A Quantum Theory of Money and Value, Part 2: The Uncertainty Principle

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Abstract

Economic forecasting is famously unreliable. While this problem has traditionally been blamed on theories such as the efficient market hypothesis or even the butterfly effect, an alternative explanation is the role of money – something which is typically downplayed or excluded altogether from economic models. Instead, models tend to treat the economy as a kind of barter system in which money’s only role is as an inert medium of exchange. Prices are assumed to almost perfectly reflect the ‘intrinsic value’ of an asset. This paper argues, however, that money is better seen as an inherently dualistic phenomenon, which merges precise number with the fuzzy concept of value. Prices are not the optimal result of a mechanical, Newtonian process, but are an emergent property of the money system. And just as quantum physics has its uncertainty principle, so the economy is an uncertain process which can only be approximated by mathematical models. Acknowledging the dynamic and paradoxical qualities of money changes our ontological framework for economic modelling, and for making decisions under uncertainty. Applications to areas of risk analysis and economic forecasting are discussed, and it is proposed that a greater appreciation of the fundamental causes of uncertainty will help to make the economy a less uncertain place.

Posted for comments on 10 Oct 2016, 8:36 am.

Comments (2)

  • Menno Rol says:

    The article deals with an interesting theme in social ontology. It is well thought, well documented by the literature about money, well written and mature. It persuades the reader of an interesting point and could be published in this form right away. If Orrell disagrees with me with what I mention below and is of the opinion that it need not be taken in consideration, I would certainly not want to suggest that the paper were not to be published.

    I do have one comment that may perhaps be important enough for consideration to the author. He says that the contrast of Newtionian versus quantum physics ‘inspired’ him to adopt the view on money as outlined. That may well be the case, but comparing the two is somewhat far-fetched. The point is more or less (Orrell develops this point in a more sophisticated way than I do here) that in quantum mechanics objects of study are and at the same time somehow are not, or not ‘really’. But this is the case always when we deal with institutions in the way for instance John Searle developed the concept of an institution. A reference to his social ontology would be much more appropriate than to physics.

    Searle convincingly shows that institutions often start with a physical thing and then continue to exist after the thing has disappeared, if there is collective intentionality leading to some generally accepted deontic power. No governments are needed for them to exist. Bitcoins are an example of such an institution, but as the author points out, one that did not start with a physical thing – at most with the mere idea of a physical thing – and yet it matches Searle’s analysis perfectly. To my lights, it is therefore somewhat disappointing that the author does not refer at all to this work on social ontology (that became famous by the book ‘the construction of social reality’, but which, if the author happens to be unfamiliar with it, is brilliantly summarized in 22 pages in ‘What is an institution’, see:
    https://www.cambridge.org/core/journals/journal-of-institutional-economics/article/what-is-an-institution/3675101CE15BE2A7681CD5783C01F6D0).

    The article under review here would really turn more interesting if the reference to physics were to be substituted by a reference to the social ontology that philosophy already disposes of. So how well does Searle’s analysis fit in here? Beautifully, I would say. Or the analysis of critics of Searle’s ontology (like Frank Hindriks)? After all it is an exercise in social ontology.

    • David Orrell says:

      Thanks very much to the reviewer Menno Rol for taking the time to read the paper and for this useful and encouraging review, and also for suggesting the connection with the article by Searle, which I found very interesting and relevant.

      As the reviewer points out, “Searle convincingly shows that institutions often start with a physical thing and then continue to exist after the thing has disappeared, if there is collective intentionality leading to some generally accepted deontic power.” There is indeed a strong connection here with money, for example in the way that Roman money continued to be used as a unit of account in Medieval times, even after the actual coins were no longer in circulation.

      Searle compares ownership of money with possession of a queen in the game of chess. The latter “is not a matter of my having my hands on a physical object, it is rather a matter of my having certain powers of movement within a formal system … relative to other pieces. Similarly, my having a thousand dollars is not a matter of my having a wad of bills in my hand but my having certain deontic powers. I now have the right, i.e. the power, to buy things, which I would not have if I did not have the money.”

      However my aim in this paper (and the preceding one, of which this is the second part) is to show that money is a special kind of institution, and has a special kind of power, because of its association with number. In particular, because money is based on number, money objects combine properties of an object that can be owned, with numbers that are universal. These two aspects are very different, and it is this which gives money objects their fundamentally dualistic nature, as well as their unique and confounding properties.

      The special nature of money can be demonstrated by pursuing this analogy a little further. The association of money with number means that it has a unique set of rules and properties which differentiate it from a chess piece. This is why currencies used in games can quite often cross over and be used as a form of money to buy things in the real world (Castronova 2014), but chess pieces can’t.

      The reviewer notes that “in quantum mechanics objects of study are and at the same time somehow are not, or not ‘really’. But this is the case always when we deal with institutions in the way for instance John Searle developed the concept of an institution. A reference to his social ontology would be much more appropriate than to physics.” I agree that Searle’s social ontology nicely captures this idea of things existing in both a physical sense and a virtual sense. However as mentioned above the quantum analogy is broader than this real/virtual split, and is related to the properties of number, and the fact that money is treated as a fundamental quantity rather than a measure of something else. (This argument is developed in more detail in the first paper, but is only summarised briefly in the paper under review.)

      It is also part of a broader argument, which is that we have failed to absorb or understand the lessons of quantum physics, and that these lessons – including the idea of irreducible uncertainty – are relevant to fields such as economics. I therefore agree it would be good to point out the connection with Searle’s work. However I am not sure it fits well with the main text of this paper which takes the theory as stated, and explores the implications for uncertainty in economics, so perhaps a note would be more appropriate.

      Edward Castronova (2014). Wildcat Currency: How the Virtual Money Revolution Is Transforming the Economy. New Haven, Conn.: Yale University Press.

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