The recent turmoil in banking and finance has provoked a lot of thinking and discussion about the fundamentals of economics. I would like to contribute to this conversation here, with a simple analogy: finance as a public address system.

Money is a slippery concept. On the one hand, it is useless in itself. On the other hand, it is supremely useful, being the most easily tradable commodity. It is both as essentially and stably self-existing as any mathematical object, and as abstract and unfindable.

Even though money is slippery, it is ancient. It seems an inevitable component of civilization. In an urban marketplace where standardized commodities are traded between strangers, bartering transactions will quickly settle into an equilibrium, so that:

It becomes practical for a market to settle on some common commodity as a common measure, so for N commodities there are just N-1 exchange ratios to be managed, instead of N*(N-1)/2.

More broadly, money and the complex financial system founded on money have evolved as a mechanism to coordinate production and consumption by the members of a civilized society. Money is not a perfect mechanism, though! It is a bit like a public address system - the microphones, amplifiers, and loudspeakers used to broadcast the speech or song of a few performers to a large audience.

A perfectly functioning public address system will faithfully bring the sound of the performers to each member of the audience. However, real public address systems are far from perfect! Not only do they introduce noise and distortion, all too often feedback loops will enable noise to be amplified and generate even more noise, so the sound broadcast becomes disconnected from the performers and instead is an artifact of the public address system itself.

In a similar fashion, financial systems seem prone to amplifying and feeding back noise, so the production and consumption signals transmitted become artifacts of the financial system, rather than of the needs and productive capacities of members of society. Just as the complexity and subtlety of electronics and acoustics often enough leads to feedback in public address systems even when competently managed, similarly bubbles and crashes can occur even a competently managed financial system. Unfortunately, incompetent and abusive management find it all too easy to hide behind complexity!