Wittgenstein’s Money

allen farrington
31 min readDec 4, 2020


What would it seem like if it did seem like a global, digital, sound, open source, programmable money was monetizing from absolute zero?

photo by Christian Puta, via Unsplash

n.b. this essay has since been adapted into a standalone chapter in the book, Bitcoin Is Venice (Amazon link here) by Allen Farrington and Sacha Meyers.

Ludwig Wittgenstein once asked a friend, “tell me, why do people say it is more natural to think that the sun rotates around the earth than that the earth is rotating?” The friend said, “well, obviously, because it just seems like the sun is going around the earth.” Wittgenstein replied, “well, what would it seem like if it did seem like the earth were rotating?

Semantics Therefore Reality

As Bitcoin begins its quadrennial bull run, we must brace ourselves for the wider world’s sudden and ill-informed interest. A great many newcomers will arrive with an open mind — as we all did once — but so too will many representatives of the incumbents to this disruption emerge from the woodwork to insist that what we can see with our very own eyes isn’t actually happening because, according to their theory, it can’t.

Bitcoin can’t be a store of value because it has no intrinsic value. It can’t be a unit of account because it is too volatile. It can’t be a medium of exchange because it is not widely used to price goods and services. These are the three properties of money. Therefore, Bitcoin can’t be money. But Bitcoin has no other basis for being valued, therefore it is valueless. QED.

I call this argument, semantics therefore reality. What could possibly falsify this? It is, at root, a claim about the material world; about what will, or in this case won’t, happen in real life. And yet it looks rather like it relies entirely on the meanings of words. In discussing dollarization in Ecuador — the instructive process of an “official” money being spontaneously replaced by a simpler superior money — Larry White says of those who deny by definition that such a thing can even happen that they, “are only looking at the blackboard and not at what is happening outside the window.” This is a curious approach to understanding novel phenomena, that, in general, I would not recommend. Reality doesn’t care how you describe it.

But there is also a softer, slipperier, more agnostic form of the semantic theory that acknowledges that something is happening: that Bitcoin is not nothing, but that it surely cannot be money because it is so dissimilar to the standard (semantic) conception of what money should be and how it should behave that the proposition is too uncomfortable to accept. It certainly seems like a network of some kind: it is global, digital, sound, open, and programmable. And it has undeniably increased in value from a point in the past when it was worth nothing at all. But does this distinguish it from a regular old financial bubble? Can “money” be reconciled with bubble-like behavior? And is Bitcoin’s digital nature such a plus? Doesn’t the Internet enable a speed and potency of virality that is arguably finely tuned to inflate a bubble in anything deemed openly, programmably digital? Bitcoin may be something — maybe the “blockchain technology” it runs on?— but, obviously, it just seems like Bitcoin isn’t money.

Wittgenstein would be most unimpressed. He would likely ask,

What would it seem like if it did seem like a global, digital, sound, open, programmable money was monetizing from absolute zero?

Let us ask that too.

The Times, They Are A-Changin’

photo by Monoar Rahman Rony, via Pixabay

The semantic theory is alarmingly static. This stasis is rooted in its semantic chicanery: many languages have different verbs to distinguish between “being” as in having some property intrinsically or circumstantially, such as ser and estar, respectively, in Spanish. English does not. I am male just as I am hungry. But in which sense is Bitcoin volatile? Is it intrinsically volatile or is it volatile at some moment, in some circumstances, relative to some standard? Are goods and services somehow fundamentally resistant to being priced in Bitcoin? What happens if you try to do so? Is it like dividing by zero?

Imagine if all respectable business knowledge had been derived from studying large, established companies because there had never been a start-up in living memory. If a start-up then came along, people might well say, “that’s not a business because it doesn’t make a profit,” or, “that’s not a business because it doesn’t have a defined business plan.” Clearly, this would be ill-advised. That is not to say that their models and definitions would be perfectly wrong instead of perfectly right, but rather that things are not so binary. Reality is messy, and it is reality we should care about, not our theories of reality that, it turns out, have never really been tested …

This essay is the first in a three-part series. In Part One, Wittgenstein’s Money, I propose we should reject the arrogance of knowing that a new money cannot emerge because reality follows from our semantics. I hope that by instead embracing ignorance and uncertainty, and by focusing on plausible behaviors and circumstances, we will have the tools to recognise Bitcoin’s emergence rather than rejecting it out of hand as a disprovable theorem. We will probe what it might seem like if it did seem like Bitcoin were money.

