Money, Capital, And Social Scalability
Part IV of the Bitgenstein Serialization
Do we necessarily want the same proportion of time and energy back at some point in the future? What if some proportion of time and energy will produce less in the future than it does now? What kind of garbage utility is that giving us?!
Before wrapping up, and to set the stage nicely for Parts V through IX, I want to explore arguably the direst flaw of the semantic theory. The economic change catalysed by money has important consequences for money. A theory of money that ignores the possibility of change blinds itself and its adherents to the most interesting aspect of its own alleged subject matter. A new money that advantageously plays to these possibilities will have an ace in the hole for the long term that may help it overcome the uncertainty it generates for itself in the short term — all of which will fly completely under the radar of the semanticists.
Let us start by thinking about how and why such garbage utility could come about. A natural disaster is perhaps a clean example once again. What we assume has been destroyed is essentially tools. If we once had a tractor that was battered by a hurricane, we will now need to use a plow, which will take much more time and energy to yield the same output. Given any constraints on time and energy, we will have to accept a lower yield. Trading our earlier time and energy for what it currently produces seems like a raw deal. If the plow too has been washed away, and the hoe and digging sticks for that matter, we are almost back at a state of nature in which the tools we desire need to come from raw time and energy itself, with no intermediation.
Working forwards, then, from this original state, we see that it is precisely this commission of time and energy to creating tools that not only increases potential output, but frees up time and energy to perpetuate this very process by using these tools to create yet more complicated tools. We can consider making squidgets instead of just widgets. If we free up enough time and energy with squidgets, we can redirect the surplus towards gwidgets. With so many productive options beyond putting time and energy directly into the bare necessities, we can forget about our worries and our strife and start to specialise in using these increasingly complex tools. Money very likely emerges at some point in this process of complexification, as the accompanying uncertainty this complexity generates across circumstances and time creates a reciprocal demand for certainty that money fulfils.
Of course, the process of making the more complex tools is by no means clear-cut from the perspective of value. We risk the time and energy being wasted on an output that is no more productive than existing tools, or not productive at all. Or perhaps it is productive, but the output is no longer valued. But equally, we can think of the time and energy provided by previous tools as buying the cushion to absorb such a risk. That might manifest literally, or, of course, via money: we trade time and energy, however indirectly, for money, that we save up to see us through a patch of experimentation of tool development such that we can afford not to rely on its outcome.
However, there will come a time when individuals’ skills become so specialised, the tools we incrementally desire become so complex, and the uncertainty inherent in their development so great, that we cannot rely on individuals to create them. Realistically, no single person has the knowledge to build a tractor all on their own (or a pencil for that matter) never mind the time. But equally, the minimum collection of those with the necessary skills may not be equally willing to take on the risk that their time and energy committed to inventing a tractor comes to nought.
Money can save the day: those who are willing to take the risk can pay for the contribution of those who are not. This might seem so straightforward as to be banal, but notice we are using money in an essentially new way: not because we want to guard against the consequences of uncertainty, but because we want to embrace them. The uncertainty in question will not be an accident of our circumstances — it will be entirely deliberate. We want to tempt others to engage in economic behavior the output of which is uncertain, at the opportunity cost of behavior that is presumably much more certain. In effect, we are buying uncertainty with certainty.
More precisely, we are creating capital. Capital is not just complex tools, nor is it the money used to motivate their creation, but could be thought of as the extent to which the two are fluid. I believe Hernando de Soto has by far the best appreciation of the true subtlety of the concept, from his brilliant, The Mystery of Capital: “capital is not the accumulated stock of assets but the potential it holds to deploy new production. This potential is, of course, abstract. It must be processed and fixed into a tangible form before we can release it.” Later he adds, “capital, like energy, is also a dormant value. Bringing it to life requires us to go beyond looking at our assets as they are to actively thinking about them as they could be. It requires a process for fixing an asset’s economic potential into a form that can be used to initiate additional production.”
De Soto focuses on the sociological importance of property rights in providing for such a process. For our purposes, we can be ever-so-slightly more abstract and see the ultimate point of property rights and the role they play as providing a certainty of economic relevance that can be measured with money and bargained against the uncertainty we want to exploit. Money provides a means to motivate embracing the risk of the opportunity cost in time and energy of exploring our assets’ potential in the hopes of realising even greater production. Highly certain money and highly uncertain complex tools are both capital to the extent they can be seamlessly exchanged.
