This article is part of the b2o: an online journal Special Issue “The Gordian Knot of Finance”.
Functionalism, Token Economies, and Money Design: Slipping Past the Gordian Knot of Finance
Dick Bryan
It’s quite standard for orthodox explanations of money to go immediately to its three core functions: means of exchange, store of value and unit of account. Such a functionalist definition of money does not define what money is; just what its ideal social roles are.
The emergence of privately issued tokens, sometimes referred to as ‘crypto’, presents a significant challenge to functionalist framings of money. The concern here is not some holistic defense or critique of ‘crypto’, for there are so many tokens (the current estimation is 2.5 million[1]) and each has its own objective, its own protocol, and its own credibility. Some are best understood as creative and reliable record-keeping and trading infrastructure, others are best understood as memes or cultural expressions. Their quality and viability is variable. Instead, my concern is to explore the challenge to mainstream functionalist definitions of money, and ultimately to capitalist formalism, that come with the emergence of privately issued tokens.
Perhaps they point to the Gordian knot of finance as a specifically capitalist knot, and the solution is to build ways to go around it; not to try and unpick it.
Functionalism
The theoretical foundation of a functionalist approach is the proposition that the institutions that make up society, be they education, religion, family of the economy, all perform a purpose that maintains society as a stable system of norms and values. So, when money is defined by its functions, it is by reference to its ability to maintain social stability. For Durkheim, often credited with being the father of functionalism, a shortage of functional norms resulted in the growth of anomie and could over time even lead to the breakdown of social order and stability. We see, then, that a functionalist account of money immediately, embeds a conservative agenda that systematically delimits what gets called ‘money’. When we see the current Gordian knot, the appeal of anomie, at least in relation to money and financial design, starts to grow.
Before we move to alternatives to functionalism, it is important to see how functionalism systematically shuts down innovations in money and finance. Although the functionalist definition of money makes no explicit reference to the state, it has been clear for the last hundred years or so that money tied to the state – chartalist money relying on the state’s reputation, capacity for enforcement and underwriting capacities – represents the contemporary money standard. Functionalism is therefore tied to the capacities of the state, and alternatives without comparable governmental affiliations, be they crypto-based or other, become defined outside the category of money.
There are many examples where the state’s role is invoked as the delineator of ‘money’ and ‘non-money’. Are community or local currencies, such as Sardex or the Bristol pound, money? Generally, they are not defined as money; they get called ‘complementary’ currencies in that they are used to substitute for ‘real’ money in particular and limited contexts. They are seen by money conservatives to lack in any of three domains: a) they are only local (national scale is inserted into the functionalist criteria as an implicit condition of being ‘money’); b) many are digital (and so are currently thought of as existing outside of state financial regulation) and c) they are not recognized by the state as ‘legal tender’ (so they cannot be used in monetary relations with the state).
Does a token have to be stable in order to be money? The conventional answer is emphatically ‘yes’. Indeed, the claim is that state money is not just stable; it defines stability. A prominent argument is that bitcoin can’t be money because it is not a stable store of value; it is often called a ‘volatile speculative asset’. Leaving aside the fact that for many lengthy parts of the last 15 years – since bitcoin’s initial appearance – bitcoin has been by far a better store of wealth than bank deposits, why does volatility preclude something being a store of value? It may be considered a volatile store of value, but why is there the condition that money must be ‘stable’? If people are actually using the asset to store wealth, its volatility per se cannot be a constraint on its moneyness. Indeed, the question could eventually be posed as to whether bitcoin is volatile with respect to the US dollar, or whether it is the dollar that is volatile with respect to bitcoin?
There are further twists here, for connection to the state does not in fact always guarantee money’s stability. The Zimbabwean dollar, for example, has had an average annual inflation rate of over 600 percent per year over the past 20 years, reaching a peak rate in the global Financial Crisis in the billions, and at various times in that duration the government has ceased issuing dollars, letting other national currencies be used instead. Yet the Zimbabwean dollar is still called ‘money’, even though it clearly lacks money functionality, because of its connection to the state, though it is certainly not ‘functional’ for Zimbabwean society.[2]
Money or ‘moneyness’
Functionalism uses secondary criteria, such as state, scale, and stability, to create a binary differentiation of ‘real’ money from its various digital and local contenders. Yet in the practices of financial markets, the issue is really one of degrees and dimensions of ‘moneyness’, where the condition of moneyness is not legal tender, scale, or stability, but liquidity. Liquidity itself once meant how close to cash an asset is, so economics could define degrees of liquidity that start with cash-as-money (‘cash is king’) followed by a series of asset classes defined on the basis of their distance from cash: money in the bank is a bit less liquid, term deposits even less liquid, etc., on up to treasury bonds. This was the basis of definitions of money supply associated with central banks’ adherence in the 1980s to ‘monetarism’(i.e. measures such as M1 (money in circulation) and M2 (M1 plus savings deposits and mutual funds, etc.) that once dominated debates about monetary policy). The problem that became apparent was that these different measures started moving at different rates, leaving central banks unsure as to which version of ‘money supply’ they should be targeting. Yet this framing of money and liquidity remains dominant.
