— Jemima Gibbons (@JemimaG) November 8, 2013
There are different ways of looking at the future of money because money performs a variety of economic functions. One core way of looking at it is as a means to facilitate trade, and therefore prosperity.
At the 2013 South-by-Southwest Interactive conference (SXSW) in Austin, Texas, there was a session called “Identity + 30” run by Sam Lessin, the Head of the Identity Product Group at Facebook. He presented a convincing thesis concerning the relationship between the evolutionary cusp in identity technology and the path of money. The core of Sam’s argument was that when sharing is expensive, or when it makes an individual less well-off, then people don’t share. We use trade to deal with this, and we evolve trust networks to do this efficiently by growing larger networks with more trading partners and by capturing more information about those partners over time.
Sam had a useful way of thinking about this, which was the idea of what he called “social hacks” to deal with the historical problem that the speed of bits and the speed of atoms are different. These hacks are things like badges, diplomas, dress codes and, as it happens, banking (banks are risk intermediaries). However, because of what Sam memorably called the “superpower” we have gained because we can instantly communicate with anyone else on Earth, we will no longer need those hacks. I may be summarising incorrectly, but I think his way of looking at the existing business models around identity as being hacks in response to incomplete identity, credential and reputation information is a good way of framing some problems.
One way of looking at money is that it is just another of those hacks and just as changing technology means that we no longer need hacks such as direct debits or memberships in professional organisations (the Guild of Master Builders etc) so it will be that we can do away with the hack of cash. We may, in time, do away with the hack of money as well.
Sam’s framing in terms of “social hacks” is to me equivalent to Narayana Kocherlakota’s formulation that “money is technologically equivalent to a primitive version of memory,” (Kocherlakota 1998) and Jaron Lanier’s more recent formulation that economic avatars (ie, pseudonyms of value in transactional environments) are “an improvement on the forgetfulness of cash” (Lanier 2013).
A consequence of the ending of the hacks is that social capital will get ever more fungible, so (for example) going to Harvard will mean less than it does now, which means that it will be worth less than it is now. You can see exactly where this headed. Just look at the way we use LinkedIn. In the old world, I would use the social hack of finding out which university your degree came from as a sort of proxy for things I might want to know about you, but I no longer need to do that because I can go via LinkedIn and find out if you are smart, a hard worker, a team player or whatever. So there’s less premium for you learning, say, biochemistry at UCL rather than Swindon Polytechnic: so long as you know the biochemistry, my hiring decision will be tied to your social graph, not the proxy of institution.
The implications go further. Google were famous for their rigorous hiring criteria, but when they looked at “tens of thousands” of interview reports and attempted to correlate with employee performance, they found “zero” relationship (Bryant 2013). Their infamous interview brainteasers turned out not to predict anything either. Nor did school grade and test scores. The proportion of Google employees with college degrees has decreased over time, as point echoed by Rory Sutherlands, the Vice Chairman of Ogilvy & Mather UK when he wrote that he was unable to find any evidence “recruits with first-class degrees turn into better employees than those with thirds (if anything the correlation operates in reverse)” (Sutherland 2013)
Rory suggests the “Moneyball” approach is better, alluding to Michael Lewis’ wonderful book about the transformation of the Oakland Athletics baseball team when they switched to statistics instead of scouts (Lewis 2003).
This would now, I suppose, be called a Big Data approach, and it has tremendous potential to uncover talent. But as the As discovered, that only works so long as you are the only one with the data. In a year or two, everyone else is crunching the same data and applying the same analysis. Maybe analysis will give you your candidate list but the social graph will rank them. In essence, the “league table” that ranks the candidates will be ranking them by social capital.
The consequence of most relevance here is, of course, that the cost of using social capital will reduce for transactional purposes until it becomes lower than the cost of alternatives, the principle alternative at low transaction values being cash, so there will be no need for cash any more. This is why, in 1998, the anthropologist Jack Weatherford was able to confidently predict that the “electronic money world looks much more like the neolithic world economy before the invention of money than it looks like the market as we have known it in the past few hundred years”.
I think Sam and Jack (and others) are right and that…
Identity is the new money.
I don’t mean this in a metaphorical sense and I don’t mean it in the “Big Data is the new oil” sense.
I mean it in the very literal sense that the evolution of the identity infrastructure in our online society will mean that there is no longer any need for a circulating medium of exchange.
Keith Hart saw this coming when at the end of the last century he wrote that “if modern society has always been supposed to be individualistic, only now perhaps is the individual emerging as a social force to be reckoned with”. Keith’s reasoning is the same as Sam’s, which is that advances in technology means that data about the individuals involved in transactions can now be managed at a distance “thereby making possible the re-personalisation of complex economic life” (Hart 1999).
The economist Paul Seabright said that money symbolises the way in which we are connected to strangers as never before (Seabright 2005), so perhaps we should explore how the instantiation of these connections in social graphs is evolving.
A central result of doing this is that the social graph is a more efficient form of the kind of memory that we need to make transactions work. Therefore the social graph will replace the less efficient forms, of which notes and coins are a prime example.
