What a Wonderful World (14 page)

The speed of a computer – the number of logical operations it can perform a second – turns out to be limited by the total energy available.
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Today’s laptops are so slow because they use only the electrical energy in transistors. But this energy is totally dwarfed by the energy locked away in the
mass
of the computer, which provides nothing more than the scaffolding to keep a computer stable. The ultimate laptop would have all of its available energy in processing and none of its energy in its mass. In other words, it would have its mass-energy converted into to light-energy, as permitted by Einstein’s famous
E = mc
²
formula.
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The computing power of such a device would be formidable. In a ten-millionth of a second it would be able to carry out a calculation that would take a state-of-the-art computer today the age of the Universe to complete. But it would carry out the calculation at a price. If all the available energy is converted into light-energy for computing, a computer would not be anything like a familiar computer. Far from it. It would be a billion-degree ball of light. It would be like a nuclear fireball, a blindingly bright piece of the big bang. Though it might be nice to have the most powerful computer imaginable on your desk, it might be just a little inconvenient.

‘When I was young I thought that money was the most important thing in life,’ wrote Oscar Wilde. ‘Now that I am old I know that it is.’ Money, as Wilde was certainly not the first or last to realise, makes the world go round. But what exactly is money? And how did it originate?

Most people would say that we use money to trade for goods and services: I give you my money in exchange for your goods. Or, alternatively, you give me your money in exchange for my goods. So, behind the question ‘What is money?’, lies a deeper, more basic question: ‘What is trade?’

Rewind the clock maybe 100,000 years. One of our ancestors catches fish. His neighbour makes hand axes. Both need fish and hand axes. Say, the fisherman catches eight fish in the time it takes the axe-maker to fashion four axes. Now, the fisherman could spend half his time catching four fish and half his time making hand axes. But he is not as skilled or as fast at making hand axes as the axe-maker, so he struggles to make one inferior axe. Similarly, the axe-maker could spend half his time making two hand axes and half his time catching fish. But maybe he is not skilled or fast at catching fish, so he struggles to catch two.

This is when one of the men has a genius idea, which he persuades the other makes perfect sense. ‘Rather than each of us doing both things, why don’t we both exclusively do the thing we are best at – then
trade
our products?’ So they do. And the
fisherman swaps four of his eight fish for two of the axe-maker’s hand axes. He therefore ends up with four fish and two hand axes, which is better than the four fish and one hand axe he would have if he had fished
and
made hand axes. At the same time, the axe-maker ends up with four fish and two hand axes, which is better than the two fish and two hand axes he would have if he too had made hand axes
and
fished.

It seems like a miracle. Both have benefited. And all because of a simple act: trading.

Of course, the fisherman and the axe-maker could have agreed on another exchange rate which was equally advantageous to both. And, even if the fisherman ends up with the same number of hand axes as when he makes them himself, they are likely to be of superior quality. Similarly, if the axe-maker ends up with the same number of fish as when he catches them himself, they are likely to be bigger and tastier, coming as they do from a better, more experienced fisherman.

Trading in this way clearly relies on both parties being honourable. The axe-maker could renege on the deal, taking the fish but not handing over the agreed hand axes. However, if the fisherman and axe-maker belong to the same group, or tribe, there may be an existing template for honourable trade. After all, men, being stronger, may hunt for meat, which they exchange, or trade, for fruit and berries, collected by women. Also, if women move to other tribes to find mates, this may gradually widen the trading circle. Although there is no way to rule out the possibility of cheating, there might be strong incentives not to cheat, which outweigh any tendency to double-cross.

The trading between the fisherman and the axe-maker is limited, however, because it requires two people to meet face to
face. An obvious way to boost opportunities for trade is to get a lot of people with a lot of tradable goods together in one place. Such an innovation is a marketplace. If there are several fishermen and several axe-makers (not to mention bead-makers, fur suppliers, fruit collectors, and so on), then they might meet at some place at regular intervals to trade, with the exchange rate being set by supply and demand. For instance, if fish are scarce and a lot of axe-makers want them, fishermen will trade with the axe-maker prepared to offer the most hand axes. Alternatively, if fish are common, fishermen, in order to attract buyers, will have to swap a lot of fish for other commodities.

