sethlJohn Brockman, literary agent extraordinaire and editor/publisher of Edge introduced me to Seth Lloyd via good old fashioned email. I had lunch with Seth today.

Seth is known for his seminal works in the area of quantum computing and is visiting Japan for a year. We talked a bit about Japan, but I jumped at the opportunity to talk to him about some of the loftier things that are puzzling me these days. My first love was physics, but I dropped out when college physics turned out to be more about math than the art of physics. I'm now a repressed physics lover who can't keep up with the math. Therefore, I always jump at the opportunity to have someone explain physics to me in an intuitive way.

Seth explained that historically, physicists have always talked a lot about energy and the conservation of energy. Energy changed form, but there was always the same amount. They later found that you would lose a bit of energy over time and they attributed this to entropy. Recently, people have realized that entropy is sort of randomized molecules and looks a lot like information. Seth explained that the whole universe could be viewed as a big huge computer and you could apply information theory on physics and vice versa.

At this point I tossed out some of the questions I've been asking all of the smart people I've been meeting these days. What is money? Is economics really the way we should be analyzing and managing the exchange of value in society? How are non-financial assets such as trust, beliefs and culture created and transmitted? Does more money beyond a certain point really make you happier and if not, what is happiness?

Seth talked about how money was similar to energy in that it was conserved, at least on paper. Seth pointed out that most things that make you happy require money and energy, but that money and energy in themselves do not usually make you happy. In a sense, they are a necessary part of the process, but not the end. You do get an endorphin rush from the process of scoring more points in a game, gambling, or making more money, but the happiness you get from chasing these obsessions is not the same happiness you get when you finish a great meal or finish a session of meditation.

Seth pointed out that if you are struggling to survive in a tough environment, eating fatty and sweet foods and conserving your energy are probably good things. When you have enough food, sitting around eating sweets on the couch suddenly becomes detrimental. Is there an equivalent to this with money? I believe that free markets and democracy are great things and are the foundation of civilization and progress. I believe that efficiency and greed play a big role in creating healthy economies. Having said that, I do not believe that just because we have free markets and democracies, that people will be happy or that we will have peace. My question is, at what point, if any, do you have too much money? At what point is greed pointless and destructive? Can countries and economies become addicted to economic growth or become financially obese?

Neoclassical economists tend to model human behavior with a simple formula where more money makes you happier and people will do everything they can to earn more. This is like saying that the more calories you take in the healthier you will be and that eating more makes the world a better place. It's obvious to most real people that we decide what to spend our time and money on based on a variety of psychological, cultural and societal influences. Very few of us only spend money to make more money. The question I posed to Seth was whether there were models from the study of energy and entropy or from quantum computing that could be applied to try to understand some of the issues at the edges of economics? Are there ways of measuring and analyzing non-financial, non-conservative value such as culture, love and trust? Were there non-economics models for modeling some of these things? Was there a way to determine whether certain types of pursuits of happiness tended to help the human condition more than others? Was there something in information theory that could help us understand the value of social networks or ties?

Seth said he would ponder some of this stuff and get back to me. I promised to try to render some of my thoughts into a more focused question or problem.

14 Comments

Not sure if their is a model in physics or not, but I always look at money not as an absolute value, but but in terms of flow and circulation. The numbers side is largely irrelevant, its not how much you have, but whether you have enough circulating. Is enough cash flowing through your system that you can do what you want to do? And unless you are super self motivated, its also possible to have too much circulating through your system. If you can always do whatever you like its far too easy to pick options that don't challenge you.

After reading this, thought you might be interested in a recent Guardian article about Philip Ball's new book on the "Physics of Society". The article briefly addresses the idea of a physics-based approach to economics. Here's the link.