Here’s why. Suppose I am wandering through Woking market and I want to buy a doughnut. I give the trader £1. The trader doesn’t have to trust me, he only needs to trust the £1, and the cost of failing to detect that my £1 is a counterfeit is quite small (despite the large number of fake £1 coins in circulation in the UK) compared to the cost of establishing my trustworthiness and creditworthiness. Other traders deal with this problem by paying banks and card schemes to manage the problem for them, but this costs them money. But now I imagine that I wander up to the trader to buy a hot dog and through his Google Glasses my face is outlined in green, which means that the system recognises me and that I have good credit. The trader winks at me, and a message pops up on my phone informing me that I am being charged £1. I press “OK” .
If the trader knew who I was, and remembered me, and trusted me, we could have done all of that without using any of the technology.
In the decade from 1966 and 1976 there were three major “all out” bank strikes in Ireland that shut the retail banks for (in total) a year. The way in which the Irish economy functioned under such duress is both interesting and illustrative (Murphy 1978). When the strikes hit, around four-fifths of the money supply disappeared and the general public were left with the notes and coins in their pockets and nothing else.
Since people could not go to the bank and draw out more money, they developed their own currency substitutes: some people began to use Sterling instead, but it was the cheque that stepped in to keep the economy going. People began to accept cheques from each other, and these cheques began to circulate.
In summary a highly personalised credit system without any definite time horizon for the eventual clearance of debits and credits substituted for the existing institutionalised banking system.
Antoin Murphy points out that one of the key reasons why this “personalised credit system” could substitute for cash was the local nature of the circulation. This centred on community centres of commerce (ie, shops and pubs), and because of that the credit risk was minimised. The owners of shops and pubs knew their customers very well and so were perfectly capable of deciding whether to accept cheques (or just IOUs) from those customers. And since the customers also knew each other very well, they too could make sensible decisions about which paper to accept.
In “local” transactions, business can work perfectly well with no currency and no banks. A generation ago Ireland’s economy was built up from such local transactions, so people were able to self-organise their own money supply. But, as I think we all understand, in the modern economy “local” means something entirely different. While none of us know how this is going to pan out, there is a clearly a redefinition of locality underway, and it has social networking, virtual worlds and disconnection technologies as inputs. One of my son’s localities is the World of Warcraft: if Zopa were to offer loans in World of Warcraft gold, my son could perform that same function as an Irish publican in the example above and provide an assessment of creditworthiness for avatars he knows. The Irish publicans could do this because they knew the locals.
Everywhere is local now.
Until the invention of the mobile phone and its connection with the internet, I think it was reasonable to assume that for small transactions there was no way of using identity, credentials and reputation cost-effectively or, indeed, at all. Which is why it made sense to continue to use notes and coins to settle retail transactions. But now? The replacement of notes and coins in this way all hinges on the trader recognising me. Once this has been achieved, the issue of trust can be instantly resolved by computations across the social graph.
I think the new monetary arrangements that will be consequence of cashlessness are worth exploring. So let’s take it for granted that the mobile phone takes over and in a few year’s time, you will be able to pay Walmart, or your window cleaner, or your niece with your mobile phone.
In this world, switching between dollars and euros and frequent flier miles and Nectar points and anything else is just a matter of choosing from a menu on the phone. The cost of introducing new currencies will collapse. Anyone will be able to do it. The future of money won’t be the single galactic currency of science fiction imagination (we can’t even make a single currency work between Germany and Greece, let alone Ganymede and Gamma Centuri) but thousands, millions of currencies.
That must sound as crazy to you as the idea of central bank and cheques did to the inhabitants of Stuart England, but it really isn’t. Trying to imagine a wallet with a hundred currencies in it and a Coke machine with a hundred slots for them is naturally nuts. But your phone and the Coke machine can negotiate and agree on currencies (or, more importantly, currency markets) in a fraction of a second, the time it takes to “tap and go” with your Google Wallet.
But who will want to issue these new currencies? Governments? Banks? One obvious category is corporates. When Edward de Bono wrote The IBM Dollar back in 1993, he looked forward to a time when “the successors to Bill Gates will have put the successors to Alan Greenspan out of business”, arguing that it would be more efficient for companies to issue money than equity. Another obvious category is communities, especially with sentiments around anti-globalisation abounding. Here in London we already have the Brixton e-Pound! The Local Exchange Trading Systems (LETS) from physical communities and the platinum pieces and Facebook credits from virtual communities will merge and surge, forming a panoply of private currencies that will make trade more efficient. Why save dollars for your retirement when you can save kilowatts, hours or calories?
Once we take cash out of society, the implications go far beyond economic efficiency and reduced transaction costs. Our view of money will change and, just as the people of Stuart England went from seeing money as coin to money as paper, we will go from seeing fiat currency to seeing a spectrum of currency types that seem alien right now.
These are personal opinions and should not be misunderstood as representing the opinions of
Consult Hyperion or any of its clients or suppliers