Magic Money Tree (MMT) - Have I Got This Right?

Modern Monetary Theory (MMT or Magic Monetary Tree) is all in the air. I have spent a good amount of time understanding the idea. I think I get it.

• MMT advocates are solely on the "left," claiming that there is more "policy space" than traditional accounting methods show and that MMT provides the "space" for more spending on social problems, such as the Green New Deal.
• I find no inherent connection between the expansion of "policy space" and the use of this space to expand spending on social programs. Ronald Reagan expanded the "policy space" to vastly increase military spending along with a jaw-dropping deficit.
• The above observation leads me to see MMT as "motivated reasoning."
• Advocates of MMT obviously assume that they will also be in political power to institute "reforms" in, for example, the Federal Reserve and to spend the funds on programs advocated by the "left." I don't see why a Tea Party government could not use the same logic to eliminate taxes entirely. The deficit doesn't matter, right? Or do we assume that the "left" will somehow be permanently in power? Hmmm...

It should be noted that "Keynsean" policies have been used in the past to produce full employment, specifically to hire any able-bodied' person for the military in World War II. This, not the "new deal," brought the American economy back to life. Price stability was another matter ...

MMT promises to achieve price stability despite full employment. We are currently seeing how the "tight" labor market is contributing to record inflation. So one must wonder exactly how MMT achieves price stability or is this just a goal? It must be said that price stability is a goal of any economic policy. It turns out to be tricky. 

"Price stability" is not up to the government. There is a real, chaotic world out there where the prices of the "stuff" that money can buy is strongly affected by the details of delivering the "stuff" to market. In the real world, there are things like pandemics, climate change, supply chains, and politics. 

It must also be mentioned that "modern" economic models don't assume perfect knowledge, perfect competition, or rational actors. All this went into the trash bin with the advent of computer models. Whatever you might say about MMT, it has the air of quaint philosophy -- more at home in 1922 than in 2022. As a philosophy, it is talk about talk, not talk about the real world.

MMT in a category of theories that aim to control the economy and, through that control, make the world a better place. The world is simply too complex for any theory - economic or not - to achieve "control."

Just as a reality check, this is what the current US debt looks like:

Advocates of MMT propose to massively increase the national debt. Debt "service" is already a huge expense, crowding out the ability to finance new programs. Some advocates claim that massive new programs can be somehow funded without debt (by an implausible modification of how money works in the US). Even if this is possible, we can see that existing debt competes with any new programming. 

Finally, we know that "printing money" is just as popular with the "right" as it is with the "left." All arguments for the "Green New Deal" are also arguments for massive tax cuts, reduced services, and more military spending.

------------------ BUT! ---------------- 

All this ignores the wealth of the USA pubic sector. This is not to be confused with the net financial position of the government, which is easily found. Ironically, the biggest financial asset of the US government is student debt!

US Government assets (not including land) are about 762,622,087,000,000 or, to save you counting commas, 763 trillion dollars as compared to the approximately 3 trillion shown above in debt.

"Not including land" is important since government land can easily be turned into rent (income).

 

It is also important to see that assets other than land require maintenance - they "depreciate." A very conservative estimate would be 10% per year - %76 trillion. This may be at the heart of "build back better" since public assets such as roads, bridges, and buildings are famously in need of maintenance and upgrade.

I suspect the figure doesn't include military assets, which cost about 3% of the US GDP of $20 trillion. What they are worth is almost a theological exercise, but the value at least involves the 38 military bases on US soil, each a small town its own right, sitting on square miles of valuable land.

And then we need to toss in the wealth of the individual states, counties and cities...

For all intents and purposes, the wealth of the US (and Canada for that matter) is infinite. Many zillions. It is this wealth that "backs up" what we borrow, not "GDP", which is vaguely related to what we can tax. If you want to assess personal debt, you compare it to assets (wealth). The ability to "service" the debt is related to income, which, in the case of a Nation State, is "revenue". MMT tosses both debt and revenue into a deep fog, but you may be able to arrive at the same conclusions (build back better) by another road entirely. It's about upgrading, maintaining and protecting our vast resources. MtMT can therefore be seen as an effort to justify the right program for wrong reasons. In the words of Keyes himself, we need a more plausible lie.

