When money did not exist, it was the gift to strengthen the bonds of a community, claiming reciprocity. Natural economy, as they name it.
Over time, the habit of postponing direct exchanges was born, measuring the various goods against a super partes reference good that had tangible, immediate value for everyone, like cattle or materials with unique physical properties.
It was the first step of an abstraction scale. From a potentially infinite series of particular objects, we move to a single object that represents them all and therefore stands at a higher conceptual level. To abstract comes from Latin ab-trahere, which means to separate: this first jump separates the acquired good from the one due. Since there is no longer a need to have what the other expects in exchange for what you want from him, exchanges become more accessible and numerous.
When pieces of gold, silver or copper take over the role of supergood, more practical to carry in the pocket than flocks and herds, the transition to a new regime begins: it’s the monetary economy. A gold coin makes perfect sense: its weight in noble metal gives it a very tangible material value. The same value can be impressed on the coin in the form of a number, to avoid the hassle of weighing it every time.
The number is the abstract entity by definition: it separates quantities from things. “Five” can indicate any five things. A number is a perfectly aerial symbol that tends to absolute independence. And in fact, the figure engraved on the coins one day detaches from the metal and moves to another support. We thus ascend the second step of the abstraction scale: a new separation dissolves the link between the value of money and the material that provided it.
The currency no longer contains the value in itself, so it becomes a trustee: you need someone to provide a guarantee for it. On the other hand, of course, trades become even more fluid. The mooring is dumped. From now on, any further innovation will no longer meet the physical obstacles that the metal posed. Heavy coins had to be carried and change hands materially; jotting down some numbers in a light transaction log is much easier.
And here we are on the third step of the abstraction scale: the number divorces from its support. Money becomes scriptural. Currency vouchers, spreading with the first banks in the late Middle Ages through the flourishing international mercantile circuits, are debt securities based on the issuer’s authority, no longer on the material value of the currency nor on its physical presence.
The credit economy begins, unleashing a new breed of increasingly abstract representations of money and capital: checks, bonds, stocks, plastic credit/debit cards, up to derivatives, i.e., promises to sell or buy underlying assets that may be abstractions themselves — for example, weighted averages of other assets (e.g. stock market indices).
At a certain point, however, a problem arises: how to assign a value to creatures so far away from any material concreteness? On the market, everything must have a price. And here comes the true power of mathematics.
In 1973 Fischer Black, Myron Scholes and Robert Merton devised a model for describing the dynamics of a derivatives market and determining prices. As always in our pseudo-science of economics, the starting postulates of their model are fanciful analogies inspired by the world of physics: for example, they assume that the prices of securities follow a Brownian motion just like fluids, and that one can buy and sell the underlying security of the derivative with sufficient continuity to rule out risk. Nevertheless, as very often, the shimmering differential equation the authors composed on these fragile supports appears so beautiful that the theoretical weaknesses and constraints upstream are soon forgotten.
The formula is adopted, takes a social life of its own. Fantasy becomes a reality. But beware: it is a game-like conventional reality, and sooner or later games must end.
The seemingly scientific doctrine unlocks the impasse, reifies a conceptual value and justifies a virtually infinite descent of abstractions.
The most destabilizing practices for global finance and economics live by abstraction: short selling to trade values you don’t possess, leverages to bet multiples of the stakes without money in your pocket, and the sadly known structured securities (generically known as ABS or Asset-Backed Securities) resulting from the mutation of credit relationships between individuals and banks into negotiable securities. It is the notorious practice of securitization, which authorizes to pack together and recycle the most disparate and desperate credits — mortgages granted to poor people to buy a house they cannot afford, offshore oil platforms insurances, broke countries bonds, etc. — and sell them to millions of savers in tiny fractions of unknown solvency. Hyper-abstract money that no one in the world could reconstruct the origin and value of.
Leaping towards an unreal paradise where things move instantaneously and cross each other without resistance, thanks to the magical lubricant of mathematics, with the blessing of the rulers and the applause of the public, the global economy has reached a stage consisting almost entirely of false, illusive values.
