The Physics of Money
standard definition is that Money is any object or record that is
generally accepted as payment for goods and services and repayment of
debts in a given country or socio-economic context. The main
functions of money are distinguished as:
A medium of exchange; a
unit of account
A store of value
Occasionally in the
past, a standard of deferred payment
kind of object or secure verifiable record that fulfills these
functions can serve as money.
is the standard definition, but what is important to you is not the
preservation of money, but the preservation of value. Money
itself is a human construct, even according to the standard
definition it is dependent on the humans using it to give it
definition within some economic context. What we need to do if we are
going to break free of the manipulations of the Federal Reserve, the
bankers and politicians is to clear our heads of anthropocentric
definitions of money and look to the solid foundations of physics
which provide less subjective definitions of value. It turns out this
isn’t as hard as it might seem and rest assured that this will
be more common sense than hard work. First, let’s modify the
standard definition of money by stating that:
is a method of measurement of value.
what is value?
is the potential to do useful work.
use money to make things happen. To move yourself into a house, to
get food, to pay for heating and cooling your home. Physics and
thermodynamics give us a way to understand what value is objectively
rather than through distorted anthropocentric economic theories.
There is no concept known as ‘money’ in physics, but
there are measurements and laws which govern the fundamental units of
the physical world, the real world wherein you and I live and what is
necessary to accomplish useful work. While ‘money’
can be made worthless in the blink of an eye through human whim
(through currency devaluation, or even by changing the exchange rate
of that best money, gold), the laws of physics are conservative and
give us a more solid foundation. Bear with us through some science
101 so we can get to some underlying economic truths you will find
nowhere else. We promise to translate the science into plain English
quickly. Here are the two Laws of Physics that apply:
First Law Conservation of Mass-Energy: Matter and energy is neither
created or destroyed.
+ dE = 0 (where M is
the mass and E is the Energy). The little ‘d’ for those
not mathematical is the symbolic way of saying differential change.
Second Law Law of Entropy – Within a closed system, order
can only degrade (or stay the same for a reversible process) but not
improve without an outside energy source.
>= dQ/T (where S
is the entropy, Q
is the energy per mass and T
is the reference temperature)
Gibb’s Free Energy – Nothing happens in the world without
a negative change in Free Energy. This isn’t a law, but really
a mixture of the first two laws.
= dH – T dS
G is Free Energy and is understood to mean energy that is free
and available to do work, H is the enthalpy or internal
energy, T is the reference temperature and S is the
G term, Free Energy, is what is important and represents value
both in the world of physics and in economics, the ability to make
things happen! Now we need to translate these three physical laws
into plain English that you can understand and show how they lead to
a common sense concept of value which will help you preserve your
assets and income within an economic situation spiked with fraud and
First Law: Mass and Energy are valuable commodities that will always
have some intrinsic value and can’t be destroyed. The
prime example of this is gold, which is valued for its mass physical
properties, rarity, density etc. Oil is another example, which has
value both as mass (carbon and hydrogen) but more importantly as an
energy source. Even bare dirt can have value as real estate. So the
First Law of Physics is the first approximation we have to value (as
seen by the age old adoption of gold as a monetary standard). But
this First Law isn’t sufficient to bring us into the modern age
because we know most of our personal wealth is not tied up in gold or
oil or even in physical commodities like bushels of corn. We know
even solid physical assets like real estate can be devalued as they
have been since the 2007 subprime crisis, so while the First Law is
important it cannot be the sum total Law of Value; we have to
account for the information value of money.
Second Law: the Law of Entropy and Disorder. It turns out that
the Second Law of Physics, the law of entropy, is also the Law of
Information because the opposite of disorder is order, or
information. Negative entropy, negentropy, or order evolving systems
would be information. We won’t go into all the history of how
information was tied to entropy through the field of statistics,
other than to say there is a vast science called information theory
based on the Second Law thermodynamics.
physics definition of entropy is at first confusing to laymen because
it says in a nutshell that everything falls apart eventually. The way
we get around the disorder predicted by the Second Law is to use the
sun (or occasionally nuclear energy) to reverse the effects of
decline – that’s why trees grow in sunlight as energy is
used to displace the disorder to the universe. That’s why we
can use the power from electrical plants to run our computers and
concentrate ever greater amounts of information
you don’t care about physics or about growing trees, what you
care about how this affects your portfolio and the value of money.
