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To John
Over the years I've come across this idea several times before. It is fundamentally flawed because a currency has to be exchangeable between one party and another. You can't exchange energy, and it's as simple as that. Indeed, the writer of the website, John Meyer, himself correctly summarizes what money is in one short paragraph:
Money has taken many forms. Basically anything which is representative of value and can be traded for a wide range of goods can be said to be money. From beads on a string (wampum) to sea shells (cowrie shells) to tokens and coupons and lumps of metal.
A large amount of what is on his website is well-written and entirely accurate, but how and why he jumps out of the physical world into energy is beyond me. If every product or service had universal value directly proportional to the amount of energy that went into their production then, I suppose, you could have a banknote currency based on energy. John Meyer is making exactly the same mistake that Karl Marx made when he valued things according to the amount of labour that went into it.
Keith
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Keith,
There are several levels of currency. The one most in need of an upgrade is the international reserve currency which is now effectively the US $. Replacing the US $ with a commodity based system would stabilize world finances and the world economy to a considerable degree. Gold has been used for that in the past and worked well for 4 decades last century until the US blew the system up.
Using energy warrants and then energy based currency for international transactions would bring the system back into some representation of reality. Domestic usages of energy pegged currency can come later but would be invisible to the user.
The most effective currency system in human history was probably that of the Egyptians based on wheat. Energy improves on wheat in every parameter and is even more pervasive, vital and accurately measured than any commodity in human history. By making energy the currency base, we are not representing all output or all assets as energy but for transactions, everything is pegged to energy.
I've had a long discussion with Prof. Bob Blair on this which will be added to the comments page hopefully within a week. Bob makes the case for using an hour of work instead of energy as the elemental base for currency so you might find this interesting.
Your comment "how and why he jumps out of the physical world into energy is beyond me" shows that we have totally different understandings of money as it now exists.
Energy is the real physical world and fiat currency is a promise printed by a system with no hint of how or when it will be redeemed. Fiat currency systems crash continually and this is largely due to the fact they quickly lose any connection to reality and when redemption time arrives, the system folds.
This won't happen with a real commodity based currency, it has never happened in history and it can't happen unless the commodity itself loses value or the supply becomes so constrained as to force an unrealistic contraction of economic activity.
Cheers,
John M.
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John,
I agree with your first statement.
Gold is coming back now, though. The European central banks are not selling it any more (and, according to rumour, are buying it -- certainly Switzerland is). When the new Euro currency started (only 11 years ago) the European central bank made sure that it has plenty of gold in its caults as back-up. The central banks of central banks -- the Bank for International Settlement -- supervises gold movements and gold accounts. China and Russia are buying it as the basis for a new world currency. Emergent countries are now buying gold as a hedge against a weakening dollar. Since Monday this week JPMorgan are accepting gold as collateral for loans -- very significant. All in all, gold is steadily making its way back as a valuable overt currency even though it has really never lost its credibility. It doesn't matter that it is scarce -- price adjusts accordingly -- so long as its supply is dependably low.
Well, Bob Blair will be making the same mistake as Karl Marx.
We don't disagree on what money is currently. As I mentioned before -- in the paragraph of yours I quoted -- you have already correctly defined what money (currency). It has got to be physical, it has got to be instantly transferable at the point of exchange, and it represents the market value of a product or service -- not how much energy was used in its manufacture or supply.
A new world currency doesn't have to be based on gold exclusively -- many other commodities would do. But gold happens to have emerged after several thousand years of trade (initially as status ornaments) as the best single material -- survival of the fittest. Gold became the basis of vastly extended trade between Europe, Islam and China (the whole civilized world) at the time of the Renaissance, and then again at the time of the massive resurgence of trade from about the 1650s and onwards. Without gold as the basic currency, the industrial revolution in 19th century England would never have taken place. It only broke down a few weeks into the 1914 war when England and other countries had to start printing money to pay for armaments.
Best wishes,
Keith H.
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Keith,
Gold and silver have had long runs just as cowrie shells have but they are really not commodities because they are not useful as anything else than currency and ornamentation.
Gold is used over 80% for non-productive applications. Gold prices will adjust to scarcity but this is exactly what you do not want because the scarcity is not related to use of a basic and essential commodity and is highly subject to speculation. We need a currency base which is a vital commodity whose real world use reflects the production of real goods. Any speculation would be very limited in impact and also very controllable.
This has not been possible before 1950 or so. But now energy is the lifeblood of every measured economy and it offers, for the first time in human history, the opportunity to have a liquid, scientifically defined, almost omni-present commodity act as a currency base. Witness the wheat currency of Egypt (probably rice currency in Japan and SE Asia) as well as the commercial commodity notes traded between merchants. Air would also be a good commodity base except it is free. Our greatest source of energy -- solar -- is also 'free' in that sense. But solar energy needs a great deal of work doing on it before it is usable.
Unlike energy, time input is not representative of real output but is a great measure of equality.
A gold revival is highly predictable given the debasement of the previous reserve currency (US $) but gold is just a fiat currency with a long time and geographical base, it doesn't reflect real output and changes a great deal in value.
Cheers,
John M.
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John
Cowrie shells (of a very particular type and size -- rare, and thus valuable, when collected by human divers off the coasts of Africa) have been in use as currency for many thousands of years following on from their use as ornamentation 100,000 years ago. As recently as about 1650 the banks of Amsterdam kept cowrie shells in their vaults as a valid currency alongside gold coins. Cowrie shells as a currency came to an end dramatically when European fishing boats started dredging them in their hundreds of thousands from sea bottoms. Gold, silver, precious stones, because of their geology, have always been rare.
