What is money ?
It is the index of the capacity at which you can consume different resources - food, clothing, housing, ornaments, entertainment etc. What determines your capacity to access these resources is the amount of energy that you possess. For most of the history of mankind, these resources have been in very short supply. Most of the population remained poor, illiterate and lacking health opportunities. In an era of scarce resources (until 17th century - not so long ago), the only energy that could be tapped was that of human beings and that of beasts of burden. Money represented your societal influence and how you could manipulate other human beings.
Then, something extraordinary has happened (in England) during the 18th century : man started automating the modes of production. Slowly but steadily, several amazing changes have come by. Food became plenty and hunger was banished. Health care become available to all and death rates plummeted. For the first time ever, the entire population became educated. As resources became more accessible to every person, the meaning of money started to change. What determined your capacity to access resources is no longer your societal influence, but (a) the amount of fuels that you possessed and (b) the degree of automation available to you. This became the new meaning of money. Historically, the fuels-(a) have been fossil fuels such as coal and gasolene. The amount of automation-(b) that can be achieved is determined by the initial capital that you possessed. This marked the begining of capitalism.
The process of automation was not painless. Man had to start at step zero, with very little energy / capital available to his disposal. To make the first machines, this available capital was not even sufficient. So more capital was obtained by robbing other people. This robbery took several forms : colonization (asia), slavery (africa), ethnic cleansing (americas), pathetic working conditions and open wars (europe). This is the reason industrialization proceeded very slowly. But every single step of automation brought further amounts of energy to the disposal of man, making this a chain reaction. With the progress of industrialization , the economic product of the society grew exponentially. You can visualize this process as a rapid increase of the size of the tappable energy and resources pool.
In the two factors that determined money (a) energy available and (b) initial capital, (a) became so high that (b) started to become negligible. In other words, the world economic product became so high that capital no longer presented a constraint for further industrialization. This was first demonstrated during the Marshall plan when USA pumped in significant amounts of capital to the industrialization of war-torn economies of Europe and Japan. This marked the first signs of maturity for the process of industrialization, and the beginning of an age of plenty, when capital is no longer a constraint and it no longer need be robbed from other people. (At the end of the second world war, USA was very rich, accounting for one half of the world 's economic product).
The lack of capital, however, delayed the industrialization in countries which adopted closed economies. There was not a lot of initial capital available in the Soviet Union, so its industrialization suffered a lot of hiccups. These constraints on capital became further apparent when the Soviet budget was stretched during the space and weapon programs. Iran to this day has a lot of oil and gas, but it still cannot exploit them completely due to lack of sufficient capital. This makes it apparent for developing countries to adopt the strategy of inviting foreign capital for industrializing their societies. In our globalized world, the surplus capital is being exchanged for profits. As demonstrated by China and India, developing countries are industrializing rapidly at rates unseen before. This is a direct result of the increased magnitude of the current global economic product. When African countries industrialize in the future, their growth rates will be higher.
As the initial capital that one possesses is becoming less important, the world is entering a state where energy becomes the true currency. All global currencies of today are tied to energy prices. In our fossil fuel economy driven by gasolene, countries with huge oil reserves automatically became rich.
But fossil fuels are not sustainable. Further, they are dangerous for the environment (increased CO2 levels cause global warming). This makes it imperative that we shift to a new economy where we depend on alternative sources of energy. There are two possible sources : solar power and nuclear power. Solar power has the advantage of being completely renewable, but has the disadvantage of being very diffuse. Nuclear power, if driven by breeder reactors, can sustain us for a very long time. Our future economy will be driven by a combination of solar and nuclear energies.
Developing these two technologies will require capital input. But as we have seen already, capital is no longer a constraint in the current world. What poses a challenge is an established pecking order in business which has deep ties to the fossil fuel establishment. This needs to be overhauled.
Economic growth of a country can be reformulated as increase in the degree of automation in that country. If you want to ensure economic growth, use the money (energy) you possess to do two things (1) to create an infrastructure of automation to consume resources (2) to create an infrastructure of producing new energy. When (2) is completed, redirect the energy to (1).
This is a failsafe method of economic growth, with no stagflations or busts. Our current markets periodically suffer from busts because they lose track of these basic principles. The money is squandered as direct waste (such as waste of food, waste of fuel, stuff purchased but never used) or as investments in non-productive sectors such as real estate.
With solar and nuclear technologies, we will soon enter a world of abundant energy. In this world, neither capital nor energy will pose a constraint for further industrialization.
Instead, what will become increasingly important are the effects on the environment due to extensive consumption of resources. These effects will be visible as deforestation, depletion of soil due to intensive agriculture, loss of biodiversity, air pollution, large scale mining etc. These ecological constraints will be added as costs in the make up of money.
Let's call this new money the eco-dollar. We can define 1 eco-dollar as 1 kilo-watt-hour of energy, as produced from environmentally friendly sources. This will be the future global currency. The price of different commodities in eco-dollars will be calculated as a mixture of (1) the energy that is needed in their production and (2) their environmental side effects. For a comfortable life of an industrialized economy, Dr David Mackay estimates that each person needs 125 kwh of energy per day. In our future economy, this is equal to 125 eco-dollars per day. This will be ensured as the guarenteed minimum wage of everyone.
Imagine a world where each human being is given a robot and that the robot is powered by solar or nuclear energy. Imagine that the robot does all the work for the human. What does the human do ? Have fun.
In reality, there will be no single robot for each human but a huge automation network will be working for the entire human society. But human beings will work less and less, catering more time to finer things in life such as art, science and philosophy. This should be goal of our economic activity.
(In this post, I tried to compress several of my ideas spawned out of discussions on the grist environmentalist community. As I started to think deeper about sustainable energy, I became more and more convinced about the inevitability of human progress, industrialization and eradication of poverty. This is in some contrast to my earlier opinions as expressed in these posts).
Tuesday, August 12, 2008
What is money ?