[R-G] [BillTottenWeblog] The Economic Thought of Frederick Soddy

[Bill Totten]

by Herman E Daly, Louisiana State University

History of Political Economy Vol 12 No 4 (Winter 1980)

Almost always the men who achieve these fundamental inventions of a new
paradigm have been either very young or very new to the field whose
paradigm they change. -Thomas S Kuhn, The Structure of Scientific
Revolutions (1962), page 89.


I. Introduction

Frederick Soddy (1877-1956) is best known as a pioneering chemist who
collaborated with Rutherford in studying radioactive disintegration,
predicted the existence of and coined the name for isotopes, and was a
major contributor to the modern theory of atomic structure. For these
achievements he was elected a Fellow of the Royal Society in 1910 and was
awarded the Nobel Prize in 1921. He was a member of the Swedish, Italian,
and Russian acadamies of science. During his career he held university
positions at McGill, Glasgow, Aberdeen, and from 1919 onward, Oxford
(Fleck 1957).

Although an enthusiastic believer in scientific progress and in the
possibility of a society in which the fruits of scientific knowledge would
be shared by all, Soddy was acutely aware that history supported the view
that science has proved as much a curse as a blessing to humanity. Nor
could he accept the comfortable view that scientists have no
responsibility for the uses to which their work is put. Even though others
(bankers and economists) bore, in his view, a far greater burden of guilt
for the misuse of knowledge, scientists could not plead innocent. The
world's real problem was faulty economics, not faulty chemistry, and for
the second half of his nearly eighty years economics replaced chemistry as
the center of his intellectual life.

Soddy realized earlier than most the theoretical possibility of atomic
energy. Since his own work had contributed to the discovery that this vast
energy potential existed, it was natural for him to ask, "what sort of a
world it would be if atomic energy ever became available" (Wealth, page
28). His answer (written in 1926) was clear:

If the discovery were made tomorrow, there is not a nation that would not
throw itself heart and soul into the task of applying it to war, just as
they are now doing in the case of the newly developed chemical weapons of
poison-gas warfare ... If [atomic energy] were to come under existing
economic. conditions, it would mean the reductio ad absurdum of scientific
civilization, a swift annihilation instead of a none too lingering
collapse [Wealth, page 28].

For Soddy, the problem was to change economic conditions in order
eventually to make the world safe for atomic energy and other fruits of
science. There must be something radically wrong with economic thought and
institutions in order for the gift of scientific knowledge to have become
such a threat. Soddy was thus led to a radical critique of economics.

It is interesting that Soddy's concern about the destructive potential of
atomic energy was considered extreme at the time. Another Nobel laureate,
Robert A Millikan, commented:

... since Mr Soddy raised the hobgoblin of dangerous quantities of
available subatomic energy [science] has brought to light good evidence
that this particular hobgoblin - like most of the bugaboos that crowd in
on the mind of ignorance - was a myth ... The new evidence born of further
scientific study is to the effect that it is highly improbable that there
is any appreciable amount of available subatomic energy for man to tap
[Millikan, page 121].

Millikan, of course, turned out to be wrong, but the underlying faith that
he went on to express is still held by many, namely that one may "sleep in
peace with the consciousness that the Creator has put some foolproof
elements into his handiwork, and that man is powerless to do it any
titanic physical damage" (ibid). As R L Sinsheimer recently noted,
"Scientific endeavor rests upon the faith that our scientific probing and
our technological ventures will not displace some key element of our
protective environment and thereby collapse our ecological
niche" (Sinsheimer, page 24). It now seems evident that the only
protective element the Creator put into his handiwork is man's capacity
for moral insight and restraint, which is far from foolproof. With the
benefit of hindsight we can see that Soddy was the true prophet and that
the scientific establishment, represented by Millikan, was whistling in
the dark.{1} Far from believing in providential "foolproof elements" built
into creation, Soddy was convinced that the economic system contained
built-in elements for assuring the destruction of creation, once science
gave man the power. The key problem therefore was to discover and correct
the errors in our economic thinking and institutions, a task which Soddy
tackled with both moral fervor and the systematic logic of an experienced
scientist.

Perhaps the most intriguing thing about Soddy the economist is that he
started his inquiry with a mind both highly intelligent and completely
free from the preconceived paradigm of the orthodox economists, for whom
he had an undisguised contempt. The contempt was mutual. With the
significant exception of Frank Knight, to be discussed later, Soddy's work
was ignored by economists. Unlike the American positional astronomer,
Simon Newcomb, who also came to economics from the physical sciences,
Soddy came as a critic, not a student, and remained an outsider. Newcomb
liked economics, did not believe that his pre-World War One America was in
mortal danger from an increasingly powerful but misdirected application of
science, and wrote a fairly orthodox Principles of Political Economy
(1885) which demonstrated that he had done his economics homework, and had
earned the right to try to make economics just a bit more scientific.
Soddy, on the other hand, considered economics a pseudoscience in need of
a totally new beginning. John Ruskin, not Ricardo, Mill, or Marshall, was
his inspiration.

