Nobody Knows What Money Is

When you ask experts from economists to bankers, ‘what is money?’ you don’t get the same answer. To paraphrase von Neumann: ‘nobody knows what money is’.

Money seems to be a self emergent phenomenon in a system of transactions as we move away from bartering. It represents not so much a thing in itself as an uncrystalised transaction path. You can use fancy physics metaphors quite a bit when talking about this. It’s like the uncollapsed quantum state of all possible transactions, where the ability of money to buy anything is as different from one-to-one barter as classical physics of concrete interaction between two particles is from Feynman’s idea of infinite paths.

But the concept of entropy seems to be particularly useful when looking at money and the two ideas share several features.

Like entropy, where there is no universal unit (and no such thing as an entropy meter) with money there is no such thing as a universal currency. Also, money is not so much a ‘thing’ as something that exists because of a perceived value relationship when things move or change hands. In the same way, entropy is a relative measure, not an a priori thing but something that exists when there is an energy flow across an energy gradient.

If we look at entropy in terms of chemical/biological systems (Jamie MacIntosh brought up Prigogine here, who is very relevant) the earth as a whole is a good starting point to compare a biological eco-system with an economic one.

The earth as a biological system, is an open one where high energy photons (lower entropy) rain down from the sun and are re-emitted as more lower energy infra-red ones (higher entropy). In the middle, the energy flow creates a self-emergent bunch of low entropy structures (life) that maximise the rate of production of entropy. The net entropy of the system as a whole, i.e. the sun, earth and the space around them (photons emitted minus low entropy biological structures) increases over time, thus preserving the 2nd Law. Biological systems, like this, are examples of self-organised criticality i.e. things which are on the boundary between order and chaos in a system which is far from equilibrium (Prigogine etc.).