It could have once been argued that currency was a medium for storing energy, or something that was easily convertible into the fruits of someone else's labor, such as a house from a carpenter or a farmer's food.
When trade was a matter of carrying things of value from one place to another across long distances, people obviously traded things that were portable and looked for smaller things to carry back with them. If you could load your mule with things that you produced, it made sense to trade this produce for coins, that could be easily carried home and traded to a local builder for a house or a barn. Currency was an efficient way to transfer energy. (Interestingly, the ancient Phoenicians were very sophisticated traders, but adopted currency fairly late, because their trade was done using ships, which were themselves efficient transporters of large objects which stored energy.)
Currency was gold and silver, metals valued fairly predictably among most people.
The other day I showed you an old silver coin I had picked up, a one ounce sterling "trade unit", issued by the US for use in China at the turn of the century. Other countries issued virtually identical coins for the same market. For them, there was no possibility of currency speculation or devaluation, as each ounce was equal in value to any other country's. No longer backed by any government, they still retain their value. In fact, I'm sure many of these were melted and cast into useful objects that hold their value to this day.
When the gold standard was dropped in the 1930's, the US Dollar became truly abstract - a dollar no longer could be easily converted to silver, nor twenty into a known measure of gold.
Money became less of a means to store work energy and more of a conduit by which information or knowledge was transferred. It then went from being a commodity in itself, coins made from valuable materials to being a "promise of a commodity" when paper was issued for fixed amounts of gold kept in a bank. Matter became energy. It later devolved into simply the hope that its abstract value would be insured by a strong government. When the bond of trust between a government and the holders of its currency is broken, the currency becomes valueless and the energy you expended in charging that storage medium is gone forever.
We spend our energies becoming dependent on strong governments, that are in turn, dependent upon its citizens to produce things of value. I can't think of a parallel in nature or physics for this relationship - it seems to be a fairly unnatural state.

Money is only useful as long as you are using it in ways that create, or cause others to create things of value. Without that, there is no happiness in having money.

Here's some ideas re: the modelling economic systems. I'll have to throw out some quotations:

The second law of thermodynamics states, ‘the total entropy (disorder) of the universe can never decrease’.

Erwin Schroedinger, in his book, 'What is Life?' has a juicy paragraph on entropy and living organisms:

What then is that precious something contained in our food which keeps us from death? That is easily answered. Every process, event, happening -- call it what you will: in a word, everything that is going on in Nature means an increase in entropy of the part of the world where it is going on. Thus a living organism continually increases its entropy -- or as you might say, produces positive entropy -- and thus tends to approach the dangerous state of maximum entropy, which is death. It can only keep aloof from it, i.e. alive, by continually drawing from its environment negative entropy -- which is something very positive as we shall immediately see. What an organism feeds upon is negative entropy. Or, to put it less paradoxically, the essential thing in metabolism is that the organism succeeds in freeing itself from all the entropy it cannot help but produce while alive.

So, in the end, a model of survival, control, what-have-you needs to find a way to absorb negative entropy. With economic systems this would be akin to consuming and destroying goods, accumulating and spending money. Consumption or Donations could be negative entropy. [Caveat, I don't like the idea of using physics/thermodynamic concepts to model social and/or economic behaviour, it's fraught with problems. And, reification can be a bad thing.]

Look for a book called 'Complexity' by Mitchell M. Waldrop. It discuss's the merging of economics and quantum physics (among other things)

With regard to your questions about money, there is quite a bit of information about gift economies on the synearth website -- http://futurepositive.synearth.net/2004/02/04. I think the earliest (and one of the best) books I've read on gift economies was The Gift: Imagination and the Erotic Life of Property, which was written back in 1983 by the poet Lewis Hyde (who also wrote a great book on Trickster stories). I remember in particular the discussion of native American potlatches (http://www.bartleby.com/65/po/potlatch.html). I think Howard Rheingold has referred to Hyde's work in a number of his books as well.

Thanks for the good thoughts. I agree with everything people have pointed out here. The flow of money can be viewed as information theory. The notion of entropy can be used to understand life, but in turned can be viewed as information. If you then take some of the great new thinking in combining information theory with complexity and quantum physics, you'd think they'd discover something new. ;-) Maybe we can discover a way to model or understand the gift economy. I LOVE the gift economy stuff. I've only read Mauss, but it's quite fascinating and I believe that understanding aspects of the gift economy is essential for understanding the non-conservative elements of value creation as well as some of the non-economic drivers of society.

In the Mauss book, he does an very interesting exploration of the history of some of our rituals. For instance, law and contracts has roots in gift economy ritual. The word "stipulate" comes from a ritual of breaking a stick in two, each party taking a piece of stick and cursed is he who breaks the contract. Or the notion of "alms for the poor". There are many rituals that are based on the notion that if you do not share what you receive with others, what you receive will be cursed or poison. These superstitions and rituals played an important social role historically and are based on some of the same dynamics of many gift economies. Organized religions has warped many of these superstitions and centralized this "sharing" to create scale for an organization.

