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- Herausgeber: Icon Books
- Kategorie: Fachliteratur
- Sprache: Englisch
Money has many apparently magical properties. It can be created out of the void - and vanish without so much as a puff of smoke. It can flash through space. It can grow without limit. And it can blow up without warning. David Orrell argues that the emerging discipline of quantum economics, of which he is at the forefront, is the key to shattering the illusions that prevent us from understanding money's true nature. In this colourful tour of the history, philosophy and mathematics of money, Orrell demonstrates how everything makes much more sense when we replace our classical economic models with ones based on quantum probability - and reveals the explosive reality of what is left once the illusions are stripped away.
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Veröffentlichungsjahr: 2022
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Praise for Money, Magic, and How to Dismantle a Financial Bomb
‘Orrell argues that modelling markets with the mathematical toolbox of quantum mechanics could lead to a better understanding of them … Such ideas may still sound abstract. But they will soon be physically embodied on trading floors … One way or another, finance will catch up.’
Economist
‘[An] impressive, intelligent and imaginative bomb of a book … [it] entertains, educates and delights … A highly recommended read for all connoisseurs of curiosity and hope. And an absolute must-read for would-be economists.’
Chris A. Weitz, Gaiageld.com
‘This is a super addition to the literature on the quantum approach towards money, its cyber-version, and how it will change our lives. David Orrell has pulled together different thinking and approaches to guide us through the maze of magic money.’
Andrew Sheng, former central banker and financial regulator, and distinguished fellow at the Asia Global Institute, University of Hong Kong
‘David is our go-to source for anything and everything about quantum finance and economics. He’s at the forefront of the subject and, what’s more, he can explain it well.’
Paul Wilmott, Editor-in-Chief, Wilmott magazine
Praise for Quantum Economics
‘Beautifully written, inherently ethical, and often hilarious, this book is a must-read for anyone wanting to understand the weird, and getting weirder, world of modern finance.’
Margaret Wertheim, author of Pythagoras’ Trousers and The Pearly Gates of Cyberspace
‘As money becomes more digital and diffuse, it also becomes more quantum. In this timely and illuminating book, David Orrell brings us to the frontier of where economics, physics and psychology intersect. You’ll never look at money the same again!’
Dr Parag Khanna, author of Connectography: Mapping the Future of Global Civilization
ii‘On the cusp of an earlier revolution, Karl Marx said all that is solid melts into air and all that is holy is profaned. Constructing a less mechanistic and even more revolutionary science of quantum economics, David Orrell proves it so. Orrell does not dabble in metaphor or metaphysics: he intellectually, persuasively and corrosively transmutates money into a quantum phenomenon. In the process, classical economics is profaned to good effect and a quantum future glimmers as a real possibility.’
James Der Derian, Chair of International Security Studies, University of Sydney
Praise for Economyths
‘A fascinating, funny and wonderfully readable take down of mainstream economics. Read it.’
Kate Raworth, author of Doughnut Economics
‘Consistently interesting and enjoyable reading … A wide audience including many non-economists could benefit from reading it.’
International Journal of Social Economics
‘Lists 10 crucial assumptions (the economy is simple, fair, stable, etc.) and argues both entertainingly and convincingly that each one is totally at odds with reality. Orrell also suggests that adopting the science of complex systems would radically improve economic policymaking.’
William White, former Deputy Governor of the Bank of Canada (Bloomberg Best Books of 2013)
‘This is without doubt the best book I’ve read this year, and probably one of the most important books I’ve ever read … Orrell exposes the rotten heart of economics … [S]hould be required reading for every politician and banker. No, make that every voter in the land. This ought to be a real game changer of a book. Read it.’
Brian Clegg, PopularScience.co.uk
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For my mother
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CONTENTS
INTRODUCTION
Money has long been associated with a kind of magic, and finance with alchemy. After all, how can something like a piece of paper with numbers on it be treated as if it were made of gold?
Money has other apparently magical properties. It can be created out of the void – and vanish without so much as a puff of smoke. It can flash through space. It can grow without limit. And it can blow up without warning.
Money is like nothing else in the world – except, that is, the basic operations of the universe.
Drawing on the findings of the emerging area of quantum economics, this book will take the reader on a journey through money, magic, and quantum reality – and show how we can dismantle the money bomb that threatens social cohesion, financial stability, and the planet.
GOING NUCLEAR
The figure below shows two phenomena which at first glance may seem to have little to do with one another. The image on the top, from 1945, is of the first detonation of a nuclear device, known as the Trinity test.1
The image on the bottom is of an empty house down my street in Toronto. The photograph was taken by my daughter as part of a high school geography project. It was during the COVID-19 pandemic, so the schools were closed and courses were online. Students were asked to take a picture of something of interest in their neighbourhood to write a short comment 2on, and she chose this house. The house had then been empty for well over a year, and at the time of writing it is empty still. The sign on the front door is a notice of demolition, but it has yet to be knocked down.
When we first arrived in the neighbourhood, to rent a place up the road, the house – a detached property on a standard lot – was occupied by an elderly man. I chatted with him a few times; I knew he used to be a chemical engineer, and was a climate change sceptic (he told me he’d written a newspaper letter on the subject). One day the house was vacated, and I heard later that he had died. The house was apparently bought and sold more than once, but remained empty. It was last sold for $2,240,000 (Canadian dollars) or about $1.8 million US. For comparison, that is about 64 times the median income 3for an individual in Toronto, or 32 times the median income of a household with two workers.2 Anyone on the provincial minimum wage for Ontario obviously need not apply, since the cost would represent about a century of full-time labour, or a few centuries if money were set aside for things like living expenses.3 And at 180 times the global median household income, the price of the house, should they come across it on the internet, might seem unworldly to most of the world’s population – especially for the bottom 10 per cent or so of people living in areas of extreme poverty and earning a couple of dollars a day, where entire villages could basically toil forever and not get close.
So what is the connection between these pictures? One is that, at least to the uninitiated, or the unjaded, they both seem to involve a kind of magic. How can less than a kilogram of nuclear material create a giant mushroom cloud? And how can that house be worth so much money?
