This post continues the story of quantum economics, which began here. There is a summary of posts to date at the end of this post.
Can you please note when reading this post and others in the series that I am not suggesting that quantum physics and economics are akin to each other. Instead, I am exploring how quantum thinking might help build new economic narratives, which is quite a different goal.
“Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.”– Fred Schwed
To continue our exploration of a quantum economics metaphor, consider the possibility that every balance in a bank account represents potential. It is, in other words, stored energy, waiting to be released. That release might come through consumption, by buying goods and services. It might come through investment, by creating productive capacity. Or it might be channelled into speculation by gambling on the future prices of assets.
Each route uses the same potential, but with very different effects.
Consumption sends ripples through the economy.
Investment creates lasting change.
Speculation, however, often traps energy in sterile loops that can quite easily be destructive.
The same monetary potential, deployed differently, leads to profoundly different outcomes.
To see this, quantum thinking helps.
First: money as stored energy
In physics, energy can be stored as potential. A boulder at the top of a hill has gravitational potential. Release it, and the potential becomes kinetic.
Money functions in a similar way. A bank balance is potential energy in the monetary field. It can be released to set processes in motion. Until it is spent or invested, it is latent.
This potential is not fixed. Its impact depends on how it is released.
Second: consumption as wave propagation
When money is spent on consumption, the potential energy within the money is released and turns into waves of demand.
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You spend £100 at a shop.
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The shop pays its staff, and then their suppliers.
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The suppliers pay their workers, and their suppliers.
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All the workers noted previously spend their wages.
In other words, the ripple created by a single decision to spend spreads far and wide. The multiplier effect means the £100 can generate several times its value in economic output. Seen in this way, consumption is wave propagation: the energy released from money gainfully spent into the economy is amplified as it circulates.
This, of course, is why fiscal stimulus works. Government spending creates demand that ripples outward. And it is why austerity fails: cut spending, and the waves collapse.
Third: investment as a quantum jump
Investment behaves differently. It does not just propagate waves. It alters the system.
When money is used to build a factory, train a worker, or create a new technology, the productive capacity of the economy changes. This is a quantum jump: the system moves to a new energy state.
The effects are lasting. A trained worker continues to produce. A new factory continues to generate output. Investment transforms potential into structural change.
This is why public investment is so powerful. It does not just stimulate demand. It creates new states of capacity, shifting the economy permanently.
Fourth: speculation as a standing wave
However, money used for speculation is quite different. It traps energy within financial markets. Examples of this activity might include this simple series of transactions:
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Money is used to buy shares, hoping their price will rise.
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Another trader buys at the higher price, hoping to sell later.
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The cycle repeats.
In this case, the money circulates, but entirely within what is, in effect, a closed loop. Prices oscillate, but little new output is created. In fact, resources may be drained from the productive economy. This is a standing wave: energy bouncing back and forth, creating volatility but not propagation.
In physics, standing waves can build to resonance, amplifying dangerously until systems collapse. In finance, bubbles do the same. Prices spiral upward, detached from reality, until collapse is inevitable.
Fifth: the costs of speculation
Speculation has real costs.
First, there is crowding out. Money tied up in speculation is money not spent on consumption or investment. Potential energy is trapped in sterile circuits.
Second, there is instability. Bubbles burst, causing crashes. The energy released destroys confidence and output.
Third, there is inequality. Gains from speculation accrue to the wealthy, who own financial assets. Losses, when crashes occur, are socialised.
Fourth, distorted signals are being sent. Asset prices rise not because of productive value but because of speculative demand, misleading policymakers and investors.
Speculation is not harmless gambling. It destabilises the economy.
Sixth: the entanglement of speculation and reality
Speculation may seem detached from the real economy, but it is always entangled with it.
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Housing bubbles raise rents, pricing people out of homes.
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A stock bubble drives executive pay, skewing corporate priorities.
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A commodity bubble raises food prices, hurting many, and most especially the poorest in any society.
Financial speculation feeds back into real lives. The entanglement cannot be ignored.
Seventh: policy implications
If money is potential energy, we must ask how best to release it.
First, we must encourage sustainable consumption. This supports wages, incomes, and, in turn, public services by creating greater potential for tax revenues that control the impact of additional state spending. This keeps waves propagating.
Second, prioritise investment. This requires the funding of infrastructure, training, and the green transition. These create quantum jumps in capacity.