But trading is more than simply the swapping of goods. It is the swapping of goods between people who have
specialised
: between a fisherman, who has
specialised in fishing
, and an axe-maker who has
specialised in axe-making
. Without such specialisation, there can be no trading for mutual benefit.

And trading, it turns out, encourages ever more specialisation. The fisherman has an incentive to make better fish hooks in order to catch fish more effectively. If his forte is actually locating fish, it may make more sense for him to concentrate on this, opening up an opportunity for someone else to specialise as a maker of fish hooks. Or fishing nets.

Trading and specialisation create more specialisation, which creates more trading opportunities, and more specialisation … The two feed on each other in a runaway process that, once started, has a kind of unstoppable momentum of its own. Just as evolution by natural selection has created the biological world around us, the idea of trade and specialisation has transformed the human world, creating the commercial world we live in.

Just look around. Pretty much everyone today has a job – a specialised thing that they do. Everyone trades his or her work for other goods and services supplied by other people, who specialise in different things – people who grow avocados or make light bulbs or supply electricity. In fact, trade and specialisation, feeding off each other in an orgy of mutual reinforcement, have in our world proliferated to an extraordinary, mind -blowing extreme. There are hardly any of us that do not use the specialised work of thousands – perhaps millions – of people, most of whom we have never met, across the length and breadth of the world.

The idea of trade plus specialisation appears to be unique to humans. No doubt we will discover that apes do it too but, if they do, it is to a far more limited degree – after all, it is we who have transformed the world not them. Of course, the social insects – ants and bees – have specialised and traded with each other for hundreds of millions of years (there really is nothing new under the Sun). But their societies are frozen into a limited number of castes that perform particular tasks. Humans are uniquely flexible. Given an education and the opportunity, a human can train to be a vet or an airline pilot or school teacher.

But specialisation and trading alone have not created today’s commercial world. There have been many other innovations, many other milestones, along the road. Each has boosted trade and accelerated specialisation. And, arguably, the most important is money.

One of the problems with straightforward trading is that it has to be done
now
. The fisherman has to trade his fish quickly because, in a day or so, they may have gone rotten. But what if the fisherman would rather trade his fish for furs, and the fur trader is not expected at the marketplace for several weeks?

Once upon a time, and it was certainly many thousands of years ago, someone came up with another genius idea. ‘I’ll give you this token for those fish and then, at any time in the future, you can swap it for the fish equivalent of fruit or furs, or whatever.’ The token was of course money. At a stroke, it multiplied the possibilities of trade. Money permitted trade to
time travel
. It was as if someone had invented a Tardis so traders could travel to the future and exchange their goods there. Economists, in less colourful terms, say money is a ‘store of value ’.

Another problem with straightforward trading is that, to engage in it, two or more people must be physically in the same space – the marketplace. But, say the commodity someone has to trade is bulky and heavy – for instance, a stone for grinding corn – and what they really want to trade it for is beads. However, the market where beads are available is a day’s journey over the mountains. Once upon a time, someone had a genius idea. ‘I’ll give you this token for that grinding stone and, then, anywhere else you go, you can exchange it for the stone equivalent of beads or pots, or anything.’ The token, once again, was money. And the innovation multiplied the possibilities of trade. Money permitted trade to
travel through space
. It was as if people had access to a
Star Trek
transporter so they could travel to faraway places and trade their goods there. Once again,
economists put it in less colourful terms. They say money is a ‘medium of exchange ’.

But the genius of money is that not only does it liberate trade in both
time
and
space
, multiplying the opportunities for trade, it has other beneficial properties. Say you do some work for someone who promises that, in a month’s time when you finish, they will pay you in a particular commodity – say copper or wheat. It might sound reasonable enough. However, the value of such commodities might fluctuate, depending on supply and demand. This means that you will not know in advance exactly what you will get paid, making it difficult to budget.