In Part Two, The Capital Strip Mine, I will paint a dire picture of what we could expect to happen to the ability to create and sustain capital when a monetary regime is contrived to ignore — or even go against — the ideal characteristics we are about to explore. In Part Three, Bitcoin Is Venice, I will take substantial poetic license in charting the course for recovery from such a disaster — what it might seem like as it is seeming like a global, digital, sound, open, programmable money is monetizing from absolute zero.

But first, how we get there.

Apples, Zebras, And Knowledge

photo by Nathan Dumlao, via Unsplash

Let us start with a thought experiment. Imagine you could see the future in a very peculiar and economically relevant way: you know how everybody will value everything at every point in time. You are certain of it. Would you ever need money? Let’s explore.

If you know how you will value things then you know what you will want to buy at any given point in the future, say Alice’s apples. Now, normally you would need money because Alice might not value whatever you had that you wanted to trade, say zebras. But in this case, you know how Alice will value zebras because you know how she will value everything. If that’s enough to buy the apples, great. If not, find something else she values more highly, say beer, and then go find Bob. Now, if Bob also doesn’t value your zebras, that’s fine too because you can just keep doing this until you close the loop, given you know all these valuations. You can instantaneously grasp the best path from zebra to apple and trade all the way to what you want. If these valuations flap around over time (which you will also know) you can plan to orchestrate your trading across time to get the best rates.

An obvious objection might be that all this excess trading would be a massive nuisance. Maybe you wouldn’t actually need money, but it would still save you time and energy because rather than having to deduce and execute the highest value trading loop in advance of every purchase, you could jump immediately to who valued zebras most, get the money, and go back to Alice. And in fact, you could do even better, because you would sell the zebra when its value peaked, and keep the money for however long happens to pass before wanting to buy the apples. Fair enough, money is still useful.

But now imagine that everybody had this superpower. Everybody knew what everybody else valued at every time. Now would you need money? Let’s ring up Alice and find out. You go to Alice with your zebras to get some apples. Does it matter that Alice doesn’t want zebras? I don’t think it does anymore because Alice now has the superpower too; if she doesn’t want zebras herself, she knows that Quintin does. If she wants Quintin’s quiches, perfect. If not — if she really wants Peter’s pies — then luckily Peter also knows that Quintin wants zebras. If he wants Quintin’s quiches, perfect, if not … what happens is that the previously inconvenient highest value trading loop doesn’t now need to be executed — it merely needs to exist at all in order for everybody to establish the relevant exchange rate between whatever they have and are trying to buy, or whatever they want and are trying to sell. This knowledge would make money moot.

If we were at all tempted to believe that some particularly economically astute individual could, in theory, know all others’ future valuations, we would be forced to admit they also knew all future events as well. How could they know how Alice will value things at an arbitrary point in the future if we don’t know what things there are to value?

This is the key to unwinding the thought experiment. Nobody can know all future events, nor the whims of all perfect strangers. Arguably, we can barely know any future events or the whims of any strangers. We may be reasonably sure of events close to us in time and circumstance, but as we get further away from our own familiarity, further into the future, or both, we obviously can claim to know less and less. Hence, we might be able to guess what we ourselves or others close to us value now, but others we know less well, or anybody at all further and further into the future, we cannot know. If we did know this, we would not need money. But we can’t, therefore money is useful.

What this shows is that a “double coincidence of wants” that makes barter untenable at any worthwhile scale has little to do with “convenience” and is first and foremost a product of knowledge. We can only have a limited appreciation of others’ valuations, and this appreciation diminishes the further removed from us they are in circumstance and in time. And note, this includes our future selves; we do not know for sure what we will value in the future because we do not know what will happen to us in future. Money is useful to us because of economic uncertainty: our fundamental inability to know much at all about what all others think and about what is going to change.

Money would ideally give its users a sense of certainty about the future — a kind of tacit agreement with the rest of the economic network precisely because next to nothing else can be known surely enough to be agreed upon in advance. But if a new money were to emerge, it would very much be challenging the agreement, and hence would be fraught with uncertainty over the period of its emergence. Its very existence would represent a kind of disagreement that would seem confusing and disorienting.