Another is that they both involve a kind of energy, which as we will see has an intimate connection with money. There are a number of ways to calculate the relationship between a financial asset such as a house and energy, but perhaps the simplest is to base it on the cost of a barrel of oil, which serves as a kind of proxy for energy in the economy. If we assume a typical price of about US$60 per barrel, which as seen later is an appropriate long-term average, the money from the house sale could buy 30,000 barrels – which is a lot of oil.4 Imagine a train with 40 tank cars and you have an idea.5 A different approach is to view the economy as a thermodynamic system, and ask how much physical energy is needed to sustain it, which as seen later gives a very similar result.
The Trinity test bomb, meanwhile, released a fearsome 92 terajoules of energy – which works out to about 20 tank 4cars full of oil. In a very real sense, the empty house therefore contains (or represents a claim on) more energy than the Trinity blast, and the same could be said for the average detached property in Toronto, or for homes in many cities across the world.6 What kind of sorcery is this?
As we’ll see, though, the most direct connection between the nuclear device and the house is that they both rely on similar technologies, which appear magical but are better described as quantum. And while the house doesn’t look like it is going to blow up any time soon, it does form part of a different, and much larger, kind of bomb, whose fissile material includes everything from payday loans to obscure financial derivatives.
This bomb isn’t a Trinity test – it is the equivalent of all the nuclear devices in the world, many times over. And mishandling it could result in the financial version of a nuclear winter.
HOW MUCH
Of course, it may seem strange to compare money’s ancient form of wizardry with advanced quantum technology. But despite its age, money still manages to retain the capacity for surprise. The wheel was probably invented around the same kind of time, but we aren’t constantly taken aback by its remarkable properties. Money is different. It has a special brand of magic that never ceases to amaze or thrill. If it had a show at Las Vegas, it would run forever. (Actually, it does have a show at Las Vegas – it’s called the casino.)
As with a magic trick, the way money works seems shrouded in mystery (assuming we pause long enough from trying to earn the stuff to even consider the question). On the one hand, we are accustomed to thinking about money as no more than a banal counting device, as just numbers on a spreadsheet or 5coins in our pockets, subject to the boring laws of addition and subtraction, profit and loss. It doesn’t help, as one personal finance coach put it, that ‘money is a taboo. Most people don’t talk about it. And because they don’t talk about it, they don’t learn about it.’7 (As will be discussed later, this money taboo extends quite generally.) But if we think a little deeper, the actual nature of money is an enigma. How is it that pieces of paper with numbers written on them – or, more usually today, just the numbers themselves, stored electronically in an account – can take on a quasi-religious significance, and become the central driving and organisational force of society? Even economists and financial experts seem dazzled and confused, as witnessed by their inability to predict the forces they help to unleash.
It is no surprise that money and the financial sector are associated with magic and alchemy. A documentary film on quantitative analysts is called Quants: The Alchemists of Wall Street; a leading book on central bankers is called The Alchemists; a member of the European Central Bank said that ‘we are magic people. Each time we take something and give to the markets – a rabbit out of the hat.’8 Richard Dzina from the New York Federal Reserve described the act of money creation, by pressing a button, as ‘a magical process’.9 In his 1967 book The Magic of Money, Hjalmar Schacht, who served as president of the Reichsbank under the Weimar Republic, wrote that ‘money really is quite an uncanny thing … Because I was able to master it, I earned myself the title of magician or wizard.’10 Even the US dollar bill has an all-seeing eye on it which resembles the sort of imagery used by fairground mind-readers.
This book will show that the reason money’s properties seem so strange, though, is because we are viewing them through the mental equivalent of a classical operating system. 6Just as quantum computers replace classical logic with a quantum version, so we need to upgrade our mental operating system in order to understand money. And just as any technology, or sorcery, can be put to creative or destructive uses, so the money system has the capacity for good or evil.
As commentators often note, the world economy is facing the interconnected problems of social inequality, financial instability, and the threat of impending environmental disaster. All of these have a common thread, which is the tension between the virtual economy of money and Wall Street and retirement accounts, and the real economy of things and people and the planet; between a mortgage, and a roof over your head. This book will argue that this tension is inherent to the quantifying and dualistic nature of money, as captured by the word quantum, from the Latin for ‘how much’ – as in, how much is this going to cost?
Inequality is to some extent a ‘natural’ phenomenon11 and has many causes, but a main driver of extreme inequality is that, as observed by the French economist Thomas Piketty, over history, the rate of return on financial investments has been greater than the rate of economic growth. Since rich people tend to have much of their income tied to virtual investments, which can also be preserved in families through inheritance, while the rest have their income tied to things like pay packets, the result is a positive feedback loop in which the rich magically get richer. In some years, my neighbour the engineer probably made multiples of his salary through the appreciation of his property, and younger generations may find their future standard of living depends as much on what they inherit as on what they earn.12 A related cause, though, is that money is not so much a store of utility, as it is portrayed by mainstream economists, as a source of power; and power isn’t by 7nature egalitarian. The rise of automation and robotics will only accentuate this trend.
Financial instability is caused in large part by a similar dynamic, which is that, in boom times at least, the rate of credit growth exceeds the rate of economic growth. A millennial or Gen Zer who wanted to buy a similar Toronto house today would probably have to take on an epic amount of debt in order to afford it, even with a grant from the bank of mum and dad.* At least they wouldn’t be alone: according to the Institute of International Finance, global debt, which comprises borrowings from households, companies, and governments, was around $275 trillion in 2020, up by about a third in five years.13 As economists such as Hyman Minsky have long argued, credit is inherently unstable, because it builds up when the economy is doing well (or during a pandemic, as it turns out) and then in a crisis everyone wants to call in their loans at the same time.14
The situation is exacerbated today by highly complex financial derivatives, which represent bets on the prices of financial assets, and whose dynamics are poorly understood even by the banker wizards who sell them.15 The notional value of these derivatives is around a quadrillion (i.e. a million billion) dollars, which truly is a magical number, since it is larger than the world economy.16 Central banks keep the debt system aloft by repressing interest rates so that loans are cheaper, which, as former central banker William White notes, only leads to ‘ever greater instability in the financial system’.17 And as political economist Susan Strange wrote in her 1986 book Casino Capitalism, it is this ‘chronic instability of the world’s financial system’ which leads in turn to the ‘ever-increasing disparity and 8inequality in the social distribution of risk and of opportunities for gain’.18 While anyone can play the game of betting on markets, only the large and powerful firms get rescued when things go wrong, as they regularly do.19
The most urgent problem with our financial system is caused by another growth imbalance, which is that the real economy, as reflected by inputs such as material and energy use and outputs such as pollution, is colliding with natural limits. While debt may be virtual, it acts as both a carrot and a stick to propel physical economic activity. Credit allows businesses and governments and individuals to press ahead with their plans; but at the same time loans charge interest, meaning that the economy has to grow continuously, and consume more energy and resources, just to meet its own obligations, which is a problem on a finite planet. As ecological economist Nate Hagens notes, ‘The energy/credit/growth dynamic is the least understood but most important phenomenon driving the current global economic and ecological situation.’20 Having an empty house on a busy street might seem to reduce damaging emissions, rather than add to them, but as will be discussed later, the real estate-financial complex as a whole is a major contributor to the climate crisis. Decarbonised it is not.
