Steve KelseyThe search for a physics based economic model, a thought experiment.
We start by defining wealth as intelligence applied to base matter. There is no physics-based way of measuring intelligence, so we use an analogue, the amount of intelligently directed energy applied to base matter.
W = M+E
We can therefore define a unit of wealth with a fixed physical definition. e.g. I Joule/kg is one kilogram of matter embedded with one joule of intelligently directed energy. 1000 Joule/kg is one kilogram of matter embedded with 1000 Joules of intelligently directed energy.
The energy intelligently applied to base matter ranges from the hand manufacture of a single item to the intelligently directed energy used in mass manufacture.
We define total wealth by including the total number of units of wealth produced.
W = (M+E) x n
Alternatively, where we know the total energy used in production, we can derive the value of each unit of production by dividing the total energy used by the system and dividing that by the production output.
Modern production is complex, involving many contributing layers of manufacture.
We sum all the contributions from each stage of mass manufacture and distribution.
W Total = (SUM ( W1 +W2 …Wn)
We can apply this formula to any product or process by summing the cascade of contributing activity. For example, factory level manufacture includes contributions from energy supplies and raw material supplies which may contain greater or lesser amounts of intelligently directed energy depending on complexity.
Summary:
- Wealth is intelligence applied to base matter.
- Intelligently directed energy can provide a physically meaningful analogy for intelligence
- A standard unit of wealth can be defined using physical definitions.
Wealth and Entropy
Wealth is physical. Therefore, wealth is subject to physical laws and in particular wealth is subject to entropy. Entropy is the physical process whereby order is lost. Wealth is affected by entropy during wealth creation and during its use.
Entropy and Wealth Creation
Wealth is subject to entropy during its creation. For every Joule of intelligently directed energy applied to base matter there is a greater quantity of waste energy.
The efficiency of a conventional electricity generating power plant is circa 35%. Similarly, the efficiency of the electrical transmission system is circa 85% The efficiency of manufacturing equipment is between 40% and 65%.
These efficiencies sum.
100 units of thermal energy at the power plant delivers 35 units of electricity.
35 units of electricity at the power plant delivers 29.75 units to the manufacturing machine
29.75 units of electricity at the manufacturing machine delivers 19.33 units embedded in base matter. Every Joule in production costs 5 joules to create and deliver
As the base unit of wealth is defined in energy terms wealth is ultimately constrained by an energy budget. The more sources of energy a community develops, and the lower the entropy in that production, the more wealth can be made per unit of energy and the more the wealth can be produced.
Our current sources of energy are increasingly scarce and highly entropic, and they are only made ‘economically viable’ by the use of fiat money subsidies.
In addition, our legacy energy sources, coal, oil, gas are all highly polluting, effecting the planets environmental health upon which we all depend. Baring the development of innovative technologies, the richest sources of energy for today and for the near future are the renewables, solar, wind and wave power. Nuclear is also a low-impact source of energy providing that reprocessing and waste management is well designed and implemented.
The upper limit on these sources of energy is order of magnitudes greater than the sources we use today.
Entropy in Use
We can separate real wealth into two use classes, consumable wealth and durable wealth.
Consumable wealth is wealth where the product of intelligently directed energy is consumed by users. E.g. food, pharmaceuticals etc.
Durable wealth is wealth where the product is used but is not consumed. This form of wealth is subject to obsolescence as well as entropy.
All wealth has a lifetime after which it must be replaced. The timescale may vary from a few days for consumable wealth to generations for some forms of durable wealth, but there is a constant need for wealth creation. Consumption or use, while providing benefit to the user, are forms of wealth destruction that create demand for new wealth creation.
Summary:
- Wealth creation is highly entropic
- Consumption creates a demand for wealth creation
- Obsolescence creates a demand for wealth creation
- Contemporary energy sources are insufficient and polluting
Virtual Wealth
To allow the equitable distribution and consumption of wealth we need a system of accounting. Historically a token system, be that paper based IOU’s or clay records and tokens, has enabled the efficient recording of exchanges of wealth between people.
A unit of real wealth can be represented by a token which is a virtual form of wealth. The virtual wealth token’s function is to provide a market to enable real wealth to be freely traded.
We define the token as 1 unit of W(virtual) = 1 unit of Wealth (Real).
The wealth token only achieves value when exchanged for a unit of real wealth and at the point of exchange the token of virtual wealth is destroyed. Therefore, for the exchange system to function, new virtual wealth tokens must be produced. This happens by the creation of real wealth. For every unit of real wealth created, a virtual wealth token is produced. The real wealth produced provides the asset providing the guarantee for the virtual wealth token. Thus, the virtual wealth token has an exchange value determined by a specific, physically derived value in the same way currency was once linked to gold, the gold standard. The growth in real wealth and the growth in token, remain in synch at all times. Both real wealth and virtual wealth supply increase in lock step, one providing the asset base to the other.
