Fifteen years ago, the late and renowned Swiss economist Hans Christoph Binswanger published a book that deeply influenced my own work in economics: The Growth Spiral: Money, Energy, and Imagination in the Dynamics of the Market Process In a nutshell, he argued that the monetary economy is inherently expansive, and that this drives the relentless growth of energy throughput. In other words, money and energy are causally connected in generating economic growth. Inspired by his approach, I wrote my ‘Foundations of Economic Evolution’ detailing this causal connection. At that time, Binswanger appreciated my reception of his theory and noticed that I added a substantial theoretical component, namely Maximum Entropy and evolutionary theory.
More recently, I argue that we need to approach money as an essential element of the technosphere. Money is a technology: You need technology to produce money, such as minting coins or creating digital equivalents such a Bitcoin. It is a physical artefact, such as tons of paper as banknotes, or electric currents in bank computers, and so on. The artefact is used according to certain rules, but these are simple, to large degree. Basically, money is used as means of exchange. For this, certain physical properties are important, such as divisibility. But in other respects, money is just a marker for the more basic operations, such as accounting and measuring the value of goods and assets. Some economists tend to marginalize money in their theories, such as in the famous view on ‘money as a veil’, others treat is as a major driver of economic cycles, mediated via credit. It is astonishing to realize that a most fundamental phenomenon in the economy is still subject to major debates in economics: There is even disagreement about basic questions such as the origin of money (loans or transactions). But most economists agree that money is a tool that is designed and controlled by humans.
When money emerged in human civilization, this was seen in a very different light. Binswanger refers to Aristotle, who was the first to theorize about the effects that money has on our agency. Aristotle famously argued that money opens an entirely new form of human action, which is ‘artificial’ compared with a ‘natural exchange’ and dubbed this ‘chrematistics’. This is because money, given its physical properties, creates infinite wants for pecuniary wealth. Following Aristotle, many observers were therefore concerned about the effects of money on human behaviour. In medieval Europe, therefore the church imposed a ban on interest, or, until today Islamic finance aims at containing certain aspects of the monetary economy.
Following the expansion of capitalism, economics neutralized the moral dimensions of money in treating it as a mere tool. Today, however, we know that Aristotle was right, in principle. Money is a foremost example for studying changes of human agency induced by a certain technology: Money is not simply a tool designed and controlled by us but transforms our agency. One of the most productive researchers in this field is the psychologist Kathleen Vohs. This research fully vindicates a full-fledged theory of money by the sociologist and philosopher Georg Simmel who agreed with approaching money as a tool of exchange, but then moved on in analysing two categories of effects that money has on human behaviour: First, it enables new cognitive operations, such as making valuations comparable across physically different goods, or enabling quantitative divisions of value that allow for further arithmetic operations. Second, it changes emotional attitudes in social interactions, such as creating space of individual autonomy (money can buy everything). Kathleen Vohs and other researchers showed that similar observations can be made by rigorous scientific experiments. The gold standard is priming with money (meaning, reminding people of money indirectly and implicitly, with money not being directly involved in the set-up of an experiment): Money drastically changes attitudes and behaviour, such as fostering more individualistic and performance-oriented actions, shifting political value statements, or even changing feelings of pain.
This is a most important example how human agency is distributed and transformed in the technosphere. Aristotle was already very concerned about the consequences of what happens if money becomes a central goal of human action. Again, this is vindicated by recent research, such as on managerial incentive systems. Putting money at the centre of CEO compensation changes behaviour. That means, different from the standard assumption in economics, we cannot analyse incentive systems as mere parameters of individual decisions, but must acknowledge their transformative powers, especially if money is involved.
Recognizing this state of our knowledge, what are the implications for actively shaping our agency in the technosphere? Money evolved in the technosphere and is today a medium in which the fundamental physical processes of energy transformations and entropy production are socially embedded and channelled. Even if these fundamental physical processes proceed autonomously, money plays an essential role in speeding them up or determining precise structural forms. In designing money, we can also influence technosphere evolution.
We need to create a new morality of money. Well, that is available in all world religions, mostly notoriously suspicious of money, and rightly so. But we need a cosmopolitan and universal morality of money, such as developed by philosophers, for example, Michael Sandel. As in the case of the medieval ban on interest, this morality must be reflected in institutional design. For example, the arch-liberal Swiss economist Bruno Frey, in recognizing the harmful psychological effects of monetary incentive systems, proposed to pay CEOs like civil servants, with a fixed salary. I have drawn an even more radical conclusion: Monetary incentives must be completely abandoned in the financial sector, turning financial professional into ‘eunuchs of money’.
But perhaps we may fail in moral terms. Therefore, another approach is to change the physical properties on money, i.e. transforming the technology. This is an idea that a century ago was suggested by one of the famous mavericks of economics, Silvio Gesell (who, however, was even taken serious by Keynes or recently Stanley Fischer). He suggested to make money ‘rusting’. That targets a core property of money that was also highlighted by Aristotle: In principle, money does not erode physically, and there is no limit to physical accumulation. His proposal was to represent money by banknotes with coupons, such that every month one coupon would lose value. Thus, money would-be put-on par with all other goods and would lose its specific incentive effects. His proposal was implemented in a few communities, but never won wider approval.
Facing the challenge of global warming, only radical solutions can help. Money is the key for the necessary institutional revolution. If we do not reinvent money, only the second time since its emergence three millenia ago, we will fail to meet the challenge.