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MyCHIPs Digital Money

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Time Accounting

Perhaps the best way to understand the true nature of money is to start by learning the formal language of money, accounting. Accounting is just as fundamental to learning about money as mathematics is to learning about the physical world around us. It employs a careful discipline of rules and constraints to help us think more clearly and to avoid common pitfalls like counting something twice, or forgetting to consider something that should be counted.

Some primitive cultures believed the sun, the moon, and the stars all circled around the earth, which was the center of the universe. This naive perspective can appear reasonable to some who may only consider a few very simple observations. But when a more formal system of analysis is employed, including mathematics and formulas correctly modeling the behavior of gravity and mass, we can arrive at a more realistic understanding of how the earth interacts with the sun and other celestial bodies.

Similarly, many people make certain naive assumptions about how money works—just because they may seem intuitive. But by properly applying the formalities of accounting, we can come to a much better understanding of the true nature of money and value.

Perhaps the most fundamental accounting principle to learn is the idea of “dual entries.” It is a simple notion: for every increase there must be an equal and opposite effect, or decrease, somewhere else. This is reminiscent of the principle of conservation of energy so familiar in physics.

In common terms, this means that value does not just appear out of nothing. Rather, it always comes from somewhere. In formal accounting terms, we might say: for every debit, or positive effect, there must be an equal credit, or negative offset. In other words, the debits and the credits should always add up to zero. If not, you have made a mistake somewhere. Either you have counted something twice, or you have failed to count something important.

Another basic principle is the idea that the net wealth of a person or entity can be represented by adding up its assets and liabilities. The assets represent positive wealth, or that which has value to its owner. Liabilities represent obligations which reduce one’s net value.

There are two other important notions in accounting: Income and Expenses. Income is recognized when one’s net worth increases. This can happen when your assets get bigger, or your liabilities decrease. Likewise expenses cause your net worth to decrease. For example, your assets can get smaller, or your liabilities may increase.

In addition to these basics, accountants may employ further standards such as GAAP, or Generally Accepted Accounting Principles. These are not so much mathematical facts, but more habits or traditions accountants have adopted amongst themselves. For example, GAAP gives guidance about how and when to recognize things like income or expenses. It helps accountants to be more uniform in the way they analyze various transactions and businesses.

Finally, for our accounting to make sense, we must assume some standard unit of measure for the values we are computing. For example, if you live in the United States, you will likely keep your books using dollars and cents. In this case, if you complete a transaction explicitly measured in dollars, it should be pretty easy to know what numbers to enter into your books. But if your transaction is in Euros, Yen, or something else entirely like carrots or gold, you may have to perform some kind of value conversion to properly record it in your books.

GAAP accounting turns out to be very useful in the role it was designed for. If your primary objective is to figure out how much money you earned so you can value your business or calculate your income taxes, GAAP is probably just what you need. But if you are really trying to understand value, how is is made, and where it comes from, you may have to reach beyond the limits of traditional tax-oriented accounting practices.

To demonstrate this point, let’s assume two different people each build a house for themselves. The first, Mika, goes to a regular job each day to earn money. While he is at work, a builder shows up at his new home site and works all day on the construction. Every few weeks, Mika uses the wages he has earned to pay his builder.

Eventually Mika’s new house is completed. His GAAP accounting will show a history of the income he earned at his job. It will also show the disbursements of money he made to his builder. But to offset these credits, he will have a significant increase to his balance sheet: his new home. In short, Mika’s accounting will tell the story about how his net wealth has increased by the value of his house.

In our second example, Shana also decides to build a house—but totally on her own. She lives near a forest and has lots of great tools. She can cut the wood, and gather the stone needed to build her house.

Over time, Shana will also get a new a house. She will work each day just like Mika did. But her work will go directly into her house, rather than passing through the work of the builder.

Strangely, according to typical GAAP, Shana’s balance sheet will not increase at all. In spite of all the work she has done, her accounting will not show any income either.

In the real world, we know intuitively that Mika and Shana have basically accomplished the same thing. They have each worked in order to build a house. They both now own a similarly valuable asset. If GAAP were about accurately representing value, Shana’s balance sheet should look more like Mika’s.

But Mika’s work flowed through the medium of central-bank money, so his work is taxable, and his gain is recognized. In contrast, Shana produced her house without any money involved, so GAAP will not recognize an increase in her assets. Her house, if it is recorded at all, would be entered at a zero value, or cost basis. And it will stay that way until she does something that would trigger a tax, like selling the home.