Token supply can be issued ahead of the growth in real wealth PROVIDING THAT the virtual wealth tokens are exclusively destined for the task of creating future wealth. This ensures the fixed link between real wealth, which is intelligently directed energy embedded in base matter, and the token of virtual wealth, is maintained.
Virtual wealth tokens that are used to generate real wealth retains its value, that which does not with an agreed timespan is zeroed losing all its value. This allows a community to issue as much investment class virtual wealth as it thinks it needs and ensures this virtual wealth is converted to real wealth in a timely manner.
For full detail on how virtual wealth token is issued and functions see the linked article on ‘Thinking Money”
Summary:
- Real wealth can be represented a by a token of virtual, or potential, wealth
- A single unit of virtual wealth is defined by a single unit of real wealth and therefore its value is fully defined in physical terms
- A unit of virtual wealth is created at the same time as a unit of real wealth
- Virtual wealth tokens for investment can be issued in excess of real wealth under contractual conditions that restricts its use to creating real wealth.
Virtual Money
So far, I have proposed a physics-based definition for wealth (Wr). I have defined a symbolic representation of wealth (Wi) that is causally linked to wealth (Wr) and therefore also has a value defined in physical terms. In effect, Wi value is defined by a physical standard in the same way currency was once defined by reference to a commodity asset like gold. I have also noted that, unlike a commodity-based reference which is dependent on the amount of material currently available, Wi increases over time tracking Wr pro rata. Finally, I have proposed that this symbolic representation of real wealth as a token that can be freely exchanged for real wealth.
We now need to explore the unphysical factors that affect the acceptance and use of Virtual Wealth as a form of money. For a token to have the same functionality as money we need its acceptance by a community. To be accepted the token has to …
- Be backed by an asset (Wr)
- Be exchangeable for real wealth (products and assets)
- Be accepted by third parties
The Wi token meets all these criteria and so can function as money within a community.
In addition to these essential attributes we can utilise the expanded functionality of digital currency to add attributes and constraints that are unavailable to conventional passive money.
Digital currency is software, and like any form of software its functionality can be tightly defined, and it can be designed to act on inputs and outputs. Digital money can have all the functionality of an App if this is deemed desirable by the community using the currency. Money as Code is not limited to passive data, a record on a database, it can be an active agent capable of responding to real world events. For more detail on the potential for new money forms exploiting digital currency methods see ‘Thinking Money’.
In the following section I will focus on the attributes and functions that that Money as Code can deliver to protect community wealth.
Not all of these attributes and functions are necessary or desirable, and some of them would conflict with one another, but I hope to illustrate with these suggestions the wide range of additional functions that Money as Code could inherit. This is far from an exhaustive list of functions and attributes that money as code could be given, the field is as wide and rich as code itself.
- Wi money can define who can send the money and who can receive it in much the same way a cheque specifies who originates the money, the intended recipient and the specific value.
- Wi money can be assigned a class which defines the limits of its exchangeability. Classes of money defend the community economy by creating silos of money classes. E.g. Community class money can be used in the community economy, ordinary day to day economic transactions. Investment class money is reserved for creating future wealth, i.e. for building new production capability, building community infrastructure etc.
- Each Wi money class can be assigned specific attributes.
- Investment Class money can be given a lifespan so that, should the money not be transformed to real wealth (Wa) by a specific time its value is zeroed.
- To increase real wealth (Wr) the community needs Wi money to be active, constantly transforming into real wealth (Wr). Wi money that is sequestered and accumulated reduces the growth of real wealth (Wr) and a community will want to prevent this behaviour. Wi Community Class Money can have a function that records the date of its last transaction and, should Wi Money not be transformed to real wealth (Wr) by a set period, its value can be zeroed. This makes the deliberate accumulation of Wi Money impossible.
- Investment Class money value is based on the production of future wealth and therefore contains a risk that this future wealth may not be delivered. The community may want to allow issuers of Investment Class money to transform their money into Community Class money, however, to protect itself from risk the community will want to define exchange rules and rates- e.g. Investment Class money can only be transformed into Community Class Money. Community Class Money cannot be transformed into Investment Class money. Investment Class Money has an exchange value of 50%, i.e. if exchanged for Community Class money it losses half its value to offset risk.
- Wi Money can have the security and durability provided by a distributed ledger and blockchain technology.
- Wi Investment Class Money can have a set of evaluation criteria responding to factors like the quality of the proposed issuer and the proposed user, the probability of the proposed project being successful based on historical results. These are the type of criteria that a bank employs before creating money as a loan. These evaluations are often completed by modelling software owned by the bank. Money as code, Money as an App, allows us to import these criteria into the currency itself.
- Wi Money can emulate the autonomy of issue that applies to digital currencies like Bitcoin or Ethereum etc.
Money as Code can provide all of the security of conventional authority backed money and go further to provide additional security and wealth protection functions. Conventional passive money is dependent on authorities for issue and policing; however, Money as Code replaces authority with inherent safeguards. This allows us to reconsider who is able to issue money and under what circumstances.