What is important to notice is that the Second Law is an inequality.
That is, dS >=dQ/ T/D. What that means to you in a practical sense
is that unlike a fixed element like gold, the amount of information
in a system is dynamic, it has no fixed value, and what value it does
have tends to degrade with time. That means money can have both a
fixed commodity component as well as a variable informational
component and in varying proportions. It is the variability of the
informational component that subjects your finances to the greatest
risk of theft by the state.
money is by political design for the most part now pure information,
fiat money, created from the ether. We barely even bother with flimsy
paper money anymore, but rely on bits of information in bank
computers and cyberspace. Our Federal Reserve has created half
trillion dollar in currency creation to backstop European banks at a
keystroke. Unlike commodity money, digital fiat money (information
money) can appreciate, or depreciate, on the whims of the Federal
Reserve as it ‘prints’ more greenbacks (though it doesn’t
even bother to print bills anymore). Our money can also change value
based on rumors and regulations.
normal situations when Central Banks aren’t printing money to
prop up failing sovereign debt and private banks, the market works
out the informational value of money on a daily basis through day to
day minor transactions and stock markets. However, intervention by
politicians and central banks has completely dislocated this value
discovery process, attempting to create money by fiat.
conundrum is that we know commodity money like gold, oil and even
bushels of corn have value, but our bankers have convinced us that
pure information in the form of digital accounting entries is real
money in the modern age. So who is right?
they both are, but to nail this down in terms of physics we need to
explore the final relationship, which is sometimes called a third
Gibb’s Free Energy equation, or by other names in
chemistry and other fields. This states in English that no reaction
occurs unless there is a negative change in the Free Energy of the
system, defined as a change in the energy per unit mass plus the
change in information content. This is something you haven’t
read in an economics book, but is critical to your financial
understanding of inflationary processes. In essence, it is the
addition of the first two laws:
happens unless there is a negative change in the mass and/or energy
and/or information of a system.
other words, you have to exchange some combination of physical
commodity (gold), energy (oil) and/or information (an engine design,
digital data). All we’re doing is formalizing what you
new intuitively already, but that bankers and politicians have tried
to obscure. Another way to say this is there is no free lunch, you
have to expend resources, energy and brains to make things happen. It
is the hard to pin down informational value that makes things so
slippery. We can demonstrate the concept quickly:
you wanted to feel rich in these uncertain times, which would you
$200,000 in the bank
drawing 1% interest, or
$50,000 in cash, a paid
off home, a basement of groceries, a bunker of heating oil and a
small pile of gold?
each individual situation is different, but what is clear is that the
person who owned a mix of commodities and cash could logically lay
claim to having the same wealth as the person with just cash. Who is
in reality better off is subjective (the subjective Second Law
inequality relationship). But what we have just shown you is that
your wealth can be a combination of Mass (like gold), Energy (fuel
oil) and/or Information (a digital bank account). This is just a
restatement in economics terms of the Gibb’s Free Energy
equation; you can make things happen if you have a gradient of wealth
made of mass, energy and information that you can ‘spend’.
No big deal you may think, but it leads to a Eureka moment when it
comes to the practical question of how to preserve your wealth.
is the ability to make things happen. It can be composed of elements
of mass/energy, and elements of information. The mass/energy
elements of your wealth are relatively hard to steal, but the
informational wealth in the form of fiat money and paper financial
instruments can be stolen at the whim of government, the Federal
Reserve, or by digital thieves in a nanosecond.
would you rather have in uncertain times?
|Daxton Brown|| www.futurnamics.com ||2011-11-08|
|You won't see a discussion of the physics of money coming from any of the Keynesians. There is no such thing as a free lunch.|