Human welfare and the four economies
My thoughts about the four economies have emerged from thinking about money and debt. Some writers, especially Graeber do a great job of sketching what money is (debt) and prying the concept away from "value". Graeber makes dire predictions about the fate of the world based solely on the nature of money. Graeber seems to think that, by the very nature of money, debt expands to choke the "real" economy - a phenomenon he calls "debt deflation".
I think that Graeber's misunderstands the way that money works and its relationship to the other economies we live in, most obviously value (which is constantly being created and destroyed) and information (which mostly grows at an exponential rate, contributing to a growing percentage of the value of everything we buy). However, Graeber's analysis is helpful in pointing out that many transactions involving money and the creation of debt take place entirely in the "money universe" without increasing value. In the big picture, this seems to increase debt relative to value, in effect, reducing the amount of value available to ordinary people. I'm not sure this analysis holds water when you realize that value doesn't obey the same rules as money. We usually acquire debt in order to obtain ownership (directly or indirectly) of something of value (other than money). "Net" value can dramatically change with ownership. The classic example is when the thing of value is a "plant" that can be used to manufacture things of value - value that exceeds the cost of production.
Graeber takes us on the intellectual journey of Marx and explains why things don't work the way Marx thought or even the way Marx wanted things to work. Borrowing money to "make" money is, as he says, a drag on the "real" economy and does little more than manufacture debt. The business of entire "finance" industry is based on the value of money for its own sake, resulting in the byproduct of growing debt floating around in the economy.
An example, dear to Graeber's heart, is real estate. One might argue that changing ownership of a house does not, as a rule, change its value. In practice, real estate prices (not values) tend to inflate and a lot of debt is generated in the process. Banks manufacture money for mortgages. For this reason, Graeber lumps real estate in with Finance as the bad guys. The insurance industry gets tossed in with the others for reasons I won't discuss (FIRE = Finance, Insurance, Real Estate).
I have my doubts about Graeber's analysis of a real estate transition. Real Estate is a market like any other. The amazing thing about a market is that it matches every buyer who thinks something is worth X with someone who thinks that something is worth getting rid of and is, therefore, it's worth less than X. In other words, the basic mechanism of any market is based on fundamental disagreement over the value of the goods being traded. Both opinions are subject to feedback (what people think other people think things are worth and what other people think about what other people think ...), resulting in a classic example of a chaotic system. You get a mass movement of investment into real estate when people think it can't possibly lose money and massive losses (crash) when real estate does, in fact, lose value.*
Mandelbrot has convincingly argued that markets are inherently chaotic According to this line of thinking, price "inflation" is just part of a truly chaotic pattern, where collapse of "bubbles' is inevitable. Chaos is guaranteed by the "math" underlying the system. If true, this refutes Graeber's thesis, not just about real estate, but about finance, which is the core market that Maldelbrot uses an example. If Mandelbrot is right, the amount of money (and therefore debt) in the "system" can be expected to fluctuate wildly to the degree that a market for money itself exists. That's not what Graeber is predicting and the difference is hardly trivial. Sadly, Mandelbrot and Graeber give us two different pictures of Hell: A long strangulation of the real economy (Graeber) versus an endless sequence of fundamentally unpredictable crashes and booms (Mandelbrot).
The fundamental point of contact between the two theories seems to be in the mind of the "players". Graeber's theory is that debt is non-negotiable, collectable under any circumstance and independent of what people think. If true, this would tend to remove (damp) chaos from the system. In 2008, we learned that some opinions about some forms of debt can change overnight, resulting in the sudden disappearance of trillions of dollars of financial "assets" and the corresponding trillions in debt. I think Mandelbrot is closer to the truth than Graeber. The crash occurs when the "system" suddenly realizes that vast sums of "money" are based on uncollectable debt.
