My favorite things, all at once!

Yay for old friends, economics, and technology! All at once!

kc wrote a blog posting with her humble ideas on how to use IP address space tax. Wait… there’s a tax on address space? Yes, because it has become a scare quantity, because people are too lazy to move to IPv6, IPv4 address space is running out. The best of all bad ideas about what to do about this is to make an open market for address space, as though network addresses were some kind of useful piece of property with any kind of useful value. (BTW: When the present econolypse is over, and the next bubble starts, it will be an IPv4 address space bubble. Mark my words…) Address space is bits. We can make more bits… Look! I just made some! But because the value of a network exists in everyone who is using it, not just your implementation of the network, you can’t just add bits in your IP stack and get any benefit. So, while bits are free, and address space could conceiveably be free, because we have a network with limited space, we have a scarce asset. And, of course, what do humans do with scarce assets? We make bubbles! Yay for bubbles!

OK, now that we’ve gotten kc and tech checked off the list for this post, what about economics? Well, actually I touched on economics above, but there’s something way more fundamental to economics. Fundamental questions tend to be hard to recognize because they seem so obvious. The world would be a lot more sane place if more people took the time to ask this particular question and understand (no… really understand) the answer:

What is money?

In case you are not following me and don’t see why this is a hard question, see if any of these wrong/incomplete answers are floating in your head:

• Money is the paper with green ink and dead guys on it. And red discs with the other dead guy on them, but it takes 100 of those red discs to make one of the green papers.
• Money is dollars, euros, and yen. It’s what you spend when you want to buy something. You can change it to the other kind of money if there’s a different symbol in front of the price on the thing you want to buy.
• Money comes from the government. The Fed sets the rate and it goes into banks, then I get it from the ATM.

These answers are all wrong. Not just a little bit wrong… they are like “the earth is flat” wrong, or “the sun goes around the earth” wrong.

So what’s the answer? I’ll tell you what… the answer is so hard that I certainly can’t tell you. You could earn two PhD’s and not really know. Money is something that humans invented after we invented trade, but before we invented numbers. That means it’s something that’s fundamental in the human condition, and that it is as human as culture and art. You might as well give up on the money question and work on a nice simple one like, “What is art?”.

But it wouldn’t be very nice of me to bring you this far and dump you with no ideas of what money is. What lead me to write this post is this great quote I found in one of the papers kc linked to in her blog posting. Here’s the quote:

The Nature of Money

My very great teachers (Alchian, 1977; Brunner and Meltzer, 1971) taught that a society uses as money that entity that economizes best on the use of other real resources to gather information about relative prices and to conduct transactions. This makes clear that the common — but wrong — statement of Gresham’s Law about “bad money” driving out “good money” needs to be restated. What we have observed through the millennia is that high-confidence monies drive out low-confidence monies (Hayek, 1976, p. 29; Mundell, 1998).

That’s academic speak, and it’s easier to understand if you read it in context. But what it’s basically saying is that “a culture will chose as money that thing which minimizes the costs for them to participate in the market to find the correct price for goods”.

That is profound. It’s very far removed from what we think about money when we are at the checkout counter at Tesco (which for me is usually “Gee, this yogurt will be 37 pence, I hope I have exact change and can make my pocket lighter”).

Here’s a related story from when I worked as an administrator in Liberia for Doctors Without Borders. A rumor was going around the country that “little head” dollars were no longer accepted by the bank. “Little head” dollars? This is Liberian shorthand to describe the difference between newly designed money with the large heads and other security features in them. The rumor, as they usually always are, was based in fact. When currency circulates outside of its place of origin, counterfeiting is easier to get away with. In Liberia, from time to time, I noticed bills that, if they’d been given to me as change in the USA, would have made me call the manager. But as long as the staff accepts them, it’s not my problem. Why do they accept suspicious money from me? Because they have no fear that the guy selling cement bags at the corner will refuse it. That guy in turn doesn’t know or care about counterfeit US dollars, and so the bill moves on through the system.

Banks who do international business don’t feel the same way about counterfeiting. Afterall, if a Liberian bank sends some counterfeit currency to London or New York, it’s not going to get passed on. It’s going to get subtracted from their total deposit amount. It won’t be investigated as a crime if it’s just one bill here or there, because it’s a drop in the ocean and the trail to the original counterfeiter has already gone cold — it was likely introduced by North Koreans into Kenya by way of India and made it’s way across to Liberia overland. There’s a certain cost of accepting money from areas with endemic counterfeiting. It’s perhaps 0.1%, but it’s there. That’s $1 per $1000, and it adds up.

Banks don’t just eat costs like that, they pass them on. One place that cost has showed up is in the exchange rate between USD and other currencies. The exchange rate between USD and Euros is different depending on the bill. Little heads low rate, big heads full rate. I don’t know who actually takes the fall for the fake bills — who’s account is debited when they are removed from circulation. But whoever loses that money is not bothered, because they’ve already covered the cost (and more) on the spread between their “little head exchange rate” and what the true exchange rate should have been that day.

OK, so back to Liberia. When the Liberian banks started charging a differential exchange rate (the same as their partner banks were doing in London), that reality-based fact morphed in the street into “the banks don’t take little heads”. The US Embassy put out a press release to try to stop the rumor. It said, “Dollars are dollars, big head or little. Every dollar anywhere on the planet can be exchanged for any other, and they are all dollars.” Which would be true, except it’s not. If you try to bring $10,000 from Liberia and spend them in the US, the odds that you have a counterfeit bill in there someplace are high enough that you’ve probably brought (on average) $9994 instead of the $10000 you thought you did.

In any case, a press release from the embassy certainly wasn’t enough to stop this story. Whether because they believed the rumor, or because they just didn’t want to be the only one not believing it (the musical chairs effect), within a few days the vendors stopped accepting little head notes. This was a few days before payday, and several staff brought the story to me, worried I would pay them in little head notes that they could not spend in the local market. I showed them the newspaper, and told them a dollar is a dollar. They told me, “a dollar I can’t spend isn’t a dollar”.

I’m going to repeat that, because it’s part of the answer to the question, “what is money?”

A dollar I can’t spend isn’t a dollar.

So, what to do? I called my boss in Monrovia, who’d had the same complaints. She made a quick decision: starting that moment, little head dollars no longer existed in the MSF system in Liberia. I was to find every little head dollar I had (a few hours work, in the end it was about 50 notes totaling about $550) and send them to her. She would send me back big head ones (thereby balancing our books). She’d send all of the little head dollars from the entire mission back to Geneva, and we’d change them there into francs and put them back into the budget at headquarters. Presumably she only chose non-suspicious bills to send back to Geneva, lest “MSF counterfeits dollars” were to show up in the newspapers the next day!

Problem solved. The staff loved me because I paid them in big head dollars. And I learned, first hand, a little bit more about what is money.

PS: Think rumors are funny? Managing rumors and knowing when to give up and get out of the way is serious business for humanitarian aid workers. Here’s an article about 3 Red Cross workers killed due to a rumor. My boss didn’t make the decision she made because she’s a nice lady. She decided this wasn’t a rumor that we were going to kill, and we needed to get the heck out of the way of it.