Consider the economy as software governing a chemical reaction.
Note: Previously, I wrote about one way I look at money: as a mathematical language. Because people found that essay interesting, I thought I’d write another in the same vein: let’s look at the economy as a process of energy, as if it were a chemical reaction managed by a computer. I will look at growth, wealth, money, labor, savings and investment from an energy perspective. Then we’ll switch tracks and look at money, markets, value and prices as being emotional software. I believe this perspective is valid, robust, and even provides new insight into the relationship between labor and capital. Here goes!
Most economists would describe the economy as
“The mechanism by which humans decide what is produced, what is consumed, and who does that producing and consuming.”
I think a better description is
“The system humans use to direct the flow of energy through the world.”
Viewing the economy through this lens is better because it is closer to the reality of what is actually happening. Money, finance, loans and credit are more akin to mathematical models running in human minds; the actual reality in play is energy. Let’s explore.
Energy, Reactions, Money, and the Economy
Everything in the physical world is made of up energy. Energy follows well understood rules. It is predictable. We can analyze the behavior of many complex systems by looking at the energy dynamics of the system.
For example, consider a steam engine on a train. Chemical energy in the coal is converted to heat energy through the process of combustion. The heat energy enters a boiler, where it is converted into pressure energy. The pressure pushes against the piston, which moves the wheel of the train — turning that energy into mechanical energy, moving the train.
At each stage of the process, there is some energy lost due to inefficiency and waste.
Can we do the same thing with money and the economy? Yes, we can. Let’s start with a simple example and build from there.
Human Beings Need Power to Survive
A human being needs 2,000 calories of food per day, in order to survive. Calories are a unit of energy. A day is a unit of time. Power is measured in units of “energy per unit time.” In other words, an adult human requires a power supply of 2,000 calories a day. This works out to about 96 watts of power.
Power = Energy / Time
How much power is that? It’s roughly the same amount of power you’d need to run a relatively new macbook. It used to be the amount of power necessary for a light bulb. Although humans have had roughly the same power efficiency for millions of years, our electronics have gotten far more efficient.
Answering questions like “why is the world so cruel?” and “why do people suffer so much?” becomes much easier when you realize how hard it would have been to keep a macbook running 24/7 in a medieval economy. You can imagine the difficulty inherent there. Our lives have gotten much better in the past few hundred years. Economists would say that this is because global GDP per capita has increased substantially. I think that’s a roundabout way of talking about a much simpler fact: we humans have access to far more energy than we used to. As the economy grows, the energy required to support one human becomes much smaller, relative to the total energy available to the human race.
Humans get this power by eating food. Ultimately, almost all of our food supply comes from the sun.
Agriculture is Solar Power
Humans get energy by eating food. The energy in our food comes from the sun. Plants use photosynthesis to store that energy in their bodies, in the form of sugars, starches, cellulose, proteins and other nutrients. Animals get their energy by eating other animals, or by eating plants. So, humans are — indirectly — solar powered.
The total energy coming from the sun to a patch of earth can be computed using the surface area and latitude of the earth. At the equator, the sun deposits roughly 1,000 Watts of power per square meter. Almost all of this energy is wasted. Do you think it would be possible for you to live, farming only a single square meter of land? Almost certainly not.
And yet if we had 100% efficient solar panels, theoretically it should be doable to live on the energy harvested after just a few square meters — and this is allowing for substantial waste.
I think a good way to view economic progress is in very simple terms: how much energy is available to human beings for their own use?
Wealth is Available Energy
When we store fruit, grain, and nuts, we’re storing energy from the sun. The same is true of meat and fish. The same is true of barrels of oil as well — this is energy that we’re storing. Someone who owns 10,000 barrels of oil or 1,000,000 fish has wealth. Of course, the guy with the fish needs to be able to sell them, or else they’ll all rot.
What about things like houses or cars? Is it reasonable to think of those in terms of energy? Yes, I think so. The “energy” of a house or a car corresponds to all of the work done to build the car. A car which can easily be reproduced is not worth as much as a car which is very difficult to reproduce. There are some issues with this equivocation, which I’ll get to later when we talk about supply and demand.
For now, let’s talk about work.
When a person does work on an object, in the physical sense, they are putting energy into it. Work is measured in units of energy. The 2,000 calories a day people consume doesn’t simply disappear into the ether. Some of that energy is used to change the physical state of the human economy.
We don’t see capital in this picture, because capital isn’t in the picture. Capital isn’t directly part of the flow of energy — capital is the control mechanism. Labor is the process by which humans modify the physical state of their world. Capital is part of the system that selects how the world will be modified.
If Labor if a man pushing a cart, capital is another man riding in the cart, choosing which direction to go. The cart has solar panels on the back, and the man choosing which direction to push the cart is trying to get more sun for the solar panel. This might sound like it’s a simple task, but what you need to understand is that “the cart” is an object moving in a space with thousands of dimensions. Most of those dimensions are bad directions to move in. Only a small number of moves the cart can make will increase the amount of sun hitting it. If capital chooses a bad direction, they’ll lessen the total energy available to both men. Hold onto this metaphor, because we’ll be coming back to it.
First, let’s look at the man pushing the cart: labor.
Marxism and the Labor Theory of Value
In Das Kapital, Karl Marx makes a distinction between the “use value” of an item (how much of human need it satisfies) and the “Exchange value” of an item — the price it fetches on the market. I don’t agree with most of Marx’s conclusions, but I think Marx was right to surmise that exchange value is directly related to the labor that went into the creation of a product.
