Evolution of Complex Systems

Evolution of Complex Systems Lecture 9: Economics and money Peter Andras / Bruce Charlton peter.andras@ncl.ac.uk bruce.charlton@ncl.ac.uk

Objectives • Exchanging human artefacts • Accounting • Money • Memory and information subsystem • Identity violations and adaptation in the economy • Organisations • Banks and the monetary system

Society • Society = system of human communications • Social systems = subsystems of the society • E.g. political system, educational system

Reproduction of the society • Reproduction of human communications – and referencing, continuation rules • Memories: human memories, written memories • Education, religion and science • Human artefacts: facilitate reproduction of human communications

Human artefacts • Objects, writing, rituals, services • Represent human communications (behaviour) which led to the creation of the artefact • Facilitate utilisation – a set of human communications (behaviour)

Exchanging artefacts – 1 • Exchange economy: three potatoes for an egg • E.g. primitive worlds, Bulgaria – 1996, Germany – 1923

Exchanging artefacts – 2 • Reproduction and expansion of utilisation behaviour – set of corresponding human communications • E.g. pots, rituals

Economy • Economic communications: exchange of artefacts • Economy = system of exchange of human artefacts seen as human communications • Economy – subsystem of the society • Artefacts: goods, services • Economy  reproduction of the society

Memories of economic communications • Memories of existing goods and exchanged goods • Transactions – what was before, what is now, what has been exchanged – stock and flow • Early forms: human memories, knots, marks in stone, writing, pieces of stone or shell

Accounting • Inventory of existing goods and services using memories – stock • Records of exchanges using memories – flow

Valuing artefacts • What can be exchanged for what • What is the potential or expected contribution of artefact to the reproduction and expansion of the society • Values are context dependent

Exchange and value • Artefact: context dependent value • Exchange: aim improved reproduction and expansion potential • Value-based exchange is expected always to lead to increased reproduction and expansion ability of the society or social system • Note that the latter does not happen necessarily in reality

Value measurement • What is the reproduction / expansion facilitating potential of an artefact (good or service) in the context of a social system • Valuation based on expectation • Valuation expressed in terms of exchange

Marginal exchange • Evaluation of equivalence of reproduction / expansion potential of artefacts • Provides the value of the artefact • E.g. a sheep is worth of three goats but not four

Early money • Shells, stones, animals • Relatively rare goods • Exchangeable with any other good or service – key feature

Money – 1 • Copper, silver, gold – coins • Rare goods emerge as universal exchange vehicles • Facilitate the reproduction and expansion of exchanges (economic communications) and through this the reproduction and expansion of the society

Money – 2 • Coins with agreed value – e.g. ‘gold’ coins made of a mixture of silver and gold or copper and gold • Paper money • Money is a standardised universal exchange vehicle • Social system / economic subsystem defines the value of the money

Money and economic communications • Economic communications: exchange of goods and services • Money: vehicle of economic communications – signal of value – price of goods and services • Money – special good

Accounting and money • Accounting in terms of money • Records of economic communications are standardised in terms of money • Stock and flow measured in money terms

Economy and money • Economic communications: exchange of goods and services – all expressed in terms of exchange of goods and services for money • Language of economy: exchanges with money • Rules of the economy system: rules regulating the money and money exchanges

Memories of economic communications • Memories: records of money exchanges for other goods, services or money • E.g. receipts, bills • Accounting in terms of money – money values of stocks, money values of flows • Money – memory of ability to exchange goods

Actions of the economy system • Actions: exchange communications that have an effect on the environment • E.g. production of goods and services • Exchange of goods and services triggers the reproduction and expansion of usage behaviour  effects on the environment

Perception of the economy system • Perception: environment effects on exchange communications changing the expectations about continuation communications • Changing needs of the society  changing values and needs for goods and services • Effect: change of the economy system • E.g. some jobs may disappear, some goods may disappear, other jobs and goods emerge

Economic expansion • Necessity in expanding society • Lack of economic expansion increases the likelihood of contraction of the whole society • E.g. communist vs. capitalist economy

Inflation • The value of money changes rapidly and the amount of changes are unpredictable • E.g. printing money • Money – can be seen as memory of the economy  what is the value of the economy • Shrinking economy + growing money supply  readjustment of the value of money  may lead to inflation • Unpredictability increases ambiguity in economic communications triggering shrinking of the economy • E.g. Brazil, Argentina, Bulgaria, Germany – 1920s