I came to my views about gold not via economics but via anthropology. Human males (and Neanderthal man and Homo erectus) always have some form of bodily ornamentation to denote status ranking in their group or tribe. About 5,000 years ago, in several civilizations throughout Eurasia, gold emerged as the supreme ornamentation for high status and then, 2,500 years ago almost "naturally" became valuable currency also (because it could easily be chopped up into coins). Until last year, India was the largest importer of gold in the world, but still largely stuck at the ornamentation use of gold (mainly for family rankings within castes when parents choose marriage partners for their sons and daughters). Being an agricultural culture India never really needed much gold for currency purposes. China became the largest importer last year (as well as being the largest home producer) on two fronts -- official (for foreign currency reserves) and private. It is the latter which is the more interesting because here we are seeing the historical sliding over of gold for ornaments (for family status) into gold as currency (at present, slim 25g,50g, 100g gold tablets) taking place because its elite coastal class is becoming prosperous very quickly, and their paper currency is inflating. The Chinese have not had the 'benefit' of official propaganda as the West have had that gold is a 'barbarous relic'.
A currency base using a vital commodity has always been critical -- from the first flint axe-head onwards -- as a necessary factor of production.
No, gold is not a fiat currency! Governments can make gold an official currency, if you like, but can't manufacture it ad lib. Ever since 1914 gold has had an artificial value because Western governments have denied it a free market. Prior to 1914 gold had a rock-steady valuation. It always has, except for a period when the Spaniard plundered Aztec gold (where it was used as status ornamentation, not currency) and a vast amount of gold suddenly arrived in Europe. This huge inflation (devaluation) of gold in Europe largely stopped significant European-Arabic-Chinese trade in its tracks until about 1700-1750 by which time gold had become more widely distributed and gold was only available again from mining. From then until 1914 gold was rock-steady in its value. Today, gold is now finding its way back to the valuation it ought to be -- probably $20,000/ounce at least -- considering the vast inflation of banknote currencies since 1914.
Best wishes,
Keith
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Keith,
Gold's value is mainly as ornamentation and a means of exchange. It is relatively unimportant as an industrial commodity. Its price is largely a factor of its scarcity not its contribution to real goods output nor its cost of production. Although gold is not printed or issued by governments and therefore does not meet the conventional criteria for a fiat currency, it is, in effect, a fiat currency. Its value has been set by the world financial order as a currency. It's value is highly volatile over time but compared to individual national fiat currencies it is a model of stability hence its value as a reserve and worldwide trading currency.
As our economic and financial systems evolve, it is necessary to move beyond a currency system with the limitations inherent in gold. In the 21st century, energy is an improvement on gold as a currency base in very parameter. Gold has served its purpose just as cowries, wheat and knife blades have in the past.
We live in an ocean of low grade energy flows but only high grade deliverable energy is a commercial economic commodity. And it is now the most vital and pervasive economic commodity. 150 years ago, most energy was either locked into natural systems or only sold locally. It is now a base commodity traded in many forms worldwide. It is time for the world monetary system to recognize and take advantage of this new and permanent reality.
Cheers,
John M.
Blog Addition - Prof. Bob Blain advocating the work hour as the basis for currency and John Meyer advocating energy based currency.
This is a lengthy dialogue on the merits of different currency bases. Both contributors are in agreement on the weaknesses of fiat currencies and the need to replace them with something better and based on real output.
Hour Of Labour vs Energy Based Currency Discussion
There are several links to sites cited by Bob the content of which is too extensive to be included here.
http://www.ied.info/books/weaving-golden-threads
http://www.earthfederation.info
http://www.radford.edu/~gmartin/
Also there are two documents one, pdf and one .doc embedded in the discussion which more fully outline Bob’s position.
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Hi John,
I was referred to your website by Ellen Brown. You saw her article, Time for a new theory of money.
I agree that the money unit must be defined, that is, made definite. However, it must be a common denominator, one that is known and understood by everyone along the chains of exchange that money is meant to facilitate. Today, money operates without a definition of its unit. I am attaching a brief statement of why work time is the proper unit. You can read the theory from which this idea is derived from : http://www.ied.info/books/weaving-golden-threads There is a lot more there than I can relay in an email, but let me say a word about why energy units are not the correct unit.
Energy is not a common denominator of price. You can know that by asking how much energy a school teacher or a plumber or a carpenter or a bus driver should be paid? 2 kilowatts? 4 kilowatts? 100 kilowatts? I know nothing about the generation of electricity. The unit must be known to all of us. Work time is known by the visible hands of the clock. Hour money is what you are reaching for.
You can download a computer version of Cooperation: The Wealth of Nations Game from my website and see that it works. With the game, you can compare barter, socialism, and capitalism and then autonomy, that uses time as the money unit.
Bob Blain
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Sent: Thursday, December 23, 2010 5:59 AM
To: Bob Blain
Subject: Time vs Energy Currency
Bob,
I think the advantage of energy over time is that energy is a scientific unit of measure and any currency representing or locked onto energy will not be subject to any kind of manipulation over time. There will be no arbitrary or "fiat" elements in its valuation. Fraud yes as always.
Energy also is a direct link to the environment and the resource base which is badly needed in our accounting system. Societies cannot survive without an effective costing system or decision making grinds to a halt. More correctly, meaningful decision making ceases and is replaced by arbitrary guesswork or "hopework" as faith-based pronouncements displace rational thought. We are surely well into this phase now.
The hour base will introduce a great degree of equality in the system but the overall system will be just as arbitrary as a fiat system in the long term. Time may be several steps up from what we are doing now but it doesn't solve enough problems to promote, with certainty, the long term development of a sustainable society.
I would guess that, in eliminating a great deal of the money shuffling froth from the economy, a good deal of equality would be restored to the society.
Energy seems to me the ideal currency base and this opinion becomes stronger the more I read about Egyptian wheat currency which has been far and away the most successful currency system in human history. (see the History of Money section of theperfectcurrency.org.) Energy has all of the advantages of wheat and adds some very powerful upgrades.