PANDEMIC
The COVID-19 pandemic lent new focus to these interconnected problems. Some headlines from 2020:
‘U.S. now has 22 million unemployed, wiping out a decade of job gains’
(Washington Post, 16 April)
‘U.S. stocks have their best month since 1987’
(New York Times, 30 April)
9‘Climate crisis: Coronavirus pandemic has caused 17% drop in global carbon emissions’
(Independent, 19 May)
‘“Essential” workers are just forced laborers’
(Washington Post, 21 May)
‘Tsunami of pandemic debt mounting in millions of British households’
(Independent, 9 June)
‘Wealth of US billionaires rises by nearly a third during pandemic’
(Guardian, 17 September)
‘Pandemic fuels unprecedented global “debt tsunami”’
(Financial Times, 18 November)
‘Default fuels fears of African “debt tsunami” as Covid impact bites’
(Guardian, 25 November)
In Canada, realtors quickly lobbied to see themselves designated as essential workers on the basis that ‘shelter is one of life’s basic necessities’ (even if it’s unaffordable).21 However, one thing that the pandemic exposed was the connection between financial health and the physical sort, as shown by the disparity of outcomes between wealthy people secluded in large houses, and the real essential workers who often lived in crowded homes and relied on public transport. Not to mention the growing numbers who, in a city with a homelessness crisis, just needed a roof over their heads. One of the more visible signs of the crisis in Toronto was the encampments that sprang up around the city, as people felt safer living in tents than in 10crowded shelters. No wonder the United Nations has called similar housing bubbles a human rights issue.22
The crisis highlighted like never before the disconnect between the virtual economy and the real economy, as stock markets and real estate alike reached new heights in the middle of record-breaking unemployment. It also made a mockery of the idea that markets set prices to reflect intrinsic value, when the reason they were soaring was largely because of massive central bank intervention, including buying bonds to crash the interest rates charged on loans such as mortgages, in what amounted to a huge inequality-boosting subsidy to capital markets (at last count the Bank of Canada owned 40 per cent of outstanding government bonds).
The pandemic exposed the fragile nature of our debt-based economy, where around a half of Canadian workers drew on government support, and one in six mortgage holders arranged for deferrals on payments.23 In the UK, the charity StepChange warned in June of a ‘debt tsunami’ (a phrase that became popular with headline writers, as seen in the examples above) that would take years to be resolved. And finally, the crisis gave people around the world a taste of what it takes to slow emissions and burn less oil – and showed that we are willing to shut down some parts of the economy when our personal safety is at risk.
Together, these three growth dynamics of inequality, debt, and environmental damage combine to form a financial version of a nuclear bomb, which policy makers around the world have long been afraid to dismantle, even though they also fear an eventual explosion. And making up its atomic core is our money system, which in a kind of alchemy fuses the real and the virtual to create a stream of ever-expanding but ultimately self-annihilating credit and debt. 11
MONETARY MAGIC
Arthur C. Clarke wrote that ‘Any sufficiently advanced technology is indistinguishable from magic’, and this book will argue that the money system can be described as a quantum social technology, whose quantum properties both create the illusion of magic and give money its power. As some examples of its magical prowess, money can jump instantaneously from one place to another (magicologists call this a transportation trick, though with money it is as easy as tapping your card at the store). It can change from metal to paper to numbers in an account (the transformation trick). It can be created out of nothing by banks (the production trick) or disappear into the void (the vanish trick). It can lift the price of a house to the sky (the levitation trick) or bring the economy to an apparent equilibrium (the restoration trick). As we will see, all of these tricks are the result not of sorcery, but of the quantum properties of money. And only by bringing this remarkable substance back into economics can we address the problems of inequality, instability, and environmental damage.
Mainstream economics has traditionally given short shrift to money, because it does not fit into the mental model held by economists of how the economy works. This concentrates on ‘real’ goods, such as manufactured items or commodities, or on services, which are produced by real human labour. As Paul Samuelson wrote in his classic textbook Economics, ‘if we strip exchange down to its barest essentials and peel off the obscuring layer of money, we find that trade between individuals and nations largely boils down to barter.’24 There are allowances for legal effects such as patents, but these can be considered as the mental counterparts of physical objects – ideas that can be owned and sold, like the rights to a property. And because economists think in terms of averages and aggregates, if one 12person loans money to another then the net effect is zero. As the Nobel-laureate economist Paul Krugman scream-tweeted to his 4.6 million followers: ‘DEBT IS MONEY WE OWE TO OURSELVES’.25 (By the same logic, theft isn’t a problem either.) This book will argue, though, that the economy is driven by forces, entanglements, and power relationships which elude a classical analysis; and that we need a new approach to economics if we are to better allocate our energy and resources.
Physics progressed from the equilibrium view of Aristotle in ancient times, to the dynamical view of Newton in the seventeenth century, to the quantum view in the twentieth century. In quantum physics, at least according to standard interpretations, matter has both particle-like and wave-like properties. For example, the position of a quantum particle is described by a probabilistic ‘wave function’ which only ‘collapses’ down to a specific value at the time of measurement. Entities can also become mysteriously entangled so that a measurement on one reveals something about another. Instead of self-contained objects obeying mechanistic laws, matter turns out to be more like a shifting, holistic, and indeterminate form of information, where measurements are questions and the response depends on context and timing.