Dimensions of Value: Influence, Power and Status

In a previous post, I mentioned how our world view - especially our perceived system of values - comes into our politics. At the same time, political players tend to misrepresent their own value system and the value system of their opponents to gain power. Power itself is a value worth looking into. In fact, "political" power seems to show up in all the "social great apes" and many other species. My aim here is simply to visualize this dimension - to come up with a visual metaphor that helps us think of this type of value. There are many values similar to "political power". I chose to talk about "influence" as a representative of this class of values. These networks are essential to understanding one of the themes of this entire blog: the superorganism. Networks of value play a role similar to the nervous system of the individuals who make up these organisms. They account for "why" these organisms value what they value and do what they do. They explain the "nuts and bolts" of how individuals are "programmed" by the superorganism.

From "Connected: The Surprising Power of our Social Networks .." Page 289

Social networks transmit all kinds of social things, including "influence", "political power" and "debt".

As already noted, debt is the shadow of "money", but this is a rather abstract idea that we can conveniently ignore. In practice, each of us in debt to identifiable entities, such as the government, the bank, and persons such as our society, our mentors and political patrons. Much of our behavior is governed by perceived obligation, even if we pretend to ourselves that we act freely.

In "Thieves of State", Sarah Chayes provides a detailed description of the architecture of one particular well developed "kleptocracies" - Afghanistan. This networked structure is composed of two-way relationships between the "boss" and the "client". Money (bribes etc.) flow "up" to the boss and perks, protection and status flow down. The link is usually established by the "client" paying for the position in the first place.  Sarah's analysis is particularly helpful in revealing how the corruption of the entire "government" structure works. It is, in effect, a criminal conspiracy that has captured the government. It is extremely durable since it comes to be an accepted aspect of the culture itself.

As Chayes points out, there are different structures in different countries, all lying on a spectrum of "corruption" - from outright capture of the economy by organized crime (Russia) to "white glove" capture of the economy by the rich, where political power and wealth are assumed to be interchangeable.

Networks of influence effectively control governments (including ours) where "corruption" is technically illegal.

Individual voters imagine that their "influence" flows to their representative in the form of their vote. In fact, such influence is openly sold to large campaign donors. "Fundraising" actually takes up the lion's share of the time available to elected officials. One of the key ideas of "socialism" is that each individual citizen should have an equal influence on the decisions of the government. This is specifically denied by the capitalist system, which is effective "one dollar, one vote". Capitalist politicians, such as Republicans in the USA, devote their energies to voter suppression - specifically standing against "equal representation" - "equal influence". They also vigorously defend mechanisms that maximize the influence of individuals and organizations with "deep pockets" (PACKS). We should note that the purpose of a PACK is to reverse the flow of influence - to influence the voter in favor of the PACK's agenda.

A whole library of books could be written on this subject. For the moment, I'd just like to point this out as one of the "dimensions of value" that matter in a fundamental way. Dimensions like "money" obviously play a role, but political power itself is a key value, most obviously to politicians but also to those who feel they are being left out - those who can be convinced to vote against their own interest in the name of some populist rhetoric. The dynamic "works" for the politician, but seldom for the disenfranchised voter. "Money talks". The rules of the game are set by those currently in power, resulting in a system as resilient to change as that in Afghanistan.

In political networks, loyalty functions more or less the same way it does in the Afghan-type kleptocracy. Individual representatives commit political suicide if they don't support the party agenda. In turn, the party provides financial help to get the representative re-elected. Loyalty networks function to draw the compliant politician closer and closer to the center of power while banishing anyone who shows a hint of disloyalty to the political wilderness. Newly elected politicians are "shown the ropes" by senior experts at the game, resulting in powerful loyalty networks between mentor and student.

