Whither the conservation of money?
Tuesday 28 October 2008 at 13:55 UTC
In physics there are a number of so-called ‘conservation laws’. For example, the conservation of energy states that the total amount of energy in a closed system remains constant. Energy cannot be created or destroyed, only changed in form such as friction into heat or sound.
Another useful way of looking at this is through the concept of continuity. In the case of mass-continuity, the principle states that the density at any point increases where material flows into a region, and decreases where it flows out.
Mass is just one of several quantities conserved. Here is a generalised form of the continuity equation in all its glory:
To me this mathematical relation is a thing of beauty. The first term on the left denotes the time change of some quantity ψ, the second term the change in density of ψ, and s the generation or removal rate of ψ. The important point to note here is that, whatever ψ is in real rather than mathematical space, it goes somewhere and does not simply disappear into thin air.
So what of money?
If information is a measurable thing governed by physical laws, then so too is money. After all, when it comes to high finance, money is realised as bits of information flowing through cyberspace, which connect with the physical world through the actions of individuals.
Today we are told by the Old Lady of Threadneedle Street – who may end up as a decrepit bag lady roaming the streets of London – that the world’s financial firms have lost some €2.3 trillion as a result of the credit crisis. If that is so, where has all this wealth gone?
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Wednesday 29 October 2008 at 09:59 UTC
Resources are conserved albeit they are continually being turned into less useful forms, e.g. greenhouse gases. Money is a function of resource, e.g. Money = (time varying coeficients)*(raw material cost of a house), etc….
Interesting to think that if carbon became the new currency many companies would suddenly have new debts or profits, since practices and policies associated with carbon footprint reduction would be proportional to money. (This is also one place where a little money has gone, but it is not accounted for yet.) However, the relationships between money and resources are often arbitrary and not always based on realistic physical models.
One day I went to market and traded one goat for 5 sacks from the corn exchange. The next year the harvest was the same across the lands and my goat was equally plump and sparkly-eyed, and chewed gleefully on the hems of passing merchants. I got five sacks of corn again for my handsome billy, only this year the corn exchange had sewed their sacks to a different size.
Wednesday 29 October 2008 at 11:58 UTC
Not only is the relationship between money and resources not always based on realistic physical models, those who operate the financial markets appear to discard the models as and when it suits them. How else can one explain the “loss” of vast numbers of currency units virtually overnight?
Bengt’s statement that money is a function of resource describes the situation as it should be, not necessarily as it is. The thing about economics is that, to a certain degree, you can simply make it up as you go along. When it comes to money, the normal chain of cause and effect may be suspended at will.
However, the fantasy becomes reality when people lose their jobs owing to a “lack of liquidity” in the markets leading to companies going arse end up.