Wednesday, August 24, 2011

Money = Equals

(What follows here is a somewhat different run up at the conundrum of money and how it pertains to debt, and what both 'really' are.)

Ignorance ‘out there’ about money is about as endemic and deep rooted as possible, penetrating the highest halls of academia, flooding the busy offices of the world’s mainstream media outlets, and poisoning economic thought and study as far as the eye can see. My own studies have yielded repeated gems of ignorance even in works that are otherwise excellent exemplars of academic rigour. The problem is that our cultural notions of money remain almost totally unexamined, even though money is key to society. Somehow we are generally prevented from debating this enormously important topic as openly and widely as it deserves.

Our collective ability to pierce money and understand it has only recently begun at the level of popular culture (the Internet is instrumental in this). Bernard Lietaer, Stephen Zarlenga, Ellen Brown, David Graeber, Charles Eisenstein, Bernd Senf and Franz Hoermann are some of the authors I know doing fine work on the money myth, and there are many others I’ve still to get to. Yet even now, most people think (or feel) that money is (or should be) a thing with ‘intrinsic’ value, that it is, in some inescapable way, real wealth. Our deep history tells a different story. Money’s origin had far more to do with measurement than store, was far more about keeping track of stuff than being something ‘intrinsically’ valuable (even though there is utility value in keeping track of value!).

With that in mind, perhaps we shouldn’t be talking about a linear progress from commodity money to information money, but of a return to information money, albeit in a new form. Graeber talks of money as debt, debt as a promise, and suggests the type of question we should be asking is what kind of promise, and how those promises are generated and administered. The launching pad for this post, however, comes from Ellen Brown’s article, “Time for a New Theory of Money”.

The concept of money-as-a-commodity can be traced back to the use of precious metal coins. Gold is widely claimed to be the oldest and most stable currency known, but this is not actually true. Money did not begin with gold coins and evolve into a sophisticated accounting system. It began as an accounting system and evolved into the use of precious metal coins. Money as a “unit of account” (a tally of sums paid and owed) predated money as a “store of value” (a commodity or thing) by two millennia; the Sumerian and Egyptian civilizations using these accounting-entry payment systems lasted not just hundreds of years (as with some civilizations using gold) but thousands of years. Their bank-like ancient payment systems were public systems—operated by the government the way that courts, libraries, and post offices are operated as public services today.


The unit of weight was the “shekel,” something that was not originally a coin but a standardized measure. She was the word for barley, suggesting the original unit of measure was a weight of grain. This was valued against other commodities by weight: So many shekels of wheat equaled so many cows equaled so many shekels of silver, etc. Prices of major commodities were fixed by the government; Hammurabi, Babylonian king and lawmaker, has detailed tables of these. Interest was also fixed and invariable, making economic life very predictable.

The point I’d like to make here, one which Brown does not address, is that the notion “equals” is a 'wisdom' vital to developing the concept of money, as is the idea that “value” is measurable (value which is to be stored for practical reasons (see below)). Eisenstein talks about equivalence in “Sacred Economics”: “Money is homogeneous in that regardless of any physical differences among coins, coins qua money are identical (if they are of the same denomination). New or old, worn or smooth, all one-drachma coins are equal.”

Money cannot therefore be the thing denoting it, it can only be the agreement (or fiat) about the measurement of value (and/or a price system generating ongoing value measurements via supply and demand). The giant question is, can there be a unit such as Value=1? Readers of “The Ascent of Humanity” will be familiar with a tribe of ‘primitives’ called the Piraha. Its members cannot understand counting, cannot be taught numbers above 1. For them, everything is unique, hence 1+1 is an impossible question (as is 1=1), cannot be imagined, its utility cannot be discerned. If there cannot be two of anything, what then is 2? Without “equal”, without a uniform unit of some kind, you cannot have money, nor counting. I see this as a profoundly important observation. An attempt to assess or measure the value of value—e.g., of grain relative to cows—can only occur in societal conditions generating the need for such measurement, including extracting taxes, paying wages, selling slaves, controlling economic activity, explicit tracking of debt and ownership, etc. At its deepest level, therefore, money arises out of the belief that nature can be controlled and measured.

