Economic sciences/3. Financial relations
Ph.D.
(Engineering) Bayakin S. G.
Siberian Federal University,
Krasnoyarsk, Russia
FINANCE –
ENERGY BALANCE
Abstract
This study addresses
the laws and rules of the functioning of contemporary socio-economic systems. Major
emphasis is placed on energy as the main component of the existence and
development of systems. More accurate notions of commodity and money are given
in terms of philosophy. A scheme of the finance-energy balance of a country, a
union, a system has been proposed and substantiated. The study analyzes the
laws of monetary circulation. The following new notions are introduced: the
food-energy budget (FEB), based on
the well-known notion of energy budget (EB), and the energy for development, Em, as a sum of EB + FEB.
The energy unit is
proposed as a standard monetary unit, and the law of monetary circulation is
expressed as the following system of equalities:
∆M = ∆Å
Ì = Em or differentially: ∂M /∂E=1
where ∆M is a monetary unit, ∆Å is an energy unit, Ì is the quantity of money, Em is
the energy for development (Em = EB + FEB).
FINANCE – ENERGY BALANCE
Over the past
century, energy and economic crises have occurred several times, either in turn
or simultaneously, complementing each other. They start in different countries,
subsequently spreading throughout continents and involving the world community.
Having gone through a phase of some stabilization, crises occur again and
again, with increasing frequency. Representatives of the international economic
and political community gather at top-level forums to put forward and discuss
various ideas of stabilizing the global economic system, but no effective
solutions have been found yet. Unfortunately, contemporary economics has abstracted
itself from the material world, and the financial world has abstracted itself
to an even greater extent.
For the past three
years, the idea of stabilizing the economy through the recovery of the lost monetary
standard, including the use of an energy unit, has been several times proposed
at world summits, but has not been developed or supported. Economists and
politicians have ignored physicists. The world, however, is primarily based on
the laws of nature and only then on the rules invented by Homo sapiens for the
human community.
This study is
another attempt to address economic processes in terms of natural science and
propose a constructive solution.
Energy as the basis of life
The main and,
actually, the only source of energy in the Solar System for the Earth’s
ecosystem, Homo sapience, and human community is the Sun. For millions of
years, solar energy, via photosynthesis, has accumulated on the Earth as energy
stocks. The constant inflow of solar energy keeps the planet ecosystem
functioning, which ultimately supports the life of Homo sapiens and human
community.
In the economic
activity, Homo sapiens use various energy sources to attain the end result. The
result usually has the form of commodities: food or other goods, or services
such as transportation etc., which are ultimately aimed at supporting and
improving the life of Homo sapiens.
The intellectual
product occupies a special position. At the present time, it cannot be
physically measured and the energy expended on its production cannot be
accurately determined. The intellectual product can be treated as an amplifier,
programmer, catalyst or, even, detonator of different processes in the
community economic activity.
The original source of any kind of energy on the Earth is the sun. Photosynthesis,
which is one of the basic processes on the Earth, initiates cycles of carbon,
oxygen, and other elements, providing material and energy basis for life on the
planet. Photosynthesis forms plants, and then plants and solar energy enable
the formation of fauna and Homo sapiens. Photosynthesis is based on the
transformation of light electromagnetic energy into chemical energy. This
energy ultimately enables conversion of carbon dioxide into carbohydrates and
other organic compounds, accompanied by oxygen release. Photosynthesis is a
source of nutrients for all living organisms, also providing humans with fuel
(wood, coal, and oil), fiber (cellulose), and innumerable useful chemical
compounds. Carbon dioxide and water bound during photosynthesis are responsible
for the formation of about 90-95% of the economic part of the harvest. The
remaining 5-10% is formed by mineral salts and nitrogen taken up from the soil.
Carbon bound in organic substances due to photosynthesis annually
amounts to 8·1010 t and the annual production of cellulose reaches
1011 t. Owing to photosynthesis, land plants annually produce about
1.8·1011 t of dry biomass, and, although one cannot measure exactly
the yield of plants growing in the Global Ocean, it can amount to about the
same mass. The contribution of tropical forest reaches 29% of the total
production of terrestrial photosynthesis and that of forests of all types amounts
to 68%. Photosynthesis of higher plants and algae is the only source of
atmospheric oxygen – O2.