So to reiterate, GAAP is most helpful in situations where the focus is on measuring taxable income, or income of interest to the government. But it may not always tell the whole story—particularly when it is difficult to quantify the transaction in some kind of standard, central-banking money. For example, if Shana spent a year building her house, how would she come up with a dollar amount to enter into her books? She didn’t spend any money—just time. So how would she even place a specific value on it?

It turns out, we can use formal accounting methods very effectively to analyze value regardless of whether traditional money is involved. But certain GAAP practices are not going to be particularly helpful. Instead, we will need a new set of guiding principles.

In a MyCHIPs economy, we adhere to the long-held notion that “time is money.” But it is not just a clever phrase. Rather, it is quite literally true. Value is created, by definition, through the application of standardized human effort, across a uniform interval of time. And money is what we will use to measure, store, and trade that value.

In fact, money will be based on the very same units as time: hours. Commodities will be valued (in terms of cost) in relation to the time required to produce them. And credit will be redeemed, or satisfied according to the amount of productive time originally encumbered in the obligation.

So when using time-based money, we will develop our new set of guiding principles, and call it Time Accounting, or TA for short. Under TA, the standard unit of measure, or monetary unit, is a CHIP. And our primary goal will be to accurately analyze the flow and accumulation of value, regardless of how it may or may not relate to central-bank money.

Now, let us return to our example of the house Shana built and see how we can structure TA to remedy the flaw we revealed in GAAP. As Shana works on the house, our real-world intuition tells us it should be getting a little more valuable each day. Each timber cut and placed should gradually add to the total until finally, it has a cost—in CHIPs—reflecting the amount of standardized human effort required to create it.

In accounting terms, this means Shana should maintain an asset account on her balance sheet representing the house, as a work in process. As work is completed, she will need to debit this account each day with the correct amount of cost, in CHIPs. That way, the asset will gradually grow until it reaches its ultimate finished total.

But if her house asset is debited, what then is the off-setting credit account? The value of the house is getting greater each day. But what is getting accordingly smaller? Dual-entry accounting tells us, there must be something to credit.

In Mika’s case, GAAP provides the notion of income which is ultimately the off-setting credit. Mika works at a job for a living. When he gets paid, he debits his cash, and credits his income. Then when he pays his builder, he credits his cash and debits his house asset. The value has flowed from income, to cash, and then to his house. But what is an income account, really?

In its simplest (and perhaps most cynical) view, income is simply an account we create in order to satisfy the accounting condition that credits must always equal debits. We need two offsetting entries to balance things out and an income account is a handy way to do this. It has the added convenience that all the transactions making one’s net worth bigger, end up in a single place where we can easily track and analyze them.

But in reality, income represents a much deeper notion. An income account itself, is not a part of the balance sheet—at least not directly. Rather, it is meant to represent the “outside world.” In other words, it can be thought of as representing someone else’s balance sheet.

When you get paid, your cash, or assets, will increase. But someone else’s cash decreases. This is why income accounts grow by credits, or in the negative direction. What we are really tracking is the negative effect on someone else, which creates a positive effect on our own net worth.

Likewise, an expense also represents the outside world, or other people. When you spend money, you credit your own cash asset. The off-setting debit goes to an expense account, and it grows in the positive direction. This can help us visualize that someone else’s balance sheet, or net worth is growing.

It seems to make some sense that as Mika gets his paycheck each week, his assets are growing and someone else’s must be shrinking. But what about Shana? Her house asset is clearly growing, but what is getting smaller? What is the off-setting credit account?

To answer the question, think about where the value we are tracking really comes from. True, there is potential value in the wood and the stone of the forest. Must we create a balance sheet for the earth, to credit each time a natural resource is harvested or collected? And if so, how do we quantify their value?

As it turns out, natural resources gain most of their value through the labor we apply to them. In fact, if you believe in the labor theory of value, commodities really don’t have a quantifiable value at all until we apply some kind of human effort to their use and application.

Trees must be harvested. The wood must be dried, sawn and planed. Rocks must be quarried, cut and shaped. All these materials must be transported back to the location where they will be used. And then they must be fitted, worked and installed for their ultimate purpose. This is what gives them their true value—the human labor expended in their collection, transportation, and preparation.

So even if we did have a “forest balance sheet” to credit with the small portion of value intrinsic to the resources themselves, what do we credit to account for all this additional labor Shana has expended in the preparation of her materials? It can not really be an income account. Who, in the outside world, is being made less wealthy as a result of her efforts? No one.

Will we credit an expense account? That doesn’t really make any sense either.