Do humans have the ability to change before societal collapse delivers massive change but not necessarily improvement? Do you know of any instances where humans have made fundamental systemic changes in time to avoid disaster?
Cheers,
John Meyer
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To John from Bob, Dec 23, 2010 11:23 am
The basic problem with energy is answering the question, How much is a fair wage? I know nothing about the production of energy. How would I know what I should be paid? The hour is scientific in that it is based on the rotation of the earth. We cannot manipulate that. Money is a medium of communication from human being to human being. Both must know the relevant meaning of any money. Money's purpose is to promote the principle, share the work and share the wealth. Any commodity, wheat, energy, etc. will not work unless you identify the labor time required to produce it. Then, you don't need the commodity at all.
Bob
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Sent: Tuesday, December 28, 2010 9:47 AM
To: Bob Blain
Subject: Re: Time vs Energy Currency
Bob,
Certainly being paid in time or energy is the ultimate form of currency as these are the only two elements which are constant.
In going kWhr we would convert from existing currency via a peg method. Exactly like the gold standard only using energy. So initially energy remains largely an abstract concept like gold. The only advantage initially would be to stabilize international currencies. This, of course, is a huge improvement but it is only a first step in advancing towards a truly viable currency and monetary system.
I maintain that energy is a more representative elemental unit of real output that an hour of work because the output from any hour of work can vary tremendously given differences in resources, technology, organization and motivation.
From the point of view of the person giving the hour of work, perhaps all hours should be valued the same but from the person buying the hour of work, the valuations will differ radically. The value of energy remains the same on both sides of the transaction. Time maybe money to most people but real output is what we pay for and an energy base allows the directness and simplicity of barter as well as accommodating any scale of transaction.
Energy would appear to me to be better suited in the long run to fully representing both the human and natural components of real wealth production. Also, the conversion process would also be much easier. Why? We've done it before successfully and crowning the kWhr as the king of currencies would use existing mechanisms. Wheat currency was the first successful currency and the Bretton Woods process was the first successful international stabilization process. Converting to an energy base would be walking a familiar path. (the British pound, Venetian ducat also worked well for generations as did some ancient coinage but really these are all effectively gold based)
Bretton Woods perhaps, because it used gold which might be viewed as a "fiat commodity", was doomed to eventual failure but it was the most effective monetary stabilization mechanism in 2000 years. It showed the way forward and perhaps we could have further improved the system and made it last longer if the Vietnam war had not launched the US off the rails of fiscal restraint. But because gold is not linked in any way to real output, failure was inevitable.
There is no reason for an energy based system to fail as there is no debate over what is being traded now or in the future. Time and the value of time as represented in an hour of labour becomes murky very quickly particularly when an effort is made to integrate with environmental processes.
Cheers,
John M.
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John, Dec 28, 4:58pm
So what is your answer to my question, What is a reasonable pay for me to expect?
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Sent: Tuesday, December 28, 2010 5:44 PM
To: Bob Blain
Subject: Time vs Energy Currency 5 steps to Full Conversion
Bob,
I, on then other hand, not really knowing what the real equivalent of an arbitrary 1 hour of work is would really rather get paid in kWatthrs be it in the form of litres of gas or electricity coming out of my wall plug.
Step 1 is to deal with international currency transactions - essentially reserve currencies which are only actually physically transferred when there is an on-going trade imbalance.
This is trade in real currency notes - actual kWhrs backed up by the physical ability to deliver energy in some form to a port ready for export. Same as the gold standard. Monitored and verified.
Step 2 is to peg national currencies to each other via a kWhr metric. If the US $ is worth 10kWhrs then the Euro is worth 15 and the yen 0.5 etc. This stabilizes the international currencies and works exactly like the gold standard.
The third step is the hardest to conceptualize. How much do we pay Bob the professor? We don't pick a number of kWhrs out of the air or try to completely account for all the Bob's physical consumption in kWhrs initially. That leap would generate chaos. If Bob the professor gets $1000 per week and the international worth of the US $ is 10kWhrs then Bob's rate of pay is 10,000kWhrs per week. Nothing changes except the money looks a little different with a notation of the kWhr value.
For an easy conversion ratio like 10:1 there would not be a huge number of problems. For other ratios as were encountered as the Euro was introduced, then the same issues would be encountered and the market would take time to iron them out. You could not, at this point, walk into your hydro sales office and pay your 5000 physical kiloWatt monthly bill with a 5000 monetary kWhr bill. Nor fill up your car with 2000kWhrs of gas and pay with 2000 monetary kWhr bills.
The last step (5) is the easiest to conceive as technology develops to the point where we can carry around and upload and download vast amounts of energy so it flows as easily as the digital versions of our $ currently do. We may never progress that far. This can easily be done now on an international reserve basis but day to day transactions for every human on the planet is going to have to wait.
But to get there we have to pass through the phase that involves actually answering your question. The actual valuation of human activities in kWhrs. The dreaded Step 4.
How much do I get paid in actual kWhrs? How do we switch from monetary (still fiat) kWhrs to the real juice? First, determine the actual "money supply" - how much energy is consumed in the economy annually. Next, match that to the fiat money supply. Come up with a ratio. How does that ratio compare to the arbitrary ratio we created in step 3. (It would be nice if we has done a quick and dirty calculation that was quite close before we implemented step 3). Since actual energy money will eventually be the new currency, over time the ratio used for fiat money currency is modified to align with actual energy money.
So Professor Bob gets paid (let's call a kWhr a "wattie") 10k watties a week at the start of step 3 and by the end of step 4 if the ratio of watties to $ for the whole country is not 10:1 but 7:1 then Bob gets 7,000 watties a week.
If this sounds nebulous and convoluted to someone (and it would to most people) it is because they really haven't dug into what our current fiat currencies actually represent. Pure faith.
