Fire vs. Water Economies

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Ran Prieur, on the role of Demurrage-based currencies in the transition from "Fire" to "Water" economies


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Ran Prieur:

"It's hard to explain demurrage currency, because it works by creating an economic system fundamentally different from the one we're used to. I'm going to call these two systems fire economies and water economies. (Coincidentally, there is already an acronym FIRE for "finance, insurance, and real estate", the main elements of the speculative bubble economy that replaced the manufacturing economy in America after domestic oil peaked in the early 1970's.)

In a "fire" economy, money makes money, the same way that fire catches more things on fire. A very small fire is hard to keep going, but a large fire is hard to put out, and it tends to grow and consume everything in its path. There's a saying: turning ten dollars into twenty dollars is very difficult, but turning ten million into twenty million is inevitable. This is not a natural law but a human law, created by human rules. The two big ones are interest and rent. Both depend on deeper rules that money and land can be "owned" by someone who is not using them, and on top of that, they allow the "owners" to leverage their wealth/power into more wealth/power, by charging fees to non-"owning" users. The result is a giant river of money flowing from the have-nots to the haves, so that wealth and poverty, power and weakness, are in positive feedback loops. Because the only negative feedback is collapse, collapse is inevitable, and often violent.

In a "water" economy, wealth and poverty have negative feedback, and masses of money are like waves in the ocean -- the higher they get, the more they are pulled down by gravity, and the lower the troughs get, the more they are filled in. There are still waves, even big waves, but the waves move around, and individual water molecules are constantly moving up and down. It's easy to make money because it's easy to lose money. In fact, in a system without perpetual growth, the only way to have upward mobility is to have equal downward mobility.

We can build a water economy simply by setting up rules that make concentrations of money shrink over time. If this is the normal behavior of the system, and if everyone knows it, then people who find themselves with extra money will not hoard it, but spend it buying goods and services from people with less money, and then those people will spend it instead of hoarding it, and the wave will keep moving. And because negative feedback is built in, the system has equilibrium, and economic collapse is not necessary.

So how do we keep concentrations of wealth shrinking? The way it's been done historically is by setting up money itself to have built-in depreciation. This Charles Eisenstein chapter, The Currency of Cooperation, covers some examples. Another is the Brakteaten system. And several readers have argued that the same thing could be done with inflation, although I think their point was, "Inflation does the same thing as demurrage, inflation ruins economies, therefore demurrage is bad."

The difference is in the context. What we know as "inflation" is not a planned permanent mechanism to create negative feedback in wealth. It's a temporary unintended consequence of an economy designed to create positive feedback in wealth. Interest leads to runaway lending, which creates more and more imaginary money, which leads governments to print more money to keep up with it, so each piece of money is worth less. This is negative feedback, but it's not a negative feedback system. It's not an ocean of water, but water thrown on a fire, and it paradoxically increases the flames, as the money-concentration interests become desperate and extreme in their attempts to continue the "growth" that they feel entitled to." (http://ranprieur.com/archives/022.html)