The Trophic Theory of Money, Part 1

There is no theory in economics more down to Earth than the trophic theory of money (TTOM). Born out of an epiphany in ecological economics by Brian Czech, the TTOM offers the clearest explanation to the ecosystem we call “the economy” and the origins of money. In this episode, we examine this theory through the lens of ancient cultures and the food chains of nature.

Transcript

Richard Tibbetts  00:13

From the Center for the Advancement of the Steady State Economy, this is The Steady Stater, a podcast dedicated to discussing limits to growth and the steady state economy.

Brian Czech  00:22

Welcome to the show. I'm your host, Brian Czech, and our episode today is "The Trophic Theory of Money, Part 2." In part one, we introduced the trophic theory of money with a focus on money's evolution in Mesopotamia, ancient Greece and China, we drew the connection of shekels, coins of electrum, and copper coins, respectively, to the agricultural surplus in those regions. Need to fill in a few cracks yet, and then move on to the implications of the trophic theory of money for economic policy. All right, let's start with a quick review of the most important points from part one. The trophic theory of money is that money originates from the agricultural surplus that frees the hands for the division of labor unto the manufacturing and service sectors. We noted in part one that this must be the case. This is the only way for money to come about due to what we called the trophic structure of the economy, where trophic refers to the flow of energy and material. Just like the economy of nature, with its trophic levels of producers, primary consumers and secondary consumers. The human economy has producers, heavy manufacturing and light manufacturing. The economy of nature and the human economy have service providers as well. Some of these services such as entertainment, are enjoyed directly by final consumers. But most of the services including most of the information services simply go to the agricultural, extractive and manufacturing sectors, as well as other service sectors such as the transportation sector. The key point here is that, just like the economy of nature, the human economy cannot grow without an expanding trophic base. If you want more woodchucks, and faxes, you must have even more grasses and forbs. If you want more cars and computer chips, you must have even more agricultural surplus. And by more, we're talking about the energy and material that goes into these activities. So if you don't think it takes material and energy to grow the computer sector, the insurance sector or even the podcast sector, better think again, it takes a trophic structure, starting with the agricultural and extractive surplus at the base. Attempting to restructure the economy in some other way, would require eliminating the first two laws of thermodynamics. LOL. Well, we ended part one with the primary corollary of the trophic theory of money. The primary corollary is that the quantity of money, and GDP as a flow of money, indicates the amount of agricultural surplus at the trophic base. And it's always been that way. A profound example was in Mesopotamia where the shekel evolved. You know, the shekel originated as 180 grains of barley, which was called shek in Sumerian. It'd be hard to find a better example of money supplies tracking with agricultural surplus. Well, the weight of that original shekel eventually became the weight in silver that was worth one gur of barley. A gur was a specific type of container used to haul grain on a donkey. In other words, one gur of barley cost a particular weight of silver, and vice versa. This was documented very thoroughly in the famous Assyrian cuneiform bookkeeping. So, these units of barley and silver were the primary forms of Mesopotamian proto money. Eventually, though, weights of silver and gurs of barley gave way to minted silver coins called shekels, which were probably the first coins on Earth. This process, from the dawn of agriculture to widespread agricultural surplus to proto money such as gurs of shek, and finally to the minting of widely circulating shekels as money per se, took thousands of years, from approximately ten thousand years ago until approximately three thousand. Much of that time was required for the agricultural surplus of Mesopotamia to reach a level that allowed for a thorough trophic structure. That means a division of labor into the artisinal trades and some of the earliest service sectors, which back then tended to be conscripted like military service, or required of slaves like cooking and cleaning. By the time such levels of trophic development had occurred, minted money became increasingly superior as a means of exchange. Prior to minting, let's say, at the stage of commodity money or metallic proto-money even, just imagine the hassle. Right away, there'd be issues with the condition of those barley grains or the size of that gur or the precise weight of those pieces of silver. Many other questions too, such as who, outside your little trading circle would be accepting these items. A lot of transactions would have entailed just as much squabbling about the means of exchange as about the actual goods being purchased. The absence of money was was like a hidden tax on all goods, so money would have been naturally selected for, you might say, as a social institution. It was just bound to come about. Now, when we're talking about the origins of money, hopefully no one would be satisfied with looking at where the coins are minted, where the bills are printed, or where the banks are that loan out the fiat money in a fractional reserve system. Those aren't the origins of money any more than the grocery store is the origin of milk. And frankly, just looking at the first historical instances of money doesn't quite cut it either. With the trophic theory of money, we provide the explanation for why money came out of Mesopotamia, Lydia and China, namely the fact that agriculture, and with it widespread food surplus, was born in these regions. So, the trophic theory of money explains the origins of money in a fundamental, ecological, evolutionary and anthropological sense. If you want to get philosophical about it, you might even say the trophic theory provides the ontology of money. It explains how money comes into being. As far as I know, and I've looked a fair bit, there aren't any other theories, theories of money, that explain how money comes into being in such a fundamental sense. Maybe the book Debt: The First 5,000 Years by David Graeber, comes closest. Another good one, of course, is the Ascent of Money by Niall Ferguson. But still, these are more like history lessons and anthropological analyses than an ecological evolutionary theory of money. The trophic theory of money is really about that long evolutionary sweep of Homo sapiens, during the Holocene epoch, given the right ecological conditions and how that set the stage for money, to even become irrelevant or meaningful concept. And one thing's for sure, of all the theories of money, the trophic theory is most congruent with the natural sciences. I want to say it's the theory of money for ecological macroeconomics. Once you understand it, you understand limits to growth and how any talk of green growth is utter nonsense. Speaking of history, though, there was a renaissance man who developed a model of the economy totally congruent with the trophic theory of money. His name was Francois Quesnay. The year was 1758 and his book was called the Tableau economique. If anyone could be called the first economist in history, it has to be Quesnay. He and his followers were the first to call themselves economists and the Tableau was the first comprehensive model of an economy. Now, in the Tableau, guess who were the producers. Yep. Quesnay identified the agricultural laborers as the productive class. The other two classes in his system were the proprietary class, the land owners, in other words, and the sterile class, the artisans and merchants. While Quesnay wasn't thinking of trophic levels per se, and he didn't write at all about money, merely recognizing agriculture as the sole source of wealth was basically trophic thinking. So we're not in bad company here. As Quesnay was known as the "Confucius of Europe," and King Louis XV used to call him "the thinker." My guess is that Quesnay would have left a far greater political legacy too, except the French Revolution restructured the political economy of France and soon enough Europe as a whole. So then Adam Smith and The Wealth of Nations became far more applicable. No doubt a lot of the framers of the American Constitution read both. I'm pretty sure Thomas Jefferson did. In fact, if you walk into Jefferson's historic home, Monticello, out in the Shenandoah foothills, and immediately turn back toward the door, you will see there the unmistakable bust of Quesnay. This helps to explain how adamant Jefferson was about developing the agrarian base of America. Now let's take a short non-commercial break with Rick Tibbetts. Then we'll consider the unique case of Mesoamerica.