I think Marx is wrong in that he dramatically underestimates the amount of work necessary to accomplish anything. When Marx looks at an object like a coat, he says that the exchange value of the coat is equal to the labor necessary to produce one additional coat, including getting all of the supplies. Marx doesn’t account for risk: He doesn’t account for the people who tried making coats and failed. He doesn’t account for the people who gathered flax, spun it to wool and then had their house burn down, losing it all. Marx doesn’t account for the guy who bought a bunch of wool, started working on coats, and found out that he was terrible at sewing. That waste has a serious cost, and Marx’s failure to account for risk prevents him from connecting all of the dots properly.
There’s been a lot written about the relationship between labor and capital. Many people have died because of disagreements over how these two systems work. There’s a lot of human misery in our economy. I think much of that misery is unnecessary and can be fixed, but only if we start to look for the direct reality in the economy, and separate it from the consensus fiction we use to control the economy. I have yet to see anyone try to express the relationship between labor and capital in terms of energy and computation — which will come up later. I think having a more reality-based understanding of how our economy works, and how labor and capital relate to each other — will be better for everyone.
Profit is Net Change in Available Energy
Suppose a woman, Alice, lives on an island with a bunch of coconut trees. Each coconut contains 500 calories worth of food. She can get a coconut down from a tree and opened up after half an hour’s worth of labor, which costs her around 300 calories.
It makes sense to say that the woman’s energy profit from the coconut is 200 calories. This sense of the word ‘profit’ lines up perfectly with our intuitive use of the word. It would be profitable for the woman to spend time getting these coconuts down from the tree.
Profit is about sustainability, pure and simple. If Alice expends 600 calories in order to get 500, that simply isn’t sustainable. She can’t do that forever. She’ll need to try something different.
Surplus, Savings, Investment, Risk, and Return
Suppose Alice has exhausted all the low hanging fruit: all of the remaining coconuts require her to spend more calories than they give her. She has a shortage. If she doesn’t resolve that shortage eventually, she’ll die.
If Alice routinely harvested more coconuts than she needed, perhaps she now has a stockpile. That’s like a bank account: in current finance terms, they’d say “she has saved some of the value she created while working.” In physics terms, she has stored energy which is now available to her. The bank account is like a battery: savings charges it up, deficit spending depletes it.
Let’s make our situation less dramatic, and say that the woman knows that new coconuts will be growing soon. She’s just got to wait. At present, let’s say that the woman lives near a grove of 10 coconut trees. If each tree produces 200 calories worth of coconuts each day, The total output of these trees is 2,000 calories a day: just enough to feed her. She doesn’t have a ton of choices here. She doesn’t have much ability to save.
Without Savings, There is no Growth
What happens if there are 11 coconut trees? Now she has the ability to harvest a little more than she needs each day. She can save. She can harvest an extra coconut, and store it without cracking it open. This harvesting saves her labor in the future. She is storing the energy made accessible by her labor in a pile of coconuts. She is accumulating wealth.
Let’s say Alice has stored enough coconuts to last her for 10 days. This means she has 10 chances to take a journey and try to find a new source of coconuts. Each day, she wakes up in the morning, and heads off in a different direction, hoping to find a new patch of coconut trees. All of that walking requires her to burn calories — maybe more than usual. Those extra calories she spends are an investment. She is spending her stored energy, in the hopes of acquiring access to more energy in the future.
If Alice finds a patch of trees, now she knows where she can go in the future. That knowledge she’s gained has allowed her to increase the rate at which she can harvest coconuts. She has found a way to increase her income. She has gotten a return on her investment. She expended stored energy, and has gotten in exchange knowledge which allows her to increase her rate of savings.
Wealth is a Level, Income is a Rate, and Property is a Fiction.
It’s important to make a distinction between levels and rates. The wealth the woman has acquired is a level: it is an amount of stored energy. Her wealth can be measured by the number of stored coconuts she has. The rate at which the woman can cut down coconuts is her income. This distinction is important. It will come up later in this essay, but first I need to lay out an even more important distinction.
What about the knowledge she earned? Isn’t that the return on her investment? The woman learned where other coconuts are. Isn’t that knowledge, itself, valuable? So far, I have avoided talking about value directly, because “value” isn’t defined in terms of physics.
We have distinguished between levels and rates. This distinction is important in physics. It’s also important to make a distinction between reality and fiction. I don’t mean a distinction between truth and falsehood. I mean a distinction between “something which is true even if people don’t believe it”, and “something which is true because people believe it.”
We don’t have a name or category for that later sort of system, but much of our world runs on these systems. “Justice” only exists when people believe it does. It takes the rough form of whatever it is that people believe — with a weighting more heavily towards people who have stored energy: that is, people with the capacity for power. Those fictions are breaking down now, in part because I think people refuse to acknowledge that they exist.
These social fictions follow different rules from physical reality. They are much more like software than they are like physical systems.
People need to eat food. That’s a physical thing. They need to consume energy at a given rate. That can be described using purely mechanical concepts. People also value eating food, and they value knowing where to get more. But what is value? What does it mean to value something?
Answering this question — about value, the relationship between value and energy, and knowledge — is important. It’s what will let us finally talk about things like money and markets. Money and markets are fictions humans use to control their economy. I say this not to put them down or to insult them, but to describe their mechanics.