To summarize, international currencies have to be stabilized. A new Bretton Woods agreement on gold would do that but why use gold when it is simply a fiat currency with a longer shelf life than paper? Gold will work for years or decades until the build up of economic distortions (to which gold has no direct link) can no longer be absorbed and the system breaks down while energy will work forever. There is absolutely no drawback to substituting energy for gold in a new Bretton Woods covering steps 1 and 2. The advantage is that it establishes the basis for a system which can then evolve into a fully stable and representative monetary system.
Your answer is buried in there somewhere Bob. In a move to a real currency, the concept will be to make it as gradual as possible without shaking confidence to an unmanageable degree. At some point in that process, Bob will have ended his days of worrying about dollars and begun worrying about watties. But what a wattie will be worth in 5 years or 50 won't be one of his concerns.
Cheers,
John
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John, Dec 29 9:29
Sorry, your answer is using dollars to define kilowatt hours. Look how close you are! You only need to drop the word "kilowatt" and you have it: Hour. I would be happy to receive One Hour of money for each hour of work that I do. How about you?
Bob
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Sent: Thursday, December 30, 2010 5:57 AM
To: Bob Blain
Subject: Re: Time vs Energy Currency 5 steps to Full Conversion
Bob,
Watt or kiloWatt like horsepower is a scientific unit which describes work. They don't describe how much work is done until time is added. Hence kiloWatt hours describes very precisely how much work has been done or can be done.
We need to describe how much work has been done and hours alone won't do it. It has to be hours of a consistent something to be useful. So hours of work as a monetary base is no worse than dollars and better with respect to equalization of society. But it does not describe real output per hour and any advanced system has to be able to represent real physical output. Simple hours requires interpretation and scaling to allow for different output per hour of all manner of endeavours.
That was the beauty of barter. What you see is what you get at the time of exchange and the transactions is completely transparent. A perfect currency will produce the same result.
Cheers,
John M.
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John, Dec 30 8:25am
How much can I expect to be paid? You seem unable to answer that question and that is the problem with using any 'thing'. We use time to organize everything in our economy, except money. It is time to use time. We pay people by the hour; let's put it on the money so everyone knows when they are paid a fair wage and when they are not.
Bob Blain
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Bob, Dec 30, 2010
In making an actual kWhr the base for international trade, there really isn't a problem. If gold worked, energy will work better.
Do you see a problem with the international trade aspect?
The problems start with trying to make an actual wattie the base for domestic transactions where it is necessary to build in the energy base commodity plus value added.
Would you see this as where the problem lies?
Cheers,
John M.
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To: Bob Blain Dec 31 8:21
Subject: Re: Time vs Energy Currency 5 steps to Full Conversion
Bob,
I'm going away for a week and I don't know if even then if one of us will be able to convert the other or even if we had years to ponder.
My background is industrial and environmental so I measure everything in real physical units. I only use dollars if there is no alternative. To me, time is of value only to the individual directly and cannot be transferred on a one to one basis. Few people value the time of others the same way they value their own time.
One buys things and consumes things and produces things (with ones time and effort) but the effective measure of those things as end products must be a physical equivalent not a symbolic one.
In the conversion to energy currency the big and immediate payoffs are stability of international finance and the elimination of speculation. I don't know if you see problems with this step as we seem to be getting hung up on the conversion on the domestic front. Here the payoffs are not as large but conversion can take place over decades. Initially one is paid exactly the same as before but with currency which looks different. Ditto once the full conversion takes place but that only occurs once a full understanding of the proper ratio of watties to fiat money supply has been achieved.
Then you'll be paid in real watties and your purchasing power will not change. The advantage is, distortions of fiat money will be eliminated and the regular disasters which fiat money visits upon the real wealth production sector will no longer occur. Whatever payment is, it will represent your output, not your time. Transactions from barter to paper money based have always been based on output not on input.
Cheers,
John M.
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Dear John, Jan 3 1:08pm
Time is based on the physical rotation of the earth. Everything in economics is organized by time. If time is not based on physical reality, how come we use it. You say you are going away for a week. I know exactly what "week" means. You may be using it loosely - maybe it will be six days, maybe seven, maybe eight. If you were working for me, we would both insist on precisely a certain number of hours within which I would expect you to produce a certain output. You say that everyone values their time differently. That is certainly true, but we all use clocks calibrated to precisely the same time.
When you say that I will be paid in watties, I have no clue as to the correctness of that pay. You say nothing about variations in the production of watties. Energy may come from wood, coal, oil, atoms, from very different places at very different costs. There is nothing uniform about costs of energy. You want price to correspond with value. People value energy differently. Good luck when you get sick and the doctor wants your life savings for saving your life. Value belongs to the buyer, not the seller. The seller deserves to be paid the price. When we charge for value we are taking what does not belong to us. We buy for value and look for the seller who can produce it for the lowest price. This is a most important distinction.
Bob
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Sent: Tuesday, January 04, 2011 9:54 AM
To: 'Bob Blain'
Subject: RE: Time vs Energy Currency 5 steps to Full Conversion
Dear J,
If you want to use energy, how about this? Hours of human energy. Yes, people value their energy differently but they value kilowatts of energy differently also. Money is a medium of communication from person to person to person. The message should be to tell someone how much they have contributed by work and therefore how much they deserve to be paid by someone else's work. That is also why people intuitively refer to time and money together.
Bob
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Sent: Tuesday, January 18, 2011 6:56 AM
To: Bob Blain
Subject: Energy = Work, Time = Well-Being
Bob,
Time can't be used as a method of payment because as you point out, value belongs to the buyer. The only time unit which has value to a buyer is his own time. The time input of the supplier is irrelevant. Real output is what is being purchased not inputs whether the input is time or energy.
But as a unit of output, energy is the most basic and scientifically definable commodity since it represents work which can be done and work that has been done. The scientific measure of work has no time component. The rate of work introduces time. The bottom line is the amount of work done. Rate of work determines what standard of living we can achieve or if we can survive at all.
