Evolution of Evolution of Complex Complex SystemsSystems

Lecture 9: Economics and Lecture 9: Economics and moneymoney

Peter Andras / Bruce CharltonPeter Andras / Bruce Charlton

peter.andras@ncl.ac.ukpeter.andras@ncl.ac.uk

bruce.charlton@ncl.ac.ukbruce.charlton@ncl.ac.uk

ObjectivesObjectives

Exchanging human artefacts Exchanging human artefacts AccountingAccounting MoneyMoney Memory and information subsystemMemory and information subsystem Identity violations and adaptation in the Identity violations and adaptation in the

economyeconomy OrganisationsOrganisations Banks and the monetary systemBanks and the monetary system

SocietySociety

Society = system of human Society = system of human communicationscommunications

Social systems = subsystems of Social systems = subsystems of the societythe society

E.g. political system, educational E.g. political system, educational systemsystem

Reproduction of the Reproduction of the societysociety

Reproduction of human Reproduction of human communications – and referencing, communications – and referencing, continuation rulescontinuation rules

Memories: human memories, written Memories: human memories, written memoriesmemories

Education, religion and scienceEducation, religion and science Human artefacts: facilitate Human artefacts: facilitate

reproduction of human reproduction of human communicationscommunications

Human artefactsHuman artefacts

Objects, writing, rituals, servicesObjects, writing, rituals, services Represent human communications Represent human communications

(behaviour) which led to the (behaviour) which led to the creation of the artefactcreation of the artefact

Facilitate utilisation – a set of Facilitate utilisation – a set of human communications human communications (behaviour)(behaviour)

Exchanging artefacts – 1 Exchanging artefacts – 1

Exchange economy: three Exchange economy: three potatoes for an eggpotatoes for an egg

E.g. primitive worlds, Bulgaria – E.g. primitive worlds, Bulgaria – 1996, Germany – 1923 1996, Germany – 1923

Exchanging artefacts – 2 Exchanging artefacts – 2

Reproduction and expansion of Reproduction and expansion of utilisation behaviour – set of utilisation behaviour – set of corresponding human corresponding human communicationscommunications

E.g. pots, ritualsE.g. pots, rituals

EconomyEconomy

Economic communications: exchange Economic communications: exchange of artefactsof artefacts

Economy = system of exchange of Economy = system of exchange of human artefacts seen as human human artefacts seen as human communicationscommunications

Economy – subsystem of the societyEconomy – subsystem of the society Artefacts: goods, servicesArtefacts: goods, services Economy Economy reproduction of the reproduction of the

societysociety

Memories of economic Memories of economic communicationscommunications

Memories of existing goods and Memories of existing goods and exchanged goodsexchanged goods

Transactions – what was before, Transactions – what was before, what is now, what has been what is now, what has been exchanged – stock and flowexchanged – stock and flow

Early forms: human memories, Early forms: human memories, knots, marks in stone, writing, knots, marks in stone, writing, pieces of stone or shellpieces of stone or shell

AccountingAccounting

Inventory of existing goods and Inventory of existing goods and services using memories – stock services using memories – stock

Records of exchanges using Records of exchanges using memories – flow memories – flow

Valuing artefactsValuing artefacts

What can be exchanged for whatWhat can be exchanged for what What is the potential or expected What is the potential or expected

contribution of artefact to the contribution of artefact to the reproduction and expansion of the reproduction and expansion of the societysociety

Values are context dependentValues are context dependent

Exchange and valueExchange and value

Artefact: context dependent valueArtefact: context dependent value Exchange: aim improved reproduction Exchange: aim improved reproduction

and expansion potentialand expansion potential Value-based exchange is expected Value-based exchange is expected

always to lead to increased always to lead to increased reproduction and expansion ability of reproduction and expansion ability of the society or social system the society or social system

Note that the latter does not happen Note that the latter does not happen necessarily in realitynecessarily in reality

Value measurementValue measurement

What is the reproduction / What is the reproduction / expansion facilitating potential of expansion facilitating potential of an artefact (good or service) in the an artefact (good or service) in the context of a social systemcontext of a social system

Valuation based on expectationValuation based on expectation Valuation expressed in terms of Valuation expressed in terms of

exchangeexchange

Marginal exchangeMarginal exchange

Evaluation of equivalence of Evaluation of equivalence of reproduction / expansion potential reproduction / expansion potential of artefactsof artefacts

Provides the value of the artefactProvides the value of the artefact E.g. a sheep is worth of three E.g. a sheep is worth of three

goats but not fourgoats but not four

Early moneyEarly money

Shells, stones, animalsShells, stones, animals Relatively rare goodsRelatively rare goods Exchangeable with any other good Exchangeable with any other good

or service – key featureor service – key feature

Money – 1 Money – 1

Copper, silver, gold – coins Copper, silver, gold – coins Rare goods emerge as universal Rare goods emerge as universal

exchange vehiclesexchange vehicles Facilitate the reproduction and Facilitate the reproduction and

expansion of exchanges (economic expansion of exchanges (economic communications) and through this communications) and through this the reproduction and expansion of the reproduction and expansion of the societythe society