Let’s go back to the idea of the men and the cart. I mentioned earlier that labor is a man pushing a cart with solar panels on the back, and capital is riding in the cart, choosing which direction to go.
Labor and Capital: Two Facets of the Same Person.
You can see how the woman in our previous example played both roles, but at different times. The woman who did the pushing of the cart was gathering more coconuts than she needed, storing them. She was walking on an empty stomach, hoping to make it back before nightfall, tired after another day of failed effort. She was spending the afternoon adding one more coconut to the pile, when she could have been playing with her friends.
The woman who was steering the cart was the same woman, but at different times. She was the voice inside, who encouraged herself to save these coconuts now, so that I can go out and find more later. She was the voice that said,
“I know they’re having fun, and I’d like to do that too, but we have to live better than this. There’s more to this island, but we can never get off this beach because we have to eat.”
She was the voice that said,
“yes, that sucked, I wish we found them today, but we’ve still got 10 days left, and that waterfall was pretty awesome even if we didn’t find coconuts there.”
In an integrated personality, these two people see themselves as the same person. In someone who is less integrated, they might get mad at that voice telling them to keep going. “ I’m tired, I’m hungry, and we haven’t found any coconuts in four days. Let’s stop doing this,” the woman might say to herself.
Growth depends upon cooperation between Labor and Capital.
This is true in one person, and it’s true for society as a whole. We don’t’ get anywhere without cooperation.
The cooperation between society is enabled with the consensus fiction system of “property.” I say that it’s “consensus fiction” not to degrade or insult it, but to describe how it functions: enough people believe something, and they enforce it, which makes it true.
If everyone woke up tomorrow morning, absolutely convinced that energy was free, it wouldn’t be true. Physics is not a consensus fiction.
If everyone woke up tomorrow morning, absolutely convinced that the stock market was doomed, it would be true. People would act on that belief, and by their actions make it true. That mechanism — where enough people believe it, so it becomes true — that mechanism is what underlies our system of property and money.
Property: A Consensus Fiction
Let’s suppose our hero returns from her journey, expecting to have enough coconuts left for three more trips. When she arrives back home, she finds that all of the coconuts have been eaten by others.
Now her risk has been for nothing. Her savings did nothing for her. Why bother saving if someone else will just take what you’ve saved?
Property is a solution to this problem. Property is a social construct, a consensus fiction. Ownership is not part of physical reality. There’s no way you can look at a physical object and determine whose property is. You’d need to ask people, or look in a book, or a database, to determine that answer.
Everything described up until now, strictly in terms of physics, is part of reality even if there’s only one person. Savings requires a surplus. Profit is necessary for sustainability — those rules are part of reality even if we don’t believe them. Value, and money, don’t work that way.
Being a ‘social fiction’ doesn’t mean something isn’t real. It just means “it is a thing human beings made up, and can change if they want to.” None of this is an argument that “we should change or abolish property rights.” In the example above, if her savings can be consumed by someone else, what reason does the hero have to save?
Without savings, there is no growth. Without ownership, there is no savings. Ownership is a social fiction, but it’s essential to a functioning economy.
Acknowledging that property rights and much of our economic system are social fictions is an important first step to protecting them and making them work better. It’s impossible to maintain a social fiction when the society is fractured and at war with itself.
Wealthy, successful people telling poor people, “Believe us! the world would be much worse without property rights.” are easily disbelieved.
That doesn’t make them wrong. It means that if we want to keep property rights — which I do — it means we need to a) admit that they are a social fiction, and b) make sure that the fiction works for people. A social fiction only functions if people believe in it. And may people are doubting it because it doesn’t appear to be working.
Software and Hardware
Property, markets, and prices are kind of like software. Energy, consumption, investment, risk and return are parts of the physical world. If the software functions correctly, it mirrors the physical world and allows us to navigate the physical world. If the software functions incorrectly — if it does not properly mirror the physical world — then we’ll have problems. We’ll get stuck, or lost.
Imagine a self-driving car. It has cameras and sensors which tell it where it is, how fast it’s going, and what’s around it. The software running in the car does not have access to direct physical reality — it only has access to measurements made by sensors. There is going to be error in those sensors, and if the software doesn’t account for these errors, the car won’t work.
Imagine a self-driving car with a solar panel on the roof. The software in the car tries to drive in a direction to maximize the energy coming into the solar panel. Do you see how this is comparable to capital and labor? The engine, wheels, and drivetrain of the car are labor. The navigational software is capital. If the engine isn’t maintained, if the drivetrain gives out, the car won’t go anywhere. If all of labor quit tomorrow, the world would grind to a halt.
If the navigation software failed, the car would get lost or stuck. If that happens, the solar panel on the roof will stop charging, and then the car will not have energy to go anywhere.
What happens if the software in the car is faulty? What if the software running on the car doesn’t reflect physical reality?
Suppose the car has a sensor attached to the solar panel which measures “rate of energy storage.” The car’s battery doesn’t have a sensor attached to it. We measure “the rate at which we are storing energy”, rather than the total energy we have saved. The car measures a rate, not a level. If this sensor is flawed, and reports increased heat as increased energy storage, what happens?
The car will begin navigating, not in a direction that maximizes energy storage, but in a direction that maximizes heat. The sensors in the car will tell the software “Great Job! We’re storing energy faster than ever.” — and the software will ‘think this is true’ — while the car is actually storing less energy than ever. The car might be losing energy, but if the software modelling the situation says “we are gaining energy”, the car will keep driving in the same direction.
