Saturday, June 9, 2012

Energy [kWh] as Currency [$]: An Attempt to Remove [Happiness life-years] as the Base Unit of Economic Theory

In Niall Ferguson’s book and videoThe Ascent of Money,” he details the history of how money has evolved throughout the ages in Western civilization. He first describes the use of clay tablets in Mesopotamia, and then slowly works his ways through the development of gold/silver standards, the rise of banks in Renaissance Italy, the success of the government bond market in Italian city-states and in Elizabethan England, the failures of the printing paper money in pre-revolutionary France, the ascent of joint-stock, limited-liability corporations in the Dutch Netherlands, the failure of Spain to adopt banking innovation after stealing gold/silver from South America, the successful rise of insurance companies in Scotland, and finally the failure of the 'Black&Scholes equation for pricing options'  to correctly model risk in the real world.
While I learned a lot about the history of money from this book, I don’t feel any smarter about what money is after having read Ferguson’s book. While it’s historically clear that we can reduce risk by forming large groups or through creating insurance, options and derivatives, there’s still a part of me that’s left empty after having read Ferguson’s book. What I largely took away from the book (and what I assume he was hoping to convey) is that we often think investments are safer than they really are. (This is also the theme of Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb.) Unfortunately, Ferguson’s book doesn’t study the underlying philosophy of life that allowed for banking to develop in places like Florence, London, and New York. There’s a part of me that wants to know: what philosophy of life developed in the West that allowed for banking innovations to be socially acceptable. Where did this philosophy of life develop and who developed it?
All I really learned from Ferguson’s book is what has worked and what has not worked in the past. And while this is definitely important, there’s just too much of me that wants to ask: “What’s the underlying structure to the economy? Is there any way to give a simplified account of what is occurring? Is there any fundamental principle to tell us the optimal amount of currency in circulation?” Physicists want to know more and more about the underlying structure of nature. Philosophers want to know more about the underlying structure of our reasoning.
And economists should be interested in learning more about the underlying structure of the economy, and they should not be content with just a statistical knowledge of the economy, i.e. how to use insurance, options or derivatives to remove risk. Right now, it seems that many libertarians are simply following in the footsteps of thinkers like Milton Friedman, focused on freedom and removing silly regulations from the economy. And why I think that this is important, especially in the highly government-controlled and highly government-regulated field of electricity generation, I think that it will be hard to affect public policy in this field until people change their underlying philosophy of life. And I don’t think that people will change their underlying philosopgy of life until we tackle the major problems in the field of economics.
Here’s a quick list of the some of the problems I see (in the form of unanswered questions):
1)    “What is the definition of wealth?” 
2)    “What is the definition of growth?”
3)    “How much currency should be printed or removed from circulation at any given point in time?”
I think that the answers to these questions must ultimately have physical units of work [MWh], rate [%/yr], and work [MWh]. My answers are: 1) the generation of work [MWh]; 2) the growth in the generation of work [%/yr]; 3) Currency should be printed or removed from circulation based off of the rise and fall of the price of electrical and mechanical work. (See associated posts.)
The problem with any currency invented so far is that the currency only “represents” work. No currency invented so far is a real physical storage of work itself. In other words, currency is just a symbol of the work that could be bought if the amount of currency is strictly linked to the amount of work generated. The only way to get around this would be if we had to physically transfer electricity from one person to another (which would happen if fully charged batteries were the currency of the society or if every transaction involved moving electricity across the grid.) I don’t think that we need to adapt a currency in which work is physically traded (even though that is really what is happening when we transfer currency.) I think that we should trust our government to follow known rules on when to print and when to remove currency. (But remember, you don’t have to trust the government in such as system. You could develop your own “battery currency” and nobody can stop you from trading batteries with other people for goods. Our you could create your own Energy Bank.) In either case, when we transfer currency, we give up our capability to do work and give that to somebody else.
     The problem with fiat currency is that governments tend to print more money than should be printed in order to maintain stable prices and the problem with gold/silver currency is that people can mine gold/silver and become rich even though they haven’t provide any new capability to do electrical/mechanical work. For example, when the Spanish conquistadors stole gold and silver from South America, and brought it back to Europe, the amount of work being generated in world did not magically go up, even though Spain increased the amount of currency in circulation. In the short-term, Spain got rich and everybody got poorer because the Spanish introduced a new supply of currency (as if they were a government printing press for currency.)
