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David Orrel: Quantum Economics; The New Science of Money

Quantum logic is coming from physics and describes exchange of energy on subatomic level. But we have seen this logic coming into other field, with emerging fields like quantum cognition and quantum social science. Many of the behavioral quirks, such as tendency to act in a less than rational way when interacting with money, may elude classical logic, but can quite easily be expressed using a version of quantum logic, which allows for effect such as context and interference between incompatible concepts (the cause of cognitive dissonance). The use of money in transactions is a way of attaching a number (the price) to the fuzzy and indeterminate notion of value. It acts like the measurement process in quantum physics, which assign a number to the similarly indeterminate properties of particle.

So, if we look at notions like wave collapsing into a unique value, we can compare that to a price of a house, that is general until it collapses into value at transaction. Entanglement can be compared to debtor and creditor financial contracts. And idea of quantum particles moving in discrete jumps is similar to money movements in credit card payment.

Instead of predicting an economy that is efficient, fair and stable, quantum economics suggests one that is creative but tends towards inequity and instability – rather like the world we live-in.

Karen Barad notes: »Quantum mechanics poses some of the most throughgoing challenges to our common-sense world-view. «[1]

The quantity known as price is fundamentally uncertain, and is determined only during the measurement procedure, when things are exchanged for money. Not just that quantum mechanics can be viewed as metaphor for understanding money, but that the economy presents as a quantum system in its own right, with its own very real versions of measurement, indeterminacy and entanglement.

The growing differentiation of our representations has the result that the problem of “how much” is separated from the question “what”. Buying something with money is equivalent of putting number on it.

When you ask yourself if money is measuring something, what it is? Some answers from history are: Adam Smith – labor, Neoclassical school – utility, sometimes it is economic value. But author thinks it is measuring money. When you buy something, you are measuring money.

Sumerians had worked out a way to put a number on a value, they have found a way to collapse plurality of options down to a single number. But by doing so they have created a new kind of quantum entity, the money object. In this quantum spirit, we can define money objects to be transferable entities, created by trusted authority or body, which have the special property of a defined monetary value, specified by a number and a currency unit. They therefore combine the mental idea of a numerical quantity of money – the virtual wave attribute – with the physical idea of an object that can be possessed or transferred – the real particle attribute.

Numbers live in the world of forms, while measurable physical events and objects live in the real world. Money is inherently dualistic by design, because it combines the attributes of a number with those of an owned object.

If we look at quantum opposites in comparison to price and value, we can see those couples:

  • Limited versus unlimited (price-value)
  • Odd versus even (price-value)
  • One versus plurality (price-value)
  • Right versus left (value-price)
  • Male versus female (price-value)
  • At rest versus in motion (price-value)
  • Straight versus crooked (price-value)
  • Light versus darkness (price-value)
  • Square versus oblong
  • Good versus evil

Difference between money economy and gift economy is that money is symmetrical, gift is not. Basic property of both numbers and monetary transaction is that they are symmetric. For every positive there is also negative. Brahmagupta in 628 AD was the first to introduce rules around how to deal with negative numbers.

Money has two sides, the real and virtual, the object and the idea. In Mesopotamia it was based on virtual idea, Greece and Rome brought physical side to the fore, but as Rome was falling, metal source was in shortage and money was going back to virtual idea. In the sixteen century with the Spanish discovery of new sources of metal in New World, money again was coming close to the object function. With setting up of central banks like Bank of England and others money moved to notes and ultimate virtual idea. Money was no longer a debt owed to the king, but the debt owned by the king. In the end money always comes down to a confidence trick. We value something like a banknote because we trust that it can be exchanged or redeemed.

Fractional reserve system added flexibility in economic system. But with a model, where banking system can print money with click of a button (only leaving 10% of deposit as a base for credit capacity), an important symmetry had been broken, between what is owned and what is owed.

Money objects entangle debtor and creditor at the moment of their creation. Governments need to run deficits, because without the debt, there would not be any money. Private banking system got some serenity to create money with debt issuing.

Value of the currency is in the network – the power to buy and sell within a community of users. With coin money, the network maintained by the sovereign, but with cybercurrencies the power is distributed among users.

One important question is also what money does? If we look at the economy, the idea that money is defining value. Value of labor according to Smith, utility according to neoclassical economist. But all these ideas are based on idea of market equilibrium. If we connect this idea with quantum thinking, we could say that price is actual measurement that reduce waves of supply and demand into price particle. We can see this in the area of house buying or defining value of stocks. Especially in stock value, we can see process where measurement of the system affects what is being measured.