The not surprising consequence of this approach was that Soddy was and
continues to be written off as a crank. In fact, Soddy's economics seems
to have been something of an embarrassment to everyone but Soddy. The
Times Literary Supplement (page 565), in reviewing his major economic work
(Wealth, Virtual Wealth, and Debt) remarked that it was sad to see a
respected chemist ruin his reputation by writing on a subject about which
he was quite ignorant. Nor had the verdict changed thirty years and
several books later, when in 1956 an obituary in Science lamented that,
"Some ... knew him only as ... a 'crank' on the subject of monetary
policy ... His fanatical devotion to schemes of this sort, derided by the
orthodox economists, ... was surprising to many who knew him first as a
pioneer in chemical science" (Russell, page 1069). This neglect of Soddy's
economics is unfortunate because, although Soddy is admittedly
unconvincing in his frequent attribution of war and all other evils to
fractional reserve banking, he nevertheless has much to teach us, and in
fact anticipated the recent contribution of N Georgescu-Roegen (1971) in
providing economics with a partial foundation in thermodynamics, the
physics of usefulness.

The fact that Soddy might have learned more from economists than he did
does not mean that economists have nothing to learn from Soddy. The
approach here taken is to think of him somewhat as an intelligence from
Mars which looked at economic issues in a different way, and to try
sympathetically to understand him and render him intelligible to modern
economists. In what follows I attempt to summarize and explain Soddy's
critique of economics.


II. The Neglected Physical Basis of Economics

Soddy's basic philosophical approach to economics might be called
materialism without reductionism. We must recognize the fundamental
dualism of the material and the spiritual and resist "monistic
obsessions" (Cartesian Economics, page 6). Economics occupies the middle
ground between matter and spirit, between the electron and the soul:

In each direction possibilities of further knowledge extend ad infinitum,
but in each direction diametrically away from and not towards the problems
of life. It is in this middle field that economics lies, unaffected
whether by the ultimate philosophy of the electron or the soul, and
concerned rather with the interaction, with the middle world of life of
these two end worlds of physics and mind in their commonest everyday
aspects, matter and energy on the one hand, obeying the laws of
mathematical probability or chance as exhibited in the inanimate universe,
and, on the other, with the guidance, direction and willing of these blind
forces and processes to predetermined ends [ibid].

Soddy rejects the monism of "Ultra-Materialism":

I cannot conceive of inanimate mechanism, obeying the laws of probability,
by any continued series of successive steps developing the powers of
choice and reproduction any more than I can envisage any increase in the
complexity of an engine resulting in the production of the "engine-driver"
and the power of its reproducing itself. I shall be told that this is a
pontifical expression of personal opinion. Unfortunately, however, for
this argument, inanimate mechanism happens to be my special study rather
than that of the biologist. It is the invariable characteristic of all
shallow and pretentious philosophy to seek the explanation of insoluble
problems in some other field than that of which the philosopher has first
hand acquaintance [ibid, page 7].

Yet a proper materialism must be one of the foundation stones of
economics. In fact, "without phosphorus no thought" (Story of Atomic
Energy, page 129) is an axiom that all philosophers and ethicists should
be required to memorize. What mechanical science teaches economics is that 

life derives the whole of its physical energy or power, not from anything
self-contained in living matter, and still less from an external deity,
but solely from the inanimate world. It is dependent for all the
necessities of its physical continuance primarily upon the principles of
the steam-engine. The principles and ethics of human law and convention
must not run counter to those of thermodynamics [Cartesian Economics, page
9].

The last sentence is very significant because it provides the basis for
many of Soddy's criticisms of the economy as a presumed perpetual motion
machine. For men, like other heat engines, the physical problems of life
are energy problems. Pre-nineteenth-century man lived on energy revenue
(sunlight captured by plants, the "original capitalists"). Present-day man
augments this revenue by consuming energy capital (coal, the "stored
sunlight of palaeozoic summers"). While man can use fuel-fed machinery to
lighten labor, he can feed his internal fires only with new sunshine, or
rather the energy of new sunshine as transformed through the good offices
of the plant. Life thus depends on a continuous flow of energy, and hence
the enabling requisites of life must partake of the nature of a flow
rather than only a stock. There are limits to the degree that this flow
can be stored for future use. A significant part of the requisites of life
must come to us as a current flow or "revenue" that cannot in any physical
sense be converted to a stock and indefinitely stored for later use. Like
the manna which God sent to the Hebrews in the wilderness, the revenue is
renewed daily, must be gathered in amounts sufficient for the day (neither
too much nor too little), and breeds worms and becomes foul if accumulated
too much in excess of current needs (Exodus 16: 17-20). Stocks of assets,
to the extent that we can maintain them against the ravages of entropy,
are aids and accessories in improving our ability to tap the energy
revenue, but the revenue itself cannot be significantly increased, and it
cannot be saved except to a limited degree. Indeed, the very maintenance
of our accumulated stock of physical wealth against the destructive force
of entropy requires the renewing power of the low-entropy "revenue" flow.
True, nature has stored energy in coal, but it took geologic epochs of
time, and we are only able to unstore it. Furthermore the "flamboyant
period" of using up the capital stock of coal was perceived by Soddy as a
"very passing phase", after which the constraints imposed by living on
energy revenue would be more clearly seen and unmistakably felt.

