Let's commit to our communities using new forms of money

According to Matt Prewitt, president of the RadicalxChange Foundation, more local money could reduce the motivation to 'exit' the communities that need the resources.

A teacher requested me to write an essay about what I would do to solve a global problem when I was ten years old. I proclaimed that I wanted to outlaw money since it was the source of so much evil. That concept was crude, and what I'll express here could be as well, so I present it with complete humility. To improve this incredibly delicate, crucial, and social institution, much work remains to be done.

The issue is genuine. Everyone believes that the ways we measure, store, and exchange value are problematic at best and broken at worst, from Keynesians to bitcoiners. We are no closer to a perfect form of money than we are to an ideal language or administration, in my opinion. That is why it is so fascinating to live in an era of programmable money, when we can deconstruct the system and reconstruct it in ways that were previously unimaginable. The monetary innovation that has occurred in the first decade of blockchain technology has disappointed me. However, many options are only now becoming apparent.

The president of the RadicalxChange Foundation, Matt Prewitt, will speak on the "Big Ideas/" stage at CoinDesk's Consensus festival in Austin, Texas, from June 9 to 12. Find out more.

I'll provide a perspective on money as a communication technique in this essay. Then, unlike fiat or Bitcoin, I'll outline some paths toward creating a new and better sort of money — money for a more prosperous and complex society.

Money is a kind of communication. People utilize it to communicate messages, just like language, democracy, legislation, and telephone networks.

Milton Friedman famously illustrated this argument with a pencil. He realized that no one really knows how to make a pencil. To get started, you'd need to cut down a tree. A saw made of good steel would be required for this. You'd have to start with iron ore for that. What about the pencil's paint, the rubber eraser, the finely ground graphite, the glue, and the metal bit that holds the eraser to the wood? And so on. This modest marvel is not the work of some polymathic craftsperson, but rather the price mechanism, which allows individuals all across the world to cooperate despite never meeting (and, Friedman significantly observes, possibly even hating each other).

Friedrich Hayek and Ludwig von Mises, both Austrian School economists, saw the economy as an information system that used pricing to integrate massive data on what people subjectively wanted where, when, and how badly. I disagree with these thinkers on a number of points, but I agree with their view of the economy as an information processing system based on the pricing mechanism. When we connect with one another through the economy, we speak and understand the language of money.

The economy's informative outputs, like those of any other complex information processor, must be compressed or decreased in comparison to what went in. This is related to the premise that entropy, or disorder, tends to rise with time, which is the cornerstone of current information theory as well as the unbreakable second law of thermodynamics.

The idea of increasing disorder in information systems may appear esoteric, but it is straightforward. A sunset photograph always leaves something out. The message is never properly conveyed by words. A map contains significantly less information than the land it portrays. This is the whole idea of information processing: photos, words, and maps help us communicate things we couldn't otherwise. However, we must be very careful to recognize the limitations of our summaries and to recognize that actual growth comes from confronting and overcoming those limitations. This is why photographers search out better equipment, languages change, and mapmakers' job never ends.

Money, like all other forms of information, is subject to this fundamental law. It's not an issue of whether it muddles its messaging, but how it does so.

Through an aperture, cameras receive data and create an image. People's decisions to buy, sell, or hold objects provide information to markets, which is used to determine a price. But what factors influence price determinations? Do prices transmit less information than they could, or information that isn't required? If that's the case, we can compare it to signal distortion or noise. And, just as a lens aids in the acquisition of a sharper image in a camera, a different type of money may aid in the capture of better information in the economy.

When we buy, sell, or hold securities in the market, we are continuously weighing alternatives. Would I rather have $5,000 or a lovely antique table, for example? The decision is actually much more difficult than it appears because I must consider persons other than myself when making it. For example, I might be in desperate need of $5,000 yet despise the table.

However, if I believe that someone in the marketplace is willing to pay $7,500 for the table, my stated choice will change. With a $2,500 profit in mind, I'll tell the market that I prefer the table to $5,000, despite the fact that this is completely false. I'd rather have $7,500 than $5,000.

This technique appears efficient if we want prices to inform us what the worldwide top bidder will pay. However, it appears to be noisy and wasteful from another angle. After all, in a market, everyone knows more about themselves than they do about others. So you'd think we'd want markets to collect the unique information that each actor has to offer: How much do you want the table? Instead, the global market requires us to speculate on what the world's wealthiest table enthusiast might pay and factor that into our buying, selling, or holding decisions.

To put it another way, the global market forces us to think and communicate about things we have no special knowledge of. This is a substantial cognitive load when applied to many economic decisions. It also drowns out other price signal information. Markets do not find out what everyone believes about the value of things, even if everyone participates in them. They're simply interested in hearing what the highest bidders have to say.

