Money, is a state of mind.
A philosophical look at how we think about ledgers, money, value and the ebbs and flows of finances.
Money makes the world go around,
a mark, a yen, a buck or a pound,
that clinking clanking sound,
it makes the world go round…
I’ve always been fascinated by people’s mental models of the world around us. There were plenty of those buzzing around at the Stockholm School of Economics when I did my Master’s degree there about a hundred years ago. Well late 1980s anyways.
One idea in particular that puzzled me at the time was the concept of ‘economic man’, the notion that humans as part of economic systems were assumed to be rational actors and make rational decisions. I mean, look around, people are people, that didn’t strike me as a very useful assumption to base economic models, predictions, planning and real life advice on. Since then, behavioural economics and other ties into social sciences have thankfully caught on a bit.
Another topic I struggled with was double-entry accounting, and not just that it was kinda boring. How money moved between debit & credit, cashflow and the profit & loss, assets & debt and the balance sheet, and so on, and how that all came together as a rather rigid system irked me for some reason.
This practice all emerged in Italy in the late 13th century, possible even earlier in other parts of the world. Not much has moved on really since then. Ledgers are still ledgers pretty much, and often remain the mental model that guides how we think about and represent ‘money’ in various forms and appearances.
At the time I also studied Mandarin in Taiwan one summer, and another source of inspiration was the Chinese way of thinking about cashflow as the life blood of the business. Almost an organic approach, as something that is embedded and flows through the venture, as the very key to the survival of a business. A few private equity and venture capitalist analysts might not disagree entirely.
So far so economically good. As part of my quest to reimagine ‘ledgers’ differently, I pondered that one also has to consider what you think ‘money’ does, and how.
It’s just money
The functions of money are often described in three categories, some add a fourth, as:
I. A medium of exchange.
II. A unit of account.
III. A store of value.
IV. A standard of deferred payment.
The defining qualities of money typically include being a generally accepted, recognizable & trusted, durable & stable, portable & divisible, fungible, and (still mostly) centralized medium of exchange in an economy, often in the form of national currencies, sometimes physical increasingly digital, used to facilitate transactional trade for goods and services, smoother than carrying around precious metals or doing barter (the provision of one good or service by one party in return for another good or service from another party).
Single view ledgers, simply money
I liked and still like getting things on one page, ideally in one picture. You know that Big Picture thingy. But small. The basic model looked like this:
- [In] Money coming in
- [Get] Money got somewhere else
- [Out] Money going out
- [Put] Money put somewhere else
- [Hold] Money being held
Five different states of money.
So in simplified terms 1 & 3 are basically your cashflow, and determine your profit and loss. How much do you have coming in compared to what is going out?
2 & 4 are your debts and your assets, in other words your balance sheet if you include cash or other liquid assets you hold in 5.
[Re 5 I was going to touch on how rethinking ‘money’ might mean rethinking money supply M0-M3, but let’s save that for a rainy day… I really wouldn’t want some of you dozing off… Nor are we going into cryptocurrencies vs fiat currencies / CBDCs (central bank digital currencies)…]
Same mental model 1–2–3–4–5 basically holds true whether you’re an individual or an incorporated company. It’s just money.
The types of flows and states will vary, e.g. for 1 you may look at a monthly salary, customers paying your invoices (hopefully) regularly, or collecting money for a charity. And for 3 it can be household expenses, paying your employees, or reducing your debt.
Likewise, if you need more money than the above 1 & 3 provides you with, from 2 you can get short or long terms loans, credit or working capital arrangements, and so on. And if you have a surplus you don’t immediately need, you may put it into different less liquid asset classes in 4, say a house, a pension, a factory, an investment fund, a short term interest yielding instrument, list goes on.
What’s in a service
Let’s consider the these flows and transformations in terms of some of the basic ‘functions of money’.
To paraphrase: money is value that can be stored and exchanged now and in the future. Money is something we use to compare the value of dissimilar objects. Money pops up and embeds itself in different states everywhere in our lives, some people just can’t get enough. Money isn’t one thing but many. And yet it is just one. But in many ways.
What’s a credit card? A service that allows you to move ‘money’ from 2 to 3, instantaneously and without actually having it. And wait some time before repaying it.
A letter of credit is just 3 with some business rules for third parties attached (and lotsa paperwork the logistics industry have struggled to digitize), with some spatial and temporal aspects. ‘When supplier X has delivered my goods FOB (free on board) pay them what they are owed within Y days’.
