A quantum theory of money and value

Download full paper

This paper is closed for comments.

Abstract

The answer to the question ‘what is money?’ has changed throughout history. During the gold standard era, money was seen as gold or silver (the theory known as bullionism). In the early 20th century, the alternative theory known as chartalism proposed that money was a token chosen by the state for payment of taxes. Today, many economists take an agnostic line, and argue that money is best defined in terms of its function, e.g. as a neutral medium of exchange. This paper argues that none of these approaches adequately describe the nature of money, and proposes a new theory, inspired by non-Newtonian physics, which takes into account the dualistic real/virtual properties and complex nature of money. The theory is applied to the example of the emergence of cybercurrencies.

Posted for comments on 18 Feb 2016, 11:15 am.
Published

Comments (5)

  • James Culham says:

    The author quite rightly observes that many of the established theories of money are inconsistent with the recent phenomenon of ‘cybercurrencies’. An alternate theory is presented, but unfortunately it is hard to comprehend and needs more clarification. I do not pretend to have fully understood the theory and apologise if some of the following comments stem from this misunderstanding.

    The author (correctly, in my view) identifies the ‘need to distinguish between money, and its units’ (p. 2), but this distinction is not sufficiently emphasised. For instance, it is not at all clear that ‘Market prices are therefore an emergent property of the system, in the sense that they emerge from the use of money objects’ (p. 3, my emphasis). Market prices could equally emerge because of the establishment of a unit of account. A related issue is that Innes’s Credit Theory of Money is much broader than the narrow state-backed chartalist version referred to in the paper. The discussion of the unit of account and its associated credit payment and clearing system should be made more explicit.

    This oversight compromises the discussion of the ‘complex properties of money’ since money ‘is based on a number’ (p. 2), with examples of weight, ‘unit of value’, and unit of account. The purpose of any theory of money is to establish a mapping from a nominal unit of money to an abstract concept of value; in other words, to show why money is worth anything at all in terms of real goods. But this mapping is problematic—for Marx, neoclassical or any other theory of value. Instead of ‘the idea that we can attach numbers to value [being] taken for granted’ (p. 2), it is the essential problem. The unit of account, by definition, is the unit that all entries (such as wealth, payments, and debts) in accounting statements are measured. So superficially the answer to the question ‘what are these units measuring?’ (p. 2) is “everything”. To respond with the answer ‘money’ (p. 3) misses the vital distinction between money objects and the unit of account.

    Ultimately, it is not entirely clear what the ‘quantum theory of money’ is. It seems to suggest that there is a simple physical relationship between the unit of account and a measure of value in the same way that light is both a wave and particle. But this cannot be. Measurement in the unit of account is a social phenomenon applied to real-world and financial objects. The paper implies that money alone exists on the cusp of the world of real objects and the social world of value measures. But is money the only thing to do this? Other financial instruments also exit on this cusp. They are also measured in the unit of account, and have values that are similarly nebulous. The analogy with waves and particles (p. 3) is misleading—the unit of account, and the objects that it measures, are distinct. They are not sometimes one thing and, at other times, the other.

    On this last point, the author should be careful using examples from physics. Money, in either unit or object form, is a social relation and therefore operates not only in reaction to the reality of physical objects, but also in reaction to society’s understanding of money itself. Comparisons with waves and particles or magnetic fields do not capture this reflexivity—a magnetic field does not adjust its behaviour based on a revised understanding of itself.

    Finally, if traditional theories have trouble explaining ‘cybercurrencies’, then the problem may very well be with the existing theories of money, as the author states. But it could also simply be that ‘cybercurrencies’ are not, in fact, money. The fact that an object can be used to buy things does not prove that it is money—barter is a valid form of payment. In the example given, where Bitcoin is exchanged for a pizza, the author glides over the essential detail that the pizza was actually purchased with a credit card! Instead, the term ‘cybercurrency’ could be seen as a form of linguistic ingenuity, a kind of verbal mind trick. Perhaps the term ‘cybercommodity’ would be a better description of an object that is created by a process of ‘mining’ and can be used as a medium of exchange merely because of its novelty and pseudo-anonymous features.