The other meaning of liquidity is how readily an asset can be sold at its ‘full’ price (the narrowness of the bid-ask spread); that is, whether instant sale requires a significant price discount or sale at full price takes significant time. This alternative definition is important, for as financial markets and communication technology develop, liquidity can be found outside of conventionally-defined ‘money’. One aspect of this is that cash, once the liquidity benchmark, has itself become less liquid – increasingly vendors refuse to handle cash, and various central banks have raised the possibility of fees for use of cash, to cover the costs of its provision. The other aspect is that certain financial markets, especially financial derivative markets, have such high turnover that their bid-ask spread is negligible: any asset can be converted to any other asset almost instantly and without the need to discount from the current price. Assets in these markets appear to have a degree of moneyness. Crypto markets are also achieving these liquidity conditions, particularly the largest tokens.
The point here is that derivatives and crypto tokens have moneyness in that they meet certain attributes of money. In the official functional binary, they are deemed ‘non-money’, but they are actually breaking down the coherence of that binary. Derivatives are designed to bridge financial categories, for example, between money and commodities (derivatives are themselves produced in financial houses, as commodities to be sold) and between debt and equity (total return swaps or convertible bonds have attributes of each financial claim). Similarly, crypto tokens are part financial assets, part money, and they can substitute for money in certain settings. The desire by central banks to exclude them from the definition of money has a clear state policy pragmatism: if their issuance cannot be controlled by central banks they are deemed outside the domain of stabilizing monetary policy – it is simpler to define them as ‘not money’. Yet central banks themselves are starting to introduce digital money, recognizing the virtues of blockchain technology to offer fast, verifiable transactions. With shifts in crypto ledger verification systems from proof of work to proof of stake, the energy costs of blockchain transactions are now lower than the costs of conventional financial clearing houses.
Functionalism may save us from ambiguity about money, giving greater apparent clarity to definition, but it does so by simply taxonomically precluding ‘real’ financial developments that are breaking down that clarity, so forcing that definition of money towards incoherence. This doesn’t, of itself, make privately-issued tokens either usable or coherent, but it must open the space where their potential role is addressed more openly.
Unit of account
The unit of account function of money is probably the least discussed, as it seems to be a passive function. Most explanations point to it as the unit in which records (accounts, ledgers) are kept, and immediately slip to the nomination of a national currency as the form of the unit of account (the baht is Thailand’s unit of account; the birr is Ethiopia’s, etc.).
Several critical issues slide by in this framing. First is the connection of the unit of account to the naming of a national currency. The baht is not a ‘function’ of money, it is a unit of denomination of (a particular) money, and that denomination is an insufficient condition for being a unit of account. What matters, when we think of the production and sale of a cup of coffee for $4, is not that it is denominated in dollars (a somewhat trivial insight), but that it ‘scores’ a 4, while a sandwich may score 3 times higher, and a bottle of water half. Economic and accounting practices and conventions specify the processes by which these relative scores are attributed, and money simply offers the units in which they are expressed.
J.M. Keynes, in his 1930 A Treatise on Money, using the term “money of account” rather than “unit of account”, contended that money of account is the “primary concept” of a theory of money.
Perhaps we may elucidate the distinction between money and money of account by saying that the money of account is the description or title and money is the thing that answers to the description. Now if the same thing always answered to the same description, the distinction would have no practical interest, but if the thing can change, whilst the description remains the same, the distinction can be highly significant. (emphasis in original) (Keynes, 1930: 3)
Keynes went on to the illustration that debt denominated in gold equal to the weight of the king varies with who is appointed king. But the point applies also to Zimbabwe: money (the thing) is changing in ways unrelated to the description. It is apparent, then, that popular depictions of the unit of account tacitly rely on precisely the functionalist presumption that ‘the same thing always answers to the same description’, such that the money thing and the unit of account can indeed stand in for each other.