The emergence of the mechanism of water oxidation followed by formation
of O2, which took place on the Earth about 2.8 billion years ago,
was the most important event in biological evolution: sunlight became the main
source of free energy of the biosphere and water turned into a virtually
unlimited source of hydrogen for the synthesis of substances in living
organisms.
The annual increase in the solar energy stock in the form of products of
photosynthesis amounts to about 1.6 · 1021 kJ, and current energy
consumption by humankind is about 10 times lower. Yet, photosynthesis uses not
more than 0.1% of the total physiologically active energy of the radiation incident
on the Earth’s surface.
Fossil fuel (coal, oil, gas, etc.) is also a product of photosynthesis,
but this product has been stored for an extended period of time, and annual
consumption of fossil fuel at the end of the 20th century was almost
equal to the biomass increment. Thus, humankind
has approached the negative carbon balance on the Earth.
Other types of energy used in human activity, such as water power,
energy of wind, tides, geysers, and other natural forces, are also formed due
to transformation of solar energy and the Earth’s thermal resources.
A special position is occupied by nuclear energy, but even in this case
one can assume that nuclear fission of heavy elements was preceded by nuclear
synthesis caused by the sun or a similar source of highly concentrated energy.
These arguments lead to the
logical conclusion that energy is needed for anything to occur in the world,
especially for transformations performed by Homo sapiens. There is no doubt
that all material objects either contain energy or energy has been used to
create them. Thus, “energy component”
can be regarded as the main property of any commodity, product, or service. The
energy component is a sum of the energy contained in the commodity – “energy content” and the energy expended
to produce it – “energy inputs”. Depending
on the type of the commodity, the energy component can consist of energy
content only, for example, in the case of carbon, firewood, electric power,
certain food products, etc. On the other hand, it can consist of energy inputs only
in the case of primary metal, inert materials, etc. The ratio of the components
can vary too, for instance, for goods made of wood, fabrics, plastics, etc.,
i.e. anything that can burn or be oxidized and release energy. Based on these
notions, one can easily determine the minimum life-support value of any
commodity as its energy content.
These
arguments lead to a definite conclusion: ENERGY is the main and, sometimes, the
only property of the commodities supporting life of Homo sapiens on the Earth
and, thus, the basis of economy.
Material-informational
dualism in the financial system
The contemporary economic system is based on the financial
system, which is in turn based on money. The essence of money has not been determined
unambiguously so far.
The definition of
commodity-money relations was first given by Adam Smith and then by Karl Marx,
and many other scholars subsequently used the following definition of money: “Money
is some commodity that serves as the general equivalent for all other
commodities”. This is the definition of
the commodity money. Hence, the theory of money, which defines money as some
commodity, has been termed the commodity money theory.
This idea, however, has long been opposed by another
one, suggesting that money is some information. The first to express this idea
was Montesquieu, and then it was modified to the quantity, nominalistic, state
and various other theories of money. These are all different variants of the
information theory of money, which is based on regarding money as some
information rather than commodity.
In contemporary history the situation with the theory of money is as
follows.
In the USSR and other socialist countries, the official ideology was
based on the commodity money theory, but it was virtually the information
system. The Western doctrine was wholly based on the quantity (information)
money theory, but it was actually the commodity system. In both cases, the
declared theoretical basis was different from practice.
In the West, the monetary-banking system has always been based on the
commodity money theory.
Originally, a market is the place where sellers and buyers meet, trade,
and come to terms. However, since the time when stock exchanges were
established, “market” terminology has defined the market as a play area, and
sellers and buyers have become players. The goal of any game is to outsmart and
deceive the adversary. An essential negative factor in this market play is the
presence of numerous money substitutes in the form of securities. Thus, the
main reason for the contemporary economic crises is most certainly the
disproportion between the play money supply and the quantity of actual goods in
circulation.
The socialist administrative monetary-banking system was actually based
on the informational character of money. Special calculations determined what
and how much a Soviet human needed for his/her life support, the content of
his/her basket of goods was priced, and salaries were fixed accordingly, their
range being very narrow for different groups of society or rather wide for the
select few.
In the monetary sphere, there was a fundamental discrepancy between
theory and practice both in the capitalist (Western) world and in the socialist
society.