Third, control speculation. This requires capital controls, financial transaction taxes (an issue I will address in a video, soon) and tighter regulations. Dampen standing waves before they destabilise.
The choice is not neutral. Left to itself, money flows towards speculation, because returns appear quicker. Policy must redirect potential energy into channels that sustain society.
Eighth: the myth of neutrality
Mainstream economics often treats the use of money as neutral: whether spent on consumption, investment, or speculation, it is all the same “demand.”
This is wrong. The macroeconomic effects differ radically. Consumption supports demand today. Investment builds capacity for tomorrow. Speculation destabilises both.
To treat them as equivalent is inappropriate. One produces nothing useful, and might actually drain productive resources from the economy. The other drives the system forward.
Ninth: the politics of potential
Recognising money as potential energy shifts politics.
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It exposes austerity as waste: leaving potential idle rather than releasing it.
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It exposes inequality as damaging: concentrating potential in hands likely to hoard or speculate.
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It exposes financial liberalisation as reckless: allowing standing waves of speculation to destabilise society.
The politics of potential is about directing energy wisely: towards flows that sustain, towards investments that transform, away from loops that destabilise.
Conclusion
Money is not wealth. It is potential. What matters is how that potential is released.
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Consumption propagates waves.
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Investment creates quantum jumps.
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Speculation traps energy in dangerous loops.
Policy that ignores these differences will fail.
Policy that recognises them can succeed.
If we treat money as potential energy, and direct it towards constructive channels, we can sustain flows, build capacity, and avoid destructive resonance.
And only then can we fund the future.
Previous posts in this series
- Discussing quantum economics, accounting, money and more
- Quantum economics, part 1: Why Quantum Thinking Matters for Economics
- Quantum economics, part 2: Money as Particle and Flow
- Quantum economics, part 3: Entanglement and Double-Entry Bookkeeping
- Quantum economics, part 4: Quantum Uncertainty and Economic Forecasts
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Keep it up is all I can suggest.
I agree that in particular that Neo-liberal economics is colour blind – that is how I riff off this post – it enables them to ignore social, moral and ethical issues and they go mono – profit rules.
Markets should act as a prism – separating the different strands of light waves, enabling us to see what is actually happening leading us to a more holistic position.
PSR, a comment if I may, but it is being very very nitpicky ………. sorry……….In reality I agree with the sentiment.
There’s a slight problem with the physics here.
A prism splits the light into different colours, red – violet.
E = hf = hc/λ
Where:
E = energy of the photon
h = Planck’s constant (6.626 × 10⁻³⁴ J·s)
f = frequency
c = speed of light (3.00 × 10⁸ m/s)
λ = wavelength
Since c = fλ (speed = frequency × wavelength), we can substitute to get E = hc/λ.
This means:
Shorter wavelengths = Higher energy (like gamma rays, X-rays, UV light)
Longer wavelengths = Lower energy (like infrared, microwaves, radio waves)
For example, violet light (shorter wavelength, ~400 nm) carries more energy per photon than red light (longer wavelength, ~700 nm). This is why UV radiation can cause sunburn and skin damage – each UV photon carries enough energy to break chemical bonds in molecules – while visible light and infrared radiation typically cannot.
This would mean that the amount of work that could be done would vary with the colour. I suspect that this may cause misunderstandings. And this is not, I believe, what you intended
I think that you are missing some of the point here, which is this series is all about creating metaphors.
The energy that produces change in the human condition requires energy. That energy comes from one of two sources, separately or together, money or humans themselves. Thus the money in the bank is like a store of energy. But, if it is just stored, it decays (as required by the second law of thermodynamics) and that decay is what we call inflation.
Inflation can thus be seen as reducing the ability for humans to produce change. This is why the government needs to ensure that inflation is controlled and minimised.
Current ideas suggest that we should aim for 2%. But this is simply because we cannot control inflation to ensure that deflation does not occur. With a quantum perspective, even 2% is causing us to loose our potential to initiate change.
Only the government can create money, thus only the government can increase the potential of the economy to meet the needs of all the population. Their decisions determine who has the ability to determine for themselves the ability to initiate and produce change beyond that which human effort alone can produce.
There are aspects of their still to be developed in the series.