Richard Tibbetts  11:26

Hi there, we hope you're enjoying the show. I just wanted to take this brief intermission to inform you about an upcoming CASSE event that you're not going to want to miss. On Wednesday, October 21st 5pm Eastern Time, the Institute on Religion in an Age of Science, or IRAS, is hosting a new session of their free monthly webinar series on science, religion and society. CASSE executive director and the host of The Steady Stater podcast, Brian Czech, is the keynote speaker of this event and will offer a sustainable alternative to GDP growth in a speech titled, "It's The Economy, Friends: Putting Sacred Cows Out to Pasture." We encourage all of our listeners to join us for this truly enlightening event. To register, just go to steadystate.org, pan over to the "Track" menu option and click "Calendar" in the drop-down menu. Then, click the link under the "Upcoming" sub header. Now, back to the show.

Brian Czech  12:20

Now, just because agricultural surplus is a prerequisite of money doesn't necessarily mean that an agricultural surplus will give rise to money, or as famous as Mesopotamia is for the origins of money, Mesoamerica is almost as famous for the absence of money, or at least money per se. The Mayans and Aztecs did adopt some proto money, most notably cacao beans or cocoa beans, if you prefer. But there were several major differences between Mesoamerica and Mesopotamia. First, agriculture apparently took hold earlier in Mesopotamia, so there was a longer evolutionary period to work with. Second, the surplus never got as pronounced or as predictable in Mesoamerica. Third, in Mesoamerica, there wasn't much production of small-grain crops like barley, which are much easier to store than, say, fruits or even maize. Fourth, the storage of whatever surplus there was, and even the commodity money such as cacao beans, was further challenged by the higher humidity and higher density of mammal and insect pests in the tropical and subtropical Mesoamerica. Fifth, markets didn't come as easily there because Mayan culture, especially, was more royalty-serving, ritualistic, warfaring, and slaveholding. But I think the other ecological reasons were more important. Plus, as I recall, Jared Diamond described in his book Collapse, how the Mayans were hit hard by a major drought about 1200 years ago, and then didn't have much time to recover before the Spanish arrived. You know, at CASSE, we've been studying the trophic theory of money a bit. The research is in the early stages and one of the decision points is how to measure agricultural surplus. Maybe the most salient variable is the percentage of individuals occupied or preoccupied by agriculture. Right now in the USA, that percentage is only about 1.3. That tells you a lot about the massive agricultural surplus we have. Not that it's sustainable, with the heavy industrial, pesticide-ridden, Ogallala-Aquifer-liquidating grain belt we have, but at this particular point in history, the surplus is still in enormous. Evidently in Mayan culture, it was more like 90% of individuals who were occupied with farming. And that figure is believed to have been significantly lower in Mesopotamia. Well, let me just say a few things now about the policy implications of the trophic theory of money. I think the most obvious ones have to do with inflation and with GDP planning. Don't forget, the trophic theory of money isn't only about money, it's firstly about the structure of the real economy, the trophic structure, and then about how that structure authorizes, you might say, the appearance and the relevance of money, though it's more of an integrated economic theory, integrating the real and monetary sectors. But I like to call it a theory of money, because then, the relevance of it to monetary policy is instantly obvious. Also, when we recognize GDP as a flow of money, then the trophic theory of money is obviously relevant to GDP as well. All right, let's, let's think about inflation for a moment. The easiest way to think about it is too much money chasing too few goods, or goods and services, which we know are integrated in that trophic structure of the economy. So how does that happen? How do we get too much money chasing too few goods? Well, maybe the simplest way is by suddenly injecting a bunch of cash into the economy without any corresponding production. Sound familiar? Yes, stimulus