09 November 2016

The Evolution of Money

David Orrell and Roman Chlupatý
Columbia University Press, 336 pages,
ISBN 9780231173728

Reviewer: Bridget Rosewell, Volterra Partners

Economists need to get their heads round the now inescapable conclusion that money did not emerge as a substitute for barter.  Rather it has always been associated with war, power and taxes.  These authors describe this with examples from across the globe, and others have made the same argument.  What we have been teaching students for the last several decades is plain wrong. Mediums of exchange are imposed, and stores of value can be many things.  So what is money?  This is the question these authors address with panache and some compelling examples.  They argue that money has a dual character, performing both abstract and real roles, as well as switching between the two.

Thus, ‘the central concept of money is that it is a means to attach exact numbers to the fuzzy and transient concept of real world value’.  That fuzziness is not however removed by this means, it is merely captured for the moment, in the same way as the quantum particles are fixed by observation.  One of the authors is a physicist and sees this uncertainty as endemic in our real world.  The efforts of people, organisations and governments are mostly focused on how to fix stuff so that we can capture it in a logical yes/no manner.  Yet at the same time aspects of reality keep coming up to bite us.  This is quite compelling as the process of disruptive innovation has such a characteristic and our normal models do tend to shove it aside.

Along this journey into money uncertainty there are some gems of information.  I did not for example know that the Great Fire which did for the palace of Westminster in 1834 was caused by deciding to burn the old tally sticks which had been used to record tax debts up to 1826, and letting the fire get out of control.

Of course Newtonian physics is all about determinism and hence creating certainty by linking money to commodity with a fixed price.  Moreover, this is what Newton did at the Royal Mint.  This is part of seeing money as a zero sum game.  If I’ve got it, you haven’t.  Yet the economy is not a zero sum game, and hence uncertainty begins to creep back in.

Fuzzy money has uncertain value and is credit and virtually based.  Credit systems are widespread through history and continuously re-emerge until stamped on by governments worried about tax collection.  Bitcoin, they argue is different because it has been pre-limited and therefore is more related to gold standard approaches to money than credit systems.

The book is an excellent read, and challenges us to incorporate money more explicitly into our models of the world as a change agent rather than an accounting mechanism.  I shall be thinking about this means to cost benefit analysis and our attempts to monetise everything in order to capture it.  Maybe I need to think again!