The growth of populism, the election of Trump, Brexit , politicians saying trade is a bad idea and let’s have more tariffs, as if Hawley-Smoot never happened — all of these things are symptoms of an underlying cause.
Some people say our economy is seriously troubled. They describe personal experiences, or big-picture narrative without a lot of numbers behind them. Others argue that things are going great — they point to things like GDP and the Stock market. These are all social fictions, designed to reflect reality.
Like all reflections, these measures are flawed. They have errors. And I think what’s happening in our economy is that we are moving in the direction we’ve told ourselves is correct — but that’s a direction in software. It’s a self-driving car algorithm, which is focused on incrementing and decrementing variables in memory, without making sure that those variables in memory reflect physical reality.
I think this is what’s happening to our economy. The physical reality (stored, accessible energy) is almost impossible for us to measure, so we measure things like income, savings, and GDP. We measure rates — how many dollars changed hands? Rather than levels — how many joules of energy are stored?
Or, even simpler — how satisfied are people? How happy are they? How convinced are they that things are going in the right direction?
Emotion is key
Marx called religion the opiate of the people. He said this dismissively, as if a happy, docile population were foolish. Who’s more foolish? A cat who sits inside all day, happy to be fed and loved? Or a cat who goes out, roaming the neighborhood, getting scratched and bitten and risking death by a car, all in the hope of conquering the world, which is impossible for a cat.
Ayn Rand writes about a world where all the ‘movers and shakers’ — the outside cats — give up and stop working. They stop trying. The world collapses, of course. Rand saw labor as freeloaders, who benefit from the advances created by people who strive for something greater. Marx saw capital as freeloaders, people who ride along in the cart that was going to go in the direction it was headed regardless.
Both Marx and Rand are wrong for the same reason: they fail to understand and fully account for emotion.
Marx derides the contentment and satisfaction that comes from believing you are doing God’s will, by providing for your family and making the world slightly better for your descendants. Marxism espouses determinism, as if there were some fate which impelled us to be better. It ignores that people need to make choices in order for the world to improve.
Randian objectivism ignores the roles played by labor that extend beyond exerting force and moving objects around. People who decide to focus on families and religion and their communities are not ‘free riding’ on the risk and effort of entrepreneurs; each depends on the other. You can’t have an entire society of leaders, and you can’t have an entire society of followers.
Everyone alive today is the beneficiary of largesse created for us by our ancestors, who loved us even though they had no idea what we’d be like. The great wealth of our world today — the scientific method, democratic institutions, the rule of law — those came to us, with no effort on our part, at great cost to our ancestors. They saved for our benefit. Their belief in what we call “outdated myths like god” allowed them to act in a way that shaped the direction of a future hundreds of years ahead of them. Perhaps they aren’t as foolish as we miserable modern men like to think.
Rand says that emotion isn’t a tool of cognition. She claims that emotion can tell you where you might be wrong, but it shouldn’t be used as a basis for logic or reasoning.
I think Rand has this precisely backwards. Emotion is the basis of cogintion; it’s cogntion in raw form, compressed. As I’ve written elsewhere, emotion is how we think about possibility. Yes, it’s prone to errors, just as logic and reason are. They need to work together, in a synthesis. When we throw out logic and follow only emotion, we are volatile, thrilled and miserable, with no structure. We burn up. When we throw out emotion and follow only logic, we become cold and dead inside. We become the automatons that Marx mocked; tools of capitalism with no thought other than to produce more money.
If labor and capital are going to work together in synthesis, we need emotion and reason to work together. Too much weight on reason gives capital license to ignore the real demands and needs of labor. Too much weight on emotion prevents capital from making the difficult, necessary choices to move us ahead.
Maintaining the elaborate social fictions of property, money, and the economy is no small task. Maybe religion is also a social fiction. Maybe the idea of right and wrong, of Heaven and God and morality and the moral arc of the universe are only true when people believe in them. Maybe, like the economy, our collective beliefs about religion become true when enough people commit themselves to the truth of those beliefs. If so, then that’s all the more reason to believe in those things.
We need to make sure they don’t conflict with empirical reality, of course. But we should top telling people “God only has the power to change the word through people that believe in God, and act according to that belief. Therefore God doesn’t exist. He’s just a reflection of people’s beliefs about a non existent thing.” You can’t honestly believe that unless you don’t value money or seek justice, because those things have that same self-effecting property.
Ok! Now that we’ve established this idea of a social fiction and argued for its necessity, let’s talk about how our social fiction currently works.
Money, Prices and Equilibria
Money as a Universal Reagent
Chemical reactions are described by giving reagents and products. You’ve probably seen diagrams like this:
In this reaction, a methane molecule combines with two oxygen molecules, to produce one molecule of carbon dioxide, and two water molecules. If we put oxygen together with methane, and then provide a spark (seed capital!) to get the party started, the reaction will keep going until either the oxygen of the methane runs out. The substance that runs out first is the “limiting reagent” of the reaction.
Now, suppose you work for the power company. Your company burns methane gas to boil water, to power a turbine to generate electricity. What’s your limiting reagent? Is it methane or oxygen? Neither, it’s Money! Money is your limiting reagent. You sell the power for money, and you use that money to go buy more methane and oxygen. As long as you have money, you can keep running the reaction.
Money acts as a universal reagent in our economy.
If you show up in the lab, and there’s no Methane, but there’s a big stack of hundred dollar bills, you can put in an order and then soon you’ll have methane. You have converted the money into Methane. The price you paid is the conversation ratio.
