Steve KelseyMoney Design for the 21st century
Introduction
The current fiat[i] monetary system is disconnected from wealth creation. The financialization of an economy reduces wealth creation by diverting investment from wealth creation functions to financial operations, where the goal of increasing money via the trade of financial assets for profit, subsumes the goal of creating wealth[ii] [iii] [iv]. These distortions interrupt wealth creation limiting the rate of a civilizations’ development and limiting the probability space[v] of a civilizations’ long-term survival. To maximize wealth creation, we need an alternative system.
This is a thought experiment exploring the physical definition of wealth and money. It is guided by the following principles.
- It will be a physics-based analysis because wealth consists of arrangements of matter and energy
- It will be constructed axiomatically
- The propositions of the thought experiment must be observable in the world
- It must deliver practical implementable actions
The thought experiment will be expressed in propositions, each proposition in the form of a statement, a brief rationale supporting the statement’s validity, and an extended argument that objectively explores this claim.
The propositions sum to a physics-based model of wealth and money that has implications for the current definition of and creation of wealth and money. These implications are briefly reviewed.
Proposition 1
Wealth is created by intelligence applied to base matter
Rationale : Wealth provides utility in a physical form and that which differentiates wealth from base matter is the intelligence applied to base matter.
We create wealth by the intelligent application of energy to base matter. There is no agreed physical measure for intelligence, so we need an analogue that can be objectively measured. [vi]
The process of algorithmic development involves observation, pattern recognition, rationalisation, formalisation, and finally, communication – making a concise statement that other people can understand and use. We readily understand these attributes and functions as facets of intelligence.
Wealth, and wealth creating processes, can be rigorously defined by algorithms that describe the production of wealth. The complexity of each algorithm can be estimated using Kolmogorov Complexity[vii] (Kc).
“The Kolmogorov complexity K(x) of a finite object x will be defined as the length of the shortest effective binary description of x. Broadly speaking, K(x) may be thought of as the length of the shortest computer program that prints x and then halts.”
In the simple example shown below (Fig 1), the total Kolmogorov complexity (Kt) can be summed as
Where n = the number of algorithms in the network.
In addition to Kolmogorov complexity, we can sum the number of nodes in the network to give us the Algorithmic Depth.
The scale and complexity of networks vary proportionately with the desired Ui
For any wealth creation network the greater the Algorithmic Depth and the greater the Kolmogorov Complexity, the greater the intelligence that can be embedded in base matter.
Proposition 2
The quantity of intelligently directed energy used by a wealth creating network can be measured.[viii]
Rationale : Energy is always conserved, and the quantity transferred to base matter to create wealth can be measured as an energy flow.
There is no need for an extensive exploration of the claim of this proposition as it is evidenced widely, however it is useful to define the measurement method applied to a wealth creating system. Using the same network in Fig 1, we can measure the energy (Ei) used by each node of the network to embed intelligence in base matter to create the required unit of wealth (Ui).
For the simple network shown in Fig 1 the total energy is
From Proposition 1 we have a measure of the wealth creating network intelligence, represented by the algorithms employed by the nodes in the network, their size estimated as Kolmogorov Complexity.
We can now add the total energy used by the network to create a desired quantity of wealth ( Ui), and this enables us to provide an energy measure per bit for the estimated Kolmogorov Complexity (Eb).
Eb = / Kt
Proposition 3
A node in a wealth creating can be characterised by its utilisation of intelligence and energy
Rationale : Each node of a network can be considered a ‘black box’ and its complexity reduced to a set of inputs and outputs of intelligence and energy over time
The functions of a wealth creating node (Fig. 2) within a wealth creating network can be characterized by five factors which can be measured or computed.
- The Ei consumed by the node
- The Ui consumed by the node
- The time s to produce a quantity of wealth.
- The wealth created Ui
- A measurement variable, Ji
Each nodes receives twotypes of input, the energy that is consumed, Ei, in creating wealth,and the Ui it receives from other nodes.[ix] Each nodes output consists of two forms, the physical output consisting of the new Uigenerated, and an accounting measure, Ji, that measures the total Ei consumed in creating the Ui.
The SI measure of energy is the joule. To differentiate an intelligently directed Joule, we will use the symbol, Ji. Inevitably, this metric will be called a Jouli. For convenience, a Jouli should be a fixed value rather than a variable, therefore any network node will output a value in the multiple of Jouli (Ji) required to represent the Ei consumed by that node.[x]
Proposition 4
The quantity of energy consumed by a node can be expressed in units of measurement that can be issued as a form of money.