Identity and identity violations • Identity of the economy: definition and regulation of money within the economy • Fault: fake money • Error: production of unwanted goods • Failure: hyper-inflation

Adaptation in the economy • Rules about valid money, punishment for using fake money • Implementation of new check – e.g. better market research • Resetting the economy by introduction of new currency – e.g. Brazil, Bulgaria, Argentina

Economy and society • Growing society needs growing economy • Growing economy supports the growth of the society • Growing economy needs small inflation • Reason: • Ideally growth in money supply should match growth in economy • If there is not enough money the economy will shrink • Predicting exactly is impossible, so supplying little bit more guarantees to have enough fuel for growth

Organisations • Organisation: set of human communications following a set of constraints (rules) • E.g. company, university, government

Organisations and economy • Production of goods and services happens in context of organisations • Organisations themselves include to large extent economic communications – exchange of services and goods – e.g. payment of a salary • Large economies rely to large extent on organisations in the production of economic communications

Structures in organisations • Structure: constraint on organisational communications • E.g. university department, marketing department of a company, badminton section of a sports club • Strucutres may generate subsystems

Memories of organisations • Records of organisational communications • Records of money values of stocks and flows

Information subsystem of organisations • Communications about memories • Management = information subsystem • Management communications: identity definition, checking and enforcement for the organisation – rules and regulations

Identity violations in organisations • Fault: wrong accounting statement • Error: production of goods that cannot be sold • Failure: bankruptcy

Adaptation in organisations • Correction of wrong calculation in the accounting statement • Rules about doing a new kind of better market research • Reorganisation by selling parts and merging others

Organisations and money • Organisation: exchanges of goods and services for money • Organisations need money to reproduce and expand • Organisations usually increase by increasing their available money amounts • Profitability – economic organisations

Organisations in the economy • Organisation: money in – money inside – money out • Profitability – criterion of success (reproduction and expansion) • Organisations compete in the context of the economy • Competition in terms of profitability

Organisations dealing with money • Early times: the mint • Coins were produced by rulers – fuelling the exchange communications  reproduction and expansion of the economy • Specialist money traders – coin exchangers  early banks

Banks – 1 • Bank: organisation performing the exchange of money and recording of such money exchanges on behalf of humans and organisations • Banks are specialist organisations generating memories of economic communications

Banks – 2 • Banks also generate communications about memory communications of the economy • E.g. analysis of loans, evaluation of credit worthiness • Commercial banks constitute the primary information subsystem of the economy

Banks – 3 • Interest rates – expectations about the economy • Multiplicator effect: lending money to clients increases the available amount of money in the economy • Bank money, electronic money

Central banks • Early: the mint • E.g. Fed – Federal Reserve System in the US, Bank of England • Central bank: regulates the money supply (base interest rate, reserve requirements), the validity of the money, rules of currency exchanges

Information subsystem of the economy • Central bank plus commercial banks • Central bank: analysis of the economy in monetary terms and setting the rules of the economy in monetary terms  identity of the economy • Commercial banks: analysis of their segment of the money market, setting local rules of loans, mortgages, interest rates

Fiscal regulations • Fiscal regulations: rules set by the state regulating the money values of state services and the procedures of implied money exchanges • E.g. taxes, tariffs, fees

Fiscal and monetary policies • Fiscal policy = the state as an organisation acting in the context of the economy and using the political power sets the rules about providing the money revenues needed for the reproduction and expansion of the state • Monetary policy = central bank sets the identity definition, checking and enforcement communications for the economy

Complexity of the economy • Hunter – gatherer societies • Coin money • Paper money • Electronic money • Central bank and banking system

Expansion and complexity • More expansion  more complexity • High inflation decreases complexity • Deflation decreases complexity • Decrease in complexity  shrinking of the economy

Summary – 1 • Human artefacts • Exchanges of human artefacts • Economy = system of exchange communications • Accounting = memory of economic communications • Money

Summary – 2 • Identity violations and adaptation in the economy • Organisations • Banks and the central bank • Information subsystem of the economy • Monetary and fiscal policy • Complexity of the economy

Q & A – 1 • Can we see the performance of a religious ritual as a human artefact ? • Is it true that a piece of land is a human artefact ? • Can we consider the writing of a poem as a form of accounting ? • Is it true that the value of a service or good is given by its expected ability to facilitate the reproduction and expansion of the society ? • Is it true that the marginal exchange value of a good provides the value of that good ? • Can we use pints of water to measure the marginal exchange value of a horse ? What about using small pieces of silver ?

Evolution of Complex Systems