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-Roegen1971), an important current of ecological economics has concerned the application of thesecond law of thermodynamics to economic analysis. Insofar as monetary theory isconcerned, however, the main contribution to the entropic perspective remains the work ofFrederick 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 widespreadtendency to confuse money with true wealth, which, he argued, was incorporated in goodsand 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 besaid to have followed in the tradition of the“[m]any 19th-century economists [who] distinguished material welfare from whatThorstein Veblen called ‘pecuniary’ wealth. (...) The distinction between ‘realwealth’ and financial claims was a central theme of Friedrich List’s National Systemof Political Economy (1841), Calvin Colton’s Public Economy for the United States(1848) and the American School of technological and protectionist writers ingeneral.”

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 wealthas a flow, constituted by degradable energy and matter subject to decomposition, ratherthan something that can be saved, or accumulated indefinitely at compound interest. As heput 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 areamong the inexorable laws of economics rather than of physics. With the doctrineof evolution, the real Adam turns out to have been an animal, and with the doctrineof energy the real capitalist proves to be a plant. The flamboyant era through whichwe have been passing is due not to our own merits, but to our having inheritedaccumulations of solar energy from the carboniferous era, so that life for once hasbeen able to live beyond its income” (Soddy 1933: 30).

In the following subsections, we will discuss three aspects of money, namely the debtrelation, the money thing, and the politics of money. Each aspect is associated with acomponent of Soddy’s natural science perspective on money, respectively: the second law of thermodynamics, the first law of thermodynamics, and the comparison with physicalscales 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 ofcompounding interest payments. As he put it: “You cannot permanently pit an absurdhuman 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 societyas a whole could live off interest, an idea made popular with the war bonds of the GreatWar (cf. Martinez-Alier 1987: 128-31). People’s desire to hold wealth was limited, becausewealth – 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 tokeep up and which bring in perennial interest. Individual wealth more and moretends to take the character of legal instruments and agreements – such as money,national debt, loans to and investments in industry, – which determine thedistribution of the national revenue as among individuals.” (Soddy 1931: 25)For conceptual clarity, it is important to understand that what Soddy primarily criticizes hereis 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 canbecome subject – depending on social practice – to the mathematical calculation of simpleor compound interest.

We will now make a brief historical detour to clarify the fact thatSoddy’s target – the contradiction between the mathematics of debt and the laws governingnatural growth – is an ancient phenomenon.In the third millennium BCE, the temples and palaces of Sumer developed a money ofaccount denominated in silver weight, setting the value of a unit of silver “equal to themonthly barley ration and land-unit crop yield” (Hudson 2004: 99). Based on the publictemples and palaces, the Mesopotamian economies were mainly redistributive, butnevertheless “mixed ‘public/private’ economies” (ibid.: 104; see Renger 2011 on theeconomic periodization of Mesopotamian history). On the basis of the accountingequivalence, both weighed pieces of silver and bushels of barley, “and a few otheressentials” (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 AgeMesopotamia (4500–1200 BC) was conducted along lines similar to those thatanthropologists have found in many parts of the world: not by payment on the spot but byrunning up debt balances. From gift exchange through redistributive palace economies, suchbalances typically were cleared at harvest time, the New Year. He was contemptuous of professional economists: “The very term used by orthodoxexponents of monetary science – monetary policy – is sufficient to condemn them. Forwhoever would talk of a weights and measures policy ” (1933: xvi, italics in original). Givenhis Ruskian influences, Soddy surely understood that money measures somethingfundamentally different than physical scales of measurement; not an objective realityexisting independently of humans, but subjective values existing only in the human mind. Tonevertheless defend his analogy, Soddy would have had to argue that there objectivelyexists an interpersonally homogeneous mental ‘substance’ of valuableness or utility, thatcan 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, morerelevant 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 theirvalue could, by means of monetary reform, become as depoliticized as “the absolutedetermination of the standards of weight, length, and volume” (1934: 169). Against this, wemay note that even Soddy’s own prescription to maintain constant the value of moneywould be a politically determined, contentious objective. We may also follow monetarysociologists in arguing that money has never been, and can never be made to be, a neutralreflection of some ‘underlying’ reality, whether of ‘real’ exchange relations betweencommodities 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 aneutral 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 asdetermined through social struggles between debtors (entrepreneurs and consumers) andcreditor capitalists over the real rate of interest, often in the shape of struggles overinflation.

The degree of stability of the price level therefore represents the degree ofpower equilibrium between social classes. Furthermore, financial innovation of ‘near-moneys’ (see section 6.5), and efforts to create alternative local currency networks, suggestthat money is an essentially contested social phenomenon. To advance the understandingof the nature of money in ecological economics, it is therefore necessary to deepen theengagement with those social science disciplines that do not conceive of money aspolitically neutral. This does not include neoclassical economics, which is associated with aconcept of neutral money that itself plays a performative role in the social struggle overmoney (Ingham 2004b: 198).More generally, as Anderson and M’Gonigle argue, if we revert the current tendency ofwhat goes for ‘ecological economics’ to increasingly adopt the framework of neoclassicaleconomics “the field would actually be able to explore seriously the economic practices neededfor an ecologically balanced and socially equitable ‘steady state’. What might acost–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 supportingdynamic local economies that generate newly understood forms of social andecological welfare? (...)” (Anderson and M’Gonigle 2012: 44)." (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_?email_work_card=title)