Rationale : By convention, a money form can be linked to a commodity or a use of energy.
The use of a commodity, typically a precious metal, as the basis for a form of money is well established. More recently, cryptocurrencies have been based on the principle of ‘mining’, the expenditure of energy by the solving of complex mathematical problems that require significant computational resources. Once a mathematical problem has been solved, consuming a quantity of energy, a cryptocurrency coin is issued. This process is termed ‘Proof of Work’[xi] by the industry. In this sense, energy consumption as backing for a money form is already established and accepted. The intelligent application of energy to base matter is an alternative form of a Proof of Work and is available as backing for a money form. This form of Proof of Work has the practical advantage of creating wealth as it consumes the energy that backs the money form.
Practically, we can measure the energy consumed in creating wealth and issue this measurement as a money form e.g., in units of Jouli (Ji)
Proposition 5
A direct means of money creation is more efficient than a centrally sourced hierarchical distribution method
Rationale: The design of a wealth creating system can be configured to measure the energy consumed in the act of creating wealth and report that consumption as a measure with a money form
The current evolved hierarchical and distributed financial system is highly complex involving many nodes and the involvement of many agents. The issue and distribution of money from a central authority through these complex distributional networks creates no wealth and is a net cost to the wealth creating processes in our civilisation. Not only is this network model non-optimal due to its complexity, inefficiency, and scale, it is highly unstable [xii] [xiii] [xiv] [xv] and prone to unpredictable disruptions to wealth creation.
A Fiat money distribution network that might service the basic wealth creating network in Fig 1 would have a Kolmogorov Complexity of
Where n > 19[xvi], and an energy cost of
In addition to the direct energy costs of the system the current financial distribution model includes losses due to mediation e.g., interest charges, fees, etc. all of which involve additional processes and consequently additional energy expenditure for no increase in wealth.
These mediation losses can be calculated by including an additional loss factor (m)[xvii]
To retrieve efficiency, we must look for network qualities that minimises the energy used and removes all associated extractive losses. The optimal distribution network using the least energy and with shortest path is a network where n =1 and m= 0.
This ideal form is readily achieved by a network node configured to issue money as it creates wealth.
Implications
For brevity I will concentrate on the less trivial implications that emerge from this thought experiment.
I have proposed that the energy employed in wealth creation may form a proof of work upon which a digital money form can be issued. Any wealth creating node can have this ability if configured to do so. The ability of a wealth creating node to produce money creates a new transactional paradigm in that the cost of wealth creation is satisfied at the time of creation. This retires the need to charge third parties who wish to consume or use the wealth created.
If we extend this ability to a community of wealth producers’ wealth can be freely exchanged between members of the community with no requirement for a transactional form of money. This ability is enabled by accounting for the balance of wealth creation and consumption at an individual level to equalize any imbalance over time. A suitable mechanism for community wide and individual accounting would be a community distributed ledger.
The wealth forms that can be consumed without the exchange of money can be of any type. This includes supplies that might be consumed by a wealth creating node as well as wealth for individual consumption. A wealth creating node may consume the resources it needs without the mediation of money. Within this framework there is no requirement for the 3rd party supply of working capital and the financial obligations that this implies, e.g., the need to generate a profit to service financial loans and build financial capital for future investment, the requirement to service the interest component of a 3rd party loan, the need to pay dividends to 3rd parties that have bought a share of a wealth creating node to provide funds for the node. In short, the energy inefficient financial networks that we use today would not be required.
It follows that any project of any scale is autonomously self-funding. The barriers to infrastructure improvement and the provision of education and healthcare services that exist in our current hierarchical distributed fiat money system, the perennial ‘how do we pay for it’ question, does not apply to a wealth creating autonomous money community. In a wealth-based community the problem is inverted, the more ambitious the project the greater the wealth creation and money creation possible. This is an important consideration for a community faced with a need to replace its unsustainable industrial infrastructure with a sustainable one.
The practical implementation of wealth-based communities with autonomous money forms will require the use of digital money and distributed autonomous community (DAO) techniques. [xviii] The definition of a DAO can include any collation of like-minded people who wish to create and exchange wealth. The scalable nature of a DAO community means that genesis DAO’s can start small and grow organically over time. Assuming a common architecture a plurality of DAO’s can share a money form. It is important to stress that an autonomous wealth-based money form is simply a measurement of wealth creation and consumption, an account, at a community and member level, to ensure consumption and creation remain balanced against the DAO’s agreed economic criteria.