We could point to this engendered uncertainty as clear-cut evidence against the new money, and reason by extension that the necessary network effects will fail to materialise. But this would be to avoid the legitimate question as to whether accepting greater uncertainty in the short run is worth gaining greater certainty in the long run, and if network effects could develop on this basis instead. This would depend on the real-life merits. There would be no textbook answer; no equation to solve; no definitions to check against — particularly not definitions that are only absolutely valid in precisely the case of zero competition, maximal certainty, and static time: a kind of inexplicably non-entropic universe. A new money could not be helpfully described as providing utility as a “medium of exchange” from its beginnings — although, in the long run, being digital certainly wouldn’t hurt its chances in this regard …

What it would seem like if it did seem like a new money were emerging would be a promise of superior certainty in the future, with an admission of increased uncertainty in the present. It would seem as much like a dangerous and exciting narrative as a provable guarantee.

Purchasing Power In A Changing World

photo by Clay Banks, via Unsplash

But how usefully can money fill a demand for certainty? We should think about what it would mean for money to be more or less useful in this way, but attempting to measure this utility brings us to the precipice of a philosophical pickle. Given this utility is understood as an emergent reaction to constant and unpredictable change, we must be careful to choose a measure that is invariant to this change. We don’t want to use a stretchy ruler. We must dig a little deeper lest we fall back into the semantic theory and demand money be a “store of value” without further exploration of what being a store of value could practically consist of.

As a starting point, let us assume it means that a candidate money retains its purchasing power over time; that it will not intrinsically depreciate, like a tool that we need to repair or food that will rot; or that will lose value for more intangible reasons, in the sense of going out of fashion, like clothes or jewellery, or real estate in a declining area.

We immediately run into problems: notice that whether or not any such item “retains its purchasing power” is precisely subject to the change we admit we cannot predict. It is circumstantial and behavioral, and depends on the subjective valuations of other market participants. A depreciated tool may nonetheless become more valuable if a new use for it is discovered and it turns out to be in short supply. Rotted food may command a higher price as compost — perhaps there is a dire compost shortage — or maybe it is discovered that it actually tastes better at a certain maturity. Clothes, jewellery, or real estate might come back into fashion and appreciate just as easily as they once went out.

There is yet another difficulty: surely, we want a failure to maintain purchasing power to capture some way in which the money ends up being valued less relative to what we might want to purchase, but not some way in which everything else ends up costing more? In other words, that the money is less useful, not that everything else is more useful. In the latter case — say a war or a natural disaster that causes all real costs to soar — it hardly seems reasonable to describe the probable resultant price increases in terms of money’s decline in value rather than on things having become much more costly to produce. Taken to an extreme, it seems nonsensical to expect that money’s ability to “store value” will entitle its holder to consume some good that may not even end up being produced — or some quantity of goods greater than everything that is produced.

But it gets even worse: what if an entirely new good or service is invented over the period across which we intend to maintain purchasing power? Has our candidate money’s purchasing power increased infinitely? What if a good stops being produced or sold on the market altogether? Has our purchasing power decreased infinitely? What to make of all this?

It might have first seemed natural to mean specifically that a candidate money “retains purchasing power” if, at t0, it can purchase a given quantity of every other good or service in the market, then, at t1, it can still purchase this same quantity in each case. Upon probing, however, this seems naïve — in the case of a new invention, “infinite” seems an amusing but entirely unhelpful answer. In the case of natural disaster, we can’t expect to purchase the same amount because we can’t expect there to have been produced the same amount, which seems not to be a negative attribute of the money, but rather the money accurately reflecting a negative change in the economic network. Perhaps we could track the changes in a “basket” of goods, but then how do we decide how to weight the inputs and how do we adjust for quality improvements? Any choice will be arbitrary and will better reflect the reality of some economic actors than others.

But even in what we might think of as more “regular” or “normal” economic circumstances, it proves tricky to pin down. Imagine that some good, a widget, hasn’t changed at all between t0 and t1, but that some new invention, a fidget, has superseded it. Nobody wants widgets anymore because fidgets are far better, so widget makers stop producing widgets, and the suppliers to widget makers stop producing widget-making-squidgets too. Now, with nobody making squidgets, it becomes very expensive to make widgets and although far, far fewer are made, their price becomes much higher than at t0, pre-fidget. So, has the money with which all these prices have been quoted “lost purchasing power”?