Some hints? The failed Lehman Brothers, the largest bankruptcy in US history and the symbolic spark of the crisis in 2008, had an exposure equal to 30 times the invested capital. The value of the financial market is estimated (no one knows for sure) between 0.7 and 2.2 quadrillion dollars against a global GDP of around 80 thousand billion: it means that at least 90% of its value does not exist (it is, indeed, an abstract thing). The global debt is estimated around 3 times the GDP, which would be meaningless enough, but actually the total debt is unknowable since the risk of many financial instruments is not calculable: remixes have cleaned it up like proceeds of crime, hiding original obligations and risks exactly as dangerous waste is removed and buried underground to fake integrity while poisoning someone else.
According to Andrew Lo, «in physics 3 laws can explain 99% of the phenomena, whereas in finance 99 laws do not explain more than 3% of the behaviors». In other words, finance is as scientific as astrology. Yet Scholes and Merton pocketed their Nobel prize in 1997, and their rowdy executors went on planting seeds of destruction everywhere in a technological circus drugged with multiplication, emulation, and veneration, with the blessing of chiefs and rulers. Traders vied to fire the most «complex, exotic transactions with strong leverage», as Fabrice Tourre, a Goldman Sachs repentant, defined them in his confessions, «without necessarily understanding all the implications of these monstrosities».
The transition from physical to virtual, the most decisive and universal abstraction leap, has greatly facilitated the prestidigitation.
As long as the mirage held up, it seemed to fulfill a hypothesis similar to the “absence of friction” made in school physics to simplify the motion calculations. While in physics, however, everyone is aware that those are stylized situations and would ever use them to build a rocket or a bridge, in mathematical finance all warnings and reality checks have been overlooked for unrestrained gluttony. With the ABS trick, for example, banks could and can expand the credit at will in order to satisfy a demand equally inflated by consumerism, keeping in hunger billions of people without a shadow of hunger. Note that we are talking about mere animal spirits here, at the antipodes of civilization, in spite of the great pomp and sophisticated formulas.
The spread of complex derivatives marks the fatal acme of the mad rush to money virtualization. It happens every time we ascend on abstraction scales: we reach a critical distance from reality, beyond which a resizing catastrophe is triggered. In this case, it’s the global implosion of capitalism and the concurrent climate crisis.
No one knows how far back it will drive us. No one can put an end to it with the tools available in this theoretical system.
The metamorphosis of money into an uncontrollable and destructive monster, through a long series of abstraction leaps, is an emblematic parable of the so-called progress: it depicts well the distinctive Western culture’s way to ignore how much it worsens as it advances, how much it loses while it gains.
It’s a general scheme: we start from natural resources whose scarcity imposes value and limits quantity, and we always end up with numbers — mathematical models, bits, data, virtually unlimited information. Feeding the illusion that material constraints can be overcome with technology, that we can create value from the void, that we can draw on some transcendent perfection. The hallucinated sensation of being limitless yet in control: a typical symptom of drug addiction. In fact, abstraction is a culture-level addiction.
The truth behind the illusion is that while the money made of numbers can grow infinitely like numbers, gold and any other resource exist in limited quantities. And the truth is that in the age of AI, Big Data, smart objects, the Internet of Things, abstraction has gone far beyond human control capabilities.
An extreme complexity, not computable with any means, generated by man but imponderable to himself, floats obscurely below us like the Solaris ocean, ready at all times to rise in random and devastating waves. The inability to produce reliable economic forecasts is at its all-time highs: predictions about deficit, debt, inflation, production, employment, growth, and so on, are published one day and retouched the next day by each institution on its own.
Clearly, this dance of percentages and opinions serves no other purpose than the continuation of a daily show, pure entertainment to excite and intimidate us, the people. At the same time, the toxic haze exacerbates anxiety and urges the shamanic recourse to more statistics and more software: the famous data-driven future is a vision of palingenesis. In turn, though, this increases the overall complexity and unpredictability.
It’s a vicious circle where we will tailspin to death if we foolishly keep pushing the digital accelerator of (digital) abstraction. If there is any principle of safety, it is to decrease the level of linguistic abstraction at which we operate, gliding back down to reality. We must return to humbler respect for the constraints imposed by the natural and human material ecosystem, including of course physical social relations, upon which everything is built.