In Fiat We Trust

Earlier this week, fellow science blogger Mike O'Risal came upon this question:

"If only the natural world exists, then how did belief in the supernatural evolve?"

Mike responded:

"Ignorance. Nothing in the material world precludes being wrong.

Ignorance is not knowing something. That doesn't have to "evolve." It isn't biological; ignorance isn't a living thing, simply an absence of knowledge. It makes no more sense that ignorance has to evolve than it does to maintain that there not being unicorns had to evolve."

That's an interesting answer, though I would use a different approach.

To start, evolution of behaviours - in contrast to the evolution of biochemical function or anatomical features - is notoriously difficult to study. One major reason is because behaviours can have a biological and/or a social source, and cultural evolution doesn't have to follow the rules of biological evolution.

Regardless of the source of this behaviour, I would say that belief in the supernatural is an over-extension of the belief in the natural, and thus both of these likely evolved in much the same way.

Just consider this:

We have direct experiences of moving around in a three-dimensional world and routine travel at subsonic, subluminal speeds.

There is nothing to stop us from extrapolating from our experiences and trying to imagine how life in higher dimensions and travel at supersonic or superluminal speeds would feel like.

Would you be able to look into the insides of everyone?

Would you be able to hear anything in a supersonic jet?

Would you be able to travel back in time when travelling at superluminal speeds?

In the case of supersonic travel, it is physically possible (and surprisingly mundane).

However, hyperspatial and superluminal travel may be physically impossible. Thus, any current speculation about what happens in those situations would be untestable, possibly incorrect and mostly irrelevant to people anyway.

But the speculations themselves had a real world source.

Now let's look at the gods of the Ancient Greeks.

Although they are supposedly supernatural beings, they can be angry, jealous, cruel, kind, loving, happy, unfaithful, fickle... encompassing the vast repertoire of human emotions.

The fact that the Ancient Greeks believed in them doesn't mean that these gods really did exist, or that gods must necessarily exhibit human emotions.

The behaviour of these gods were simply extrapolated from human nature.

Of course, anyone can insist on believing in their extrapolations.

Stock market traders would caution against this sort of high risk behaviour though. Just ask anyone who believed in the prediction that crude oil will hit US$200 a barrel this year...

You can immediately see that it's a bad practice to compel others to believe in your speculation as if it was a fact.

In this post, I am going to focus on yet another human behaviour that is commonly over-extended.

Faith.

It is a deeply polarizing word that can evoke feelings of warmth or disgust, depending on your worldview.

But I should emphasize that faith has a real world, naturalistic source - it is an extension of trust, confidence and loyalty, a human value that is indispensible for the formation of society.

There is nothing fake or imaginary about faith itself. It is an emergent social trait as concrete as any material object.

Not convinced?

Let's discuss this with a real world example.

Suppose I was feeling hungry one day and wanted to eat a loaf of banana bread.

In a remarkable flash of "inspiration", I decide to print my own dollar bill to pay for it.










I hand this note (Microprint! Gotta have more microprint!) over to the minimart cashier.

Can anyone guess what would happen next?

Of course she won't accept it.

If I wasn't immediately laughed out of the store, the cashier might even keoh mata (call police).

But... real money is also made of paper, so what's the diff?

What gives value to a piece of paper?

The uninitiated might answer: "Real government money has symbols such as the government Coat of Arms and real security features like hologram and security thread. The paper is given value by the authority of the government. Your dollar bill is not backed up by authority, so it is worthless."

Hmm... sounds plausible.

Let's go for a quick history lesson:

When the First World War started in 1914, Germany expected to win.

Thus, instead of taxing people to pay for the war effort, the government borrowed huge sums of money to be paid by the enemy after the war.

Unfortunately, they lost.

In addition to the heavy war debt, victor nations such as the United States, Britain and France exacted severe reparations on Germany's new Weimar Republic government.

To make matters worse, the democratic socialist government had promised the people reduced work hours and improved social benefits.

The country was still rebuilding from the ruins of war and did not have the resources to finance these new benefits.

So, in order to pay off all these debts, the government resorted to printing money.

Billions of new German Marks rolled off the printing presses.

At first, everything seemed OK. During the war years, the German people had been working hard and saving hard. There weren't many opportunities to spend money as millions of men were away from home on the battlefields, while the women worked in the military factories.