    • David Orrell says:

      My thanks to the reviewer James Culham for taking the time to read the paper and for the useful comments, which will be very helpful in revising the paper. I have listed the comments below and respond to each in turn.

      Comment: The author quite rightly observes that many of the established theories of money are inconsistent with the recent phenomenon of ‘cybercurrencies’. An alternate theory is presented, but unfortunately it is hard to comprehend and needs more clarification. I do not pretend to have fully understood the theory and apologise if some of the following comments stem from this misunderstanding.

      Response: I am glad that the reviewer agrees that the topic deserves attention, and as discussed below will clarify the theory following his remarks.

      Comment: The author (correctly, in my view) identifies the ‘need to distinguish between money, and its units’ (p. 2), but this distinction is not sufficiently emphasised. For instance, it is not at all clear that ‘Market prices are therefore an emergent property of the system, in the sense that they emerge from the use of money objects’ (p. 3, my emphasis). Market prices could equally emerge because of the establishment of a unit of account. A related issue is that Innes’s Credit Theory of Money is much broader than the narrow state-backed chartalist version referred to in the paper. The discussion of the unit of account and its associated credit payment and clearing system should be made more explicit.

      Response: As the paper notes, the units of money are sometimes confused with money itself. But the distinction between money and its units is just a question of basic logic (you can’t pay someone with a unit, which is a concept of measurement). I will add a note to make this more clear.

      The question then becomes, what are these units measuring? One answer is value, but this does not work because value is not numeric (it is not a linear concept like length). So another approach is to say that money is a “fundamental quantity”. A dollar bill has a monetary value of one dollar, in the same way that an electron has a charge of -e (negative one elementary charge).

      These units of money, taken in isolation, do not in themselves determine prices in the real economy, however these prices emerge as described from the use of money. And I would argue that this, rather than the “establishment of a unit of account,” is the process by which market prices are determined.

      Cybercurrencies are a useful illustration of this process. When Bitcoin was invented, it established a unit of account – the BTC – but that was meaningless, and it could have remained that way. However it is no longer meaningless, because now you can buy things with bitcoins. There was no clear transition between these two states, or a particular date when it was officially established that Bitcoin should be accepted as money at a certain exchange or price level. Instead it is more accurate to say that market prices emerged in tandem with the use of the money.

      As the reviewer points out, theories of money exist over a spectrum, but for the scope of this paper my aim was to present two extreme cases, bullionism versus chartalism, since these each have (now and historically) their adherents, and as discussed further below (and in the paper) can be seen as describing two complementary aspects of money. I will again add a note to this effect.

      Comment: This oversight compromises the discussion of the ‘complex properties of money’ since money ‘is based on a number’ (p. 2), with examples of weight, ‘unit of value’, and unit of account. The purpose of any theory of money is to establish a mapping from a nominal unit of money to an abstract concept of value; in other words, to show why money is worth anything at all in terms of real goods. But this mapping is problematic—for Marx, neoclassical or any other theory of value. Instead of ‘the idea that we can attach numbers to value [being] taken for granted’ (p. 2), it is the essential problem. The unit of account, by definition, is the unit that all entries (such as wealth, payments, and debts) in accounting statements are measured. So superficially the answer to the question ‘what are these units measuring?’ (p. 2) is “everything”. To respond with the answer ‘money’ (p. 3) misses the vital distinction between money objects and the unit of account.

      Response: While it is certainly true that the mapping of value to price is at the heart of monetary theory, I would argue that the emphasis has been on the question of what number rather than how a number. On the one hand it is obvious that number and value have very different properties, but we tend to gloss over it exactly because it is so obvious. For example, a standard definition of money is that it serves as a means of exchange, a store of value, and a unit of account. But it is this last which I would argue “misses the vital distinction between money objects and the unit of account” (since a unit by itself is not money, it’s a unit). This paper starts from the idea, not that money and value are linearly related and we just need to find the right map, but that money and value are fundamentally different in nature, yet are combined through money objects.

      As mentioned above, the paper proposes that money should be treated as a “fundamental quantity” rather like electrical charge. This is what is meant by the statement that the units of account are measuring “money” so I will clarify the wording. My intention is not to confuse money with units of account; these are clearly distinct, in the same way that an electron is not the same as a unit of electrical charge. (One solution would be to use the expression “money charge” where appropriate, but that is probably too much physics!)