Before leaving aside this topic for the moment, I should mention how "money" is only a value in itself when it buys the basics of life (food, shelter, security). Beyond that, money is a symbol of status and valued membership in a group. Status and membership are values on their own. Beyond "minimum wage", money buys status. A with all the great social apes, status figures into every minute of every day. It is the key to obtaining access to other values, such as mates, medical care, education, information and, of course, power. They also allow the individual to obtain shiny things like gold, jewels, and fancy cars, whose main function is to signal social status, even if this status is empty and devoid of actual influence or power - "status in the mirror".

The Creation Myth of Money

(Originally posted in "The Zen of Value")

Discussions about how money originates often start with the assumption that it evolved to facilitate trade and "store value". Otherwise, so the story goes, you and I would simultaneously want something somebody else had (say, you have more fish than you need and I have extra sheep).

There is scant evidence for "cash" arising out of this situation. Evidence for another narrative can be found in human behavior that naturally arises when "cash" is in short supply.

Say, you go fishing and catch 5 nice big salmon. It would not be unusual at all for you to show up at my door and offer me a fresh salmon "for free". On the other hand, we would tacitly understand that this establishes a debt. Perhaps at some point, I'd mow your lawn or give you a basket of berries, or jam from my last berry picking trip. The math doesn't need to work out. If I'm in bad shape and have nothing to give in return, it would not be unusual for the fish to keep appearing at my door (perhaps even more frequently).

Such a system is not "communism", where all goods are held in common, no matter how and by whom they were produced. It's based on sharing, generosity and reciprocity between friends and neighbors. It is embedded in a wider set of customs that add up to encouragement of behaviours that tend to bind he community together while discouraging freeloaders and cheaters. All the great apes seem to behave in this way to some degree.

Bringing the discussion into the 21st century, we see that money is just a standardized form of an "IOU". A dollar bill is an IOU from the Government. If I give you a dollar, the Government owes you one more dollar and me one dollar less. Most of my "dollars" are actually numbers in a bank account, which record an IOU from the bank to me.

If there were no banks and all cash magically vanished, we would instantly go back to an IOU-based economy. This apparently happened in Ireland during a 6 month strike of bank employees. Magically, the economy boomed without "money".

Money based on specie (such as gold) is actually a step backward from the natural system. It quickly converts itself back into an IOU system. Gold certificates (IOU gold) replace actual gold for all but the smallest transactions. Banks naturally step in to the void to "do the math" in a complex web of who owes what to whom. Quite naturally, we evolve into a system where most debts directly or indirectly are owed to or from a bank. Nations establish "central" banks and currency that is, in effect, an IOU from the central bank (the Nation).

Of course, "official" money has a serious drawback. The assumption is that all things traded (or "owed") can be measured in money, which flies in the face of both everyday experience and the way our "great ape" minds work. Value is based on what one individual perceives to be needed at a particular time. Such needs are not subject to the rules of arithmetic. Failure of money as a proxy for value results in all kinds of distortions, including the illusion that

1. The more money you have, the more goods and services of value you will be able to access.
2. If you don't have enough money for food and shelter, you are allowed to die, establishing a rather precise money "value" of a human life.
3. Any given object has the same value to anyone at any time
4. Anything of value has a price

Violation of rule 3 results in the common situation where person A values the same object less than person B, resulting in his willingness to "sell" the object to B. We sometimes forget that the result of this transaction is an increase in total value, while the amount of money in the system remains constant. The increase is a direct consequence of the fact that money is not a proxy for value.

The trouble starts to arise when we separate the role of the "social IOU" from the context of community. Money is an abstract IOU from an imaginary "person" - a debt that no longer contributes to strengthening the social fabric. Our money transitions that buy and sell, hire and work are conducted with strangers or even completely abstract theoretical "persons". 

