• Why there’s no money: the imaginary part of financial systems

    by  • February 28, 2013 • Everything Else • 10 Comments

    The Phases of Money
    We discuss money as if it was water – a liquid, flexible, easily-measured, infinitely dividable pure substance. This aspect of money is well understood.

    But we live in a situation where very nearly all the wealth in the world seems to be tied up in destructive forms. If the money is fluid, why is it not able to simply flow from destructive forms to creative ones?

    The answer is simple: money has a fluid aspect or phase. In this phase, it is found in small conglomerations known as “pocket change.” You can spend this change on a bus ride or a newspaper and never notice it. It simply flows.

    Consider this form of money against the mortgage (French for “death contract“) The whole point of this vehicle for money is that it is as permanent as the life of the person who has promised to pay. In Japan, they have 100 year mortgages, intended to be passed down through generations of a family. We are no longer dealing with “pocket change” we are dealing with an appalling fixity and permanence.

    This is like a phase transition: gas into liquid, liquid into solid. The individual little pieces of pocket change gather together into a hundred year contract to be passed down the generations, a tie that binds, or one faces homelessness.

    Now let’s talk about real money
    Bill Gates amassed a personal fortune large enough to personally pay off the external debt of countries like Argentina, Saudi Arabia or Israel.

    Gates then gave most of his money to a foundation, and Warren Buffet joined him. The Bill & Melinda Gates Foundation is worth $36 billion give or take, with pledges to put more money in later actually increasing its total expected payouts.

    Now we can begin to understand what real fixity looks like. There are complex politics around this money, but let’s make it simple: if somebody spent the whole thing on solar panels rather than development aid, in the short term a lot of people would die. Research programmes would stop, education would be defunded, monitoring would cease, vaccinations would cease to be available, and people would start dying.

    What holds that money in place is people’s lives.

    Now let’s get back to the routine world of grant funding, donor-driven aid and the rest of the mess. Money in real quantities does not exist as a fluid. It exists as an entangled mass of political, legal and social obligations, which are there from the time the money is collected onwards.

    Consider money coming from government: it is collected from tax payers by the state “for their own good,” pooled in a national budget, allocated to an agency like DFID which exists with a clear mandate and bureaucratic structure, then trickled down into a budget where somebody takes responsibility for spending it. Everybody in that chain, from the taxpayer through to the final recipient of the aid is obligated to the system. The money never existed in a fluid form, it only ever existed as a set of legal obligations inside of a machine. The money is aggregated using legal force, and that legal force pervades every aspect of its later use. To do otherwise is corruption.

    Imaginary numbers and imaginary money
    Almost all of the substantial pools of money are bound in this way. However, we habitually think of money-in-pools as a much larger version of “pocket change.” The reason for this is probably rooted in our childhoods, where the first money we see is probably an allowance from our parents, discretionary spending to do what we like with. As we begin to earn money of our own, we still feel like it is “our money” and slowly, resentfully learn how much of it is actually earmarked at the point of creation into a wide variety of mandated buckets – some political, some legal, and some social. We have very little control of most of it. Fully discretionary income is rare.

    But we do not really have a notation to reflect this reality. In mathematics, there are so-called “complex numbers” which are a superset of our common-or-garden integers and floats. Complex numbers have two parts, a real part (X – an ordinary number, on the real number line) and Y, the imaginary part. Y is in odd units, “i” the square root of minus one. “i * i = -1″ and so on. The details do not really matter, the important part is that all real money has an imaginary component, usually made of politics, law and social obligations.

    Lacking common notation for these invisible attributes of money, we simply look at a world made of money and wonder why none is going into the most-urgent causes or the vital long-term research and development efforts which could lift humanity out of poverty. This is as blind as looking at a ton of “complex numbers” and simply ignoring the “imaginary components.” If you don’t know any of the math, this is kind of abstract – it is akin to walking into every house as if it was your home, regardless of who thinks they live there or own it. It just does not make any sense.

    In fact, the political, legal and social system completely encapsulate all but the crumbs of money that live in our pockets. Even the rich have very little discretionary spending – you can pick which yacht to buy, but without enormous political power and wealth, simply deciding to buck the values of your society and give all your money away will destroy you socially because of other people’s discomfort. They keep each-other in line much as any other social class does, and while exile to a mansion and other people’s parties does not seem like much of an exile, still exile it is. You have no friends because you did something weird. You make new friends, but you have become an outsider.

    The awkward position of the self-aware middle class
    Most of my current readers are in a difficult position. They’re globally in the top 1% or 5%, making middle class or better salaries, or privileged, well-educated intellectual activists. But they feel poor because they spend a lot of time dealing with the mess made by the genuinely rich, the people Occupy calls the 1%, the people who control most of the assets in the rich countries. This 1% is a global elite – the 1% are the super-rich elite of our 5%-of-the-world rich societies.

