Blood money, digital fool’s gold, and the second law of thermodynamics

September 25, 2016 § 24 Comments

The subject of money is pervaded by all sorts of unreal mysticisms.  If you want to better understand economic reality it is important to hunt down these unreal mysticisms in your mind and kill them.

All economic exchange is barter.  If you get nothing else out of this post, take this one concept to the bank.  All exchange is barter.

Attempts to segregate property bartered in marketplaces into ‘money’ versus ‘other property’ is one of those fuzzy social conventions which is fine as long as it isn’t taken too seriously.  Taking ‘money’ as something categorically distinct from property in general distorts and obscures reality.  Any property at all might be used as money (sunk in exchange); and even property conventionally thought of as “money” — coins, bills, and the like — can be displayed or put to other uses than exchange.  This was all perfectly obvious to Aquinas, but modern people are frequently incapable of seeing the obvious when it comes to the subject of money.

We typically think of money as a special kind of thing which can be easily transferred and exchanged. That is fine as long as the term “money” denotes property with the further connotation that the property is easily transferred and exchanged.  Money can be thought of as a kind of property fuzzily distinguishable from other kinds of property by its ease of exchange.  But it becomes insanity when “money” is viewed as categorically distinct from property in general.

The term “money”, then, does not really describe a specific thing or class of things.  It describes a role that some property takes on, some of the time, in economic life.  Some property is more suitable in this role than other property.  If you transfer or spend some property – exchange it for different property – that property takes on the economic role we call “money”.

The property actually exchanged in barter falls into one of two categories: securities and non-securities.  (As it happens, securities are for the most part very easily transferred and exchanged versus most non-security property).

Securities derive their value from the property they impair and the rights involving that property which they assert, as opposed to ‘the paper they are written on’.  Yes, ‘the paper it is written on’ can be a kind of property in itself, or a sort of meta-property.  But you can’t drive your car’s pink slip to work.

Non-security property derives its value from its own objective attributes[1].

Bitcoins and other cryptocurrencies are not a security. They are like virtual gold, except that unlike actual gold they have no useful objective properties at all other than the value intrinsic to authenticated records of wasted computation. Bitcoins are a kind of digital fool’s gold, entitling the owner to nothing other than the pleasure and bragging rights of virtually possessing them, rather like the high scores on your favorite video game.

Now it is true – because human beings are both ignorant and irrational much of the time – that you can often trade worthless things for valuable things under the ‘greater fool’ theory, based on fad and fashion and deluded/false economic theories and the like. Whether someone wants to apply the label ‘money’ to the worthless things traded to ‘greater fools’ is neither here nor there when what we are after is an accurate understanding of reality: it doesn’t turn those actually worthless things into actually valuable things.

Like the market price of gold, the market price of bitcoin is radically distorted when measured against its objective attributes qua property. The difference in the case of bitcoin is that the market price has even less reality baked into it: at least gold actually has objective attributes which anchor its economic value in reality, and has been used as a raw material for making artifacts for thousands of years.  Cryptocurrencies are not an escape from the moral and ontological anti-realism of modern finance: they are its apotheosis.

This brings us to the subject of workers and wages. All exchange is barter, and the exchange of work for pay is no exception.

As I explain in the Usury FAQ and elsewhere, a worker is owed wages not simply for time elapsed but for what he, through his own powers exercised under agreement with his employer, makes actual. Because we are finite beings and can only do so many things in our lifetimes, one might poetically refer to wages as representative of human life. It is true enough that cheating workers out of their just wages is wickedness several times over, an unholy combination of robbery, dishonesty, fraud, taking advantage of the good will and often inferior position of one’s fellow man, and destroying his chance to do something different with his finite time alive in this world. (A sudden calamity preventing payment of wages is a different story of course).

But poetry about money representing human life probably obscures more than it reveals here. Burning cash or destroying other kinds of property isn’t murder.

Consider a car mechanic. He works on your car for agreed rates. Until you pay him he retains (whatever the positive law may assert) the moral equivalent of a “mechanic’s lien” against your car, the property into which he put his labor.