Deeper into the money story we have explicit debt, a direct corollary of “equal”. The notion of an explicitly measurable credit/debt axis, though balancing and balanced, can, I feel, only arise out of the Separation Eisenstein talks of; Self from NotSelf, Me from You, Us from Them, Mine from Yours, Body from Spirit, etc. But why must a benefit be opposed by an exactly equal detriment? Isn’t that pure negation? Can anything be net-created at all? How is there change? We say every action has an equal and opposite reaction, but what is the opposite action of a smile? More fundamentally, what is an action? It is true that if energy goes there, it leaves here, so in that narrow sense credit/debt might be understandable. But what is energy, exactly? Information, perhaps? Are those two one? I don’t think so, and that is a VERY weird thought. On with the article:

Grain was stored in granaries, which served as a form of “bank.” But grain was perishable, so silver eventually became the standard tally representing sums owed. A farmer could go to market and exchange his perishable goods for a weight of silver, and come back at his leisure to redeem this market credit in other goods as needed. But it was still simply a tally of a debt owed and a right to make good on it later. Eventually, silver tallies became wooden tallies became paper tallies became electronic tallies.

Note how perishable is bad. Surely decay can only be a bad thing if we are too frightened of death, age, decrepitude, of the circle of life? This fear too has its roots in Separation. Note also the inescapable progression from store to bank to debt/credit. If I deposit something I own with you (ownership is vital), you owe me it back, or, you hand over an equal amount of something, so as not to owe me. But that something (silver, gold, paper, money, ledger entry) becomes a claim on other people’s product, a.k.a. society’s debt to me generated by my contribution to it as measured by some weight of silver/unit of value. And they must equal, otherwise the process is unfair, unjust, ‘game-able’, etc. But they cannot be equal. Nor can we really measure how much of that contribution was a product of my work, how much is owed to the soil, how much to slaves on my farm, to the sun, rain, weather, etc. The whole process is fraught with difficulty even at the simplest level, and very vulnerable to manipulation and corruption.

Next comes the implicit zero-sum of money-based thinking (which Brown arrives at discussing modern alternative money types):

Consider, for example, one called “Friendly Favors.” The participating Internet community does not have to begin with a fund of capital or reserves, as is now required of private banking institutions. Nor do members borrow from a pool of pre-existing money on which they pay interest to the pool’s owners. They create their own credit, simply by debiting their own accounts and crediting someone else’s. If Jane bakes cookies for Sue, Sue credits Jane’s account with 5 “favors” and debits her own with 5. They have “created” money in the same way that banks do, but the result is not inflationary. Jane’s plus-5 is balanced against Sue’s minus-5, and when Sue pays her debt by doing something for someone else, it all nets out. It is a zero-sum game.

Something bugs me about all this. There are two important money-related things happening when Jane bakes cookies for Sue. One is the dead material, including the energy, used to bake the cookies. The other is the effect doing such has on Jane’s and Sue’s (‘friendly’) relationship. How would this market process sound to us if we were to discover Jane and Sue are in fact sisters? In what way is baking someone cookies a favour if it is immediately ‘paid for’ with an exactly corresponding debt? Any potential gratitude disappears into the hole called “-5 favors”. Sue need feel no gratitude to Jane whatsoever, since now she explicitly owes the Friendly Favors community 5 favours. And what if those favours were iPads, or houses? How many cookie-favours equal one house-favour? And yet the idea of money as a favour is powerful.

Inescapable in a money-system is a unit of account, which needs market-trading to be organic and flexible (Value cannot = 1), which at least implies competition and profit, profit being reward for success, which is part of sorting the good ideas from the bad. We cannot escape failure (and shouldn’t try to), which with an explicit money-measure means indebtedness, which tends to accumulate, which is something no one wants happening to them (The Stick). Logically an accumulation of wealth must also occur (The Carrot), potentially (always?) followed by corruption aimed at keeping the playing field favouring the successful (since they’ve ‘proven’ themselves successful, this is of course justified; ‘survival of the fittest’ and all that), and so on. And history delivers this pattern again and again, with excessive income gaps preceding breakdown and revolution. Can we escape history's rhyme? Should we? Sort of and sort of. Neither money nor poverty can buy you love or joy, and the oscillations they set up are increasingly destructive. We risk our own extinction in pursuit of an illusion. The pattern has gone global.