I'm going to shoot off on a tangent here, but this also relates to a lot of the economists notion of why we have companies and firms. Some talk about lowering transaction costs and explain it in terms of market efficiencies, whereas I tend to think that many of us collaborate because we enjoy it. I think there is a lot to human behavior that can be explained as a drive for efficiency in a system of economy, but would make sense to think of in another way.

My favorite metaphor is that although you can explain beautiful music with mathematics, but you can't really make beautiful music with forumlae.

Oh Joi, you just know that's not so. I mean, not to be reductionist, but all of Bach is practically algorithmic.

Far be it from me to deny the joy of messay human agency, though. (My own personal opinion is that we're all something akin to endlessly-iterated CA.)

What is money?

You must be kidding me?

If you live in America, and don't marvel at least once a day about our country's greatest invention, then you're not paying attention. I'm talking about FIAT money, first appearing on the scene during the Civil War, and now it dominates the global.

If you haven't noticed their is a sort of currency "cold" war being waged right now (well the war is nearly a decade old), between the euro and the dollar. Btw, did you see where China will become Europe's largest trading partner in 2005-06. Hmmm?

If you really want to study money, I suggest you spend your time with the Austrians, you can start your journey with this link: http://www.mises.org.

They have plenty of articles and books on topic.

Talking to a physicist about money and energy is borderline absurd, unless of course the physicist has mastered "cold fusion"!

PS. Say hello to Brian A. and perhaps you should google "bounded rationality".

Well money can't buy happiness but some argue that levels of happiness can be measured by money.

http://www.fastcompany.com/magazine/68/richlife.html

The "research" also shows that 1.5 Million or so appears to be the point of fulfillment.

Charlie, it's not absurd, talking to a physicist about money is talking to our assumed modern priest about our real modern religion. :)

Ohh, may I again suggest this book:
"A Brief History of Econimic Genius" by Paul Strathern
(The canadian edition I have is titled "Dr. Strangelove's Game: A Brief History of Econimic Genius". I guess it was too controversial for the U.S. market... Come to think of it, I'm not convinced it's entirely the same book at this point.. hrmm...)

I haven't finished it but it talks about various physicists involved with the A & H bombs, game theory etc, and how economists picked up on some of their work...

Adam, totally agree. I guess that was my point. You can describe Bach as an algorithm, and he had one running in his head obviously, but it a rigorous understanding of math or the ability to describe Bach mathematically is not enough to be Bach and make his music.

Charlie, I have read Simon and know about bounded rationality. It is quite an interesting way to look at things, but it does break some of the basic methods for modeling the economy doesn't? Do you know of any work that I can read about how the notion of bounded rationality has been used to describe some of this stuff rigorously?

"Neoclassical economists tend to model human behavior with a simple formula where more money makes you happier and people will do everything they can to earn more."

I don't think this is true. The whole concept of 'utility curves' is that different people have different preferences, desiring a different combination of goods/services/etc. The 'etc' in this case certainly includes people choosing non-financial rewards such as free time.

A very standard neo-classical economic analysis of taxes, for example, indicates that as tax rates rise, people will choose to work less, because their marginal compensation for work falls below their marginal value for non-work (ie free time).

This is not to say that analysis of these non-financial assets and rewards is not worthwhile. But I think the key thing to remember is that 'non-financial' just generally means that we have not yet found a way to accurately determine an objective value. For example, financial options are now an integral part of the financial system. This only became the case after Black-Scholes enabled us to accurately price options. Today, 'real options' are a commonly used business tool to analyze the value of project phases - they provide a much better basis for decisions than doing an NPV or other more traditional financial analyses.

Money, as a poster mentioned above, is an informational tool. It demonstrates value and scarcity. The closer we can get to quantifying the intangibles, the better we will all understand how 'wealth' really goes beyond just possession of money. This may lead people to rethink how much or how they work or consume. At a minimum, it would allow policymakers to better determine the likely impact of government policies (for whatever that's worth). And it will certainly lead to increased business efficiency and new business structures as individuals and companies can better quantify the value of others' connections, knowledge, cultural background, etc.

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