Traditionally, economics has defined money purely as a store of value, a neutral medium of exchange. Now, though, some are finding reasons to throw that definition out and start from a different background merging the fields of systems science, thermodynamics, and ecology.
In a recent interview with Financial Sense, George Mobus, associate professor at University of Washington’s Institute of Technology and co-author of Principles of Systems Science, argues that instead of holding to these traditional views, we should reevaluate our definitions and reclassify money in terms of energy.
Work and Energy
“If you think about it, literally everything we do is ultimately based on work, which, by definition, requires energy.” He says. “The real currency of an economy is the energy that you supply and pass around to do various kinds of work. If you want to decide in a social sense what kinds of work really are more important, then you have to have some way of controlling the flow of energy.”
Ultimately, that's what money is meant to regulate, Mobus argues. Money has gone through an evolutionary process, but in all it’s various forms it represented the flow of effort that was going to be put into various production capabilities, he said.
However, at some point, the system of money became greatly distorted, especially as concepts about borrowing money and fractional reserve banking took hold.
Now, Mobus says, money has taken on a life of its own.
“People think of money as creating money,” he notes. “You invest money in the stock market, for example, and magically more money comes into being. We’ve gotten away from understanding that what we really need to be doing is controlling the flow of energy, and not just making stuff up out of smoke and mirrors.”
An Energy Standard of Money?
Though Mobus isn’t sure we could institute such a system, we could create an accounting model that assigns a value to money based on energy input.
The concept would function similar to current cost accounting systems, he says, where we accumulate costs that we can check against prices to see if we’re able to produce a profit after expenses.
“It works the same way with energy,” Mobus says. “We can accumulate or aggregate all the energy inputs to production in real physical terms.”
For example, we could use British Thermal Units as the standard by which we denote value, but Mobus thinks we need something universal that can capture the idea of all useful energy in the system.
We would then have to add up all energy units being used, but we would still require some way to codify and transfer this value, which is where the new conception of money comes in.
“Customers can give us tokens—called money, and that money would then represent a certain amount of energy that we could turn around and use to buy from our energy sources,” he says. “There is a tight connection between the original idea of what money was and how it worked, and the flow of energy.”
Entrepreneurs are starting to put these ideas into practice, notes Financial Sense co-host Cris Sheridan. SolarCoin, for example, is an energy standard for money based on the production of solar power where 1 SolarCoin = 1 Megawatt hour of electricity.
Biophysical Economics and Ecology
Biophysical economics deals mostly with resource supplies and particularly energy going into an economy whereas ecological economics primarily looks at the effects of the output of the economy, Mobus notes.
In his work, he’s found a relationship between how economies develop and how a natural ecological system will change, all based on flows of energy.
“For example, we know there’s a relationship between species diversity, the number of species per unit of area, and the flow of energy into that area, the amount of photosynthesis and the number of species of plants and animals that end up getting supported because of the availability of that energy,” he said.
As society has evolved, it has increased its dependence on fuel sources with high energy density, Mobus says, being driven to high complexity as a result, not because of investment decisions or financialization, but because of cheap energy flows.
“Energy is the fundamental backdrop against which all economic activity occurs,” he says. “And you can build economic models based on these phenomena.”
Part of Mobus’ work with the Biophysical Economics Group had to do with looking at energy return on energy invested (EROI). He noted that, early in the current cycle, it was relatively easy to extract energy, and that energy sources are becoming progressively less dense and harder to get at.
He built an economic model taking into account the worst-case conditions we might face in which we struggle to extract all available energy while the EROI was still continuing downward.
He was able to show that, at some point, it will be impossible to pay back loans based on future energy extraction value, he says.
“Society’s going to have recognized that (it has) been living on a dream for a long time with the high power that’s available in fossil fuels,” he adds.
Ultimately, Mobus believes we are going to have to adapt to a more efficient, lower energy consumption lifestyle and that alternative energy technologies are not a panacea. Biophysical economics is a helpful framework for understanding this.