Cashless Vortex --
The New Economy

"the importance of money essentially flows from it being a link between the present and the future"
-- John M. Keynes
he Christmas rush has subsided. Staggering profit numbers from on-line merchants have been reported. By all accounts it was a stunning year for e-commerce. The "new economy" is revving up. Even more impressive have been the gains in the stocks of Internet and e-commerce companies, with on-line trading and day-trading being major factors in the run up in these issues.

However, when you consider the blast-off in Internet stock prices and the growth of e-commerce in tandem, an interesting, potentially disturbing and less benign picture of this "new economy" emerges. With massive amounts of wealth being created, accounted for and consumed via the

By all accounts it was a stunning year for e-commerce. The "new economy" is revving up.
Internet, the possibility exists for this new electronic economy to metamorphose into a "token"-based economy, rather than a cash-based one.

Why is this important? First, let’s take a closer look at token-based economies. A token-based economy is a closed system, like a prison, in which the constituents of the system (inmates) are paid for certain behavior patterns with credits or tokens that only have value within that system. In a prison, inmates work in the license plate shop, behave well and earn credits or tokens. These can be redeemed at the prison commissary for goods.

For nearly 70 years, the Soviet Union operated a token-based economy on a massive scale. Yes, there were rubles – but the ruble of the old Soviet era wasn’t truly money – it was a token that could only be used within the Soviet system. To buttress the contention that rubles were tokens to appease the population, consider that Soviet industry and its banks did not use paper rubles at all, but credits and accounting units that were called "rubles." Hence, the rubles that the population held could only be exchanged for approved goods and services and had no life of their own. They were virtually impossible to use outside the closed Soviet system.

Because the state controlled the means of production and distribution, it was able to effectively create different prices for the same goods and services, depending on the purchaser. In the old Soviet Union, a well-connected apartchek could purchase a bag of flour from the special state store for 100 rubles. The proletariat, Moscow street sweeper, on the other hand, had to go to the people’s store, wait in line for four hours and, if available, perhaps purchase a bag of low-grade flour for 500 rubles. Pricing for goods and services was based on the purchasers and their position rather than the value of ruble bank notes.

What does any of this have to do with the Internet and e-commerce? Perhaps not much; or maybe it is a harbinger of the truly new economy – one in which "dollar" is simply the name of the accounting units that you accumulate by working, investing and purchasing on-line. These dollar units are held for you in an Internet-based bank or brokerage account. Presently, you can place your money with an Internet broker or bank and, if you choose, can withdraw that money into cash. So the Internet at present is not quite a closed system.

However, as cash becomes less widely used and more of the economy is conducted electronically, the value and usefulness of government-issued hard cash diminishes. This becomes especially true as those companies that sell goods and services on-line begin to offer incentives and rank consumers based on their on-line consumption behavior and habits. Liken it to going to Las Vegas and getting rated when you gamble. If your rating is high enough, you don’t pay for rooms, meals, etc. Another example is flying on a specific airline because you "get more miles," which you can then trade for trips.

It is not difficult to foresee the next step the new Internet-based economy might take – goods and services have no price until the moment of purchase. When purchased, the price is determined based on the past and anticipated behavior pattern of the consumer. You are rewarded for keeping your credits within the new economy, never converting those dollars units in your virtual e-commerce account into cash.

We may ultimately see an economy where cash is replaced by credits, much like plastic chips replace cash at casino gambling tables.
Consider the following scenario – you buy stock in amazon.com via your eSchwab account (BTW – 60% of all Schwab trades during the last quarter were done on-line). You then buy books from amazon.com, using your Schwab account debit card number. The more books you buy, the higher goes the stock price of amazon.com, giving you even more money. In addition, you have an attractive consumption profile and are an amazon.com shareholder, so your "dollar" units are worth more at amazon.com than those of a non-stockholder. Because amazon.com and your bank are partners, you get more value for your dollar units because you keep your dollar units in an on-line bank.

Clearly, I’ve taken the situation somewhat to the extreme. Although it’s not that hard to image an entire closed economy based on the Internet, where there is no cash, and where dollars are simply accounting units that you gather and expend. In addition, the value of the dollar is unique to each consumer, since prices for goods and services are dynamically set for each on-line consumer at the time of purchase.

We may ultimately see an economy where cash is replaced by credits, much like plastic chips replace cash at casino gambling tables. Consumers become divorced from cash, and the new economy becomes driven not by any of Maslow’s needs or any consideration of the future, but by the need to perpetuate itself. The incentives to create wealth and consume within the context of the new economy become so high that supporting this new economy becomes an end unto itself.


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