On Our Token Economy System

by: William Henderson

I remember being fascinated about a "Token Economy System" designed and implemented in a mental hospital setting. For me, a psych major with a bent for economics, this was an easy concept to grasp as it was based on the model for a “real economic system”. This novel approach to reinforcing positive healthy behaviors amongst the hospital residents was a resounding success. However, if in duplicating this system you skipped some steps or took shortcuts you could end up with something less than desirable. Like, for instance inadvertently reinforcing less desirable behaviors, while at the same time squashing good behavior. Or if there was cheating or widespread counterfeiting of Tokens the program would quickly lose its value and usefulness as a carrot to the residents and not have any effect on behavior whatsoever. In fact, if the price of the Token was highly valued and too difficult to attain, or too low in value to even expend the effort towards garnering, you would have a breakdown in its desired effectiveness in modifying behavior. These of course are the risks to a real economy system as well.

The last time I checked, the world was no sane place, and it is now apparent to me that it has a varying number of well developed "Token Economy Systems" that reward its “captive residents” with Tokens, be they Credits, Euros, Dollars, or Renminbis for certain "desired" behaviors, i.e. wanton consumption and production at any cost. These “Token Systems” started out quite well, but it is plain to recognize that some of the “residents” are developing some really bad habits that are causing many “other residents” to be denied their basic needs.

Here is the definition you are likely to find in a psychology journal or text book:

"Token Economy System"

A token economy is a form of behavior modification designed to increase desirable behavior and decrease undesirable behavior with the use of tokens. Individuals receive tokens immediately after displaying desirable behavior. The tokens are collected and later exchanged for a meaningful object or privilege.


Not too hard to understand. Relatively simple idea, good behavior = tokens vs. bad behavior = no tokens.

It is easy to see how pervasive the Token Economy Systems are, you don’t have to look very hard. For instance, if you look at the US One Dollar Bill it says "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE." Did you know that the One Dollar Bill, as is every US dollar denominated bill, is a "FEDERAL RESERVE NOTE"? Not too long ago you could take this note and exchange it for precious metal, ACTUAL Silver/Gold. That is not the case anymore. Calling it a note connotes that it can be turned into something of value, but what is that something?

Currently the US has 8,133.5 Metric Tonnes of Gold, which at $1,000 per oz. is somewhere in the $5 Trillion Dollar range of value. As a point of reference, there are currently $24 Trillion dollars in the US Retirement System/Structure (IRAs, Kehoes, Pension, Mutual Fund and 401k Plans), $3 Trillion or 16% of which are in 401k plans or at least were as of 2006. As of April 26th, 2010 there was close to $8.47 Trillion Dollars in M2 Money Supply, see graph below.

Of course as long as Gold goes up theoretically so does the Dollar, unless the US, IMF, Germany or China decides to sell their Gold which could have an immediate impact on the price. As far as the EURO goes, Germany, France, Italy and the EU bank have Gold Reserves that together outweigh US reserves. This lends implicit credibility to the status of the Euro, though which of these countries in their right mind would spread their Gold around. This is at the root of federalization of the eurozone. It's funny when post becomes prologue, in regard to the US and the individual states.

If any one of these three countries decides they have had enough of the Euro AND GO IT ALONE, it's splitsville. Bye, bye Euro. In fact, I would anticipate more of an alliance of the Euro countries into the haves and the have nots. Curiously, Portugal (383 Tonnes) has greater Gold Reserves than the U.K. (310 Tonnes). What does this say about the credit risk of Portugal vs. the U.K.? Spain has (282 Tonnes) and with Greece (112 tonnes) it is easy to see how Greece is the odd country out. Even Turkey (116 Tonnes) has more gold.

The components of the US money supply, expressed in terms of M0, M1, M2, and M3, measured monthly from January 1959. The most recent data is February 2006 for M3, and July 2009 for M0, M1 and M2. (Note: The Federal Reserve previously published data on three monetary aggregates, but on 10 November 2005 announced that as of 23 March 2006, it would cease publication of M3.)

  • M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.

  • M1: The total of all physical currency part of bank reserves + the amount in demand accounts ("checking" or "current" accounts).