Under current conditions, the issue of resolving the
material-informational dualism in commodity-money relations is becoming
increasingly urgent for both philosophical and practical purposes, but no
understandable and practicable solutions have been proposed yet.
Based on the
conclusion about the interrelationship between the commodity and energy, one
can logically derive a notion of commodity:
Commodity is an object or an aggregate of objects
necessary for Homo sapiens to develop, or an object plus information.
Thus, the notion of
commodity now unites and determines the interactions between the matter,
energy, information, and Homo sapiens. The definition of commodity unites two
notions: object and information. The components matter and energy define it as
an object. The informational component, as a property of the object, determines
the degree to which it is necessary for Homo sapiens.
In order to
exchange goods, to allow the property rights to be transferred from one human
to another, to produce new goods, to create new objects and living conditions,
and, generally speaking, to let humankind develop, Homo sapiens in different
parts of the world invented an equivalent for commodities – money.
Based on the fact
that both commodities and money are derivatives of the activity of Homo sapiens
and are necessary for Homo sapiens only, within the framework of the above arguments,
I propose the following definition of money:
Money is a universal property of the commodity, which
corresponds to the degree of its being necessary for Homo sapiens. It cannot
exist without commodity or Homo sapiens.
The development of the above argument that the main and, sometimes, the
only property of the commodities circulated by Homo sapiens is energy, suggests
an equally indisputable conclusion that the
two properties of commodity – energy as a physical property and money as an
informational one – are UNITED.
Thus, under current conditions, material-informational dualism in
commodity-money relations can be regarded as an anachronism. As for the financial
systems based on either commodity or information doctrine, they are doomed to
degradation, which has been confirmed by the contemporary history of financial
crises occurring in countries with different state and political systems.
Money theories, laws,
and monetary standards
To develop these
arguments, it would be reasonable to consider and briefly analyze the basic
theories of money, which were put forward as early as 16-18 centuries, during
the genesis of classical political economy.
Money theories
The metallistic money doctrine was developed in the early period of contemporary history and played a
progressive role in the struggle to prevent debasing of coins (a reduction in
the precious metal weight). The most significant part in its advancement
belongs to mercantilists, who developed the doctrine of metal coins of full
value as national wealth. Metallists’ mistake was that they equated money to
goods and did not understand the difference between circulation of money and
commodity exchange. Representatives of the metallistic theory denied the
possibility of substitution of the token money for metal money of full value in
the domestic circulation.
The nominalistic money doctrine was developed by critics of mercantilism, who negated the commodity nature
of money. Its representatives argued that money is just a
token, which has nothing to do with the goods. Nominalists focused on the
analysis of the functions of money, as a means of circulation and an instrument
of payment, allowing a replacement of metallic money by paper money. The main
mistake of advocates of the nominalistic theory was that they negated the
commodity nature of money. Whereas suggestions based on the metallistic theory
hindered the introduction of paper money, nominalists’ proposals could cause
inflation buildup.
The quantity theory of money stated that the quantity of money should influence the level of
commodity prices. Its early representatives were C. Montesquieu in
France and D. Hume in England. In the 20th century it was developed
by J.M. Keynes in Great Britain, I. Fisher in the USA, G. Cassel in Sweden, M.
Friedman in the USA, and other economists. The
quantity theory of money establishes a direct relationship between the increase
in the quantity of money in circulation and a rise in commodity prices. M.
Friedman, the leader of monetarism, one of the main lines in the contemporary
neoclassical economic theory, argued that any government intervention in the
circulation of money is fruitless and harmful. Hence, the main suggestion
against government intervention in economy is to keep the quantity of money
increasing at a steady rate (about 3% a year), irrespective of economic
conditions.
Laws of monetary circulation
The
functioning of money is supposed to obey certain objective principles. The basic
ones have been formulated as K. Marx’s law, the Copernicus law (Gresham’s law),
the Fisher equation, and the Cambridge equation.
K. Marx’s law of monetary circulation is expressed by a basic equation, determining the
main parameter, M – quantity of money.
MV=PT
The Copernicus
law – Gresham’s law was formulated
in the 16th century almost simultaneously and independently by Nicolaus
Copernicus, a Polish thinker, and Thomas Gresham, an English financier. The law
states that if there are two forms of money in circulation, “bad” money drives
“good” money out of circulation. People will use more stable (“good”) money as
a means of hoarding and, thus, take it out of circulation. Money that has
unstable value, debased (“bad”) money will be used in transactions and for
payment.