The response of the banking system to the 2008 crash is a separate issue, involving some fancy footwork by the world's central banks. This massively involves the "reserve" system, which doesn't seem to factor into Graeber's story about money (at least in his book on debt). "Reserve" money - what banks owe each other - is not connected to debt. It's more like a way of making sure that there are enough tokens in the right pockets to keep the whole thing running, especially a way of making sure that there is enough "cash" (IOU's from the Government) around to allow depositors to "withdraw" their money (transfer debt from the bank to the government) and pass it around between banks in a more or less frictionless way.
Putting it all together to understand the world we live in would seem to require an understanding of more than money and debt. In fact, it would seem to involve re-evaluating a lot of things. It's not surprising at all to find ourselves retracing the thoughts of Marx on the subject. He thought deeply about money, debt and value. But the role of information was completely ignored in his time and the universe itself seemed to be nothing but a passive store of raw materials. In our time, the universe is fighting back.
Money
Money is created in the modern economy precisely in the amounts of debt people (including governments) are willing to assume. Most people have no idea how "money" works, yet it can control their lives.
The physical form of money is hardly relevant. It may exist purely as information and it is, in a sense, pure information. A dollar is a fact. That fact is that a government (Canada, say) owes the bearer one dollar. That would seem to be a circular statement, except the "fact" is supported by the Government, which is not a figment of anybody's imagination. When a dollar is deposited in the bank, its factual nature changes slightly. Now it is the bank who owes the depositor one dollar.
As information, a dollar is a unit of debt. Somebody owes somebody a dollar. It's the "somebody's" that make it real.
Biology and Value - The "Real Economy"
Value relates to living things and makes no sense in the inanimate world. Value is always relative to a living thing. One animal's mother is another animal's food. Perception of value is not necessary for value to exist, although the domain of perceived value by humans is the case we will discuss here.
As humans, we constantly weigh up the value of things in our environment, creating an economy of made up of all the "stuff" that matters to us. In the value universe of humans, most stuff of value is owned by someone (or, as in the case of the "commons" by society) and the rules whereby ownership is changed are complex and interesting. Money can be involved and usually is, but when goods are exchanged for money, the amount of money in the system remains unchanged but the value can dramatically increase or decrease. One example among many is the purchase of mineral rights.
For example, when I buy a banana from the grocer, a bit of money moves from my hands to his and the ownership of the banana changes from him to me. As food, the banana has value to me. But if nobody buys it, the banana will rot and be without value to the anyone. Laying aside a few details, value is created when I buy a banana, even more obviously, when I pick it from a tree.
The biological forms we perceive and name can be somewhat arbitrary. It's important to identify the form you are talking about to make sense of the relative value. To illustrate this point, internal discipline is a value to a human organization - it contributes to the survival of that organization. However, it may not coincide with the welfare of individuals in the organization - in fact, it may be seen as a negative value by certain individuals. such as soldiers ordered into certain death.
Information
The information economy is increasingly important in the modern world. Information can be created from nothing, duplicated and shared. It is very similar to the "stuff" in the value economy in that its importance is solely in the eye of the beholder. But efforts to apply the concept of ownership to information reveal its slippery nature. If I share information with you, we both have it. In fact, the value of information often seems to grow the more people have it. It obeys its own unique rules.
Life itself is the transmission of information (DNA) to future generations. This all takes place in a physical world where one thing is not as relevant to that transmission as another (value) and the whole process is taking place in the real world, where the laws of physics cannot be circumvented.
Energy and the "Real World"
The entire natural world is all about the exchange of energy in countless forms. These exchanges take place according to rules and patterns of their own, irrespective of human value or even the presence of humans. Biology is a subset of this world, where information becomes important (DNA, evolution, stimulus and response).
"Stuff" - matter - participates in the energy economy. Stuff can be bought and sold as can energy itself, but the financial details do nothing to circumvent the rules of the energy economy, such as the laws of thermodynamics, conservation of matter etc.
We buy and sell energy as part of the "money" economy, often ignoring the physics and biology involved in these transactions. Underlying all such transactions is a loss, due to entropy, of the thing being traded. It's like a sales tax on every money transaction except that in this case, the tax is simply thrown away. "Production" of energy often involves irreversible destruction of value in the form of environmental destruction and other ways that the energy industry regards as "external" costs.