Surely, then, the area of concern should be trading itself, or, more accurately, the paradigm and social infrastructure in which trading takes place, the functions and expectations it fulfils. At this point reference to Marshall Sahlins’ work on reciprocity would be helpful.

Sahlins ("Stone Age Economics" p193ff) divides reciprocity into three types; generalised, balanced and negative. Generalised reciprocity is ‘pure’ gift-giving with no expectation of return. Balanced reciprocity might be transparent agreements between clans or friends where the exchange is as equal as can be; no profit allowed at the cost of the partner, mutual profit being the point. Negative reciprocity includes tricks and subterfuge, what in economics might be called “information asymmetry”, such that maximum profit is sought at the expense of the partner.

Trading can only be about negative reciprocity, if such profit is its goal. The persistence of the myth that ‘free’ markets deliver maximum social good shows us how far we still must go to see our species as one family whose members should engage only in generalized and balanced reciprocity. Large, differential profit is still the sign of good business, the indicator of success, and by the dubious logic of economics business success leads inexorably to a successful society. And yet isn’t it by now abundantly clear that the Invisible Hand is a failed myth, that trickle down was a cynical and empty promise?

Reorganizing our paradigm to provide a framework in which trade and exchange can include investment of accumulated wealth yet be free of negative reciprocity will not be easy (at the simple level, Friendly Favors is a case of balanced reciprocity, but I don’t see how it could scale up). The challenge I see is how, even in crude outline, to walk the path towards a resource-based economy. Parts of it will be negative interest rates (demurrage), guaranteed income (social dividend), re-localization (the break up of the state), but what is clearer and clearer to me is that, from here, we cannot know what a resource-based economy will actually look like. For example, if money is a promise somehow denoted by a unit of account, perhaps we will never do without it. Will our language one day be free of “Thanks, I owe you one”? I doubt it, but who knows.

I’ve wandered off in a direction Ellen Brown probably wouldn’t have foreseen as a response to her article. No short article can cover all the bases, nor do I agree with anyone on everything (not even with myself), and yet I have a hard time disagreeing with Ellen Brown’s conclusion, which may surprise some of my readers:

“We have emerged from the financial crisis with new clarity: Money today is simply credit. When the credit is advanced by a bank, when the bank is owned by the community, and when the profits return to the community, the result can be a functional, efficient, and sustainable system of finance.”

Even treading the path to a RBE will require a new definition of money, and a new role for our banks—neither can be switched off over night, probably never. Whatever fulfils the function of a bank—which should be democratically redistributing community-accumulated wealth back into the community—whether that entity is internet-based, or located in an actual building, that function is inescapable, even should there be no money in the way we understand money today. What seems inescapable, and healthy, is a transparent method for democratically managing the excess fruits (profits) of the community’s efforts, a system we can trust because it is open, clear, simple to understand, and staffed by people we know and can talk to if need be. Local is therefore key. Guaranteed income is likewise key for those of us who, for whatever reason, are not quite as ‘useful’ to the economic sphere of the community as others. What may not happen is a forgotten, poverty-drenched sector of society that can find no way to dignity, and becomes alien at the edge of life. What may also not happen, is that the economic sphere is thought of as the most important.

(Here are some rough thoughts in reaction to this post:

Money is a promise frozen as an exchangeable debt which has utility proportionate to society's need to trade goods and services in some kind of market. If trade is unnecessary, so is money.

"Money is a promise" to pay. To pay what? Goods and services? Kinda. Couldn't we say that goods and services are promises to pay money? Bank of England notes are promises to pay the bearer the amount denoted on them. This is incomprehensible, but because it is everywhere and state-sanctioned we accept it unquestioningly.

Money is a moment-to-moment enabler of the belief that it is a promise to repay a debt--it works! If I have 'earned' money, I have 'earned' promises from society to hand over those goods and services of equal value I choose to purchase. The money I hold is society's debt to me. It is an indication of a relationship, a standing between me and society as measured by credit/debt.

Banks of the western model profit from this debt/credit accounting/monitoring via usury. Should they? They are providing a service, so why should they not be rewarded? They should be, but that line of inquiry is a dead end. Why money? Because trade? Why make explicit an accounting of debt and credit? Because trade? Why trade? Scarcity. Labour. Property.