Economics, as we’ll see, has in contrast long been arrested in the stage of Aristotelian equilibrium. Economists found it impossible to arrive at meaningful analogues for concepts such as force or mass, for the simple reason that money does not behave like a classical object. However, the aim of this book is not to link economics directly to quantum physics, but rather to something that is both simpler and deeper – namely what might be described as our mental operating system, which shapes how we see and experience the world. To do this we will need to draw on quantum mathematics. 13
When the word ‘quantum’ is used in everyday language, it immediately conjours images of a strange and spooky world in which objects can translocate from one place to another and a cat can be alive and dead at the same time. As discussed later, the air of mystery is partly by design; however, it is unfortunate because it gets in the way of understanding the quantum approach for what it is, namely a set of mathematical tools that can be applied to different situations, from the subatomic world to the behaviour of people.
Of course, a common criticism of economics is that it puts too much emphasis on elaborate mathematics – but as an applied mathematician and writer, I believe that words and symbols can work together. The neoclassical economist Alfred Marshall described his system in a letter to a younger colleague: ‘(1) Use mathematics as a shorthand language, rather than an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This last I do often.’26 I have taken a somewhat different tack.
My 2018 book Quantum Economics: The New Science of Money proposed, in as clear language as I was capable, how economics could be quantised. It built on the insights of researchers in areas such as quantum cognition and quantum finance, and combined them with a quantum theory of value, which argued that money has dual real/virtual properties. Its technical companion Quantum Economics and Finance: An Applied Mathematics Introduction translated these ideas into mathematical equations, and also extended them in new directions, towards things like the pricing of financial options, the intricacies of supply and demand, and the energy encoded by money.
Although I am not an academic, I published many of the 14results in specialised scientific journals, in areas ranging from quantum mathematics to international relations to economics to quantitative finance; and was exposed to the works of a wide range of scholars who are working in and between these disciplines. This book will re-translate these new findings back into English (the non-academic sort) and show how they can be applied to our present situation. Many books promise the reader a new take on economics or the economy, but here the insights are derived less from a particular ideological viewpoint than from a fundamentally different form of logic and probability.
So what are these quantum ideas that I will be proposing? Here is a sample:
Money has the properties of both a virtual number and a real, owned thingMoney jumps, instead of moving in a continuous flowPeople don’t obey classical logic, or even adjusted versions of classical logic of the sort used in behavioural economicsThe financial system entangles people in a web of debtEconomic behaviour is affected by things like subjective feelings and altruismThe economy is a dynamical system, i.e. it moves aroundTransactions are inherently probabilistic, rather than deterministicMoney creation out of the void is one of the most important phenomena in economics, but also one of the least understoodEternal growth cannot be supportedEthics are important.If these proposals all seem painfully obvious and pedestrian compared to the stories peddled by mainstream economists, 15such as the marvellous Invisible Hand of Capitalism which drives prices to equilibrium, or the equally amazing Efficient Market Hypothesis which says that prices magically incorporate all available information, then don’t worry – that is the point. As we will see, they are all incompatible with some of the basic tenets of mainstream economics (and for that matter a lot of non-mainstream economics), at least in the absence of epicycles. And together, they point the way to a new economics, which has no need for such ungainly appendages, and which has room for the truly magical and creative properties of money.
MINDBOMB
The field known as quantum natural language processing is based on the idea that language can be treated as a quantum system, in which words are bound together through grammar and meaning to form what researchers from the firm Cambridge Quantum Computing call an ‘entangled whole’.27 This book, too, can be viewed as a series of quanta: chapters on topics that are separate, but entangled at the same time. Chapter 1 describes the alchemical process of money creation. Chapter 2 investigates the two-sided nature of money, and its connection with Greek philosophy, while Chapter 3 shows how quantum computers are rewriting the basics of logic, and economics. Chapter 4 explores why topics related to money – including subjectivity, gender, and all things quantum – are downplayed, ignored, and even treated as taboo by mainstream economists, and why this has impeded our understanding of the economy. Chapter 5 describes the atomic power of finance, and explains why money is the economy’s uranium. Chapter 6 shows how the quantum approach upends the most famous – but strangely unverifiable – result from economics, namely the ‘law’ of supply 16and demand. Chapter 7 reveals how economists performed an amazing sleight of hand when they introduced their theory of utility. Chapter 8 introduces the quantum view of human psychology, while Chapter 9 explores the mysterious phenomenon of entanglement. Chapter 10 compares economic models with the marvellous mechanical automata that have long been beloved of magicians. Chapter 11 reveals the paranormal quantum model for pricing financial options. Chapter 12 explores in greater detail the relationship between money and energy. Finally, Chapter 13 gives a three-step plan for how to safely dismantle a financial bomb, and as a free bonus reveals the secret of money.
On the way we will explore: the connection between money and ancient gods; how our modern monetary system was designed by a group of seventeenth-century alchemists; the relationship between heavy metal music, Pythagorean harmony, and quantum social science; the thread which links Newton’s theory of gravity, the quantum theory of entanglement, and a loan contract; how money has a colour, but it’s not green; how a medieval tally can be modelled on a quantum computer; what economic decisions have to do with the dual-slit experiment in quantum physics; how to price financial options using particles of light; how quantum approaches provide alternatives to some of the most famous results from economics and finance; why the rise of quantum computing is eyed with both excitement and fear by Wall Street; and how finance, like physics, involves quantum processes that have the capacity for either creation or destruction.
As a theory and mathematical model of human behaviour, mainstream or neoclassical economics has probably been the most influential (and certainly the best funded) in history; however, it is based on the misconception that humans – and the 17economy as a whole – behave according to classical logic. The quantum approach is a better description of the economy, is more useful at making predictions, and also changes what we see, and don’t see. Quantum cognition can model and predict the outcomes of psychological experiments, or the behaviour of mortgage-holders during a crisis, but also provides a different vision for humanity. The quantum version of supply and demand can be used to build sophisticated models of economic transactions, but also draws our attention to the non-equilibrium and sometimes unfair nature of their dynamics. The quantum model of money gives an expression for the social force and effort needed to create money, but just as importantly it shows how money, far from being an inert chip, is a form of information with a profound link to energy. Quantum models of financial markets lead naturally to new methods for pricing things like financial options, but they also make us acknowledge that the entangling tissues of contracts which underly the financial system are based as much on unquantifiable subjective forces as they are on objective calculations. Above all, the quantum approach draws our attention to topics such as money and power which have been sidelined in mainstream economics.