Or are they? Does it make sense to re-introduce the social aspect of money through things like customer loyalty, "nepotism", referring friends to friends ...

It does appear that, as societies grow larger and more complex, there is a tendency to:

• minimize the value of human effort (driving wages to the bottom)
• ignore "externalities" such as the decrease in common values such as clean air, open space, personal choice etc.

Corruption, Assimilation and Debt

Thieves of State

"Thieves of State" is about a particular form of society - sadly perhaps the most common form of society - a kleptocracy. "Thieves" goes into a lot of detail about how individuals are drawn into (assimilated into) this form of society ("dragon"). The examples allow us to drill down to get a close-up view of how assimilation takes place, how it is almost inevitable and why it is so difficult to resist.

It's hard to find an example of a social form that doesn't feature a "strongman" (usually but not always male) with built-in mechanisms that draw group resources to the strongman and his immediate family. This is as true of a Canadian "first nation" as it is of the Trump administration in the USA.

Chayes describes how this phenomenon permeates the whole society in a kind of fractal structure, with layer upon layer of mini-strongmen paying up to the strongmen above them while extracting resources from humans below them in the pyramid. We may think of this structure as the skeleton of the dragon. Its joints are made strong by the bonds of mutual protection and flow of resources up and down the structure.

Mid-level strongmen (who may be humble officials such as border guards or policemen) are bound to the system by being laughably underpaid (making bribes necessary for daily survival) and the debt incurred by buying the position in the first place (There is an echo here: the theme of "debt strangulation", where 99% of the population is in debt to the top 1%). The exchange involved is not just for money. It involves the tacit assumption that anyone in the structure will be protected by all the others. For example, the corrupt border guard can be assured that nobody in the police force will prosecute him for his involvement in smuggling drugs. In mature kleptocracies, protection of corruption is burned into law, especially protecting individuals from prosecution, stripping debtors of rights, making corrupt courts accessible only to the corrupt. "Freelance corruption" can be framed as "crime", allowing the kleptocracy to attack its rivals with the full force of law.

I wonder if these structures arise out of almost physical or mathematical necessity out of the way that basic human needs are met more efficiently by larger and larger groups of humans. Within these groups networks of control, obligation, power and wealth quickly lead to kleptocracy. Another interesting question is whether the same conditions work in a "free" society to produce dramatic inequality. "Capitalism" tends to give free reign to these forces. Debt is the lifeblood of capitalism, creating "legal" bonds that may be structurally identical to those in more "primitive" kleptocracies.

"Socialism" can be seen as a counter-force against the natural tendency for power and wealth to concentrate whether or not the society can be described as an overt kleptocracy. On the other hand, there is a distressing tendency of even "socialist" governments to be captured by networks of obligation, mutual assistance, and general desperation. From this point of view, we may see all of politics as corruption versus socialism. We see that socialism requires extensive state intervention and strict rule of law since the natural order of society (unregulated) is to slip into kleptocracy. In the US, the key difference between Republicans and Democrats is the Republican insistence that all regulation be dismantled (most recently the EPA and consumer protection), while the Democrats see more and more programs and regulations as needed to create a just society.

This question would seem to be something that could be addressed empirically and historically - perhaps in the form that "Thieves of State" takes. Are there countries that successfully counteract the natural tendency to become "kleptocratic"? In "Thieves", Chayes points out a range of policies (all ignored) the US can employ to avoid support of corruption in states it is trying to "stand up", like Afghanistan. Is there a set of similar policies that could be adopted as part of a political platform of a socialist party, such as the Canadian NDP? Such policies would focus on issues such as undermining the power of the banks and freeing people from the chains of "rents" that flow up the pyramid to the rich and powerful.

I provide a related rant on money and debt in another post.

The Zen of Value - Creation Myth of Money

This was originally posted in its own "Zen of Value" blog but has been moved here for sake of integration and connection. It turns out that I don't have much more to say about the "Zen of Value".