For Soddy the basic economic question was "How does man live?" and the
answer was "By sunshine". The rules that man must obey in living on
sunshine, whether current or palaeozoic, are the first and second laws of
thermodynamics. This in a nutshell is "the bearing of physical science
upon state stewardship". Wealth is for Soddy "the humanly useful forms of
matter and energy" (The Arch Enemy, page 6). Wealth has both a physical
dimension, matter-energy subject to the laws of inanimate mechanism, and a
teleological dimension of usefulness, subject to the purposes imposed by
mind and will. Soddy's concept of wealth reflects his fundamental dualism
and his belief that the middle world of life and wealth is concerned with
the interaction of the two end worlds of physics and mind in their
commonest everyday aspects. That Soddy concentrated on the physical
dimension in order to repair the consequences of its past neglect should
not be allowed to lead one to suppose that he proposed a monistic physical
theory of wealth, a misinterpretation which, we will see, was fostered by
Frank Knight.


III. The Major Confusion: Wealth Versus Debt

The fundamental error of economics is the confusion of wealth, a magnitude
with an irreducible physical dimension, with debt, a purely mathematical
or imaginary quantity. The positive physical quantity, two pigs,
represents wealth and can be seen and touched. But minus two pigs, debt,
is an imaginary magnitude with no physical dimension:

Debts are subject to the laws of mathematics rather than physics. Unlike
wealth, which is subject to the laws of thermodynamics, debts do not rot
with old age and are not consumed in the process of living. On the
contrary, they grow at so much per cent per annum, by the well-known
mathematical laws of simple and compound interest ... For sufficient
reason, the process of compound interest is physically impossible, though
the process of compound decrement is physically common enough. Because the
former leads with the passage of time ever more and more rapidly to
infinity, which, like minus one, is not a physical but a mathematical
quantity, whereas the latter leads always more slowly towards zero, which
is, as we have seen, the lower limit of physical quantities [Wealth, page
70].

The ruling passion of the age is to convert wealth into debt in order to
derive a permanent future income from it - to convert wealth that perishes
into debt that endures, debt that does not rot, costs nothing to maintain,
and brings in perennial interest (Money Versus Man, page 25). No
individual could amass the physical requirements sufficient for
maintenance during his old age, for like manna it would rot. Therefore he
must convert his non-storable surplus into a lien on future revenue, by
letting others consume and invest his surplus now in exchange for the
right to share in the increased future revenue. The revenue is "a river of
perishable and consumable wealth, steadily flowing to waste whether
consumed by human beings or by rats and worms" (Inversion of Science, page
24). But since future annual revenue is limited, there is a corresponding
limit on the extent to which present surpluses can be exchanged for
perennial streams of future revenue. Soddy emphasizes that the present
surplus accumulation can never be changed into future revenue in any
physical sense, but only exchanged for it under social conventions.
Although it may comfort the lender to think that his wealth still exists
somewhere in the form of "capital", it has been or is being used up by the
borrower either in consumption or investment, and no more than food or
fuel can it be used again later. Rather it has become debt, an indent on
future revenues to be generated by future sunshine. "Capital", says
Soddy , "merely means unearned income divided by the rate of interest and
multiplied by 100'' (Cartesian Economics, page 27).

Although debt can follow the law of compound interest, the real energy
revenue from future sunshine, the real future income against which the
debt is a lien, cannot grow at compound interest for long. When converted
into debt, however, real wealth "discards its corruptible body to take on
an incorruptible" (Money Versus Man, page 28). In so doing, it appears "to
afford a means of dodging Nature" (page 24), of evading the second law of
thermodynamics, the law of random, ravage, rust, and rot. The idea that
people can live off the interest of their mutual indebtedness (Wealth,
page 89) is just another perpetual motion scheme - a vulgar delusion on a
grand scale. Soddy seems to be saying that what is obviously impossible
for the community - for everyone to live on interest - should also be
forbidden to individuals, as a principle of fairness. If it is not
forbidden, or at least limited in some way, then at some point the growing
liens of debt holders on the limited revenue will become greater than the
future producers of that revenue will be willing or able to support, and
conflict will result. The conflict takes the form of debt repudiation.
Debt grows at compound interest and as a purely mathematical quantity
encounters no limits to slow it down. Wealth grows for a while at compound
interest, but, having a physical dimension, its growth sooner or later
encounters limits. Debt can endure forever; wealth cannot, because its
physical dimension is subject to the destructive force of entropy. Since
wealth cannot continually grow as fast as debt, the one-to-one relation
between the two will at some point be broken - that is, there must be some
repudiation or cancellation of debt. The positive feedback of compound
interest must be offset by counteracting forces of debt repudiation, such
as inflation, bankruptcy, or confiscatory taxation, all of which breed
violence. Conventional wisdom considers the latter processes pathological,
but accepts compound interest as normal. Logic demands, however, that
either we constrain compound interest in some way, or accept as normal and
necessary one or more of the counteracting mechanisms of debt repudiation.
{2} As Soddy put it,

You cannot permanently pit an absurd human convention, such as the
spontaneous increment of debt [compound interest], against the natural law
of the spontaneous decrement of wealth [entropy] [Cartesian Economics,
page 30].

The perpetual motion delusion of living on debt has arisen in the
following way, Soddy says:

Because formerly ownership of land - which, with the sunshine that falls
on it, provides a revenue of wealth - secured, in the form of rent, a
share in the annual harvest without labor or service, upon which a
cultured and leisured class could permanently establish itself, the age
seems to have conceived the preposterous notion that money, which can buy
land, must therefore itself have the same revenue-producing power [Wealth,
page 106].