  • M2: M1 + most savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000).

  • M3: M2 + all other CDs (large time deposits, institutional money market mutual fund balances), deposits of Eurodollars and repurchase agreements.

Every country in the world now has a "Token Economy System" but how long before the Token ceases to be perceived as real value? The U.S. as an example of too many Tokens circulating is not acknowledging that this is a worldwide affliction. Quite simply, there are just too many "Token" notes sloshing around the world. Add to this dynamic that this Token money is able to move 24/7 chasing the Sun, so to speak, creating huge risks in any one currency and/or asset. Bubbles can be inflated and burst in very quick and destructive ways, literally overnight.

I found it curious that the US Government would stop collecting and publishing information on the M3 money, particularly institutional money market mutual fund balances, deposits of Eurodollars and repo agreements. I doubt of course that they stopped gathering the data, more likely they just stopped reporting because it would fill in too much detail. Likely that the M3 money is enormous and static and is inherently problematic, because it can move incredibly fast.

If you are brave enough you can check out this Wikipedia entry on Money Supply and quickly ascertain that many industrialized and emerging markets, i.e. countries in the world, have increased their money supply over the last 20 years. At least doubling or tripling it, except Japan, which likely accomplished this feat in the 1980s.

I urge you to look up the definitions of “Token”, “Economy” and “System”. Actually if you just refer to the “system” I encourage you to follow this defintion, which in itself is a system.

If you looked at that definition it's not so hard to understand the complexity involved once you put a framework of simple ideas and declare it a system. How it quickly becomes alive, amorphous, unwieldy and wild. Like Frankenstein, a patchwork of pieces. Alive, but no Soul.

So I bet you are asking how the heck did we end up here, with an out of control “Token Economy System” and how can we make it better. Well the answer believe it or not lies within our learning about successful and unsuccessful implementations of “Token Economy Systems” in mental institutions. Let’s explore this a bit more.

The Purpose of a Token Economy System

The primary goal of a token economy is to increase desirable behavior and decrease undesirable behavior. Often token economies are used in institutional settings (such as psychiatric hospitals or correctional facilities) to manage the behavior of individuals who may be aggressive or unpredictable. However, the larger goal of token economies is to teach appropriate behavior and social skills that can be used in one's natural environment. Special education (for children with developmental or learning disabilities, hyperactivity, attention deficit, or behavioral disorders), regular education, colleges, various types of group homes, military divisions, nursing homes, addiction treatment programs, occupational settings, family homes (for marital or parenting difficulties), and hospitals may also use token economies. Token economies can be used individually or in groups.

Missing from that description are countries, companies, organizations and yes even not-for-profits. When the "Token Economy System" for use in mental institutions was envisioned we were still on the Gold standard. It was easy to describe a "Token Economy System" juxtaposed with a "Real Economy System". Looking back we can now see how we have supplanted the "Real Economy System" with a "new and improved" "Token Economy System", which in and of itself is not a bad thing in theory. It's just like in the mental institution, you have to be aware of the risks of a bad implementation.

In using a “Token Economy System” as a euphemism for a "Real Economy System" it is important to recognize the basic tenets for a successful Token Economy System. For instance:

Token Systems should never deprive individuals of their basic needs, such as sufficient food, comfortable bedding, or reasonable opportunities for leisure. If staff members are inadequately trained or there is a shortage of staff, desirable behaviors may not be rewarded or undesirable behaviors may be inadvertently rewarded, resulting in an increase of negative behavior. Controversy exists regarding placing individuals in treatment against their will (such as in a psychiatric hospital), and deciding which behaviors should be considered desirable and which should be considered undesirable.

In replacing the "Real Economy System" with the new and improved “Token Economy System” we needed to make sure that we manage the risks carefully as though it were a real economic system. Instead, we have ignored the risks and we have an unsuitable situation and potentially a volatile one. These risks are not in the Token itself, for the last time I checked we don't have an issue with the token... paper, bits and bytes, copper etc. Although very subjective, the Tokens in use easily meet the basic tenets of proof in a "Token Economy System":

Anything that is visible and countable can be used as a token. Tokens should preferably be attractive, easy to carry and dispense, and difficult to counterfeit.