Discussions about how money originates often start with the fable that it evolved to facilitate trade and "store value". Otherwise, so the story goes, you and I would simultaneously want something somebody else had (say, you have more fish than you need and I have extra sheep).

There is scant evidence that "cash" arose out of this situation. This can be seen when "cash" is in short supply or in small groups (families, neighbors) who exchange goods and services without cash, even indignantly refusing cash when it would be perfectly sensible when interacting with a stranger. We also have times, such as the "Dirty 30's" where, for technical reasons, nobody had "money" but everybody had more than they need of some things and/or spare time available to "work". Rough standards might emerge (eggs for field work), but the underlying sentiment was "we're all in this together".

Say, you go fishing and catch 5 nice big salmon. It would not be unusual at all for you to show up at my door and offer me a fresh salmon "for free". On the other hand, we would tacitly understand that this establishes a debt. Perhaps at some point, I'd mow your lawn or give you a basket of berries, or jam from my last berry picking trip. The math doesn't need to work out. If I'm in bad shape and have nothing to give in return, it would not be unusual for the fish to keep appearing at my door (perhaps even more frequently).

Such a system is not "communism", where all goods are held in common, no matter how and by whom they were produced. It's based on sharing, generosity and reciprocity between friends and neighbors. It is embedded in a wider set of customs that add up to encouragement of behaviors that tend to bind he community together while discouraging freeloaders and cheaters. All the great apes seem to behave in this way to some degree.

Bringing the discussion into the 21st century, we see that money is just a standardized form of an "IOU". A dollar bill is an IOU from the Government. If I give you a dollar, the Government owes you one more dollar and me one dollar less. Most of my "dollars" are actually numbers in a bank account, which record an IOU from the bank to me. One function of banks is to make it possible for you and me to consider our IOU's as equivalent even though they are owed by different banks or the government. The other important function of banks is to create money by saddling someone with an equal and opposite debt. They don't have a pile of cash in the vault to lend you - the money they lend is created out of thin air, or, if you like, from the skin off your back.

If there were no banks and all cash magically vanished, we could instantly go back to an IOU-based economy. This apparently happened in Ireland during a 6 month strike of bank employees. Magically, the economy boomed without "money". We would see some difficulties in re-inventing money this way that essentially re-play the problems with its introduction in the first place. For example, saving someone's life or finding a suitable husband for a friend's daughter creates a debt  but not one that can be repaid in any ways subject to monetary calculation. These are not wild exceptions - in practice, everything is like this. Spend some time in a thrift shop or garage sale if you think the price of something is an intrinsic property like it's weight.

Money based on specie (such as gold) is actually a step backward from the natural system. Gold quickly converts itself back into an IOU system. Gold certificates (IOU gold) replace actual gold for all but the smallest transactions. Banks naturally step in to the void to "do the math" in a complex web of who owes what to whom. Quite naturally, we evolve into a system where most debts directly or indirectly are owed to or from a bank. Nations establish "central" banks and currency that is, in effect, an IOU from the central bank (the Nation).

Of course, "official" money has a serious drawback. The assumption is that all things traded (or "owed") can be measured in money. This flies in the face of both everyday experience and the way our "great ape" minds work. Value is based on what one individual perceives to be needed at a particular time. The system works because any two people will have wildly different valuations of any particular object at any given time. Such needs are not subject to the rules of arithmetic. Failure of money as a proxy for value results in all kinds of distortions, including the illusion that

1. The more money you have, the more goods and services of value you will be able to access.
2. If you don't have enough money for food and shelter, you are allowed to die, establishing a rather precise money "value" of a human life (typically poorly estimated as "minimum wage")
3. Any given object has the same value to anyone at any time
4. Anything of value has a price

There is also a hidden assumption that needs to stay hidden for the whole thing to work:

     5. It's all about shuffling debt around -- not the pretty things you buy but how much you borrow 

Violation of rule 3 results in the common situation where person A values the same object less than person B, resulting in his willingness to "sell" the object to B. We sometimes forget that the result of this transaction is an increase in total value, while the amount of money in the system remains constant. The increase is a direct consequence of the fact that money is not a proxy for value. Did I lose you? OK here's an example. I sell you the useless rusty bike that has been hanging in my garage for 10 years. You pay $10. I have more space, you have a bike. $10 IOU moved from you to me. No change in the total amount of "money" in the system. In fact, situations where a transaction results in a decrease of value are usually associated with some kind of crime.