Consider a barber who just cut your hair. The tacit agreement is that you have money in your pocket to pay him. If you don’t, then see Question 49 of the usury FAQ for the different kinds of scenarios.

Examples can be multiplied, but note that none of this imparts mystical spiritual human qualities to some particular kind of financial security (e.g. fiat dollars), or to some other etherial being labeled “money”.

Setting aside assertions of the positive law (taxes, etc), there is no moral requirement for a worker to barter for fiat dollars in exchange for his work. Any property – or even trading one kind of work for another – will do. The idea that there is something super special about certain securities labeled ‘money’ that make them ‘wages’ and thus ‘a fungible representation of human life’ is really just errant nonsense, if it is taken literally.

Finally, we come to the idea that inflation or deflation in the market price of currencies versus other kinds of property is a moral travesty, a sin against workers, an offense against the common man: in short that people (as long as they are not wealthy) are morally entitled to have the purchasing power of their property preserved over time as long as that property is of the mystical class ‘money’. This atrocious idea really needs to be hanged in the city square where everyone can see, its broken and destroyed body beaten and desecrated to make it clear how utterly stupid and destructive it is.  (It does not follow that ‘currency debasement’ is never immoral, of course).

In general people who think that they are entitled to the magical preservation of the buying power of their own property against the relentless tide of the second law of thermodynamics are in the grip of usurious entitlement. Someone ought to slap them out of it, for the sake of both the common good and their own good.


[1] This of course is not (and is not intended to be) a complete characterization of, or even a particularly adequate partial characterization of, economic value.  It is merely an observation that any attempt to characterize the economic value of property accurately must take into consideration the objective attributes of that property. In general, economic value cannot be reduced to nothing but subjective human preferences as expressed in current market prices.

§ 24 Responses to Blood money, digital fool’s gold, and the second law of thermodynamics

  • Josh says:

    But what if the objective attributes of a piece of property are co text depends dependent. Copper is more useful in a society that has indoor plumbing. A blu ray player is objectively more valuable than an hd DVD player, not because of its own characteristics, but because in a spontaneous convergence to a Nash equilibrium, all the movie companies decided to put out their movies on blu ray. There similarly exists a tendency for people to barter in a particular piece of property. This again the result of a Nash equilibrium which does not require anyone to behave irrationally. Whatever the piece of property tends to be valued for its use in exchange. Even though these characteristics are situationally dependent, it is still being valued for its objective characteristics, i.e. It’s characteristics that make it a good item for people to use as a means of exchange and hoarding for future exchange. This is what everyone means by “money” even if they can’t articulate it. It’s a natural phenomenon like government, or marriage. I have no particular love for Bitcoin and I am in agreement with essentially everything else you said.

  • Zippy says:

    That property has greater or lesser utility based on context is uncontroversial.

  • Josh, note that according to Aquinas (Summa Theological, II-II, 77.1) the just price of a thing depends not on its usefulness to the buyer, but on the cost of its production or the harm which would occur to the seller by its loss.

  • vishmehr24 says:

    Is second law of thermodynamics applicable in economics? Can it be stated in economic terms?

  • Josh says:

    zippy,

    Why can’t piece of property have utility as money depending on context thus justifying the higher price in a way that doesn’t depend on “greater fools” or irrationality?

  • Zippy says:

    Josh:
    Because money gets whatever value it has – whatever anchor in reality it has – from either its non-money utility or by reference to property other than itself. The former is true of precious metals, and the latter is true of currency and bank deposits.

    The idea that money is valuable for its utility as money, without reference to any other property, is obviously circular.

  • fjwawak says:

    The term “money”, then, does not really describe a specific thing or class of things. It describes a role that some property takes on, some of the time, in economic life.

    For me that has clarified the question of money even more.

  • ignacy says:

    Zippy,

    You state that:

    All exchange is barter.

    True, all transactions are essentially exchanges of one good for another, and I’m agnostic on the distinct ontological status of money qua money, but monetary transactions have a some additional practical qualities that are different than those which are most commonly referred to as barter. The first one is that in monetary transactions there is a unit of account, or numeraire, involved, which is most often absent in a barter transaction. This unit of account usually serves as a measure of value. Secondly, monetary transactions involve a medium of exchange, which is not valued for its intrinsic qualities, but precisely for its ability to account for value and for further exchange.

