- Frederick Soddy from various internet sources
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- "Wealth is real and physical. It's the stock of
cars and computers and clothing, of furniture and French fries, that we
buy with our dollars. The dollars aren't real wealth, but only symbols
that represent the bearer's claim on an economy's ability to generate wealth.
Debt, for its part, is a claim on the economy's ability to generate wealth
in the future. "The ruling passion of the age," Soddy said, "is
to convert wealth into debt" - to exchange a thing with present-day
real value (a thing that could be stolen, or broken, or rust or rot before
you can manage to use it) for something immutable and unchanging, a claim
on wealth that has yet to be made. Money facilitates the exchange; it is,
he said, "the nothing you get for something before you can get anything."
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- "Debts are subject to the laws of mathematics rather
than physics. Unlike wealth, which is subject to the laws of thermodynamics,
debts do not rot with old age and are not consumed in the process of living.
On the contrary, they grow at so much per cent per annum, by the well-known
mathematical laws of simple and compound interest ... It is this underlying
confusion between wealth and debt which has made such a tragedy of the
scientific era."
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- Wealth, Virtual Wealth and Debt is a 1926 book by the
Nobel prize-winning chemist Frederick Soddy on monetary policy and society
and the role of energy in economic systems. Soddy criticized the
focus on monetary flows in economics, arguing that "real" wealth
was derived from the use of energy to transform materials into physical
goods and services.
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- Soddy pointed out the fundamental difference between
real wealth buildings, machinery, oil, pigs and virtual wealth,
in the form of money and debt. Soddy wrote that real wealth was subject
to the inescapable entropy law of thermodynamics and would rot, rust, or
wear out with age, while money and debt as accounting devices invented
by humans were subject only to the laws of mathematics. Rather than
decaying, virtual wealth, in the form of debt, compounding at the rate
of interest, actually grows without bounds. Soddy used concrete examples
to demonstrate what he considered this flaw in money economics.
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- Essay by economist Herman Daly on Frederick
Soddy's solution as it can be applied to the current economic meltdown
(Nov 2008)
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- The turmoil affecting the world economy unleashed by
the US sub-prime debt crisis isn't really a crisis of "liquidity"
as it is often called. A liquidity crisis would imply that the economy
was in trouble because businesses could no longer obtain credit and loans
to finance their investments. In fact, the crisis is the result of the
overgrowth of financial assets relative to growth of real wealth- basically
the opposite of too little liquidity. We need to take a step back and explore
some of the fundamentals that growth-obsessed economists and commentators
tend to neglect.
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- After winning the Nobel Prize for chemistry, Frederick
Soddy decided he could do greater good for humanity by turning his talents
to economics, a field he felt lacked a connection to biophysical reality.
In his 1926 book Wealth, Virtual Wealth and Debt: The Solution of the Economic
Paradox, (a book that presaged the market crash of 1929), Soddy pointed
out the fundamental difference between real wealth buildings, machinery,
oil, pigs and virtual wealth, in the form of money and debt.
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- Soddy wrote that real wealth was subject to the inescapable
entropy law of thermodynamics and would rot, rust, or wear out with age,
while money and debt as accounting devices invented by humans
were subject only to the laws of mathematics.
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- Rather than decaying, virtual wealth, in the form of
debt, compounding at the rate of interest, actually grows without bounds.
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- Soddy used concrete examples to demonstrate the flaw
in economic thinking. A farmer who raises pigs faces biophysical limits
on how many pigs he can take to market. But if that pig farmer took on
debt a promise to repay at a future date he would in effect
be issuing a claim or lien on his future production of pigs. If he borrowed
the equivalent value of 100 pigs, he could represent the loan on his balance
sheet as "-100 pigs."
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- While debt as the farmer's accounting entry is negative,
negative pigs do not really exist. If the farmer should suffer a series
of lean years and be unable to pay the interest, he might soon owe more
pigs than could be raised on his farm. After a year, with interest looming,
he'd show "-110 pigs"; in 5 years, "-161"; in 40 (assuming
a patient bank), "-4526." When the bank finally came to call
on the pig farmer to collect repayment of its loan, it could well find
that most of the virtual wealth that had grown so appealingly on its books
had to be written off as a loss.
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- Soddy's insights show us that the institutions of a growth
economy lead to the type of crisis that hit the US economy in 2008. Real
wealth is concrete. Financial assets are abstractions. Existing real wealth
serves as a lien on future debt. For example, the 100 dollars of virtual
wealth that I carry in my wallet are a lien on real wealth in that those
dollars enable me to buy pork at the store.
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- The problem that we're seeing in the US has arisen because
the amount of real wealth is not a sufficient lien to guarantee the staggering
outstanding debt which has exploded as a result of banks' ability to create
money, loans given out on shaky assets and the US government's deficit,
which has been stoked by financing the war and recent tax cuts. All of
these factors are exacerbated by the compounding mechanism on debt. The
debt is growing, and consequently, it is being devalued in terms of real
wealth.
