A couple of months ago, I decided to simulate an economy from the basic building blocks. As usual I didn’t see it to the finish. But I did end up wondering a good deal about a lot of small things.
At some point, for the sake a simulation, I had to make the assumption that the total money in the system is constant. While this is convenient, I knew subjectively that it isn’t true. Because you can make more money without your neighbor having to make less. Economies of countries across the world grow with others not having to dimnish. In short, this isn’t a zero-sum game.
So pretty much like anyone on the internet, I googled for things in the world that are actually constant. And if money too is?
One particular Quora answer piqued my mind that said the only known constant in the universe so far is energy. Come to think of it, that really is the only constant we know of. How fascinating isn’t it! That a quest into fundamentals of econmics should lead to fundametals of physics.
Law of conservation of energy states that energy can neither be created nor destroyed; rather, it can only be transformed or transferred from one form to another.
Armed with this little wisdom, I started to ponder how money is actually connected to energy and if there is a mental model I can build for myself.
Money as a battery
Before money came along, barter existed. Barter had couple of problems.
Problem 1: A common exchange medium didn’t exist. You may need the shoes I’m making but I may not need the pancakes you’re making. Maybe I want cotton. But we still want to trade.
Problem 2: The exchanged goods were time sensitive. You may need my shoes that will last for a year, but you’re only willing to give me milk that will go spoilt in 2 days.
Barter had more problems too but we can skip those.
Now let’s think of batteries. Batteries can power a plethora of things: homes, cars, gadgets etc. So they’re a common exchange medium. You can charge a battery today and use it tomorrow, or maybe 6 months down the line if it’s an advanced battery. So they’re not time-sensitive. (I know this isn’t fully true but it doesn’t invaidate the primary argument.)
Let’s frame the model now
If money was a giant battery all of us humans used, what charges it? Given the current scenario: fossil fuels, solar, nuclear, wind and hydro.
We discharge the battery for various purposes everyday. To run our machines that enable agriculture, vehicles that enable transport, computers that reduce and automate tasks etc and a bazillion other things.
But interestingly, we humans not only discharge it, but we also charge it. When we do this we call them companies. And other humans discharge it. Generally anybody who charges this battery makes money and anybody who discharges it spends money.
So there we have it. Money modeled as the electro-static energy in a giant battery. Each of us humans own a small a piece of it. We usually call them bank accounts, but whatever.
Let us not get into the caveats of how there are different types and values for money (dollars, yen, dinar, rupee) and how all of that can be modeled as a battery. Maybe we can investigate that separately later.
But let us come back to the original question.
Is total money constant?
No. Because we can charge the battery as much as we want by simply building more power plants. Solar, fossil, oil, hydro, nuclear etc.
Why don’t we? Because among the readily available sources on Earth, only some are exist in ample amounts, are accessible and available consistently. Namely solar, fossil and nuclear.
Why do we still not tap them? Because energy conversions aren’t always easy. And never perfect. Just like we generate waste from what we eat (called poop), all power conversions generate waste. We’ve ignored the waste for too long thinking it wouldn’t be a problem. Now it’s such a big pile outside the door that it’s threatening the whole planet.
Climate change is basically a waste management issue at a global scale. But that’s for another post. :)