By David Orrell and Roman Chlupatý
Of all human inventions, money must be the most deceptively powerful. It helped spark the development of writing and the organization of the first city-states. Its use contributed to a great flowering of thought in the Axial Age. It has been the cause of epic bloodlust and the focus of scientific geniuses. It arouses overpowering emotions but also a kind of detachment. It has the nuclear power to make or destroy nations. We revere it but also see it as corrupting—even evil. And yet our economic theories treat it as a mere tool for exchange and accounting, nothing special in itself.
Neoclassical economics, for example, began as a kind of utopian vision for society—aiming to achieve what Francis Edgeworth called “the maximum energy of pleasure, the Divine love of the universe.” One property of such visions is that money never plays much of a role. The original Utopia, after all, was that of Thomas More, who in his book of the same name wrote in 1516: “Men’s fears, solicitudes, cares, labours, and watchings would all perish in the same moment with the value of money; even poverty itself, for the relief of which money seems most necessary, would fall.”
The word was a pun on the Greek words ou topia (no place) and eu topia (good place), and meant a good place that doesn’t exist—and another property of utopias is that attempts to build them on Earth routinely fail, whether they are led by religious cranks or staid academics. The neoclassical version certainly didn’t work out quite as its inventors planned. While the economy has grown enormously, and many people around the world have escaped poverty, not everyone has achieved “the maximum energy of pleasure,” and we are now faced with a number of interlinked problems that are in a way related to that success. Two of the most prominent and frequently discussed are environmental limits to growth and economic inequality. Like a projection of money’s two sides, each is associated with a different kind of debt—the physical with the planet and the numerical between groups. There is a symmetry between the slow but inexorable rise in global debt and the rise in global carbon emissions. Techno-utopians will argue that the answer to either problem is more economic growth, based on the idea that we can buy our way out of trouble, but so far the evidence seems to point the other way. It’s not that technology has disappointed—we are all impressed with the Internet and smartphones—but that the impact of the most important technology—money—doesn’t usually get taken into account.
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Perhaps the defining issue of our age is that the human economy has grown to a scale where it impacts the environment at every level: on land, in the oceans, and in the air. As Kenneth Boulding put it, we are transitioning from a cowboy economy, where the world is an open frontier, to a spaceman economy, where we are restrained by natural limits. This transition, ecologist Eugene Odum argued, resembles that followed by ecosystems as they become established. At the early stages of an ecosystem’s development, available energy (whose ultimate source is the sun) is rapidly exploited by a few species in a sudden bloom of growth. As the ecosystem matures, the food chain switches from a linear chain—carnivores eating herbivores eating plants—to a more web-like, decentralized structure in which multiple species interact in increasingly complex ways. The waste of one organism is recycled as food for another, and resources such as nutrients and minerals are conserved. An example of a mature ecosystem is a tropical rain forest, where most of the nutrients are not in the ground but in the trees and the species that live in them. The land itself has little agricultural productivity, as farmers discover if they cut down the trees and try to grow soy or provide pasture for cattle.
Economies also develop in a similar manner. In a society of pioneers, wrote Odum, “high birth rates, rapid growth, high economic profits, and exploitation of accessible and unused resources are advantageous.” As the economy matures, the emphasis switches to “considerations of symbiosis (i.e., civil rights, law and order, education, and culture)” and the recycling of resources. However this transition is a work in progress: “Until recently mankind has more or less taken for granted the gas-exchange, water-purification, nutrient-cycling, and other protective functions of self-maintaining ecosystems, chiefly because neither his number nor his environmental manipulations have been great enough to affect regional and global balances. Now, of course, it is painfully evident that such balances are being affected, often detrimentally.” And matters have not improved in the ensuing half-century, as carbon dioxide emissions have climbed and the lifesupport abilities of the planet have continued to degrade. We have grown richer in monetary terms but the hidden charges are mounting up.
In her book This Changes Everything (whose uncompromising stance has led to critics calling it a “utopian call to arms” in the climate battle) the author and activist Naomi Klein asks “What is wrong with us? I think the answer is far more simple than many have led us to believe: we have not done the things that are necessary to lower emissions because those things fundamentally conflict with deregulated capitalism, the reigning ideology for the entire period we have been struggling to find a way out of this crisis.” Indeed mainstream economics is an ideology that has shaped our attitudes toward both the economy, and the natural world. But while this ideology has certainly been influential, it has never been left alone behind the wheel. Neoclassical theory was started with the best of intentions but was co-opted or exploited by market fundamentalists to justify the existing power structure. Economics, along with its bank-sponsored Nobel Prizes, was bought, the same way anything else can be bought in a market economy. Its argument that “money is a distraction” just distracts from that fact.