checks are inflationary if they're backed only by reserves of fiat money, ginned up by the Treasury just for the occasion. Now, you might wonder, yes, but if incomes have declined as well, then why would stimulus checks have to be inflationary? What if they just covered the difference? The thing is, the incomes declined for a reason, less goods and services were being produced, and are being produced, during the COVID-19 pandemic. So the trophic structure has been compressed, there's not as much of the manufacturing and services, especially, though the proportion of money to the goods it's chasing around has increased, all else equal. That's inflation. Hopefully that sheds some light on so called modern monetary theory to, at least for those who are tempted to think we can just print enough money to buy our way out of the problems we face at the limits to growth. That would be a surefire recipe for inflation. Here's the thing though, about modern monetary theory, I think they're still ironing it out. If you look, for example, at the Wikipedia entry, you will find five so-called "tenets" of modern monetary theory. Right after that, oddly enough, it says the first four tenets do not conflict with mainstream economics' understanding of how money creation and inflation works. So apparently, there's only one tenant that fifth one that's somehow modern, and it seems to me a fairly esoteric point about bonds. But fully two of the first four tenants seem to acknowledge the threat of inflation. I get the impression that some proponents of modern monetary theory have had to backpedal a little bit in the face of the inflation critique, but that still leaves us with non-modern monetary theory and conventional monetary policy, as practiced by the Fed. The Fed tries to stimulate the economy along a rigorous growth path by lowering interest rates, and, you might say, maxing out the borrowing of Americans to whatever fractional reserve requirements still remain. That worked okay for a while. But now that we're bumping up into limits to growth, really profound 21st century limits, that Fed policy is just as inflationary as stimulus checks. When Mother Nature and Farmer Joe tell us we're out of acres, aquifers and acceptable climate for increasing grain yields, guess what, the trophic base isn't expanding anymore, geographically or productively. The limits to growth are absolutely unforgiving when operating from the bottom up in the trophic structure. The Fed can pump all the money at once into the system, but if the agricultural and extractive surplus is declining at the base, that trophic structure will shrink and there'll be fewer goods for the money to chase. Finally, a word about GDP. Actually, you know what? Go back to our Steady Stater episode from, let's see, which one was that? Steady State Politics, Joe Biden, Most Shocking Conclusion of Mainstream...oh, there it is. September 6th, it's the one called "GDP: Don't Shoot the Measurement." If you listen to that, it'll resonate strongly now that you know the trophic theory of money. Let me just point out here a couple of the most relevant highlights. Money exists in the economy as a stock and flow. The stock is the money supply. The flow of money, or at least the most important flow in macroeconomics, that's GDP. If you're not used to thinking of GDP as a flow, just remember, two of the three methods for calculating GDP are the expenditure method and the income method. See the flow now? It's that circular flow of money between businesses and households in exchange for the goods and labor, respectively. It circulates in proportion to that upward flow of energy and material, from the producer trophic level up through manufacturing and service provision, upward and outward to the final consumer. Well, that about wraps her up, folks. In these last two episodes, we covered the trophic theory of money. It's the theory of money for big picture long-term thinking, thinking about limits to growth. It certainly is the theory of money for ecological economics. If you want to know more about the trophic theory of money, go to www.steadystate.org, pan over to the "Discover" button, then click on "Reading List." You will find an article in there called "The Trophic Theory of Money: Principles, Corollaries and Policy Implications." I'm Brian Czech with The Steady Stater podcast. See you next time.