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The Metastasis of Money

......So how did money get transformed from a convenient yardstick for real wealth to the be-all and end-all of contemporary economic life? At least three factors were involved, two of them common to complex urban societies throughout history, one unique to ours.

First, despite the drastic oversimplifications of the textbook example cited earlier, it reflects a reality: a complex society can gain significant advantages from a medium of exchange that can be traded for any form of wealth. Even in societies where most goods and services are distributed by way of social networks, a social consensus tends to establish certain trade goods – wampum shell strings among the First Nations of eastern North America, for instance – as a common measure for those goods and services that are exchanged in other ways. As a society becomes more complex and the division of labor among different crafts expands, some standard measure of wealth becomes more useful. While money itself was invented around 700 BCE by the ancient Greeks, other ways of measuring wealth for the sake of easy exchange had been in use in Old World urban societies for millennia before then, and it’s not inaccurate to include money or some equivalent system as part of the basic toolkit that makes complex urban societies possible.

Second, whenever common measures of wealth are controlled by institutions, those who manage those institutions become powerful, and can be counted on to maintain and expand their power whenever possible. In ancient Egypt, for example, grain in temple warehouses provided the basic measure of wealth; as a result the priests who controlled the stockpiled grain became a potent political force. In medieval Europe, when land was the basic measure of wealth – there’s a reason we still call it “real estate,” as though all other wealth is unreal – the power of the feudal nobility derived directly from their control of land. Today the governments that claim exclusive power to print and regulate money, and the banks and financial corporations that manage most of society’s money, derive much of their effective power from their control over the medium of economic exchange, and can be counted on to encourage the rest of society to rely ever more completely on the thing that gives them power.

These two factors can be traced in the history of most of the complex urban societies of the past. What makes our civilization something of an extreme case is a third factor – the extreme complexity of an economic system that has temporarily replaced the limited energy resources of other human societies with a torrent of cheap and abundant energy from fossil fuels.

Ilya Prigogine, one of the most innovative physicists of recent years, showed via a series of dizzyingly complex equations that the flow of energy through a system increases the complexity of the system. If there was ever any doubt of the accuracy of his claim, it was settled by the economic history of the western world from 1700 to the present. The societies over which the tsunami of the Industrial Revolution broke in the early 18th century were not unusually complex by the standards of past civilizations; their own contemporaries in the Chinese and Ottoman Empires considered western Europeans, and not without reason, to be grunting, smelly barbarians with few of the arts and graces of civilization.

Fossil fuels may not have done anything about the gracelessness and the smell, but it certainly made up for any shortage in complexity. Until the dawn of the industrial age, as a general rule of thumb, some 90% of the inhabitants of any complex society worked in agriculture, providing the food and raw materials that supported themselves as well as the 10% who could be spared for all other economic roles. By 1900, at the zenith of the age of coal, many nations in the industrial world had dropped the percentage of their work force in agriculture below 50%, and shifted the workers thus freed up into a broad assortment of new economic roles. By 2000, buoyed by the much higher concentration and efficiency of petroleum, many industrial nations had dropped the percentage of their work force in agriculture below 5%, with the other 95% filling newly invented roles in the most complex economies in the history of the planet.

One consequence of this swift and unprecedented surge in complexity was the triumph of money over all other systems of exchange. When the vast majority of workers at every income level labored at tasks so specialized that their efforts only produced value when combined with those of hundreds or thousands of other workers, money provided the only way they could receive a return on their labor. When most of the customers for any given product had money and nothing else to exchange for it, buying products for money became standard. Social networks of exchange – household economies, customary local exchanges, church and fraternal networks– shattered under the strain, and were replaced by purely economic relationships – wage labor, shopping, public assistance – that could be denominated entirely in cash. The last three centuries of social and economic history are largely a chronicle of the results.

If economists took a wider view of the history of their discipline than they generally do, they might have noticed that what most of them consider a fundamental feature of all economies worth studying – the centrality of money – is actually a unique feature of an economic era defined by cheap abundant energy. Since the fossil fuels that made that era possible are being extracted at a pace many times the rate at which new supplies are being discovered, current assumptions about the role of money in society may be in for a series of unexpected revisions.

In an ironic way, this process of revision may be fostered by the antics of the world’s industrial nations as they try to forestall the Great Recession by spending money they don’t have. The economic crisis that gripped the world in 2008 was primarily driven by a drastic mismatch between money and wealth. When the price of a rundown suburban house zoomed from $75,000 to $575,000, for example, the change marked a distortion in the yardstick rather than any actual increase in the wealth being measured. That distortion caused every economic decision based on it – for example, a buyer’s willingness to go over his head into debt to buy the house, or a bank’s willingness to lend money on the basis of imaginary equity – to suffer similar distortions. Now that the yardsticks have snapped back to something like their proper length, the results of the distortion have to be cleared out of the economy if the amount of money in the system is once again to reflect the actual amount of wealth.

Yet this is exactly what governments and businesses are doing their level best to forestall. Governments are scrambling to prop up economic activity at a pace the real wealth of their societies can no longer support; banks and businesses are doing everything in their power to divert attention from the fact that a great many of the financial assets propping up their balance sheets were never worth anything in the first place and now, if possible, are worth even less. Both are doing so by the simple expedient of spending money they don’t have. As government deficits worldwide spin out of control and the total notional value of the world’s derivatives market climbs steadily above one quadrillion dollars, the decoupling of money from wealth is even more extreme than it was at the height of the real estate bubble.......