View source for Frederick Soddy’s Contribution to the Ecological Economics of Money

== Discussion ==

By By Kristofer Dittmer:

"Since the publication of The Entropy Law and the Economic Process (Georgescu-Roegen 1971), an important current of ecological economics has concerned the application of the second law of thermodynamics to economic analysis. Insofar as monetary theory is concerned, however, the main contribution to the entropic perspective remains the work of Frederick Soddy, the English radiochemist. Awarded the Nobel Prize in chemistry in 1921, Soddy dedicated the second half of his life to economics. He denounced the widespread tendency to confuse money with true wealth, which, he argued, was incorporated in goods and services, whereas money was merely a claim on such wealth. In making this argument, he acknowledged the influence of John Ruskin (Soddy 1922; 1933), but can more broadly be said to have followed in the tradition of the “many 19th-century economists [who] distinguished material welfare from what Thorstein Veblen called ‘pecuniary’ wealth. (...) The distinction between ‘real wealth’ and financial claims was a central theme of Friedrich List’s National System of Political Economy (1841), Calvin Colton’s Public Economy for the United States (1848) and the American School of technological and protectionist writers in general.” 

Soddy’s advance upon this dual understanding – which goes back to Aristotle’s
Politics (I.10) – was arguably to apply the principles of thermodynamics to conceptualize physical wealth as a flow, constituted by degradable energy and matter subject to decomposition, rather than something that can be saved, or accumulated indefinitely at compound interest. As he put it: “You cannot burn [coal] and still have it, and once burnt there is no way, thermodynamically, of extracting perennial interest from it. Such mysteries are among the inexorable laws of economics rather than of physics. With the doctrine of evolution, the real Adam turns out to have been an animal, and with the doctrine of energy the real capitalist proves to be a plant. The flamboyant era through which we have been passing is due not to our own merits, but to our having inherited accumulations of solar energy from the carboniferous era, so that life for once has been able to live beyond its income” (Soddy 1933: 30).
 
In the following subsections, we will discuss three aspects of money, namely the debt relation, the money thing, and the politics of money. Each aspect is associated with a component of Soddy’s natural science perspective on money, respectively: the second law of thermodynamics, the first law of thermodynamics, and the comparison with physical scales of measurement.

===The debt relation and the second law of thermodynamics===

Soddy focussed much of his critique of the monetary system on the social convention of compounding interest payments. As he put it: “You cannot permanently pit an absurd human convention, such as the spontaneous increment of debt [compound interest], against the natural law of the spontaneous decrement of wealth [entropy]” (Soddy 1922:30, as cited in Daly 2011: 6). He criticized what he saw as the collective delusion that society as a whole could live off interest, an idea made popular with the war bonds of the Great War (cf. Martinez-Alier 1987: 128-31). People’s desire to hold wealth was limited, because wealth – subject to the forces of entropy – perishes with the passing of time. Therefore: “What they desire is not wealth, but debts that do not rot, that are not expensive to keep up and which bring in perennial interest. Individual wealth more and more tends to take the character of legal instruments and agreements – such as money, national debt, loans to and investments in industry, – which determine the distribution of the national revenue as among individuals.” (Soddy 1931: 25) For conceptual clarity, it is important to understand that what Soddy primarily criticizes here is the interest-bearing debt relation, not money as a medium of exchange. The interest-bearing debt relation is defined by the quantification of the obligation of a debtor to a creditor by means of a unit of account, or money of account. Once quantified, a debt can become subject – depending on social practice – to the mathematical calculation of simple or compound interest.

We will now make a brief historical detour to clarify the fact that Soddy’s target – the contradiction between the mathematics of debt and the laws governing natural growth – is an ancient phenomenon. In the third millennium BCE, the temples and palaces of Sumer developed a money of account denominated in silver weight, setting the value of a unit of silver “equal to the monthly barley ration and land-unit crop yield” (Hudson 2004: 99). Based on the public temples and palaces, the Mesopotamian economies were mainly redistributive, but nevertheless “mixed ‘public/private’ economies” (ibid.: 104; see Renger 2011 on the economic periodization of Mesopotamian history). On the basis of the accounting equivalence, both weighed pieces of silver and bushels of barley, “and a few other essentials” (Hudson 2004: 100), could be used as means of payment (cf. Renger 2011: 24-6).

