The Future of Everything

February 14, 2018

Of minds and money

Filed under: Economics — Tags: — David @ 3:04 pm

Post written for the Rebuilding Macroeconomics blog of the UK’s Economic and Social Research Council (ESRC), 23 February 2018

In 2017, when the ESRC announced that it was setting up a network of experts from different disciplines to “revolutionise” the field of economics, I thought it sounded like a very good idea. But in the spirit of that disruptive mandate, what if the revolution has already happened – and economics just needs to recognise it? I am talking about the quantum revolution which overturned physics at the start of the last century.

Of course, the thought that economics has anything to do with quantum physics will sound to many economists (or physicists) like a particularly severe case of physics envy. But my point is not that economics can be reduced to quantum physics (in my book Economyths I argue against such reductionist approaches). Nor is to assert that we can use quantum physics as a fuzzy metaphor to understand the economy. Instead, it is to say that the economy is a complex quantum system in its own right and should be treated as such. This recognition has the potential to disrupt all the pillars of mainstream economics, including its models of human behaviour, markets, and the macroeconomy.

To see why (and starting with the obvious), recall that quantum physics grew out of the empirical discovery by scientists that energy is transmitted, not continuously, but in discrete chunks they called quanta, from the Latin for “how much”. This violated the basic principle that Natura non facit saltum (nature makes no sudden leaps), as the epitaph of Alfred Marshall’s Principles of Economics read at the time (and until the final 1920 edition). But of course the same is true of money. When you pay for an item with a card, the money doesn’t drain out in a continuous flow, it goes as a discrete transmission.

Quantum objects can magically appear out of the void, and disappear back into it. In the economy, we have the creation of money by private banks issuing loans, and its destruction when loans are repaid. Again, these are discrete processes that take place “instantaneously and discontinuously” as a 2015 Bank of England working paper observed, so don’t fit easily with the continuous nature of conventional models – one reason they are typically excluded.

Another discovery of quantum theory is that matter has two complementary aspects, a “real” particle aspect and a “virtual” wave aspect. Money too combines the virtual properties of a number, with the real properties of an owned object – a bitcoin seems pretty virtual, unless you lose the computer it’s on – and it is this dualistic nature which gives money its confounding properties.

In quantum mechanics, a particle doesn’t have a well-defined location or momentum. In the economy, prices of something like a stock, or a house, are similarly indeterminate, and there is no unique intrinsic value (or eigenvalue in the quantum jargon). This is why some traders, along with researchers in the field of quantum finance, model the markets as a quantum system, with its own version of an uncertainty principle.

One of the more mysterious features of quantum reality is that subatomic particles can become entangled so that a measurement on one instantaneously affects the state of the other. Suppose I take a mortgage out with a bank. If I choose to default, then from that moment on the state of the loan has changed. Of course it will take time for the bank to learn what happened and settle the matter, but it takes time to measure particles too, during which other effects may come into play. It is a financial version of the social entanglement studied in quantum social science (see for example the 2015 book Quantum Mind and Social Science by political scientist Alexander Wendt).

Finally, another key property of quantum systems is interference: as in the double-slit experiment, where shining a light beam through two slits produces an interference pattern on the other side, even if only one photon passes at a time. Of course, money objects don’t interfere with each other, which is good because otherwise they might cancel out in your pocket. But the purpose of money is to put a number on the idea of value, and dissonance between these two things – objective number and subjective value – does produce interference patterns in our minds, of the sort modelled by researchers working in the area of quantum cognition.

In fact, instead of following classical logic when making decisions, it turns out that we are better described as following a version of quantum logic. As physicists Vyacheslav Yukalov and Didier Sornette note, “It is the appearance of interference terms that makes the structure of quantum expressions richer than the related classical ones and that allows one to explain those psychological phenomena that, otherwise, are inexplicable in classical decision making.”

As an example of a quantum economics phenomenon, suppose that you come under financial stress and are deciding whether to pay the latest installment on your mortgage, or default. Your mental state – and that of the loan – can then be treated, following the methods of quantum cognition, as being in an indeterminate superposition of two states. The emergent consequences in the entangled economy can be modelled at a societal level using complexity methods, including quantum agent-based models, though as always the system eludes reduction or exact computation.

Until now, money has played no more role in the quantum social sciences than in neoclassical economics, where it has traditionally been treated as an inert medium of exchange. But as seen above, quantum ideas are perfectly suited to things like the creation of money, entanglement through loans and other contracts, and credit default – all of which were at the heart of the 2007/8 crisis, but nowhere in the macroeconomic models.

As I argue in a discussion paper and in more detail in a forthcoming book, the quantum approach has implications not just for finance, or macroeconomic modelling, but for all the basic assumptions and conclusions of mainstream economics; and points the way to a new economics which is to its neoclassical version what quantum physics was to its classical version. Economics isn’t physics, but can learn from it; and if the intention is to rebuild macroeconomics, the natural place to start is with the quantum, dualistic nature of both mind and money.