If debt and money are the units of measure by which we account for and
keep track of the production and distribution of physical wealth, then
surely the units of measure and the reality being measured cannot be
governed by different laws. Soddy's "acid test is that no monetary
accountancy be allowed that could not be done equally well by physical
counters" (The Arch Enemy, page 24). If wealth cannot grow at compound
interest for long, then debt should not either. If wealth cannot be
created ex nihilo then how can we allow money (debt) to be created ex
nihilo (and just as easily destroyed)? Worse, how can we tolerate the fact
that money is both created ex nihilo and lent at compound interest, while
at the same time serving as a unit of measure for wealth which is
incapable of either of those "conjuror's tricks"? This brings us to money,
the topic which most occupied Soddy's attention.


IV. The Monetary Flaw

The main defect in the economic system was, for Soddy, the practice of
fractional reserve banking whereby the private banking system was enabled
to create money, thus appropriating what he called the Virtual Wealth of
the community, which it then lent at interest. The concept of "virtual
wealth" plays a key role in Soddy's analysis. Essentially it is the
aggregate value of real wealth which individuals in the community
voluntarily abstain from holding in order to hold money instead. In order
to escape the inconvenience of barter everyone must hold money, which
could be exchanged for real wealth, but is not. In Soddy's words, "This
aggregate of exchangeable goods and services which the community
continuously and permanently goes without (though individual money owners
can instantly demand and obtain it from other individuals) the author
terms the Virtual Wealth of the community" (Role of Money, page 36).

If everyone tried to exchange his money holdings for real assets it could
not be done, because all real assets are already owned by someone, and in
the final analysis someone has to end up holding the money. So Virtual
Wealth does not really exist as actual wealth over and above the value of
real assets, which is why it is called Virtual. Yet people behave as if
Virtual Wealth were real, because at an individual level money is easily
exchangeable for physical assets. The phenomenon of Virtual Wealth must
occur in a monetary economy, unless the money is itself a commodity that
circulates at its commodity value.

The value of each unit of money, or the inverse of the "price-index", is
simply the Virtual Wealth divided by the total aggregate of money held.

Soddy gives the following summary of the nature and importance of Virtual
Wealth:

Money is now a form of national debt, owned by the individual and owed by
the community, exchangeable on demand for wealth by transference to
another individual. Its value or purchasing power is not directly
determined by any positive or existing quantity of wealth, but by the
negative quantity or deficit of wealth, the ownership and enjoyment of
which is voluntarily abstained from without the payment of interest, by
the owners of the money, to suit their individual business and domestic
affairs and convenience. The aggregate of this deficit is called the
Virtual Wealth of the community, and it measures the value of all the
money owned by the community, which is forced by the necessity of
exchanging its produce to act as though it possessed this amount of wealth
more than it actually does possess. The Virtual Wealth of a community is
not a physical but an imaginary negative wealth quantity. It does not obey
the laws of conservation, but is of psychological origin [Wealth, page
295].

Virtual Wealth varies with the size of population and national income and
the business and payment habits of the community. It is only when Virtual
Wealth is constant that we can equate the value of a unit of money to the
ratio of Virtual Wealth to aggregate money held. Soddy believed that
Virtual Wealth, though not constant, was far less variable than the money
supply.

Who benefits from Virtual Wealth? In a sense the whole community does,
since it is the price of avoiding barter, or more precisely the price of
avoiding the waste of a full commodity currency which uses costly
resources (gold) to perform a function that could be performed by paper or
by abstract accounting units. In another sense, Virtual Wealth is like
seigniorage, the difference between the monetary value and the commodity
value (cost of production) of the money token. With the advent of credit
money the commodity value of the token becomes nil and seigniorage or
Virtual Wealth is the full monetary value of the money issued - or rather
the equivalent in forgone utility. The analogy with seigniorage suggests a
further answer to the question of who benefits from Virtual Wealth. It is
the issuer of fiat money, whoever first puts it in circulation, that gets
the seigniorage. The ancient prerogative of the crown has been usurped,
not by the modern State, the crown's legitimate heir, but by the private
banking system, which "has corrupted the purpose of money from that of an
exchange medium to that of an interest-bearing debt'' (Wealth, page 296).
Moreover the very existence of the bulk of our money depends upon this
debt never being liquidated. The very existence of money now becomes a
source of private income, and the total money supply becomes a
"concertina" expanding to fuel a boom, and contracting with debt repayment
and default thereby reinforcing a slump.

Soddy's concept of Virtual Wealth bears an interesting relation to the
modern debate about whether fiat money is a part of the net wealth of the
community. Pesek and Saving (1967) argue that it is, whereas others, such
as James Tobin (1965), argue that it is not. Soddy says that fiat money is
Virtual Wealth. Individuals voluntarily hold money balances rather than an
equivalent value in real assets in order to escape the enormous
inconvenience of barter. Virtual Wealth is the utility cost of holding
money. The fact that the benefits are worth more than the costs does not
make the costs disappear, and does not convert money into wealth. The
social institution of money may be regarded as a form of collective
patrimony in the same sense as an efficient legal code or an advanced
technology. But the money commodity itself need not be, and in the case of
fiat money is not, a productive asset. Indeed, the very advantage of fiat
money is to free resources from being tied up in money so that more real
assets may be produced with the resources. We count the extra real assets
made possible by fiat money as a part of the aggregate wealth of the
community, but not the paper chits themselves. Soddy's notion of Virtual
Wealth is actually very close to what James Tobin terms the "fiduciary
issue":

The community's wealth now has two components: the real goods accumulated
through past real investment and fiduciary or paper "goods" manufactured
by the government from thin air. Of course, the nonhuman wealth of such a
nation "really" consists only of its tangible capital. But, as viewed by
the inhabitants of the nation individually, wealth exceeds the tangible
capital stock by the size of what we might term the fiduciary issue. This
is an illusion, but only one of the many fallacies of composition which
are basic to any economy or society. The illusion can be maintained
unimpaired as long as the society does not actually try to convert all of
its paper wealth into goods [Tobin, page 676].

