The Laws of Money
In this Daily Prophecy, I will recount some principles of the information theory of economics that I taught to my new group of virtual “Gilder Fellows,” and a hundred or so other subscribers who signed up on Zoom for my two-day program at the Discovery Institute last week.
As I have written before, with its market cap of $69 billion and its subsidiaries in China, Zoom is a symbol both of the genius of Silicon Valley where it resides in San Jose and the interdependence of US and Chinese technologies. In an obsession with China, trade warriors in Washington are undermining most of the leading US technology companies, including our critical path semiconductor capital equipment leaders such as Applied Materials.
But let us zoom beyond the China issue and contemplate the increasing socialization of the US economy in the name of controlling and regulating trade and technology. When the government controls the outcomes of an economy, whether to fight the chimera of climate change or to battle the spread of a virus, it moves the economy toward “Life After Capitalism.”
Real Capitalism derives from the Latin word “caput,” meaning head, conveying a mind-based system. It is not the system named by Karl Marx in 1852 in the first volume of Das Capital and depicted as an engine of greed. A free economy is not an incentive system, based on carrots and sticks, but an information system, based on human creativity.
Creativity always comes as a surprise to us. If it didn’t, we wouldn’t need it, and socialism would work. Recognition of the centrality of surprise in entrepreneurial growth leads us to Shannon’s information theory which defines all information as surprisal, or entropy.
In the information theory of economics, once you grasp knowledge as wealth and growth as learning, the key theme unifying it all is money as tokenized time.
Let me sum up its laws:
- Material resources are intrinsically abundant and changeless — the atoms of the universe, as available to the caveman as to us.
- In order to guide and gauge the course of economic tradeoffs and transactions, priorities and goals, money must be scarce. What remains scarce when all else is abundant is time. Time is the fundamental scarce resource pervading, governing and constraining all economic activity.
- Money is the way the essential scarcity of time is fungibly translated into all the transactions, investments and valuations of an economy.
- Money is not wealth. It is a measure of wealth. It is a measuring stick of value, not its vessel. It is a metric, not a commodity. You cannot simulate real money by a basket of commodities, as many economists propose. A measuring stick cannot be part of what it measures.
- The true prices in economics are time-prices: the time to earn the money to buy a good or service. When you run out of money, you are really running out of time to earn more. Time-prices can also gauge the time to produce a good or service. Both are measured in hours, minutes, and seconds. Across an entire economy both are the same. Supply is demand.
- Time-prices measure in one universal number the effects of economic progress, both the increase in real wages and the drop in real costs. Time-prices obviate the consumer price indices, GDP deflators, and purchasing power parities that muddle all existing economic data.
- The difference between the time to earn the money to buy a good or service and the time to produce it registers its profitability.
- Money is time, but time is not money. Money must be invented and managed. Money is tokenized time, time as tokens of value. Time is not a commodity but a measure of all commodities.
- The two ways money is conventionally managed are by quantity and by price. It can be fixed in supply or fixed in value. If it is fixed in supply, as monetarists and central bankers widely recommend, it becomes volatile and unsettled in price and cannot serve as a vessel of information. It becomes a vessel of speculation rather than a unit of account and transactions. The only path to stable money is to fix the price against a physical constant — time.
- The most successful form of money invented by humans is gold. The time-price to mine or produce gold has scarcely changed in millennia, as a gold rush pioneer with a sieve in a stream could pan a gram of gold as quickly as a giant automated mine of today that takes 10 years to install and open. The time-price to buy gold has changed as a result of economic progress — the growth of knowledge and learning — or as a result of government manipulation.
- The rise of the digital economy and the invention of the blockchain by one Satoshi Nakomoto provide a unique opportunity to reestablish money as a source of information rather than a tool for speculation.
- Time-prices offer a new way to think about inequality. Time is equally distributed to all, 24 hours per day. But through the millennia, time-prices have dropped exponentially. Time to acquire food, for example, has dropped from eight or more hours for the caveman to eight minutes or less per person to acquire a thanksgiving dinner. As Discovery Fellow Gale Pooley has demonstrated, the time-price to acquire rice as food for a day in India has dropped from about seven hours in 1960 to under one hour today, while the time-price of a comparable allotment of wheat in Indiana has dropped from one hour to 7.5 minutes. As Pooley points out, this means a striking reduction in inequality. The Indiana wheat purchaser has gained some 52 minutes to do other things while the Indian peasant has gained six hours and two minutes.
Hundreds of attempts have been made to launch new digital monies but none has yet succeeded. All have foundered on a failure to grasp the crucial principles and laws propounded here.
When investing in cryptocurrencies, the central rule is to assure that it follows the laws of money as time. Bitcoin is mistaken in capping the supply at 21 million. Time is not capped but runs on into an essentially infinite future.
The supply of money must be elastic, governed by the willingness of entrepreneurs to endure risk and pursue new opportunities and the readiness of bankers or investors to fund them. As long as debts are not guaranteed by government, they can yield learning and economic growth.
Government guarantees for the downside risks of banks, assuming they are “too big to fail,” have contributed to the US move to “Life After Capitalism.” A loan guaranteed by government cannot produce real growth or learning.
The key to learning, as philosopher Karl Popper showed, is “falsifiability.” Unless a scientific proposition is couched in terms that can be refuted, it is not falsifiable and cannot yield knowledge or learning.
Similarly, unless a business can go bankrupt, it cannot produce learning or growth. Efforts by government to guarantee economic growth, in fact, prohibit growth by suppressing learning.
Editor, Gilder’s Daily Prophecy