Saturday, February 09, 2013

Money is Energy

The global economic crisis of last 5 years has brought out many voices which incisively cut through everyday beliefs about how the engine of economic activity works. It may be a "Breath, Neo!" moment when the underpinnings of the economic Matrix transform from a smudge background to a sharp, focused image.

Building up my own perspective on these issues has a thought gain hold on me. Money is Energy.

Fundamentally, all work we do as humans uses energy. In a broader sense, any activity which occurs on this planet, be it by animals, plants or nature, uses energy. And all this energy comes from our great star, the Sun. All fossil fuels are a store of Sun's energy. All green sources (solar, wind, tidal) are a store of Sun's energy. The only energy which humans can claim to be creating independent of Sun is in form of nuclear energy (fission and fusion), and even that is just imitating Sun. We haven't tapped yet into other exotic forms like zero point energy, anti-gravity etc. as of now.

What is wealth? It is the useful surplus generated when one expends energy to harness more energy. We eat food and then work to build machines which can do multiple times more work. We eat food and extract energy from Earth so that these machines can be run.

At any time of human development, there is a limit to how much extra energy can any one human produce. If a man was stranded on an island all alone, he could make tools and use them to better his living conditions only to a natural limit - which is imposed by time available, longevity of his body, availability of natural resources and his knowledge about how to harness any resource. Time is something which we yet don't know how to create (we haven't yet invented time machines). Body longevity is something which medical profession is dedicated towards. Availability of natural resources is why wars take place. And amount of knowledge a human can gain is limited by brain's capacity and time at hand. Among all these constraints, effectively it is only the 'knowledge' factor which most humans have some control on. So, we, as a species, discovered that skill specialization is the best way to increase our energy output.

However, that left us in a Catch 22 situation. If we specialize in one knowledge area, how do we make our needs met in areas of life which require other knowledge. So, we invented money.

Money is a representation of the value of the extra energy we have harnessed to produce something useful for  others. It is, therefore, firstly a common unit for measuring the utility of a produce. It is the token one gets for expending themselves in creating something. This token can then also serve as a medium of exchange. Money can be used to get end results of some other person's specialized knowledge of harnessing energy. The seller then uses the obtained money to become buyer to some other seller's produce. Money transfer links one person to another in the ecosystem.  

But, if money were only this, maybe we would have a simpler world to live with. Its allure is more because it is also a store of energy which can be used in future, i.e. money is wealth. It is something which affords the peace to a man that his future needs will be met and that he can pass on his store of wealth for his off-spring to utilize. The utility of money is as the wealth required for a man's life to go on with ease and his offsprings' to have a good launching pad into their own life. This is driven by the another fundamental force permeating through the Universe. That, life wants to find a way. Or, that genes want to survive and propagate. And for genes to achieve this objective, they need to deploy energy. So, 'the selfish gene' ensures that humans try to maximize energy available for themselves and also ensure that enough will be available for use of their off-springs.
Of course, for some people, the means become the end, and instead of viewing the utility of the quantity of money one wants to have, some primal portion of the brain gets into a race for having more of the quantity of the money. Perhaps, it is because if you have more money than your own needs, you are in a position to command others on whom your can bestow portions of your surplus money. This 'power' helps the gene to survive better and ensure a safer world for their off-springs.

Before money was invented, it was difficult for any one person to conclusively hold on to any surplus he generated. Any extra food he may forage would perish in a matter of days. Any extra cattle may get attacked by predators. His command over others could only be maintained so far as he had physical power to assert himself. And there was no guarantee that his offsprings could pull of the same feat.

Thus, money is a store of energy which complex organisms like us invented for the purpose of giving our genes a better today and promise of a better tomorrow. Money is how we want to store the Sun's life giving energy and use it as a proxy for energy transfer between humans. It is the ultimate talisman!

[Viewing money as an energy store can help in understanding true nature of various economic systems, right ways of money creation, discern what is investment, know how money is misused by few powerful people and even understand central bank policies. Want to write about this some time soon.]