A new economic and financial theory of money (2310.04986v7)

Abstract: This paper fundamentally reformulates economic and financial theory to include electronic currencies. The valuation of the electronic currencies will be based on macroeconomic theory and the fundamental equation of monetary policy, not the microeconomic theory of discounted cash flows. The view of electronic currency as a transactional equity associated with tangible assets of a sub-economy will be developed, in contrast to the view of stock as an equity associated mostly with intangible assets of a sub-economy. The view will be developed of the electronic currency management firm as an entity responsible for coordinated monetary (electronic currency supply and value stabilization) and fiscal (investment and operational) policies of a substantial (for liquidity of the electronic currency) sub-economy. The risk model used in the valuations and the decision-making will not be the ubiquitous, yet inappropriate, exponential risk model that leads to discount rates, but will be multi time scale models that capture the true risk. The decision-making will be approached from the perspective of true systems control based on a system response function given by the multi scale risk model and system controllers that utilize the Deep Reinforcement Learning, Generative Pretrained Transformers, and other methods of Generative Artificial Intelligence (genAI). Finally, the sub-economy will be viewed as a nonlinear complex physical system with both stable equilibriums that are associated with short-term exploitation, and unstable equilibriums that need to be stabilized with active nonlinear control based on the multi scale system response functions and genAI.

• The paper presents a new economic and financial theory integrating electronic currencies, advocating for long-term virtuous economic activity over short-term profit through AI-driven management.
• It shifts focus from microeconomic tools like DCF/NPV to a macroeconomic approach valuing the 'social aesthetic' or societal benefits of economic activity.
• The theory proposes AI-driven electronic currency management firms using methods like DRL and GPT to actively stabilize the system for long-term sustainable activity.

A New Economic and Financial Theory of Money

In the paper titled "A New Economic and Financial Theory of Money," the authors Glinsky and Sievert present a comprehensive reformulation of economic theory to incorporate electronic currencies, shifting the focus from short-term profit maximization to long-term virtuous economic activity. The advent of electronic currencies, including decentralized blockchain currencies like Bitcoin and centralized entities such as PayPal, provides a basis for reevaluating the current economic paradigms and incorporating electronic monetary systems into mainstream economic theory.

The authors challenge the microeconomic emphasis on Discounted Cash Flows (DCF) and Net Present Value (NPV) as the primary valuation tools for investments. Instead, they advocate for a macroeconomic-centric approach, emphasizing the societal benefits of economic activity, or what they term the "social aesthetic." This shift of perspective demands a reconceptualization of value in economic terms, associated with tangible assets within a sub-economy and governed by electronic currency management firms. These firms, functioning like central banks, are posited to utilize Deep Reinforcement Learning (DRL), Generative Pretrained Transformers (GPT), and other methods of AI to create robust control systems for electronic currencies, thus enhancing economic stability and performance.

Central to this new theory is the equation $P_{\text{ec}} \sim m_e S_0 R_0$, where $P_{\text{ec}}$ represents the value of the electronic currency. This equation emphasizes the importance of maximizing sustainable economic activity based on factors like savings multiplier and network effects, diverging from the traditional short-term profit focus. Moreover, the authors propose that the electronic currency management should focus on maximizing sustainable economic activity by facilitating investments where the resulting increase in monetary demand justifies the investment, rather than being driven purely by short-term DCFs.

The paper reinforces the juxtaposition of this new economic model as one analogous to an inverted pendulum needing active stabilization through sophisticated AI-driven systems, contrasting it with existing systems that may result in equilibria optimized for short-term exploitation rather than long-term social aesthetics. Moreover, it posits that this framework naturally integrates with religious philosophies by adopting a supervision approach akin to assessing societal benefits, further reinforcing the ethical dimension of long-term economic activities.

The implications of this reframed theory are profound. Practically, it suggests that economies should pivot away from predominant profit-driven paradigms to those that incorporate electronic currencies designed to stabilize and grow in alignment with virtuous economic activities. The theoretical advances outlined could prompt reformation in macroeconomic policy frameworks to value profitability alongside social and environmental contributions, a shift potentially facilitated by the strategic use of AI technologies.

This paper, by reshaping economic thinking around the integration of electronic currencies, highlights a strategic move towards a more integrated and holistic financial ecosystem that values long-term sustainability and societal benefits over short-term gains. While speculative at present, the ideas presented could drive meaningful dialogue around the reformation of economic policy in an increasingly digitized world.