodwill. The same difference already exists between Small and Medium-sized Business and the monopoly money as governments are using it. The issues and problems arise from these entities using the same coin, the scale of things have gotten so much apart the elasticity of the relation is gone, and neither side can really do something about issues of the other… which is quite apparent in the current self-fulfilling recession. If money is a universal recipe, it is worth evaluating whether in most cases it actually still needs a uniform currency.
“Money is a tangible illusion, the frozen shadow of a thousand trade events.” – European fortune cookie