Electronic IOUs, The Future of Economics?
Thursday, June 4th, 2009Over the course of the economic meltdown, an idea has come to me, and though I have tried to not think too deeply about it, it has continued to come back to me again and again. The idea is that there is something problematic about the very core of economics. That the whole foundation of centrally controlled money is inherently flawed. Why? Because it is a limited resource.
There are many economic theories as to the purpose of money. One is that it is a ‘medium of exchange’. However, in order to acquire money, you must get it from someone who has it, or someone who issues it. If you and your trading partners do not have it, you cannot easily exchange your goods with each other.
Consider the following situation. A reasonably self-sufficient town is hit by economic hard times beyond their control. Those seeking loans have a difficult, if not impossible time getting those loans. Those with savings may have found the value of their savings substantially decreased. Everyone is spending less. The money supply shrinks. The farmer finds that the toolmaker has no money to buy his fruit, and farmer has no money to buy the toolmaker’s parts. Their goods retain their value, but since there is no medium of exchange, they must either resort to barter or don’t do the deal. It is easy to resort to barter if a deal can be made between the two parties, but if Joe wants nothing that Alice has, they cannot effectively barter. What they CAN do is issue IOUs. Alice can issue an IOU “backed by her honor” to Joe.
Herein lies the problem with IOUs, in order to be worth something, they need to be honored. This is a problem that the internet can help solve. A system on the internet can, publicly, track and maintain the state of everyone’s IOUs. Not sure if you should accept an IOU from Jim? Look him up and see how many IOUs he has issued, how many people have given him IOUs, and if he has refused any IOUs, along with timelines for his IOU activity and his IOU balance.
What is to stop someone from just issuing IOUs and not doing any work? Well, that can be complex, but it starts with the knowledge that when someone dies, their IOUs are worth nothing. Working backward from this, if Alice thinks she will not be paid back by Jim based on his IOU issue rate, age, IOU income rate, outstanding IOUs and personal history, then she might not want to accept one of his IOUs.
Balance Computation
The system would ‘work through the IOU’ graph to remove all unnecessary IOUs from the system. For example, If Tom owed Jim and Jim owed Alice and Alice owed Tom one IOU, then those amounts would be cancelled out and removed from the system.
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