Money – 2 Money – 2

Coins with agreed value – e.g. ‘gold’ Coins with agreed value – e.g. ‘gold’ coins made of a mixture of silver coins made of a mixture of silver and gold or copper and goldand gold or copper and gold

Paper moneyPaper money Money is a standardised universal Money is a standardised universal

exchange vehicleexchange vehicle Social system / economic Social system / economic

subsystem defines the value of the subsystem defines the value of the moneymoney

Money and economic Money and economic communicationscommunications

Economic communications: Economic communications: exchange of goods and servicesexchange of goods and services

Money: vehicle of economic Money: vehicle of economic communications – signal of value – communications – signal of value – price of goods and servicesprice of goods and services

Money – special goodMoney – special good

Accounting and moneyAccounting and money

Accounting in terms of moneyAccounting in terms of money Records of economic Records of economic

communications are standardised communications are standardised in terms of moneyin terms of money

Stock and flow measured in money Stock and flow measured in money termsterms

Economy and moneyEconomy and money

Economic communications: exchange of Economic communications: exchange of goods and services – all expressed in goods and services – all expressed in terms of exchange of goods and terms of exchange of goods and services for moneyservices for money

Language of economy: exchanges with Language of economy: exchanges with moneymoney

Rules of the economy system: rules Rules of the economy system: rules regulating the money and money regulating the money and money exchangesexchanges

Memories of economic Memories of economic communicationscommunications

Memories: records of money exchanges Memories: records of money exchanges for other goods, services or moneyfor other goods, services or money

E.g. receipts, billsE.g. receipts, bills Accounting in terms of money – money Accounting in terms of money – money

values of stocks, money values of flowsvalues of stocks, money values of flows Money – memory of ability to exchange Money – memory of ability to exchange

goodsgoods

Actions of the economy Actions of the economy systemsystem

Actions: exchange communications Actions: exchange communications that have an effect on the that have an effect on the environmentenvironment

E.g. production of goods and servicesE.g. production of goods and services Exchange of goods and services Exchange of goods and services

triggers the reproduction and triggers the reproduction and expansion of usage behaviour expansion of usage behaviour effects on the environmenteffects on the environment

Perception of the economy Perception of the economy systemsystem

Perception: environment effects on Perception: environment effects on exchange communications changing the exchange communications changing the expectations about continuation expectations about continuation communicationscommunications

Changing needs of the society Changing needs of the society changing changing values and needs for goods and servicesvalues and needs for goods and services

Effect: change of the economy systemEffect: change of the economy system E.g. some jobs may disappear, some goods E.g. some jobs may disappear, some goods

may disappear, other jobs and goods may disappear, other jobs and goods emergeemerge

Economic expansionEconomic expansion

Necessity in expanding societyNecessity in expanding society Lack of economic expansion Lack of economic expansion

increases the likelihood of increases the likelihood of contraction of the whole societycontraction of the whole society

E.g. communist vs. capitalist E.g. communist vs. capitalist economyeconomy

InflationInflation The value of money changes rapidly and the The value of money changes rapidly and the

amount of changes are unpredictableamount of changes are unpredictable E.g. printing moneyE.g. printing money Money – can be seen as memory of the economy Money – can be seen as memory of the economy

what is the value of the economy what is the value of the economy Shrinking economy + growing money supply Shrinking economy + growing money supply

readjustment of the value of money readjustment of the value of money may lead to may lead to inflationinflation

Unpredictability increases ambiguity in economic Unpredictability increases ambiguity in economic communications triggering shrinking of the communications triggering shrinking of the economyeconomy

E.g. Brazil, Argentina, Bulgaria, Germany – 1920sE.g. Brazil, Argentina, Bulgaria, Germany – 1920s

Identity and identity Identity and identity violationsviolations

Identity of the economy: definition Identity of the economy: definition and regulation of money within the and regulation of money within the economyeconomy

Fault: fake moneyFault: fake money Error: production of unwanted Error: production of unwanted

goodsgoods Failure: hyper-inflationFailure: hyper-inflation

Adaptation in the Adaptation in the economyeconomy

Rules about valid money, Rules about valid money, punishment for using fake moneypunishment for using fake money

Implementation of new check – Implementation of new check – e.g. better market researche.g. better market research

Resetting the economy by Resetting the economy by introduction of new currency – e.g. introduction of new currency – e.g. Brazil, Bulgaria, ArgentinaBrazil, Bulgaria, Argentina

