The Future of Everything

March 1, 2021

QEF11 – The money bomb

In quantum economics money plays a role rather like energy – so what happens when we get an awful lot of energy together in the same place?

In 1945 the Trinity Test convincingly demonstrated that quantum forces are not limited to the subatomic domain, but can scale up to affect our lives. Since then we’ve learned to exploit the energy inside the atom in different ways, from peaceful nuclear reactors to more recently quantum computing.

Money is a quantum social technology with quantum properties that also scale up to affect the economy as a whole.

Perhaps the most important concept in physics is that of energy. The Trinity Test released some 92 terajoules of energy which is about the same as 20 tank cars full of oil. There is also energy in finance. As an example an empty house close to where I live recently sold for 2.24 million Canadian dollars. One way to equate that with energy is to do a thermodynamic analysis of the world economy and figure out how much energy is needed to maintain a dollar bill. Another way is to simply figure out how much oil it would buy, and actually either method gives roughly similar results which is about 40 tank cars of oil or two Trinity Tests. That’s a lot of energy, so where does this energy come from?

Most money is created not by central banks but by private banks lending money for things like mortgages on houses. As the deputy governor of the Bank of Norway explained in a 2017 speech, when you borrow from a bank the bank just credits your bank account, the bank does not transfer the money from someone else or from a vault, it’s simply created by the bank itself out of nothing. We have already seen this process for a Medieval tally stick, so now instead of a sovereign backed by the divine right of kings, we have your local bank making a loan to someone who wants to buy a house. Instead of a tally stick the output is going to be new money which as we have seen is associated with energy through the equation \Delta E \approx \frac{\hbar a x_0}{2} \log \frac{1}{p} . Here the \frac{1}{p} term represents the degree of coercion, so this is ultimately where the energy is coming from.

Now in physics Bohr’s principle of correspondence states that at large enough scales quantum mechanics should converge to classical, but things like nuclear devices don’t wash out. Nuclear reactors are based on self-sustaining nuclear chain reactions, and we get the same kind of self-sustaining exponential growth in the economy. Banks make loans on real estate, this adds to the money supply, it’s used to buy more real estate, and so on, so you find that the growth in house prices in Canada at least matches quite closely the growth in the money supply. And the system needs to grow continuously in order to pay the interest on the debt. It’s ironic that Aristotle thought that money was sterile and should not “breed” as he put it by handing out interest but we ended up with what amounts to a financial breeder reactor. And the product of all this is asset price inflation and inequality.

On top of all this debt is a system of derivatives which has an estimated notional value of some one quadrillion dollars. This quadrillion dollars is really a kind of a magical number because it’s larger than the actual economy. So how do macroeconomists model this financial sector which is so huge? Well really they don’t – one reason the banking crisis of 2007/8 wasn’t predicted was because banks weren’t in the models.

Since then there have been efforts to incorporate financial “frictions” into these models, but when you think about it this is odd because finance is really the the opposite of friction, and a crisis is what happens when friction breaks down completely, which is why plots of price changes during the crisis resemble plots of tremors during earthquakes.

These concerns about the financial system are not exactly new. One person to raise them was Frederick Soddy who was awarded the Nobel Prize in chemistry in 1921 but switched to economics because of his fear that a financial crash would lead to nuclear conflict. Soddy described money as virtual wealth that gives the illusion of being unbound by earthly constraints, and believed that we had to align human law and convention with the needs of thermodynamics.

His solution to all these problems was basically to stop paying tax in order to make “a clean sweep of all the webs woven to entangle humanity by the magicians who have discovered how to get something out of nothing and moreover to make it bear perennial interest.” I’m not sure that strategy would really work today but the split between the virtual and the real which he highlighted was very evident in the spring of 2020 when we had two headlines at the same time: US stocks have their best month since 1987; US now has 22 million unemployed.

This real-virtual split in money is perhaps most evident in our attitude towards the environment. Mainstream economics treats the planet as an inert object, and environmental damage as a market failure (even though markets are optimizing the numbers by growing as fast as they can). One of the main contributions of the quantum approach is to draw our attention to this dual real-virtual nature of money and help us to align our economy and our use of energy with the thermodynamic realities of the planet.

Further reading:

Orrell D (2018) Quantum Economics: The New Science of Money. London: Icon Books.

Soddy F (2003). The Role of Money: What It Should Be, Contrasted with What It Has Become. London: Routledge.

Previous: QEF10 – A Quantum Option Pricing Model

Next: QEF12 – A quantum oscillator model of stock markets

Playlist: Quantum Economics and Finance


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