BOOK REVIEW News Weekly
Money and quantum physics
, February 11, 2017
THE EVOLUTION OF MONEY
by David Orrell and Roman Chlupaty
Columbia University Press, New York
Hardcover: 320 pages
Price: AUD $72.50
Reviewed by Colin Teese
Who would have thought of linking money and quantum physics? Well, Orrell and Chlupaty have done just that in The Evolution of Money, perhaps the best book on money I have ever read.
David Orrell is an applied mathematician by training and a writer by choice. Having read The Evolution of Money, it is hardly surprising to find that his other books include How the Science of Complex Systems is Transforming Economic Thought.
Yes, economic thought. But what about economic practice? The problem is that economic practice is embedded in politics (despite what most economists would prefer to believe), while science is less so. Orrell’s co-author, Roman Chlupaty, is a journalist and consultant on the global economy and politics.
Books on money have streamed into our literature over recent decades. Most are long on the narrow history of money and short on information about how and why it became what it is today.
Orrell and Chlupaty have developed a substantial bibliography to support the views they put to us in what turns out to be a brilliant book. It is noteworthy that within that bibliography relatively little is drawn from the mass of literature specifically about money.
The title of the book gives us a clue as to why. The authors have set themselves the dauntingly difficult task of explaining money, as it were, from the ground up, cutting the cant that has surrounded the subject for centuries. Blending a happy combination of skills and experience, they have recorded a satisfying and entertaining account of how money has impacted, of course, on economics, but no less on politics and society.
But that is not the end of it. They make a persuasive case, at least to this reader’s satisfaction, on how the evolution of money has tracked that of science – with special reference to 20th-century developments in quantum physics.
20th-century research resulted in scientific thought moving away from what was called traditional Newtonian “linear” thinking.
Proceeding to conclusions on the basis of “linear structures” (for example, 1+2=3) could no longer alone explain what was happening in much more complex scientific systems such as quantum physics.
What apparently interested David Orrell, in particular, was the fact that economics and money had been caught up in the same phenomenon. The scientific reaction was to take on board and adjust to the fact that complexity was reshaping the way they approached their discipline.
Complexity was reshaping 20th and 21st-century economics in the same way. However, research in economics and money, subject to the same influences, chose to remain committed to 19th-century lateral thinking.
That orthodox economics reacted in this way is hardly surprising. Nineteenth-century economic thought, from which current orthodoxy is derived, was locked into a position that necessarily rejects the idea of complexity or even evolution in economics. From the start, money was not part of their thinking. It was dismissed as having no more than an intermediary influence over the operation of the real economy – rather like barter, which they believed it superseded. Money was little more than a more convenient system for the exchange of goods between parties, effectively replacing barter, whereby exchanges were made between parties with actual goods or services.
Orrell and Chlupaty contradict those assumptions. Money is an essential element of economics; over time it has evolved into a complex system inextricably woven into the process of making and distributing goods and services to the community in ways that most economists have chosen to ignore. Barter, the authors point out, did not precede money; indeed, money in various forms has been with humankind as long as there have existed rulers and ruled.
In an evolutionary way, the power and influence of money has enjoyed steadily widening reach. It is now deeply embedded in the economic, political and social fabric and interacts with those various elements in complex ways.
Neither author specifically says so, but it is truly remarkable that the power and influence of money still remains so little understood. Orrell and Chlupaty expose this disappointing truth while, at the same time, dispelling many widely held myths about money.
The ordinary reader should not be put off. Money might be complex, but it is not beyond understanding, providing we don’t allow orthodox economic thinking to tie us in knots.
Orthodox economics must ignore the central position of money in economics. Orthodoxy insists that the discipline be recognised as pure science – like physics – and, as such, be treated as if divorced from social and political considerations.
Accepting the reality that money had its source in the political acts of governments or kings, and was from the very beginning as much part of society and politics as economics, would mean giving up the idea of a direct link between economics and science. Neither could it continue nursing the idea that economics was a simple system of ironclad rules, beyond the reach of government influence.
Orrell and Chlupaty, of course, totally reject the orthodox position. For them, money’s complexity in its own way is as complex as quantum physics. Where money is concerned everything influences everything else. It also has many different forms.
If we own a bunch of notes or coins with numbers on them, these are the unit of account our government has decided upon. They are called dollars. Most transactions entered into will be settled in that unit of account. Accordingly, the Australian dollar is also the measure of wealth used by all Australians, from the richest to the poorest.
Is the dollar a store of value? No. In effect nothing can be a store of value, because “value” is a subjective term. The price of goods and services varies, sometimes daily, in line with selling and buying pressures.
To complete a transaction buyer and seller must agree on how many dollars will buy the goods and services on offer. This remains true whether the money is real (notes and coins) or virtual (electronically transmitted). Normally we exchange the nation’s unit of account (dollars) for goods and services – we call that commerce.
From whom do we get our money? Easy: we get it from our employer in return for work. But doesn’t he need to get money to pay us? Yes, and that’s the interesting part. The money he is able to use in his business and with which he pays his employees comes from the government.
Our government has a monopoly over the creation of dollars. In practice it allows private banks to create such money on its behalf. Banks create money by crediting sums to borrowers accounts. These actions are, as necessary, backed up by overdrafts that the banks maintain with the Reserve Bank.
That’s one way money gets fed into the economy. Most of this is not notes and coins, but virtual money, fed into accounts of businesses and individuals maintained at banks. Most of the spending will be virtual as well.
There is a second way money gets into the economy: through government spending. We have been conditioned to regard this as bad. But think about it: what happens when the government spends? Either it buys things, in which case it pays money into the accounts of those who supply the goods or services; or it employs people, and their wages or salaries are spent or saved into the economy.
By these means, more goods and services are produced and sold. Economic wealth is created. In fact wealth cannot grow without the injections of money needed to make sure all available productive resources are fully utilised.
Of course the way in which this all plays out is more complex than the above outline suggests, so it is understandable that Orrell and Chlupaty insist that a money economy cannot be properly understood and managed with the simple tools orthodox economists (along with the policy advisers and politicians who listen to them) insist on using.
From all this comes a suggestion.
A reasonable and benign dictator might demand that those engaged in activities relating to economic management should, as a condition of employment, be compelled to read The Evolution of Money and pass a written examination based on an understanding of its contents.
Colin Teese is a former deputy secretary of the Department of Trade.