So perhaps the answer, at least in a technical sense, is even simpler: the design of money. After all it is our monetary system as much as any particular ideology that dictates how we move energy and resources around the economy; and the technology was never intended to be environmentally friendly.
Money is created primarily by private banks and lent out at interest. The interest can only be repaid if the economy and money supply constantly inflate. Prices emerge from the use of money in markets to trade goods between people and firms; but the process does not work at the edges of the system, that is, with the input of natural resources or the output of pollution. Much economic growth comes from transforming preexisting natural systems and services—land, oil, gold, trees, fish, water—into money; but the Earth does not trade or haggle over price, it just passively supplies, up to a point. If money, as Tolstoy said, is a new form of slavery, then the planet is the biggest slave of all.
Some economists argue that we can create an artificial market for the planet’s services and harness Adam Smith’s invisible hand to the task of environmental protection. But if the connection between price and value is tenuous for goods traded on human markets, it becomes looser still when you try to attach numbers to nonhuman systems. What is the price of a species if it is not an obvious service-provider? Or the price of fresh water that we don’t plan to drink? And if modelers can’t accurately calculate financial risk, such as the chance of a company going bankrupt, how can we price the risk of, say, a fishery’s collapse? By translating environmental problems into monetary terms, we can justify anything, because the numbers are easily rigged by whoever holds power and stands to profit—a fact excluded from economic models that focus on abstract calculations of utility.
Environmental conflict is therefore hardwired into the design of our monetary system—built for funding wars with kings and empires and now, as Klein documents, with the planet (one that, if it continues, the planet will win—it’s bigger). Dazzling us with number, it distracts us from the costs. This, rather than ideology, is why the GDP produced in a city like Beijing is booming, but people are leaving because they can’t breathe the air (and why, a little late, the National Congress of the Communist Party wrote the goal of an “ecological civilization” into its constitution in 2012). Like a toxic algal bloom on a lake, the economy is doing fine, but it is asphyxiating everything around it.
Of course, money only works if we believe in it, and economic ideas are part of maintaining and feeding that belief. How can we redesign money— and our mind-set—for a mature economy or an ecological civilization?
The continuous growth required by our monetary system for its survival also dominates the structure of our working lives. In his essay “Economic Possibilities for Our Grandchildren” (1930), John Maynard Keynes predicted that countries could support themselves on a fifteen-hour work week. In 1967, the New York Times, with a slightly more restrained degree of optimism, reported that “by the year 2000, people will work no more than four days a week and less than eight hours a day. With legal holidays and long vacations, this could result in an annual working period of 147 days worked and 218 days off.” Today many are working longer hours than ever, so what happened?
Part of the reason is a shift in the composition of jobs. According to a 2006 report on the American job market, “professional, managerial, clerical, sales, and service workers (except private household service workers) grew from one-quarter to three-quarters of total employment between 1910 and 2000.” Technology has indeed meant that we can produce more with less, as the utopians promised, but somehow we have conspired to maintain our workload, by managing one another. Another reason is that as we get richer, we increase our expectations and bid up the prices of things like real estate. But this still doesn’t completely explain why we collectively feel compelled to work so hard in what should be an age of plenty. And again the answer is related to the design of our monetary system, which to an excessive degree fosters competition and inequality.
Keynes wrote in his thesis that “we shall endeavour to spread the bread thin on the butter—to make what work there is still to be done to be as widely shared as possible.” But money has a different idea. While we certainly seem to be trying to spread the work around, the actual reward—that is, the bread—has tended to be more concentrated, with most going to the very top tier of earners. The picture is complex, and growth in China and India has helped to reduce global measures of inequality, but within many countries wealth distribution has become increasingly skewed toward the rich. According to Thomas Piketty, this is because the rate of return on capital has long tended to exceed the rate of economic growth, with the result that money builds on itself as it is passed on within families through inheritance.
Piketty’s proposed solution of a global tax on capital is, he admits, politically infeasible—a “utopian idea.” And again, the main problem is with money itself. Money begets money, in a positive-feedback loop, through interest but also through its association with power and status. Instead of spreading evenly, it clumps and clusters. As capital accumulates with the wealthy, so its opposite—debt—accumulates with everyone else. Gains in productivity due to technology are captured by the elite class of CEOs and investors. In the United States, the pay ratio of CEOs to unskilled workers is 354:1 (a survey showed that most people thought the real ratio was 30:1 and the ideal ratio 7:1). Wages for the middle classes stagnate, while those people further down the income scale are essentially wage slaves—rather than enjoying the much-anticipated age of leisure, they are working to break even or get out of debt. The tension, inherent in money, between positive wealth and negative debt has grown to a point where it threatens social stability.
