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The real and virtual economy

To compare activities in an economy they are translated to a monetary value, which can later on be converted to other activities and when not needed they can be stored. That is more or less how I see money. So you work, deliver something get that converted to money that you spend to live today and store for times there is a dip. The financial world should manage your store, so it keeps the flow going and assures it doesn’t evaporate.
Although activity is more or less a constant, the output of activity is useful only in discreet events. So there are moments where there is activity but no useful deliverable. In our world we don’t like those gaps too much so we interpolate between the outputs to make it look like continuous. 

With a continuous value profile we could sell the contract in between as long as the new buyer accepts the underlying model that there won’t be money available from the asset, but only from a future buyer of the contract for a new value, so a horizontal movement instead of a vertical going back to the underlying value.
This approach requires

  • The buyer to accepts the uncertainty of not really being able to get the money out the asset (not needing the money in between).
  • The buyer to believe that the asset will follow the given profile (trust).

In other words we have a nice construction to allow investments for long term assets to be converted any time in a $ value. And whether this investment is in the form of a forest that grows or a company becoming successful is not important, we can give a value for something to happen in future, with a progress path.
By the way nothing new here, this already got done hundreds of years ago when ships were financed to return with cargo from a foreign country. And when it failed the investors lost their money (often the money wasn’t gone it just went to others). There is however one difference with the early days, those investments were financed with already earned money.


Making money

Today however, banks can issue more money than they have (this is a story on itself). Although that got done also hundreds of years ago, it was done in a local environment, where the bankers could oversee the actions of the participants. As a result they can finance the start of the investment with money that has not been earned yet, so when that is lost a part of the future is lost and not the past. It was however allowing us to grow the economy.

Getting more creative

The financial world, comfortable with just thinking in numbers on paper however has been working feverishly on innovative approaches to find ways to multiply contract value by using different streams of money with different payment schemes.

As a result this financial contract world, derived from assets in the real economy but also from derivatives became a world of its own with more value than the real world. Here individuals could tap profits that had not happened yet, so borrowing from the future. From one end this world looked stable as product were composed by mixing products with a different risks and different payout times. So on average it is more stable for the risks in the real world.

Unless due to an event the contracts where forced to be converted to the real world value by requiring payout of the contract. As indicated earlier many contracts can not be converted as there is no real possible output at a given time, so they will get a terrible valuation.

So when converting back was not possible the contracts lost their trust and so their value. Particularly this is exaggerated by knowledge that there even isn’t enough money to pay back the debts as the debts were borrowed from the future income of the lender. As a result the whole system stops and it is unclear how this system will react as there are no clear relationships any more between the real world assets and the contracts in the virtual economy. Add on top of that automated responses from computer systems that amplify trends. E.g. when every owner of a stock with a high market capitalisation protected their stock to sell when it reaches a stop loss value a dip could start a sell off for which isn’t enough buying capital to profit. Many measures have taken to stabilize such behaviour, but these don’t work adequately enough any more when the flows become too big. And becoming too dominant is the real issue.

Systemic mistakes

The intended service providers (bankers) for the real world economy had created their own world, thinking that the real world economy would follow. Resulting in the follow mistakes

  • Diversity of contracts was a fake one, as the contracts behaved all the same. If it goes well all gets better and when one fails other could fail and would not stabilize without trust in the future.
  • The growth loops, designed to start a trend, allowed the value of growth constructs to grow beyond control.
  • The means were borrowed from the future by emptying the stores of energy, raw materials and returning waste in a way that isn’t sustainable.

What to do?

  • Bankers need to become guardians of their financial system again.
  • Growth structures need to be capped in size. No individual components may become too important to fail.
  • Diversity needs to increased.
  • Use of resources needs to become sustainable.

So we need to create more smaller production companies, to assure that a failure of a single company doesn’t creates a domino effect of failures. Further a real diversity of products and energy generation needs to be established as a bigger scale only improves the efficacy of an organization to a certain size. After that point power and influence allows bigger companies to squeeze more profits from their suppliers and employees and not smarter operations and economy of scale.

Bootstrapping out of debt

As said before nothing wrong with growth constructs as long as they get they stabilizing counter partner. What have we seen is that the smarts in the financial world were capable to let that world grow fast. Innovation was the key, only applied too long on a virtual world. By applying a distributed innovation towards sustainability. Knowledge could be used many times for different markets in stead of been hidden in a company for others to use. To make it work the knowledge needs to be valued and it most be possible to regroup knowledge fast and it must be distributed in ownership.

If a knowledge regrouping doesn’t bring success the individual knowledge isn’t lost, so no real value is lost. A regroup would even benefit from the experience so the underlying knowledge has increased in value. This would be a compensating system for the asset value system that has supported our growth so far.

Through innovation individuals can grow the economy as value is created that can be used by others for other aspects that just feeding the stomach. The energy and raw materials for supporting the thoughts that design new products and services should be renewable. Knowing that we get 10.000 times the energy we need daily through the sun, renewable for energy should not be an issue, besides that we have a late start and a lot of work to make the conversion work in time. Also many individual entrepreneurs have shown to hard core businessmen that a renewable approaches makes commercial sense (Cradle to Cradle approach).  

Innovation economics as defined in the ingenesist project describes how we could organize and value the knowledge. The easier or lesser part of the total manufacturing becomes, the easier innovation economics will grow in that segment. Examples of easy manufacturing are the financial-, software-, film-, music- and many other entertainment industries, all use computers for the production and a media carrier to hold the end product.

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