Evolution of Complex Systems Lecture 9: Economics and money Peter Andras / Bruce Charlton

Objectives Exchanging human artefacts Exchanging human artefacts Accounting Accounting Money Money Memory and information subsystem Memory and information subsystem Identity violations and adaptation in the economy Identity violations and adaptation in the economy Organisations Organisations Banks and the monetary system Banks and the monetary system

Society Society = system of human communications Society = system of human communications Social systems = subsystems of the society Social systems = subsystems of the society E.g. political system, educational system E.g. political system, educational system

Reproduction of the society Reproduction of human communications – and referencing, continuation rules Reproduction of human communications – and referencing, continuation rules Memories: human memories, written memories Memories: human memories, written memories Education, religion and science Education, religion and science Human artefacts: facilitate reproduction of human communications Human artefacts: facilitate reproduction of human communications

Human artefacts Objects, writing, rituals, services Objects, writing, rituals, services Represent human communications (behaviour) which led to the creation of the artefact Represent human communications (behaviour) which led to the creation of the artefact Facilitate utilisation – a set of human communications (behaviour) Facilitate utilisation – a set of human communications (behaviour)

Exchanging artefacts – 1 Exchange economy: three potatoes for an egg Exchange economy: three potatoes for an egg E.g. primitive worlds, Bulgaria – 1996, Germany – 1923 E.g. primitive worlds, Bulgaria – 1996, Germany – 1923

Exchanging artefacts – 2 Reproduction and expansion of utilisation behaviour – set of corresponding human communications Reproduction and expansion of utilisation behaviour – set of corresponding human communications E.g. pots, rituals E.g. pots, rituals

Economy Economic communications: exchange of artefacts Economic communications: exchange of artefacts Economy = system of exchange of human artefacts seen as human communications Economy = system of exchange of human artefacts seen as human communications Economy – subsystem of the society Economy – subsystem of the society Artefacts: goods, services Artefacts: goods, services Economy  reproduction of the society Economy  reproduction of the society

Memories of economic communications Memories of existing goods and exchanged goods Memories of existing goods and exchanged goods Transactions – what was before, what is now, what has been exchanged – stock and flow Transactions – what was before, what is now, what has been exchanged – stock and flow Early forms: human memories, knots, marks in stone, writing, pieces of stone or shell Early forms: human memories, knots, marks in stone, writing, pieces of stone or shell

Accounting Inventory of existing goods and services using memories – stock Inventory of existing goods and services using memories – stock Records of exchanges using memories – flow Records of exchanges using memories – flow

Valuing artefacts What can be exchanged for what What can be exchanged for what What is the potential or expected contribution of artefact to the reproduction and expansion of the society What is the potential or expected contribution of artefact to the reproduction and expansion of the society Values are context dependent Values are context dependent

Exchange and value Artefact: context dependent value Artefact: context dependent value Exchange: aim improved reproduction and expansion potential Exchange: aim improved reproduction and expansion potential Value-based exchange is expected always to lead to increased reproduction and expansion ability of the society or social system Value-based exchange is expected always to lead to increased reproduction and expansion ability of the society or social system Note that the latter does not happen necessarily in reality Note that the latter does not happen necessarily in reality

Value measurement What is the reproduction / expansion facilitating potential of an artefact (good or service) in the context of a social system What is the reproduction / expansion facilitating potential of an artefact (good or service) in the context of a social system Valuation based on expectation Valuation based on expectation Valuation expressed in terms of exchange Valuation expressed in terms of exchange

Marginal exchange Evaluation of equivalence of reproduction / expansion potential of artefacts Evaluation of equivalence of reproduction / expansion potential of artefacts Provides the value of the artefact Provides the value of the artefact E.g. a sheep is worth of three goats but not four E.g. a sheep is worth of three goats but not four

Early money Shells, stones, animals Shells, stones, animals Relatively rare goods Relatively rare goods Exchangeable with any other good or service – key feature Exchangeable with any other good or service – key feature