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- The conventional wisdom is that when faced with the threat
of recession and business failure, the solution is to grow the economy
so we can grow our way out of the crisis. But because the wrong diagnosis
is made, namely that businesses are in trouble because access to credit
has tightened, the wrong solution is proposed. Even if we could grow our
way out of the crisis and delay the inevitable and painful reconciliation
of virtual and real wealth, there is the question of whether this would
be a wise thing to do. Marginal costs of additional growth in rich countries,
such as global warming, biodiversity loss and roadways choked with cars,
now likely exceed marginal benefits of a little extra consumption. The
end result is that promoting further economic growth makes us poorer, not
richer. The cost of feeding and caring for the extra pigs is greater than
the benefit of eating extra pork.
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- To keep up the illusion that growth is making us richer,
we deferred costs by issuing financial assets almost without limit, conveniently
forgetting that these so-called assets are, for society as a whole, debts
to be paid back out of future growth of real wealth. That future growth
is very doubtful, given the deferred real costs, while the debt continues
to compound to absurd levels.
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- What allowed symbolic financial assets to become so disconnected
from underlying real assets?
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- First, our economy is based on fiat money (paper money
issued by governments) that has value by convention but isn't backed by
any physical wealth. Second, our fractional reserve banking system allows
pyramiding of bank money (demand deposits) on top of the fiat government-issued
currency. Third, buying stocks and "derivatives" on margin allows
a further pyramiding of financial assets on top of the already multiplied
money supply. In addition, the financial sector was very inventive in coming
up with new financial instruments that were designed to circumvent government
regulation of commercial banks to protect the public interest.
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- The agglomerating of mortgages of differing quality into
opaque and shuffled bundles that led to the sub-prime mortgage crisis should
be outlawed. The US balance of trade deficit has allowed us to consume
as if our economy was growing real wealth instead of accumulating debt.
So far, US trading partners have been willing to lend the dollars they
earned from running a trade surplus back to us by buying treasury bills
but these treasury bills are liens on yet-to-exist wealth. Of course, they
also buy real assets and their future earning capacity. Our brilliant economic
gurus meanwhile continue to preach deregulation of both the financial sector
and of international commerce (i.e. "free trade").
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- How then do we clean up this mess?
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- A massive bailout and having the US taxpayer take
on billions in bad debt is merely a way to keep the growth economy
from failing a little longer while allowing it to continue degrading the
planet. Propping up such a destructive system makes no sense. Instead,
we need to redesign our laws and institutions to foster an economy that
remains within biophysical limits.
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- I would not advocate a return to commodity money (such
as gold), but would certainly advocate gradually increasing reserve requirements
for banks. Commercial banks should act as financial intermediaries that
lend other peoples' money, not as engines for creating money out of nothing
and lending it at interest. If every dollar invested represented a dollar
previously saved, we could restore the classical economists' balance between
investment and abstinence. Far fewer stupid or crooked investments would
be tolerated if abstinence had to precede investment.
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- Of course the growth economists will howl that such measures
would slow the growth of GDP. I say so be it growth has become uneconomic,
and we have limited time to bring the economy into line with the biosphere's
carrying capacity.
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- Were Soddy still around, I doubt he would be surprised
by the havoc wreaked by all these two-legged Wall Street pigs, given that
they were left free to raid whatever troughs they could poke their snouts
into while drawing on conventional economic thinking to disguise their
mess as innovations in finance. But I also think he would be disappointed
that 80 years after the publication of his book, we still haven't figured
out a way tether the economy to reality to ensure that the number
of negative pigs can't grow without limit.
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- INNOVATIVE and opaque instruments of debt; greedy bankers;
lenders' eagerness to take on risky loans; a lack of regulation; a shortage
of bank liquidity: all have been nominated as the underlying cause of the
largest economic downturn since the Great Depression. But a more perceptive,
and more troubling, diagnosis is suggested by the work of a little-regarded
British chemist-turned-economist who wrote before and during the Great
Depression.
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- Frederick Soddy, born in 1877, was an individualist who
bowed to few conventions, and who is described by one biographer as a difficult,
obstinate man. A 1921 Nobel laureate in chemistry for his work on radioactive
decay, he foresaw the energy potential of atomic fission as early as 1909.
But his disquiet about that power's potential wartime use, combined with
his revulsion at his discipline's complicity in the mass deaths of World
War I, led him to set aside chemistry for the study of political economy
- the world into which scientific progress introduces its gifts. In four
books written from 1921 to 1934, Soddy carried on a quixotic campaign for
a radical restructuring of global monetary relationships. He was roundly
dismissed as a crank.
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- He offered a perspective on economics rooted in physics
- the laws of thermodynamics, in particular. An economy is often likened
to a machine, though few economists follow the parallel to its logical
conclusion: like any machine the economy must draw energy from outside
itself. The first and second laws of thermodynamics forbid perpetual motion,
schemes in which machines create energy out of nothing or recycle it forever.
Soddy criticized the prevailing belief of the economy as a perpetual motion
machine, capable of generating infinite wealth - a criticism echoed by
his intellectual heirs in the now emergent field of ecological economics.