Human societies have risen and fallen on their soil resources. Large per capita soil resources mean very productive fields which means, over time, a highly advanced society. As soil resources decline, the society declines and ultimately collapses.
Today, we have 7 billion people living on soil resources which can, at best, sustainably support 1 billion people (some soil scientists put the number at 100 million). The sole reason we are able to support 7 billion people is oil (fossil) inputs in the form of fertilizer, mechanization, irrigation, transport and storage. No amount of human labour alone can replace these massive inputs.
If oil resources suddenly ceased to exist, try as we might, we would not be able to generate remotely adequate food for 7 billion people. In making the effort to do so, we would shut down most industries and send 85% or our workforce on to the fields in an attempt to squeeze the most from the soil. The energy we would expend would exceed the energy we would get back in the form of food. This process would take the form of a downward spiral until the food requirements of a much smaller human population was able to be met reliably by the output the soil and natural systems could maintain.
Energy is the key component, not time because energy best defines real work done and the potential to do real work. Human time is secondary and is better applied to understanding standard of living and equality issues. As a currency (a means of exchange), energy is the best base but as a measure of human well-being, time is the higher level analytical metric.
Cheers,
John Meyer
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John, Date January 19, 2011
The purpose of money is to communicate reciprocity among human beings. "I help you, you help me" is the basic rule of human cooperation. In a group so large that people cannot know each other, people use money to let everyone know who is helping and, therefore, who has earned the right to be helped. Clock measured time is our best tool for encouraging reciprocity in how much we each contribute and how much we each consume.
You raise important issues about sustainability and I agree with your concerns.
To address over-consumption, we need to deal with the various realities qualitatively as well as quantitatively. We should not want GDP to grow. It is already too big. We should want GDP to improve. That would mean better products for less energy.
I keep asking you how much of the energy you are talking about I could expect to be paid under your system.
Bob
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To: Bob Blain Jan 21 6:58am
Subject: Re: Energy = Work, Time = Well-Being
Bob,
Trade is not communication, it is pure exchange. There is no need for any kind of reciprocity, equality or any social meaning in any specific individual transaction. Any individual transaction must only reflect real costs and demand at the specific time of the transaction. Structuring the basis of transactions to effect equality and social well-being is an altogether different thing.
In the long term, efforts to achieve sustainability and social well-being have to be based on efficient and cost representative transactions or the real goods producing mechanism will break down no matter what the social intent. Conversely, if the transactions are not structured to produce an overall social structure that is viable then the society breaks down.
So we need both ideally costed transactions and a strategic structure for society to achieve its goals. Think of it as the transaction being the molecule and the structure being the steel parts of the engine.
Energy is the best representation of real basic input so it should be the basis for currency. Intent should be applied to a higher level of decision making.
You get paid in watties which reflects a certain amount of real input and output modulated by social intent which, in your case, would be to allow an individual to live reasonably well so he can contribute to the best of his ability to upgrade the physical and social skills of upcoming generations.
Your individual financial picture would not change much in a move to energy currency but the transactions upon which the commercial structure is based would become much more rational over time. In short, you would not notice much of a difference except an elimination of financial booms and busts. Environmental, resource and climate booms and busts will always be with us.
Cheers,
John
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John, Jan 22 10:40pm
I think we have reached the nub of the difference between us. If trade is not communication, why do we use notes? Money says on it that it is a note. Why?
Bob
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Hi John, Jan 23 12:18pm
Here is a little graphic of how I see transactions.
Person B works for person A. A gives B money. Person B passes the money to person C who then actually pays person B.
A <-- Work B <-- Goods C
Money --> Money -->
We say that the money pays B, but B is not actually paid until C pays B in goods or services.
Reciprocity requires that B receive from C an equivalent of what B did for A, but C usually does not know A and has no idea what B did to earn the money. The money alone must convey how much B deserves to be paid. Money today cannot do its job while the meaning of 'dollar' is not defined. Although you will not read this in an economics textbook, the ambiguity of 'dollar' is the actual cause of inflation and deflation.
It seems to me that you are treating economic exchange as if it does not involve people at all, only objects. Economics seems to have stripped all concern about ethics and reciprocity out of its thinking. However, ethics is inescapable. Any choice is a moral choice and government and laws are important parts of it, unless you want to think of economics as governed by laws of the jungle. It's a shame that economics has become so divorced from ethics.
Paul Samuelson in his many editions of his textbook uses the example of a rich man's dog getting the milk that a child needs to avoid rickets. He says if that bothers you, take it to philosophy. The auction market is only doing what it is designed to do; putting goods into the hands of people with the most money votes. This example has always angered me. What an outrage, that dogs get milk while children get rickets! Maybe that is why economic relations are so screwed up. Reciprocity may be the most fundamental law of economics. We produce wealth through cooperation. People will continue to participate honorably in economic exchange as long as they are treated fairly - that means drawing from the system an equivalent of what they contribute. I hope you are seeing that exchange between people always has a moral component. Otherwise, why do we care if people earn or steal their money.
Bob
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John, Jan 24 7:27 pm
I am truly amazed. You have stated so well the need for objectivity and accuracy in currency. That is what a clock is for. Money is not a commodity. It evolved from warehouse receipts, but it is now a note - printed on high quality paper, embossed with inspiring images and words, backed by the legal authority of the State with severe penalties for counterfeiting. My dictionary defines note as an aid to memory. So the money's job is to 'remember' what I am owed for the work I did.
Economists emphasize price stability but not accuracy. A stable but inaccurate price is worse than an unstable one.
The clock is based on the precise rotation of the earth. We hold each other to the clock perhaps to nothing else with as much confidence that we are right if the clock says so. Have you tried walking out of work before the clock says it's time to go home? Classes, faculty meetings, parties, people insist on time according to the clock, it's o'clock. Let's do that with money. Then I will know how much to expect in pay, One Hour of money for one hour of work. I haven't a clue what I would ask for in kilowatts.