Money – 1 Copper, silver, gold – coins Copper, silver, gold – coins Rare goods emerge as universal exchange vehicles Rare goods emerge as universal exchange vehicles Facilitate the reproduction and expansion of exchanges (economic communications) and through this the reproduction and expansion of the society Facilitate the reproduction and expansion of exchanges (economic communications) and through this the reproduction and expansion of the society

Money – 2 Coins with agreed value – e.g. ‘gold’ coins made of a mixture of silver and gold or copper and gold Coins with agreed value – e.g. ‘gold’ coins made of a mixture of silver and gold or copper and gold Paper money Paper money Money is a standardised universal exchange vehicle Money is a standardised universal exchange vehicle Social system / economic subsystem defines the value of the money Social system / economic subsystem defines the value of the money

Money and economic communications Economic communications: exchange of goods and services Economic communications: exchange of goods and services Money: vehicle of economic communications – signal of value – price of goods and services Money: vehicle of economic communications – signal of value – price of goods and services Money – special good Money – special good

Accounting and money Accounting in terms of money Accounting in terms of money Records of economic communications are standardised in terms of money Records of economic communications are standardised in terms of money Stock and flow measured in money terms Stock and flow measured in money terms

Economy and money Economic communications: exchange of goods and services – all expressed in terms of exchange of goods and services for money Economic communications: exchange of goods and services – all expressed in terms of exchange of goods and services for money Language of economy: exchanges with money Language of economy: exchanges with money Rules of the economy system: rules regulating the money and money exchanges Rules of the economy system: rules regulating the money and money exchanges

Memories of economic communications Memories: records of money exchanges for other goods, services or money Memories: records of money exchanges for other goods, services or money E.g. receipts, bills E.g. receipts, bills Accounting in terms of money – money values of stocks, money values of flows Accounting in terms of money – money values of stocks, money values of flows Money – memory of ability to exchange goods Money – memory of ability to exchange goods

Actions of the economy system Actions: exchange communications that have an effect on the environment Actions: exchange communications that have an effect on the environment E.g. production of goods and services E.g. production of goods and services Exchange of goods and services triggers the reproduction and expansion of usage behaviour  effects on the environment Exchange of goods and services triggers the reproduction and expansion of usage behaviour  effects on the environment

Perception of the economy system Perception: environment effects on exchange communications changing the expectations about continuation communications Perception: environment effects on exchange communications changing the expectations about continuation communications Changing needs of the society  changing values and needs for goods and services Changing needs of the society  changing values and needs for goods and services Effect: change of the economy system Effect: change of the economy system E.g. some jobs may disappear, some goods may disappear, other jobs and goods emerge E.g. some jobs may disappear, some goods may disappear, other jobs and goods emerge

Economic expansion Necessity in expanding society Necessity in expanding society Lack of economic expansion increases the likelihood of contraction of the whole society Lack of economic expansion increases the likelihood of contraction of the whole society E.g. communist vs. capitalist economy E.g. communist vs. capitalist economy

Inflation The value of money changes rapidly and the amount of changes are unpredictable The value of money changes rapidly and the amount of changes are unpredictable E.g. printing money E.g. printing money Money – can be seen as memory of the economy  what is the value of the economy Money – can be seen as memory of the economy  what is the value of the economy Shrinking economy + growing money supply  readjustment of the value of money  may lead to inflation Shrinking economy + growing money supply  readjustment of the value of money  may lead to inflation Unpredictability increases ambiguity in economic communications triggering shrinking of the economy Unpredictability increases ambiguity in economic communications triggering shrinking of the economy E.g. Brazil, Argentina, Bulgaria, Germany – 1920s E.g. Brazil, Argentina, Bulgaria, Germany – 1920s

Identity and identity violations Identity of the economy: definition and regulation of money within the economy Identity of the economy: definition and regulation of money within the economy Fault: fake money Fault: fake money Error: production of unwanted goods Error: production of unwanted goods Failure: hyper-inflation Failure: hyper-inflation