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October 20, 2017

A Quantum Theory of Money and Value, Part 2: The Uncertainty Principle

Filed under: Economics, Forecasting — Tags: — David @ 4:53 pm

New paper in Economic Thought

Abstract: Economic forecasting is famously unreliable. While this problem has traditionally been blamed on theories such as the efficient market hypothesis or even the butterfly effect, an alternative explanation is the role of money – something which is typically downplayed or excluded altogether from economic models. Instead, models tend to treat the economy as a kind of barter system in which money’s only role is as an inert medium of exchange. Prices are assumed to almost perfectly reflect the ‘intrinsic value’ of an asset. This paper argues, however, that money is better seen as an inherently dualistic phenomenon, which merges precise number with the fuzzy concept of value. Prices are not the optimal result of a mechanical, Newtonian process, but are an emergent property of the money system. And just as quantum physics has its uncertainty principle, so the economy is an uncertain process which can only be approximated by mathematical models. Acknowledging the dynamic and paradoxical qualities of money changes our ontological framework for economic modelling, and for making decisions under uncertainty. Applications to areas of risk analysis, forecasting and modelling are discussed, and it is proposed that a greater appreciation of the fundamental causes of uncertainty will help to make the economy a less uncertain place.

Published in Economic Thought Vol 6, No 2, 2017. Read the full paper here.

October 10, 2016

More quantum money

Filed under: Economics — Tags: , , — David @ 2:37 pm

New discussion paper at Economic Thought is called A Quantum Theory of Money and Value, Part 2: The Uncertainty Principle.

Here is the abstract:

Economic forecasting is famously unreliable. While this problem has traditionally been blamed on theories such as the efficient market hypothesis or even the butterfly effect, an alternative explanation is the role of money – something which is typically downplayed or excluded altogether from economic models. Instead, models tend to treat the economy as a kind of barter system in which money’s only role is as an inert medium of exchange. Prices are assumed to almost perfectly reflect the ‘intrinsic value’ of an asset. This paper argues, however, that money is better seen as an inherently dualistic phenomenon, which merges precise number with the fuzzy concept of value. Prices are not the optimal result of a mechanical, Newtonian process, but are an emergent property of the money system. And just as quantum physics has its uncertainty principle, so the economy is an uncertain process which can only be approximated by mathematical models. Acknowledging the dynamic and paradoxical qualities of money changes our ontological framework for economic modelling, and for making decisions under uncertainty. Applications to areas of risk analysis and economic forecasting are discussed, and it is proposed that a greater appreciation of the fundamental causes of uncertainty will help to make the economy a less uncertain place.

Download the paper here.

October 8, 2016

Notes on the quantum theory of money and value

Filed under: Economics — Tags: , — David @ 12:38 am

Following the publication in Economic Thought of my paper “A Quantum Theory of Money and Value” I have received a number of interesting comments and questions from readers, and this post is an attempt to clarify some of the points which came up. For a description of the theory, please see the paper, or (for the book version) The Evolution of Money.

What is a money object?

These are objects – either real or virtual – which have a fixed numerical value in currency units. Just as quantum objects have dual real/virtual properties, so do money objects (bitcoins don’t seem like objects, until you lose the hard drive they are located on). Money objects are unique in that they have a fixed numerical price. Other objects or services attain their price by being traded for money objects in markets.

Is money an emergent phenomenon?

Money objects are designed (e.g. by the state) to have a set price. The prices of other things emerge as the by-product of money-based markets, which themselves emerge into being as money objects become commonly used. Therefore prices and markets can be viewed as emergent phenomena, but money itself is better seen as a carefully designed technology. (Of course the way that e.g. cybercurrencies emerge into actual use, as markets develop around them, can also be described as an emergent phenomenon.)

What does money measure?

Nothing. Because prices emerge from the use of money objects, one consequence is that price should not be viewed as an accurate measure of “labor”, “utility”, “economic value”, or any other quantity. Money is better viewed as a fundamental quantity, like electrical charge. Money objects, as used in markets, are a way of attaching numbers to things, but that is not the same as measuring them in some way. Of course market forces tend to align prices with some vague idea of value, but the process is far from exact, and money has its own dynamics (which is one reason CEOs in the US earn over 300 times the median wage of their employees). Note this contradicts the Aristotelian idea, later expressed by Aquinas, that money was “the one thing by which everything should be measured.”

Why quantum?

The comparison with quantum theory comes about because money is treated as a fundamental quantity (from the Latin quantum); and money objects are a way of combining the notions of number and value, which are as different from one another as the dual wave/particle properties of matter. For example, number is stable, while value varies with time. Money objects are therefore fundamentally dualistic.