    Because money gets whatever value it has – whatever anchor in reality it has – from either its non-money utility or by reference to property other than itself.

    What about liquidity premium, then? Obviously, more liquid asset will have a higher price than less liquid one, e.g. on-the-run 30-year Treasuries vs. off-the-run Treasuries spread is not explained by difference in accrued interest. I presume you are aware of the significance of such effects, but I don’t really understand why you insist that only intrinsic value (or, to put it in another way, the value which would remain if all markets were immediately closed afterwards) should be taken into account, while clearly something being money does imply some additional utility, namely the ability to engage in future transactions more swiftly.

    The idea that money is valuable for its utility as money, without reference to any other property, is obviously circular.

    It isn’t. If I evaluate an asset for its utility as money, I base my evaluation on the estimation of its future money-like qualities (and these estimations are usually based on past performance and past qualities of that asset). So there is neither synchronicity nor circularity in valuing money based on its liquidity or breadth of liquidity effects. True, to gain liquidity, an asset hase to have non-monetary utilities somewhere at the beginning, but this doesn’t imply that that asset derives its current value solely from that.

    What’s more, it may need to have only the resemblance of value – e.g. it may be pumped, mass-distributed or so, just as it was in the case of Bitcoin, which definitely was only a set of cryptographically authenticated records of wasted computation circa 2009, but now it is worth much more than that. If you start a blockchain, with the same mechanisms, or even fork the Bitcoin blockchain, it will be worth zero, but it doesn’t prove the zero value of Bitcoins, which now comes from the significant network effects combined with monstrous hashing power, amounting to the Bitcoin’s blockchain records being extremely credible.

    Finally, contrary to your theory, stated elsewhere, which says that the value of fiat dollars as money comes from them being tax vouchers, I have never seen taking that into account when assessing fundamental value of currency (e.g. by FX markets analysts). I’m sure that some value comes from this ‘tax voucher’ fact, but it’s far from clear that it is the only source.

    Moreover, there is at least one example of currency, which although started as a ‘tax vouchers’, was subsequently disowned but nevertheless functioned as medium of exchange. This was Iraqi’s so-called “Swiss” dinar. To quote,

    Despite having been forsworn by the CBI, Swiss dinars did not become valueless. Along with US dollars, they continued to be used as a medium of exchange in northern Iraq. The fact that Swiss dinars were fixed in supply — the Kurdish government did not attempt to print new notes — helped sustain their price. Through the 1990s and early 2000s, the value of the Swiss dinar actually increased.

    Again, I find it hard to believe that you, given your financial knowledge, are unaware of at least some of the arguments I listed above (which are attempts to state more or less the same viewed from different angles), so there may be some fundamental misunderstanding going on.

    P.S. Apologies for double-posting, the lack of preview significantly impairs my ability to post well-edited comments.

  • Zippy says:

    ignacy:

    The first one is that in monetary transactions there is a unit of account, or numeraire, involved, which is absent in a barter transaction.

    Quantity isn’t absent in barter transactions. 5 shares of Google for one motorcycle is no less quantitative than a barrel of apples for a half barrel of oranges, or 5 dollars for one Starbucks latte.

    This unit of account usually serves as a measure of value. Secondly, monetary transactions involve a medium of exchange, which is not valued for its intrinsic qualities, but precisely for its ability to account for value and for further exchange.

    That is the mythology. It is arguable though that the less people think about the measure itself as money (thereby distorting the measure itself through their collective illusions), the more accurate the measure. I’ve mentioned the Big Mac Index before, for example.

    What about liquidity premium, then? Obviously, more liquid asset will have a higher price than less liquid one, …

    Sure. I’ve discussed that before, when I described why PC tyranny is good for big business and bad for small ongoing concerns, because it creates liquidity in ‘human resources’.

    I don’t really understand why you insist that only intrinsic value (or, to put it in another way, the value which would remain if all markets were immediately closed afterwards) should be taken into account

    I don’t insist on that. I insist that all of the value of bitcoin and the like is fashionable bubble hype layered over authenticated records of wasted computation.