Trouble starts to come up when we separate the role of the "social IOU" from the context of community. Modern money is an abstract IOU from an imaginary "person" - a debt that no longer contributes to strengthening the social fabric. Our money transitions that  buy and sell, hire and work are conducted with strangers or even completely abstract theoretical "persons" such as banks and governments.

Another symptom of value distortion is the mountain of useless crap that fills the homes of all but the poorest citizen. All this garbage cost money at some point but has somehow lost value over time - in fact, when we consider the cost of storing this junk, its value is negative. That snow blower you never use is just like a hamburger that you paid for but can't flush down the toilet. The money we paid for this stuff is still in circulation (it's immortal unless the debt is repaid) but the value has vanished. How can this be? Debt is handed around like a hot potato until repaid. Somebody, somewhere owes somebody the full price of that rusty bike you have hanging in your garage. A powerful metaphor for this situation is thinking of value as slowly evaporating unless it's replenished with constant inflow of money (new debt) which is retired much more slowly than value evaporates, if ever. This is a problem created by money itself - it's not a law of physics that we must sink further and further into debt.

I am surrounded by obscenely bloated houses and streets full of leased new cars. It is debt that makes all this possible. It's not a sign of "prosperity". Lots of money around is mathematically and absolutely equal to lots of debt - to the penny. For me, real prosperity is symbolized by sensible, paid-off houses and practical old cars in good condition.

The idea that debt will actually be repaid has slowly disappeared from Government policy and the financial plans of most citizens. Thus, money-based theories of economics increasingly float free from any grounding in the actual world we live in. Somewhere along the line, the idea of "balancing the budget" (the conservative mantra but never the conservative policy) has become completely unrealistic. From time to time (such as in 2008), trillions of dollars of debt simply vanishes from the system with catastrophic effects on real people. We really just move from one fairy tale version of reality to another but the consequences are quite real (I lost my job in 2008 and never found another).

There is evidence that we are shifting to a new economy that goes under names like "Attention Economy". The idea is that relationships are what's worthwhile - cash transactions are secondary. This can easily take a sinister turn but, as a challenge to "money=value", it's a change in the right direction. But maybe not. If I sit back and listen to marketing efforts with my "man from Mars" hat on, what I hear is "Pay attention: let me sell you more debt".

Later consideration would see money and economics as an example of paradigm - a whole way of speaking about society that "makes sense" to generations. As with many paradigms, challenges are unintelligible.  For example, Donald Trump's recent decision to pull out of the Paris Climate Change accords was justified in economic terms. More jobs. Bad trade deals. For conservatives, this makes perfect sense. How else to talk about policy? For those who think that way and subscribe to the economic paradigm (including the idea that they are somehow disadvantaged because of stagnant wages, lack of jobs) asking about other things (such as the long term survival of the human race) makes no sense. In a more narrow sense, in the economic paradigm, money is seen as real like phogiston and luminous aether. It is the real, tangible medium in which human well being "swims".

Human welfare and the four economies

My thoughts about the four economies have emerged from thinking about money and debt. Some writers, especially Graeber do a great job of sketching what money is (debt) and prying the concept away from "value". Graeber makes dire predictions about the fate of the world based solely on the nature of money. Graeber seems to think that, by the very nature of money, debt expands to choke the "real" economy - a phenomenon he calls "debt deflation".