The emergence of capital has at least three notable effects. Firstly, the more capital we succeed in creating — the process is risky, remember, and we can’t guarantee we will create any — the more specialised we are likely to individually become, meaning the less our understanding of supply and demand helpfully extends beyond our own circumstances and into the future. Secondly, the more capital we merely try to create, the more uncertainty we directly invite into the network. Thirdly, the possibility of creating capital in future rather than just deferring consumption means that the uncertainty we want to brace against with money need not imply a risk but an opportunity as well.
That capital creation is more or less dependent on human creativity means that the chance to take part in capital creation could arise at any moment; wanting to ensure we are able to do so if or when the opportunity arises further increases money’s utility, which, of course, further enables capital creation. For all three reasons, fundamental economic uncertainty will increase. Money, having allowed for the circumstances for capital to emerge, therefore becomes all the more useful the more capital proliferates.
Money emerges from uncertainty, capital emerges from money, and uncertainty emerges from capital. Thankfully, this cycle holds to the extent time and energy is becoming increasingly valuable. If money is useful to the extent it lets us trade time and energy to the network at one point in time knowing that at any future point, we can receive the same proportion back, then we should want the same proportion back in the future. If the money is genuinely useful, this “same” in time and energy will be more, better, or both, in “value”.
A given money may have qualities that lend it to more or less sustainable formation of capital. This provides another, more oblique, avenue to judge its utility: how sustainable is the proliferation of capital that is forming with this money at its base? If money has characteristics that, for whatever reason, are understood to be encouraging reactions to economic uncertainty with reckless or net-value-destructive risk-taking, this undermines the utility of any certainty implicitly guaranteed in the first place. This is reason to believe the economic network it serves will, over time, generate less, worse, or both.
That uncertainty has such a key causal role shows that the network created by money is far more complex than the kinds we are normally used to, and that its “network effects” are far more nuanced as well. When you use Facebook, Twitter, Telegram, email, or whatever, you understand the nature of your relationship to the network. It facilitates your talking to whomever you want to talk to. Beyond that, you don’t really care how it works, nor does it really affect you. But with money, not only do the mechanics of the network intimately affect your interaction with it, you can’t know how it works. All around you, actors in the network are embracing uncertainties you don’t understand so that you don’t have to. We are back in The Triangle Game. How it affects you is determined by how everybody else behaves, with everybody else in the same intractable position. In Money, Blockchains, and Social Scalability, Nick Szabo explains the titular concept of social scalability as follows:
“the ability of an institution –- a relationship or shared endeavor, in which multiple people repeatedly participate, and featuring customs, rules, or other features which constrain or motivate participants’ behaviors — to overcome shortcomings in human minds and in the motivating or constraining aspects of said institution that limit who or how many can successfully participate. Social scalability is about the ways and extents to which participants can think about and respond to institutions and fellow participants as the variety and numbers of participants in those institutions or relationships grow.”
Money provides a clear and stable way for participants in the network of economic exchange to think about and respond to their circumstances, precisely as capital formation follows from the variety and numbers of participants growing. This growth creates a fundamental uncertainty that exceeds the cognitive capacity of individual humans to grasp and hence to respond to directly. While simpler networks create value for their users by allowing channels of communication that would likely have been too costly to establish otherwise, money allows channels of communication that could not be comprehended otherwise.
If, as in a social network, we knew with whom we were dealing in economic exchange, we could perhaps base this communication in the simpler medium of trust than in money. But since we mostly do not, the specific social scalability conferred by money allows for what Szabo calls “trust minimization” or, “reducing the vulnerability of participants to each other’s and to outsiders’ and intermediaries’ potential for harmful behavior,” adding:
“Most institutions which have undergone a lengthy cultural evolution, such as law (which lowers vulnerability to violence, theft, and fraud), as well as technologies of security, reduce, on balance, and in more ways than the reverse, our vulnerabilities to, and thus our needs to trust, our fellow humans, compared with our vulnerabilities before these institutions and technologies evolved.”
Given money bridges the likely lack of trust we have with direct economic counterparts, and the certain lack of trust we have with the entirety of an economic network, it is crucial that we trust the money itself. A functioning money “reduces vulnerabilities to, and thus our need to trust, our fellow humans.”