In the Organisation for Economic Co-operation and Development countries, for example, the average income of the richest 10 percent is about nine times higher than that of the 10 percent at the bottom, and the gap is widening even in traditionally more egalitarian places such as Germany or Scandinavia. And things only became worse in the aftermath of the GFC and the rescue operations that flooded the system with liquidity via quantitative easing, profiting the disproportionately affluent who are active market players. As the Bank of England reported in 2012, its monetary rescue mission had boosted the price of domestic stocks and bonds by 26 percent—and about 40 percent of resulting gains went to the richest 5 percent of British households. Quantitative easing was thus “exacerbating already extreme income inequality and the consequent social tensions that arise from it,” according to Dhaval Joshi of BCA Research. In the United States, the top 5 percent own 60 percent of individually held financial assets, so QE represented a regressive redistribution program.
Upward social mobility, or a chance that “one will have enough to be able to stop elbowing the others,” has thus been severely limited in the course of the past three decades or so. In some Western countries like Great Britain, the generation of recent graduates is the first in a long time that does not have a better prospect of social advancement than their parents, an Oxford University study shows. And the same goes for the United States, where people believed in the American Dream the least in nearly two decades in 2014 (when only 64 percent of those polled said hard work could result in riches, down from 74 percent in the midst of the GFC in 2009).
According to mainstream economics, prices correspond to utility, so things like pay inequality just reflect economic reality. As Eugene Fama said in a 2007 interview: “You’re just looking at market wages. They may be big numbers; that’s not saying they’re too high.” But as discussed, prices are influenced by power relationships. The financial system, for example, is dominated by a relatively small number of highly connected firms. Profits flow to these companies and their employees largely because they occupy a privileged position in the network. Of course they must compete to retain that position—they are all working very hard, managing away like crazy—but that competition appears to provide no real constraint on wages.
Economic inequality is not just a matter of fairness—or the perception of it, which is crucial for social cohesion and thus stability—but also of economic health. In other words, the rising inequality orchestrated by “the relentless apostles of efficiency” hurts what they cherish the most—efficiency. This full circle seems to suggest that we have reached the natural limits of the current system, the monetary empire is overstretched, and a way forward cannot be powered by business as usual. As former governor of the Federal Reserve Henry Wallich said: “Growth is a substitute for equality of income. So long as there is growth there is hope, and that makes large income differentials tolerable.” But when growth slows, inequality becomes very obvious. Also, while predictions for an age of leisure (or unemployment) have consistently been proven wrong, the revolution in areas such as robotics and artificial intelligence has barely begun; this will affect everything from factory work to legal work. The labor market will certainly adapt, and new occupations will appear, but if the whole point of robots is to replace people then at some level they will probably succeed. This should be a good thing, but again, benefits will primarily flow to investors and managers. Which would you rather do, compete with a robot or own the robot?
From the viewpoint of neoclassical economics, people are rather like robots anyway, since we are driven by similarly mechanical impulses (as one student from the University of Glasgow put it, “Whenever I sit an economics exam, I have to turn myself into a robot”). The only difference is that robots are programmed by us, while we are programmed by our desire to “optimize utility”; and we want to be happy, while robots (like slaves) just need to be maintained. However, extreme social inequality combined with environmental collapse does not seem the ideal circumstance to achieve Bentham’s “greatest happiness principle.” How can we redesign our monetary system to “spread the bread” and produce a fair society in which the benefits and the hazards of economic prosperity are more equally shared— even when growth is constrained to an extent by environmental factors?
Mainstream economics has long argued that the market economy, at least in its idealized form, is a rational, efficient process that optimizes utility. At its heart is the idea that price equals value. But when we see price as an emergent phenomenon that depends on the complex properties of money objects and their use in society, that raises some questions. Money is a way of stamping numbers onto the world, but what do we do when the numbers look wrong? When the incentives they produce no longer make sense? When they are leading us on a dangerous course? Money may have been described as a form of memory, but what if its use is actually erasing local memories and creating a kind of cultural amnesia—a massive blind spot in the way we see the world?
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As the Harvard political philosopher Michael J. Sandel explains, “We have drifted from having market economies to becoming market societies. The difference is this: A market economy is a tool—a valuable and effective tool—for organizing productive activity. A market society, by contrast, is a place where almost everything is up for sale.” In this case: “What role should money and markets play in a good society?”
