Money and Entropy

Nobody knows what money is.

I was on a ‘fintech’ panel at the FT’s Camp Alphaville recently where someone brought up the idea that energy cost is the only objective measure a currency can ultimately be tied to. This lead to a discussion about entropy and thermodynamics, and the link between logical entropy (information) and thermodynamic entropy (unusable energy).

This all sounds terribly wonkish and academic, but understanding money in a scientific sense is important given what you can do with it (and the problems a lack of it create).

Jamie MacIntosh from the Institute for Security & Resilience Studies quoted the famous von Neumann response to Claude Shannon when he asked what he should call his information measure: ‘call it entropy, because nobody knows what it means’. Although von Neumann was probably being facetious (and information entropy and heat entropy are now known to be equivalent in order to resolve the Maxwell’s Demon paradox), there is a similar issue with money.

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.).

The Econosphere

If we look at the ‘econosphere’, the sum total of human economic activity, money seems to be a product of an open system where we build things like houses and corporations as money flows through it.

In the same way that we talk about using energy when in fact we technically mean we increase entropy (energy can never be used) the value of money isn’t ever spent it is merely exchanged, and as it is exchanged it loses value while the total value of the things it creates (assets) grows, allowing us to print more of it.

The system is open, because it is growing. In the pre-industrial age this growth could only come from a growth in population (global GDP was population based until the 19th Century), in the industrial age, this could come from leveraged use of energy (machines that use oil are effectively using ‘negentropy’ from stored solar energy) and in the information age this can come from an increase in the efficiency of the energy per bit (an information economy where people buy Spotify subscriptions can grow economically without either population growth or energy usage growth). Incidentally, the last factor is the only way that humans have a hope of dealing with climate change.

Because the economic system is open, it is far from equilibrium and therefore on the edge of chaos, like a ping pong ball floating on a fountain jet. Disruptions to the flow of money, energy or bits, for whatever reason, can have chaotic effects such as balls dropping to the ground or market crashes. Further, these crashes are provably unpredictable, since they are non calculable events. We don’t live in a clockwork world we live in a chaotic one.

All three reasons for the system’s growth (increased population, use of past reserves of stored solar energy, increased efficiency from technology) rely ultimately on the world being an open system physically, not just economically. The increased population is an indirect result of the sun continuing to shine; the oil, of the sun having shined and the technology from the sun shining long enough to create complex local order (our brains) to create it.

In other words, economic entropy (money) is directly linked to thermodynamic entropy which is equivalent to information entropy. In fact, money is easier to understand in terms of information than energy, being commonly represented as bits in a computer rather than physical banknotes or coins.

Memes, Genes and Money

Looking at the relationship between biological information stores (genotype) and human societies, Richard Dawkins created the concept of the extended phenotype. He suggested that the physical form (phenotype) of human culture (roads, bridges, house, cities, furniture) was analogous to a biological phenotype and even that human ideas could replicate like genes. He called these memes. Dawkins’ extended phenotype and meme concepts were separate strands of thought, however. One related to the physical products of humans and one to ideas.

In the same way that memes are an analogous form of gene, or buildings, metaphorical phenotypes, it’s surprisingly useful to treat money as an analogous form of economic (negative) entropy. Perhaps something similar to entropy is what is needed to link memes and extended phenotypes, to represent how the information stored in memes ends up creating all sorts of things.

Anyway, we can call money economic entropy because nobody knows what entropy is.