In 1944, as Allied physicists were nearing their goal of a nuclear bomb, the Bretton Woods conference extended a version of the gold standard into the post-war period, with the US dollar acting as a reserve currency pegged to gold. As the banking expert Andrew Sheng noted for a Bretton Woods Committee report commemorating its 75th anniversary, a new approach to finance is called for today. ‘To put it simply, we can no longer use the reductionist neoclassical economic paradigm, because the invisible hand of the market cannot deal with climate change, nor the inequities of war and disruptive technology … The neoclassical blindness arose because 18its framework was founded on the classical mathematics and physics of Descartes and Newton … A quantum paradigm of finance and the economy is slowly emerging, and its nonlinear, complex nature may help the design of a future global economy and financial architecture … Financial assets and virtual liabilities have quantum characteristics of entanglement with each other that are not yet fully understood … All of these developments suggest that using a new “quantum” imagination, the Bretton Woods framework can be reengineered.’28
This book will give a hint of how such a quantum framework might look. In 2010 I wrote a book called Economyths: Ten Ways Economics Gets It Wrong which was in part my reaction to the financial crisis. It ended with an exhortation – reproduced by Adbusters magazine during Occupy Wall Street, an event which the magazine had initiated – for economics students to overturn neoclassical orthodoxy and do something new.29
It was an example of what we might call a mindbomb – but this particular bomb had little effect on economics, which as we’ll see has remained rather unchanged. So, some years on, please consider this latest quantum entertainment to be my own humble, and I hope diverting, attempt at something new. We start in the next chapter with our first magic trick, which in alchemical circles used to go by the name of transmutation.
Front cover of the UK edition of Adbusters, November/December 2011 issue.
315Notes
1 Image from Wikipedia: http://en.wikipedia.org/wiki/Trinity_%28nuclear_test%29
2 Median salary in 2018 was $34,600. A household with two workers will of course make about twice this. Statistics Canada. Table 11-10-0239-01: Income of individuals by age group, sex and income source, Canada, provinces and selected census metropolitan areas.
3 Minimum wage in Ontario in 2020 is $14 per hour. The cost of the house therefore represents 160,000 hours. Assuming 36½ hours per week, and five weeks for holidays and statutory days off, it will take 93 years to pay off the house. Land transfer and realtor fees add a few more per cent.
4 Fix, B. (2020), ‘As We Exhaust Our Oil, It Will Get Cheaper But Less Affordable’. https://economicsfromthetopdown.com/2020/12/03/as-we-exhaust-our-oil-it-will-get-cheaper-but-less-affordable/
5 A standard DOT-111 railcar holds 717 barrels. https://en.wikipedia.org/wiki/DOT-111_tank_car
6 The average price for a detached home in Toronto was about $1,360,000 at the time.
7 James Coursier, quoted in: Godwin, R. (15 November 2020), ‘How much have you got? Breaking the taboos on money’. Guardian.
8 Speciale, A. and Seputyte, M. (11 May 2016), ‘ECB Can Still Pull Rabbits Out of the Hat, Council Member Says’. Bloomberg.
9 National Public Radio (23 October 2015) Planet Money, Episode 659: ‘How To Make $3 Trillion Disappear’.
10 Schacht, H. (1967). The Magic of Money. London: Oldbourne.
11 Scheffer, M., Van Bavel, B., Van de Leemput, I.A., Van Nes, E.H. (2017), ‘Inequality in nature and society’. Proceedings of the National Academy of Sciences 114(50): 13154-13157.
12 This isn’t unusual: in 2020, over half of Canada’s major real estate markets inflated by more than the median family income. Punwasi, S. (17 February 2021), ‘Canadian Bank: “Your House Makes More Than You Do,” Draw Your Own Conclusion’. Better Dwelling. https://betterdwelling.com/canadian-bank-your-house-makes-more-than-you-do-draw-your-own-conclusion/316
13 Wheatley, J. (18 November 2020), ‘Pandemic fuels global “debt tsunami”’. Financial Times. Canadian mortgage debt grew by 7.7 per cent in 2020 alone: see Erik Hertzberg (19 February 2021), ‘Canadians pile into mortgage debt at fastest pace in a decade’. Bloomberg.
14 Minsky, H.P. (1972), ‘Financial instability revisited: the economics of disaster’, in Reappraisal of the Federal Reserve Discount Mechanism (Washington, DC: Board of Governors of the Federal Reserve System), pp. 95–136.
15 Wilmott, P., Orrell, D. (2017), The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets. Chichester: Wiley.
16 The notional value of a derivative is based on the value of the underlying assets. See Wilmott, P., Orrell, D. (2017), The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets. Chichester: Wiley.
17 Dittli, M. (16 November 2020), ‘Central Banks Keep Shooting Themselves in the Foot’. https://themarket.ch/interview/william-white-central-banks-keep-shooting-themselves-in-the-foot-ld.3053
18 Strange, S. (1986), Casino Capitalism. Oxford: Basil Blackwell.
19 In 2021, Morgan Stanley CEO James Gorman accurately warned Reddit traders, who had bid up prices on unloved companies such as Gamestop in order to burn hedge funds who had bet on their demise, that they were ‘in for a very rude awakening at some point here’. Not like Morgan Stanley, then, which was one of the biggest recipients of bailout funds in the aftermath of the 2007/8 financial crisis. Or Gorman himself, whose pay package in 2020 amounted to $33 million in a year when, according to Bank of America’s chief investment strategist Michael Hartnett, ‘policy stimulus in 2020/21 continues to flow directly to Wall St not Main St, inciting historic wealth inequality via asset bubbles’. Natarajan, S. (28 January 2021), ‘Gorman Says Reddit Rally Traders Are Headed for “Rude Awakening”’. Bloomberg. Durden, T. (15 February 2021), ‘BofA Hints That Weimar 2.0 Could Be Coming’. Zero Hedge. https://www.zerohedge.com/markets/bofa-hints-weimar-20-could-be-coming
20 Hagens, N.J. (2020), ‘Economics for the future – Beyond the superorganism’. Ecological Economics 169: 106520.
21 McNutt, L. (14 April 2020), ‘Why is Real Estate an Essential Service?’. RE/MAX. https://blog.remax.ca/why-is-real-estate-an-essential-service/
22 ‘Housing. It’s a Human Right’. http://www.unhousingrapp.org/.