Economy and societyEconomy and society Growing society needs growing economyGrowing society needs growing economy Growing economy supports the growth of Growing economy supports the growth of

the societythe society Growing economy needs small inflationGrowing economy needs small inflation Reason: Reason:

Ideally growth in money supply should match Ideally growth in money supply should match growth in economygrowth in economy

If there is not enough money the economy If there is not enough money the economy will shrinkwill shrink

Predicting exactly is impossible, so supplying Predicting exactly is impossible, so supplying little bit more guarantees to have enough little bit more guarantees to have enough fuel for growthfuel for growth

OrganisationsOrganisations

Organisation: set of human Organisation: set of human communications following a set of communications following a set of constraints (rules)constraints (rules)

E.g. company, university, E.g. company, university, governmentgovernment

Organisations and Organisations and economyeconomy

Production of goods and services Production of goods and services happens in context of organisationshappens in context of organisations

Organisations themselves include to Organisations themselves include to large extent economic communications large extent economic communications – exchange of services and goods – e.g. – exchange of services and goods – e.g. payment of a salarypayment of a salary

Large economies rely to large extent on Large economies rely to large extent on organisations in the production of organisations in the production of economic communicationseconomic communications

Structures in organisationsStructures in organisations

Structure: constraint on Structure: constraint on organisational communicationsorganisational communications

E.g. university department, E.g. university department, marketing department of a marketing department of a company, badminton section of a company, badminton section of a sports clubsports club

Strucutres may generate Strucutres may generate subsystemssubsystems

Memories of organisationsMemories of organisations

Records of organisational Records of organisational communicationscommunications

Records of money values of stocks Records of money values of stocks and flowsand flows

Information subsystem of Information subsystem of organisationsorganisations

Communications about memoriesCommunications about memories Management = information Management = information

subsystemsubsystem Management communications: Management communications:

identity definition, checking and identity definition, checking and enforcement for the organisation – enforcement for the organisation – rules and regulationsrules and regulations

Identity violations in Identity violations in organisationsorganisations

Fault: wrong accounting statementFault: wrong accounting statement Error: production of goods that Error: production of goods that

cannot be soldcannot be sold Failure: bankruptcyFailure: bankruptcy

Adaptation in Adaptation in organisationsorganisations

Correction of wrong calculation in Correction of wrong calculation in the accounting statementthe accounting statement

Rules about doing a new kind of Rules about doing a new kind of better market researchbetter market research

Reorganisation by selling parts and Reorganisation by selling parts and merging othersmerging others

Organisations and moneyOrganisations and money

Organisation: exchanges of goods Organisation: exchanges of goods and services for moneyand services for money

Organisations need money to Organisations need money to reproduce and expandreproduce and expand

Organisations usually increase by Organisations usually increase by increasing their available money increasing their available money amountsamounts

Profitability – economic Profitability – economic organisationsorganisations

Organisations in the Organisations in the economyeconomy

Organisation: money in – money Organisation: money in – money inside – money outinside – money out

Profitability – criterion of success Profitability – criterion of success (reproduction and expansion)(reproduction and expansion)

Organisations compete in the Organisations compete in the context of the economycontext of the economy

Competition in terms of profitabilityCompetition in terms of profitability

Organisations dealing with Organisations dealing with moneymoney

Early times: the mintEarly times: the mint Coins were produced by rulers – Coins were produced by rulers –

fuelling the exchange fuelling the exchange communications communications reproduction reproduction and expansion of the economyand expansion of the economy

Specialist money traders – coin Specialist money traders – coin exchangers exchangers early banks early banks

Banks – 1 Banks – 1

Bank: organisation performing the Bank: organisation performing the exchange of money and recording exchange of money and recording of such money exchanges on of such money exchanges on behalf of humans and behalf of humans and organisationsorganisations

Banks are specialist organisations Banks are specialist organisations generating memories of economic generating memories of economic communicationscommunications

Banks – 2 Banks – 2

Banks also generate Banks also generate communications about memory communications about memory communications of the economycommunications of the economy

E.g. analysis of loans, evaluation of E.g. analysis of loans, evaluation of credit worthinesscredit worthiness

Commercial banks constitute the Commercial banks constitute the primary information subsystem of primary information subsystem of the economythe economy

Banks – 3 Banks – 3

Interest rates – expectations about Interest rates – expectations about the economythe economy

Multiplicator effect: lending money Multiplicator effect: lending money to clients increases the available to clients increases the available amount of money in the economyamount of money in the economy

Bank money, electronic moneyBank money, electronic money

Central banksCentral banks

Early: the mintEarly: the mint E.g. Fed – Federal Reserve System E.g. Fed – Federal Reserve System

in the US, Bank of Englandin the US, Bank of England Central bank: regulates the money Central bank: regulates the money

supply (base interest rate, reserve supply (base interest rate, reserve requirements), the validity of the requirements), the validity of the money, rules of currency money, rules of currency exchangesexchanges