    We look around at our talent, capabilities and expertise, and wonder why we cannot lay our hands on enough wealth for a manned space mission or a hexayurt refugee camp or an open source education system, or even an energy system which does not sacrifice the future stability of the climate to inefficient houses and metal-cave cars. The world is made of money.

    But politics, law and society are the invisible component of every substantial accumulation of wealth, from the 100 Year Mortgage of the Japanese, through to the binding covenants which Gates and Buffet put around their money when they gave it away. It is only when you start looking at large pools of wealth and mapping the political, legal and social frameworks around them that you begin to understand how little discretionary spending there is in the world, how little liquid money there is to do innovative things with.

    Most of the money is made, at root, in one of two ways: oppressing other people, or destroying the natural world. The political, legal and social frameworks which enable these acts to be performed are then encoded into the structures which govern the wealth so-created, and that wealth can no more flow to constructive ends than water can flow up hill. In fact it is critical to understand the contradiction and paradox at the heart of constructive capitalism in all of its forms to really appreciate how difficult it will be to turn the ship around.

    When it is all added up, there is almost no financial freedom at all. Venture capital is to make more money. Innovation funding is not to cause revolutionary change. Social enterprise must not stray into socialism. Everywhere you go the available funding streams come with invisible or softly whispered political, legal and social constraints. We call that system accountability, justice and transparency, but in practice it is control: only visions coherent with the forces which brought a given pool of money into existence are generally permitted to draw on it.

    The invisible and imaginary component of money is power.

    Understood another way: “Money is the mask of power.”

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    Vinay Gupta is a consultant on disaster relief and risk management.


    10 Responses to Why there’s no money: the imaginary part of financial systems

    1. zerology
      February 28, 2013 at 1:33 pm

      So then the next steps for deeper understanding are studying macroeconomy and reading Michael Mann.

    2. Jeff Wegerson
      February 28, 2013 at 2:26 pm

      I’m no “economist” and I don’t have a full understanding of the ideas called Modern Monetary Theory. That said, my concern with this piece is that it leaves out the notions of “where does money come from in the first place.” Your example starts with the government taxing its people and implies that the people (and the culturally constrained pools) get their money from the government. A nice tidy circular flow when the money is in its liquid state.

      But the first money? The Christian Adam and Eve money? Where did that come from and more importantly, is the amount of pocket change and locked pool money fixed in amount? Or are there injections of never before existing money into these ties that bind?

      What if all that is holding back cultural progress is sufficient money to drive incentive to use currently available resources and effort? I’m not talking about resource scarcity or skill scarcity situations. I’m talking about “what if there simply isn’t enough ‘money’ in the system?” How would we add more in those situations?

      Obviously my preface suggests where I think the answer lies.

    3. Bolo
      February 28, 2013 at 4:02 pm

      Jeff: I used to be a strong proponent of MMT, but have come to realize that it basically has one good idea–that government can spend fiat money to stimulate the economy. However, it misses everything else. Here’s a decent place to start with some critiques: http://www.thomaspalley.com/?p=322

      Vinay: This is a great essay. As an engineer who has been straying into political economy more and more, using imaginary numbers to explain money especially struck a chord with me.

    4. Jeff Wegerson
      February 28, 2013 at 5:13 pm

      Bolo: The summary of the article at the link you posted makes sense as a criticism of MMT. The notion that the fundamental idea behind MMT is not new seems reasonable as well. My only intention in raising MMT was as a shorthand to the idea of so-called fiat money. I say so-called because calling money ‘fiat money’ strikes me as redundant.

      But it is exactly the fiatness of money that I found missing in Vinay’s very brief exposition on money. Granted his purpose here was likely to highlight his very original idea of money containing an element like the imaginary in mathematical numbers rather than an encompassing essay on money.

      So my desire, I guess is that piece, the area of fiatness, be added to the discussion.

      In my own shorthand for understanding money, I imagine that most of the current fiat additions of money are finding their way to culturally locked pools that do not facilitate economy amongst the lesser pools and individuals. So then the question becomes how much potential economy is being left uncreated on the table not for reasons of resource scarcity nor effort scarcity but simply because of ‘money’ scarcity? And isn’t fiat money by definition money that has not had the locks of the imaginary cultural constraints yet applied and therefore available for good works decried as needed? (And yes I get that such money could as easily flow into bad works like war.)

    5. Jared R.
      March 16, 2013 at 1:17 pm

      Excellent article.

    6. Ethan
      March 16, 2013 at 3:18 pm

      “Everywhere you go the available funding streams come with invisible or softly whispered political, legal and social constraints.” Except Bitcoin? (http://bitcoin.org/)

    7. March 16, 2013 at 8:28 pm

      Another great resource along these lines is Charles Eisenstein’s Sacred Economics, available for free or purchase here: http://sacred-economics.com/

    8. Pingback: Bitcoin: New money, but not new power | Bitcoin Life

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    10. March 18, 2013 at 9:47 pm

      You can read the Hacker News comments on this article here https://news.ycombinator.com/item?id=5382279

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