Category: History and future

[Dave Birch] Will McInnes from NixonMcInnes called me up so see if I could pop in at the Meaning Conference 2013 as one of his speakers had been taken poorly. I had the day set aside for filling out my expenses forms following recent trips to Palo Alto, New York, New York, San Francisco and San Jose. This normally takes no more than 4-6 hours, so a day is adequate to polish off the task at a leisurely pace. But when Will called, I felt obliged to help out a chum — or engage in an episode of reciprocal altruism — and jump on the train down to Brighton. An hour-and-a-half on the train was plenty of time to pull together a presentation which, though I say so myself, went down rather well on the day. You can see it on YouTube (soon), but if you can’t be bothered to sit through my Sergio Aguero fraud routine yet again, here are the (unedited and unpolished) notes that I cut together from parts of a book I am writing at the moment and used for the slides.

Perfect pitch, delivery & understanding of audience from @dgwbirch on the future of money #meaningconf

— 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

[Dave Birch] There have been some interesting conversations about the future of money on some of the projects and at some of the events that I have been involved in recently, so I thought I would go back to one of favourite topics, paleofutures, to kick around some ideas in this space for our October Tomorrow’s Transactions Unconferences held in conjunction with our friends from BayPay (in Palo Alto) and NYPay (in Manhattan) and with support from our friends at Discover and Google. For my thought piece at the event, I thought I’d return to the big subject of the future of money. I am always curious to see what people used to think about the future of money and, where they were wrong, always curious to understand why they were wrong. This, I hope, will help me to look forward in a more measured and structured way. That particular line of thought in this particular month led me to an October 1998 article called “The Fiscal Frontier“, in which Discover magazine asked a number of prominent thinkers to speculate on the future of money. So, 15 years on, I thought I would have a quick look at what was said.

Philip Davis, still a Professor Emeritus of Applied Mathematics, Brown University talked about the psychological relationship between the possession of virtual money and the ownership of real property, a very live topic and the subject of a recent Tomorrow’s Transactions podcast with the artist Heidi Hinder, and ended up flagging the “law of unanticipated consequences”, with which I am wholly in sync. Money is such a complex nexus it is particularly vulnerable to this law and there is (bizarrely) an inevitability about it. Just as tally sticks were invented as a mechanism for deferred payment but the market mutated them into a store of value and then a means of exchange, who knows what the market will do with Bitcoin.

Paul Kocher, President of Cryptography Research, said that breaking a cryptosystem is far more difficult than robbing a physical bank but potentially far more profitable (I’ll blog about this soon). Paul was, and still is, one of the world’s greatest experts on cryptography. He went on to predict that the first multibillion dollar heist would occur before the year 2010. I’m not sure whether that happened or not. It may have happened and remained a secret. After all, banks have lost billions to “rogue traders” and who’s to say that these were accidents? Publicly-reported “heists” are still in the millions or tens of millions. [Paul’s prediction dates from an era when the people who robbed banks didn’t work for them.]

Chris Gregory, then Professor of Anthropology and Archeology at the Australian National University (ANU) and now a Reader in Anthropology at the same institution, said that gold will remain as the sovereign form of money for as long as war between people remains a possibility. At first I thought this was a depressing comment, being as it is a reflection of the ongoing narrative of man’s inhumanity to man. But it also represents, I think, a streak of profound conservatism about money. I do find myself, turning to anthropologists when I want to obtain a deeper understanding of the complex inter-relationship between money and technology (which is why I’ve just recorded a podcast with Professor Bill Maurer, who leads the Institute for the Study of Money and Technology at UC Irvine). Therefore I read the comments of Jack Weatherford with. Jack is the Professor of Anthrolopology at Macalester College said that “If we take the long view of history, money was not necessary until very recently. Soon — though not in our lifetime — the money phase of history will pass, and money as we know it will be become one of those quaint curiosities of the past”. Wow. Jack wrote The History of Money, one of the more well-thumbed volumes on the topic on my bookshelf and he has a wide and well-informed perspective. He went on to say that “Already cash has become the domain of poor people and poor nations” and…

With the many new forms of money, the difference between barter and money systems will become blurred. 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 hudnred years.

I don’t think this is a crazy as it first sounds. A neolithic barter system based on networks of trust couldn’t scale into an economy of cities and settlements beyond kinship groups but the arrival of the internet changes the dynamic again as Sam Lessin, Head of the Identity Product Group at Facebook, pointed out in his talk at the Unconference. With an effective identity infrastructure (which is needed to build a trust and reputation management infrastructure on top) it is certainly possible to imagine rapidly resolved “barter chains” removing the need for money as an intermediary in transactions.