As mentioned in The Evolution of Money, other authors and economists (and many others) have used the term “quantum” in different ways. One example is Charles Eisenstein’s Sacred Economics, where in an appendix called “Quantum Money and the Reserve Question” he notes “the similarity between fractional-reserve money and the superposition of states of a quantum particle,” in the sense that money can seem to exist in more than one place at the same time. The quantum macroeconomics school, also known as the theory of money emissions, which dates to the 1950s, gained its name from the idea that production is an instantaneous event that quantizes time into discrete units. A completely different concept is quantum money, which exploits quantum physics in an encryption technique.

What inspired the approach?

One thing is the history of money. The most concrete example of a money object is a coin, which consists of a number pressed into a piece of metal. These date to the time when Greek philosophers were developing the first theories of mathematics. Pythagoras believed that the universe was based on number, and money can be seen as a way of making that true by impressing numbers onto the real world. However mixing the properties of number and things produces a strange kind of alchemy. See this presentation for the 2015 Marshall McLuhan lecture at transmediale in Berlin for a discussion.

How does this differ from the usual understanding of the role of money?

One consequence of the theory is that it inverts the usual narrative of mainstream economics. Since the time at least of Adam Smith, economists have downplayed the importance of money, seeing it as a kind of neutral chip that emerged as a way of facilitating barter. But instead of money emerging from markets, it is more accurate to say that the use of money (jumpstarted by the state) prompted the emergence of markets. And far from being an inert chip, money is an active, dualistic substance with powerful and contradictory properties. Putting numbers on things changes the way they behave.

What is the mathematical map or connection between price and value?

In general there is no such map. Price is an emergent property, which means it need not be computable at all. Of course it is possible to come up with some rules of thumb, but there are no fundamental laws as in physics.

 

Update

The quantum properties of money and the economy as a whole are explored in the new book Quantum Economics: The New Science of Money. For a discussion of the mathematical background, please see: Introduction to the mathematics of quantum economics.

September 6, 2015

The true value of money: What would a revolution of economics look like?

Filed under: Economics — Tags: , — David @ 11:50 am

Economics needs a revolution.

This sentiment has been expressed by people from the physicist turned hedge-fund manager Jean-Philippe Bouchaud (in a 2008 paper), to the Bank of England’s Andrew Haldane (in a 2014 foreword for Manchester’s student-run Post-Crash Economics), to activist groups such as Kick It Over. So what would such a revolution look like?

Perhaps the archetypal model for a scientific revolution is the quantum revolution that shocked the world at the turn of the last century. In the space of a few short years, almost everything that was known about the nature of matter was overturned. The Newtonian view of the world as a predictable machine crumbled with it.

Except, that is, in economics – which continues to base its models on quasi-Newtonian economic laws.

Read the full article at Adbusters.

August 27, 2015

99 Bitcoins interview

Filed under: Economics — Tags: , , — David @ 1:00 pm

Chatted about cryptocurrencies with Maria Santos from 99 Bitcoins, full interview is here.

August 19, 2015

Bitcoin needs a new theory of money

Filed under: Economics — Tags: , — David @ 4:06 pm

Is bitcoin money? To its users the answer will be a resounding yes, but to many people, including former Federal Reserve Chairman Alan Greenspan, the answer is less clear. Indeed, one of the things holding back the adoption of cybercurrencies such as bitcoin is that they do not conform with traditional ideas about money.

Read the rest of the article at Bitcoin Magazine.

July 19, 2015

A Quantum Theory of Money and Value

Filed under: Economics — Tags: , — David @ 9:09 pm

Abstract of a new paper posted to SSRN:

The answer to the question “what is money?” has changed throughout history. During the gold standard era, money was seen as gold or silver (the theory known as bullionism). In the early 20th century, the alternative theory known as chartalism proposed that money was a token chosen by the state for payment of taxes. Today, many economists take an agnostic line, and argue that money is best defined in terms of its function, e.g. as a neutral medium of exchange. This paper argues that none of these approaches adequately describe the nature of money, and proposes a new theory, inspired by non-Newtonian physics, which takes into account the dualistic real/virtual properties and complex nature of money. The theory is applied to the example of the emergence of cybercurrencies.

 

Read the full article here.

May 8, 2015

Quantum money

Filed under: Economics, World Finance column — Tags: , — David @ 3:42 pm

It is often said that quantum physics is so weird that it is beyond our understanding. But there is one area where some quantum insights might prove applicable to our everyday lives, and it’s a surprisingly common one: money. Just as subatomic objects have a dual nature, so do the money objects that we use to make payments. The main difference is that these objects are things we have designed ourselves. They are our contribution to the quantum universe.

Read latest World Finance column here.

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