Practically anything that human beings create or produce can be had with money. The exceptions are few. Money acts as a universal reagent; whatever inputs your reaction requires, you can use money to obtain them.
The power plant will be profitable as long as the following conditions hold:
a) The chemical reaction generates more energy than it consumes, plus a surplus to cover waste and inefficiency.
b) The money you gain from selling the power is greater than the money it costs to buy the reagents, plus a surplus to cover operational costs.
Notice the symmetry here. The first part — the efficiency of the reaction — is governed mostly by the laws of physics. A better laboratory setup, and better practices can help — but ultimately, if it takes more energy to run the reaction than it releases, the system isn’t sustainable. Profit exists in nature; it’s called “net change in free energy from a reaction.”
The second part — enabled by the social fiction of money — is a rough mirror of the first part. The prices of Methane and Oxygen will go up and down, depending upon their availability and the demand for them. This is where the human notion of profit comes in.
We can use this same analysis to consider any kind of business. Suppose you run a taco truck. Your reagents are hungry people with $5, and taco components — tortillas, vegetables, and meat. The reaction consists of the hungry people giving you money, and then you assemble the food into tacos and give them to the hungry people. As long as $5 is enough to cover the cost of the components and labor to assemble them, you have a profit.
What determines whether $5 will be enough? That depends, eventually, on the entire human economy. You can’t buy a taco without interacting with the whole world. Let’s consider this a bit further.
Markets and Global Interconnectivity
For any object in existence, we can construct a causal network behind the object. If you want to really enjoy your taco, try to think about all of the people who worked in order to make that taco happen. It really is quite remarkable when you imagine just how many people had to work and coordinate their actions, in order to get that taco in your stomach.
For example, The meat had to be grown, slaughtered, packed, and shipped. At every step of the way, accountants had to track expenditures and receipts. Mechanics had to service the truck, and someone had to feed them lunch. Maybe someone fed them tacos! I try to think about these things when I eat my meals, because gratitude makes everything more delicious.
Just as Alice, gathering her coconuts, was working to get access to more energy, I think most parts of the economy are doing something similar. A business that provides value — solves a problem, meets a need — I think that action increases the total energy available for human beings to use. Some of this energy goes to feed us, some goes to shelter us, and some of it just goes to entertain us. All of those actions serve the entire human race whenever they enable anyone to work a little longer, produce a little more, meet a little more human need.
I think free enterprise is a marvelous way of arranging human affairs, but it’s easily tainted by a single non-free action in the chain. Don’t do that taco-gratitude exercise on drugs, or you’ll have a terrible trip. You’ll realize you are eating someone else’s misery. Whatever causal pathway you traverse, eventually you run into the slavery, violence, fear, and panic that are still present in our world. Whenever you spend money, you are interacting with the entire world; good and bad. The argument “No man is an island” is getting at this. Because all global markets are connected, every action you take has meaning in a global context.
Prices help establish that global context, by signaling what’s in relative abundance or scarcity. The act of earning a profit, in dollars, should correspond to an action that ultimately helps move humanity forward. When people exchange dollars for goods and services that should mean, as a whole, the world is now slightly better off. I say should because this only works if our market models accurately reflect reality. No model accurately reflects reality in toto. The only accurate model is reality itself.
When people exchange money, and the world is worse off as a result of the exchange, it’s bad on two levels. The first order effect is that the world is worse off. Consider someone forced into a psychiatric hospital against their will, so that the hospital can make money. That person loses time and money. The world is robbed of their output. That person loses trust in the institutions which are ostensibly in place to protect them. They lose trust in their own mind.
The second order effect is even more pernicious: The company is rewarded for its bad behavior. Now it has access to more energy; now it has more power to change the state of the physical world. It will do the same thing, again and again, because why not?
If you support capitalism and free exchange; if you think those are good ways of running the world, then you need to encourage your government to come down hard on anyone abusing the system. The glory of markets is that even a janitor in eastern Kentucky deserves some of the credit when humans walk on Mars. The shame of markets is that the president has slavery on his hands if there are slaves anywhere connected to the market — which is to say, anywhere on Earth.
Money as a “ Turn Token”
If the “physical level” function of money is as a universal reagent, there’s a “social fiction” aspect of money as well. If we imagine the human economy as a turn based game, then each dollar is like a token that lets the holder have a turn. On your turn, the economy serves you.
When you hand over $3 for a cup of coffee, the entire world has served you just then. The barista who pours the cup is just like the top of a mushroom; the whole organism spans miles underground. That barista is the final step in a process that’s spanned hundreds of man-years of effort and touched thousands of lives. Coffee farmers, coffee pickers, packers, shippers, truckers, mechanics, longshoremen, sailors, captains, accounts, lawyers, executives and politicians are all working behind the scene to let you take your turn. Enjoy your coffee! It’s an end product of the causal mechanism underlying all of human society, bent at that moment to serve your will.
After having handed over the $3, now it’s someone else’s turn. The more dollars you have, the more turn tokens you get. It takes a lot more turns to build a car than it does to build a cup of coffee, so you’ll need more tokens to buy the car. One of the key principles we have in our system is that if you want to take a turn, you have to give someone else a turn first: You can’t spend money you don’t have. A basic income changes this mechanic; it says that everyone gets a turn even if they haven’t “earned one” by getting a turn token from someone else. I think this is a better set of rules, for the reason that there are many ways people end up with turn tokens that didn’t involve giving someone else a turn.
