The Elementary Functions of Money

Earlier this year, I wrote a set of notes (something like a paper) on money as a technology, using the language of promise theory. As is often the case when you pull on a thread many details began to unravel, leading to a rather longer exposition than was intended. Even after more than a hundred pages of simple matters, the notes only scratched the surface of money and its basic functions. For some, this is no doubt too much to swallow. After all, how hard could it be? The answer is that money is not all that hard, but that people have made it harder than it needs to be, and therefore it is worth writing down the basic insights in a formal way. Economists are just terrible at doing that, often grandstandong without ever even defining their assumptions.

Since then many people have asked me to do them the service of writing a simple summary (usually with expletives in the request). Below is a short summary of the major points in the promise theory of elementary functions of money, and my wider investigation of money as a network.

  • Ownership of things and deeds is a prerequisite to the reason for purchase and payment.
  • Money is a proxy for accounting during such transactions where ownable objects change hands. This leaves us to explain services or the ownability of someone's time. In other words, money is a network transfer mechanism for purchase accounting.
  • Money may be represented in many forms or representations, by `proxies' like cash notes and coins, bank transfers, bonds, credit, etc.
  • Money is analogous to language as an equalizer of opportunity. It is not merely having it that helps, but rather how it is used and whether it can be accepted in the hands of agents in order to facilitate meaningful or valuable exchanges. If you don't speak the language, being in possession of many words is not helpful. This is just a paraphrasing of the basic law of promise influence propagation. It is not enough for agents to offer (+ promises), others also need to accept (- promises) in order for intent to be transferred.
  • Most discussions of economics talk about `value' in a variety of ways. This leads to much confusion, but promise theory makes the notion of value simple. Value is a subjective assessment of what a thing, good, or service promises, in the view of the promisee. We cannot make an objective story about money using the term `value', because it is inerently subjective. So I only used the terms amount or measure and price when talking about money.
  • The amount or measure specified on a monetary proxy is not related to the value of anything a priori, nor is the price of a good or service. The measure of money is invariant over time. Only its impact on transactions between parties changes. This leads us to a straightforward theory of relativity for money.
  • The semantics or functional behaviours of money vary widely across its different proxy representations. Functions may be added by proxies that extend the promises of simple money, like cash, beyond the basic representation of amounts. To make the analogy with the OSI network stack, if money's functions are analogous to a layer 7 payload, and the basic proxies are layers 2-6.
  • Money is often treated as if it were a conserved quantity, but it is not and indeed it cannot be conserved. Thus the relationship between trust, satisfaction, and repayment of debt are only loose, not precisely quantifiable. This is quite like physics, where we believe that energy is conserved locally, but we have no idea whether it is conserved throughout the whole universe. Money is more like free energy though, it can be lost or rendered unable to do work by a kind of `entropy'. Inflation is one kind of entropy.
  • Movement of money (signifying exchanges or transactions) is often facilitated by Trusted Third Parties (TTP) who make certain promises on behalf of all their clients to reduce the need for verification of trust on a peer to peer basis. It takes less human effort less to trust one such third party (say a bank) than it does to trust every person and entity we make trades with. So these TTPs play an important role in brokering trust.
  • Cryptocurrencies, by themselves, do not solve issue of the broker/escrow role of banks in trust. When we make small transactions without formal binding contracts, there is a risk that the provider will not deliver or that the client will not pay. Using a trusted third party (a covalent, trusted third party interaction) this is handled. As long as one trusts the third party, payment can be mediated. This is the function of a third party that a cryptocurrency alone cannot solve. Smart contracts can solve this problem, if one trusts the platform, and the contacts do not cost too much.
  • Money usually loses its memory of where it has been. Some proxies for money can remember chains of transactional history. Most people trust money more if it has no history, as money could become tainted by its history or provenance, erecting a barrier to transactions. For example, we might not want to accept a particular currency, based on risk (debts swaps), trends, or ethical, moral, or even astrological concerns.
  • Money exists in positive and negative forms: credit and debit, liquidity and debt. Credit and debt have very different semantics. Debts may never be fully cancelled out by repayment of monetary amounts.
  • The liquidity of forms of money depends on both the ease of promising it, and the willingness to accept it. As noted above, the willingness to accept money, in any form, may depend on the extent to which it can forget its past transactions or not. Cash remembers nothing (a Markov process), while ledgers and contractual forms of money remember their origins. Entropy is the term that describes the forgetting of distinguishing history.
  • Progress in society depends on the abilty to shed the anchor of debt semantics: entropy is sometimes a positive thing. Microcurrencies protect against entropy, i.e. prevent the exchange of one debt for another. Thus debt may be perpetuated by the increased semantics, and an inability to forget past events.
  • Time plays a major role in money: how quickly do we need to settle accounts, and why? If the time limit on repayment tends to infinity, then no one would need to repay anything. If we have to settle every debt within a week, many businesses would go bankrupt immediately.

    When should someone's credit balance affect their ability to obtain new goods and services? This is an individual moral judgement, sometimes turned into a societal convention. The need for positive money in order to obtain things places an arbitrary throttle on economic transations, but relates to peer to peer trust. There is nothing fundamentally toxic about having a negative trade balance (whether as an individual, a company, or even a country). The question is how quickly is it growing or shrinking? Monetary conventions act as a behavioural constraint of new interactions.

Concerning the scaling of money:

  • As monetary networks scale, how do the promises and elementary semantics of money scale to macroeconomic flows? The general rule is that as we aggregate agents and transactions, the less microscopic details apply. This breaks down when systems are non-linear, because non-linearity can amplify small effects to remain significant on aggregate scales (a butterfly effect).

    In macroeconomic models, we would expect promises to alter the constants of proportionality and paramter values, revealing the complexity of different failure modes.

This is a brief summary of some key points. Many of them still crave further work to analyse in detail, especially when it comes to scaling from micro transactions to macro level economic concerns. After writing the longer paper, I changed my mind somewhat about the role of microcurrencies on the future. I had assumed that they would be a helpful thing, but I now think that they could drive a wedge between people and help society as we know it to unravel, as proposed in my old book Slogans about the information society.

Anyway, I hope to return to these issues in between paying bills.

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