For Soddy, banks do not really make loans, because a loan implies that the
lender gives up what the borrower receives. When a bank lends money it
gives up nothing, creating the deposits ex nihilo up to the limit set by
reserve requirements. {3} The real "lender" is the community at large
whose money balances lose in purchasing power with the issue of new money.
We know the new money will be spent and increase demand, because the
borrower who gets it would not pay interest just to increase his idle
balances. Prices are bid up since ex nihilo creation of money (demand) can
increase much more rapidly than can the ex materia creation of new
physical wealth (supply). But the more direct line of causation is simply
that relatively constant Virtual Wealth divided by more pounds means each
pound is worth less. Money should not bear interest as a condition of its
existence, but only when genuinely lent by an owner who gives it up to a
borrower. Banks are like counterfeiters who lend false money, accept their
own false money in repayment and destroy it, but receive the interest in
real money transferred to them by the rest of the community, and which is
not destroyed. Banks create and destroy money with no understanding of the
"laws that correlate its quantity with the national income" (Wealth, page
296). Also by continually changing the value of money as they create and
destroy it, the banking system converts the pound sterling into a rubber
yardstick, in effect making a mockery of all physical measurement
standards, since "yards per pound" or "gallons per pound" become variable
magnitudes, even though yards and gallons be fixed.

At first sight it may seem odd that one who analyzes the economy with the
concepts of physical science should focus so much on money, instead of
real resources, matter, energy, and the rest. But, of course, it is
precisely the fact that money seems to have escaped the laws of
conservation and entropy that led Soddy to conclude that the flaw in the
system must lie with the "conjuror's tricks" of modern bankers, who 

have been allowed to regard themselves as the owners of the virtual wealth
which the community does not possess, and to lend it and charge interest
upon the loan as though it really existed and they possessed it. The
wealth so acquired by the impecunious borrower is not given up by the
lenders, who receive interest on the loan but give up nothing, but is
given up by the whole community, who suffer in consequence the loss
through a general reduction in the purchasing power of money [Wealth, page
296].

A further contradiction arises from the interest-bearing national debt
being used as collateral security by bondholders who borrow from banks.
Banks create a deposit (new money) for the borrowing bondholder and charge
him interest. The public is taxed to enable the government to pay interest
on the bond to the bondholder who, in effect, passes the interest on to
the bank. Soddy draws the conclusion that "taxes are thus paid to the bank
for doing what the taxes were imposed to prevent being done, namely, the
increase of the currency. Otherwise, there would have been no reason for
the State to borrow at interest if it had not wished to prevent the
increase of the currency" (Wealth, pages 195, 298). Soddy considers this
the final reductio ad absurdum of the monetary system.


V. Reform Measures

Three basic reforms are suggested by Soddy to restore honesty and accuracy
to the economic system: a 100 percent reserve requirement for banks; a
policy of maintaining a constant price-index; and freely fluctuating
exchange rates internationally.

With a 100 percent reserve requirement banks could no longer create money,
and that basic function, along with the seigniorage prerogative, or the
ownership of Virtual Wealth, would be restored to the State, which would
again become the sole "utterer" of money. Banks would have to exist by
charging for their legitimate services, that is, those that do not require
the creation of money.

What principle is to govern the State in issuing money? Money is to be
created or destroyed by the State as needed in order to keep the
purchasing power of money constant. A price index will be devised by the
National Statistical Authority. If the index has a tendency to fall over
time, the government will finance its own activities by printing money.
Alternatively it might lower taxes, or use the newly created money to
redeem interest-bearing national debt. In other words deflation would be
corrected by some form of money-creating government deficit. If the index
shows a rising tendency the government will raise taxes (or issue
interest-bearing national debt) and not spend the revenue. Inflation would
be corrected by a money-destroying government surplus. Soddy makes an
analogy between the price index and the governor on a steam engine. Both
provide a mechanism of stabilizing feedback. The then existing system
suffered from destabilizing feedback, since the money supply would expand
during a boom and contract during a slump, thereby reinforcing the
original tendency.

Equilibrium in balance of payments with the rest of the world would be
achieved by freely fluctuating exchange rates which would tend to
establish a kind of purchasing power parity among currencies.
International flows of gold and the consequent inflationary and
deflationary pressures on national economies would thereby be eliminated,
thus easing the task of keeping the internal purchasing power of the
currency constant. Furthermore, the need for tariffs and other
interferences with free trade designed to correct international payments
imbalances, major causes of international conflict, would have been
eliminated.