Court mandated fines, government subsidies, and rent seeking are all ways of getting turn tokens without giving someone else a turn. I’d like to live in a world where we can choose to avoid interacting with those people. A basic income makes that far more doable, because a person has the ability to leave an employer the moment they do something unethical.
If the economy serves you when you spend money (because it’s your turn), and each dollar is a turn token, we can start saying something about prices and value. More valuable objects require more turn tokens; they have a higher price.
So what is value?
Prices and Value
Karl Marx, Adam Smith, and David Ricardo all argued that the price of a commodity (such as coal) ultimately reflected the amount of labor it took to get that commodity out of nature. For Adam Smith, this was only true for simple commodities which didn’t require capital. For David Ricardo, this was true of even more complex commodities, as long as you accounted for the labor necessary to create the means of production. Still, Ricardo also knew of examples that didn’t fit this pattern. He wasn’t sure if it was that meaningful. Marx saw this relationship as an iron law of nature.
I think all three of them are conflating a model of reality (prices in dollars) with reality itself. The Subjective Theory of value says that an object’s price reflects only its ability to satisfy wants and desires. This is the theory which I think is correct, subject to the correlate that our wants and desires are (usually) rooted in reality, to some extent. We value what makes us feel good. Surviving feels better than dying, so we value the things that help us survive.
Marx talked a lot about “use value” vs “exchange value”, and argued that exchange value tracked the labor cost of marginal production. I think Marx is right to consider labor as playing a role here, but he doesn’t seem to understand or respect risk. Marxism is heavily steeped in scientific determinism; the idea that there’s only one way things could play out. Perhaps if determinism were valid that Marxism would be ‘correct’, but the empirical evidence is against Marx there. Risk is real.
When Marx accounts for the labor cost of something like a coat, he doesn’t account for all the people who tried and failed to build and sell coats. He doesn’t account properly for fires in wool factories or unusually warm winters. Marx fails because he doesn’t account for risk. Capitalism succeeds only when it encourages accurate estimation of risk. It is impossible to justify capitalism without understanding risk.
Interest and Risk, Rates and Levels
Let’s go back to Alice. That knowledge that Alice gained, learning where more coconuts are — that knowledge is helpful because it gives her the ability to increase the rate at which she acquires coconuts. Was the risk she took worth it? It’s easy to say, after the fact, that yes, it was worth it — if she found a new supply of coconuts. What if she spent her saved energy and didn’t find any coconuts?
To figure out whether it’s a good risk, we’d look at the amount of energy wagered, and the possible amount of energy gained. But how do you value “A pile of ten coconuts” against “the possibility of getting access to a future stream of coconuts?”
The way we’d talk about this situation from an accounting perspective is to compute the “net present value of the future cash flow.” This process works because it defines the operations in terms of value (that nebulous, human concept) instead of either energy or power.
Knowing ‘here are 10 more coconut trees’ is very different from knowing “Here is a pile of 100 coconuts.” Which one is worth taking on depends on a number of variables. Our financial system treats these two as being interchangeable via the interest rate, and I think that confusion is at the root of several problems.
In our economy, if you create a piece of one off value (i.e. you go out and find a pile of coconuts), we treat it the same as if it were a stream of value. We treat that pile of coconuts roughly the same as if you had found a grove of of coconut trees. A piece of value is a quantity of energy; a stream of value is a source of power. By putting price tags on both, (talking about both in terms of value) and describing both in the same units, we’ve thrown out a ton of information.
Suppose we have company that earns $100,000 a year, with no expenses or overhead. Say it’s just a machine that somehow prints money. How much is that worth? It depends on the interest rate. It depends only on the interest rate.
Most financial experts will say that you can get a “risk free return” of 1%, say by buying US Treasury bonds. That’s what we’ll use as an interest rate. In that case, a machine that generates 100 thousand dollars a year produces the same amount of cash flow as 10 Million dollars with of US treasury bonds. This means that the machine is worth 10 million dollars. According to current economic models, It wouldn’t make sense to pay more than 20 million for the machine, because you could get a better return on your investment by buying treasury bonds.
I think this equivalence is false. There is no such thing as a ‘risk free return’. This false equivalence being exercised so regularly has serious consequences.
It isn’t a coincidence that we’ve seen lots of ‘unicorns’ in the startup scene over the past few years. Valuations have gone up like crazy because interest rates are so low. When interest rates are very high, valuations as a multiple of earnings go down.
Salary: Money as Energy
When you are paid a salary, you’re paid money per unit of time. Power is measured in units of energy per time, and work (in the physical sense) is equivalent to energy.
You are “paid for work” in the physical sense of the word, but also in the colloquial sense. I think this is an accurate description of what’s going on.
Capital: Money as Power
When you pay for capital that generates a return, you’re paying for a power source, not energy. This is the difference between renting and owning.
Remember, we treat the two of these as interchangeable in our economy. They both have “values” which can be interchanged, and our economic game is built around the idea of “Adding value” instead of “freeing up energy” or “finding new power sources.” To the “value” game, those two are interchangeable. A revenue stream has a present cash value, and a present amount of cash can (ostensibly) be converted into a revenue stream.
Many people are pointing to increased concentration of wealth as being “the problem” with our economy. I don’t think that is the problem — I think outcome is a natural result, a symptom, but not the root problem.
If the solar-powered self driving car has bad software which encourages it to drive for warmth, rather than storing power, the battery will start to overheat. That will cause other problems — but the heat isn’t the root problem. It’s the bad reflection of reality that’s the root of the problem.