    True, to gain liquidity, an asset has to have non-monetary utilities somewhere at the beginning, but this doesn’t imply that that asset derives its current value solely from that.

    Right. Different kinds of property have varying degrees of liquidity[1] and therefore perform the ‘money’ function more or less often, better or worse, etc. Securities by their nature tend to be used as money more often than fixed property precisely because of liquidity.

    It is true that ignorant people will sometimes continue to trade in something even after that something has become objectively worthless, or when it has always been worthless from the beginning. This is the ‘greater fool’ effect.

    [1] UPDATE: And uniformity for that matter, two apples being more alike than two motorcycles, deposits at different banks with $100 face value being even more alike still, and two shares of GOOG or two $100 deposit accounts at the same bank being about as close to identical as particulars can be.

  • Zippy says:

    ignacy:

    P.S. Apologies for double-posting, the lack of preview significantly impairs my ability to post well-edited comments.

    No problem. I responded to the first one, so hopefully I didn’t miss anything crucial.

  • ignacy says:

    Zippy,

    It is true that ignorant people will sometimes continue to trade in something even after than something has become objectively worthless, or when it has always been worthless from the beginning. This is the ‘greater fool’ effect.

    I think that I begin to understand what you mean. To paraphrase your argument, you state that indeed there may be some liquidity premium on otherwise intrinsically valuable asset (and the more uniform or fungible asset, the greater the premium can be), but one this liquidity premium is attached to to completely worthless assets (or significantly exceeds its intrinsic value), then it becomes the ‘greater fool’ effect.

    Assuming that I paraphrased you correctly, this implies that the difference becomes merely in degree, not in kind. This may also ignore the fact that our estimations of the liquidity premium may be incorrect in plus as well as in minus, and that liquidity effect may be so stable and strong that even when the underlying asset to which it is attached is intrinsically worthless, the trading in that asset does not resemble the ‘greater fool’ trading commonly observed during bubbles.

    I chose to say that an asset may be ‘intrinsically’ (rather than ‘objectively’) valuable, as I aim to point that liquidity premium, although extrinsic to the asset’s qualities, is real and no less objective than, say, asset’s convertibility (or lack thereof). It will certainly depend on the asset’s intrinsic properties, but ultimately depend on the market (or ‘network’) in which it is traded (that is, on quality of that market, quality of participants, market makers etc.), which is the source of its liquidity.

    To continue my paraphrase of your words, you would probably reply: “sure, the market may be very good and liquid, but if it’s trading in something worthless, then it is a clear sign of irrationality of its participants”. To that I respond that it may be also a sign that the asset traded isn’t really worthless and you may be mistaken in your assessments.

    Bringing this back to Bitcoin, an asset may be worthless at the beginning (or in Bitcoin’s case, very close to worthless), but it doesn’t mean that it is worthless now. Blockchain filled with records from about 7 years and backed by enormous computational power is different than the just-started blockchain. The difference is in degree, sure, but it is plausible that even an empty blockchain has tiny albeit non-zero value, just as, say SWIFT network setup is worth something even if no bank actually uses it.

  • Zippy says:

    ignacy:

    Assuming that I paraphrased you correctly, this implies that the difference becomes merely in degree, not in kind.

    Sure. The colloquialism ‘bubble’ doesn’t imply that the property traded doesn’t exist at all. It implies that the property traded is priced far out of proportion to its actual worth. (This presupposes metaphysically that there can be a difference between the current market price of some property and the actual worth of that property. I presume that nobody is going to deny the occurrence of asset bubbles).

    … liquidity effect may be so stable and strong that even when the underlying asset to which it is attached is intrinsically worthless, the trading in that asset does not resemble the ‘greater fool’ trading commonly observed during bubbles.

    Until it pops, sure. Investors in ponzi schemes and the like have to assume that they will get their money out before the music stops, and it is notoriously difficult to predict just when bubbles will pop.

    This of course raises both ethical and financial issues. The fact that someone is willing to buy something from you for a price does not in itself justify selling it to him at that price.

    To that I respond that it may be also a sign that the asset traded isn’t really worthless and you may be mistaken in your assessments.