Money changes things, however. If your payment is in money, you will know in advance exactly what you will get – unless, of course, you are unlucky enough to live in a time of hyper-inflation such as post-First World War Germany. Money, say economists, is a ‘standard of value ’.

Of course, if money is to be used as a standard of value, it must be something whose supply does not fluctuate much since scarcity of any commodity boosts its value while plenitude depresses it. One of the first forms of money might have been salt because its source was well known and the technology for extracting it created a supply at a relatively constant rate. Roman soldiers, in particular, were paid in salt, or
sal
, which is the origin of our word ‘salary’.

Salt has several other properties that should ideally be possessed by money. It should be
portable
so that it can be easily carried about. And it should be divisible. This allows someone to buy something and get change, which they can use at a later time. Think of the dilemma if the exchange rate is four fish for one hand axe but the fisherman has only three fish. With divisible
money, the axe-maker can exchange his axe for the three fish, and receive some change, which he can spend later.

Salt, most people would probably agree, is not an ideal form of money. A better currency is provided by gold, in the form of coins. Although money was used as a unit of account for debts from about 3000
BC
, the first gold coins appeared in Greece only around 700
BC
.

The trouble with gold is that it is heavy, especially if you are rich. However, there is a clever way around this. Say you are at the goldsmith’s one day to exchange some goods for gold – a lot of gold – and the goldsmith says, ‘I’ve got an idea. Instead of you humping those heavy bars around with you, I will give you an IOU. You will not physically have the gold but you will know that I am storing it here for you. And, any time you want it, just come back, present the IOU, and I will give you the gold.’

Maybe, when you find some goods to buy, you will indeed go back to the goldsmith, present your IOU, carry off your gold and exchange it for the goods. But, sooner or later, you will realise there is a better, more convenient, way. Simply present the IOU to the person you are trading with. After all, they will know that, if
they
present it to the goldsmith,
they
will get the gold.

The goldsmith, without perhaps knowing it, has transformed himself into a bank – an entity that stores gold and creates a new kind of money – IOUs. If he stores gold and issues IOUs for other clients as well, sooner or later he will realise that it is highly unlikely that everyone will want their gold back at the same time. So he can create more IOUs than he has gold in the
bank. However, if he is prudent – unlike many of the modern banks that triggered the 2008 global banking crisis – he will make sure he has enough gold reserves for an unusual event, when a significant fraction of gold-owners want their gold back simultaneously.

But, just as money is multi-faceted, so too are banks. In addition to creating money and guaranteeing its value, banks perform another key function – they match up lenders and borrowers. Lenders are people who have surplus money they do not want to spend just yet, which they put in the bank. Borrowers are people who need money for some venture – maybe to start a business or buy a house. They expect to earn the necessary money over the following months or years. However, they need the money
now
, and so they borrow it.

This might look like bringing money from the future – future earnings – into the present. But, actually, the amount of money for consumption at any time is fixed. If you borrow money for a mortgage on a house and have to pay it back and so have less to consume, the bank collects your money and lends it to others. So others get to consume instead of you. There is no net transfer of money.

The bank charges the borrower money on top of what he or she borrows because the bank runs the risks of the borrower not paying back the money, or defaulting, and because the bank is a business that needs to make a return, or profit. Some of this interest is passed on to the lenders, so as to make it attractive for them to put their money in the bank in the first place.

To understand what an innovation a bank is, consider what happened before. If you wanted to fund a venture – say, take a ship to the East Indies and trade for spices – you would have to
find a very rich backer. There would be a limited number of such people. And a backer might be hesitant to support you since he or she would be risking a lot.

Contrast this with the situation after the birth of banks. To fund your venture, you go to a bank, of which there are many. Because they have combined the resources of a large number of lenders, not only do they have the resources to fund lots of ventures such as yours, but the risk has also been pooled. Each individual lender has less to lose than a single big investor. And, anyhow, the bank can absorb some failures, knowing the majority of ventures have a good chance of succeeding.