I am attaching an update I just finished a few minutes ago. The center of gravity of currency exchange rates is already equal work time.
Bob
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– To: Bob Blain Jan 24 8:43am
Subject: Re: Energy = Work, Time = Well-Being
Bob,
"If trade is not communication, why do we use notes? Money says on it that it is a note."
The term "note" has a spread of meanings here. The original "notes" were used as guarantees against real goods. These printed certificates were for exchanges of specific amounts of specific real goods between merchants. There was nothing abstract involved. The note was issued and at some point in the clearly foreseeable future, it was redeemed for the real goods. Promise issued and promise redeemed in a short time frame.
The term "notes" was carried over into the realm of printed fiat money which was intended to be a more convenient form of coinage while still offering the ideal of stable value, coins with a constant precious metal content. The ideal and the intent quickly became debased however as the authorities in charge of the printing presses were seduced by the ease with which they could churn out printed promises without ever having to make good on them. Bank notes now involve no fixed real good equivalent and no time limit. Promise printed and never redeemed. Inflation and social inequality all in one tidy package.
In economic terminology, "note" was never meant to mean any communication between people other than an absolutely clearly defined amount of real goods.
Transactions vs Economics
I agree that economics must encompass the whole real goods production system and that the economy must be structured to assure a sustainable society functioning in a way that is environmentally sustainable.
In order for this to happen the fundamental structure and the costs of any transaction have to be made absolutely clear by the monetary system. If the monetary system does not provide an accurate value of the inputs and outputs of a system and if it is subject to manipulation then the system will break down sooner or later.
Currency is the most basic element in any economic structure and if it isn't extremely accurate, then the economic structure will make poor decisions and twist itself into unsustainable structures. These will break wholly or partly and will be cobbled back together by market/government actions to maintain some sort of material goods flows but as long as the myriad transactions are based on inaccurate currency then full correction is impossible and massive failure of the entire system is inevitable.
Currency should be treated just the same as math. Fudging the numbers to get the desired outcome no matter how noble is a short walk from disaster. Clarity is the best base for morality.
The "rich man's dog's milk vs needy child's milk" is a choice of the economic and social system and has nothing to do with the currency or the measurement of milk. If I were proposing that currency be based on milk and not energy (this would work well for the Masai tribe in Africa) then we would be talking about transactions represented by liters of milk not kiloWatt hours.
Whatever priority you put on giving the distribution of the milk, the milk has to be measured accurately in liters. That is the unit of real goods in question and however it is distributed and consumed, that unit value will not change. If you put a different value on it so that the value of milk consumed by the dog has a much lower value than that consumed by the child (or visa versa) then the basic accounting system becomes distorted. There is no social justice in a liter of milk or a kWhr but there is a clear unit of value which can then be consumed or invested as a society sees fit.
Currency must be an inert scientific reality. One that has no vision or compassion and, on the other side, no ability to manipulate or distort. Those capabilities must higher order processes dictated by the structure of the economy and the intent of the people who designed it.
If society is to be sustainable, trade must be reciprocal and can be viewed as communication but in the book of the economy, currency must be the ink on the page, not the hand which holds the pen.
Cheers,
John M.
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John, Jan 26 8:48 pm
How would you explain the correlation between GDP per hour of work and currency exchange rates?
Bob Blain Metric
Bob
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To: Bob Blain Jan 26 8:26 am
Subject: Re: Energy = Work, Time = Well-Being
Bob,
I'm very impressed with the hour/standard of living/exchange rate relationships you have displayed. I never would have thought things would line up that well.
I think our main area of disagreement is based around the issue of counting outputs or inputs. Energy currency would be based on real output but would also provide a good window on inputs. Time reflects human inputs but this produces no guarantee of real output. Basically I think that energy better reflects real work both done and deliverable than does human time. Human time does not have an implicit link to the physical environment whereas energy does.
On an implementation note, the issue which is immediately before us is the establishment of a new international reserve currency to replace the US dollar. We know what has worked in the past: physical commodities. Wheat, gold, silver and even cowrie shells. In the time period in which the gold and silver coins were not debased, their value remained largely stable. This would be in the scores of years for some Roman coinage and hundreds of years for the British pound. Gold and silver and sea shells have no intrinsic value but they were in short enough supply to maintain their perceived value for milennia. Call them international fiat currencies.
Wheat never lost it's validity but was too cumbersome to act as a currency much beyond the borders of the wheat producing area of Egypt.
Gold worked for a good 40 years last century as a reserve currency before the US blew the system up and got off the gold standard. However, no matter how big or how small a nation is, they are all effectively now on an energy standard.
Energy is the new gold and, as a reserve currency, improves on gold in every parameter. A nation can be on the energy reserve standard or off it but no matter who comes into or out of the system, the system remains robust because it is the base currency for all international transactions. Every nation, like it or not, is in the energy network and participates in energy transfers both domestically and internationally.
So to replace the US $, all that has to be done is to create warrants or notes for energy - so much, in what form standardized to kWhrs to be delivered before a date with a practical redemption notice time. 1 gig kWhrs in natural gas at port of Kiev redeemable within 3 years on 30 days notice.
Once a pool and flow of these notes has been established the individual details can be eliminated and all transfers simply executed in kWhrs.
Domestic currencies are a much more involved second step but fairly mechanical once the reserve currency process has been established. Once an ideal international reserve currency has been established, I'm not sure just how critical it is to convert domestic currencies as many of the issues will be gone. Especially once currencies are pegged to the reserve currency.
I'm going to look at your hours mechanism more as I have some questions of how it represents real output. I'm not sure if it doesn't include some of the distortions that our current fiat currencies create but can't quite put the issues into words.
Cheers,
John M.