Adaptation in the economy Rules about valid money, punishment for using fake money Rules about valid money, punishment for using fake money Implementation of new check – e.g. better market research Implementation of new check – e.g. better market research Resetting the economy by introduction of new currency – e.g. Brazil, Bulgaria, Argentina Resetting the economy by introduction of new currency – e.g. Brazil, Bulgaria, Argentina

Economy and society Growing society needs growing economy Growing society needs growing economy Growing economy supports the growth of the society Growing economy supports the growth of the society Growing economy needs small inflation Growing economy needs small inflation Reason: Reason: Ideally growth in money supply should match growth in economy Ideally growth in money supply should match growth in economy If there is not enough money the economy will shrink If there is not enough money the economy will shrink Predicting exactly is impossible, so supplying little bit more guarantees to have enough fuel for growth Predicting exactly is impossible, so supplying little bit more guarantees to have enough fuel for growth

Organisations Organisation: set of human communications following a set of constraints (rules) Organisation: set of human communications following a set of constraints (rules) E.g. company, university, government E.g. company, university, government

Organisations and economy Production of goods and services happens in context of organisations Production of goods and services happens in context of organisations Organisations themselves include to large extent economic communications – exchange of services and goods – e.g. payment of a salary Organisations themselves include to large extent economic communications – exchange of services and goods – e.g. payment of a salary Large economies rely to large extent on organisations in the production of economic communications Large economies rely to large extent on organisations in the production of economic communications

Structures in organisations Structure: constraint on organisational communications Structure: constraint on organisational communications E.g. university department, marketing department of a company, badminton section of a sports club E.g. university department, marketing department of a company, badminton section of a sports club Strucutres may generate subsystems Strucutres may generate subsystems

Memories of organisations Records of organisational communications Records of organisational communications Records of money values of stocks and flows Records of money values of stocks and flows

Information subsystem of organisations Communications about memories Communications about memories Management = information subsystem Management = information subsystem Management communications: identity definition, checking and enforcement for the organisation – rules and regulations Management communications: identity definition, checking and enforcement for the organisation – rules and regulations

Identity violations in organisations Fault: wrong accounting statement Fault: wrong accounting statement Error: production of goods that cannot be sold Error: production of goods that cannot be sold Failure: bankruptcy Failure: bankruptcy

Adaptation in organisations Correction of wrong calculation in the accounting statement Correction of wrong calculation in the accounting statement Rules about doing a new kind of better market research Rules about doing a new kind of better market research Reorganisation by selling parts and merging others Reorganisation by selling parts and merging others

Organisations and money Organisation: exchanges of goods and services for money Organisation: exchanges of goods and services for money Organisations need money to reproduce and expand Organisations need money to reproduce and expand Organisations usually increase by increasing their available money amounts Organisations usually increase by increasing their available money amounts Profitability – economic organisations Profitability – economic organisations

Organisations in the economy Organisation: money in – money inside – money out Organisation: money in – money inside – money out Profitability – criterion of success (reproduction and expansion) Profitability – criterion of success (reproduction and expansion) Organisations compete in the context of the economy Organisations compete in the context of the economy Competition in terms of profitability Competition in terms of profitability

Organisations dealing with money Early times: the mint Early times: the mint Coins were produced by rulers – fuelling the exchange communications  reproduction and expansion of the economy Coins were produced by rulers – fuelling the exchange communications  reproduction and expansion of the economy Specialist money traders – coin exchangers  early banks Specialist money traders – coin exchangers  early banks

Banks – 1 Bank: organisation performing the exchange of money and recording of such money exchanges on behalf of humans and organisations Bank: organisation performing the exchange of money and recording of such money exchanges on behalf of humans and organisations Banks are specialist organisations generating memories of economic communications Banks are specialist organisations generating memories of economic communications

Banks – 2 Banks also generate communications about memory communications of the economy Banks also generate communications about memory communications of the economy E.g. analysis of loans, evaluation of credit worthiness E.g. analysis of loans, evaluation of credit worthiness Commercial banks constitute the primary information subsystem of the economy Commercial banks constitute the primary information subsystem of the economy