      According to this theory, then, monetary units do not measure “everything”. They are a measure of money. The fact that a secondary process attaches numbers to something is not the same as saying that it is a measure (for example, you can measure a biomarker of a disease, but that doesn’t mean you have measured the disease). The reviewer has highlighted a useful point here and I will amend the paper to address this.

      Comment: Ultimately, it is not entirely clear what the ‘quantum theory of money’ is. It seems to suggest that there is a simple physical relationship between the unit of account and a measure of value in the same way that light is both a wave and particle. But this cannot be. Measurement in the unit of account is a social phenomenon applied to real-world and financial objects. The paper implies that money alone exists on the cusp of the world of real objects and the social world of value measures. But is money the only thing to do this? Other financial instruments also exit on this cusp. They are also measured in the unit of account, and have values that are similarly nebulous. The analogy with waves and particles (p. 3) is misleading—the unit of account, and the objects that it measures, are distinct. They are not sometimes one thing and, at other times, the other.

      Response: The core idea of the theory is that money objects are entities (which can take many different forms) which have an assigned monetary value, and that prices emerge from the trade of these objects. So the intention is not to imply that “there is a simple physical relationship between the unit of account and a measure of value”; instead this applies only to money objects, which are defined to have a certain monetary value.

      As stressed in the paper, number and value are completely different things that are forced into a relationship through the creation of these money objects. Because number and value are fundamentally different, one consequence is that money exhibits dualistic properties (which is where the quantum analogy comes in). The relationship between value and price is something that emerges from the use of money, so is an emergent property which as the reviewer points out depends on a wide variety of social factors.

      The analogy between waves and particles relates to the dualistic real/virtual nature of money objects, which expresses itself in various ways, including the historical alternation between physical and virtual forms of money. The paper does not deny that “the unit of account, and the objects that it measures, are distinct” (if I am reading this correctly); indeed it points out the illogical nature of such an assertion. Also, the intention is not to argue that “money alone exists on the cusp of the world of real objects and the social world of value measures.” The paper is based on a book (The Evolution of Money) which goes into this in more detail, but for this paper I concentrated on the topic of cybercurrencies. I will amend the paper to make these points clear and address any confusion.

      Comment: On this last point, the author should be careful using examples from physics. Money, in either unit or object form, is a social relation and therefore operates not only in reaction to the reality of physical objects, but also in reaction to society’s understanding of money itself. Comparisons with waves and particles or magnetic fields do not capture this reflexivity—a magnetic field does not adjust its behaviour based on a revised understanding of itself.

      Response: I have argued elsewhere (e.g. in the cited book) that mathematical models fail to capture many basic properties of social systems, or for that matter of complex organic systems in general; and also that for historical reasons we feel very comfortable using mechanical analogies, but uncomfortable using analogies with quantum physics, despite the fact that the latter can actually be very useful. For example much economic theory is based on simple mechanistic analogies, with random perturbations and restoring forces. As acknowledged in the paper, the use of analogies from quantum physics is therefore problematic, but I believe it is justified in this case. My aim is not to draw an exact correspondence between money and physics, but to use physics as an analogy. In particular, the paper argues that money has dualistic properties which seem more comprehensible when we compare them with examples from physics. I will add some notes to clarify these points.

      For example, one manifestation of this dualism is that we can have two completely different theories of money, one (bullionism) which says, to paraphrase a little, that the only real money is gold, and the other (chartalism) which says that the only real money is state credit. The situation resembles the long debate over the properties of light, with one school claiming it was made of particles, the other it was made of waves, until the question was finally resolved by saying it was both at the same time, with the different aspects presenting themselves in different contexts. However, the reviewer’s point that analogies from physics have their limits is well-taken, and I will add a note to that effect.