So, we can see that mainstream economic explanations are tending to market equilibrium, to reduce economy to stable Newtonian mechanistic rules. But quantum world view is more aligned with the right hemisphere’s affinity for uncertainty and complexity.

One method that has become increasingly popular since the crisis of 2007-2008, known as agent-based modelling, is to model individual agent separately. Economy based on this model emerges indirectly as a result of agent behavior.

John Law was financial consultant to King Louis and he convince him to allow Bangue Generale (that Law set up) to issue banknotes. In 1718 the bank was nationalized, becoming Bank Royale. Law then delinked notes from reserves of precious metals and he establish Mississippi Company, whose stock you could buy with notes.

In America Benjamin Franklin was also experimenting with increased money supply. Experiments with paper money in Pennsylvania was quite successful. In America they establish central bank in 1913 – it was called Federal Reserve. Bretton Woods set US dollar as reference currency and it was tied to gold bar at a rate 35 USD per ounce. System worked until Nixon on 15. August 1971 imposed wage and price controls and delinked dollar to gold.

Frederick Soddy in his book Wealth, Virtual Wealth, and Debt, in 1926, he defined money as the nothing you get for something before you can get anything. Money is virtual wealth and actual goods are real wealth. Because interest-bearing debts increase exponentially forever, while in the real-world non-living things generally don’t, the virtual wealth expands until it dwarfs real wealth to such a degree that crisis occurs: people lose confidence in the system, and they all attempt to cash in their virtual chips at the same time. The result is financial disaster. Perhaps the biggest problem with fractional reserve banking, though, is that it turns out not to be a true description of the financial system. The reality is even more unstable – as central banks admitted only in the last few years. In reality, private banks are free to create as much money as they like by issuing loans, subject only to things like regulatory of self-imposed capital requirements. Taking out new loans, creates money, the repayment bank loans destroys it.

Joseph Schumpeter in his 1934 Theory of Economic Development, he defined entrepreneurs as innovators who come up with ideas and realize them in high-growth companies. He believes that money creation by banks, is about creation of new purchasing power, not transforming it. In a rising market, the question how much often seems to be less about how much is it worth, than how much can you borrow.

The most obvious reason for omitting the pivotal role of banks, though, was because economist wanted, to keep money out of the equation. Only by doing so could they maintain the pretence that the economy is some kind of barter system based on rational exchange.

House prices are new base of money creation. Price increase lead to more money creation and more money creation leads to house pricing rise. Hyman Minsky in his Financial Instability Hypothesis from 1972 is explaining that desire for credit tends to increase during expansion. But at one moment (Himsky moment), people lose faith and stop playing the game.

When we model economy, which is very complex system, we should find an approach, that would be able to explain and incorporate non-linear dynamics. One of those systems was developed by Steve Keen, it is called Minsky model and he picked up rising levels of private debt as risk for financial crises. Another technique is agent-based modeling.

Money is quantum system in its own right, with its own version of duality, measurement and entanglement.

Neoclassical economist see economy as stable system, based on rationality, stability and efficiency. Movement are only based on technology or news. But in quantum economy, uncertainty is a key.

In 1938 Otto Hahn and Fritz Strassman bombarded atoms of uranium-235 with slow moving neutrons. Neutrons broke uranium nucleus into about the same parts, but some of the mass (1/5 of proton) was converted into energy. There were also two or three neurons that broke free and travel through material in a random walk, colliding with uranium atoms and seeding more divisions. This was a base for nuclear bomb.

Random movement of neutrons was researched in Monte Carlo method in late 1940s by Stanislav Ulam. This was needed to estimate critical mass. And that enabled creation of nuclear bomb. But this random walk techniques were already used in 1900 by Louis Bachelier in stock price calculation. In 1965 Eugene Fama used this randomness to show that efficient markets already incorporate all available information. Black-Scholes formula was a version of heat equation and was used for dynamic hedging. What they did was providing consistent techniques for pricing options; they suggest that risk can be hedged away and they changed story around options.

Development of quantum computers can bring huge efficiency effect into computing approaches. And if financial system is quantum in nature, they can be even more appropriate for researches into financial systems.