Soddy's proposals have nothing in common with those of Silvio Gesell or
Major Douglas, or other famous "monetary cranks". Soddy respected these
men for raising important questions, but concluded that in their proposals
for reform they were just as guilty of appealing to "conjuror's tricks" as
were the orthodox money men. Far from advocating "funny money schemes",
Soddy considered the existing canons of sound finance to be elaborate
mystifications obscuring the most blatant "funny money" practices carried
on in the interest of the bankers and their class, to the detriment of
society. These socially dishonest though perfectly legal practices, along
with the attempt to convert wealth into debt internationally and live off
the interest received from other countries, plus the waning of the
"flamboyant period" of energy capital consumption, of which "imperialism
marks its final bid for survival" (Cartesian Economics, page 12), would
lead inexorably to international conflict and to the misuse of the gifts
of science in warfare.

Reform of both economic understanding and the economic system in the light
of physical and moral first principles is the sine qua non of a
civilization capable of using knowledge for good rather than evil. "Let us
have an end of the pretence that economics should not be concerned with
morals" (Role of Money, page 214). As a minimum morality, economics must
surely insist on a system of honest weights and measures underlying
exchange; yet the current monetary system with its fluctuations in
purchasing power subverts honest measure and gives a false accounting of
the physical realities underlying the production and distribution of
wealth.


VI. The Relevance of Soddy's Economic Thought Today

Soddy's insistence that the first and second laws of thermodynamics must
be the starting point of economics (Role of Money, pages 4, 5) is a
fundamental insight the relevance of which has grown as we have come to
discover that neither the sources of low entropy inputs nor the sinks for
high entropy waste outputs are infinite. Probably the most important
economic treatise of the last forty years is Nicholas Georgescu-Roegen's
The Entropy Law and the Economic Process (1971), which demonstrates that
the economic process is entropic in its physical coordinates; that wealth
is an open system, a structure maintained in the midst of a throughput
that begins with the depletion of low entropy matter-energy and ends with
the return of an equal quantity of polluting high entropy matter-energy
back to the environment; that in contrast to the reversibility of
mechanical phenomena, entropic phenomena are characterized by
irreversibility, a fatal weakness of the mechanistic epistemology of
standard economics; and that there is a critical asymmetry between our two
sources of low entropy. The last point refers to the fact that solar low
entropy (Soddy's revenue) is nearly infinite in total amount but strictly
limited in its rate of flow to earth, whereas terrestrial low entropy
(concentrated minerals in the earth's crust) is strictly limited in total
amount, but can be used up at a rate of our own choosing. Economic
development since the industrial revolution has been in the direction of
ever less reliance on the abundant solar flow and towards dependence on
the relatively scarce terrestrial stock. This is what Soddy called the
"flamboyant period", destined to be short-lived.

Evidently Georgescu-Roegen was unaware of the writings of Soddy on this
subject, because he never cites Soddy. No one is more scrupulously honest
and painstaking in citing the work of others than Georgescu-Roegen, and
this omission is pointed out only to indicate the extent of Soddy's
obscurity as an economist. Similar comments apply to Kenneth Boulding, {4}
who has also related economics to thermodynamics, without mentioning
Soddy, and to the present author as well. This omission is understandable
because after all Soddy was a chemist not an economist, and his economic
writings all bore titles indicating only the monetary nature of his
economic work, or such uninformative titles as Cartesian Economics. Only
the subtitle of the latter, "The Bearing of Physical Science Upon State
Stewardship", gives any hint of the nature of his most important and
original contribution to economics. But the fact remains that Soddy
anticipated the basic insights of Georgescu-Roegen and Boulding regarding
the relation of economics and thermodynamics, and deserves recognition as
a pioneer in a line of thinking which I believe will one day be dominant.

Soddy was also a pioneer in recognizing the moral responsibility of
science, and in realizing ahead of others that new knowledge, while it
might not be permanently "forbidden", can certainly be "inopportune" under
existing social and moral conditions, even to the extent of being lethal
to the civilization that made it possible (Sinsheimer, page 24).

Was Soddy successful in his effort to discover the flaws in the economic
system that corrupted the fruits of science and led to war? Would 100
percent reserves, a constant price index, and flexible exchange rates make
the world safe for atomic energy? Is it true that whether science
emancipates or destroys humanity depends on a "minor technical point in a
banking system", as Soddy claimed (Inversion of Science, page iv)? One may
reasonably doubt it. In fact it seems that at this point Soddy himself was
"seeking the solution to insoluble problems in some field other than that
of which the philosopher has firsthand acquaintance" - to recall his own
jibe at the mechanistic biologists. But the fact that Soddy exaggerated
the efficacy of his suggested reforms does not mean that his analysis is
unimportant. Neither the specific proposals nor the reasoning underlying
them can be fairly dismissed as those of an outsider or a monetary crank
who just does not understand economics. {5} Flexible exchange rates have
come into being already, and Soddy was arguing their virtues at a time
when most economists were wedded to the gold standard. The new humility
born of the theoretical anomaly of simultaneous inflation and unemployment
and the demonstrated inability of orthodox "monetary cranks" to deal with
persistent inflation could conceivably lead to a reconsideration of the
constant price-index and 100 percent reserve requirements. Of course some
of these policies have had other champions besides Soddy, some with very
respectable academic credentials, such as Henry Simons and Irving Fisher
(see Simons 1948 and Fisher 1935).