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John, Jan 31 4:51pm
I use GDP as a measure of general price level. I know that is not orthodox, but GDP is arrived at by adding selling prices. On the hoariness, the neat thing about correlation with a large number of cases is that other variables generally cancel each other out. Given all the complications, does that not make the simplicity and strength of the observed correlation even more significant?
You are overlooking the hoariness of kilowatts of electricity. There are many variables that make it not a standard except as electricity. Its costs vary by type, time, and place. Kilowatts are not stable in cost or value. In Norway and Saudi Arabia because of abundant oil, electricity is practically free for them.
The unit for currency must be divisible - as the hour and kilowatt are. The hour is more immutable than electricity.
To use a commodity for the definition of a currency unit is really no different than using gold, silver, copper, or many other things. Commodities for currency denies the relevance of people to prices. The price that matters in terms of human beings working together is the human price.
If the hour is so inappropriate, why is everything in our economy organized by time - the working hour, day, week, year, the scheduling of rent, loan payments, taxes, dividends, age to start work, age to retire, etc, everything except money? Put the other way, why is money exempted from the clarity, stability, and universality of time? I think it is so people can hoard it without their hoarding being obvious. What do you think?
Bob
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Sent: Monday, January 31, 2011 6:53 AM
To: Bob Blain
Subject: Re: Energy = Work, Time = Well-Being
Bob,
There has to be a fairly strong link given pretty open world trade but I was surprised to see the linearity.
But the whole approach to me is quite hoary as it involves many accounting issues. The noise floor here is pretty high. Hours worked are not the same in every country varying between 1400 and 2200+ per year. Structures of the economies are different with large scale resource exporters such as Norway and the bigger OPEC producers having a vastly higher GDP/hour worked than say Singapore which must produce everything.
Nor is net debt taken into account in the GDP calculations which is a significant factor for the US probably. In any case, I am very leery of the GDP measurement as an indicator of anything more than cash flow and try to stay well away from it.
But basically this approach is one that does not involve a fixed basic commodity. Hours is a higher order calculation and more useful for achievement of equality than accurate and stable transactions. It is not an indivisible, immutable base which the ideal currency must be.
Cheers,
John M.
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John, Jan 31 8:25 pm
"The ideal currency would be based on a commodity which is not limited in supply relative to the scale of the economy but rather representative of it."
I agree with the above statement from your email.
Human energy is energy. Commodity in origin means 'what makes life comfortable.' Treat human energy as a commodity when applied competently to produce values that we call 'goods' because they make life more comfortable.
Money is a note passed from person to person to person communicating that the bearer deserves to be paid an equivalent of what they did for someone else. This is not rocket science.
Tell me how much kilowatts of energy I should be paid. I know the answer clearly in hours - an hour of money for an hour of work. I haven't a clue what that means in kilowatts of electricity. We could put it in calories for human energy, but the calories burned is not a good index of goods produced.
I agree that output is what we must judge usefulness upon.
Input must be motivated and properly rewarded. That's money's job. What is making that so hard to understand?
Bob
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Sent: Monday, January 31, 2011 6:21 PM
To: Bob Blain
Subject: GDP / Ratios / Real Commodities
Bob,
I have a built in bias against the use of GDP for any serious measurements of social progress, environmental sustainability etc. GDP is too flawed to use for anything except a snapshot or, in a very limited number of cases, for ratios such as you are doing. The other source of massive confusion is fiat currency which is what the distorted accounting of GDP uses as a base unit. A double layer of fog does not guarantee daylight. Measurement in physical units is the only thing that can really be useful which is why I am suggesting currency using real energy units as its base.
The cost of producing the energy is absolutely irrelevant as we are only counting real output. If a state produces 1 gigaW hrs by holding a button down for 60 seconds, it has the same value as a state which clears 10 thousand hectares of forest and burns the wood up in steam generators over 4 months to produce 1 gigaW hrs.
Real output is the only currency of a transaction.
Commodity based currencies are the only ones which have done their job for a long period of time. I really don't have a problem with gold or silver as it was used throughout history which is as a given portion of real coins. The British pound sterling and the Venetian ducat held their value well for hundreds of years. But gold and silver (and cowrie shells) are really nothing more than fiat currencies themselves in the very long term and against the very large scale because they have no real use other than their attractiveness and scarcity. They are phony commodities but are treated like commodities because they are useful as money. The ancients first stab at moving beyond the limitations of the barter of disparate goods.
Only 15% or 20% of gold is actually used in the production of real goods (ornamentation not included here). Few useful processes really need it. So over 80% of golds application is speculative/ornamentation/money stabilizer. The ideal currency would be based on a commodity which is not limited in supply relative to the scale of the economy but rather representative of it. This commodity would be a real working commodity, used in many processes with a very low ratio of speculative to real application usage. What is the percentage of energy produced and used by the economy compared to the percentage physically held by speculators? Pretty low certainly although it is probable that some of the price of energy is controlled by speculators through paper and digital transactions.
In terms of scale and usefulness, no energy, no economy. Period. Huge amounts of energy, potentially huge economy. Small or huge amounts of gold, no effect on the economy except if gold is used as a currency, then the money supply becomes limited by a small amount or inflated if there is a huge amount (see late 1500s Europe as a flood of precious metals from the New World arrived).
In the ancient world, wheat fitted the role of a commodity based currency perfectly in Egypt and energy is now the carefully measured, ubiquitous blood-of-economic-life that wheat was 3000 years ago.
Time is used as the measured human commodity input but it does not represent real output. Energy is a real input and output. It doesn't matter how much energy or time went into producing the energy offered for sale, only the energy slammed down on the barrelhead matters but once on the barrelhead (or port of export), energy is the most definable, ubiquitous and vital commodity in universe.
Cheers,
John M.
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John, Feb 1 11:48am
Here is a paper I did for a Global Studies Conference at the University of Illinois last year. It puts money in the context of other media. I think it is pretty elemental.
