Economics needs a revolution.
By David Orrell
This sentiment has been expressed by people from the physicist turned hedge-fund manager Jean-Philippe Bouchaud (in a 2008 paper), to the Bank of England’s Andrew Haldane (in a 2014 foreword for Manchester’s student-run Post-Crash Economics), to activist groups such as Kick It Over. So what would such a revolution look like?
Perhaps the archetypal model for a scientific revolution is the quantum revolution that shocked the world at the turn of the last century. In the space of a few short years, almost everything that was known about the nature of matter was overturned. The Newtonian view of the world as a predictable machine crumbled with it.
Except, that is, in economics – which continues to base its models on quasi-Newtonian economic laws.
A peculiar feature of orthodox economics is that money is treated as an inert medium of exchange, with no special properties of its own. As a result, money is largely excluded from macroeconomic models, which is one reason the financial crisis of 2007/8 was not predicted (it involved money). In many respects, when viewed through the lens of quantum physics, money behaves a lot like matter – and acknowledging that behavior promises to do to economics what quanta did for physics.
The main insight of quantum physics is that matter is composed of entities which behave in some ways as waves and in other ways as particles. This novel insight countered the Newtonian view that billiard ball-like atoms behaved independently of each other. A beam of light, for example, is an electromagnetic wave but it is also a stream of particles known as photons. At a quantum level, matter is fundamentally dualistic: neither the particle nor the wave description is complete by itself.
The same can be said of money, which turns out to have quantum properties of its own. Money is strange stuff, when you think about it – but because it has been around for millennia we rarely do. Consider for example a U.S. dollar bill. On the one hand it represents a number – in this case the number one. On the other hand it is a physical thing which can be possessed, exchanged and above all valued (even lusted after, if there are enough of them). It therefore lives partly in the abstract world of numbers and mathematics and partly in the real world of things, people and value.
The same is true of any money object that we use for payment. Here “object” could refer either to a physical object – such as a coin – or a virtual object, such as 1.2107 bitcoin (BTC) sent from a phone. What makes such objects special is that they have a fixed, defined value in currency units.
While seeing money objects as things with a fixed monetary value might appear trivial, it turns out to have complex and contradictory properties that feed into the economy as a whole. In particular, they combine two aspects, abstract number and real world value, which are as different as waves and particles.
For example numbers are subject to mathematical laws – such as compound interest – and can grow without limits, while in the real world natural processes tend to be subject to bounds. In 1850 an American lawyer did the math and calculated that five English pennies invested at 5 percent compound interest since 0 AD would have accumulated to 32 billion spheres of pure gold, each equal in size to the Earth. This is a useful exercise for anyone who thinks that gross domestic product (GDP) can grow forever.
Numbers can be negative, as in debts, but (as the English physicist-turned-economist Frederick Soddy pointed out) there is no such thing as a negative number of objects. You might be underwater on your mortgage but you can’t own a negative house. Throughout history the frightening ability of negative debt to grow without bounds has been responsible for forcing people into economic slavery.
Numbers are hard and precise, like the particle aspect of matter. Real-world concepts such as value are diffuse and fuzzy, like the wave aspect of matter. By combining these two aspects in a single package, money objects are our contribution to the quantum universe.
The dualistic nature of money explains its frequently paradoxical behavior. In the early 2000s, cheap credit in the United States meant that even low-income people could afford their own homes. Some cashed in and sold their houses at the top of the market. For them the money was real – they could go to the bank and withdraw dollar bills. But when the credit crunch kicked in most of the new money disappeared into the ether, as if it had never existed. Money seemed to be both real and unreal at the same time – a sensation familiar to anyone who has studied quantum physics.
Just as quantum physics overturned Newtonian physics, so a reexamination of money promises to disrupt economics. The reason that critics are calling for fundamental change is that neoclassical economics has failed to provide answers to problems such as wealth inequality, financial crises and environmental degradation – which is unsurprising if it treats money as nothing more than an inert, Newtonian medium of exchange. The tendency of money to clump and accumulate with a small group of creditors, or for financial markets to be inherently unstable, or for GDP growth to be valued over the environment, becomes clearer when we acknowledge the vital, active role of money and the tension and discrepancy between numbers and the real world that drives it.
Of course, one should not underestimate the resistance of economists to adopting new ideas, however the worldwide student movement calling for change is unlikely to go away. Economics is primed for a quantum revolution of its own.