The Fisher equation is named after
Irving Fisher, an American economist. This equation describes the factors
determining the quantity of money necessary for normal functioning of market
economy. The equation has the following form: M ×
V = P × Q.
The Cambridge
equation was formulated in the 20th century by
Arthur Pigou, an English economist. It has the following form:
M = k × P ×
Q,
where k
is the portion of the product (P × Q) that will be held as
liquid assets, V is the velocity of money, P is the price level,
and Q is the quantity of goods
sold.
Similarly to the Fisher equation, the right-hand part
of the Cambridge equation shows money demand and the left-hand one – money supply.
K. Marx’s law, the Fisher formula, and the Cambridge
equation only provide guidelines for the answer to the most important question
of the market system: How much money should be issued to ensure normal economic
development? All of them, however, have two drawbacks: there is no monetary standard
and their statistical data are subjective.
Regulation of money circulation.
Monetary policy is the regulation of money supply to curb inflation, to
reduce unemployment, and to stimulate economic growth. It is based on the
ability of the monetary and credit system to exert significant influence on the
solutions to problems of macroeconomic instability.
The policy of “expensive money” is conducted to
control inflation. A reduction in money supply causes a rise in the loan
interest rate. This can lead to a decrease in the inflation rate, at the same
time, reducing investments and increasing unemployment.
The aim of the policy of “cheap” money is to stimulate
economic growth. Money supply is increased and the loan interest rate
decreased. The loan becomes more affordable, investments and employment
increase. However, the disadvantage of this policy is higher inflation rates. The
main regulator of money circulation is the central bank of a country. To
increase the quantity of non-cash assets, more loans should be given, without
having to print more money.
The central bank uses three main approaches to
monetary regulation:
1.
Discount policy – a change in the discount rate.
2.
Open market operations.
3.
Changing legal reserve requirements.
These instruments are used to reduce or increase the
quantity of money. This is how the central bank regulates the investment flow,
the inflation rate, national currency rates, and, ultimately, the growth rate
of gross domestic product and the employment level.
Monetary standards. Gold and silver proved to be
the most suitable materials to function as money.
In 1944, the United
Nations Monetary and Financial Conference held in Bretton Woods (USA)
established the international monetary system. The Bretton Woods system was
based on an interstate financial gold standard currency.
The Bretton Woods system had the same set of elements as the gold
standard, but that was a transitional system. Gold was still a standard of
value, but US
dollars were used as the world’s new reserve currency. Until 1952 gold had been almost
solely used as bank reserves. Gold backed the US dollar, deficits in the
current accounts, and intervention.
The Bretton Woods system was followed by the Jamaica monetary system,
agreed upon by IMF countries at a meeting in Kingston (Jamaica) in 1976.
In April 1978, after the IMF countries had ratified this agreement, the
IMF statute was altered. As the USA position in the external market became
weaker as a result of reduction in gold reserves of the country, in 1971 – 1973
the international monetary system based on the US dollar’s fixed value against
gold collapsed. The US dollar was no longer the only reserve currency. The FRG
mark, the Japanese yen, the British and Swiss pounds, and, more recently, SDR,
ECU, and Euro also acquired the function of reserve currencies. On
August 1, 1971, dollar’s convertibility into gold was suspended and the
fixed dollar price of gold was cancelled officially.
ECU became a basket
of currencies for the European Monetary System (EMS) member states in March
1979. ECU was a paperless unit used in accounts of central banks of the EMS
member states. ECU was later replaced by Euro, also without an exact standard.
In order to
alleviate the problems of international liquidity, the International Monetary
Fund created a Special Drawing Right (SDR). The SDR value was initially
determined by the price of gold in US dollars (US$ 35 per ounce at that time).
In 1976 it was defined on the basis of the currency basket of 16 countries. In
1981, the
SDR unit was defined as a weighted sum of contributions of five major currencies: the US dollar, the
German mark, the French franc, the pound, and the Japanese yen.
The contemporary
monetary system of Russia functions in accordance with the Federal Law on the
Central Bank of the Russian Federation of April 12, 1995. The basic monetary unit (currency) is the ruble. There is no legally fixed
price of gold in rubles.
