Wednesday, October 15, 2008

Sticks and Stocks

George Dyson with a short, insightful Edge article detailing antecedents of our financial crisis.
The unlimited replication of information is generally a public good (however strongly music publishers, software developers, and other pockets of resistance disagree). The problem starts, as the current crisis demonstrates, when unregulated replication is applied to money itself. Highly complex computer-generated financial instruments (known as derivatives) are being produced, not from natural factors of production or other goods, but purely from other financial instruments. When the Exchequer splits the tally stick in two, the King keeps the gold and silver, and you keep one half of the stick. Derivatives are the equivalent of splitting off (and selling) further copies of the same stick - or the "clipping" and debasing of coinage that led Isaac Newton to spend the later part of his life reforming the financial system as Master of the Mint.
(image credit: tally sticks, National Archives, UK, from edge.org)