Creative Commons (BY NC CA) licence granted by the author(s)
Disclaimer: This blog entry reflects the thoughts of the author and does not speak on behalf of the Sensorica community. Further, the work is built on the work of the Sensorica community on value equation. Moreover, the author has many views on the value equation and this blog represents only of the many perspectives. Lastly, the author assumes that the reader is familiar with concepts of Open-value network.
The current capitalistic economic model was designed in the industrial era to reflect the thoughts, culture, technology, knowledge and processes of that era. In fact, our current economic model has been optimized to reflect the technological (information processing) capacity of industrial era. The era of internet, however, requires a new economic model and new efficiency mechanisms. In order to understand the notion of value equation, it is important to understand the value cycle and the efficiency mechanisms of the current economy.
Value cycle refers to the processes of how value is created, exchange, distribution and accumulated in the economic system.
Currencies exist in order to create efficiencies in the market place by creating units for the value cycle. Conceptually, currency could be thought of as a standard for the unit of value. Perhaps not so surprisingly, money becomes the de-facto currency since it already exists as units but at the end of the day, money is nothing more than a solution for the matching problem. In its current state money solves two crucial matching problems - value exchange problem (5 apples = 3 oranges = 7 bananas = $10) and value distribution ("equitable" reward) problem (or salary/pay in simple words). In a free-market system, this is a matching problem in a sense that the basic units exists and the people can do the matching ; hence, 1 apple = $2, 1 orange = $1, 1 banana = $0.5, etc. (exchange process), similarly, 1 hour work of engineer = $60, etc. (distribution process); whereas, in a controlled market, the government does the matching (subsidies, fixed income, etc). In reality, all systems are a combination of the two.
There are three major problems within the current industrial era based value cycle that would need to be addressed within the internet era. First, reserves (accumulation) process becomes value creation process by the principles of interests (money makes money); this makes money the de-facto currency. Second, only money is used for motivation during the value creation process by influencing the value distribution process, even though, research shows that money is a negative motivator (hygiene factor) - that is, without money people still work but with money people may or may not work. Third, value creation process can involve thousands of people (for example, open-source projects) but exchange value (including reward and money) can only be distributed to a small subset of participants in the value creation process. This phenomenon is observed because accounting during the value creation process and valuation during the value distribution process are optimized for the industrial era by reliance on extreme human intervention and not for internet era.
The key idea behind value equation is to reformulate the value distribution problem to a matching problem and disconnect money (or exchange value) from the process of value distribution. Even though, money could be the reward to be distributed, it is not the only basis of the accounting. In this way, value equation and accounting can provide a solution to the matching problem of value distribution in the internet era. The value equation, however, does not solve the value exchange or accumulation problem; although, the ideas in this blog could be extended to those problem sets.
Side notes: Unitized (unit based) currency made sense when we did not have the technology to be able to "solve" complex NP-hard or NP-complete problems. Perhaps, we still do not have the technology and mechanism (data) to "solve" the matching problem for a larger problem (ex: marketplace) but we do have the technology to "solve" matching problem for the value distribution process. Although, technically speaking, we do not know how to "solve" NP-complete problems efficiently, that is, calculate the optimal solution. However, we do know how to approximate them and for a certain class of NP problems, we understand the range of error of the approximation.