If you still want to buy widgets, then yes, you have lost desirable purchasing power. If you prefer fidgets, then no, you have gained purchasing power. But crucially, these are connected at root by decisions to shift real, scarce resources from producing one good to another. Hoping for an answer that can be sensibly relative only to our individual demands is myopic because the prices will be dictated by the aggregation of all demands (and for that matter, all supplies — people who sell widgets and squidgets have a stake in this too!). If any demands or supplies change — due to discovery, taste, costs or opportunity costs elsewhere — any circumstance or behavior anywhere — then the allocation of scarce resources to try to match supply to demand will almost certainly change too, and in a way that will wrap back around eventually to affect the original demands and supplies.

Can we grapple with this? And can we coherently describe why it is difficult to grapple with? Even before resolving this, it is worth pointing out that money itself will be subject to these same forces — it will just be a lot less natural to point out whenever there is no legitimate monetary competition because we are using it as our measure in the first place. The binaries of the semantic theory seem to absolutely apply. This money would be a unit of account, and while we can assess how it is accounting for units, it means little to ask if it is doing so well: well relative to what?

But were a new money to emerge, it would naturally have to emerge in a specific place, at a specific time, in a given locality of the economic network. It would not appear everywhere, all at once, and hence could not be helpfully described as providing utility as a “unit of account” from its beginnings — although, in the long run, being global certainly wouldn’t hurt its chances in this regard ...

It would present different utilities to different people depending on their circumstances, their behaviors, their beliefs, and its price. Its entry into the web of supply and demand would change the allocation of scarce resources in ways that would wrap back around and eventually affect its own supply and demand. Hoping for an explanation of its value that can be sensibly relative to individual demands is myopic.

What it would seem like if it did seem like a new money were emerging would be widely disparate views, rapid change, and no consensus, with sentiment ebbing and flowing unpredictably as the relative merits of the promise of future certainty from the challenger and the supposed failures of this promise from the incumbent were constantly being weighed and re-weighed by the market.

Time, Energy, And The Triangle Game

photo by Ryan Geller, via Unsplash

Have you ever played The Triangle Game? Here’s what you do: get in a big group and instruct everybody to mill around aimlessly. While this is happening, instruct everybody to pick two other people, but keep their choice to themselves. Then, on a signal, tell everybody to move to form an equilateral triangle with the two people they chose. Then, watch chaos ensue. Even if the activity of the network as a whole ever seems to calm down, it can just as easily spiral out of control again with one step because one person moving may be reacted to by others, which may be reacted to by others still, and so on. Every individual decision has effects that permeate unpredictably through the entire network, unevenly over time, while every individual decision-maker is only immediately aware of the dynamics in their small locality, just like in a network of economic exchange.

Asking an individual to evaluate an invariant of the economic aggregate in terms of only their own supplies and demands is rather like asking a participant in The Triangle Game to explain the average speed of every player solely in terms of their own next step. You can’t even begin to explain it. And that’s holding just about everything we can constant in a small environment: if millions of participants started periodically changing their choice of vertices and entering and exiting the game, all while the geography on which the game was being played was shifting under their feet, that might start to better resemble real economic activity.

We need to ask what participants in an economic network are giving and getting in a deeper sense than the highly circumstantial and reflexive prices at which they are faced with buying and selling. What opportunity cost do they all have in common? Consider that rather than accepting a price that is dependent on literally every other demand and supply in the network, you could always make the widget yourself. If there are literally no widgets for sale anymore, you needn’t assume your purchasing power has “infinitely decreased” if the inputs can still be purchased and the knowledge of how to combine them still exists and can be accessed. You can still “purchase” a widget, and you can still sensibly conceive of its cost: that of the initial purchase of the inputs, plus the opportunity cost of your own time and energy, since any time and energy you devote to making a widget you can’t devote to making or doing anything else that might later be traded for money.

If, on the other hand, widgets are still mass-produced, you will very likely find that the difference between the cost of the inputs versus the available market price of the finished widget is one you cannot reconcile as a viable opportunity cost of your time and energy turning one into the other. Since so much effort has been put into minimising this exact opportunity cost of time and energy on the part of the widget manufacturer as a requirement to stay competitive, you will probably rather pay the difference than commit this time and energy yourself.

