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The Future Value of Money - a new definition
“We shape our tools and then the tools shape us.”
Introduction:
This ‘idea about money’ is put forward to the LessWrong community as a starting point for some new thinking. I considered this an important discussion as it is germane to the technical changes we are currently going through. This definition offers a new paradigm for economic theory.
Follow-on posts will consider some of the wider, significant economic and societal concepts that this basic idea promotes. These ideas on money and its relationships to the real world have been considered by myself for some years now. Prompted by the 2008-09 banking crisis that urged me review my understanding of economic theory and question its relationship between money and the underlying physical tools and infrastructure of the world's economies. At this time, physically the world was the same after the crash as before - so, why were humans so concerned about the ability to create ongoing wealth?
Some people may consider my ideas trivial. It may be obvious to many that as the efficiency of tools nears infinity, the labour required to create wealth tends to zero. Yet, my understanding of economics is that a unit of labour seems to be central to many of the theories currently used to predict important outcomes, including savings and debt. If this definition is obvious, then why are the economists not discussing it - as the ramifications are astonishing.
I put this definition forward in the hope that the community provides feedback - along with an active discussion of its merits, considers refinements and potential misconceptions. I believe that such a new definition - if we can agree one - is useful for critical thinking about the future - exactly the sort of thinking that the LessWrong community should be good at as we progress towards, (perhaps), AGI and the ‘smart robot’.
Basis of the Theory:
This new theory is built upon two basic concepts:
It seems to me, that we can define money in two ways:
The first definition is tricky as it depends upon many factors including human feelings and scarcity. Gold may be expensive at some point in time, yet in future, it may not be, due to its considered valuation by humans.
This new theory does not attempt to define the purchase value of money.
The second definition of the value of money is the effective cost of money at a point in time, i.e. what you pay to borrow it and put it to use. This defines its future value and is all about how it can be put to use to create wealth in future.
The Historical Context:
Consider the historical path of the value of money. This provides one of the insights from which my new theory is derived.
The 800-Year graph from the BOE (Bank Of England) below identifies the declining trend from 1300’s to present day. (Bond yields show a similar decline.)
Such a long term trend is likely to be driven by some basic factors. I propose that the main factor at work with this declining value of money is the increase in efficiency of human work output due to changing technology.
Summary of this Future Value of Money Theory:
I attempt to simplify the Future Value of Money in terms of work output and efficiency.
The following steps through this thinking, building a simple new equation for the future value of money.
The relationship between output, tool making and efficiency:
There is common understanding and acceptance that human efficiency has progressed throughout the ages, (and yes there have been many ups and downs). But historically, our current wealth creation processes do indeed stand-upon the shoulders of our forefathers. Humans invented tools and refined those tools during past generations. Such progress is iterative, in the sense that to make a more efficient tool requires a tool and so on.
Over the period from 1300 humans have seen massive iterative progression in tools and in the efficiencies of individual worker output. This is clear even from the simplest view of history; from the scythe, the river boat, the windmill, the horse and cart, to the ships, steam trains to the phone and computer driven machinery and currently to the automated data systems and now AI.
We can see that this progression has been more or less continuous over this extended time period. It may have had ups and downs derived from local factors such as wars and changing political and social systems, but the trend towards increasing efficiency for each average worker has been unstoppable.
My theory requires a definition of this tool efficiency. I use a function [eft]y that represents the total average efficiency of all the tools employed in year [y]. This is almost certainly a complex function. But for this purpose it makes little, if any, difference to the final outcome.
Relationship between output, (wealth creation), and money deployed:
This theory also needs to equate the money employed at some point in time [y] with the output, i.e. the wealth created at that time [y]. I do this using the term ‘capital employed’. This represents the overall investment at the time [y] to do the work along with all the tools used. This does not differ from standard economic theory in my understanding.
But, we can also define Capital Employed in terms of tool efficiency and units of labour. This is because, historically, capital has provided for all the tools employed at any given time. And so, I substitute capital employed by unit labour along with the efficiency function [eft]y
The efficiency function [eft]y is simply the overall efficiency of all tools employed in the year [y]. The greater [eft] becomes the less labour is required to finalise the final product or service as the tools become more efficient. Thus, as [eft] increases, the units of labour required decrease for any given output.
Since the capital employed is effectively one and the same as the value of money in some future year, we can see that both their values must also decrease with increasing efficiency.
We can see therefore, that as humans have steadily increased the effectiveness of their tools, the future value of money must have decreased. This is what the BOE graph above is indicating, the future value of money is tending towards zero as the tool efficiency tends towards infinity. What this also means is that the total capital employed is also tending towards zero - is this correct?
I have spent some time considering ‘smart robotics’ - which I define as a robot that is capable of making another robot that can do almost everything. It seems to me that, if or when, we arrive at the ‘smart robot’, then we are on an exponential upward-spiral of tool efficiency; one that tends towards infinity.
The Formal Definition:
Attempting to value money itself seems to me to be conceptually difficult. My considered view is that money, (including savings and debt), is a ‘promise’ to create wealth at some point in the future.
(This is a different definition to what money can purchase today; which is about supply and demand and human factors.)
The start point is based on equating future value of money in year [y], [VofM]y with Wealth Creation [WC] in year [y]:
[VofM]y = [WC]y
This should not be particularly contentious, as wealth creation is about employing the tools that exist along with labour to produce something useful. So we can also say:
[WC] = Capital Employed * units of labour * [1/eft]
Where [eft] is a complex function relating to the efficiency of all the tools employed. It divides the unit of labour because the labour required for a given output decreases as the efficiency of the tools increases.
But, we can also define capital employed in similar terms of simply labour and efficiency - as it just represents the historical cost of creating the tools put to use at some point in time [y]:
Capital Employed = all tools applied * units of labour
So, substituting capital employed in the previous equation:
[WC] = [all tools * labour] * [1/eft] * units of labour
Simplified:
[WC] = [units of labour] * [1/eft]
(Yes, there is almost certainly more complexity in this equation than shown, but adding additional functions would not seem to me to change the final issue of equating wealth creation to just labour and tool efficiency)
Therefore at year [y] we can state:
[VofM]y = [units of labour] * [1/eft]y
This shows that at some time in the future [y], if the efficiency of all tools continues to increase, (tending towards infinity), the units of labour must also tend towards zero:
[VofM]y = units of labour/[eft]y → 0
Thus the future value of money becomes zero when the tool efficiency is infinite.
Thank you.
B.