If banking were automated, it would need only to be fed the amount of energy it needs to run. The admins sorting out the inevitable problems would have to be paid though! By whom? By society. Society would owe them a debt. What if those admins had fun doing their work, and needed no explicit reward, as in open source software? What if work done to keep the system going were rewarded generally by the functioning of a RBE? What if debt and credit were not explicitly tracked? What if it were culturally understood that we all benefit from doing what we can to keep such a system going, hence there would be no need for a money-accounting as an explicit attempt to measure value and track credit/debt. We need only track resources and ecosystem health. For starters, value cannot be measured. Attempting to do so has proven vulnerable to all sorts of heinous and unforeseen side-effects. Because money-rich is better than money-poor, having (explicit) money as part of society becomes a pressure to game the system so as to get rich and stay rich.)


Charlie said...



for in interesting perspective on Modern Money Theory and the flaws in explanations of monetary theory given in the orthodox economics textbooks.

It might also explain why we're in this mess, and unlikely to find a solution as long as current theory holds sway.

Toby said...

Thanks for stopping by, Charlie.

I visit New Economic Perspectives often, but feel the authors there don't go deep enough, don't follow their own logic far enough. The way the current system works is purposefully convoluted, and the folks over at NEP are fringe for a reason (though I suspect they are less and less fringe by the day, and that those who benefit most from the current system are ready to co-opt the NEP's prescriptions). I don't visit Bill Mitchell's blog as often as I once did, and previous posts of mine here should make obvious why. I'm suspicious of 'full employment' and job guarantees, and find the "nets to zero" element of MMT dangerously misleading. There is, however, much in MMT I am impressed by, and will dip into its waters again one day.

In my opinion we need to build something new at the local level, and thereby slowly shake off the existing system, or at least have a growing and viable alternative well rooted in the soil of a new paradigm before collapse of this system renders that effort impossible. Hence, understanding the nitty gritty of Central Banks and commercial banks as they now are is not my focus. See the post before this one and the comments under it for more on that front.

I recommend Charles Eisenstein's books "Sacred Economics" and "The Ascent of Humanity", as well as "Zeitgeist: Moving Forward" (free online film) as works that really provoke a different way of seeing the world. It's at that depth of discussion I feel most comfortable. MMT doesn't do it for me at that level.

Timbo614 said...

After clicking on the Film link 3 hours ago now...! Its a good and informative film, in fact I can't really pull any holes in it at a first viewing except that perhaps it aims too high for people to take the first steps towards what it is promoting. People do not believe in or think that Utopia is achievable. They are probably partly right, but that should not mean that we shouldn't try for it.

I think the ending is more relevant for people today - to believe in the possibility of correcting and restarting - but one step at a time.

I have just been posting elsewhere discussing the current crises and suggested that "intelligent governments should give the banking system enough rope to hang itself". Then pick up the pieces :) Every one is scared of such a solution though because of the "money" - "What money" I say no matter how much they created, borrowed and lent when they are all allowed go bankrupt the result is same - Zero money in banks, which scares them more. I have been trying to educate my associates concerning money (Since I learned it's current nature by reading blogs and articles like yours and others) most of them now think I'm a bit mad they even call me Prof. Tim now but still don't believe me:(

Toby said...

Hi Tim,

do you mean "Zeitgeist: Moving Forward"? If so, they would say they are not advocating Utopia, just a different and better way of organizing society. As to "no money", that is an enormous topic which seems to have no end. I've been contemplating and exploring and writing around the connotations and ramifications of that idea for about three to four year, and the material still to study just keeps growing. The first problem is defining money, and I'm still working on that one. How can you do without a thing if you cannot describe exactly the thing you are to do without? David Graeber, for example, describes money (sort of) as "I owe you one." How can we do without that?

In terms of what The Zeitgeist Movement and The Venus Project are about, I guess the best way to think of it is organizing production and distribution of (most) goods and services such that the need for money (as we culturally think of it now) falls away. You rearrange the economy so as to not need (formalized) money. That takes time, I reckon generations. It's not about burning all money and suddenly starting from scratch, building a new world. Things can't work like that. Not only is the idea too off beat, there are also 6.8 billion people out there with millions and millions of different ideas about how the world works.

