Preface:
This article is intended to explore what “value” really is. Not necessarily what people mean when they say “this is worth x” but the deeper idea of how and why things have worth. To do this we will look at media of exchange and units of account, what they are, what they do, and how they have been insufficient at representing “value”. Then at the end I briefly present a solution invented by my friend Josh that seems to fix the problems of previous media of exchange and units of account. I hope you come away from reading this with a more foundational understanding of what an economy is doing and the social technologies involved in provisioning what people want.
Bitcoin:
Bitcoin is a means of associating yourself with a number in a computer program. As the person associated with that number via a cryptographic key you can transfer its association from yourself to any other cryptographic key and what or whomever it is associated with. The number in the program neither represents nor promises anything about the world otherwise, apart from the conversion of some amount of useful energy into heat via a computational process.
Gold:
Gold is a metallic element. Gold has some uses because of its elemental properties for science and engineering. However these alone would not sufficiently explain the price associated with gold on the open market nor the long tradition of people risking their lives, or anything remotely pleasant about them, in order to possess it. The only way to understand gold’s place in civilizational history is to understand the double coincidence of wants and that gold offers a solution because of its relatively fixed supply, divisibility, and ease of ownership/transference. The equilibrium of gold operating this way is indicative of the scale of the problem posed by the double coincidence of wants and the collective lengths that society is willing to go (attributing intrinsic usefulness to a more or less random material) to resolve it.
The relative stability of this equilibrium and the broad adoption of the standard was supported by the dynamic that anyone who didn’t participate would suffer from the double coincidence of wants and either move to it or fall behind as the gold standard economy grew. Without other ways of efficiently participating in it they would have to adopt the standard further strengthening it (positive feedback).
The source of instability of this system is that there is no reason beyond convenience and the collective action problem of transitioning that the gold standard (or any given currency’s use) should continue, so given a better alternative technology (such as paper fiat currency) and the means of solving the collective action problem (say, by a powerful government…) gold would be mostly abandoned as a currency and potentially as a store of future useful claims as well.
This instability is inherent to using gold or any media of exchange that trades for things of more usefulness than it is inherently useful for itself. By nature the social choice to employ a currency that is “over valued” in this precise sense exposes the underlying economy to risk. The risk being that a move away from the current standard to a new medium of exchange could cause a bank run effect that would leave actors in the economy left with shiny ingots or pieces of paper that used to have utility in a network of transactors that no longer exists. It might at first glance look like the only way to avoid collapses of a currency’s network based market cap would be to not use currencies at all, instead biting the bullet of the double coincidence opting for a barter system where things that are voluntarily traded are necessarily of equal usefulness to the respective parties. As we will later see this isn’t necessarily the case.
The Dollar:
The United States government is the whale of whales in the market of markets. It is the biggest firm with the biggest balance sheet. This is because the US government is at least a partial if not complete owner of every asset in the United States, and also many outside of it. Assets like the white house, public lands (and their corresponding energy/mineral rights), and fighter jets are some obvious examples of its complete ownership. However the extent of its fractional ownership is massive and extends from all the shares in google, to the food in the grocery stores, and your bicycle. The sense of partial ownership I am referring to is perhaps unobvious, after all the title to your home likely does not list the United States as a partner, nor do the legal documents demonstrating ownership of shares in business, or your receipt for your groceries. Understanding this idea of partial ownership comes more naturally with the notion that one does not strictly “own” anything. At least in the commonly understood sense that owning something means you can do what you wish with it. Instead ownership refers to a set of enforceable claims pertaining to an asset. These claims specify what you can and cannot do with something and are much more extensive for groceries than a piece of property in a strictly zoned district. This conception shows how ownership is a more nuanced and continuous idea than most intuitively believe it to be.
Some evidence of the government’s partial ownership of all assets are the powers of eminent domain, that its agents can possess your car at the flash of a badge, and enter your home with similar ease. It has been upheld in the highest courts that the federal government has near complete control over the regulation of the financial system, implying a claim, however small, on all of the assets controlled therein. If any other individual or entity had this kinds of direct or indirect enforceable claim assets that you consider yourself to “own” this would be a weak kind of ownership indeed.
The reason it is not so common to think of the government as a partial owner of all the assets it has enforceable claims to, is that we implicitly know that it is the case whether or not it is stated. We know it can write and rewrite the terms of its partial ownership under no higher legal authority and have those claims enforced by its own violence.
Why then, since it can, does the government not express its ownership maximally to possess as many assets as it can becoming extremely powerful and wealthy. Some people might say that it was the genius of the founders who insured checks and balances in the structure of the federal government. I think that this claim is weak and downstream from the more real reasons.
We don’t live in a state owned world and only live in a partially state owned world because states that grow to global power do so off the productive capacity of their economy. A good way to not align the incentives of the people who operate your economy with your own is to enslave them and force them to work at your whims. As a government comprised of people “your” whims are likely incoherent and destabilizing in the long term, and even if they weren’t, enslavement itself is often a very costly practice both because of the totalizing enforcement it requires and in that it doesn’t allow you to take advantage of the diverse capabilities and perspectives that might contribute to greater economic efficiency if all of the enslaved had a reason to care for “your” success and had avenues to identify and enact efficient contributions themselves.
In stark contrast it is far easier, because of the nature of exponential functions, to rise to global power by directly controlling a much smaller piece of an exponentially growing pie than it is to own all of a much slower growing, or even shrinking, pie. I think these dynamics are the evolutionary mechanisms that selected for the kind of partial ownership that world powers operate with. An interesting thing about this mechanism is that it is evolutionary. This evolutionary mechanism tests new emergent government institutions occasionally successfully, but often with brutal human consequences.