However, contrary to the orthodox myth of barter, “[e]xchange in Bronze Age Mesopotamia (4500–1200 BC) was conducted along lines similar to those that anthropologists have found in many parts of the world: not by payment on the spot but by running up debt balances. From gift exchange through redistributive palace economies, such balances typically were cleared at harvest time, the New Year. He was contemptuous of professional economists: “The very term used by orthodox exponents of monetary science –
monetary policy – is sufficient to condemn them. For whoever would talk of a
weights and measures policy ” (1933: xvi, italics in original). 
Given his Ruskian influences, Soddy surely understood that money measures something fundamentally different than physical scales of measurement; not an objective reality existing independently of humans, but subjective values existing only in the human mind. To nevertheless defend his analogy, Soddy would have had to argue that there objectively exists an interpersonally homogeneous mental ‘substance’ of valuableness or utility, that can be divided into discrete quanta by the application of a monetary measurement scale. Whereas the philosophy of value is largely beyond the scope of this dissertation, more relevant here is Soddy’s claim that the creation of money things – which, as we have argued, by their essence have no solid basis in physical reality – and the determination of their value could, by means of monetary reform, become as depoliticized as “the absolute determination of the standards of weight, length, and volume” (1934: 169). 
Against this, we may note that even Soddy’s own prescription to maintain constant the value of money would be a politically determined, contentious objective. We may also follow monetary sociologists in arguing that money has never been, and can never be made to be, a neutral reflection of some ‘underlying’ reality, whether of ‘real’ exchange relations between commodities as in neoclassical economics, or of non-monetary social relations of production and exchange as in Marxism (cf. Ingham 2004b). Neither, may we add, can money become a neutral reflection of the biophysical metabolism of societies. It appears more adequate to think of the nature of money as “inherently unstable” (Ingham2004b: 202). Money’s relative scarcity, and therefore its value, can be partly understood as determined through social struggles between debtors (entrepreneurs and consumers) and creditor capitalists over the real rate of interest, often in the shape of struggles over inflation.

The degree of stability of the price level therefore represents the degree of power equilibrium between social classes. Furthermore, financial innovation of ‘near-moneys’ (see section 6.5), and efforts to create alternative local currency networks, suggest that money is an essentially contested social phenomenon. To advance the understanding of the nature of money in ecological economics, it is therefore necessary to deepen the engagement with those social science disciplines that do not conceive of money as politically neutral. 

This does not include neoclassical economics, which is associated with a concept of neutral money that itself plays a performative role in the social struggle over money (Ingham 2004b: 198). More generally, as Anderson and M’Gonigle argue, if we revert the current tendency of what goes for ‘ecological economics’ to increasingly adopt the framework of neoclassical economics
“the field would actually be able to explore seriously the economic practices needed for an ecologically balanced and socially equitable ‘steady state’. What might a cost–benefit analysis look like without using capital as the single denominator? What new forms of economic exchange (community currencies, cooperatives, complementary trade, and so on) might minimize entropic effects while supporting dynamic local economies that generate newly understood forms of social and ecological welfare? (...)” (Anderson and M’Gonigle 2012: 44)."<br />
— [https://www.academia.edu/10016673/Alternatives_to_Money_As_Usual_in_Ecological_Economics_A_Study_of_Local_Currencies_and_100_Percent_Reserve_Banking_PhD_thesis_ Alternatives to Money-As-Usual in Ecological Economics: A Study of Local Currencies and 100 Percent Reserve Banking] (PhD thesis)

[[Category:Thermodynamic Efficiencies]]

[[Category:Money]]