Money is purely abstract except the 3 percent that is note or coin. The 97 percent is merely figures tapped onto computer screens. Money is an enabler, facilitator or prompt for the direction of resources for production and consumption. Ki b
The 3% is not real. It’s also a metaphor for debt.
This is a superb post. I could feel chains of implicatons going off in my head, almost fireworks. Thank you.
Thank you.
This was happening to us when discussing this. That’s why the series happened.
This series is going from strength to strength!
Congratulations on explaining in such a clear manner how some potentially tricky concepts actually work.
Thanks.
Editing these is hard work but fun. I worked literally until bedtime last night.
This is an excellent series. I’m understanding a lot more about real economics thanks to these articles.
Thanks
Slightly nit-picky post alert! Although, I’m not trying to correct the physics. My comments below aim to refine the metaphor further 🙂
> Third: investment as a quantum jump
I like this!
> Investment behaves differently. It does not just propagate waves. It alters the system.
Yes! Although, to play devils advocate, the system now exists in a higher-potential state…
> When money is used to build a factory, train a worker, or create a new technology, the productive capacity of the economy changes. This is a quantum jump: the system moves to a new energy state.
Yes!
If I may be so bold as to continue with the quantum metaphor…
Systems will naturally relax back to the lowest available energy state.
If we apply this to economics, what this implies, is that if we cease to feed energy (money) into the system (the U.K. body economic), the system will “relax” back down to low-energy states.
In this case, I suggest that this means money dissipating away from public investment, either destroyed through tax, or captured by the private sector. If no more energy is pumped in, the system will not excite again. It will relax, and we will be trapped in a low-energy state. I hypothesise that a relaxing economic system might be characterised by decaying infrastructure and worsening services. I’m not sure where the ground state would be – I don’t think I ever want to see it.
Conversely, if you supply lots of energy to a system, you might find that it changes to a new phase of matter (solid -> liquid -> gas -> plasma). If you reach plasma stage, you have ionised your atoms. You have removed electrons and the atoms are now charged. This could be too much energy. It’s a bit of a messy metaphor, but maybe there’s a way to tie this into the polarising world we’re witnessing/speculative bubbles. Just batting thoughts about 🙂
I’ve really enjoyed this series, Richard. It uses metaphors that speak to my existing mental models. Great stuff & KUTGW!
I like that.
I think you might find the quantum biology series gets closer to this…soon….starting next week
Is money not a “social prosthetic” that we need to use to balance our individual needs with those of others? When we spend money we extend “ourselves” we set a factory in operation to make us a loaf of bread and the workers there receive an income to also go out and buy a loaf of bread.
http://ndl.ethernet.edu.et/bitstream/123456789/42836/1/380.pdf#page=546
See Chapter 19, page 541 “On the Evolution of Human Motivation: The Role of
Social Prosthetic Systems” Stephen M. Kosslyn
I am not wholly convinced by that metaphor, but if it works for you…
Is money a social tool or is it not? I would say yes on the basis that a teacher is a social adjunct, a mentor.
@ Schofield
I think, if anything, you’re proving the “quantum” point.
You’re asking a tool-y question “is money a social tool” and getting a tool-y answer “yes, money is a social tool” (with which I agree by the way).
But the point is, money’s not just a tool. It’s not just a tally of what’s been done. It’s not just a flow of interactions/transactions through a society. And it’s not just potential. It is all of these simultaneously, but it depends which lens you’re looking through as to which model best fits
Agreed
Just to finish the argument of money being a Social Prosthetic it’s obvious that we use a teacher as a mentor but money allows to easily buy a book on the internet to take our learning further. Human beings do find understanding the role of money difficult. In the United States for example the Sioux tribe found it difficult to understand why white settlers wanted to grab land to farm. Selling farm produce gained access to money which gained access to many other needs.
This series is really helping me join the dots on so many of the real world issues you talk about in this blog
These metaphors are dynamite. I’ve studied degrees level economics and accountancy and have never understood how they get away with teaching a version of economics so adrift from reality
The concepts and metaphors you are sketching out here are revelatory
Thank you for determination to create them and test them out here
Thank you. Appreciated.
It’s a brilliant brave series you have launched where few fear to tread. Many aspects remind me of Frederick Soddy’s work: “MONEY versus MAN,” A STATEMENT OF THE WORLD PROBLEM FROM THE STANDPOINT OF THE NEW. ECONOMICS. Well done, thank you.
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