My argument for gold follows in the footsteps of certain Austrian School economists (and now bitcoin). According to the Austrians, these difficult-to-mint currencies reduce people's cognitive burdens by making saving straightforward. Instead of socking money away and planning for our own futures, the threat of inflation with easy-to-mint money forces everyone to invest rather than save: we all have to "play the markets," guessing what the global highest bidders will pay for tech stocks, euros, and beachfront real estate next year. This is a difficulty with labor division. It suggests that those who are outstanding at something, like music, must spend less time generating fantastic music and more time spending money in an incompetent manner merely to keep their money.

But (and this is where I depart from Salzburg) markets forcing everyone to consider what other people will want next year isn't necessarily a negative thing. It may be argued that this is a benefit rather than a bug: injecting distributed intellect into the problem of money allocation across society is worth the mental capacity it requires.

The Austrians, on the other hand, are pointing to a true issue, because it is wasteful for individuals to have to evaluate complex topics about which they have no special knowledge. Regrettably, the fiat-dominated global market constantly requires us to do so. Moving to a world where everyone merely hoards hard money, on the other hand, would return the pendulum to the opposite extreme of individualism, inattention to others' capital needs, and compounding power concentration.

The real issue is a size disparity between an individual and the global (or other extremely huge) market environment in which they must set their rates. Because of the disparity in scale between people' narrow interests and the immensity of the market, the information they send to markets is noisy - similar to a microphone signal with too much gain or a photograph taken with too long an exposure.

However, if markets incentivize us to price goods in local rather than global terms, the situation could be very different. Then, while deciding whether to purchase, sell, or hold, we'd consider simply what ourselves and our communities require, rather than the needs of the entire global market. Because our communities are near by, this would not waste as much energy. We actually know quite a bit about them.

This explains the appeal of local currencies (despite their drawbacks, which I'll discuss shortly). Currencies that circulate locally rather than worldwide could bend the plane of focus of market players like a lens, collecting less noise data. Rather than attempting to estimate what an expert Manhattan dealer could pay for an antique table, a participant in a truly local economy would simply examine the table's value to themselves and those they know.

This shift in people's attention could lead to more healthy and self-sustaining economic communities. Global trade networks aren't going away, but significant local or community currencies could potentially build additional layers, contributing to a more richly textured global economy in accordance with the subsidiarity concept (the idea that decisions are best made nearest the people they impact).

Capturing locally relevant information in prices might encourage more local rather than global commerce. Instead of waiting for remote employment from the same few multinational agencies, brilliant professionals in Ohio or Nepal might work for more local enterprises, helping to bootstrap local economies.

It's also worth noting that "local currency" does not always have to do with location. Many intersecting currency networks could operate inside communities defined in a variety of ways.

It's difficult to say how much wealth this could generate, but it's evident that enhancing the informational quality of prices in this way could be huge. So why hasn't it happened yet? Many projects have done significant good, but none have fundamentally transformed the economy in the way I propose. Why hasn't the ease with which ERC-20 tokens can be produced resulted in a surge in community currencies?

Local currencies have always had a difficult time. People tend to wish to trade their money for a more universal type of money when they amass a substantial quantity. Even before they do it, they mentally translate: "How many dollars do I have in currency XYZ right now?"

This is understandable because we can spend our money wherever we want, not simply where we got it. We can feel richer as individuals by taking what we acquired in one society and transferring it to another where it can buy more. Yes, there are benefits to trade.

However, this is air leaving the balloon from the perspective of the first community, where the accumulation happened. Local currencies will only be able to support local economies if they can deter people from withdrawing money.

To put it another way, we need individuals to think in terms of local currencies rather than dollars or bitcoins in order for them to capture more information than the global economy. This may appear to be an additional cognitive strain, but recall that pricing everything in a local economy would be easier since you wouldn't have to consider strangers on the other side of the world's desire to pay.

The question is, how do you go about doing it? How could we create community-oriented currencies that people believe in rather than abandon?

The ability to express shared ideals is a powerful motivator for using community currency. Accepting the currency of a community would be a show of support. It would be a symbol of belonging if you spent it. And the resulting economy would reflect the community's particular ideals.

However, withdrawing cash from the system must come at a cost (either a direct cost or a visible opportunity cost) in order to retain this unique, local information – this representation of specific, shared values – against the winds of global economic forces. And, in order to be sustainable, that cost would have to be more than a speculative belief in rising prices. (Sorry, but HODLers aren't a genuine group.)

Existing and developing technology will allow us to experiment with currency administration more quickly than ever before. Making local and community financial systems semipermeable will be crucial. We want them to store energy, similar to efficient internal combustion engines, while also breathing and communicating intelligently with the outside environment, similar to biological membranes with transport proteins. Two incentive systems pointing in that direction are shown below.

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