Upon reflection, this process and mentality is exactly the same for anybody who transforms one good or service into another in order to later sell at a profit: that the price is deemed by buyers to be an acceptable equivalent of their time and energy, that the costs were treated in the same way by the (current) seller, and that the hoped-for profit is deemed the best use of their time and energy in transforming one into the other. In setting out to make our own widgets, whoever we buy the squidgets from will have gone through the same thought process and calculations. The gwidget-makers (you need a gwidget to make a squidget) will have done the same.

And so on, all the way down to the absolute origin of the supply chain of every good or service. If a good, extracting raw materials, which, if you own the land, takes only time and energy; if a service, only time and energy; if, in either case you nonetheless require tools, back into the loop you go. The entirety of the chain of prices across all exchanges is shown to be a series of independent and real-time decisions about how to value one’s own time and energy and best guesses as to how others value theirs.

We can readily imagine, if you go back to trying to create your own widget, just how long it would take if you were committed not to use money to pay any upfront costs for inputs but to spend only your own time and energy fashioning everything required from beginning to end. The difference between however you value this presumably enormous amount of time and energy and the cost you actually pay for the inputs, is exactly the value created by money intermediating a much more specialised series of exchanges.

Back to our original circumstances, if the prices of widgets have gone up because resources have been pulled from squidgets, etc., what this really means is that a great many economic actors no longer believe their time and energy to be best allocated to widget making. Although we can articulate their reasons for believing this, we cannot say it is objectively right or wrong. It is as “right” as they end up profiting by how they allocate their time and energy instead. The invariant measure we require is therefore not of widgets, specifically, but of the aggregate contribution of time and energy to productive enterprises as collectively valued by their output. Widgets might matter to you, but we can tell by the fact of their being produced far less (or not at all) that they no longer matter as much to the network. Time and energy matter to the network, but circumstances and behaviors have changed what time and energy can be transformed into.

Readers may have noticed I sneakily begged the question when I originally introduced natural disasters: I said this would cause “real costs” to soar. But what is a “real” cost? If we aren’t measuring costs in money, then what are we measuring them by? Now we have our answer: in human time and human energy. In the case of a natural disaster, we are assuming a great deal of intermediate resources of production is destroyed and we have to devote time and energy to rebuilding it all if we hope to maintain the same output. Whatever output we achieve will cost more money because it will take more time and more energy.

And so, “maintain purchasing power” as a property of money can only sensibly mean: if, at t0, it can purchase a given proportion of the whole output of the economic network, then, at t1, it can purchase that same proportion. Regardless of what has inevitably changed in the meantime, money is useful to the extent it lets us contribute time and energy to the network at one point in time knowing that our claim will not be diluted, and that at any future point in time we can receive the same proportion back.

The semantic theory leaves us hanging with ungrounded promises of “storing value”. Value as decided by whom? And stored relative to what? It is far more fruitful to understand money as preserving a contribution of time and energy relative to the economic network that uses it. A new money could not be helpfully described as providing utility as a “store of value” from its beginnings —although, in the long run, being sound certainly wouldn’t hurt its chances in this regard ...

Even if it is clear its contribution will be preserved, it will not be at all clear what will happen to the network itself and hence how valuable this preservation really is in the wider scheme of things. But the better a money can preserve such contributions and protect them from dilution, the greater the chances its network will attract time and energy, and hence value. The semantic theory assumes the incumbent money’s network is mature and total, and hence can’t make any worthwhile sense of a challenger “gaining share” of “time and energy stored”. If it is messy and confusing in real life, then of course it is messy and confusing from the perspective of such static and limited definitions.

What it would seem like if it did seem like a new money were emerging would be superficially extreme uncertainty masking such a substantial improvement in the promise of protection from dilution that the nuisance of the uncertainty of the period of emergence could credibly claim to be outweighed.

Money, Capital, and Social Scalability

photo by Alexander Schimmeck, via Unsplash

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 Part Two, The Capital Strip Mine, 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 …

photo by Jason Blackeye, via Unsplash

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.

In Part Two of this series, The Capital Strip Mine, I will evaluate the contemporary incumbents, and in Part Three, Bitcoin Is Venice, I will evaluate the challenger. But for now, I will conclude by saying that 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 Two:

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Thanks to Sacha Meyers, Nic Carter, Pierre Rochard, and Robert Breedlove for edits and contributions.



allen farrington

I’m an investor. I think about things. I write some of it down.