     As Niall Ferguson rightly states in “The Ascent of Money”,  “What the Spaniards had failed to understand is that the value of precious metal is not absolute. Money is worth only what someone else is willing to give you for it. An increase in its supply will not make a society richer, though it may enrich the government that monopolizes the production of money. Other things being equal, monetary expansion will merely make prices higher.” In the long-run, there was only so much gold/silver in the colonies, and Spain failed to develop a real system for generating wealth (i.e. work.) The conquistadors basically stole wealth from other people.  
     This is the essential problem with a currency backed by gold or silver. The Spainish conquistadors were able to steal gold/silver from South America, introduce the gold/silver to Europe, and single-handedly make everybody poorer who owned gold/silver as currency. This is the reason why there was the California gold rush. You could, if you were lucky, find some gold and basically steal wealth from other people. It is a purely win-lose situation (like gambling.) This is the main reason I hate the idea of a gold/silver backed currency. Productive work is wasted mining gold/silver so that the gold/silver can be stored in a vault. But there are still a lot of economists who want to return to a gold/silver standard. And the reason that they want to do this is that they don’t understand what is the definition of wealth.
     The problem today is that the best of economists can’t define wealth. For example, I watched an interview with Thomas Sowell in which he completely evaded the first question from a colleague, “How is wealth created?”  Sowell states (paraphrase) “Wealth is created when people, who know to create wealth, create it.” To me, this is an evasion of the question. I would answer the question as follows: Wealth (i.e. work) is created (i.e. generated) when a power plant generates more work than it took to build the power plant. The goal should be to build power plants that can build more power plants as quickly as possible, i.e. to achieve a high rate of return on work invested.
     This doesn’t mean that we should stop doing anything except build large plants. When I say “power plants”, I’m also including humans, other animals, plants, bacteria as well as human-designed power plants. All of these creatures are able to yield positive rates of return on work invested, i.e. they are able to grow. To have a healthy growing society, we need educators, scientists, doctors, police, military, politicians, engineers, technicians, farmers, etc… A society, like any power plant, has a lot of inputs that are required to keep it growing.
     My concern is that economists are focusing so much on trying to achieve human happiness that they forget that “Happy power plants rarely survive when faced against power plants whose goal is to destroy other power plants or against power plants that just want to grow.” Human happiness should not be an end in of itself. And therefore, we need to remove the concept of utility from the study of economics. It’s a concept that can’t be defined, and therefore makes economics a pseudo-science.
     In the same interview with Thomas Sowell, he was asked the question (paraphrased), “So you want to end the Fed. What would you replace it with?” Sowell’s response (paraphrased): “Not necessarily the gold standard, maybe bank notes.” While I respect Thomas Sowell’s humility in stating that there probably is no optimal currency, it appears that Thomas Sowell, like other libertarian economists, does not understand the relationship between currency and the generation of electrical & mechanical work.
When the 2008 crisis occurred, there was almost knee-jerk reactions from libertarians (“It’s the government’s fault. What we need is more free markets. Let’s End the Fed, and cut government spending.”) and from socialists (“What we need is more government, more regulations, more health care, more education loans, more bailouts of unions, states, and cities, more ‘economic stimulus,’ more environmental protection, more taxes on the wealthy.”)
What I haven’t seen as much (but there are few other people working on this topic) is an attempt to go beyond the unscientific philosophies that underlies libertarianism, socialism, and utilitarianism. By scientific, I mean developing theories, making predictions of quantities in units of [mass, charge, length, time], and validating theories with experiments. Economists can’t do this right now because they have made up units that are unscientific [utility & $’s]. What if a physicist proposed at a conference a new theory that rested on the unit of [happiness.] He or she would be laughed at, and then most physicists would walk out of the room. Why do economists think that they can get away with developing theories whose underlying units are [happiness]? 