I think risk is way, way too complicated to be represented by a single variable.
Problems, Small to Large
Value is Software, not Hardware
We reward people for creating things which are valued, which is a software construct. Value isn’t a physical thing: it’s a software variable. Think about what it means if we are maximizing a variable in software (value), instead of an aspect of physical reality (energy or power): rather than trying to grow and produce more food and clothing and things people need, we’ll focus on whatever behavior can make the financial system increase the variables it uses to represent reality.
If there’s any gap between the model and reality, that gap will grow larger over time. Changing reality is hard; changing models is usually easier. The more distorted the model becomes, the more distorted its representation of difficulty becomes. That in turn means the gap between “producing something people actually value” and “producing things which the market rewards” grows bigger over time.
Remember the example earlier, of the psych hospital that imprisons people because it gets paid by their insurance companies for doing so? That psych hospital is increasing the demand for straightjackets and tranquilizing drugs, which encourages more companies to produce those products.
Recessions are Corrections, not Problems Themselves.
Bad companies succeeding causes one set of problems. But failed companies limping along continuously causes a different set of problems. When the economy contracts, businesses fail and people lose their jobs. Most people see this as a bad thing and believe that recessions and depressions are something we should avoid if possible.
I think this is completely backwards. The dollar economy contracts when poorly managed companies go bankrupt, but this is necessary if we want the economy to be an accurate model of physical reality. Capital (the man driving the cart) does make bad choices. Nobody is perfect. If those companies that made bad choices are allowed to fail, the resources they’ve held onto are released back into the economy, for other companies to use.
Think of the self driving car that measures heat instead of energy going into its batteries. Eventually, that thing will overheat. Then it will slow down, and its measurements will report “hey, we aren’t gathering enough energy.” The car slowing down will allow it to dissipate heat, and it may get itself back into a state where the software measuring energy to the batteries functions correctly again.
If you are only in touch with a model, and not reality itself, you might think that the model getting into a worse state is the problem. But that’s not true at all. If you place your hand on a hot stove, it’ll hurt like crazy. The pain isn’t the problem — it’s that your hand is burning. If you managed to make that pain go away, you’d now have two problems. First, your hand is still burning. Second, and perhaps more importantly, you haven’t yet learned that putting your hand on a stove is a bad idea. You might even congratulate yourself on having the quick wits to drink some whiskey, because boy did that hurt.
When bad companies are propped up through bailouts or cheap credit, the economy never gets a chance to correct itself. Companies headed in a bad decision just keep going that way, dragging everyone else along with them. Speaking of cheap credit, we come to another problem: debt.
Debt is Risk, Not Wealth
Imagine you gave a 3 year old access to a Billion dollars. What do you think would happen?
That 3 year old would spend money on all kinds of things. Whole industries would pop up to deal with the whims and desires of the 3 year old. For a few years, the toy industry would boom. Entertainment companies would rake in huge amounts of money. It would look like things were going great for the economy. Eventually, of course, the show would be over.
The toy companies would shrink, and lay off workers. The companies that supplied the toy company would see a reduction in order flow for their products, and so they might cut back as well. Every company involved in getting money from that 3 year old would contract back to a sustainable level, and in that contraction, people would lose their jobs and benefits.
The people losing those jobs might not be able to make some credit card payments, which increases defaults. The stress of losing their job might take a toll on their health, and they may avoid the doctor because of the bill.
So now imagine that politicians said “We can’t let this kid run out of money! All of these adults will lose their jobs. We’d better give that kid more money, so that the adults can keep working to support this child’s whims.” You can see why that would be a mess.
Of course, nobody’s giving a 3 year old a billion dollars any time soon. But we’ve given lots of credit to companies, that haven’t behaved very responsibly. When they spend that money, it looks like the economy is growing. That isn’t actual growth. It’s just the appearance of growth, which has to be paid back later in the future. In the meantime, the economy has been warped by these companies spending money they won’t be able to spend indefinitely.
The flip side of this is that when debt is issued, the debt holder can see this as wealth. If you own a corporate bond, you’re holding a promise from that corporation to pay you back. You might think that this is worth something, and it will be, unless the corporation goes bankrupt. Then it’s worth nothing.
Most companies will pay back their debts. But many won’t — and if that happens, it can start a chain reaction. So much of our economy is set up to be susceptible to these chain reactions. IF one company defaults, anyone holding their debt loses wealth and might have to sell assets to make up for a cash flow situation — which further exacerbates the problem.
Then you have pension funds and other retirement vehicles that purchase this corporate debt, hoping to get a return. If they lose their investments, the political stability of our entire system gets threatened. We should view corporate debt the way we view lottery tickets. Imagine how bad it would be if lottery tickets were seen as socially respectable for smart people to buy, and they also had a small probability of blowing up the entire economy because they created a network of promises that susceptible to collapse.
Debt isn’t the only thing that looks like wealth, but isn’t. Let’s look at GDP.
GDP Is a Rate, not a Level
Economists use a metric called GDP to measure the total dollar value of goods and services produced in an economy. This is as close as we have to a measure of the size of the economy. Remember, value is a software construct: it’s not part of physical reality.
To see why using GDP as a measure of the economy is a problem, consider this scenario: A friendly alien shows up with a machine that magically grants each person whatever they want. If it’s true that economic models reflect reality, it should be clear to see that this machine would dramatically increase the wealth of the world.