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- A more apt analogy, said Nicholas Georgescu-Roegen (a
Romanian-born economist whose work in the 1970s began to define this new
approach), is to model the economy as a living system. Like all life, it
draws from its environment valuable (or "low entropy") matter
and energy - for animate life, food; for an economy, energy, ores, the
raw materials provided by plants and animals. And like all life, an economy
emits a high-entropy wake - it spews degraded matter and energy: waste
heat, waste gases, toxic byproducts, apple cores, the molecules of iron
lost to rust and abrasion. Low entropy emissions include trash and pollution
in all their forms, including yesterday's newspaper, last year's sneakers,
last decade's rusted automobile.
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- Matter taken up into the economy can be recycled, using
energy; but energy, used once, is forever unavailable to us at that level
again. The law of entropy commands a one-way flow downward from more to
less useful forms. An animal can't live perpetually on its own excreta.
Neither can you fill the tank of your car by pushing it backwards. Thus,
Georgescu-Roegen, paraphrasing the economist Alfred Marshall, said: "Biology,
not mechanics, is our Mecca."
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- Following Soddy, Georgescu-Roegen and other ecological
economists argue that wealth is real and physical. It's the stock of cars
and computers and clothing, of furniture and French fries, that we buy
with our dollars. The dollars aren't real wealth, but only symbols that
represent the bearer's claim on an economy's ability to generate wealth.
Debt, for its part, is a claim on the economy's ability to generate wealth
in the future. "The ruling passion of the age," Soddy said, "is
to convert wealth into debt" - to exchange a thing with present-day
real value (a thing that could be stolen, or broken, or rust or rot before
you can manage to use it) for something immutable and unchanging, a claim
on wealth that has yet to be made. Money facilitates the exchange; it is,
he said, "the nothing you get for something before you can get anything."
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- In 1900 he became a demonstrator in chemistry at McGill
University in Montreal, Quebec, Canada, where he worked with Ernest Rutherford
on radioactivity. He and Rutherford realized that the anomalous behaviour
of radioactive elements was because they decayed into other elements. This
decay also produced alpha, beta, and gamma radiation. When radioactivity
was first discovered, no one was sure what the cause was. It needed careful
work by Soddy and Rutherford to prove that atomic transmutation was in
fact occurring.
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- In 1903, with Sir William Ramsay at University College
London, Soddy verified that the decay of radium produced alpha particles
composed of positively charged nuclei of helium. In the experiment a sample
of radium was enclosed in a thin walled glass envelope sited within an
evacuated glass bulb. Alpha particles could pass through the thin glass
wall but were contained within the surrounding glass envelope. After leaving
the experiment running for a long period of time a spectral analysis of
the contents of the former evacuated space revealed the presence of helium.
This element had recently been discovered in the solar spectrum by Bunsen
and Kirchoff.[1]
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- From 1904 to 1914, Soddy was a lecturer at the University
of Glasgow and while there he showed that uranium decays to radium. It
was here also that he showed that a radioactive element may have more than
one atomic mass though the chemical properties are identical. He named
this concept isotope meaning 'same place' - the word 'isotope' was initially
suggested to him by Margaret Todd. Later, J.J. Thomson showed that non-radioactive
elements can also have multiple isotopes. Soddy also showed that an atom
moves lower in atomic number by two places on alpha emission, higher by
one place on beta emission. This was a fundamental step toward understanding
the relationships among families of radioactive elements. Soddy published
The Interpretation of Radium (1909) and Atomic Transmutation (1953). In
May 1910 he was elected a Fellow of the Royal Society [2]
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- In 1914 he was appointed to a chair at the University
of Aberdeen, where he worked on research related to World War I. In 1919
he moved to Oxford University as Dr Lee's Professor of Chemistry, where,
in the period up till 1936, he reorganized the laboratories and the syllabus
in chemistry. He received the 1921 Nobel Prize in chemistry for his research
in radioactive decay and particularly for his formulation of the theory
of isotopes.
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- His work and essays popularising the new understanding
of radioactivity was the main inspiration for H. G. Wells's The World Set
Free (1914), which features atomic bombs dropped from biplanes in a war
set many years in the future. Wells's novel is also known as The Last War
and imagines a peaceful world emerging from the chaos. In Wealth, Virtual
Wealth and Debt Soddy praises Wells's The World Set Free. He also says
that radioactive processes probably power the stars.
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- In four books written from 1921 to 1934, Soddy carried
on a "quixotic campaign for a radical restructuring of global monetary
relationships", offering a perspective on economics rooted in physics-the
laws of thermodynamics, in particular-and was "roundly dismissed as
a crank". While most of his proposals - "to abandon the gold
standard, let international exchange rates float, use federal surpluses
and deficits as macroeconomic policy tools that could counter cyclical
trends, and establish bureaus of economic statistics (including a consumer
price index) in order to facilitate this effort" - are now conventional
practice, his critique of fractional-reserve banking still "remains
outside the bounds of conventional wisdom".[3]
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