What it would seem like if it did seem like a new money was emerging would likely be a focus by its proponents on the qualities of capital that are totally absent from the semantic theory. In the semantic theory, money doesn’t change in any sense worth pondering, and so capital formation happens however it happens. In the real world, the operation of money might become more or less trustworthy, uncertainty might become more or less dangerous, and capital formation might become more or less healthy. A new money would be much more likely to emerge if it seemed like all these characteristics of the incumbent were getting worse and worse. If the new money were open source and programmable, that certainly wouldn’t hurt its chances either …
What It Would Seem Like …
What would it seem like if it did seem like a new money was emerging? It would depend on the relative merits of the challenger and the incumbent, but also on how the perceptions of these merits spread, how perceptions of these perceptions spread, and so on. As the opportunity cost is absolute, the challenger money cannot merely be dabbled in, like a novel social network, but must be sincerely believed. Hence the challenger’s emergence may for a time depend on how individuals in the network think about money itself …
An adherent of the semantic theory would dismiss the challenger out of hand. If it isn’t acting as a medium of exchange and a unit of account then it won’t acquire the network effects to ever do so, meaning it won’t store value either, and it can’t be money. QED.
But a more sophisticated observer might be less interested in definitions and look to the circumstances of competition between the two in real life. She would realise money has value on the basis of economic uncertainty, and that the greater the uncertainty we have around its operation, the less useful it becomes; that the demand for certainty it reciprocally fulfils means its value is primarily derived from perceived utility in exchange in the future rather than in the present; that it should support healthy and stable capital formation and that its mechanism should trustworthily capture true scarcity without dilution.
Turning to the challenger, she might be put off by the lack of immediate utility and the uncertainty this unfavourably invites. Nonetheless, she might recognise the value of the essential trustworthiness of its mechanism, and its transparent and limited dilution as providing a useful future certainty that respects the time and energy it aims to preserve. She might be encouraged by its prospects for healthy capital formation and the early signs of such capital formation taking place, and notice that the perception of its utility is spreading, steadily self-perpetuating the size and strength of its network.
As for the incumbent, she might worry its highly dilutive mechanism could not be trusted at all; that the capital formation it supports is toxic and unstable; that its overall operation is highly uncertain and that, as this perception seems to be spreading, its long-term utility and the size of its network is in increasingly serious question. She might reason that, like Esperanto, its elaborate design may make it pleasing to its designers yet fragile and encumbered in the real world, whereas natural languages and natural moneys emerge and evolve to fulfil a decentralised demand. They suit a coarse reality, not a clean semantics. That these designers seem to have no conception of the importance to money of time, uncertainty, knowledge, and capital might make her more nervous still about the likely quality of their design.
But regardless of her own appreciation of the merits, our observer cannot escape that she will also need to pre-empt others’ realisation of the merits, and their appreciation of others’ realisations of the merits, and so on. The challenger money’s success will be subject to precisely the uncertainty that generates its potential utility. This is not just a trade-off in the minds of economic actors, but a likely source of dynamic instability. As with any good, we may grasp our own demand and supply for the challenger money right at this moment, but we can only have a limited appreciation of others’ valuations, our own in the future, and others’, and this appreciation diminishes the further removed from us they are in circumstance and in time. As we act on this valuation, this decision will have effects that permeate unpredictably through the entire network, unevenly over time. We might be aware of the dynamics of the network in our small locality, but we can have next to no idea of the consequences of our actions on the dynamics of the network as a whole.
This is all to say that if it did seem like a new money was emerging, it would likely seem extremely volatile, irrational, and unpredictable. From any individual’s perspective, it would be. But we are back playing The Triangle Game: the individual’s perspective tells us nothing. It possibly tells us less than nothing because it might seem informative as a snapshot of the dynamics of the network as a whole. It might seem like this volatility, irrationality, and unpredictability destroys the challenger’s utility as money. But his individual perception is irrelevant to the whole. If it is acted on, by an individual, it affects the whole in volatile, irrational, unpredictable ways, and loops back around to affect his later perception.
If it did seem like a new money was emerging, I propose it would seem more like it were tracking an evolving and messy narrative than obeying a fixed and clean equation. It would be slow, and it would be sporadic. It would not be the smooth exponential of a hot new social network, because the nature of its “network effects” would frankly be far more complex. It would be, in essence, the erratic and ever-changing spread of a contrarian belief about the nature of money itself. In the short run it would be a (literally) chaotic mess, but in the long run it would tend towards the merits of the belief.
If it did seem like a global, digital, sound, open source, programmable money was monetizing from absolute zero, I guess it would seem a lot like this.
continue to Part V:
or go back to Part III:
n.b. This is a serialization of my previous trilogy on Bitcoin, economics, and capital markets: Wittgenstein’s Money, The Capital Strip Mine, and, Bitcoin is Venice.
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