Information subsystem of the Information subsystem of the economyeconomy

Central bank plus commercial banksCentral bank plus commercial banks Central bank: analysis of the economy Central bank: analysis of the economy

in monetary terms and setting the rules in monetary terms and setting the rules of the economy in monetary terms of the economy in monetary terms identity of the economyidentity of the economy

Commercial banks: analysis of their Commercial banks: analysis of their segment of the money market, setting segment of the money market, setting local rules of loans, mortgages, interest local rules of loans, mortgages, interest ratesrates

Fiscal regulationsFiscal regulations

Fiscal regulations: rules set by the Fiscal regulations: rules set by the state regulating the money values state regulating the money values of state services and the of state services and the procedures of implied money procedures of implied money exchangesexchanges

E.g. taxes, tariffs, feesE.g. taxes, tariffs, fees

Fiscal and monetary Fiscal and monetary policiespolicies

Fiscal policy = the state as an Fiscal policy = the state as an organisation acting in the context of the organisation acting in the context of the economy and using the political power economy and using the political power sets the rules about providing the money sets the rules about providing the money revenues needed for the reproduction revenues needed for the reproduction and expansion of the stateand expansion of the state

Monetary policy = central bank sets the Monetary policy = central bank sets the identity definition, checking and identity definition, checking and enforcement communications for the enforcement communications for the economyeconomy

Complexity of the Complexity of the economyeconomy

Hunter – gatherer societiesHunter – gatherer societies Coin moneyCoin money Paper moneyPaper money Electronic moneyElectronic money Central bank and banking systemCentral bank and banking system

Expansion and complexityExpansion and complexity

More expansion More expansion more more complexitycomplexity

High inflation decreases High inflation decreases complexitycomplexity

Deflation decreases complexityDeflation decreases complexity Decrease in complexity Decrease in complexity

shrinking of the economyshrinking of the economy

Summary – 1 Summary – 1

Human artefacts Human artefacts Exchanges of human artefactsExchanges of human artefacts Economy = system of exchange Economy = system of exchange

communicationscommunications Accounting = memory of economic Accounting = memory of economic

communicationscommunications MoneyMoney

Summary – 2 Summary – 2

Identity violations and adaptation in Identity violations and adaptation in the economythe economy

OrganisationsOrganisations Banks and the central bankBanks and the central bank Information subsystem of the Information subsystem of the

economyeconomy Monetary and fiscal policyMonetary and fiscal policy Complexity of the economyComplexity of the economy

Q & A – 1 Q & A – 1 1.1. Can we see the performance of a religious Can we see the performance of a religious

ritual as a human artefact ?ritual as a human artefact ?2.2. Is it true that a piece of land is a human Is it true that a piece of land is a human

artefact ?artefact ?3.3. Can we consider the writing of a poem as a Can we consider the writing of a poem as a

form of accounting ?form of accounting ?4.4. Is it true that the value of a service or good is Is it true that the value of a service or good is

given by its expected ability to facilitate the given by its expected ability to facilitate the reproduction and expansion of the society ?reproduction and expansion of the society ?

5.5. Is it true that the marginal exchange value of a Is it true that the marginal exchange value of a good provides the value of that good ?good provides the value of that good ?

6.6. Can we use pints of water to measure the Can we use pints of water to measure the marginal exchange value of a horse ? What marginal exchange value of a horse ? What about using small pieces of silver ?about using small pieces of silver ?

Q & A – 2 Q & A – 2

7.7. Is the money a memory communication unit Is the money a memory communication unit in the context of the economy system ?in the context of the economy system ?

8.8. Is it true that inflation is caused by large Is it true that inflation is caused by large amounts of fake money ?amounts of fake money ?

9.9. Is it true that hyperinflation usually is Is it true that hyperinflation usually is handled by redefining the identity of the handled by redefining the identity of the economy through introduction of a new economy through introduction of a new currency ?currency ?

10.10. Is it better to have zero inflation than to Is it better to have zero inflation than to have small positive inflation ? have small positive inflation ?

11.11. Is it better to have negative inflation Is it better to have negative inflation (deflation) than to have high positive (deflation) than to have high positive inflation ?inflation ?

Q & A – 3 Q & A – 3

12.12. Are organisations formed by sets of Are organisations formed by sets of constrained economic communications ?constrained economic communications ?

13.13. Is it true that criterion of profitability in the Is it true that criterion of profitability in the context of competition of firms is implied by context of competition of firms is implied by the need for growth of the society ?the need for growth of the society ?

14.14. Is it true that commercial banks increase Is it true that commercial banks increase the money supply by printing more money ?the money supply by printing more money ?

15.15. Can we consider the central bank as the Can we consider the central bank as the core of the information subsystem of the core of the information subsystem of the economy ?economy ?