     Note that this doesn’t mean that I don’t have an immense respect for the founders of the study of economics, such as Adam Smith, David Ricardo or Milton Friedmann, to name a few. I encourage people to read the Wealth of Nations, to watch Friedmann’s TV show “Free to Choose”, to watch Penn&Teller’s show “Bullshit”, and even to watch John Stossel’s TV series that revolves the philosophy of libertarianism. It’s just that the field of economics rests on nothing but sand, and it’s no wonder that there are more Hindus, more Christians, more Muslims, and more Confusists than there are strict libertarians; and by strict libertarians, I mean those people who believe that the goal of life is to maximize human happiness and that the means to do is through increased human freedom to choice who to satisfy their own wants, needs and desires. 
     Libertarianism and Objectivism unfortunately rest on the concept that human consciousness is the source of all rights. But what is human consciousness? How different is it from dolphin consciousness or ape consciousness? What about pig or cow consciousness? People like Ayn Rand simply assume that human consciousness is unique, and that all philosophy rests upon the assumption that humans are conscious and other animals are not conscious.
     If this assumption is at the heart of your own philosophy of life, please recognize that it is just an assumption. It has not been scientifically proved or validated. (I’m not even sure how one would prove that human consciousness if different from dolphin consciousness.)   
     I’d like to point out the problem with utility (i.e. human happiness) by criticizing an absurd essay in which the authors use the unit of [Happy  life-years]. (This is almost as absurd as the government of France trying to measure wealth in terms of human happiness.) How could we ever develop a scientific method for measure units of [Happy life-years]? But this is exactly the problem that researchers face if they try to be scientific when starting with the assumption that the goal of life is for human beings to be happy. At least these researchers were brave enough to follow through with the line of reasoning started by previous thinkers. These researchers are just following through with the silly concept of utility developed by Smith, Ricardo, and others.
You can’t quantity happiness, and therefore, there is no way to do any scientific research if you are trying to measure happiness. And the fact that France is trying to get rid of the measuring [GDP] and replace it with a measurement of [Happiness], is like replacing [Dumb] with [Dumber]. Our goal should be to have a quantifiable way to compare the wealth of a nation with the wealth of a different nation. I suggest that the correct units of units of mechanical and electrical work [kWh], i.e. how much electrical and mechanical work does a society generation in a given year. This appears to be the correct measurement of the wealth of nation. Of course, knowing the present generation of work says nothing about the amount of work that the society will generate in the future, so a nearly-equally important variable to measure is the rate of growth of the electrical and mechanical work generated [%/yr].
     While I’m being critical of libertarian philosophy here, please note that I find it more appealing that socialism, fascism, communism, statism, feudalism, mercantilism, crony capitalism, etc… But I think that libertarian philosophy could be improved if the field of economics was consistent with the known laws of physics. What I’m trying to point out here is that there is a disconnect between economics and physics, and we should be working on bridging that gap. One way I think that we can help bridge the gap between economics and physics is for economists to use both the units of currency [$] and the units of work [kWh].
     We need to strength the connection between currency and electrical/mechanical work so that we can teach people how to grow society. People throughout history have been pretty good at growing society; the problem right now appears to be the fact that we are not as good at growing society as we have been in the past. And this ties back to the apparent goal of Niall Ferguson’s books “The Ascent of Money” and “Civilization.” We seem to assume that if things are going well, then they will continue to go well. (Sure, there are a few people suggesting that there is a problem, but how many of these people are actually growing society? We need a lot more people actually growing society in order to offset all of those people who are trying to stop society from growing.)
     A study of the Decline and Fall of the Roman Empire should remind all of us that civilization is not safe. The Roman Empire was unable to continue growing after ~190 c.e, and it eventually fell both in the West (in the 5th century) and in the East (7th through 15th centuries). And while a lot of this had to do with the problems associated with figuring out who would be the next emperor, I think that a lot of it had to do with the fact that the Roman Empire did not develop banking,  science or democracy. In other words, they didn’t develop the underlying philosophy of life that could foster banking, science, and democracy.
     Thanks in part to a long list of thinkers (from Thomas Aquinas to Descartes to Bacon to Galileo to Newton to Locke to Smith and to Franklin…to just name a few) our Western civilization has developed the underlying philosophy of life that has allowed us to develop banking, science, personal property rights, democracy and engineering.
     We can return the US, Canada, E.U., and Japan to being societies with growth rates above 5%/yr. We just have to develop and to foster those philosophies of life that help us reach what is a modest goal of 5%/yr real growth in the capability to do mechanical and electrical work, as measured in units of [GW-yrs].

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