Paul Krugman, then Professor of Economics at MIT but now at Princeton (here’s his New York Time blog), made four particular comments that I want to remark on. After all, if you’re going to disagree with someone in public, you might as well choose to argue with one of the world’s leading economists on a subject he knows everything about. So here goes…

1. There will be a distinction between electronic cash and electronic money because of the need for small transactions where neither the buyer nor seller want the buyer’s creditworthiness to be an issue.
   I used to think that this was true, but I don’t any more. The “internet of things” and always-on connectivity have eroded the cost differential between the two.
2. There will not be a universal currency for a long time. There is a big advantage to separate currencies providing price stability in different parts of the world.
   I don’t think there will be a universal currency ever. It doesn’t make sense in economic terms, let along technological or social or political or business terms.
3. Corporations will not issue their own currency.
   I’m not so sure about this. If there are going to be more than fiat currencies, the corporations are obvious issuers of transactional medium of exchange currencies. Whether they can deliver a store of value is harder to predict, given that corporations don’t (in the great scheme of things) last that long.
4. What everyone wants is an anonymous, reliable means of exchange; given a chance, they will always prefer one backed by a government. “One can imagine that a system of purely virtual money might be subject to severe instabilty”.
   Everyone? I don’t. And I think a lot of people say they want anonymity (when what they really want is privacy) only because they haven’t really though it through. Do you really want to live in a society where all transactions are anonymous?

So I’m in the tough position of disagreeing with one of the world’s leading economists on a subject that he knows far more about than I do. Gulp. All I will say is that the nature of the medium of exchange is a topic that has undergone accelerating change in response to new technology. Talking of new technology, Marvin Minsky, then Professor of Computer Science at MIT and now still at the MIT Media Lab, said that

With fast computers and huge memories, we could have a nonlinear database that would better understand what each person has and wants. Then, by using complicated game theory-related computations, it might turn out that in general everyone would get more (in terms of their personal values) for the goods that they are willing to “sell”.

There is a link between Marvin’s deductions from the technology roadmap and Jack’s comments on society, but we’ll come back to those shortly. Marvin went to make some comments about the relationship between cash and crime.

Currency, except for small change, will disappear. [It pretty much has already].

Yes and no. Almost all British currency is electronic (the cash “in circulation” is a fraction of the money supply). The US is on a similar road to cashlessness Peak cash is behind us. In time, cash will vanish from polite society. Yet rump cash will be hard to eradicate and its erosion will take some time.

Taxes will be lower because of the vast amount of uncollected tax today.

A man after my own heart. Given that somewhere in the region of a fifth of the economy in developed countries is untaxed and outside the formal financial system, the tax burden falls pretty heavily on us remaining wage slaves, and as the post-crisis  tax burden climbs, so will the call for some reform. Marvin goes on to reinforce my point in the comments about Paul Krugman’s view, by say that:

The system of electronic currency will never be acceptable unless the laws protecting privacy are greatly strengthened.

Strengthening the laws is one thing, but on the whole I would prefer to strengthen the cryptography. As I’ve said a thousand times, I want to depend on mathematics, not ombudsmen. Here, I think, there is cause for optimism. Were we to decide to implement private payment systems, the technology to do so is well-known and well-understood.

Naturally, we will want the private payment system of the future to built from open source and assembled under public scrutiny to see that the “privacy dial” is set at a democractically-accountable level. Hence the warning from Robert Sapolsky, still Professsor of Neuroscience at Stanford University, who said that “The very perfection of the identification system will guarantee urban myths about guys bankrupted when some techno-schnook stole their pheromone signature and racked up huge bills buying antique CDs for the Madonna centennial”. I’d like to that that we can design payment systems that hinge on

Ultimately, I think I most closely align with Jack Weatherford’s line of thinking, which is in a way unsurprising. Jack is a thorough scholar of the history of money and must have therefore had some pretty well-formed ideas about where it is going. Hence I find his vision both plausible and appealing.

In the future, everyone will be issuing currency.– banks, corporations, credit card companies, finance companies, local communities, computer companies, Net browsers and even individuals. We might have Warren Buffett or Bill Gates money. The future will produce thousands of forms of currency. Some of them will be based on commodities such as gold, land or sugar. Others will be shares in institutions or corporations, and many will simply be based on faith and performance.

I think the pressures of technology will continue the well-established trend of decentralisation and reduce central control, supporting Jack’s vision against more conservative scenarios.

These are personal opinions and should not be misunderstood as representing the opinions of 
Consult Hyperion or any of its clients or suppliers