It is curious that Irving Fisher never mentions Soddy in his writings on
100 percent money. Soddy, however, in a pamphlet written in 1943 refers to
Fisher: "Some years later, after the great depression in the USA, an
American economist, Professor Irving Fisher of Yale University, put
forward a scheme which in its original form was practically identical [to
Soddy's "pound for pound banking" plan] and which he termed 100%
money" (The Arch Enemy, page 11). Soddy's plan was published in 1926,
Fisher's in 1935. Soddy seems to regard the near identity of plans as an
interesting and encouraging coincidence and in no way suggests that Fisher
had copied or even been influenced by him.

Although a great enthusiast for science and technology, Soddy could not
share the popular obsession with unlimited growth. Even if continual
economic growth were possible, it would at some point become senseless. On
this point Soddy quotes John Ruskin, whom he greatly admired as an
economist: "Capital which produces nothing but capital is only root
producing root; bulb issuing in bulb, never in tulip; seed issuing in seed
never in bread. The Political Economy of Europe has hitherto devoted
itself to the multiplication ... of bulbs. It never saw or conceived such
a thing as a tulip" (Money Versus Man, page v).

Soddy held that "economic sufficiency is the essential foundation of all
national greatness and progress" (Money Versus Man, page 12). But
sufficiency means "enough" and growth beyond "enough" is just "seed
issuing in seed never in bread". Soddy does not define "sufficiency", but
it is clear that any definition must respect the limits of energy revenue
from the sun as captured by plants, and the entropic limits on the
possibility of storing up wealth for future use, as well as the
teleological constraint implied by a defined (that is, limited) purpose
from which low entropy matter-energy derives its value dimension, and thus
becomes wealth. Not all matter-energy is capable of becoming wealth; only
low entropy matter-energy has the physical potential for usefulness, for
receiving the imprint of information and purpose. Since the entropy law
says in effect that potential gets used up, then scarcity must increase
over the long run. But what bothered Soddy was not the scarcity
implications of entropy, since he believed that science could more than
offset increasing scarcity for a very long time yet. The truly scarce
factor for Soddy was not low entropy, but our ability to keep from blowing
up scientific civilization with the increasing power that science made
available. We persist in applying those powers toward the impossible goal
of making the real world of matter-energy conform to the purely
mathematical law of compound interest. This leads to debt cancellation,
conflict, and war. Orthodox growth economics notwithstanding, the best
evidence is that the earth is not growing at all, much less at a rate
equal to the rate of interest. The attempt to pit an absurd human
convention against a natural law is not only foolish, but highly dangerous.

The absurdity of infinite growth has been the most carefully ignored
anomaly in the paradigm of modern economics. As Soddy put it,

If Christ, whose views on the folly of laying up treasures on earth are
well known, had put by a pound at this rate, it should now be worth an
Octillion, and Tariff Reform would be of little help to provide that, even
if you colonized the entire stellar universe ... It is this absurdity
which inverts society, turns good into evil and makes orthodox economics
the laughing stock of science. If the consequences were not the familiar
atmosphere of our daily lives they would be deemed beyond the legitimate
bounds of the most extravagant comic opera [Inversion of Science, page 17].

A contemporary unsympathetic reviewer, economist A G Silverman, was at
least forthright enough to face the issue and to attempt a reply:

In criticism of the above theory, it may be asked how can the receivers of
interest, if they live on this income, take advantage of the law of
compound interest; and if they reinvest this "unearned" income why cannot
the law of compound interest approximately hold for physical capital as
well as debt [Silverman, page 277]?

The first question is sensible but irrelevant because Soddy never
suggested that one could take advantage of compound interest without
reinvesting at least part of the interest income. The second part of the
question, however, reveals that the questioner had no conception of the
difference between physical and purely mathematical quantities, and must
have made Soddy despair of ever communicating with economists. Perhaps by
"approximately" Professor Silverman meant "for a limited time period". But
then we must ask what happens at the end of that limited time period, and
how long it is.

Probably the most favorable review that Soddy got from an economist came
from none other than Frank Knight, who began by confessing that

Somewhat to the reviewer's surprise this book [Wealth, Virtual Wealth, and
Debt] has proven well worth the time and effort of a careful reading.
Surprising because, in general, when the specialist in natural sciences
takes time off to come over and straighten out the theory of economics he
shows himself even dumber than the academic economist, and because, in
particular, Soddy's Pamphlet on Cartesian Economics which we read some
years ago did not promise to set a new precedent in this regard [Knight,
page 732].

Knight went so far as to call the book (page 732) "brilliantly written and
brilliantly suggestive and stimulating". I would like to be able to appeal
to the authority of Frank Knight to support my own favorable evaluation of
Soddy's economics, but unfortunately our particular appreciations of Soddy
conflict. Knight considers Soddy's practical theses concerning money to be
"highly significant and theoretically correct" (ibid), a judgment with
which I do not basically disagree, but consider a bit too kind, since
Soddy certainly exaggerated the significance of his practical theses,
however correct they may be. Concerning the physical basis of economics
and the relation to thermodynamics, however, Knight is very negative
(ibid):

His effort to establish a conception of physical wealth, subject to a
principle of conservation and interpretable in relation to physical
energy, must be briefly dismissed.