My advice: patience and perseverance. If this road attracts you, know right now that it is not an easy one. And if you haven't already, check out Charles Eisenstein's two books "The Ascent of Humanity" and "Sacred Economics". They're very good.

Thanks for stopping by!

Timbo614 said...

Hi Toby,
Thanks for the reply. Yes I did mean "Moving Forward". I realise that the film is primarily inspirational and tries to show people that the possibility of an alternate way exists.

My interest in this subject is 4 years old, before that I had the average working man's view of banks and money. I have not progressed far as you can see from my pretty naive comment.

It was sparked by the banking crisis in the US/UK - at that time I had just paid an enormous tax bill which (due to my own stupidity in risking the tax on a business venture I mainly had to borrow the money to pay), from the same banks that promptly went broke a few weeks later. I was then informed by the government that I and millions of others would be paying for those same banks to survive! Eh? So... You have taken my tax, which I just borrowed from these banks, and given it to them ... So I pay by tax again AND I am now paying to borrow my own money. Eh?

This sequence of events caused first simple anger, and then a light bulb to flicker dimly in my brain and it illumined the thought "None of them actually have any 'money' do they? Not the banks, not the governments, not the insurance companies etc. We, the people, certainly did not have the 400-600 billion that was needed... did we? AND If we did would we "give" it to the banks? Why wouldn't we "magic up" 600 Billion to solve a few of our social problems? Which lead to the question: "So where is all the money?" and ultimately "what is money?"

I think I have the fundamentals now :) Money is just a human construct initially designed/invented/evolved to permit trade in goods, a simple means of exchange. Also, today, Debt is money - No overall debt - No overall money. Money (as controlled by banks) is in fact a ponzi scheme because it must always grow to pay the interest on the very debt that creates the money that the interest is charged on, masking the fact that none of it really exists. Hence the continuous struggle by nations to increase GDP(a pretty awful indicator but that's another subject) and a target for inflation above zero - I previously always wondered why that was, surely zero would be best! But of course the ponzi money system CAN'T allow zero inflation. So much for the mechanics it really doesn't seem much more complicated.

After that initial exercise is understood, and even after three years my mind tends to veer away from such a monumental basic fraud, I asked where does this lead me?

Can we continue increasing GDP(or whatever measure) or even should we? That led me to energy, environment, answer a pretty obvious no, or not without huge changes to industrial (production) attitudes.

So the questions (lots of them) become what are the alternatives?
How do you wean people off money? Or, how do you wean them off of consumerism? How do you convince them that growing potatoes and onions is actually better? Is it better? Is it only me that thinks it might be better because I have gained "some knowledge"? Or I'm just older now? And so on :(

I now have an "argument breaker" question that I ask people - my "genesis bank" - first assume there is NO MONEY one bank the first one ever, then invents it, funding itself with a gold nugget the only nugget that exists. Based on the "Value" that the bank assigns to the nugget the bank lends one customer - the first and only one - 100 "New Money" at 10% interest. How does the customer pay the interest? Where does the interest come from? Without admitting it's a ponzi scheme it can't be answered :)

Well, that's enough rambling for now - it's just more proof that "what is money" is a difficult question to answer. That we are all doomed to crash and burn at the behest of banks if we don't stop them creating it isn't.

Timbo614 said...

Yes, I read David Graeber's article on NC (where I sometimes comment as "TimOfEngland") but NC seems too concerned with the "mechanics" and arguing about different economic theories and economist's thinking. I don't know all the "great writers and thinkers" that they endlessly discuss so I'm "out of my depth" and because of that they are in danger of disappearing up their own exhaust pipe. They are losing sight of that fact, as I understand it, economists only deal with money/economy in a closed bubble, outside the bubble is the real world that continuously messes up up their neat and tidy theories :) - only my opinion of course

Toby said...

That's really interesting, Tim, very similar to my story, except the bug really bit me and I'm kind of obsessed with this issue. I've even handed in my notice at work in hopes of freeing up more time to research and write around this general topic.

In the end we each do what (more or less) feels right to us. So, while it feels more or less right, keep it up! I imagine your thought exercise to expose the ponzi is very effective. In the end, P<P+I, though elegant, doesn't really say all that much without a lot of mumbo jumbo attached, which puts the vast majority off. We need people honing their communication skills, which takes painful trial and error, until there are thousands of effective ways of communicating the basic truths of what's happening around us. Me, I get too lost in the details. It's a curse. ;-)


Timbo614 said...