One option, as in More’s utopia, would be to move away from the idea of money altogether. Such an approach was favored by Athens’s great rival in ancient Greece, the city-state of Sparta, whose highly militaristic society had no need for money, which it saw as corrupt. Post-revolutionary Russia made a game attempt to eliminate money and create a communist version of utopia in 1920. Today we have people such as the Irish activist Mark Boyle, known as the Moneyless Man because of his unorthodox career choice to live without money. However, apart from a few such holdouts, money has been in continuous use since the time it was invented and seems unlikely to go away any time soon. That leaves us with a few other options. One is to exploit its positive qualities while trying to contain its worst excesses through regulations; another is to redesign its basic features; and a third is to actively cultivate arenas that magnetically shield us from some of its effects.
The first option is the default one, and there has been some progress on improving the financial regulatory framework since the crisis, for example, by increasing reserve requirements for banks, and strengthening oversight of things like complex derivatives. However, it is generally agreed that these changes have been largely cosmetic and have done little to address the underlying problem, which is that the financial sector is far too large and unstable. Of course we should continue to press for change in areas such as regulation of derivatives trading, the bonus culture, and so on; but if even a crisis of that magnitude did not result in truly transformatory change, it only shows how entrenched and resistant to change the monetary system has become.
The second option—redesigning money. Complementary currencies tend to become popular during times of crisis and less popular when the crisis is over (and before the next one arrives). However, there are a number of reasons why the current enthusiasm for new solutions may not be a temporary phenomenon. One is that the existing monetary structure, with its gold standard institutions, is based on a pretense that is becoming harder to maintain, as alternative currencies highlight its inconsistencies and threaten its monopoly. At the same time, technological advances such as the blockchain mean that alternative currencies can spread quickly and become global phenomena. And an unconditional basic income, which could be paid in a complementary currency, might seem particularly applicable if robots end up doing all the grunt work. Currencies bearing negative interest would have seemed a stretch a decade ago, but in the anemic recovery from the GFC many central banks, including the European Central Bank, have successfully experimented with bonds that do exactly that, effectively charging to store money in a safe place. (Though when debt levels are a problem, negative interest seems like throwing fuel on a fire.)
Of course one should again not underestimate the inertia of our financial system, the power of entrenched interests, and the great advantage enjoyed by official currencies, which is that they have a large captive market—taxpayers. The reason money caught on in ancient Greece was not just because the coins were handy and looked great but also because they were demanded back as taxes, thus closing the loop and guaranteeing their acceptance. Note that in principle there is nothing to stop a government from one day adopting an altcoin as an official currency. In 2014, before his spell as the Greek finance minister, Yanis Varoufakis proposed a blockchain-based currency denominated in euros and backed by future taxes—buy the altcoins now and use them to get a discount on taxes in two years time. China is also said to be contemplating its own digital currency.
In addition to these, there is the third option, which is to explore and develop the space around money and create a kind of oasis from it. Money hasn’t always been as important as it is today. We might not be able to live without the stuff, but—armed with a knowledge of its true nature—we can learn to better control, moderate, and direct its lines of force. Doing so will require finding ways to renegotiate the relationship—at the core of money—between number and value.
As the behavioral psychologist Dan Ariely observes, “We live in two worlds: one characterized by social exchanges and the other characterized by market exchanges.” The former include offers of help, exchange of gifts, neighborly collaborations, and volunteer work; immediate reciprocity is not expected, demanded, or even wanted. Market exchanges, in contrast, are “sharp-edged” and based on left-brained, numerical calculations of wages and prices. The difference between the two spheres therefore comes down to the use of number. Confusing them can result in problems. “Imagine that you help me move and I give you twenty-two euros and seventy-five cents at the end of the day. You would be offended,” notes economist and philosopher Tomáš Sedláček, adding that once it is a nice meal and a glass of wine of the same price everybody suddenly feels happy.
One of the powers of money, because of the way it points toward number, is that its mere presence is enough to make us shift from social norms to market norms. This has been demonstrated by a number of experiments in which subjects are primed to think about money before carrying out some tasks, for example, by seating them in view of a pile of Monopoly cash. The effect of the exposure to money was to make them less likely to ask for help, offer help, or collaborate in any way. They even preferred to sit farther apart from each other. (Unsurprisingly, given its mantras of scarcity, competition, self-optimizing behavior, rational economic man, etc., the study of economics appears to make people more self-centered.) A study by the University of Los Angeles found that over the last 200 years there has been an increase in use of words such as “get,” “unique,” “individual,” and “self,” but a decrease in words such as “give” and “obliged.” The researchers put this down to English-speaking countries moving from “a predominantly rural, low-tech society to a predominantly urban, hi-tech society” but another reason could be the growing importance of money. An oft-stated advantage of money is that it removes the need for personal relationships to conduct business, but a side effect is that personal relationships get replaced by money.