    Being human, I can always be mistaken about pretty much anything. But I would counter that the fact that some people happen to be buying and selling authenticated records of wasted computation for a particular price is as likely to constitute evidence of their financial stupidity as it is to constitute evidence that the combination of ARWC’s intrinsic value with a liquidity multiplier is in fact worth what they think it is worth.

    Blockchain filled with records from about 7 years and backed by enormous computational power is different than the just-started blockchain.

    Sure. It is an authenticated record of a great deal of electricity converted into heat by overclocked silicon.

  • ignacy says:

    This presupposes metaphysically that there can be a difference between the current market price of some property and the actual worth of that property. I presume that nobody is going to deny the occurrence of asset bubbles

    Obviously I do not deny the existence of asset bubbles, but “nobody” is a too strong qualifier.

    Sure. It is an authenticated record of a great deal of electricity converted into heat by overclocked silicon.

    I should have stressed that by enormous computational power I mean current (and estimated) computational power which guarantees that the subsequent new records in the ledger will be very credible and irreversible.

    Until it pops, sure. Investors in ponzi schemes and the like have to assume that they will get their money out before the music stops, and it is notoriously difficult to predict just when bubbles will pop.

    Still, we have to be somehow able to make a difference between unstable level of the liquidity premium (aka ‘bubble’) and a stable (or long-term, or fundamental, or objective) level.

    This of course raises both ethical and financial issues. The fact that someone is willing to buy something from you for a price does not in itself justify selling it to him at that price.

    True enough. That’s why I try to dig into this ‘liquidity’ question in general and Bitcoin in particular. Perhaps you could, by the way, share your thoughts on just price theory/theories?

    To restate my position:
    1) it is possible that an asset has an objectively justified liquidity premium,
    2) to say that an asset price is irrationally high (or that there is a bubble), is to say that it is beyond its intrinsic value as well as its stable level of liquidity premium,
    3) Bitcoin may or may not be a bubble (personally, I believe it isn’t now – though it used to be multiple times – given that its price behavior is manifestly different than bubbles known to me), but its intrinsic value is higher than zero and its fundamental level of liquidity premium is also higher than zero.

  • Zippy says:

    ignacy:

    Obviously I do not deny the existence of asset bubbles, but “nobody” is a too strong qualifier.

    I should have said ‘nobody sane’.

    I should have stressed that by enormous computational power I mean current (and estimated) computational power which guarantees that the subsequent new records in the ledger will be very credible and irreversible.

    As far as I know, bitcoin does not represent legal title to a distributed data center nor legal entitlement to the continued operation of any specific hardware owned by others.

    Various people own their various systems independent of their ownership of bitcoins, and it is a basic error to conflate the two.

    Still, we have to be somehow able to make a difference between unstable level of the liquidity premium (aka ‘bubble’) and a stable (or long-term, or fundamental, or objective) level.

    One of my own heuristics is that when the property in question is worthless in itself, any liquidity multiplier is just multiplication by zero. Property that is essentially trash in itself selling for non-trash prices confirms an irrational liquidity premium.

    Perhaps you could, by the way, share your thoughts on just price theory/theories?

    As far as I can tell our situation is the following:

    A) There is such a thing as both just and unjust pricing in particular cases.

    B) A general theory which provides a sufficient description of when prices are just or unjust in general does not exist.

    I can give examples of just and unjust pricing, much as I can give examples of cats and dogs. So the distinctions are real. But see (B), and this post.

    1) it is possible that an asset has an objectively justified liquidity premium, …

    Agreed.

    2) to say that an asset price is irrationally high (or that there is a bubble), is to say that it is beyond its intrinsic value as well as its stable level of liquidity premium,…

    That depends in part on what you mean by “stable”, I suppose. Though I probably shouldn’t even grant that much.

    Human beings have a thoroughly demonstrated capacity to persist in irrationality for quite a long time, generations even, both as individuals and as communities. So the simple fact that an insane idea persists over some period of time (e.g. the pricing of bitcoins by the self-selected group of people who trade in them) does not mean it is not insane. See (e.g.) Islam, liberalism, etc.