Factoring, aka invoice financing, would be transforming expected future 1s of a high enough certainty into 5s today, at a discount to compensate for time and risk and the value of having money today rather than in say 60 days.
Insurance is using smaller amounts of 3 in order to protect against potential future negative impacts on much larger amounts of 4.
You get the picture.
A question of time
When I joined digital creative hothouse Razorfish in London in the late 1990s and we were doing all things digital for a large local bank, including their digital brand (eDentity), a radically new website (ah the early days of dynamic html), clever online calculators and financial tools, interfaces for ATMs, WAP phones and interactive TV, I used to try my alternative mental models on the client teams, alas without much success.
Our head of strategy Neil used to talk about our ‘permission space’, what the client would actually allow us to do. My role as account director was helping them learn to navigate a new exciting medium, and deliver a new way of creatively conducting day2day business with their customers, not rethink the fundamentals of their business model. Dream on, worth a try lol.
The other side of Neil’s equation was our ‘capability space’, the things we could actually do. Which may or may not correspond with your ‘permission space’. When they more or less overlap, happy days, clients expect you to do stuff which you do, ideally brilliantly. If the two spaces are out of synch, if your capabilities should really be higher compared to expectations so you struggle to deliver, or if your permission space is so small you feel restricted and unappreciated, you have some challenges.
So, fast forward to today.
Today, we have immense amounts of historical data about money, which with pretty clever technologies such as AI keep driving deeper behavioural insights that can predict probable outcomes better and better.
This means we’ve collectively entered a capability space where I think it really is time we rethink how we think about money. And what we do with it. How we can really manage it. How we transform it and mould it into our servant rather than our master.
If you fundamentally think of the five states of money as a system, integrated and interconnected, with blurred boundaries rather than the seemingly solid box around 5, and apply a bit of a blue sky creative lens, ‘money’ should be able to move much more freely between the five different states.
“Eventually everything connects — people, ideas, objects.
The quality of the connections is the key to quality per se.”
- Charles Eames, designer
And as I hinted at in the ways money transformed between 1–2–3–4–5, and we create different services, time is a crucial design aspect, often overlooked. Today transforms for today, today transforms for the future, from the expected future transforms for today. Time is money. And money actually can time travel, look at basic stuff like NPV calculations (net present value) or options pricing.
Redesigning money
I like to consider most design as either fix, flex, or fluid. Bit like the three states of matter in nature; solid, liquid, gas. A lot of the ways we think about money is quite fixed. You have cash, or you have a house with a mortgage. Liquid or illiquid. What if we allowed a certain (disciplined and rules based) flex with ‘money’? Or even fluid money.
Some things, whether processes or services, should just be done the same way all the time, no deviation, checklist on repeat. Fix it.
Some stuff can work with clear and flexible business rules, ‘if A then B unless you prefer X cause then Y’. Flex it.
Some may operate within mere guardrails that set boundaries, and allow for n degrees of freedom or randomness. Flow it.
Maybe there’s a new catch phrase in there. ‘See anything not quite right about your money? Fix it, flex it, flow it.’ I always did like the design approach of London Underground.
What if our financial services providers said “yeah everything counts, and it’s all your ‘money’ anyway, here’s a new dynamic ledger and you may transform your ‘money’ however whenever you like, some is fix, some you can flex, and some is fluid”.
Maybe rather than endlessly creating more hard to grasp derivative products (subprime mortgage crisis anyone…) we’ll reimagine and reconnect a digital barter system where money is closer linked to the underlying assets yet freer.
Money on the edge, and in between. Money within other types of ‘money’. Money as a fluid asset. Money as simple value. It is all about value at the end of the day. A dynamically empowered value exchange, data based, fully in the hands of whoever owns the different states of value.
Well, that’s quite a few mouthfuls. Permissions, capabilities? Could we, would we, should we? Where’s the revolution? You tell me on Linkedin…
I’ll return with another philosophically meandering mental model to think about decomposing money as Tao and yin&yang in a future blog. We’ll take money apart and put it back together again. On that note, let me randomly leave you with one of my favourite jokes…
Who is that in the corner?
That’s Beethoven.
Isn’t he dead?
Yeah he is.
So what’s he doing there?
Decomposing.
(Disclaimer: The views expressed are those of the author and do not reflect the official policy or position of any organisation.)