23 Evans, P. (10 September 2020), ‘Canadians have deferred $1B a month worth of mortgage payments since pandemic began’. CBC News.317
24 Samuelson, P.A. (1973), Economics (9th edn). New York: McGraw-Hill, p. 55.
25https://twitter.com/paulkrugman/status/1180457374705999872
26 Letter to A.L. Bowley, 27 February 1906.
27 Coecke, R., De Felice, G., Meichanetzidis, K., Toumi, A. (2020), ‘Foundations for Near-Term Quantum Natural Language Processing’. https://arxiv.org/pdf/2012.03755.pdf
28 Sheng, A. (July 2019), ‘A New Bretton Woods Vision for a Global Green New Deal’. Revitalizing the Spirit of Bretton Woods: 50 Perspectives on the Future of the Global Economic System. Bretton Woods Committee, pp. 360–367.
29 The excerpt read: ‘So: students. Decision time. You live at what many believe is a bifurcation point in human history. You’ve seen all the graphs with lines curving up like a ski jump. Human population. Gross domestic product. Species extinction. Carbon emissions. Inequality. Resource shortages. You know that something has to give. You’ve got an idea that the price isn’t right. Maybe you’re even suspicious that, if the world economy does turn out to be a Ponzi scheme, you or your children are a little bit late in the game.
‘You therefore stand at a fork in the road. You can take the orthodox route – and risk ending up with a qualification as impressive as a degree in Marxist ideology right after the fall of the Berlin Wall. Or you can take a chance on regime shift, by speaking up, questioning your teachers, being open to disruptive ideas, and generally acting as an agent of change.
‘You can insist that the economy is a complex, dynamic, networked system – and demand the tools to understand it.
‘You can point out that the economy is unfair, unstable, and unsustainable – and demand the skills to heal it.
‘You can tell the oracles that they have failed.
‘You can go in and break the machine.
‘And then you can do something new.’
* In 2021 a Reddit group paid for a billboard in Toronto which read, ‘Can’t Afford a Home? Have You Tried Finding Richer Parents?’
CHAPTER 1
TRANSMUTATION
For a long time now an increasing number of people have been asking questions about the world counting-house, getting down at last to such fundamental questions as ‘What is money?’ and ‘Why are Banks?’ It is disconcerting but stimulating to find that no lucid answer is forthcoming.
H.G. Wells, The New World Order, 1940
For Mike’s sake, Soddy, don’t call it transmutation. They’ll have our heads off as alchemists.
Ernest Rutherford, 1901
The ancient goal of alchemists was to transform one substance into another – especially if the end product was gold. The money system performs a similar alchemical trick by transforming labour and material into numbers in an account – or an empty house into two million dollars. To appreciate the quantum nature of money, a first step is to understand the magical nature of transmutation, which underpins interactions of both the nuclear and financial sort. This chapter shows how our current financial system was actually first designed by alchemists, and reveals some of the secrets behind its sorcery.
While problems such as financial inequality and instability seem particularly pressing now, concerns about the financial system are not exactly new. One person to warn of the unstable 20real/virtual nature of the financial system – and link it with an out-of-control nuclear device, though in a different way – was the English chemist-turned-economist Frederick Soddy a century ago.
Following his Nobel Prize-winning work on the basic properties of radiation, which he carried out at McGill University with Ernest Rutherford, Soddy became something of a proselytizer for the wonders of atomic energy. In his 1909 book The Interpretation of Radium, he wrote that this energy source held the promise to ‘transform a desert continent, thaw the frozen poles, and make the whole world one smiling Garden of Eden’. Fans of Soddy’s book included the author H.G. Wells, who acknowledged it in the dedication of his novel The World Set Free. However, Wells took Soddy’s technological utopianism to a different and harsher level. His story begins with a war in which aeroplanes dropping ‘atomic bombs’ destroy hundreds of cities. From the aftermath of the destruction emerges a new world run by a socialist global government.
Wells saw the outbreak of the First World War as confirming his prediction, and described the conflict in hopeful terms as ‘the war that will end war’. Soddy agreed with Wells about the potential of atomic weapons, but was less sure about the healing properties of nuclear conflict. In a 1915 speech, he noted of radioactive materials that ‘a pound weight could be made to do the work of 150 tons of dynamite. Ah! there’s the rub. Imagine … what the present war would be like if such an explosive had actually been discovered.’1 And in another speech the same year he concluded that ‘the social effect of recent advances in physical science promises to be annihilating, unless, before it is too late, there arises an equal and compensating advance, of which there is at present no sign, in the moral and spiritual forces of society.’ 21
Soddy realised that the economic system in particular, with its split between what he called real and virtual wealth, held within it the seeds of a collapse, which could ultimately trigger the nuclear war which he feared. To prevent such an event, he had five main policy proposals. These were to abandon the gold standard; let international exchange rates float; use federal budgets as a way to counterbalance cyclical trends; establish bureaus to compile statistics for things like prices; and finally, stop private banks from creating money out of nothing.