I think that Graeber's misunderstands the way that money works and its relationship to the other economies we live in, most obviously value (which is constantly being created and destroyed) and information (which mostly grows at an exponential rate, contributing to a growing percentage of the value of everything we buy). However, Graeber's analysis is helpful in pointing out that many transactions involving money and the creation of debt take place entirely in the "money universe" without increasing value. In the big picture, this seems to increase debt relative to value, in effect, reducing the amount of value available to ordinary people. I'm not sure this analysis holds water when you realize that value doesn't obey the same rules as money. We usually acquire debt in order to obtain ownership (directly or indirectly) of something of value (other than money). "Net" value can dramatically change with ownership. The classic example is when the thing of value is a "plant" that can be used to manufacture things of value - value that exceeds the cost of production.

Graeber takes us on the intellectual journey of Marx and explains why things don't work the way Marx thought or even the way Marx wanted things to work. Borrowing money to "make" money is, as he says, a drag on the "real" economy and does little more than manufacture debt. The business of entire "finance" industry is based on the value of money for its own sake, resulting in the byproduct of growing debt floating around in the economy.

An example, dear to Graeber's heart, is real estate. One might argue that changing ownership of a house does not, as a rule, change its value. In practice, real estate prices (not values) tend to inflate and a lot of debt is generated in the process. Banks manufacture money for mortgages. For this reason, Graeber lumps real estate in with Finance as the bad guys. The insurance industry gets tossed in with the others for reasons I won't discuss (FIRE = Finance, Insurance, Real Estate).

I have my doubts about Graeber's analysis of a real estate transition.  Real Estate is a market like any other. The amazing thing about a market is that it matches every buyer who thinks something is worth X with someone who thinks that something is worth getting rid of and is, therefore, it's worth less than X. In other words, the basic mechanism of any market is based on fundamental disagreement over the value of the goods being traded. Both opinions are subject to feedback (what people think other people think things are worth and what other people think about what other people think ...), resulting in a classic example of a chaotic system. You get a mass movement of investment into real estate when people think it can't possibly lose money and massive losses (crash) when real estate does, in fact, lose value.*

Mandelbrot has convincingly argued that markets are inherently chaotic According to this line of thinking, price "inflation" is just part of a truly chaotic pattern, where collapse of "bubbles' is inevitable. Chaos is guaranteed by the "math" underlying the system. If true, this refutes Graeber's thesis, not just about real estate, but about finance, which is the core market that Maldelbrot uses an example. If Mandelbrot is right, the amount of money (and therefore debt) in the "system" can be expected to fluctuate wildly to the degree that a market for money itself exists. That's not what Graeber is predicting and the difference is hardly trivial. Sadly, Mandelbrot and Graeber give us two different pictures of Hell: A long strangulation of the real economy (Graeber) versus an endless sequence of fundamentally unpredictable crashes and booms (Mandelbrot).

The fundamental point of contact between the two theories seems to be in the mind of the "players". Graeber's theory is that debt is non-negotiable, collectable under any circumstance and independent of what people think. If true, this would tend to remove (damp) chaos from the system. In 2008, we learned that some opinions about some forms of debt can change overnight, resulting in the sudden disappearance of trillions of dollars of financial "assets" and the corresponding trillions in debt. I think Mandelbrot is closer to the truth than Graeber. The crash occurs when the "system" suddenly realizes that vast sums of "money" are based on uncollectable debt.

The response of the banking system to the 2008 crash is a separate issue, involving some fancy footwork by the world's central banks. This massively involves the "reserve" system, which doesn't seem to factor into Graeber's story about money (at least in his book on debt). "Reserve" money - what banks owe each other - is not connected to debt. It's more like a way of making sure that there are enough tokens in the right pockets to keep the whole thing running, especially a way of making sure that there is enough "cash" (IOU's from the Government) around to allow depositors to "withdraw" their money (transfer debt from the bank to the government) and pass it around between banks in a more or less frictionless way.