Here in my view is where we fell short in our implementation. We need "A clearly defined target behavior". Perhaps we need to look at each "transaction", a reach for the common good? Are we doing enough in society to specify what acceptable behavior is? I know that we have delineated good behavior in comparison with bad behavior in broad terms, e.g. murder, stealing and terrorism, but are we not evolved enough to tackle the lofty aspects of what make us uniquely human? As many are oft to describe being created in the widely held notion of being in the "image" of an infinite being? Can we not prize more of humanity? Does this need to be regulated? In a successful "Token Economy System" it has to be in the manual, i.e. regulatory framework.

Individuals participating in a token economy need to know exactly what they must do in order to receive tokens. Desirable and undesirable behavior is explained ahead of time in simple, specific terms. The number of tokens awarded or lost for each particular behavior is also specified.

Another need is for appropriate "Back-up reinforcers". Does a 15-17 room starter castle count as an appropriate Backup reinforcer? Could we not use the amount of kids fed or clothed or educated as a meaningful status of accomplishment, wealth and celebrity? Or how about the number of elderly we idolize and respect?

Back-up reinforcers are the meaningful objects, privileges, or activities that individuals receive in exchange for their tokens.

We could make adjustments to meet a new and growing demand for a "System for Exchanging Tokens"; quite frankly the current system apparently doesn't work too well, and now is too unwieldy. Of course while some of the “residents” are benefiting from the way it is currently, too many don't and for the time being they are ok with shuffling about staring blankly, but when this changes and they collectively start channeling Chief Bramden - in One Flew Over the Cuckoos’ Nest - and throw the Hydrotherapy Console out the proverbial window it will be too late.

Perhaps a new system of accounting that records the Goodwill of a transaction is needed. In order for a good "Token Economy System" to flourish it needs a good "System For Exchanging Tokens". Might I suggest a requirement to measure "Therapeutic" value in addition to Demand and Monetary value. Just ask Goldman Sachs (NYSE:GS). A new system to value and provide a mechanism to exchange Tokens and place value on meaningful back-up reinforcers and recognition of good behavior would go a long way towards fostering a fairer and more equitable “Token Economy System .

A time and place for purchasing back-up reinforcers is necessary. The token value of each back-up reinforcer is pre-determined based on monetary value, demand, or therapeutic value.

Of course a successful ‘Token Economy System” requires transparency. "A System For Recording Data", a baseline from which to measure how far someone or something has come or gone is essential. Yes, I know this sounds awfully Orwellian, but if we want a successful "Token Economy System" this is essential. If we don't like it let's go back to the "Real Economy System".

Before treatment begins, information (baseline data) is gathered about each individual's current behavior. Changes in behavior are then recorded on daily data sheets. This information is used to measure individual progress, as well as the effectiveness of the token economy. Information regarding the exchange of tokens also needs to be recorded.

Last but not least we need to ensure "Consistent Implementation Of The Token Economy By Staff", i.e. government(s) and business structure. The lack of fairness, inconsistency of enforcement and counterfeiting of tokens and unfulfilling and gaudy back-up reinforcers are undermining the foundation of our floundering ”Token Economy System".

In order for a token economy to succeed, all involved staff members must reward the same behaviors, use the appropriate amount of tokens, avoid dispensing back-up reinforcers for free, and prevent tokens from being counterfeited, stolen, or otherwise unjustly obtained. Staff responsibilities and the rules of the token economy should be described in a written manual. Staff members should also be evaluated periodically and given the opportunity to raise questions or concerns.

There is no doubt we are utilizing a "Token Economy System" the world over. The problem inherent in this framework is that of perception. If the system is perceived as broken and unfair, the benefits and rewards mis-placed, the rules re-written, the baselines smeared or erased and the residents restless, the "Token Economy System" for which it stands will break down completely and the residents will be looking to run the asylum. If we can't make these changes to make it a better system, we will revert back to a "Real Economy System" whether we intended to or not.

Disclosure: No positions