      Comment: Finally, if traditional theories have trouble explaining ‘cybercurrencies’, then the problem may very well be with the existing theories of money, as the author states. But it could also simply be that ‘cybercurrencies’ are not, in fact, money. The fact that an object can be used to buy things does not prove that it is money—barter is a valid form of payment. In the example given, where Bitcoin is exchanged for a pizza, the author glides over the essential detail that the pizza was actually purchased with a credit card! Instead, the term ‘cybercurrency’ could be seen as a form of linguistic ingenuity, a kind of verbal mind trick. Perhaps the term ‘cybercommodity’ would be a better description of an object that is created by a process of ‘mining’ and can be used as a medium of exchange merely because of its novelty and pseudo-anonymous features.

      Response: I will add a line to clarify that, while that first pizza was indeed bought with a credit card, that event was just the first step in a process, and there were soon all kinds of things that could be bought with Bitcoin (not all of them legal, which was why the FBI closed down the Silk Road website!). However I would not agree with the idea that cybercurrencies are best seen as mind tricks (at least more than other currencies) or commodities. Not all cybercurrencies are mined in the same way that Bitcoin is (though of course they have to be produced somehow), or are more anonymous than cash, or are particularly novel anymore. It is my opinion that when you can use Bitcoin to buy Ether to invest in a Decentralized Autonomous Organization etc. we have to accept that this cyber-economy deserves to be taken seriously by the economics community.

      Indeed, the cyber-economy is serving as a kind of monetary petri-dish, allowing us to see how currencies get started and either perish or survive, and also to test out our ideas about money. Rather than being seen as curiosities that we can ignore if they do not conform to current theories (which in any case do not agree with each other), I believe that they represent a fertile area of study, and have much to teach us about money in general. I will amend the paper to better make this case.

      References

      Orrell, David; Chlupatý, Roman (2016). The Evolution of Money. Columbia University Press.

  • James Culham says:

    Thanks for the excellent reply, David; it certainly goes a long way towards clarifying the concepts for me. I look forward to seeing the revised paper, and would be happy to provide further comments if you feel that they might be helpful. In the meantime, it looks like I should get a copy of your book!

  • Annalisa Rosselli says:

    I have found the discussion between the author and James Culham very interesting and helpful in clarifying the author’s point of view. This was necessary because, although the paper is well-written and the analogies with physics are always well-thought-out – its implications for monetary theory and policy are not easy to grasp, perhaps because of the novelty of the approach. Thus, I am not sure that the quantum theory of money helps us clarify the enigma of cybercurrencies that puzzled Greenspan and worries central bankers. We may agree that “The core idea of the [Quantum] theory is that money objects are entities (which can take many different forms) which have an assigned monetary value, and that prices emerge from the trade of these objects.” But the problem remains: how and why does this trade begin? How come that “monetary objects” are traded for things that have value, whatever this means? History and economic theory give different replies to this question, but in the case of cybercurrencies the reply cannot be that bitcoins draw their value from network externalities – as the author says – because this holds for all sorts of moneys. Anything can be a monetary object as long as 1) has a number attached to it (I agree with the author) ; b) there is a critical mass of agents who accept it. But how is this critical mass formed? The author seems to suggest (I am not sure about this point) that we should stop raising this question. Money exists, it is measured and measurable. Let us stop worrying about where the value of money comes from, because the answer is “it depends”. Instead, we should focus on money’s main function, the creation of monetary prices. If this interpretation is correct, I would like the author to be more explicit. If not, modify the paper in order to avoid this misinterpretation.

  • David Orrell says:

    My thanks to the reviewer Annalisa Rosselli for her useful comments. I have incorporated my response into a revised version, but to summarise, my aim is not to suggest that we should stop investigating how money systems get started or how a critical mass of users is achieved. Describing money systems as a kind of emergent phenomenon, as the paper does, might sound a little dismissive, as if there is no point in exploring further the dynamics of their creation or use, but this is far from being the case. Exploring how money systems grow or are imposed, and either reach a critical mass or fail, is a fascinating area of study. As the reviewer points out, Bitcoin may draw its authority from its network of users, but in a way the same can be said of any form of money; the difference is that conventional currencies get a boost from the state. The recent and ongoing emergence of a diverse ecosystem of cybercurrencies offers economists a unique opportunity to study the process by which currencies come into use, with governments, corporations, and other organisations all playing a role. I have modified the paper to make these points and avoid any misinterpretation.