Banks – 3 Interest rates – expectations about the economy Interest rates – expectations about the economy Multiplicator effect: lending money to clients increases the available amount of money in the economy Multiplicator effect: lending money to clients increases the available amount of money in the economy Bank money, electronic money Bank money, electronic money

Central banks Early: the mint Early: the mint E.g. Fed – Federal Reserve System in the US, Bank of England E.g. Fed – Federal Reserve System in the US, Bank of England Central bank: regulates the money supply (base interest rate, reserve requirements), the validity of the money, rules of currency exchanges Central bank: regulates the money supply (base interest rate, reserve requirements), the validity of the money, rules of currency exchanges

Information subsystem of the economy Central bank plus commercial banks Central bank plus commercial banks Central bank: analysis of the economy in monetary terms and setting the rules of the economy in monetary terms  identity of the economy Central bank: analysis of the economy in monetary terms and setting the rules of the economy in monetary terms  identity of the economy Commercial banks: analysis of their segment of the money market, setting local rules of loans, mortgages, interest rates Commercial banks: analysis of their segment of the money market, setting local rules of loans, mortgages, interest rates

Fiscal regulations Fiscal regulations: rules set by the state regulating the money values of state services and the procedures of implied money exchanges Fiscal regulations: rules set by the state regulating the money values of state services and the procedures of implied money exchanges E.g. taxes, tariffs, fees E.g. taxes, tariffs, fees

Fiscal and monetary policies Fiscal policy = the state as an organisation acting in the context of the economy and using the political power sets the rules about providing the money revenues needed for the reproduction and expansion of the state Fiscal policy = the state as an organisation acting in the context of the economy and using the political power sets the rules about providing the money revenues needed for the reproduction and expansion of the state Monetary policy = central bank sets the identity definition, checking and enforcement communications for the economy Monetary policy = central bank sets the identity definition, checking and enforcement communications for the economy

Complexity of the economy Hunter – gatherer societies Hunter – gatherer societies Coin money Coin money Paper money Paper money Electronic money Electronic money Central bank and banking system Central bank and banking system

Expansion and complexity More expansion  more complexity More expansion  more complexity High inflation decreases complexity High inflation decreases complexity Deflation decreases complexity Deflation decreases complexity Decrease in complexity  shrinking of the economy Decrease in complexity  shrinking of the economy

Summary – 1 Human artefacts Human artefacts Exchanges of human artefacts Exchanges of human artefacts Economy = system of exchange communications Economy = system of exchange communications Accounting = memory of economic communications Accounting = memory of economic communications Money Money

Summary – 2 Identity violations and adaptation in the economy Identity violations and adaptation in the economy Organisations Organisations Banks and the central bank Banks and the central bank Information subsystem of the economy Information subsystem of the economy Monetary and fiscal policy Monetary and fiscal policy Complexity of the economy Complexity of the economy

Q & A – 1 1. Can we see the performance of a religious ritual as a human artefact ? 2. Is it true that a piece of land is a human artefact ? 3. Can we consider the writing of a poem as a form of accounting ? 4. Is it true that the value of a service or good is given by its expected ability to facilitate the reproduction and expansion of the society ? 5. Is it true that the marginal exchange value of a good provides the value of that good ? 6. Can we use pints of water to measure the marginal exchange value of a horse ? What about using small pieces of silver ?

Q & A – 2 7. Is the money a memory communication unit in the context of the economy system ? 8. Is it true that inflation is caused by large amounts of fake money ? 9. Is it true that hyperinflation usually is handled by redefining the identity of the economy through introduction of a new currency ? 10. Is it better to have zero inflation than to have small positive inflation ? 11. Is it better to have negative inflation (deflation) than to have high positive inflation ?

Q & A – Are organisations formed by sets of constrained economic communications ? 13. Is it true that criterion of profitability in the context of competition of firms is implied by the need for growth of the society ? 14. Is it true that commercial banks increase the money supply by printing more money ? 15. Can we consider the central bank as the core of the information subsystem of the economy ?