At the time, hardly anyone took Soddy or his suggestions seriously. The Nobel-laureate physicist Robert Millikan, for example, described Soddy’s idea of a nuclear weapon as a ‘hobgoblin’. A 1926 review of one of his economic treatises by The Times Literary Supplement remarked that ‘it was sad to see a respected chemist ruin his reputation by writing on a subject about which he was quite ignorant’.2 An exception was the economist Frank Knight, who agreed in another review that handing the job of money creation to private banks leads to ‘important evils … notably the frightful instability of the whole economic system and its periodical collapse in crises’.3
Soddy’s predictions were borne out by the arrival three years later of the Great Depression, which led in short order to the rise of the Nazis, the outbreak of war, and the first use of nuclear weapons. But after his death in 1956, an obituary in Science wrote that he was widely perceived as a ‘crank’ on monetary affairs whose ‘fanatical devotion to schemes of this sort, derided by the orthodox economists … was surprising to many who knew him first as a pioneer in chemical science’.4
As we’ll see, mainstream economists remain equally derisive towards outsider criticism, especially when it comes from ‘monetary cranks’, to use Paul Krugman’s phrase (defined as people who don’t understand economists’ ‘intellectual 22strategy’ towards money, which seems quite broad and inclusive).5 However, while Soddy’s ideas were considered crazy at the time, today most of them are standard practice: the gold standard is history, exchange rates float, federal budgets are used to counterbalance cyclical trends, and bureaus exist to compile statistics for things like prices. The only idea not to have been adopted was the prohibition against money creation by private banks.
This lack of interest would not have surprised Soddy; as he observed in 1934, ‘orthodox economics has never yet been anything but the class economics of the owners of debts’ and those who own debts may not want to abandon that privilege, or draw attention to it.6 And as Irving Fisher wrote, ‘It has been maintained – and the assertion is scarcely an exaggeration – that the theorems of Euclid would be bitterly controverted if financial or political interests were involved.’7 However, it does point to an interesting anomaly, which is that while money is at the heart of the economy, it has long been missing from mainstream economics. This goes back at least to the time of Adam Smith, who as discussed later treated money as a ‘veil’ over the real economy; and finance is still treated as a technical arena that doesn’t quite connect with the rest of the field. One of the reasons why the financial crisis of 2007/8 wasn’t predicted, for example, was explained by Vítor Constâncio of the European Central Bank ten years later in a 2017 speech: ‘In the prevalent macro models, the financial sector was absent, considered to have a remote effect on the real economic activity.’ In particular, the models ‘ignored the fact that banks create money by extending credit ex nihilo’ (out of nothing).8
Since the crisis, there have been efforts to add so-called ‘financial frictions’ to mainstream economic models, which account for effects such as varying abilities to obtain credit.923(Or as Servaas Storm from the Institute for New Economic Thinking put it in 2021, ‘practitioners are frantically trying to incorporate money in their otherwise money-less models.’)10 However, the use of the word ‘friction’ seems a little strange, given that other writers have described money as a ‘lubricant’ for economic activity, and events such as mass defaults represent sudden cascading behaviour. As we’ll see, such ‘frictions’ are the economics version of epicycles: the patches that ancient astronomers made to their geocentric model of the cosmos, in order to make it conform more closely with observations.
But, while the threat of nuclear war hasn’t gone away – and no other human invention compares to the horror of nuclear weapons – what if the quantum alchemy we should be worrying about most is not the atomic bomb, but the financial sort?
QUANTUM ALCHEMY
Soddy’s insights into both physics and finance may have been primed and influenced by his longstanding interest in the field of alchemy. While at McGill he delivered a series of lectures on ‘The History of Chemistry from Earliest Time’ which included two on alchemy. In these, he described the alchemists’ ‘quackery’ and ‘feverish desire’ for wealth as something that had nothing to do with ‘the normal development of chemistry’ but was instead ‘the result of a mental aberration’.11 However, he soon changed his mind. Even before his discovery of radiation, the old idea of the atom as an immutable, indivisible, fundamental unit of matter was breaking down with the recent discovery of the electron by Rutherford’s mentor J.J. Thomson. This seemed to open up the possibility of one element transforming into another – i.e. transmutation. It also meant that Soddy’s history of chemistry, which was based on the classical picture, was looking a little out of date. 24
In an unpublished paper titled ‘Alchemy and Chemistry’ he revisited the topic. His earlier history had dated alchemy to the fourth century, but in his new paper he described its birth as being in ‘an antiquity so remote that its origins appear in the records of mythology rather than in those of history’. And he argued that ‘The constitution of matter is the province of chemistry, and little indeed can be known of this constitution until transmutation is accomplished. This is today as it has always been the real goal of the chemist before this is a science that will satisfy the mind.’
In other words, the ultimate goal of chemistry was the same as that of alchemy – transmutation. When he and Rutherford discovered that the radiation they were studying was produced by the transmutation of thorium, he ‘was overwhelmed with something greater than joy … a kind of exaltation, intermingled with a certain feeling of pride that I had been chosen from all chemists of all ages to discover natural transmutation’.
Rutherford was more guarded. ‘For Mike’s sake, Soddy, don’t call it transmutation,’ he said.* ‘They’ll have our heads off as alchemists.’12 And Soddy’s excitement itself transformed into a sense of horror as the implications sank in.
THE INTELLIGENCER
The Western tradition of alchemy, with its emphasis on transmutation and wealth, has its roots in the notion, endorsed by Aristotle, that all things in the universe are composed of four elements: earth , water , air , and fire . The stars and planets – basically everything beyond the Moon – were made of the fifth element, ether (also known as the quintessence, 25denoted QE†). According to Aristotle, each element belonged in a separate sphere – with earth in the centre, surrounded by water, then air, then fire – to which it would tend to return. But elements could also transmute; so, for example, heating water turns it into air (steam actually but you know what they meant). Or, more hopefully, lead could turn into gold.
During the Middle Ages, the discovery of ancient Greek texts led to a renewed interest in alchemy. Alchemists – who became known as ‘puffers’ because of the time they spent blowing air into their fires in order to achieve the necessary temperatures for transmutation to occur – did a (literally) roaring trade selling their research and development services to European governments, and their laboratories were regular features in cities such as Paris, Prague, and London. However, as the quest for things like an elixir of life, or a philosopher’s stone which could transmute a base metal into gold, proved more elusive than anticipated, some alchemists turned their attention to another way of producing infinite wealth: banking. Chief among these financial magicians were the Hartlibians.13
The Hartlibians were a group of social reformers, natural philosophers, and utopians centred around the ‘intelligencer’ (i.e. an intellectual figure) Samuel Hartlib. Their broad range of intellectual interests included both alchemy and finance. Economic development at the time was hampered by a lack of access to money. Commerce was largely carried out on the basis of credit, but the terms had to be negotiated on a case-by-case basis, which slowed trade. The Hartlibians believed that credit could be used as a kind of financial philosopher’s stone to transform the economy.