Knight's grounds for dismissal are opaque:

Magnitudes of wealth and productive capacity ... change absolutely
whenever a human being changes his (or her!) mind; and the mass-energy
relations of mind-changes are as unimportant in this connection as they
are obscure - if their very existence is anything but a metaphysical
inference based on the monistic bias of the scientific intellect [Knight,
page 732] 

Whatever that may mean, it is surely odd that anyone who read Cartesian
Economics (recall the first two quotations in Section III above) could
even obliquely accuse Soddy of "monistic bias". Furthermore Soddy had no
theory of conservation of the value dimension of wealth (which may change
with mental states), but only insisted that the physical dimension of
wealth is subject to the laws of thermodynamics regardless of mind changes
or financial conventions, and that this fact is not trivial. If the fact
that magnitudes of wealth and productive capacity change absolutely
whenever a human being changes his mind were the whole truth, then how
easy it would be to make everyone wealthy - all we would need do to double
wealth would be to change our minds! Then wealth could grow as fast as
debt, since it would be free from its physical body. It would be quite
unfair to accuse Knight of such simple-minded angelism, but it strikes me
as equally unfair of Knight to treat Soddy as a simple-minded physical
reductionist. It is true that Soddy emphasized the physical aspect of
wealth in order to correct for its neglect by economists, a procedure
which, if Knight's attitude is representative, Soddy was certainly
justified in adopting.

In view of the fact that Soddy's critique of money stemmed directly from
his prior physical analysis, it is strange that Knight could so
categorically reject the latter while enthusiastically embracing the
former, although it is conceivable that one could arrive at the right
monetary conclusions for the wrong physical reasons. Knight offers the
following support for Soddy's views on money:

In the abstract, it is absurd and monstrous for society to pay the
commercial banking system "interest" for multiplying severalfold the
quantity of medium of exchange when (a) a public agency could do it at
negliglible cost, (b) there is no sense in having it done at all, since
the effect is simply to raise the price level, and (c) important evils
result, notably the frightful instability of the whole economic system
[ibid].

Knight deserves much credit for having been the only reputable economist
to have taken Soddy seriously, even though in my opinion he missed Soddy's
main contribution. But then so did everyone else until now, when, in the
light both of Georgescu-Roegen's masterly reuniting of economics with its
physical base and of the current recognition of the critical importance of
energy, the prior contribution of Soddy has become visible enough for
anyone to see. Soddy was in many ways fifty years ahead of his time.

Notes:

1. In fairness to Millikan it should be noted that in concluding his
vigorous defense of science he did temper his optimism with the following
caution: "I am not in general disturbed by expanding knowledge or
increasing power, but I begin to be disturbed when this comes
coincidentally with a decrease in the sense of moral values. If these two
occur together, whether they bear any relationship or not, there is real
cause for alarm" (Millikan, page 129).

2. This point has been forcefully made by biologist Garrett Hardin. See
his (with Carl Bajema) Biology: Its Principles and Implications, third
edition (San Francisco, 1978), page 257.

3. When a bank lends to A it forgoes the opportunity of making the same
loan to B, so in that sense there is an opportunity cost in allocating the
virtual wealth among borrowers, but there is no opportunity cost to the
bank in acquiring the Virtual Wealth in the first place.

4. In fact, Boulding told me he was very much aware of Soddy the
scientist, having slept through his chemistry lectures at Oxford, but knew
nothing of his economic writings. As for sleeping through chemistry
lectures, even the writer of one obituary tribute remarked that it would
be idle to pretend that Soddy was a successful classroom teacher.

5. For such a dismissal see A G Silverman (1927).

_____

The author is grateful for support from the Rockefeller Brothers Fund
during the period in which this article was written. Helpful comments on
an earlier draft were received from T Beard, W Campbell, E Cook, G Hardin,
S Farber, G Smith, and an anonymous referee. The author, of course, is
solely responsible for all contents of the article.


References

Irving Fisher. 100% Money. New York, 1935.

Alexander Fleck. "Frederick Soddy". Biographical Memoirs of Fellows of the
Royal Society 3 (1957): 203-16. 

Nicholas Georgescu-Roegen. The Entropy Law and the Economic Process.
Cambridge, Massachusetts, 1971.

Frank H Knight. Review of Wealth, Virtual Wealth and Debt. Saturday Review
of Literature, 16 April 1927, page 732.

R A Millikan. "Alleged Sins of Science". Scribner's Magazine 87, no 2
(1930): 119-30.

B P Pesek and T R Saving. Money, Wealth, and Economic Theory. New York,
1967.

Alexander S Russell. "F Soddy, Interpreter of Atomic Structure". Science,
30 November 1956, pages 1069-70.

A G Silverman. Review of Wealth, Virtual Wealth, and Debt. American
Economic Review, June 1927, pages 275-78.

Henry Simons. Economic Policy for a Free Society. Chicago, 1948.

Robert L Sinsheimer. "The Presumptions of Science". Daedalus, Spring 1978,
pages 23-35.

Frederick Soddy. Science and Life. London, 1920.

Frederick Soddy. Cartesian Economics. London, 1922.

Frederick Soddy. Wealth, Virtual Wealth, and Debt. London, 1926, 1933.

Frederick Soddy. Money Versus Man. New York, 1933.

Frederick Soddy. The Role of Money. London, 1934.

Frederick Soddy. The Arch Enemy of Economic Freedom (pamphlet). Oxford,
1943. 

Frederick Soddy. The Story of Atomic Energy. London, 1949.

Times Literary Supplement, London, 26 Aug. 1926, page 565.

James Tobin. "Money and Economic Growth". Econometrica 33, October 1965.


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