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MyCHIPs Digital Money

Content Illustration

Wool Blankets for All

The animations in the prior section help visualize how money flows from one party to another. In this section we will expand our analysis to include what is even more important: why the money flows.

The study of money is, at its core, the study of value. Ultimately, value relates to the utility various things have in meeting our wants and needs, as human beings. It only has meaning within the context of our control or deployment of resources.

So money is a human invention, created to facilitate more efficient acquisition of the things we need to survive comfortably. Value is an abstract concept meant to quantify the utility of these assets we want and need. In other words, value is a mirror, or a measure of the assets we hold at any given time.

In the language of money we express this truth with the fundamental axiom:

Liabilities + Equity = Assets

This is a simple notion for anyone familiar with basic accounting. But its implications in the study of value are profound.

Value is a measure of our assets. And our claim to those assets is typically quantified by two separate components: Liabilities and Equity. More commonly, we might use the words: debt and ownership. Other common terms include: credit and collateral, or money and property.

We see the same division in financial markets. You can invest in bonds or stocks. Why is there this natural division? And what does it really mean?

First we must fully understand how value itself exists only within the context of our own wants and needs. The wool on a sheep’s back may have no inherent value to anyone except the sheep. It is not until someone exploits the wool (or the sheep) to meet a human need that it has any meaning in our own abstract system of measuring value.

This is the basis for the labor theory of value. Economists across the political spectrum, from Adam Smith to Karl Marx, have recognized the basic principles it expresses. They just seem to interpret those principles very differently.

The core idea is pretty simple: Most things, particularly the scarce ones, derive their value largely based on the amount of human labor invested in collecting, developing or deploying them for human use. Said more simply, the more work we must do to obtain and use a natural resource, the more expensive it is likely to be.

And now we can answer our question: Equity, or stock represents the value of past human labor. Liabilities, or credit represents the value of future human labor.

Time is the ultimate measure of value. And today, the present, marks the difference between the two different kinds of value.

Money too is found in these same two varieties: commodity money and credit money. In more primitive economies, we have seen common commodities such as salt or wheat used effectively as money. Many cultures have standardized around precisely measured amounts of precious metals, generally silver and gold.

But it has always been awkward to carry around bags of gold, or worse, crates of salt. So most economies eventually evolve toward the more efficient notion of trading in credit.

Credit money has been implemented in various ways, including tally sticks, printed paper notes and more modernly, digital contracts. In each case, the concept is the same. Someone promises to deliver value at some time in the future. And that promise is backed by ownership, or equity in some good and valuable commodity, the collateral.

The promisor must expend new energy and work to satisfy the promise. Otherwise, he may have to forfeit his collateral so the creditor can be made whole.

Six Wool Blankets

In our modern era, we have all grown up under a system based on credit money—paper notes and their digital equivalent. However, that system has been largely controlled by a government sponsored monopoly, or central bank.

In other words, it has become less common for people and companies to issue credit directly to each other. Instead, our credit more often moves through the clearing house of the central bank. While this does offer a number of conveniences, it does not come without its own set of problems and costs.

Recently we have seen the introduction of Bitcoin and other various digital equity-based systems which are not based on credit at all. But digital coins suffer from some of the same problems of carrying gold coins around with you to every transaction. For example, they can sometimes be lost or stolen. And once we resort to using a provider to hold our digital coins, we end up right back in a credit-based money system anyway.

So let us examine how an economy could work based on credit money issued directly from one individual to another. There is no need for a central bank so there are no fees or interest to be charged, just for the privilege of using money.

Run this simulation slowly, and study the implications at each step. Move back a step or two where necessary to understand each part of the sequence. You can see a visual presentation of each person’s balance sheet at each step of the process. By hovering the pointer over objects in the diagram, you can see a more detailed explanation of each item.

Here are some helpful points to note as you run through the simulation:

  • In the beginning, everyone’s current net assets are zero. At each new step along the way, as people add work, their net net-worth goes up. The capital owners are adding past labor, or value previously accumulated into their fixed assets from past work. The workers are adding their own form of capital—their labor.

  • In this simulation, we can see the flow of commodities, in addition to the flow of money. Commodities and money generally flow in opposite directions between the same two parties involved in any given transaction. You give someone money, they give you something else back in return.

  • For purposes of simplicity, we make several assumptions. First, it requires 12 hours to shear enough wool to make 6 blankets. Likewise, it requires 12 hours to spin it into yarn, and another 12 hours to weave it into the 6 blankets.

    In a real economy, things are much more complex, but this normalized view helps illustrate the point more clearly.

  • The simulation demonstrates the growing pie theory. This is the idea that the more we work, the more everyone can prosper. There is not a limited amount of wealth that must only transfer from one person to another. Rather, everyone can prosper at once.

    The economy can be a “win-win.”

  • The growing pie theory, while true in its right, can also be viewed as false from a different perspective. Wealth sought in the form of credit money, is a win-lose game. Each unit of money, or positive credit, is offset by an equal and opposite negative credit. Each CHIP, or dollar you earn is an obligation of a debtor somewhere else in the system—maybe even you!

    Said another way, the total credit in the system is always zero.

The Root of Square Pie

The growing pie theory is clearly true. It is self evident that individuals can improve their own circumstances by their own efforts. One person’s prosperity does not have to come at another person’s expense.

And yet, the concept also proves strangely false when viewed from a second different perspective.

In our simulation, we purposely glossed over certain key assets from the balance sheets of the participants: their capital assets. These are graphically illustrated by several icons, including sheep, a spinning wheel, and a loom. But they are not quantified on the balance sheets.

There are also other important capital assets we only briefly alluded to. They are the very bodies and minds of the participants themselves.

A capital asset simply means something that is generally used to produce other assets. If we could show them accurately on the balance sheet, they would deserve to have a value. And from an accounting standpoint, it would certainly be appropriate to credit, or reduce that value a little bit each time they were used to produce something else during their useful life.

But it is difficult to know exactly how many blankets a loom will weave before it falls apart. It is even more difficult to know how long a person can function before he will die of an illness or simply, old age.

So capital assets can be very difficult to value. But they do have a value nonetheless. We just don’t know exactly what it is until their utility actually comes to an end.

As a result, one equally legitimate alternative to the growing pie theory is: Each of us is born with a valuable endowment. We are given the gift of life, or in other words, time.

As long as we are able to enjoy the right to liberty and the pursuit of our own happiness, then we truly own ourselves. You own your mind, your body, your life, your time.

The question is: what will you do with that endowment, that time? Will you perform extra labors in order to produce enough to also help and uplift others? Or will you work only enough for yourself? Some may choose to do even less, attempting to take what has been produced by others.

In this interesting way, we can see that when we are born, we already own all the potential value of everything we will ever produce by our own work. You own the capital asset that will produce it all: your own person, and all the days of your life you have yet to live.

Life is simply the unfolding of our gift. And ultimately, that gift is time.
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