26One member of the group, William Potter, wrote a pamphlet called ‘The Key of Wealth, or, A New Way for Improving of Trade’. (In alchemical discourse, ‘the key’ referred to the knowledge of how to transmute matter.) Henry Robinson, another Hartlibian, described his own scheme as ‘capable of multiplying the stock of the Nation, for as much as concernes trading in Infinitum: In breife, it is the Elixir or Philosopher’s Stone’.
The alchemical key in this case was the idea that the ‘base metal’ of things like land or goods or future earnings could be converted into the ‘gold’ of money through the magic of credit. For example, suppose someone had a valuable plot of land which they wanted to keep, but they needed to raise money in order to pursue a business venture. The usual method was to borrow money from someone, in exchange for a claim against the land. If the business venture failed, then the creditor would have their claim, but would have to wait a long time to be repaid. However, if the creditor instead received paper notes, and these notes could be exchanged, then they would be as good as money. The creditor could then spend them immediately (i.e. pass the debt on to someone else), and the money supply would expand accordingly.
This new money was effectively as good as gold, but was backed by a legal claim on an asset rather than by precious metal. As William Potter wrote, the resulting credit currency would unlock society’s ‘store-house of Riches’, making credit ‘the true Seed of Riches’. He estimated that the scheme could double England’s capital every two years, so after twenty years £1,000 would grow to a million pounds.
Some critics worried that creating such a source of infinite credit would lead to runaway inflation, just as discovering an actual philosopher’s stone would mean that, after a while, ‘gold and silver will grow cheap, like dung’, as the alchemist George 27Starkey, writing under the pseudonym of Eirenaeus Philalethes, observed. As we have since discovered, though, what counts is not the quantity of money, but its velocity of circulation – and money parked in inert assets like houses doesn’t circulate. Asset prices can therefore expand without leading to either price or wage inflation, at least in the short term. Of course, just as debt money can be created by making more loans, so it is extinguished when those loans are called in, which is why new loans have to be constantly generated in order to keep the show on the road.
IS THIS REALITY?
A number of land banks along these lines were attempted, but didn’t manage to attract enough broad interest to survive. However, a similar Hartlibian scheme was carried out in France by the expatriate Scots mathematician John Law, who with the backing of the sovereign opened a small bank, the Banque Royale, which went on to become for a short time the largest in the world. A difference was that the notes were effectively backed not by land directly, but by investments in Law’s Mississippi Company, which had trading rights over a huge expanse of what is now the United States.
One reason for Law’s success, while it lasted, was his stagecraft. For example, he didn’t just hand potential investors in the Mississippi Company a prospectus – he turned the whole thing into a show. Emigrants on their way to America – their ranks supplemented by prisoners and prostitutes – were given a leaving parade. Rumours were propagated about the enormous supplies of gold, silver and diamonds that awaited them in Louisiana. Tales of the immense riches won by speculators were spread. As the journalist and author John Flynn wrote in his biography of Law, ‘It is not to be wondered that for a few 28brief months Paris hailed the magician who had produced all these rabbits from his hat.’14 Still, not everyone was convinced. As Voltaire wrote: ‘Is this reality? Is this a chimera? Has half the nation found the philosopher’s stone in the paper mills?’
A similar company known as the South Sea Company was launched around the same time in England. In return for an offer to help fund the English national debt, the company was granted a permanent monopoly on trade with Mexico and South America, that included the right to carry African slaves to Spanish ports in the New World. The company’s public relations efforts were assisted by wordsmiths including Daniel Defoe and Jonathan Swift, who were paid to write articles promoting the scheme. Part of their job was to give the public a positive view of the brutal Atlantic slave trade. This was done by emphasising the exotic nature of the locations, and what one anonymous author (possibly Defoe) called the ‘inexhaustible Fountain’ of gold and silver available in the New World.
Again, not everyone was convinced, as shown by a song called the ‘South Sea Ballad’, which was apparently sung for months around the streets of London:
’Tis said that Alchemists of old,
Could turn a brazen kettle,
Or leaden cistern into gold,
That noble tempting metal.
But if it here may be allow’d,
To bring in great with small things,
Our cunning South Sea, like a god,
Turns nothing into all things.
It concluded by noting that ‘all the riches that we boast; Consist in scraps of paper’. 29
Neither of these schemes ended particularly well. You may have heard of the Alaska Gold Rush, or the Colorado Gold Rush, or the California Gold Rush, or even the Yukon Gold Rush, but you probably haven’t heard of the Mississippi Gold Rush. The reason is because there wasn’t any gold. The failure of Law’s Banque Royale meant that for the next couple of hundred years, financial institutions in France preferred to describe themselves as anything other than a bank. The South Sea bubble, meanwhile, introduced the word ‘bubble’ into the financial lexicon (this use was probably first due to Defoe, though Swift helped popularise it).
One problem with the Hartlibian analysis was that it missed the most important part of the equation, which is power. Law, for example, had the backing of the French crown, but his boundless ambitions to take over every aspect of the money system, including tax collection, alienated the financial community. The Bank of England solved this problem by a power-sharing arrangement. In exchange for a £1.2 million loan, King William III granted the bank a number of things including, apart from regular interest payments, the right to issue banknotes backed by the debt. The crown and its creditors were thus entangled like the two sides of a coin; neither could exist without the other, but together they were money.
The modern era of fiat currencies – named after the Latin for ‘let it be done’, since they are backed by the state rather than by metal – began with the 1971 ‘Nixon Shock’ in which President Nixon delinked the US dollar from the price of gold. This time Nixon made sure to have the bankers on board – and the new money was secured by something even more powerful than the divine right of kings: nuclear weapons.
However the Hartlibian idea of a land bank is alive and well. In fact, it is the basis of much of our modern financial 30system. And today the alchemists all work in finance, where they puff up prices.
THE FREE LUNCH
A common principle in economics is that, to quote the title of one of Milton Friedman’s books, ‘There’s No Such Thing as a Free Lunch’. Or as the neoclassical economist William Stanley Jevons put it, ‘there is no law better established in physics than that man can neither create nor annihilate matter.’