However, if things financial, economic, and social are not stable, then this presumed passive function of money itself becomes volatile. A functionalist approach does not want to engage the possibility of disparity, and it will try to ignore emerging volatility until it expresses itself as a monetary crisis. Such volatility can have various origins. It can stem from a rapid buildup of assets on the books of central banks and raise the question of whether the underwriting of financial market stability is infinitely sustainable. Another challenge could be a looming failure of accounting conventions, for instance the inability to account for the value of intellectual capital, which makes up the predominant value of the world’s big tech companies, and hence the incongruity of these companies’ share prices remaining so exceptionally high relative to company earnings.[3] Another expression of failure, ‘external’ to current accounting would be the incapacity to deliver modes of measuring and recording that depict the real costs of environmental damage.
A further assumption in the functionalist depiction of a unit of account is the notion that there should be just one unit: just one way to attribute value, for a value monologic is functional to social stability. Two related issues arise here.
First, two countries with different currencies may well share a unit of account. Britain and the United States have different currencies, but they adopt basically – though certainly not completely – the same ways of measuring (accounting conventions; state levies and bounties). Indeed, it is only because they have this shared base that shifts in exchange rates can give information about ‘the economy’ rather than just about the money thing itself. Put simply, focusing on different currency denominations as different units of account exaggerates state autonomy and diminishes the underlying level of globality in economic processes.
Second, we should challenge the functionalist premise that a singular unit of account is itself an expression of social stability and consider whether it is actually a statement of power, asserting the hegemony of one discourse of value over all others. Specifically, the (single) unit of account in capitalist countries reflects capitalist modes of calculation and the rule of the conditions of profit. The coffee scores 4 and the sandwich 12 because these are the profitable number of dollar units at which these goods are supplied to the market. Corporate assets are, by convention, valued according to the expected future capacity to deliver profit (which is why the extraordinary valuations of the tech giants is such a transgression of coherence).
For most progressive political movements, challenging the unit of account is out of reach, so politics becomes the process of demanding the state modify the power of the rule of profit: to tax polluters and to subsidize the living standards of the poor, etc. One of the potential virtues of ‘crypto’ token systems, as privately issued ‘money’, is that they could trigger challenges to the state’s unit of account: a new ‘money’ could provide the space for new criteria for measuring the values of goods and of assets and liabilities.
At the base of all tokens are accounting practices: recording transfers on a reliable ledger. So defining a unit of account – or the protocol by which units of account will be socially defined and enacted – is one of their genesis design questions. The problem is, however, that most leading crypto designers are not seeing this potential. Bitcoin embeds no alternative ‘views’ on the unit of account, so it operates just as an aspiring contender with state monies, utilizing their units of account. Stablecoins, managed to maintain parity with the dollar, are heavily invested in treasury bonds as collateral, so they too operate within the units of account of state money.
Other crypto designers are rather entranced by the deceptive simplicity of Hayek’s libertarian economics, and his advocacy of private money competing with state money for popular use resonates with their deeper politics. But Hayek is by no means challenging the capitalist unit of account: indeed his challenge is to the propensity of states to meddle with the profit-based unit of account by ‘distorting’ market signals. We may consider whether we find here an economic basis for the alliance of libertarianism and authoritarianism that is so visible in political life right now.
To move away from a capitalist economic framework, we must start by challenging functionalist definitions of money and seek disruptive, but creative, reframings of what money can become. One such project, with which I am involved, uses financial technology and distributed ledgers to create postcapitalist protocol, designing the conditions of an economy with multiple, coexisting units of account and allowing members of a network to express which value criteria they wish to endorse. Perhaps some will support capitalist profit criteria, but others will support investments and outputs with environmental and social criteria embedded in their value propositions and ledger systems. The challenge is how to keep these multiple value systems coexisting and determined in distributed, not centralized, processes, and preclude collapse to a monologic. I invite you to read our recent book Protocols for Postcapitalist Expression (Bryan, Lopez and Virtanen 2023)[4] which seeks to build protocol to meet those challenges.
Dick Bryan is emeritus Professor in Political Economy at the University of Sydney where he has worked on the digitization of financial assets and its relation to financial risk. He is also Chief Economist at the Economic Space Agency, a digital ledger organization building the protocol for a postcapitalist economic network.
References
Bryan, D. Lopez, J. and Virtanen, A. 2023 Protocols for Postcapitalist Expression. London: Minor Compositions.
Keynes, J.M. 1930 A Treatise on Money. London: Macmillan.
[1] This compares with 180 national currencies and 334 million joint stock companies (companies listed on stock exchanges. In 2024, 5,300 new tokens are launched each day. See https://www.coingecko.com/research/publications/how-many-cryptocurrencies-are-there?utm_source=newsletter&utm_campaign=Data%2BVisualization&utm_medium=email
[2] A similar, though less extreme case could be made regarding the currencies of Turkey and Argentina
[3] See, for example, https://www.ft.com/content/308541a8-5f14-42c8-9b7d-e314059dadb4.