Perhaps the most useful contribution of quantum finance will be to change the way we think about the financial system. Instead of seeing stock prices as particles that are randomly jostled from their stable resting place by interactions with many independent investors, we begin to see them as fundamentally indeterminate quantities. In quantum physics, particles can never be perfectly still, because that would violate the uncertainty principle. In quantum economics the only kind of object which always has a single eigenvalue – and where the wave function has been stamped down so there is no possibility of further collapse – is the money object.

Neoclassical economist tried to create economy models based on Newton mechanic physics. If we look at building blocks, we could compare individual with particles, commodity with space, marginal utility/disutility with force, disutility with work and utility with energy. They solved problem of different individuals with introduction of rational average man as main point. Using Arrow-Debreu model, that is based on Brouwer fixed-point theorem, they try to give mathematical explanation of market equilibrium and invisible hand mechanism. The main challenge to rational economic man has come from the field of behavioral economics. It was founded in 1970s by Kahneman and Tversky. The problem is that it is more explanation of individual effects than coherent model and it doesn’t go far enough.

Quantum physics on the other hand offer a lot of elements to be used in explanation of human behavior. One is idea that measurement creates result, not only reveal them. Tversky used that already in paper in 1993 that it could be the same with preferences of man. In 1978 Asghar Quadir argued that the quantum formalism is ideally suited for handling situations where consumers behavior depends on infinitely many factors and that the consumer is not aware of any preference until the matter is brought up. In cognitive science Jerome Busemeyer and Peter Bruza explain that the wave nature of and indefinite state capture the psychological experience of conflict, ambiguity, confusion and uncertainty; the particle nature of a definite state captures the psychological experience of conflict resolution, decision and certainty.

Many of the finding of neoclassical economics are based on fixed preferences, independent agents, expected utility, and game theory. But a lot of examples from game theory shows that we live in entangled system and that as Alexander Wendt argues in his book Quantum Mind and Social Science, we are walking wave function and that normal human mind is in a superposition rather that well-defined state. But because of all that uncertainty mainstream economics model exclude a lot of elements in order to maintain stable model frameworks. That is one of the reasons why they exclude loan, debts and especially money (that can be both measurement and entanglement device) from models. As Kate Raworth is explaining we are not narrowly self-interested, we are social and reciprocating. We don’t have fixed preferences; we have fluid values. We are not isolated, we are interdependent. We don’t calculate, we approximate. We don’t have dominion over nature, we are embedded into it.

Changing the view of the economy from a collection of inert atoms, to a complex system where even the observer is entangled, has profound implications, for how we model it – and explains why it is even harder to predict that the weather. The economy was a giant thermodynamic system, which converted work into utility. Working on entanglement properties of economy, team of scientist from Harvard lead by Ricardo Hausmann concluded that prosperity depends not so much on specialization, but on diversity of knowledge across individuals and on their ability to combine this knowledge and make use of it, through complex webs of interaction.

Money is not an externality, it is about as internal as you can get; and omitting money, credit, and a quadrillion dollar – worth of derivates from the models is not the same as missing a forecast – it is missing reality. The real reason economists didn’t see the crisis coming was because they ignored its entangled, quantum nature.

Area of complexity theory concerns systems that are characterized by emergent properties, which even in principle cannot be predict from a knowledge of the system’s parts alone. In Harvard Atlas of Economic Complexity project, they try to come up with complex-based metrics that could be used to quantify the availability of productive knowledge embedded in an economy. The main two metrics were ubiquity and diversity. Third is proximity. Basically, is about how many countries produce product, how many products country produces and likelihood of developing a product.

In 1967 Arthur Koestelr coined the term “holon” to describe “self-regulating open systems which display both the autonomous properties of wholes and the dependent properties of parts. Every holon has a dual tendency of preserve and assert its individuality as a quasy-autonomous whole; and to function as an integrated part of an (existing or evolving) larger whole.

Just as quantum effects can appear as emergent properties of physical systems, so emergent social properties may sometimes be best expressed using a quantum formalism.

Perhaps the main driver of the environmental crisis – which of course is excluded from models – is our debt-based money system. Debt bears interest, so if the economy were to stop growing, and the money supply tapered off, then it would be impossible to pay off the debt. One solution would be to change our money system towards something like full-reserve banking, in which private banks can only loan what they actually have. Money is not a natural system; it is human invention which by its nature brings us into conflict with natural systems.

We are entangled with each other and with the economy as a whole, and our subjective judgements about value both define the economy and are shaped by the economy.

If quantum economics has a single central demand it is that economists need to put money – and the question how much – at the center of economics. Economy is entangled, emergent and nonlinear system.

[1] In the book on page 45