Bob
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to Bob Feb 1 11:36 am
“It occurs to me ...
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To: Bob Blain Feb 1 6:38am
Subject: Re: GDP / Ratios / Real Commodities
Bob,
I think you are putting too many demands on currency. You are making it complicated and it needs to be elemental. It is not a social tool, it should be the absolutely inert basis for transactions which themselves should be structured to deliver the desired social outcome. Currency is not the vehicle to do that. Motivation lies outside of the transaction. It doesn't matter whether a transaction is good or bad for those involved or whether they will be motivated to do it again. All that matters is that the transaction provide clarity and contain no latent distortions. Good and bad and social intent are outside of the transaction. They can structure and be evident in a transaction or stream of transactions but they have no place in the basic chemistry.
You as a individual would never see energy as currency. Energy based currency would just be different looking paper or a term on a computer screen. Until we have the ability to carry huge amounts of energy around in our pockets, energy currency will be representative notes just the same as we have now. Money was invented so we didn't have to either transport or visualize chickens, pigs and goats to pay for fuel wood, bronze or fish. Physical conversion or equivalency ceased to be required.
Of course, this is what got us into trouble as currency developed, it totally lost any connection with the physical world and ceased to be viable. Energy based or commodity based currency, anchors the money system to physical reality but does not require constant reference to it for day to day transactions. Wheat currency maintained its link to the physical world which is why it was successful.
As a reserve currency, energy can be viewed in its physical form. A barrel of oil, liter of gas, and all of the methods to generate electricity all converted to the universal kWatt hr base. National currency monitors might have an interest in this but the man in the street will not.
Energy is more vital to an economy than human time. If there is an abundance of energy, humans can live quite well with virtually no time input. If there is no energy or energy that we can control, there are no humans. The same argument holds for air but the still has no commercial value since everyone gets it for free.
I say again that inputs do not matter, only the output has relevance in a transaction so human time is irrelevant on the supply side. Of course, if you could sell someone his own time, then that would have value but that does not happen often enough to built a monetary system on.
To get an idea of how energy flows shape an economy, skim David MacKay's "Sustainable Energy - Without the Hot Air" which describes the energy flows in a modern (British) society. It is downloadable at www.withouthotair.com
This illustrates fairly clearly how economic output is energy constrained. Human input is secondary in importance. It is the cart, not the donkey. Basic energy is the most important driver.
Cheers,
John M.
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Bob, Feb 3 8:12 pm
I've been looking over "A Metric for Money" and I wish someone with your talents were carrying the torch for energy based money!
I'm going to take issue with a number of points so bear with me.
Adam Smith and Ben Franklin lived in an era in which many commodities were vital. Food came from many sources and human controlled energy from but two, wood, water and maybe coal. Iron, copper and other metals were needed for their economies to function as were crops like cotton. None of these would lend themselves for use as a currency base due to their bulkiness. There was no uber-commodity around which the economy was built like the wheat economy of Egypt. Gold and silver were the clear choices up to maybe 60 years ago despite the fact that neither were very useful in any economic processes. They were representative and in effect, worldwide fiat currencies.
In seeing the flaws of these as currency bases, Smith and Franklin had no other practical alternatives so time naturally came to mind as a universal input. The fact that they did not promote units of labour as a currency base is not because they did not think of it, it is because it wasn't suitable.
I think you are mixing terms in your use of "price" and "value". In economic terms (real product transactions) the strike price is the value at the moment of the transaction. There is not necessarily any connection between real cost and the selling price for any single transaction but over time and with a larger number of transactions, price will reflect cost (cost being the sellers inputs including his profit - his time -required to repeat the transaction). In an economy with a huge number of transactions, we can consider cost and price to be the same. Differentiating between cost and price and entering into the minds of the transactors to represent intent is a futile endeavor.
The successful currencies of the past have been commodity based. Whether it was wheat in Egypt or commercial notes guaranteeing cotton, sheep, or fish, these currencies provided a sound, stable and transparent base for trade. They were not practical universally because they were cumbersome, geographically constrained or directly useful to only the people in that particular trade. But they worked and the notes did not reflect time or effort to produce the commodity but the actual deliverable commodity itself.
In terms of messaging, a kiloWatthour metric is a pure fibre optic plane connecting all economic entities on the planet (as well as in the universe) without loss in the chain of communication. Hour of work must be a calculation somewhat like the basket of currencies being proposed as the reserve currency replacement for the US $. The kWhr is a name for a scientific unit of measure which is easily translatable into other scientific measures like barrels of oil, liters of gas and cubic feet of natural gas.
In looking at the existence of man or any other entity, we live by our output and not by our input. Effort is irrelevant, only results matter. We may run civil society on a payment per time basis but underlying that, is real output. If nobody delivers real output, nobody eats.
The terms capitalism and socialism should not be involved at the transaction level. They are upper order machinations applied to the flow of transactions in favour of one group or another. I find them meaningless myself because there is no such thing as free enterprise in the real world. Just like hydrogen - it exists only in the lab. Once let out of its container it turns into something else. All transactions are subject to some kind of human social structure and whether they are to the benefit of one group or another is where these labels begin to be mis-applied. If the transactions themselves lack integrity then the social structure will eventually undergo sufficient change to assure that transactions are based on reality - for a short time. Printed money gave the weak and corrupt one more means (and maybe the best way) to steal and it has been done by the whole spectrum of political organizations.
Cheers,
John M.
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One final note by JM. Although it is not possible to build equality or any other intent into the basic element of economic transactions, the simple act of basing currency on a scientifically defined unit of energy will be a huge step towards equality. By eliminating speculation and fraud and dealing in real units, large engines of inequality will have been removed and a much more clear view of the real productive economy will have been rendered. Transparency is an absolutely necessary condition for equality to be achieved and energy currency delivers it.