1. Ecological Economics: Principles and Applications Chapter 14: Money Herman E. Daly and Joshua Farley

2. Chapter Overview o Money o Use Value and Exchange Value o Transactions with and without money o Virtual Wealth o Creating Money - Money as a symbol o Money as a Public Good o Money and Thermodynamics

3. Money functions “Anyone who is not confused by money probably hasn’t thought about it very much.” -245 Money is: A medium of exchange, a unit of account, and a store of value. To measure exchange rate a unit is needed and that unit must hold its value long enough to effect both sides of the transaction.

4. Use value vs. exchange value Use value arises from the actual use of commodities. There is a physical limit to use value. Self limiting. Exchange value is abstract, inheres in money and does not necessarily have any physical embodiment. No obvious limit to the accumulation of exchange value. Not self limiting. Marginal utility and the diamonds-water paradox

5. Marx and the evolution of transactions C - C* Straight up bartering C - M - C* Money as a medium. The goal is to increase use value. M - C - M* “Capitalist circulation” Money makes commodity; commodity sells for presumably for more money. M* - M = ∆M Profit A change from increasing use value to increasing exchange value.

6. Virtual Wealth Frederick Soddy - “Wealth is the positive quantity to be measured and money as the claim to wealth is a debt.” Virtual Wealth - is the aggregate value of the real assets that the community voluntarily abstains from holding in order to hold money instead. The value of a dollar is determined by the wealth of a community divided by however many dollars are in circulations.

7. Creating money The monetary value of the token, the profit made to the issuer and creator of money is Seigniorage. Money does not honor the laws of thermodynamics as it can be created and destroyed. The Fractional Reserve System Assuming just 10% reserve requirement $100 of new cash deposit can create $900 In demand deposit. $100 Cash Bank A $90 Bank B $81 Bank C$72.90Bank I …….. $900 “new money”

8. Money as a Public Good Money functions in some ways as a public good Money is nonexcludable: in fact money only has value if everyone can use it; and money is nonrival: a dollar spent does not decrease in value. BUT money is not treated as a publicly owned resource. The money supply is privately loaned into existence at interest encouraging a strong growth bias with cyclical instability. An alternative money supply system: Government controlled supply system with money printing and taxing or by increasing or decreasing international payments balances.

9. Money and Thermodynamics Money can be both created and destroyed thereby forgoing the laws of thermodynamics. The problem is that though money (the symbol) does not adhere to the laws of thermodynamics, wealth does. Exponential growth of wealth 64 doublings of grain on a chess board 18,446,744,073,709,551,616: a quantity greater than 1,000 years of wheat production The world can’t even handle 64 doublings of a grain of wheat How many doublings can the world handle of populations? Of plastic waste? How many times can we divided by half the number of species of plants and animals?

10. Conclusions M - C - M* treats money as an end rather than a means This drives innovation for making money rather than production. Limits to the growth of money: 1)As long as the production of real goods and services increases, more money is required to pursue them but this kind of growth cannot continue on a finite planet. 2)Growing financial assets grow driving the demand for money. Financial bubbles inevitably burst. 3)Speculation can serve to transfer resources from those who produce to those who merely speculate.These transfers are tied to the above two limits. So money is not really exempt from the laws of thermodynamics…..