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* Of course, many real estate transactions are not based on such "disagreement". The buyer simply pays a "fair price" for what the seller has and no longer needs. There is something "real" underlying the transaction. This is unlike purely financial trades, where some form of security is being traded.
I think that Graeber's misunderstands the way that money works and its relationship to the other economies we live in, most obviously value (which is constantly being created and destroyed) and information (which mostly grows at an exponential rate, contributing to a growing percentage of the value of everything we buy). However, Graeber's analysis is helpful in pointing out that many transactions involving money and the creation of debt take place entirely in the "money universe" without increasing value. In the big picture, this seems to increase debt relative to value, in effect, reducing the amount of value available to ordinary people. I'm not sure this analysis holds water when you realize that value doesn't obey the same rules as money. We usually acquire debt in order to obtain ownership (directly or indirectly) of something of value (other than money). "Net" value can dramatically change with ownership. The classic example is when the thing of value is a "plant" that can be used to manufacture things of value - value that exceeds the cost of production.
Graeber takes us on the intellectual journey of Marx and explains why things don't work the way Marx thought or even the way Marx wanted things to work. Borrowing money to "make" money is, as he says, a drag on the "real" economy and does little more than manufacture debt. The business of entire "finance" industry is based on the value of money for its own sake, resulting in the byproduct of growing debt floating around in the economy.
An example, dear to Graeber's heart, is real estate. One might argue that changing ownership of a house does not, as a rule, change its value. In practice, real estate prices (not values) tend to inflate and a lot of debt is generated in the process. Banks manufacture money for mortgages. For this reason, Graeber lumps real estate in with Finance as the bad guys. The insurance industry gets tossed in with the others for reasons I won't discuss (FIRE = Finance, Insurance, Real Estate).
I have my doubts about Graeber's analysis of a real estate transition. Real Estate is a market like any other. The amazing thing about a market is that it matches every buyer who thinks something is worth X with someone who thinks that something is worth getting rid of and is, therefore, it's worth less than X. In other words, the basic mechanism of any market is based on fundamental disagreement over the value of the goods being traded. Both opinions are subject to feedback (what people think other people think things are worth and what other people think about what other people think ...), resulting in a classic example of a chaotic system. You get a mass movement of investment into real estate when people think it can't possibly lose money and massive losses (crash) when real estate does, in fact, lose value.*
Mandelbrot has convincingly argued that markets are inherently chaotic According to this line of thinking, price "inflation" is just part of a truly chaotic pattern, where collapse of "bubbles' is inevitable. Chaos is guaranteed by the "math" underlying the system. If true, this refutes Graeber's thesis, not just about real estate, but about finance, which is the core market that Maldelbrot uses an example. If Mandelbrot is right, the amount of money (and therefore debt) in the "system" can be expected to fluctuate wildly to the degree that a market for money itself exists. That's not what Graeber is predicting and the difference is hardly trivial. Sadly, Mandelbrot and Graeber give us two different pictures of Hell: A long strangulation of the real economy (Graeber) versus an endless sequence of fundamentally unpredictable crashes and booms (Mandelbrot).
The fundamental point of contact between the two theories seems to be in the mind of the "players". Graeber's theory is that debt is non-negotiable, collectable under any circumstance and independent of what people think. If true, this would tend to remove (damp) chaos from the system. In 2008, we learned that some opinions about some forms of debt can change overnight, resulting in the sudden disappearance of trillions of dollars of financial "assets" and the corresponding trillions in debt. I think Mandelbrot is closer to the truth than Graeber. The crash occurs when the "system" suddenly realizes that vast sums of "money" are based on uncollectable debt.