Some, already familiar with accounting, will simply choose to credit an equity account. After all, that is sometimes done in standard accounting when marking low, or zero-cost-based assets up to a more realistic market value. But crediting equity leads to a different problem, perhaps worse than trying to credit income.

Equity accounts are used to represent the “obligation end” of ownership. That is why they don’t typically show up as often, or in the same way, on a personal balance sheet as they do for a corporation. A company maintains capital accounts in the equity section to properly reflect the interests of the people who own them.

Said another way, the equity shown on the balance sheet of one entity corresponds exactly to an asset on the balance sheet of the person who owns that entity. If you are a free person, that equity had better be owned by you—the very same entity.

If Shana were to credit equity with the cost of her new house, she is signaling that someone else really owns her, or at least a portion of her. And to keep her owner’s accounting consistent with Shana’s, we would have to debit his ownership interest in Shana. And that means we still need to credit something else. But what?

We are right back to where we started: with an orphan credit needing an account to apply to. Where should the missing credit be applied? As Shana’s house is getting more positive, something must be getting more negative. But what?

The answer is: the cost of the house is based on labor which flows out of Shana herself. She is the very source of the value, and hopefully its owner too. Her body, her mind, and her time are the true resource being tapped for the production of the home. Each day she wakes up and is still alive, another 24 hours, or CHIPs-worth, of potential value becomes available for her to spend as she chooses, to produce what she will, to pursue her own happiness.

You might think of it as Universal Basic Income, quantified in CHIPs. And you don’t even have to tax anyone! We all just have it as an inherent part of the condition of living.

This gives us some more insight into the logic behind time-based money. Value comes from human life, intelligence, and labor, applied to a productive task, or some otherwise-desirable activity.

We measure CHIPs according to hours. But we might also measure it in heart beats. For an hour past, is merely an hour and not a CHIP at all, unless it includes a living human being who uses that hour in the application of his own creative powers.

This helps us understand the true source of value much better and it also help us identify the correct credit account. It is right there on Shana’s balance sheet with all her other assets. Each human being is born with a measure of potential—an unknown, yet finite number of days and hours, to spend as she will.

How many heart beats do you contain? How many CHIPs? The number may be unknown to you. But it is a number still, so we will represent it, like any other unknown mathematical value, with a variable. We will call it “C.”

C is the asset that represents your life—the number of hours of creative potential included in all the days of your life. Each hour Shana spends working on her house, she transfers value from her reservoir of C, to the house itself. The house gets a little more valuable. And a little bit of her C is used up in the process.

You may have heard the term “human capital.” Time Accounting has brought us a formal way to quantify and represent it on a person’s balance sheet.

Imagine a man builds a wooden wagon to help him haul his goods more efficiently to town for sale. The wagon represents capital. Under TA, its cost would equal the number of hours, or CHIPs he expended to build it. Its ultimate value will equal the number of hours, or CHIPs he will save by using it, as opposed to carrying his goods by hand.

The more trips he takes with the wagon, the more he will gradually wear it out. To account for this value, he would enter the value of the wagon on his balance sheet. Then, for each period of use, he would reduce its value a little bit—estimated to be the amount of its value used up in the course of the use. In accounting terms, this is called “depreciation.”

If our foresight were perfectly accurate, we might be able to predict just how long the wagon would last. Then, we would make our final depreciation entry just as the wagon wore out, its value finally reaching zero.

Similarly, every person begins life with a human capital account containing C, his own private reservoir of human productivity potential. Each day of living, that value depreciates slightly until on the last day of life, it finally reaches zero.

In Shana’s case, she used her own C to produce a house. As she did so, she revealed more about just how valuable her own potential would turn out to be. And by booking that value to her balance sheet, we have a way of quantifying and tracking that productivity.

Shana might instead have spent her daily allocation of 24 CHIPs sitting on the beach, reading a book, or contemplating the mysteries of money. And if those activities were sufficiently rewarding, they may well constitute the best way for Shana to pursue her own happiness and fulfillment.

Maybe she would rather trade her CHIPs for gold, money, or credits with her favorite merchants and suppliers. Hint: we call this a job. This will allow her to store up some of her C in a more liquid form so she can decide later how she might want to spend it.

She might even want to spend some of her C directly helping others. Sometimes, it is even better to build up the worth of others rather than just concentrating on our own balance sheets.

But lest we digress past the point of no return, we will return to our principles of Time Accounting:

What about Mika? GAAP did a pretty good job of tracking his value. Will TA still work for his case too? Absolutely!