    In general the idea that stability in price confirms objectively rational economic valuation is just wrong, as far as I can tell. Keynes (IIRC) was quite right that the market can stay irrational for a lot longer than one can stay solvent, and that in the long run we are all dead; though I almost certainly disagree with the bulk of the prescriptive conclusions he draws from those observations.

  • vishmehr24 says:

    Zippy,
    If paper money is a security–and represents claims on the real property-as it is indeed declared on the paper itself-then govt printing more paper money leading to the diluation of the claim is a fraud.
    Now, the principle is that the lender should be made whole. But how could he be, if one insists that one would replay 100 paper dollars borrowed in 1980 with exactly 100 paper dollars in 2016?

    Your oft-repeated complaint of “usorious mindset” is revealing. Does the sin of usury not exist in the world today that you have to talk not about the actual usuers but merely about the usorious mindset (which is no sin).
    In your pictures, the borrowers commiit no sin, being just victims. And the lenders are institutions hence no person is actually guilty of the sin of usury. Then why should Church spend its breath on a sin that no one committs?

    Your attack on the usourius mindset itself is strawmannning. These people are not after preservation of their property but against the depradations of a self-aggrandizing govt that has not their best interests in mind.

  • Zippy says:

    vishmehr24:

    … then govt printing more paper money leading to the diluation of the claim is a fraud.

    I’ve explained many times why that is not (necessarily) the case: why it depends upon what the printed money is used to buy.
    Does Google always and necessarily commit fraud or do other wrong when it issues new shares of Google stock?

    Does the sin of usury not exist in the world today that you have to talk not about the actual usuers but merely about the usorious mindset (which is no sin).

    There is plenty of actual usury in the world today, as I have explained many times. There are also many people who feel entitled to the preservation of the purchasing power (based on some unspecified measure) of their property, and are filled with high dudgeon that the purchasing power of their property (as long as it is ‘money’) often erodes.

    Finally, the principle in mutuum lending is that it should only be done as charity or friendship: it is a gift, not a financial investment. ‘Friendship’ as financial entitlement which hedges against inflation or other property value fluctuations is no friendship at all.

  • Zippy says:

    If you want to hedge against inflation you should do so by purchasing property, not by making mutuum loans. The idea that you ought to be able to hedge against inflation by making mutuum loans arises from a usurious mentality: it is one step prior to actually committing usury, that is, actually making an interest bearing mutuum loan.

    Consider divorce. The idea that you ought to be able to divorce if you are unhappy is a “divorce mentality”. And the idea that you are entitled to interest on mutuum loans – for any reason at all other than borrower fraud or other crimes committed by the borrower – is a “usurious mentality”.

  • vishmehr24 says:

    Zippy,
    “Does Google always and necessarily commit fraud or do other wrong when it issues new shares of Google stock?”

    It has no bearing on whether Govt committts a fraud by printing money.
    For one thing, nobody is obliged to buy Google stock but people are obliged to use Govt money. And that Govt money is simply not analogous to Google stock and that govt is analogous to Google is simply an inadequate view of Govt.

  • Zippy says:

    vishmehr24:
    I’m not seeing any evidence that you understand what you are criticizing.

  • […] you will find is that prices – the relative trading ratios of different goods and services – are not static.  And you will find that ethically […]

  • […] Alex in a previous thread, is a concrete picture of the relationship between tax law and the real value of a dollar.  This unboxing of a fiat dollar is worth elevation into an easily referenceable post, so here it […]

  • […] we’ll get the simultaneous assertions that the nature of money has changed (as if that were even relevant), that simple mutuum (personally guaranteed) loans are […]

  • […] A ‘gold standard’ dollar is the same kind of thing.  It is a financial claim against the balance sheet of the sovereign; the financial rights conferred are the satisfaction of debts owed to the sovereign, in particular tax liabilities[2].  The difference is that the gold standard irrationally presupposes that a substantial portion of the sovereign balance sheet must or should be made up of gold — an otherwise not very noteworthy kind of property, property which while fairly durable sits unproductively in a vault where it destroys economic value in the demands that it places on its defense and maintenance against the universal tide of entropy. […]

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