It is evident that
AT THE PRESENT TIME THERE IS NO MONETARY STANDARD IN ANY COUNTRY OF THE WORLD!
In the analysis of the history of theoretical
foundations for the contemporary monetary system, one cannot ignore the practical conclusions made by
the most prominent historical figures.
The significance of monetary policy was emphasized by
J.M. Keynes, an English economist: “There is no surer means of
overturning the existing basis of society than to debauch the currency.”
(1883-1946)
“All the perplexities, confusions,
and distresses in America arise, not from defects in their constitution or
confederation, not from a want of honor or virtue, so much as from downright
ignorance of the nature of coin, credit, and circulation.” said John Adams, the
second President and the author of the Constitution of the USA (1797-1801).
M.A.
Rothschild, a banker, expressed it in an even more definite way: “Give me
control over a nation’s currency and I care not who makes its laws.” (1743-1812)
Careful analysis
shows that the parameters constituting the laws considered above are based on
subjective statistical data, and their main parameter – the quantity of money –
is purely subjective. As the quantity of money is determined by the government
or the ruler, the laws of monetary circulation depend on the person signing the
document that starts money emission or on the interested party.
Hence, we arrive at
Aristotle’s conclusion: MONEY CAME ABOUT THROUGH AGREEMENT, NOT BY NATURE, BUT
BY LAW.
The analysis described above suggests the following
conclusions:
1. Money is a universal property of the commodity, which
corresponds to the degree of its being necessary for Homo sapiens.
1. There is no monetary standard in any of the states of
the contemporary world.
2.
The two properties
of commodity – energy as a physical property and money as an informational one
– are UNITED.
These conclusions logically give rise to the idea of
the FINANCE-ENERGY BALANCE.
Finance-energy balance
The idea is based
on three fundamental principles:
1. The law of conservation
and transformation of energy: “The total amount of energy in an isolated system,
whatever the processes occurring in the system, remains constant over time.
Energy can only be transformed from one state to another and be redistributed
among different parts of the system.”
2.
The law of the equivalence of mass and energy: (E = mc2 A.
Einstein)
3.
The main
instrument of economy is MONEY
THE MAIN PURPOSE OF
THIS IDEA is to achieve sustainable, crisis-free development of the economic
system (of a country and the world) by employing the principle of strict
correspondence between the quantity of circulating commodities and the quantity
of money in the system.
The balance between
energy and money in a country, a system, or the world can be addressed in terms
of a more general science – ecology.
Further arguments
require a definition of ecology, and E. Haeckel’s seems to be the most
appropriate, although it was written at the time when biology was a purely
biological science.
“By
ecology we mean the body of knowledge concerning the economy
of nature—the total relations of the animal to both its inorganic and
organic environment. In short, ecology is the study of all those complex
interactions referred to by Darwin as the conditions of the struggle for
existence.”
To show the main
idea, I propose presenting the major interrelationships as a scheme of the
finance-energy balance of a country, a union, a system.
Fig. 1 A scheme of the
finance-energy balance of a country, a union, a system
The economic potential of any country, union, or
system comprises the following principal components:
·
the territory receiving solar energy, which has stored energy resources
and renewable energy sources;
·
economically active population – human resources;
·
active portion of the national wealth – production facility;
·
national wealth – created and accumulated components of the sphere of human
activity;
·
intellectual (scientific, administrative) population, capable of
advancing all the components listed above.
In what follows we will use the following terms:
The energy for
development, Em – the
energy transformed and utilized by the economy of a country, a union, or the
world.
The energy for
creation, EÑ – the energy used
to increase national wealth and improve the conditions of human activity.
The energy for
destruction, Ed – the
energy used to destroy the sphere of human activity (war, destruction of the
ecosystem, etc.).
The contemporary
system cannot exist and develop without energy for development and its two
components: the energy for Homo sapiens (food) and the energy for economy and
production (fuel, electric power, etc.). The energy for economy and production
is usually measured in tons of equivalent fuel or terajoules. The conversion to
equivalent fuel (EF) is conducted by multiplying the amount of certain fuel by
a so-called heat ratio. Electric power generated by hydroelectric and nuclear
power plants is converted to EF based on the following estimate: 1 TEF =
2000-3000 kWh (depending on the efficiency of the power plant). The annual
consumption of electric power by the country’s economy is usually calculated as
energy budget (EB).