Under GAAP, we imagined Mika’s increasing value to be coming from an income account, or in other words, some outside party. But that may not be completely accurate either. Accountants just do it that way because it is Generally Accepted—not necessarily because it is an accurate reflection of values.

Mika also has a reservoir of potential value, just like Shana. He too trades bits of his life, or his C, for the money he will use to pay for his house. So even for Mika, the traditional notion of income is shown to be somewhat of an illusion.

Properly accounted under TA, Mika’s balance sheet is not really getting any larger. He is just exposing more of what was contained in his C account all along. Value is being transferred out of Mika’s C, and it will ultimately land in his house asset account. It just takes a brief stop in his cash account along the way.

Accordingly, Mika’s employer’s balance sheet is not really getting any smaller either—at least if he is doing a good job of running his business. He trades one of his assets: money, for what he needs even more: human labor, so he can profit from the sale of goods and services.

So is there such a thing as income at all? Or is it merely an illusion meant to facilitate the notion of income taxes?

To answer, let us return to the basic tenet of accounting: The credits must equal the debits. Said another way, value always comes from somewhere—it doesn’t just appear out of nothing. Properly applied, this is true not only within a single entity’s books, but also across multiple entities who are interacting with each other.

In other words, your books must balance to zero. And your books, in combination with the people you deal with, should also balance to zero.

Under a mathematically consistent notion of income, if your balance sheet is increasing with a debit, that value must be coming from somewhere. Someone else’s balance must be reduced by the same value. It is like one big, consolidated balance sheet representing everyone in the whole economy! And as always, if the credits and debits don’t sum to zero, someone is fudging the numbers somewhere.

When labor is voluntarily exchanged in trade, both sides benefit from the transaction. Each party gives one of his own assets to get another thing of even greater value when considering his own needs. But their balance sheets aren’t really growing at all—at least in the ultimate sense.

Rather, the parties are just converting their own human capital to the other kinds of assets they want and need to live their lives. They are unfolding an asset of yet undetermined potential value, and turning it into assets which can now be seen and used.

So it looks like the notion of income is probably limited to the actual transfer of wealth between parties. This may occur voluntarily, such as by a gift or an inheritance. Or it may be involuntary, in the case of theft or fraud. But these are the only ways one’s TA balance sheet will increase in conjunction with the decrease of another.

So what about expenses? Are they not analogous to income, but just on the other side of the ledger?

In simple-minded accounting, we sometimes think of all the money we spend as an expense. For example, if you buy an apple, you would typically book the transaction to an expense account. Your money got smaller, and the merchant’s money got bigger. That all seems to make sense.

But under TA, we realize this approach is not entirely correct. The merchant reduced his inventory asset by one apple. And he increased his cash inventory by exactly the same value—at least considering the value of the apple to you. Your cash decreased by the value of one apple, and your food stores increased by exactly the same amount. The real expense hasn’t happened yet.

The real expense, if there is one, comes only when you eat the apple. That is when it falls out of your food stores, never to be available again. In effect you are spending a portion of your C factor on the maintenance of your own body.

Said another way, you are deploying some of your C, to preserve and extend C itself! To keep life going, you will be needing a number of apples, and quite a few other things as well.

And in addition to satisfying your basic needs, there is an even more important notion: your desires and choices.

This helps us understand how, under TA, such transactions are not considered expenses at all. Instead we will create another asset account to represent your legacy. We will call it “L”.

L will accumulate the cost of all your efforts, all your activities, all your experiences. As you live your life, you transform the unknown, unquantified value of C, to the known and measurable L. This includes the material assets and achievements you leave behind for your children and for society when your life is finally complete. It also contemplates the knowledge, wisdom and memories you may be able to take with you to wherever it is you will be going next.

Each morning you wake up and are still alive, you get a fresh new allocation of your endowment, thanks to the miracle of life. The value of that daily allotment: 24 CHIPs. Your Universal Basic Income from the hand of Providence itself.

By necessity, you will spend 8 or 10 of your CHIPs in basic maintenance like sleeping and eating. You may spent about 8 more working to obtain the other things you need like food, clothing and shelter. You have another 6 or 8 potential CHIPs left over each day to spend as you will.

You can spend it on pleasure and entertainment. You can use it to build up your own personal capital, such as improved education and literacy. These are things that will help you be even more productive with your time in the future.

Eventually, your life will be over. And what you have left to show for yourself will be your L—the result of the way you applied your time.

How will you use your C, your CHIPs, your heart beats?

And what will be your legacy?
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