It is likely that wealth based DAO’s, and conventional economies will co-exist in the same way that open-source communities and conventional commercial communities do today. Wealth based DAO’s are not restricted in their fields of operation, but as just one example, wealth based DAO’s provide a new route for the open-source communities[xix] to secure income in terms of the wealth they exchange. Wealth economy based DAO’s will enable all creator-based economies to grow alongside conventional fiat-based economies. Competition and trade will no doubt create new forms of interaction between these economies.
It is likely that conventional ideologies[xx] will seek to contain or assimilate the emergence of wealth based autonomous creator communities and economies. Although it is impossible to predict the outcome of an ideologies attempt to assert control, the recent history of digital currencies suggests that accommodation rather than control is the more likely outcome.
Finally, it can be observed that where alternative economic models compete, the model offering the greatest wealth creating potential and greatest efficiency dominates.
Steve Kelsey
London
2/01/2022
revised 29/01/2022
[i] Fiat money, by social consensus, is a carrier of value where each unit of money has its face value defined by law. This is an abstract legal and social construct with no physical reality. Fiat money is subject to change by political diktat or exogenous events beyond the control of the user. In contrast, a money form based on a physical definition of wealth has a value determined by its fixed relationship to a physically measurable quantity
[ii] Financialization and capital accumulation in the non-financial corporate sector: A theoretical and empirical investigation on the US economy: 1973–2003 Özgür Orhangazi https://academic.oup.com/cje/article-abstract/32/6/863/1706977
[iii] The role of UK governments in the financialisation of the British economy and its industry
[iv] The Transition from Industrial Capitalism to a Financialized Bubble Economy by Michael Hudson
[v] Probability space is a mathematical concept that measures the probability of an outcome using three parameters, a sample space, which is the set of all possible actions, an event space, which is a set of all the possible outcomes, and a probability, which is assigned to each outcome. The size of the sample space and the size of the event space determines the number of possible outcomes. For a civilisation, the larger the sample space and event space the greater the potential outcomes and therefore the greater the civilization’s chances of survival. Limiting potentials by reducing the ability to build new patterns and structures designed to reinforce and extend a civilisation reduces that civilizations’ chances of surviving. Diverting activity away from wealth generation. e.g., by the financialization of the economy, reduces the probability space of a civilisation. https://en.wikipedia.org/wiki/Probability_space
[vi] Alternative Analogues for Measuring Intelligence.
A full exploration of the candidates for a physical measure of intelligence is beyond the scope of this thought experiment but a brief review of the ground covered in preparation for this paper may be helpful.
Information and Entropy. Recent studies have demonstrated a correlation between intelligence and entropy, where a high degree of entropy indicates higher intelligence. ( Ref. https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0191582) If we interpret entropy to be degrees of freedom for cognition this makes sense and corresponds with the Shannon model of entropy. This may seem to have an application in this thought experiment; however, we are interested in in measuring the effects of the application of intelligence, not intelligence per se. A system with high entropy does not contain useful information, it contains the potential for useful information. It is the action of intelligence that converts this potential for useful information into an instantiation of usable information. The effect of embedding intelligence in base matter is to fix the degrees of freedom and to differentiate the elements forming the desired wealth from the rest of the system. This is a condition of low entropy. A low entropy state created by the application of intelligence may form an objective measure of intelligence embedded in base matter.
Algorithms are distilled human thought, concise and accurate descriptions of processes and actions. The process of algorithmic development involves observation, pattern recognition, rationalisation, formalisation, and finally communication – making a concise statement that other humans can understand and use. We readily understand these attributes and functions as facets of human intelligence. In a sense algorithm are concise models of human thought and we can measure the degree of intelligence in a system by the counting or estimating the complexity of its algorithm(s) and the number of algorithms required to complete a wealth creation process, which we will term its Algorithmic Depth.
Complexity – Kolmogorov complexity may provide an objective measure for intelligence embedded in base matter. Any artefact can be replicated by a precise set of instructions (algorithms). Kolmogorov complexity measures complexity by asking the question ‘what is the minimum size of a computer algorithm designed to replicate an object’.