And yet if this machine existed, people wouldn’t bother with nearly as many economic transactions. Why go out and buy a house or a car or new shoes or a coat or food if you just get those things magically for free from the machine?
Our GDP would crater, and the measurement system would say that economy had its worst year ever.
If you run the thought experiment longer, you’d see that services would suddenly become the basis of the economy. This would be great for anyone who had a house already, because all of their needs would be totally met. For anyone that didn’t have a house, now they’re in trouble. You need money to get a house, and the economy would be a complete mess because all of the companies that existed to provide products would be out of business. You’d be competing in a labor market with the majority of the world that doesn’t own land, all clamoring for the chance to serve the small fraction of the world that does.
Of course, “a magical machine given to us by aliens” doesn’t exist. But an approximation of that machine does exist. It’s called technology. If that situation I’ve described sounds like the modern economy, it could be that our more advanced technology is bringing us closer to this state.
Of course we aren’t yet at a point where a machine will give you whatever you want. But we see the beginings of this trend playing themselvs out. This pattern is essentially the same pattern Marx pointed out when he argued that eventually, labor would become worthless, as capital accounted for more and more wealth.
Capital and Automation
Over time, we should expect that money comes to represent, more and more, the value of capital. Labor’s value will become worth less and less. The reason is simple: automation.
Once Alice found the coconuts, that knowledge allowed her to get coconuts faster and faster. The work of finding new coconuts only needed to be done, and then it was done for everyone who wanted to use the coconuts.
Automation changes the way energy enters our economy. Increased automation means more energy comes into the system through existing capital. As the ratio of ‘energy gained through automation’ vs ‘energy expended via human labor’ increases, the impact of labor on the economy, relative to the overall economy, will shrink.
The value of labor goes down, because the energy coming in through labor represents a much smaller fraction of total energy entering the system. That means that relative to capital, labor is valued less over time, as productivity increases.
Add on top of that factor the increased bargaining power of “people with enough money to live on investment” and “people who need a job to survive”, and it’s no wonder that labor will see declining shares of income over time.
If you think this is a new phenomenon, even agriculture is a form of automation: we automated harvesting the sun’s energy. We’ve been dealing with automation-induced inequality for literally all of human history; the sedentary shift and the beginning of written history are marked by agricultural empires that used slave labor to enrich a small class of nobility. That nobility then used the same slave labor to defend the agricultural fields from invaders. Risk was a lot worse in the past.
Throughout history, there have been periods of plenty, where the common man ate well and the nobility didn’t as hot as they normally do. Two of those periods that come to mind followed the Black Death in Europe, and the Second World War 2 Lots of death and destruction thin out the mass of laborers and wealthy alike, increasing demand for labor relative to supply.
Those horrible conflicts and losses of life do something to us. They align us, in the realization that we’re not just fucking around here on the Earth. Things Matter. Not all ideas are created equal, and not all governments are just.
Perhaps wars and strife are a hardware mechanism that prevents broken human software from perpetuating itself; evolution at the sociological level. A social fiction that can’t muster an army or nurse it’s sick back to health is a social fiction that will die.
Carl Sagan wrote beautiful about the pale blue dot we inhabit. His writing, mocking generals who fight for land, was done on a platform surrounded by a ring of blood and guts and oil and metal, men dying in the mud to make a safe space for him to look up at the stars. There can be no telescopes without night watchmen. Those night watchmen need to pay rent, too.
Computers were conceived in the mind of a gay weirdo who did more for the Allied war effort than any other man. Computers were born in the belly of second world-war battle ships, tracing parabola through smoke, for American shells to punch holes in the armor of warships fighting for imperial Japan. Computers grew up in the late 20th century, in a mixture of greed and moral miasma that was also good enough to let weirdos like Mr. Turing escape the cruel fate that the good guys forced on him. Yes, we were the good guys. That doesn’t mean we didn’t do some horrible things.
Computers have now become adults, focused on their careers and proving their value to the world. We must not forget the old friends who made these computers possible. We must honor the farms, soldiers, mechanics and janitors the same as we honor scientists, financiers and investors — otherwise we shall have nothing but soldiers.
Solutions: Reflection and Self-Modification
A basic income fixes the divergence between capital and labor, by allowing everyone to ‘take a turn’ on the economy, even if they haven’t gotten a “turn token.” Reducing the massive inequality in our society makes sustaining the necessary social fictions far, far more tractable.
A basic income reduces the problem of ‘bad behavior gets rewarded’ by giving everyone seeing their employer doing unethical things more freedom to quit. How many people work for companies doing terrible things, but don’t want to leave because they can’t find a new job, or a new job looks bad on their resume?
A basic income also changes the game by ensuring that the number of turn turns rises roughly in step with the total value of the economy. I think this last part is essential. When we’re past a Kardashev level 3, it’ll seem silly to insist that “yes, we can harness all the power of a black hole, but if we let people have access to any power-stream that wasn’t contingent upon proving transmission of power in a pre-configured direction, then we’ll run out of power.”
Ultimately, though, a basic income won’t fix all the problems. Only reflection, critical self-awareness, and a desire to improve life for all beings will prevent us from getting stuck in a local maximum. We need recessions to weed out failed companies. This will be much more politically feasible with a basic income, because the argument “think of the jobs!” will not have nearly as much of a draw to it.
This essay has grown too long and for me to risk adding any more. I hope you’ve enjoyed it. If you like my writing, check out my book on amazon.