As the post-war economy normalized, all those saved Marks reappeared on the market.

Together with the massive supply of newly pressed money, inflation started to pick up pace.

As prices crept higher and higher, the German public started to lose their confidence in the paper money that they own.

Worried that the Mark will quickly lose its value if they keep it, people rushed to the market to cash them in for real goods.

As the money supply on the market increased, the value of the Mark dropped further, making the goods more expensive by the day.

People were running out of money to spend, so in response the government printed even more Marks, in higher denominations.

A dangerous positive feedback loop was emerging.

In the middle of 1922, the German economy exploded into hyperinflation.

People kept spending money, which kept depreciating in value, resulting in a lack of money causing the government to print more money.

Businesses had to deal with dwindling profits and increasing labour costs, so they increase prices even further.

In addition, hyperinflation had the bizarre effect of diminishing debt towards nothingness, so companies started to borrow excessively to buy more goods and infrastructure, creating yet more demand for money.

Rinse and repeat.

More and more zeros were added to the new Marks that were flying off the presses.

By late 1923, ordinary citizens had all become "multi-billionaires", except that a billion Marks could barely pay for a loaf of bread.

The "Paper Mark", as it would be later called, arguably became worth less than the paper it was printed on. People started to burn stacks of Paper Marks as firewood and used them as wallpaper.

Eventually a currency reform known as the "Rentenmark Miracle" finally put an end to this economic disaster. Although the economy was saved, the severe hardship experienced by the people and their resentment towards the government and banking industry would later steer them towards Hitler and his Nazi Party.

Although all this happened 85 years ago, hyperinflation isn't a thing of the past.

Right now, it is happening in Zimbabwe, with the official inflation rate of 231 million per cent last year.

Even after dropping ten zeros off the old Zimbabwean dollar in August, the government finds itself continuing to add more zeros to the new dollar. Just yesterday, the Reserve Bank of Zimbabwe issued a new 500 million dollar bill which is only worth US$8 and rapidly depreciating.

Notice that in both Weimar Germany and Zimbabwe, paper money is officially printed by the government with real security features and backed up by the full authority of the government, but yet they are practically worthless.

So now let's return to our original question.

What gives value to a piece of paper?

The answer is confidence, or faith.

People believe that their paper money is worth something, as long as everybody else around them also believes that.

Most modern paper money is fiat currency, which means that they are no longer pegged to physical commodities such as gold and thus do not have any "intrinsic" value.

But if you think about it, even the use of gold as currency also depends on faith.

If nobody around you is willing to exchange your gold coin for food, you'd starve to death real quick.

The value of any form of money depends on the common belief of thousands upon thousands of adherents.

It can't be the faith of just one person. That's the reason why my Fresh Brainz dollar is worthless.

The establishment of a new currency may depend on government authority, but once it's out on the market, it's the people who will assign real value to these placeholders.

If the value of the money slips too much due to over-supply or other forms of economic mismanagement, the people will begin to lose confidence in the value of money and try to exchange it for something of stable value.

Once this confidence evaporates, even governments backed by strong military power are helpless to stop the vicious cycle of hyperinflation.

Therefore, faith in the value of money is socio-emergent and not primarily determined by top-down authority.

In fact, money can continue to maintain value in the absence of the issuing authority!

Here's an interesting quotation:

"Friedman notes that after the Russian revolution, the Bolsheviks introduced a new currency. They printed huge amounts of it and soon it became almost worthless.

At the same time some of the older Czarist currency still circulated and maintained its value in terms of goods. It appreciated enormously in terms of the new money.

Why?

This money was not redeemable. Nobody expected the Czarist government to return.

Why did this currency hold up?

"Because," says Friedman, "there was nobody to print any more of it."

As long as there is a social consensus to assign worth to a piece of paper, it will hold its value even if the government that printed it no longer exists.

Thus, you can see that there is nothing magical about faith, though it can be over-extended in the supernatural or any other realm that one desires.

Even without a central authority, a large group of people can create stable entities of value out of practically nothing, using social consensus.

If the source of the power is within the people themselves, then why do so many people prefer to believe in supernatural authorities?

Stay tuned for the next article about the socio-emergence of authority.


Would you like to know more?
- Supply and Demand of Money (Optionsatoz.com)