As food balance
will be calculated in the same units as EB,
it seems reasonable to introduce the notion of food-energy budget (FEB). Thus, the energy for development
can be presented as a sum of the two values: Em = EB + FEB
The scheme in
Figure 4 is an illustration of the following:
1.
The main source of the inflowing and stored energy is the Sun.
2.
The energy for development is the energy involved in economy: Em = EB + FEB.
3.
The energy for creation is the energy used to create the conditions for
human activity and develop its constituents. This is the difference between the
energy for development and the energy for destruction: EÑ = Em
- Ed .
4.
The energy for destruction, Ed,
is the portion of the energy for development with destructive functions:
deterioration of the territory, war and any other activities that destroy
energy sources, national wealth, population, etc. Importantly, the energy used
to destroy another system also destroys its own system.
5.
The export-import energy balance determines the degree to which the
system depends on external systems.
6.
The development, stability, and security of the system of a country or a
union are determined by the reserve, amount of transformed energy and the
export-import balance.
As, in this case, money is defined as a universal instrument of
commodity circulation and, hence, energy circulation, interactions between the
major components of the system can be presented as occurring via monetary
circulation, but the contemporary monetary system has two drawbacks that do not
allow one to do this:
The first drawback is that there is no monetary standard.
The second is that the laws of monetary circulation are subjective.
At the present
time, the functions of modern supercomputers enable accurate and detailed
simulation of almost any natural process. Economic processes can even be
modeled in real time and space, on a global scale. The question arises: Why has
not it been done yet?
Numerous attempts
to construct accurate mathematical models of the economy of a country, a union,
or the world have not been quite successful due to the lack of a pivot (a
reference point), because of the drawbacks mentioned above.
In contemporary
ecology and economy, energy can serve as a pivot and any mechanism of its
transformation, including money, can be a lever.
A real-time
computer model of energy fluxes inside the system would enable very accurate
control of the economy of the system as a whole.
The proposed
solution
Based on the above
arguments and the conclusion that the two properties of the commodity – energy
as a physical property and money as an informational one – are united to make a
universal instrument of commodity circulation and, hence, energy circulation, expressing
the monetary unit ∆M as an
exact physical quantity, in the general form ∆M = ∆Å (e.g., 1 Ruble = 1 kWh), and expressing the energy of development, Em, as a sum of the annual
energy and food-energy budgets (EB
and FEB), Em = EB + FEB, I suggest expressing the law of monetary
circulation as the following system of equalities:
∆M = ∆Å
Ì = Em or differentially: ∂M /∂E=1
where ∆M is a monetary unit, ∆Å is an energy unit, Ì is the quantity of money, Em is
the energy for development (Em = EB + FEB).
The monetary unit
can be compared to the standard at any point of payment, for example, for the
standard 1 Ruble = 1 kWh – at the point where the electricity meter is
installed. The cost of any commodity acquires a standard value as its own
energy content and the energy expended to produce the commodity.
The equalities ∆M = ∆Å and Ì = Em, as an absolute prerogative
of the government of a country, a union, or a system, are established and
controlled exclusively by the state.
The mission of the
proposed solution is:
1.
Construction of an extremely
accurate real-time computer model of the economy of a country, a union, the
world.
2.
Control of the
stability of the economic system in a country, a union, the world.
3.
The world leadership of the country initiating
modernization of the global monetary system (creation of new universal
international currency).
4. Stability of social guarantees such as 1 kWh = 1
Ruble; 1 liter of petrol = 8 Rubles; 1 loaf of bread = 10 Rubles; stable
municipal rates; etc.
5. Accurate
implementation of the national budget in internal and external payments.
6. Development of the positive aspects of the system:
environmentally friendly energy, ecological balance, rational economy,
comfortable conditions for human activity, humane policy.
The author would
like to express his gratitude to
E.A. Vaganov, M.C.
Zalikhanov, V.F. Shabanov – Full Members of the Russian Academy of Sciences,
V.S. Sokolov – Full Member of the Russian Academy of Education, Professors R.G.
Khlebopros and S.V. Biryukov, and V.I. Aralkin, D.Sc. (Economics)
for discussing the
main idea with the author, for their comments, constructive suggestions, and
encouragement.