Perhaps the best way forward, in monetary terms rather than social organization, is in fact to reach backward—not to the nineteenth century, but even further, a thousand years back. Few people today would want to give up the incredible developments in technology and living standards of the past few centuries. But in a search for new monetary ideas, much can be learned from the last era when virtual currencies were in the ascendant phase, the High Middle Ages of the eleventh to thirteenth centuries, before finance was Medicified.
While neoclassical economics was developed by idealists who had a vision of a good society, one of the more notable features of both modern capitalism and economic theory to have made itself evident by its absence during the GFC was any sense of right and wrong, of good and evil. Economic theory teaches that market price measures intrinsic value, which itself is a measure of utility. As economists M. Neil Browne and J. Kevin Quinn note, “Economists distinctly do not question the moral worth of market prices and wages.” According to Sedláček, mainstream economics has neglected ethics to the point where “it is almost heretical to even talk about it.” Instead, this subject was outsourced to the invisible hand of the markets.
As we have seen, though, while money is a tool for setting numerical prices in the market, the relationship it produces between exact price and fuzzy value is uncertain, unstable, and often misleading. The idea that the market knows best, or that maximizing profit is the same as doing “God’s work” in Blankfein’s phrase, is very far from the view that prevailed in the Middle Ages, with its concept of the just price. The idea that the state—and everyone else—must borrow its own money at interest stands in marked contrast to medieval ideas about usury. The idea that the economy has to continuously grow would have been equally foreign. Our aim is certainly not to romanticize the High Middle Ages or sell it as a utopian vision—and few would want to see an economy based on undernourished and disease-prone serfs doing digital piecework, where what counts is social standing and control of land (though that sometimes seems to be the way we are heading). But the comparison does point the way to a monetary system that would address issues such as limits to growth, economic inequality, and societal happiness and resilience.
By harnessing the powers of virtual currencies and the extraordinary wave of invention overtaking finance, we can realign the basic incentives of our monetary system away from an exclusive focus on short-term profit. Seignorage earned on national and regional currencies can be recycled back to the state rather than being sequestered by private banks (the Medicis of our day). Alternative currencies will play an important complementary role, and local currencies can help align money with the needs of a community. Currencies with negative interest rates, appropriately used, will both discourage hoarding, and—by not discounting the future—encourage long-term thinking. We also need imaginative strategies—such as basic income–style cash handouts or restrictions on lending—to tackle the mounting debt whose charge hangs over every region of the world economy, holding us in awe and fear of its next unpredictable lightning strike (given the mathematical tendency of unpaid debts to climb toward infinity, one suspects that debt write-offs will also be involved at some stage). A first step is to come out of denial about the true nature of our current virtual money system, with its easy money creation and gold standard debt collection.
At the same time, we can reinvigorate the idea of a commons and fight back against the modern enclosure of land, water, and even our thought processes by corporate interests (then the commons were reserved for grazing animals, now we need some unbranded space for our minds to wander). We can reduce the size of the financial sector, so that it no longer dominates the flow of money in the economy. Perhaps a modern version of caritas will even emerge as a nonmonetary measure of personal and societal worth. In this context, a shrinking GDP would by no means be a disaster, if it represents a kind of reclaiming of space from the money economy.
Money is the Message
Faced with worries over resource shortages, environmental disaster, extreme wealth inequality, out-of-control debt, mass unemployment, and so on, it is easy to be pessimistic about the future—especially since we have borrowed so much from it already both in financial and environmental terms. However, these problems are in many respects the product of our old money system, and its associated ideology, which say that numbers accurately reflect value, that debt is just a neutral transfer from one group of people to another, and that money is inert. We live in a time of change when, having been trained to equate value with scarcity, we perceive everything as being scarce, except for information—and information is the most precious commodity of all. If we are worried that computers and robots are going to remove the need for work, it only shows how perverse economic incentives have become—and how urgently we need to embrace the new paradigm that is emerging in piecemeal fashion from the tremors of the Nixon shock and the later financial crises. Some of the most interesting developments will take place in the areas that are least well-served by our conventional money system, where the gap between number and value is the greatest.
Excerpted from THE EVOLUTION OF MONEY by David Orrell and Roman Chlupatý. Copyright (c) 2016 Columbia University Press. Used by arrangement with the publisher. All rights reserved.
2016 April 23
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