Intelligent Energy. Without intelligent direction, energy applied to matter will increase entropy. Just as the measurement of temperature is a practical analogy for the excitation of a cluster of particles, intelligently directed energy provides us with a practical measure of intelligence embedded in base matter. This analogue provides a practical way to derive a measure as energy consumption is a measure made by industry on a regular basis, entropy, algorithmic depth, or Kolmogorov complexity, are not.
[viii] The application of intelligently directed energy to base matter increases entropy (S) over time (s)
Therefore, a strict definition of wealth (Ui) is
Ui = Eis-S
However, is not convenient or practical to differentiate between the intelligently directed energy embedded in base matter and the total energy consumed during the wealth creating process and so we measure the total energy over time, Eis, as an analogue for wealth Ui.
The entropy consists of waste heat and emissions that have a large impact on our planet’s climate and biosphere and therefore we must look for methods to reduce entropy as far as possible.
It is possible to reduce the entropy losses by increasing energy efficiency per unit of wealth created (Ui ).
Ui that is not consumed is a substantial entropy cost to the environment that includes the Eis expended on the redundant wealth creation and the additional cost of recycling and waste management for the unconsumed Ui. Ui that is not consumed therefore attracts a negative value
-ve Ui
During consumption or use, Ui is reduced, and entropy increases until a point is reached where the viability of Ui is lost. The time t for S to maximise is a variable. A complex pattern like that of a consumer durable may be viable for years, a prepared food will only last hours. We use tmax as a measure of the time taken to reduce Ui to the entropic state, Smax, where the Ui loses viability. tmax establishes the lifecycle metric for Ui.
Therefore, to reduce the entropy cost of creating Ui, and to increase sustainability, we need to reduce S in the production of Ui and increase tmax, the length of time Ui remains usable. The tmax, of any Ui can be extended significantly, with a consequent reduction in entropy and waste products, if it is possible to repurpose or recycle some of the Ui created, e.g., modular design enables components that wear out or need to be upgraded for performance needs to be recycled, leaving the bulk of the product intact. Designing for a long tmax has many implications for design and engineering.
Summary: To reduce entropy we need to
- Reduce the energy Ei needed to produce a measure of Ui
- Minimise -ve Ui
- Extend tmax
[ix] In all cases a network node will receive some wealth, Ui, from a source that is needed for the operation of the node e.g., a body pressing plant will require sheet steel. A sheet steel plant will require primary steel coils. A steel smelting plant will require iron ore etc. Primary nodes that initiate the wealth creating network are defined by the input of base matter rather than Ui.
[x] The scale or complexity of the node is not significant for our purposes and can be reduced to the total energy consumed by a node to create wealth. This include the energy input of all workers in the node, and I use an averaged energy input of 2.789 MJ per worker per 8-hour shift. This is based on an average calorific input of 2000 per worker per day.
[xi] For more information on digital Proof-of-Work strategies see https://eprint.iacr.org/2016/555.pdf
[xii] https://www.imf.org/external/pubs/ft/wp/2011/wp1174.pdf
[xiii] https://voxeu.org/article/global-banking-network-s-role-shock-transmission
[xiv] “This paper contributes to the debate on the optimal size and scope of banks. It shows that large banks, on average, create more individual and systemic risk than smaller banks. The risks of large banks are especially high when they have insufficient capital, unstable funding, engage more in market-based activities, or are organizationally complex.” https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2421995
[xv] https://www.sipotra.it/old/wp-content/uploads/2018/05/Evolution-of-the-Global-Financial-Network-and-Contagion-A-New-Approach.pdf
[xvi] This is a conservative assessment of the number of nodes involved in a financing network.
[xvii] Using the definition of wealth as intelligence applied to base matter the financial network does not produce wealth of any form.
[xviii] The design of a wealth based digital currency for a wealth-based DAO is beyond the scope of this thought experiment but can be referenced in a companion paper “Thinking Money- Digital Money Forms for Wealth Creating Communities”. Kelsey 2022.
[xix] Open-source software is the primary source of all server-side software today. Most global scale corporations run their servers on Linux, MySQL, Python, PHP, as do most national governments.
[xx] Economic models assume the characteristics of an ideology over time as competing agencies seek to extend political control over them. From Piketty we learn that ideologies arise to create and maintain inequality for the benefit of the controlling minorities. “Every epoch therefore develops a range of contradictory discourses and ideologies for the purpose of legitimising the inequality that already exists or that people believe should exist” Thomas Piketty Capital and Ideology