Finance as time traveling retail

When you first heard of the barter system, the thought that probably occurred to you is that it requires every trader to have something to offer to a trader from whom they want something from. And this seems like an excessive limitation -- a cause of great inefficiency. You later realized that the solution to this came through the notion of derived demand -- a trader would anticipate that a trader he wants something from wanted something else from him, and he would thus buy said thing else in advance (and of course he may not have something to offer that trader, so he may buy something else for that, etc.). This allows for the creation of supply chains, and is the idea behind the retail industry.

Typically, the term "supply chain" is used for factors of production, but you should be able to see that it's the same idea.

But consider the following scenario: you want to buy some wheat from another trader, but you have absolutely nothing in your pocket. You know that you will be able to work in future and earn money (maybe only if you get the wheat, otherwise you'll die of hunger, which makes the wheat a factor of production for your work), but how do you use that to buy something now? You can't trade with someone in the future, right?

Well, a solution you may come up with is to borrow some wheat from him, in exchange for a promise to pay him later. This means you're trading debt for wheat.

Your future prosperity allows you to manufacture debt right now.

One way of putting this is: future-you gave you the debt, you gave the debt to the wheat-seller, and the wheat-seller gave the debt to his future-self. And debt has a kind of time-trigger on it, it turns into a usable good ("matures") at the right point in time.

Equivalent descriptions of the situation

It is important to note that it is indeed a transaction of debt -- it is only debt that can "travel back in time" in this sense, the underlying good itself cannot. You can't actually increase the amount of rice, or whatever it is the wheat-seller wants, in the world -- but you can manufacture debt, from what information your future-self sends you.

And obviously, we do not have true time travel, not in a world with imperfect information. But if we had perfect information, time kinda ceases to hold its importance anyway, and the situation really does become identical to one with time travel.

And money is a kind of debt. Obviously that wouldn't be a good description of commodity money, which was the kind of money we were discussing in the first paragraph, but it is obviously true of representative money, which is a promise by the government to furnish the holder with some commodity. And it is also true of fiat money, which although doesn't promise any goods and services, can nonetheless (through certain network effects) be trusted to do so (and in this definition, I include things like gold and bitcoin). When you spend money on wheat, you are selling some debt that the economy "owes" you, allowing the wheat-seller to be "owed" this debt instead.

And remember: time-travel is weird. It allows for self-fulfilling prophecies, which are the time-travel version of network effects, which is what gives value to fiat currency (including gold and bitcoin), as well as to some stocks -- and self-fulfilling prophecies are hard to predict. Their result -- like the value of gold, or whether bubbles burst ("timing the market") is presented to you fait accompli, just by virtue of some game theoretic "recursive expectations".

I mean, because it's not real time-travel it is in principle predictable purely from human behavior, just not from simplified value-based economics in which there is a "true" value based purely on consumers' utility functions and deviations from this true value result due to people's uninformed beliefs. Instead, network effects mean that any notion of value however "true" actually depends on people's beliefs about it, even if those beliefs result from beliefs about other people's beliefs, ad infinitum. You see this sort of thing in game theory all the time, of course, like with the Prisoner's dilemma.

(By the way, this is how superstitions continue to have an effect on real estate markets even when no one actually believes them. I don't buy a "haunted" house because I know other people won't buy it because they know that other people won't buy it, because ... )

(And network effects are indeed a market failure, and government instituting and regulating central banks -- so we have regulated monopolies instead of unregulated ones -- is a way to correct this ... sort of. And this may also justify certain other macroeconomic interventions, although I am less sure.)

No comments:

Post a Comment