Putting it all together to understand the world we live in would seem to require an understanding of more than money and debt. In fact, it would seem to involve re-evaluating a lot of things. It's not surprising at all to find ourselves retracing the thoughts of Marx on the subject. He thought deeply about money, debt and value. But the role of information was completely ignored in his time and the universe itself seemed to be nothing but a passive store of raw materials. In our time, the universe is fighting back.

Money

Money is created in the modern economy precisely in the amounts of debt people (including governments) are willing to assume. Most people have no idea how "money" works, yet it can control their lives.

The physical form of money is hardly relevant. It may exist purely as information and it is, in a sense, pure information. A dollar is a fact. That fact is that a government (Canada, say) owes the bearer one dollar. That would seem to be a circular statement, except the "fact" is supported by the Government, which is not a figment of anybody's imagination. When a dollar is deposited in the bank, its factual nature changes slightly. Now it is the bank who owes the depositor one dollar.

As information, a dollar is a unit of debt. Somebody owes somebody a dollar. It's the "somebody's" that make it real.

Biology and Value - The "Real Economy"

Value relates to living things and makes no sense in the inanimate world. Value is always relative to a living thing. One animal's mother is another animal's food. Perception of value is not necessary for value to exist, although the domain of perceived value by humans is the case we will discuss here.

As humans, we constantly weigh up the value of things in our environment, creating an economy of made up of all the "stuff" that matters to us. In the value universe of humans, most stuff of value is owned by someone (or, as in the case of the "commons" by society) and the rules whereby ownership is changed are complex and interesting. Money can be involved and usually is, but when goods are exchanged for money, the amount of money in the system remains unchanged but the value can dramatically increase or decrease. One example among many is the purchase of mineral rights.

For example, when I buy a banana from the grocer, a bit of money moves from my hands to his and the ownership of the banana changes from him to me. As food, the banana has value to me. But if nobody buys it, the banana will rot and be without value to the anyone. Laying aside a few details, value is created when I buy a banana, even more obviously, when I pick it from a tree.

The biological forms we perceive and name can be somewhat arbitrary. It's important to identify the form you are talking about to make sense of the relative value. To illustrate this point, internal discipline is a value to a human organization - it contributes to the survival of that organization. However, it may not coincide with the welfare of individuals in the organization - in fact, it may be seen as a negative value by certain individuals. such as soldiers ordered into certain death.


Information

The information economy is increasingly important in the modern world. Information can be created from nothing, duplicated and shared. It is very similar to the "stuff" in the value economy in that its importance is solely in the eye of the beholder. But efforts to apply the concept of ownership to information reveal its slippery nature. If I share information with you, we both have it. In fact, the value of information often seems to grow the more people have it. It obeys its own unique rules.

Life itself is the transmission of information (DNA) to future generations. This all takes place in a physical world where one thing is not as relevant to that transmission as another (value) and the whole process is taking place in the real world, where the laws of physics cannot be circumvented.


Energy and the "Real World"

The entire natural world is all about the exchange of energy in countless forms. These exchanges take place according to rules and patterns of their own, irrespective of human value or even the presence of humans. Biology is a subset of this world, where information becomes important (DNA, evolution, stimulus and response).

"Stuff" - matter - participates in the energy economy. Stuff can be bought and sold as can energy itself, but the financial details do nothing to circumvent the rules of the energy economy, such as the laws of thermodynamics, conservation of matter etc.

We buy and sell energy as part of the "money" economy, often ignoring the physics and biology involved in these transactions. Underlying all such transactions is a loss, due to entropy, of the thing being traded. It's like a sales tax on every money transaction except that in this case, the tax is simply thrown away. "Production" of energy often involves irreversible destruction of value in the form of environmental destruction and other ways that the energy industry regards as "external" costs.

------------------
* Of course, many real estate transactions are not based on such "disagreement". The buyer simply pays a "fair price" for what the seller has and no longer needs. There is something "real" underlying the transaction. This is unlike purely financial trades, where some form of security is being traded.