Perhaps this will lead us to a sustainable utopia at some point but this would be massively improbable. Evolution sucks for things that feel pain and seems to select for them. If only people put more energy into studying different and more efficient optimization schemes for complex dynamical systems and applied them to intelligently improving our civilization. 🙂
The unstated contract between the economy and the state is one made between bilateral monopolies, as they can’t exist independently of one another. The state provides services, the only critical of which is the military, in exchange the economy “agrees” (in an evolutionary sense) to be taxed both monetarily and through the less tangible but equally effective tax of enforceable claims on assets.
In this video Ray Dalio explains the nature of this evolutionary process. He talks through the history of world powers failing when political regimes misunderstand the evolutionary bilateral monopolistic nature of their relationship to their economic productivity engines, and instead of recognising the alignment between their long term success and the economy’s growth (and vise versa) they fall from power trying to expropriate more than they sustainably can. He demonstrates how this works through combinations of borrowing excessively on too little real underlying equity (in this case enforceable claims on productive assets) and rent seeking.
Coming back to the topic of this article… This framework of equilibrium at partial government ownership demonstrates how the dollar works as a currency. In an extreme it is possible for the state to print so many dollars that it effectively annexes all of the dollar market cap in the world. In practice doing so would jeopardize the safety of the underlying economic activity that allows the government to exist, potentially sparking war over the nearly nine trillion dollars in debt held internationally, and bankrupting many businesses and most capital markets domestically. Doing this would ensure that there would be no valuable dollars in the world unless great military force was exercised to enforce the dollar’s continued use. Again slavery is both costly and inefficient especially when the people you are trying to enslave have their own large militaries protecting them. In practice the government takes a nearly opposite approach and exercises its enforceable claims on all dollars by consistently reclaiming two percent of their total market cap annually. It is important that this is as consistent and well understood as possible so that institutions and individuals that enter the dollar market do so with accurately discounted valuations of the dollar that come from this inflation. Recognizing the importance of trust and clarity in its actions the government goes to considerable lengths to communicate and act on this agenda like the stability of the world economy, and by extension its own existence depends on it.
The most powerful method that the government employs to preserve the stability of the global monetary system that it dominates via the dollar is almost exclusively transacting in it and upholding its end of the bargain in said transactions. If you want to do business with the whale, or be protected by its power you will be paying or getting paid for those services in its currency. People would not care about dollars if they did nothing. If there were no taxes to pay, no FDIC to insure dollar denominated deposits, no national parks passes to purchase, no oil extraction deals to make, and no thirty trillion in government bonds people were interested in purchasing dollars wouldn’t mean much, but there are. All of these things are real products that the government sells, only accepts dollars for, and that people want either as individuals and firms explicitly or in the weaker evolutionary bilateral monopoly bargaining sense explained above. If dollars didn’t offer sufficient underlying usefulness compared to other currencies it would be likely that the global financial system would switch or diversify reserve currencies. This would leave the government less able to do things like lock Russia out of global finance as a sanction, or tightly monitor and control aspects of the financial systems it can and does because dollar infrastructure they control allows them to. The government likes the world this way and is willing and able to endow the dollar with tangible usefulness to insure that.
Of course, like is the case with gold, a currency’s innate usefulness can be small/miniscule compared to the usefulness one can exchange it for. The importance of solving the double coincidence of wants and the high price people are willing to pay to resolve it still holds. I am not claiming that dollars are special in this regard. In fact it seems likely to me that dollars are priced higher in the same fashion because of these network effects, and by extension the dollar market would be subject to a similar “bank run” dynamic on a very grim day as gold or BTC. Though instead of the dollar’s usefulness being erased by a collapse of the network of useful trades this would require the collapse of the government’s legitimacy which ultimately undergirds that network of useful trades. The point is that dollars have some real usefulness which we can expect to be present at some level in the future, assuming no government collapse.
That is much more than can be said of bitcoin which is predicated on the destruction of useful energy rather than its creation, or even gold whose elemental uses are negligible compared to the scale of transactions done with the government for things of material usefulness.
The Joule (full credit to Josh for the idea here):
The joule is a unit of energy equal to one watt released for a second. Joules cannot be created or destroyed only transferred from one form of energy to another. Joules can come in many forms of potential and kinetic energy, water stored on the top of a hill, a delicious bowl of salad, even the effort of someone thinking and typing on a keyboard can be measured in joules. The framework of joules is in fact so broad that the entire economy can be abstracted to it. The work represented by the economy can be completely understood as the reconfiguration of joules to the liking of its participants. You can eat them for breakfast, live in a house with them, design, build, and operate machines with them and everything between.
In this sense joules are a foundational representation of economic usefulness, as such they can be traded like all other desirable things. However the nature of harnessed joules being the general form of what we call usefulness means that they innately have ideal properties for a medium of exchange. In a sense they are the currency we already use whether or not we recognise that. The choice to account and trade in joules offers a solution to the double coincidence of wants that avoids the need for currency and the risks of currency collapse whether due to a disappearing network of traders or a disappearing government. It is even possible to see that we have understood some of the properties of joules to be desirable in our currencies because these currencies were only weak proxies for trading them; these include divisibility and fixed supply.
Joules don’t rely on network effects, or a government backstop to retain their usefulness, they are foundationally a measure of usefulness because as humans we have preferences about the energy landscape of our universe and the action of cooperatively reconfiguring this space is what we call economy. They are by their nature an ideal solution to the double coincidence of wants, and break the distinction that currencies make between valuation and usefulness.
P.S.
Interestingly joules have the opposite properties as bitcoins. Bitcoins are a measure of destroyed useful energy, and joules are a measure of harnessed useful energy. So while gold’s market cap merely represents a societal effect where people decide not to capitalize helpful things/activity, bitcoin’s market cap represents a societal effect where people decide to capitalize the destruction of helpful things/activities.
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