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Tuesday, November 28, 2000

Zero-Sum Economics

A while back I pondered the economics of having a fixed number of Quatlus (monetary units) in the economy. But the one problem this never solved is how to allocate and assign the Quatlus at the start. So you're on a deserted island with ten other people, what do you do? Give everyone a Quatlu and say "spend it wisely"?

What if, instead, there were always exactly zero Quatlus?

Call it a double-entry economy, where every Quatlu gained one place is a Quatlu lost another, so that at any given time some percentage of the population (including business entities) would have positive Quatlu balances and some percentage would have negative ones (debt); and the total number of Quatlus in the world would at all times be zero.

It sounds odd at first, but it's the most direct tally I can think of of what's actually going on: If you trade coconuts for a bamboo ladder directly, there's not much use for Quatlus. But since the synchrony and scope of a one-on-one exchange is often too limiting, one person might instead loan the other person some value -- I'll give you my ladder if you'll pay me back in coconuts or other goods within the next two weeks. The easy way to keep track of this is by simply transferring an appropriate number of Quatlus from the coconut picker to the ladder maker, and to charge interest for the time-value of the loan. If we were starting from ground zero in this example, the coconut picker would then end up with a negative sum of Quatlus until he'd "sold" enough coconuts to pay off his debt.

Now if we assume for the moment that nobody would ever die or otherwise default on their debt, the interest rate should be universal--the same for everybody, whether loaning or borrowing--since a broadly accepted Quatlu exchange would constitute a free market of short-term debt. (Something akin to the not-so-free-market American "Prime Rate"?) But it's not immediately evident to me how this rate should be adjusted.

To account for bankruptcy and death (of individuals and business entities), negative balances would need to be "insured" based on the entity's credit rating and the total magnitude of the debt, so that the total cost of holding a negative balance would be slightly higher than the gain of holding a positive one, with the difference going to cancel out defaulted debts. Presumably this insurance could also be sold on the free market, encouraging the most accurate credit assessments possible, though I don't know how you account for the possibility of poorly or deviously managed insurance carriers going bankrupt. If the carriers were mutually insured, then the other carriers would pick up the burden as their own debt and would have to raise their insurance rates to pay that debt plus interest.

Moving on, if I were the ladder maker I might wish to tie up some of my newly acquired Quatlus (which effectively originated as promissory notes from the coconut picker) in some investment in exchange for a higher expected return (and perhaps higher risk) than the basic Quatlu rate. For instance, I might invest in a boat-building business, who would take my Quatlus and give them to workers in exchange for their labor, who then would spend those Quatlus on coconuts, ultimately canceling out the coconut picker's debt. So in essence, by being willing to give away my ladder in advance of getting any material compensation for it--i.e., by producing more than I consume--I am indirectly helping to build a boat. Down the road when the boats were sold, I'd get back my Quatlus with a tidy return. Though still these Quatlus would just be consolidated promissory notes from the boat buyers... The magnitude of the economy could be expressed as the total debt (that is, summing only the negative balances or only the positive ones), and would be limited by the insurers' actuaries and the prime rate.

It all seems very fragile, but it's exactly what's going on now, isn't it? I earn interest on every dollar I have saved, which means someone has borrowed that money. Cash is the only mystery element -- it represents positive Quatlus and should become more valuable with time, not less.

I'm not sure what would control the perceived value of Quatlus in this system -- how many Quatlus would buy a loaf of bread? Would it rise with time, fall, stay the same, or fluctuate with the wind?

But in any event, it is interesting to note that any economy is essentially zero-sum -- which is not to say the total value of goods is not changing with time, but simply that money is just a promissory note, just a record of lending and borrowing with a net sum of zero and no direct tie to the actual net worth of goods held in the community. For instance, the ladder maker could buy coconuts from the picker for the next two weeks, and both their Quatlu balances could end up at zero. But the coconut maker still has a ladder (and by then the ladder maker probably has another one too), so both of them are richer even though there are no Quatlus at all.

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