The response of the banking system to the 2008 crash is a separate issue, involving some fancy footwork by the world's central banks. This massively involves the "reserve" system, which doesn't seem to factor into Graeber's story about money (at least in his book on debt). "Reserve" money - what banks owe each other - is not connected to debt. It's more like a way of making sure that there are enough tokens in the right pockets to keep the whole thing running, especially a way of making sure that there is enough "cash" (IOU's from the Government) around to allow depositors to "withdraw" their money (transfer debt from the bank to the government) and pass it around between banks in a more or less frictionless way.
Putting it all together to understand the world we live in would seem to require an understanding of more than money and debt. In fact, it would seem to involve re-evaluating a lot of things. It's not surprising at all to find ourselves retracing the thoughts of Marx on the subject. He thought deeply about money, debt and value. But the role of information was completely ignored in his time and the universe itself seemed to be nothing but a passive store of raw materials. In our time, the universe is fighting back.
Money
Money is created in the modern economy precisely in the amounts of debt people (including governments) are willing to assume. Most people have no idea how "money" works, yet it can control their lives.
The physical form of money is hardly relevant. It may exist purely as information and it is, in a sense, pure information. A dollar is a fact. That fact is that a government (Canada, say) owes the bearer one dollar. That would seem to be a circular statement, except the "fact" is supported by the Government, which is not a figment of anybody's imagination. When a dollar is deposited in the bank, its factual nature changes slightly. Now it is the bank who owes the depositor one dollar.
As information, a dollar is a unit of debt. Somebody owes somebody a dollar. It's the "somebody's" that make it real.
Biology and Value - The "Real Economy"
Value relates to living things and makes no sense in the inanimate world. Value is always relative to a living thing. One animal's mother is another animal's food. Perception of value is not necessary for value to exist, although the domain of perceived value by humans is the case we will discuss here.
For example, when I buy a banana from the grocer, a bit of money moves from my hands to his and the ownership of the banana changes from him to me. As food, the banana has value to me. But if nobody buys it, the banana will rot and be without value to the anyone. Laying aside a few details, value is created when I buy a banana, even more obviously, when I pick it from a tree.
The biological forms we perceive and name can be somewhat arbitrary. It's important to identify the form you are talking about to make sense of the relative value. To illustrate this point, internal discipline is a value to a human organization - it contributes to the survival of that organization. However, it may not coincide with the welfare of individuals in the organization - in fact, it may be seen as a negative value by certain individuals. such as soldiers ordered into certain death.
Information
The information economy is increasingly important in the modern world. Information can be created from nothing, duplicated and shared. It is very similar to the "stuff" in the value economy in that its importance is solely in the eye of the beholder. But efforts to apply the concept of ownership to information reveal its slippery nature. If I share information with you, we both have it. In fact, the value of information often seems to grow the more people have it. It obeys its own unique rules.
Life itself is the transmission of information (DNA) to future generations. This all takes place in a physical world where one thing is not as relevant to that transmission as another (value) and the whole process is taking place in the real world, where the laws of physics cannot be circumvented.
Energy and the "Real World"
The entire natural world is all about the exchange of energy in countless forms. These exchanges take place according to rules and patterns of their own, irrespective of human value or even the presence of humans. Biology is a subset of this world, where information becomes important (DNA, evolution, stimulus and response).
"Stuff" - matter - participates in the energy economy. Stuff can be bought and sold as can energy itself, but the financial details do nothing to circumvent the rules of the energy economy, such as the laws of thermodynamics, conservation of matter etc.
We buy and sell energy as part of the "money" economy, often ignoring the physics and biology involved in these transactions. Underlying all such transactions is a loss, due to entropy, of the thing being traded. It's like a sales tax on every money transaction except that in this case, the tax is simply thrown away. "Production" of energy often involves irreversible destruction of value in the form of environmental destruction and other ways that the energy industry regards as "external" costs.
------------------
* Of course, many real estate transactions are not based on such "disagreement". The buyer simply pays a "fair price" for what the seller has and no longer needs. There is something "real" underlying the transaction. This is unlike purely financial trades, where some form of security is being traded.
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