The Genesis Bank question is based on your P < P + I
I'm a computer programmer in real life. One glance at that equation was enough for me.

..."given in your notice"... I trust you have an "independent income" then. Whatever, good luck, you already have a few followers so now you need to write a book and publish it yourself. Easy to do for Kindle and other e-readers and does not need dead trees either :)

I have a monumental idea growing in my head based on my money reseach, which I am working on turning into a web site... Most would say it's pure madness but might be worth the experiment. I'll keep you informed...

Toby said...

This blog is my nowhere-near-good-enough alternative to a massive idea I tried to get off the ground with a guy in Boston. It didn't get off the ground, but is still in my head as a project. I conceived a dynamic library-like site presenting the pros and cons of various socioeconomic systems with deepening, interconnected layers of complexity re. the data, so that a path would begin with simple bullet points, which each links to paragraphs, then essays, then white papers or whatever.

I am indeed writing a book on all this money stuff that literally begins with the nature of energy and matter and goes pretty much all over history and just about everything else, but will give it away for free, both in print (some hundred copies or so left in doctors waiting rooms and on bus seats etc.) and as PDF. The book will have content that could be turned into a dynamic site that I would like to be able to grow, organically, like Linux does, in excellence and accuracy, in detail and breadth. Long term goal, but still very much in my head, on my to do list.

But no independent income. I'm leaping in the dark, with family, for the second time in my life. I'm something of a gypsy and need adventure. I'm confident my various skills, including new skills my wife and I will be acquiring, will generate enough income to keep us in clover. Wish us luck! And keep me informed on your side too. Maybe we can help each other out.

Timbo614 said...

You triggered a memory with that last comment:

amazing what you can find directly with google if know something specific :). I remembered that I commented "Deep respect" and that was enough...and I have just re-read your part in that thread. My comment still applies.

Stranger still, "autodidact" I didn't know this word existed even though I probably am one to a point. I have not always been a programmer. I started life in the building trade from necessity. My then girlfriend had a baby when I was 17 and we got married when I was 18 (we are still married, 40 years later) so money was what I needed and err.. now! And when young and strong building things is fairly easy. The point being that other than the then secondary school education to age 16, and I was a pretty "difficult" student, I have had no other formal education. Just seeing/observing and doing. "How difficult can it be?" is one of my favourite sayings.

So I have been doing this self-taught programming for 25+ years now and I'm still good and capable, but I feel like I'm slowing down. At 58 learning new stuff is OK but it's not as fast :(

In addition to that aspect is the overall result of the "computer revolution" - I find I don't like it. Sometimes I even feel guilty that I have contributed to it. I don't like the way that computers are now utilised. For me the validity has gone because of some of the results. Persecution of the populace by computer is one. For example having my number plate and face photographed just so I can park my car (going in and out!). I find it repellent. This is all put forward as "fairness" - no one is to get away with anything. It's not fairness it's simple extraction and we paid ourselves to have these things built and installed through local taxes. "Customer service" phone lines are another, again extraction a few pennies each time. Plus I'm just unhappy about something when I have to talk to a computer, irrational maybe, but hey that's us humans! In our current society some people need to get way with things. They simply do not have the cash to do things properly or sit on phones lines listening to muzak at £x per minute. I would rather people could just drive out without paying if they really need to or simply don't have the £1.10p. for the shortest stay in their pocket. Dammit, just make them free, we already paid to build them!

So helping to program something that might help reverse some of these objectionable uses does have an attraction :)

For mapping out "fuzzy" concepts have you seen Mindmapping software? It's free and although there is a learning curve it's reasonably easy to use and quite fascinating in it's own right:


(There was a lot more of this - but it was too long) maybe I'll rehash it as blog post.)

Toby said...

Thanks for the kind words, and for the tip. I've seen Mindmap, but never really thought of applying it to my own work. Good idea.

I guess with all that surveillance and other unsavoury aspects of our age, we can only focus on what we feel to be good and keep on keepin on. What else is there.

And respect your way too. Re-skilling is quite a challenge, but as you say, how hard can it be?